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Operator
Moderator
Good day and welcome to the Philip Morris International fourth quarter 2022 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. In order to ask a question, please press the star key followed by the number one on your touchtone phone at any time. Media representatives on the call will also be invited to ask questions at the conclusion of the questions from the investment community. I will now turn the call over to Mr. James Bushnell, Vice President of Investor Relations and Financial Communications. Please go ahead, sir.
James Bushnell
Vice President of Investor Relations and Financial Communications
Welcome. Thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2022 fourth quarter and full year results. You may access the release on 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. gap measures, and additional smoke-free volume and net revenue data are at the end of today's webcast slides, which are posted on our website. Growth rates presented on an organic basis reflect currency-neutral adjusted results, excluding acquisitions and disposals. As such, figures and comparisons presented on an organic basis exclude Swedish Match up until November 11, 2023. As mentioned previously, starting in the second quarter of 2022 and on a comparative basis, PMI excludes amortization and impairment of acquired intangibles from its adjusted results. Today's remarks contain forward-looking statements and projections of future results. I direct your attention to the forward-looking and cautionary statements disclosure in today's presentation and press release for a review of the various factors that could cause actual results to differ materially from projections or forward-looking statements. I'm joined today by Jacek Olczak, Chief Executive Officer, and Emmanuel Barbeau, Chief Financial Officer. Over to you, Jacek.
Jacek Olczak
Chief Executive Officer
Thank you, James, and welcome, everyone. We had a remarkable year for our smoke-free transformations in 2022. Despite the exceptional challenges of the war in Ukraine, severe supply chain disruptions and global inflation, we delivered very strong financial performance and took two major strategic strides towards a smoke-free future. I would like to express my deepest thanks to all my colleagues who spared no effort to drive excellent business results during these unprecedented times. Our thoughts also continue to be with those affected by the war in Ukraine and the recent tragedy in Turkey and Syria. In 2022, PMI delivered its second consecutive year of total volume growth reflecting continued ICOS progress and broadly stable cigarette volumes. Full-year smoke-free net revenues reach almost one-third of total PMI and over 50% in 17 markets. This is impressive progress towards our ambition of becoming a predominantly smoke-free company by net revenues in 2025. ICOS Outstanding results continued with over 21% full-year growth in both shipment volumes and in-market sales, excluding Russia and Ukraine. This reflects broad-based momentum in the European Union region, Japan, and emerging markets. ICO Ziluma continues to generate excellent growth in its launch markets, with upgrades from existing users and new user acquisition outperforming our initial expectations. The success is supported by the increasing deployment of a two-tier heated tobacco units portfolio, providing adult smokers with an expanding range of innovative and high-quality alternatives to cigarettes. Incombustibles we delivered a robust performance with a 3.7% growth in organic net revenues and 0.3% higher share of segments, excluding Russia and Ukraine, despite the impact of adult smokers moving to smoke-free products. We also achieved two critical strategic milestones this year, reaching an agreement to take full control of ICOs in the U.S. in 2024, and successfully completing the acquisition of Swedish March. These achievements will accelerate our smoke-free journey and further position us to lead the transformation of the wider industry. Clearly, currency headwinds were extremely strong and weighed on our US dollar performance, but although volatility remains, I am pleased that they seem to significantly abate in 2023. Overall, 2022 was a pivotal year and we look forward with confidence to 2023 and beyond. Let me now take a moment to cover our key strategic priorities for the coming year. With the acquisition of Swedish March and securing the rights to ICOS in the US, we are now a global smoke-free champion. The addition of the world's biggest market and the leading nicotine pouch brand Zin, alongside Icos, provides us with significant untapped opportunities to further accelerate the growth of smoke-free products. As the strength of our Icos business continues to grow rapidly, the full global rollout of Icos Ziluma is a major priority and we expect to make substantial progress on this in 2023. The success of Illumai in launch market so far demonstrates the importance of groundbreaking consumer-centric innovation, and we continue to broaden our portfolio with new science-backed offerings. This includes Bonds by Icos, our latest heat-not-burn device, aimed at low- and middle-income adult smokers. Pilot city launches in Colombia and the Philippines in the last quarter of last year show encouraging early results and we intend to take the learnings from these markets before deploying on a wider scale. Following a successful first three years of partnership with KT&G, We also recently extended our long-term agreement to commercialize their innovative smoke-free portfolio outside South Korea. I am very pleased to welcome Swedish Match to the PMI family. In particular, the fast-growing potential of ZEN is an incredibly exciting addition to our company. We are focused on supporting the Swedish match team to continue and accelerate Zyn's outstanding success in the US while also leveraging PMI commercial capabilities to prepare for international expansion of nicotine pouches. IQOS and Zyn are premium brands leading the global categories. In the US, Zyn is helping American smokers leave cigarettes behind and offers great growth prospects. For ICOS, the world's biggest smoke-free market is a fully untapped opportunity and our plans are well underway in anticipation of our commercialization in the second quarter of 2024. We will be leveraging the sales and distribution capabilities of Swedish Match and deploying our commercial model, digital engine, organization and infrastructure for a successful rollout. We continue to expect to file an FDA application for Illuma in the second half of 2023. Logically, the international expansion of pouches, US ICOS penetration, and the replacement of ICOS through Illuma entail additional investments this year, which combined with inflationary pressure will weigh temporarily on our margins. Indeed, many of the ILUMA-related costs are one-off in nature, as Emmanuel will explain shortly. In combustibles, we continue to target a stable category share over time despite the impact of ICOS cannibalization while taking judicious pricing actions. As we have explained previously, maintaining our leadership in combustibles helps us maximize switching to smoke-free products through the connection to adult smokers and the retail trade. In terms of our financials, the strength of our business provides a robust operating cash flow, which we intend to maximize to provide reinvestment in our smoke-free business, the leveraging and growing dividend. Finally, and importantly, Shaping tobacco harm reduction by providing better alternatives to smokers and advocating for science-based regulation is critical to accelerate the end of smoking. Harm reduction is also at the core of our transformation as we lead on sustainability to achieve a positive impact. We will be expanding on some of these topics at the CAGNI conference on February 22nd. And we also plan to host an investor day in September this year, where we will go into greater detail on our strategies and future vision, particularly with regard to the U.S. Now, I will hand it over to Emmanuel to discuss our results in 2023 and outlook in more detail. Thank you, Jacek.
Emmanuel Barbeau
Chief Financial Officer
Our business, driven by the strengths of our innovative and expanding smoke-free portfolio, generated excellent top and bottom line 2022 growth, despite the very difficult operating environment and currency headwinds. Our full year net revenues grew organically by plus 7.7%, excluding Russia and Ukraine, and by plus 7.1% for total PMI, despite the impact of hyperinflationary accounting in Turkey. This reflects the continued strength of ICOS, accelerating pricing, and the recovery of combustible in many markets against a pandemic-affected comparison, notably in H1. ICOS devices accounted for approximately 5% of our full-year smoke-free net revenue, both including and excluding Russia and Ukraine. Our net revenue per unit grew plus 4.4% organically, excluding Russia and Ukraine, and by plus 5.5% in total. This was driven by combustible pricing of plus 4% excluding Russia and Ukraine and plus 5% overall, and the positive mix impact of an increasing proportion of HTUs, heated tobacco unique, in our overall volumes at higher net revenue per unit. Our 2022 operating income margin contracted organically by 60 basis points, excluding Russia and Ukraine, and by 70 basis points in total, due to a number of headwinds, which I will come back to. These headwinds were partially mitigated by the growth of ICOs, pricing, and ongoing cost saving. In 2022, we delivered growth saving of $800 million dollars, with over $1.6 billion in the first two years of our cost efficiency program. This puts us well on track to exceed our target of $2 billion over 2021-2023 and mitigate recent inflationary pressures. Despite margin pressures, our excellent top-line growth and diligent cost management enabled us to deliver currency-neutral adjusted deleted EPS growth of plus 11.9% to $5.34 excluding Russia and Ukraine. This includes unfavorable currency of 85 cents and a small contribution from Swedish match net of financing cost for the 50 days of consolidated results. For total PMI, we delivered adjusted diluted EPS of $5.98. We also had a strong finish to the year. We delivered excellent Q4 organic net revenue growth of plus 7.9% excluding Russia and Ukraine, again reflecting continued strong high-cost performance and robust combustible pricing. Our Q4 operating income margin expanded organically by 80 basis points, excluding Russia and Ukraine, mainly due to a favorable comparison. On a total PMI basis, organic margins were flat, including the impact of a challenging comparison in Ukraine and shipment timing in Russia. Fourth quarter currency neutral adjusted diluted EPS grew by plus 20.8% to $1.23, excluding Russia and Ukraine, and plus 15.3% in total to $1.39, an excellent performance. Before discussing our 2023 guidance, I would like to provide an update on our Ukraine and Russia businesses. We continue to support our employees in Ukraine. I would like to personally thank them for their tremendous efforts to secure our business continuity during these extremely difficult times. In Russia, the environment for divestment has become increasingly challenging and complex, especially given recent December 2022 regulatory developments. To provide more clarity to investors on the full extent of our business, We will now include both Ukraine and Russia in our 2023 outlook and reporting. Now, turning to the 2023 outlook, we expect to deliver very strong organic net revenue growth of plus 7 to plus 8.5%, supported by a step-up in combustible pricing and another year of rapid progress from ICOS. This would represent the third consecutive year of organic top line growth above plus 7% and excludes the impact of Swedish Match for the large majority of the year. Including Swedish Match, we expect our reported currency neutral net revenues to grow into the teens as its business continues to deliver strong performance. We expect excellent high cost momentum to increase our HTLU volume growth on a total PMI basis, supported by the growing presence of Illuma across our key markets. We forecast between 125 and 130 billion HTU shipment volumes, representing plus 15% to plus 19% growth. This reflects an acceleration compared to the total PMI growth rate in 2022, despite an expectation of no significant progress in Russia, given our decision to restrict investment and innovation. As mentioned previously, the pace of Illuma launches has also been constrained by supply chain disruption and the outstanding take-up in initial launch markets. We expect this constraint to gradually improve through the first half as we progressively roll out to more geographies. We expect organic smoke-free net revenue growth to have an aligned progression with the rate of HTU volume growth this year, with less distortion from device revenues. Including Swedish match and at constant currency, we expect to deliver around $13.5 billion in smoke-free net revenue, compared to $10 billion in 2022, and to approach 40% of total PMI net revenues this year. While our top line outlook is very strong, like many other global companies, we are facing significant margin pressures from the intensifying inflationary environment, in addition to a number of specific transitory factors and investments, which I will come back to shortly. As a result, we expect our adjusted operating income margin to contract between 50 to 150 basis points organically. Accordingly, We forecast currency-neutral adjusted diluted EPS growth of plus 7% to plus 9%. This includes a full year's positive contribution from Swedish match net of the related interest expense. However, this benefit is offset by the increased interest cost on our non-Swedish match debt and planned investment. This translates into an adjusted diluted EPS range of $6.25 to $6.37, including 15 cents of unfavorable currency at prevailing rates. This forecast, notably, does not factor any potential favorable court ruling in Germany regarding the legality of the surcharge on the existing excise tax on heated tobacco product effective in Germany as of 2022. We continue to account for the excise surcharge in our result and outlook. However, the obligation to pay the surcharge is currently suspended. If favorable, the difference to our forecasted 2023 excise payments would increase our net revenue by around 1% and adjusted diluted EPS growth by around 3 points, thereby increasing our forecast currency neutral growth range to plus 10% to plus 12%. In this scenario, we would expect our operating cash flow would move toward the upper half of our forecast range. We expect a judgment toward the end of the year. There are a number of other assumptions underpinning our outlook. We expect total international industry volume of cigarette and heated tobacco units excluding China and the US to decline by minus 1 to minus 2%. Given our leadership in smoke-free products and the growth of the category, we expect to gain share and target total PMI shipment volume to be flat to plus 1%, which would represent a third consecutive year of growth. While we seek to maintain our share of the combustible category, given the current inflationary environment, we assume combustible pricing will accelerate to around plus 6% on an organic basis compared to the plus 5% realized in 2022. We also expect full year capital expenditure of around $1.3 billion as compared to $1.1 billion in 2022. reflecting increased investment behind our smoke-free platform, including Illuma and Swedish Match portfolio. Let me now come back to the various factors impacting our margins. In 2022, total PMI gross margin contracted by 220 basis points organically. While growing inflationary pressures were a drag, the largest impact came from the combination of the rapid growth of Illuma and transitory factors such as supply chain disruption and the need to use air freight. Illuma drove accelerated device replacement from existing users in Japan and other launch markets. Such device sales are positive for acquisition, retention, and full conversion. However, devices are margin-dilutive, and this dynamic is likely to continue on a temporary basis as we roll out to more markets this year and consumers upgrade from ICOS Blade. The initially higher weight and cost of Filuma consumable also played a role, and this meant that the overall impact of our heat-not-burn business, including devices, was margin-dilutive in 2022. Importantly, average gross margin on HTUs remained around 10 percentage points higher than for cigarettes on a higher net revenue per unit. This is a fundamental long-term positive margin driver through the growing HTLU volume mix in our business, and this had a plus 110 basis point favorable impact in 2022. Our two other key long-term margin drivers of pricing and productivity also continue to contribute favorably. Growth margin headwinds were mitigated at the operating income margin level by SG&A costs, which declined by 150 basis points of net revenues due primarily to cost efficiency, operating leverage, and comparison effect. The picture for 2023 is quite different. While our gross margin will face increased inflationary pressure, this is now primarily due to COGS for the cigarette business as LEAF, acetate tau, salaries, and energy cost increase. An acceleration in combustible pricing and lower air freight costs will serve to mitigate this exceptional inflation. However, a timeline is built into our projections. Importantly, while cost inflation is also a headwind for ICOS, the 2023 margin impact of our heat-not-burn business is expected to be favorable due to the positive impact of increased HTU volume at higher net revenue per unit, planned ILUMA efficiency, and a more measured increase in devised volumes. Overall, these underlying strengths from high costs combined with pricing will not be sufficient to offset combustible cost inflation in 2023. However, we expect a lower organic growth margin decline compared to last year, and for our heat northern business to have an increasingly visible positive impact as we approach 2024. 2023 SG&A cost would include incremental investment to drive future growth, including in the commercialization of Illuma. Also included is around $150 million with a broadly even split between the U.S., where we are preparing our organization capability for the launch of ICOS, and wellness and healthcare investment in product development and clinical trials. In addition to inflation, this means an SG&A cost increase more in line with net revenue growth is likely, with limited margin impact. A few words now on 2023 phasing. We expect margin pressures to be weighted to the first half, particularly given a challenging Q1 2022 comparison and a progressive decrease in air freight costs throughout the year. In addition, Investments are expected to be front-loaded, and we know that the rollout of Illuma can lead to a short period of slower user acquisition as consumers wait for the launch. Combined with the timing of shipment and cost-saving, we expect our 2023 top- and bottom-line delivery to be heavily H2-weighted. Indeed, we expect the first quarter to be the most challenging, with low single-digit organic top-line growth and soft margin. Shipment timing and ILUMA launch impact are expected to be pronounced, and we accordingly expect HTU shipment volume of around 26 to 28 billion HTUs. We also face a comparison with a significantly lower impact from war-related disruption. We forecast adjusted deleted EPS of $1.28 to $1.33, including 10 cents of unfavorable currency at prevailing rates. Importantly, we expect margin to improve as we approach 2024, as headwinds relent, and the fundamental margin accretive driver of our smoke-free transformation continue in the form of heated tobacco unit growth, pricing, and cost optimization on ILUNA. Our cash flow generation remains strong. We delivered $10.8 billion in 2022 operating cash flows, representing plus 3% growth on the currency neutral basis. This includes a favorable timing of certain financing item of around $0.3 billion. Given non-recurring item and working capital movement benefited 2021 by around $1 billion, this was an excellent result. In 2023, we forecast $10 to $11 billion in operating cash flow, despite a notable expected impact from higher working capital requirements due to growth, global inflation, and the reversal of one-off timing benefits. This put us on track to deliver our 2021-2023 target of around $35 billion given in February 2021 at then prevailing rates. While our net debt is 2.9 times adjusted EBITDA on a 12-month trailing basis, this reflects only 50 days of Swedish match results. Including a full year contribution for Swedish match would clearly result in a lower ratio. We target robust EBITDA growth, which combined with strong cash flow allows us to focus on deleveraging while continuing to invest in innovation and the growth of our business. In addition, Our commitment to our progressive dividend policy is unwavering and in line with our long-term commitment to return cash to shareholders. Turning back to our 2022 results, both our HTU and in-market sales volume increased by around 21.5%, supporting total volume growth of plus 3.2%, excluding Russia and Ukraine. Q4 HTU shipment volume grew by plus 37.5%, partly reflecting the replenishment of inventory for Illuma in Japan, following lower shipment earlier in the year, and favorable shipment timing in the EU, notably in advance of new Illuma launches. Supported by very solid cigarette performance, we delivered total volume growth for the second consecutive year, both including and excluding Russia and Ukraine. Focusing now on combustibles. Our portfolio delivered robust organic net revenue growth of plus 3.7% for the full year, excluding Russia and Ukraine. Combustible pricing increased in H2 as we continued to adjust to the inflationary environment. This resulted in Q4 organic pricing of plus 4.8%, excluding Russia and Ukraine, and yielded full year pricing in line with our expectation, with notable contribution from Germany, the Philippines, and Turkey, despite the impact of hyperinflationary accounting. In 2022, our share of the cigarette category increased by plus 0.3 percentage point, excluding Russia and Ukraine, following category share decline in 2020 and 2021, exacerbated by the pandemic. This includes sequential growth in every quarter of 2022. Marlboro remains extremely resilient despite pressure on disposable income and the impact of high-cost cannibalization, with plus 0.2 percentage point share of segment growth. In addition, while we have not yet seen any meaningful acceleration in downtrading, our share in the low price segment increased by plus 0.6 percentage point, excluding Russia and Ukraine. As Jacek mentioned earlier, maintaining our leadership in the cigarette category is a key enabler in accelerating smokers switching to better alternatives. Our robust cigarette share, combined with the growth of ICOS, delivered an overall market share gain of plus 0.6 points in 2022, excluding Russia and Ukraine, with notable contributions from Egypt, Italy, Japan, and Poland. PMI heated tobacco units continue to strengthen their position towards becoming the largest nicotine brand in markets where ICOS is present, and reached the number two position in 2022, with a record high share of 8.5% in Q4. Now, focusing on ICOS user growth, there was an estimated 20.3 million ICOS users as of December 31, excluding Russia and Ukraine. This reflects growth of around plus 3.5 million for the full year. For total PMI, we estimate there were almost 25 million ICOS users as of year end. Consistent with comments in our recent disclosure, user growth in October and November was slower due to higher than expected impact from Mielu's commercial activity and lower acquisition for high-cost blade product in anticipation of the launch of Illuma in certain key markets. However, we saw a strong rebound in December as Illuma launches continued, delivering robust user growth of plus 0.8 million for the quarter. was actually close to our initial expectation, and we look forward with confidence to 2023 as Illuma continues to be deployed. Illuma is driving volume and share growth across its market, supporting our strong position in the international category. We launched in eight new markets in Q4, including the Czech Republic, Italy, Portugal, and South Korea, bringing the total to 16. Market with Illuma launched now represents more than half of our total HTU volumes. Illuma delivers a superior consumer experience as evidenced by net promoter scores, which on average increase by more than 10 points across its different market archetypes and higher conversion rate compared to ICO3DUO. While the rates of acceleration differ by market, in both Switzerland and the more recently launched United Arab Emirates, off-tech share has almost doubled since launch. Importantly, as I mentioned earlier, the benefit of scale and optimization should allow us to bring down the cost of Iluma over time, starting in the second half of 2023. Focusing now on the European Union, where smoke-free net revenue exceeded 40% of the region for the full year. Our fourth quarter HTU share increased by plus 2.4 points to reach 8.8% of total cigarette and HTU industry volume, with a modest flattering effect from timing factors. IMS volume continued to grow sequentially and reach a record high of 9.3 billion units on the four-quarter moving average. This reflects success across many markets and T-Cities, including Vilnius, with over 43% share, as well as Athens and Rome with over 25%. In Japan, the heat not burned category now represents close to 35% of total tobacco, with high costs increasingly driving its growth. In Q4, the adjusted total tobacco share for our H2 brands increased by plus 2.6 points to 24.5% with off-tech share in Tokyo surpassing 30%. Our two-tier consumer portfolio continued to deliver strong results. IMS again grew sequentially to reach a record high of 8.8 billion units on the four-quarter moving average as the number of Japanese high-cost users crossed a remarkable 7.5 million adult consumers. In addition to strong high cost gain in developed markets, we continue to see very promising growth in low and middle income markets. In 2022, our HTU shipments grew by almost 50%, excluding Russia and Ukraine. These robust performance reflect success across many markets, including Egypt, where Eubankero exit of tech share surpassed 7%, Bulgaria and Malaysia, where Q4 of tech share reached 14% in both capital cities. Let's now move on to Swedish Match, which finished the year strongly, further confirming our belief that this combination will be accretive to our growth and margin profile over the coming years. Please note for housekeeping purposes that my comments on Swedish Match financial results are based on publicly available information through September the 30th and from November 11th when it was consolidated in PMI's financial statement. Swedish Match delivered excellent performance following the acquisition with strong net revenue and adjusted operating income. Most impressive was the phenomenal US growth of ZIN, which I will come back to on the next slide. In other U.S. smoke-free products, MoistNuff also performed well, gaining almost one percentage point share of segment and growing 2022 volume within a declining category. In Scandinavia, the overall smoke-free market and Swedish match continued to grow, albeit helped by year-round trade inventory movement due to a January excise tax increase in Sweden. The cigar business delivered robust performance to end the challenging year with growth in volume and category share. We are very pleased with a strong 2022 result from Swedish Match, which also included positive pricing across all smoke-free categories. We look forward to reporting our combined results going forward. Now, let's discuss Zin's recent US performance in more detail. Excellent progress continues with shipment volume growth of plus 37% in 2022 and plus 35% in Q4, reaching a record quarterly high. Zin's category volume share grew sequentially by 1 percentage point compared to the third quarter and by 2.2 percentage point compared to the prior year, further strengthening its position as a clear number one nicotine poach brand despite continued heavy competitive discounting from less premium offering. Importantly, retail value share for ZIN remains strong at 75.7%, highlighting its premium positioning and high brand equity. 2023 promises to be a very exciting year. We are thrilled to have welcomed Swedish Match employees and leading oral nicotine portfolio into the PMI family to create a global smoke-free champion, and we will work together to create value as we accelerate toward our shared vision of a smoke-free future. In particular, bringing Zyn and IQOS together in both the U.S. and international markets presents a significant opportunity to drive accelerated growth and switching of adult smokers to better alternatives. As a well-run and successful business, we expect continued strong performance from Swedish Match's existing operations. A key focus this year will be supporting and further driving strong ZIN growth in the US. In addition, we are now preparing for the international expansion of nicotine pouches, leveraging Swedish Match's rich product portfolio and PMI's extensive smoke-free commercial infrastructure. In parallel, will be actively enhancing Swedish Match US distribution and commercial capabilities for the launch of ICOS in 2024.
Unknown
Sustainability Officer
Moving now to sustainability.
Emmanuel Barbeau
Chief Financial Officer
As we transform our company, our business and sustainability strategy are advancing end in end with increasing momentum. PMI and Swedish Match have a shared vision and values. The combination helps us further accelerates toward achieving our purpose, transforming for good to make cigarettes obsolete, and maximize the benefit of smoke-free products. Our goal for best-in-class ESG performance is aligned as we seek to address the environmental impact of our product, eradicate child labor, reduce our carbon footprint, and provide a more inclusive and empowered working environment for all our employees. In December, we publish a standalone report detailing our new biodiversity and water ambitions. For biodiversity, we aim to achieve no net loss on ecosystems connected to our value chain by 2033 and contribute towards a net positive impact on nature by 2050. For water stewardship, we aim to scale solutions towards a positive impact on water resources by 2033 and contributes towards a positive impact on water resources by 2050. I am also proud to share that for the third consecutive year, we have been awarded CDPs AAA. CDPs score nearly 15,000 on their climate change, forest and water security disclosures, of which only 12 received this prestigious score. In addition, I am excited to share that we are included in the 2023 Bloomberg Gender Equality Index for the third year running. I'll now turn it back to Jacek for concluding remarks.
Jacek Olczak
Chief Executive Officer
Thank you, Emmanuel. Overall, our business delivered both a strong fourth quarter and full year performance despite many challenging headwinds. We achieve excellent top and bottom line growth with double digit currency neutral, adjusted diluted EPS growth, and almost $6 of adjusted EPS for total PMI. The consistent quality and sustainability of our organic top and bottom line delivery has been clearly demonstrated over the last three years. Most impressive was the continued outstanding performance of ICOS, which is now complemented by the remarkable growth of Zin. Combined with Swedish Match, we have a comprehensive global smoke-free portfolio with leadership positions in heat-not-burn and the fastest-growing category of oral nicotine. We expect 2023 to be a landmark year for our smoke-free transformation with smoke-free net revenues of around $13.5 billion at constant currency, approaching 40% of our company. We have exciting opportunities for growing nicotine pouches in the US and internationally, along with the US commercialization of ICOS next year. We expect margin headwinds will persist in 2023 before improving in 2024. However, our underlying growth fundamentals remain strong and we look forward with confidence. With an excellent performance over the past two years and our strong 2023 outlook, we expect to comfortably exceed our three-year minimum CAGR targets of more than 5% organic net revenue growth more than 9% in currency-neutral adjusted diluted EPS growth, and broadly stable shipment volumes. Finally, our strong growth outlook and highly cash-generative business enables us to deliver rich while maintaining our steadfast commitment to our progressive dividend policy. Thank you for your attention. Emmanuel and I will be happy now to answer your questions.
Operator
Moderator
Thank you. We will now conduct the question and answer portion of the conference. Again, in order to ask a question or make a comment, please press the star key followed by one on your touchtone phone. In the interest of fairness and time, we ask that participants keep to a maximum of two questions each. If time allows, follow-up questions may be taken. You may rejoin the queue again by pressing star then one on your touchtone phone. We'll take our first question from Chris Groh with Stiefel.
Chris Groh
Stiefel
Hi, good morning. Good morning. Hi, Chris. Good morning. I want to ask you, first of all, and you give some great color there in detail in your remarks. As I look at the EPS growth in 2023, just understand some of the burdens on that growth. We know about $150 million of investment you've outlined for the U.S. and your health and wellness division. What other costs do you foresee in some of these supply chain costs and use of air freight, for example? How much are those burdening your costs for the year, if you can give some color on that?
Jacek Olczak
Chief Executive Officer
Yeah, so maybe I start and Emmanuel will chip in, I guess. Yes, it's $115 million between the U.S. and the wellness health care, almost evenly spread between the two. Now, you have the air freight, and this is more of the thing which I think we should start seeing some improvements in 2023, and especially as we go towards the second half of the year, I think we should start normalizing the use of the air freight, which will then obviously continue for the 2024. Now, you have the inflationary pressure on the COGS. I think Emmanuel mentioned in his remarks the LEAF, Leave, obviously, due to our duration of inventories of the leave and the way the leave prices are rolling through the P&L, that's something which lasts usually longer. You have three years about the duration of inventory. So on a moving average, valuations, I mean, that spreads over the period of time. You have energy, which is obviously the big hit across the number of directly or indirectly through the materials. Now we start seeing energy prices easing at least at this stage, but also you bind it by some contractual arrangements, et cetera. So I don't think this is helping at 23, but I remain cautiously optimistic that as of 24, we should start seeing reversal of those. Obviously, you have a cost of the ICOs, Illuma rollout, right? Because we are at the year end, we've been at the 16 markets out of 73 markets, total ICOs. So there is a bulk of the markets in front of us in 23, and we don't want to stop or slow down the rollout of Illuma. So obviously, you have a pressure on the margin coming from the extra sales of the devices, right, which obviously are the drug on the margins and with essentially accelerating replacement of the devices at the existing consumer's level. But with the very clear view now that we have a very nice payback going forward with the accelerated acquisition, better consumption, better conversion rates. And that's the key items. So Manuel, if I missed something important.
Emmanuel Barbeau
Chief Financial Officer
No, I think you were very exhaustive, clearly, Yacek. Just a couple of further details. Clearly, in 2023, we've been flagging it. We expect our in-the-down business to contribute positively at the level of the gross margin rate evolution. So in 2023, it's really inflation impacting us very negatively at the level of all cost of goods. But on combustible, we're going to increase price, but it's not going to be sufficient to offset this impact. And just to give you a color, Jacek was alluding to energy price. We're not talking about, you know, even WGT inflation. I mean, energy price between 23 and 21, we are talking about, you know, close to a 3x factor. So it's a big increase with a big impact on the P&L. Over time, with price increase, we're going to overcome that. But there is just a lag, as we said, on matching that. Then there is a big difference also on our SG&A cost evolution. In 2022, we were flat because we've been generating a lot of efficiencies. Inflation was not as hard as it's going to be in 2023 with a lot of salary increase. And probably the basis of comparison were more favorable. In 2023, we expect to grow our SG&A in line with top line, more or less, which one would expect. We continue to invest a lot in order to support the growth of the business, to acquire new users, digital investment. We talk about DOS and wellness and healthcare, and there will still be efficiency, but not at the same level. Last element that I have to add, the cost of the debt. I'm not talking about the debt of acquisition of Swedish Match, because for Swedish Match, we are in line with expectation, i.e., a low single-digit accretion on the EPS. But clearly, for the existing debt, there is also an increase in the cost, and that is having an impact on the evolution of the adjusted EPS. I think with that, Chris, we are giving all the information we can on what we are facing in terms of evolution on our cost.
Chris Groh
Stiefel
That was sure exhaustive. Thank you for that. It was very, very helpful. I had just one quick follow-up, which would be that you have heated tobacco unit growth of expectation of that 15% to 19%. I just want to get an understanding on two facets of that. Is Russia-Ukraine down likely in 2023, given you're not investing there? And then just to what degree it's capacity limited today? You know, if you had more Illuma capacity, could that grow even faster? Thank you for your time.
Jacek Olczak
Chief Executive Officer
Okay, so actually, Russia and Ukraine... And obviously, Russia, due to its weight even more, they were a drug on our performance both in 22 and will be, as far to assume, will be a drug in 2023. As you know, our decisions, strong decisions today in West and essentially, you know, Illumise, for example, is the key, you know, technology advancements which we'll have, which we decided not to roll out in Russia, has an impact, right? So that... The numbers which we now, just for the visibility to the investors of the business assets today, we're including Russia and Ukraine, but both find very much Russia not contributing to the growth. So one could think opposite, excluding Russia and Ukraine, our growth rates would be at the higher level, on a comparable level. Capacity... we will i think we have we are guiding the market that they will we expect the better results in the second half of the year and that's partially reflects the moment when we think we will be beyond the bottleneck with regards to the capacity around the luma so we really managing the business on a very tight supply chain through steel this year sorry 2022 And for the first half of 2023 and the second half of 2023, we should be okay. That's again, I can bridge back to the famous air freight, et cetera, because all of these things are consequences of us running on a very tight supply chain.
Unknown
Sustainability Officer
That makes sense. Thank you.
Operator
Moderator
We'll take our next question from Bonnie Herzog with Goldman Sachs.
Bonnie Herzog
Goldman Sachs
All right. Thanks. Hi. Good morning, Bonnie. Good morning. Hi, Bonnie. My first question is on your margin guidance and the implied leverage. Maybe you could break down the headwinds you highlighted just a bit further and think about it in the context of what you can control, like the investment you're making to drive future growth. Could Could you help frame that for us? You know, just trying to think through how big of a step up the investments will be this year versus last year. And then how do we think about the investments required next year and beyond? I guess, you know, I'm trying to get a sense of how much of the investments required to, you know, essentially roll out ICOS in the U.S. It will take place this year versus next year. And I'm well aware of the investments you need to roll out ALUMA, but anything there would be helpful.
Emmanuel Barbeau
Chief Financial Officer
Happy to take that one, Bonnie. So I think on the US, we've been clear on the fact that we expect something like half of 150 million. Of course, it's a rounding of extra investment in the US as we prepare the launch of ICOS in the US. That is for 2023. When we have a plan for the coming years, and of course, with more detail, we'll of course come to you and elaborate and detail that. Now, for the rest of the business, I think we are, and that was the sense of my comment on SG&Evolution, on a relatively regular basis, we are investing an extra few hundred million, and please allow me not to be more specific because, of course, that is sensitive information. behind the acceleration of ICOS, and it's going to come, of course, behind ICOS Iluma in 2023. So the growth, you know, when we say we expect SG&E to grow broadly in line with top line, there is a huge impact of inflation. I mean, I don't need to explain that inflation is in most countries around high single digits, and we need to reflect that on salary increase. We have efficiency on cost in front of that, and that is enabling us to, on top of the inflation impact to keep investing on the growth of the business. And we do that in a rather consistent manner, of course, very much focused behind Illuma in 2023.
Bonnie Herzog
Goldman Sachs
Okay, that's helpful. And then just a second question, if I may. It's just related to the user growth in Q4 on ICOs. Could you maybe talk through some of the puts and takes that you saw in the quarter? I mean, it seemed to accelerate relative to Q3 despite some of the headwinds you had you know, recently highlighted. And then you did mention that Illuma drives higher conversion rates than ICO's three duos. So could you possibly quantify that for us? I guess I'm trying to think through, you know, when that platform scales, do you expect your overall, you know, conversion to grow meaningfully, possibly above your current 70% rate?
Jacek Olczak
Chief Executive Officer
Yeah, so I might be taking the Illuma conversion rates in the markets at this stage. versus a run rate conversion rates before a die-cause blade will be somewhere up in the range of a 10 percentage point. Okay, so obviously different markets, there is some difference between the markets, but the rule of thumb is about the 10 percentage points, which essentially means the way we measure conversion, that 10% of the devices sold through acquisition of new users are in use, and they are generating the recurring demand for the consumables. So there's a better productivity on the user acquisitions and the devices sold. I want to just bridge back to your previous question, Bonnie, if you allow me. When we look at the US investment, we highlighted, you know, including the wellness, healthcare, about 150 million. But we shouldn't just look at the investment from the lenses of ICOS, because part of the investment, which we already started, what we committed to make this year, I believe will also benefit federal growth opportunity for ZIN, okay, for Swedish mud. So it's not that we're really running this as a two separate type of businesses. We try to look at this from the leveraging and further enhancing the capabilities of Swedish watch, and I believe that the opportunities for ZEN in the US, they had a spectacular, phenomenal growth, depends which adjective you like better, but I think there is more to come on this one. So the way we're looking at allocating the resources that it is not just going to, you know, prepare us for the ICOS take back in 24, but also in the meantime, can be a further boost to the Z. Now, to your question also about the future rollout of ICOS alone in the U.S., I think, you know, September when we met, I hope during the investors' day, we will be in a position to give a more precise plan. We're obviously taking into consideration the expected timelines vis-à-vis or from FDA. We said that we're going to file ICO Ziloma, which is the best flagship and the best propositions we have today. And obviously our objective, prime objective, would be to enter markets, U.S. markets, with the very big momentum coming from international and the best what we have. But I think by September this year, we should have more details and more visibility about this one.
Bonnie Herzog
Goldman Sachs
Okay, that's super helpful. I appreciate it.
Unknown
Sustainability Officer
Thank you, Bonnie. Thank you, boys.
Operator
Moderator
We'll take our next question from Gaurav Jain with Barclays.
Gaurav Jain
Barclays
Hi, good morning. Hi, Gaurav. Hi, Emmanuel. So, you know, first is on the step-up in cigarette pricing. So it was 5% last year. You're saying it will be 6% in FY23. Japan had 5% pricing last year, this year it will be zero. So clearly ex-Japan cigarette pricing is accelerating from 4% to 7% approximately. So where exactly is this biggest step up happening in cigarette pricing?
Jacek Olczak
Chief Executive Officer
In Japan, you're pretty good in a single out Japan in this case, right? It's the biggest in a pricing from the unknown, right? And it's difficult to make any assumptions in Japan. But we have already this year working pretty well with the good results on the reversing the pricing trend in Indonesia, as you may recall. And I believe we really turned the corner in Indonesia, which always due to volume underlying size of the and the weight of the business to us is very important. I think we have a stronger Philippines because the European markets also come with a strong pricing. So that 6%, which we assume in the you know, for this year is just a reflection of this. Now, it depends what's happening in Japan. I mean, all of these things will be coming on the top. But actually, Japan, from the large geographies, is the only market where visibility, for obvious reasons, is very limited.
Gaurav Jain
Barclays
Sure, thank you. And then on this EU heated tobacco flavor ban, which is expected to come later this year, how should we think about it? And how is it factored in your guidance?
Jacek Olczak
Chief Executive Officer
I mean, it's one of the events which, you know, nobody ever experienced. We have some sort of similarities with the flavor bands, including menthol on the combustible cigarettes. You may recall a few years ago. And frankly speaking, it has not had any material sort of impact on the cigarette volume. So I think here, okay, we'll see what's going to happen. We think it's going to be manageable.
Gaurav Jain
Barclays
Sure.
Unknown
Sustainability Officer
Thank you so much. Thank you, Gaurav. Thank you.
Operator
Moderator
We'll take our next question from Pamela Kaufman with Morgan Stanley.
Pamela Kaufman
Morgan Stanley
Hi. Good morning.
Jacek Olczak
Chief Executive Officer
Hi, Pam. Good morning.
Pamela Kaufman
Morgan Stanley
Can you discuss your strategy for the U.S. market this year for Swedish match and what your key priorities are? And then what are your plans for the international rollout of ZIN and the timeline?
Jacek Olczak
Chief Executive Officer
Yeah, so obviously, you know, the focus is to continue and enhance the spectacular momentum of, you know, pouches ZIN growth in the U.S. I mentioned this before answering another question that, you know, part of the investments we are allocating to U.S. I believe also will benefit the current business of a Swedish match. I think there should be a better pricing, especially on the cigar business, although it is not really our strategic focus, but still obviously helps the overall business performance. And the strategy in terms of the long term, I mean, the big question, obviously, is, you know, how we will approach ICOS commercialization the moment when we fully take it back in 2024. And we, you know, we know what sort of infrastructure capabilities are missing at the Swedish match level, so we're adding them. But the real big commercial spend, I mean, it will depend on the timing and the intensity of our rollout plans. which we will share, I guess, around September this year, around the Investors' Day. When it comes to the pouches on international, I think Swedish match and us now together have plans how to start addressing some share pressure, especially in the Nordics. But on the bigger international scale, We have quite a few markets which we will start rolling out the pouches this year, but for obvious reasons I will not mention which markets. But there was the whole purpose of acquisition of Swedish match, as you recall, leverage the base and the growth opportunity in the US. It's a huge relief in a sense of a preparedness for high cost. but also I believe the category has quite the potential in the RRP, in the reduced risk product space on an international basis. We have infrastructure in most of the markets. I'm not disclosing any strategic confidential matters. Obviously, Vicos is present in 70-plus markets. This is where the infrastructure is most developed and very likely the markets for ZIN products will be within the list of these markets.
Pamela Kaufman
Morgan Stanley
Thanks. And then can you just talk about your strategy with the bonds product that you launched in test markets and what your early observations are? And then how are you thinking about a broader rollout over time?
Jacek Olczak
Chief Executive Officer
Yeah, I mean, it's a broader rollout of the Bonds is more strategically planned for the 2024, so the next year. We will have some volume, but nothing compared, to be very frank, to what we have about the ICOs and the Luma products. This is by far the prime focus. But I think the early results, which we'll get from the Philippines and Colombia, they're very strong. Actually, they're very strong. Obviously, our expectations after seven or so years of experience with Icos products are much higher than we ever had, so bonds have to come and meet that expectation as well. The proposition, essentially, we knew that the moment when we'll be going more into the emerging markets, lower income, when the consumer affordability might be at a bottleneck in achieving our smoke-free ambitions, We had to also come up with a technology both on the consumables and on the device which somehow adjusts the cost of the propositions to the potential pricing we can offer to the market. So obviously the focus will be on the emerging markets, but I do believe that that proposition also nicely will help in some developed economies because, you know, across the spectrum of the of the smokers audience obviously they also group of people who for whom their affordability might create some constraints so that will be a very nice complement complementary propositions in our portfolio and essentially it also helps icos to continue on its you know extremely successful history of occupying this premium or medium plus space. This is this mega brand which we're trying to build while preparing ourselves that, you know, billion plus smokers in the world, I mean, they're going across the different various price segments from the premium meat, low, super low, etc. And we need to provide the relevant propositions there. So I think Bonds is on the track and this is how we're going to play strategically in the portfolio.
Pamela Kaufman
Morgan Stanley
Thank you. That's very helpful.
Unknown
Sustainability Officer
Thank you, Pam. Thank you. Thank you.
Operator
Moderator
We'll take our next question from Vivian Acer with Gowen. Thank you.
Vivian Acer
Gowen
Good morning. Hey. I was hoping to talk about the ICOS outlook, please, in terms of the sticks. And in particular, what impact is the removal of characterizing flavors on HTUs in the EU impacting your outlook? How are you accounting for that? And what's the expected timing of that, please? Thank you.
Jacek Olczak
Chief Executive Officer
Yes, I partially answered that question before, Vivienne, but, you know, the characterizing flavor, you know, we had an experience with a cigarette, combustible cigarette in the past, and it's the only, you know, reference point we have today. And, you know, as you recall, you know, the mental and others ban in Europe, didn't really impact in any material way the volumes of the cigarettes. So I think here, you know, one can expect a similar sort of a manageable impact, if you like, of that bag. The second thing, it's worth also reminding everyone that Icos by far today is the best tobacco flavor proposition. Yes, there are some flavors which we have in our portfolio in the market, that proportions might be different. But by far, ICOS on the pure tobacco flavor, and this is, by the way, where the bulk of the cigarette market rests in essentially all geographies. I mean, this is an ICOS strength. So there is a portion of a portfolio which will be impacted. But I think for the vast majority of the smokers, existing compared to ICOS, users and the smokers, which are still on a combustible. I mean, ICO still offers today best-in-class taste and flavor experience, which is in the core of the tobacco flavor.
Vivian Acer
Gowen
Thank you for that. And I apologize if I missed this, but is there any way that you can provide an update on kind of the infrastructure build-out for ICOs in the U.S. ahead of your reacquiring the commercial rights to that proposition, both in terms of the consumables as well as the devices. Thank you.
Jacek Olczak
Chief Executive Officer
Yeah, I think there was, look, there was a, you know, we're looking also, as a, we're also looking at this not only on ICOS on a standard basis, but ICOS and the ZIN and other parts of the Swedish much business. And I believe, you know, the obvious, the questions of the optimal distribution, and I believe this can very well, any enhancement, sorry, to the distribution serves not only in a future ICOS, but, you know, can and will serve actually in growth opportunities today. There is the whole digital aspect. There is, you know, a better management of the pricing, promotions, the whole consumer piece, right, which is so strong behind an ICOS success. I mean, that's something which we are preparing the infrastructure for.
Unknown
Sustainability Officer
Okay, thank you. Thank you.
Operator
Moderator
We'll take our next question from Owen Bennett with Jefferies.
Owen Bennett
Jefferies
Afternoon, gents. Hope all well. Yeah, my question is more a bigger picture, longer term one around the U.S. and the overall RRP space. Now you've got control of your own destiny. I was hoping to get your thoughts on how you see RRP overall develop longer term across the different categories, whether you see some more attractive than others, and do you still think heated can be sizable when reintroduced into the U.S., obviously bearing in mind the limited traction it got with Altria? And then just linked to these U.S. RRP plans, any update on timing for a PMTA submission with your vape product? Thank you.
Jacek Olczak
Chief Executive Officer
Yes, I start with the last one. We plan to submit Icosilomar to PMTA to FDA in the second half of this year. Now, with regards to the potential, we think that the Nyko's strength, which is really if you go to the core of the smokers today, when they really, you know, enjoy this pure, unaffected by any flavors, et cetera, tobacco, flavor and so on is undisputed. Every market you go, IQOS exactly delivers on the flavor, taste, expectations to this audience. And that's also, I believe, a critical factor in IQOS high conversion rate and how many people fully adopt IQOS. And not only that they're leaving cigarettes fully behind them, they don't even attempt it on an occasional basis to go back to cigarettes, okay? So that's the core, and I believe for the audience, which was the smoking audience, which we have in the U.S., IQOS perfectly fits into this whole thing. Obviously, the other platforms which offer you the different ritual, different experience, the e-cigarettes and the pouches. E-cigarettes usually are more driven by the flavors. Obviously, absence of the pure tobacco, natural type of a flavor, that's the challenge, which partially, in our opinion, is behind the more of the dual consumption than the full conversion but also you know the products are uh uh you know under development that they're getting better and pouches actually on the risk continuum of the product i mean it's another you know important offering for the consumers who really want to you know reduce significantly uh you know exposure and potentially the the harm by while enjoying the product. So I think there is this complementary role of each of these platforms. You know also that we're working on our platform forward internally, which is a GIF and the GIVA products, the electronic cigarette segment going through its own dynamics, this mix of the flavors, disposable, etc. It's not necessarily great for the economics, but partially also because of this lower conversion rate compared to the other platforms. So we have said it from the very beginning of our transformations. If you follow us seven, eight years ago, I recall at one of the first investors conferences when we announced the purpose that we want to go smoke-free, we have said that there is the room for every platform at the different moments for different consumers. And our job is at the right time
Owen Bennett
Jefferies
deploy these platforms and the the leverage the the opportunities and the benefit to the smoker great fantastic and just uh sorry to follow up the question on the pmta was not for a luma i think previously for v you'd said you targeted first half of 23 just any update on the pmta submission yeah i think we're also thinking about the 2023 but now having goals of the zine
Jacek Olczak
Chief Executive Officer
and knowing what the luma can do and knowing that before we also need to uh you know make sure that we have a right pmta submission strategy right because an effort behind each of them and we need to prioritize but uh i mean we we are thinking well sorry thinking it's more than a thinking we're working on bringing our people to the us as well great thanks guys appreciate it thank you owen
Operator
Moderator
We'll take our next question from Andre Kondra with UBS.
Andre Kondra
UBS
Hi, everyone. Thank you for taking my question. Just one from me. Hi, Andre. Hi. Sticking to U.S. ICOS, we know that the U.S. menthol ban from the FDA proposed standards potentially will allow for some exemptions to it. and thinking that your ICOS has the MRTP designation, which is rather unique versus all its peers. Were you factoring this in when you set out your ambition of, I believe, 10% market share by 2030, if I'm not mistaken?
Jacek Olczak
Chief Executive Officer
Yeah, I think you're quoting my words. This is Jacek here. Yeah, I still do believe that ICOS by 2030... Knowing how it performs on many other international markets, the 10% is not out of... It can be a realistic ambition or a realistic dream. Now, to be very frank, when we look into this, we have not been trying to factor in that there might be some flavors or mental bans on other products. But you rightly, you know, to notice that ICOS today is two variants of ICOS authorized with the menthol flavor. Will this be an accelerating factor or not? The future will tell, but I still believe that ICOS is in a current environment due to its strength and the satisfactions it gives to smokers, et cetera, has the, you know, that that big potential in front of us.
Unknown
Sustainability Officer
I see. Very clear. Thank you. Thank you, Andrzej.
Operator
Moderator
We'll take our last question from Jared Dignas with JP Morgan.
Jared Dignas
JP Morgan
Yeah, thanks. Hi, guys.
Jacek Olczak
Chief Executive Officer
Thank you. Hi.
Jared Dignas
JP Morgan
Hi. A couple for me, please. First, given the COPX, the step-up in COPX that you expect for this year, I just wanted to ask, how should we be thinking about COPX levels beyond 23? Is next year kind of a one-off given the ZIN international expansion plans?
Emmanuel Barbeau
Chief Financial Officer
Look, I think you should expect us, of course, to accompany the growth. We are growing volume within more capacity, so the CapEx will reflect that. There is certainly, when it comes to Illuma, a moment where we build the capacity for Illuma, and that is translating into a significant increase. investment. So you see that in the 1.3. I would say we are going to certainly regularly invest on the capacity for the Swedish match oral business. So I'm not able yet at that stage, you know, I'm not giving guidance on 24. I certainly believe that there is this transition moment where we are building the capacity on Illuma. Then, you know, of course, that will be accompanying the growth of Illuma. And we are very ambitious, as you know, on growing oral product. So that will come with investment, but of course, They are not of the same magnitude as the one that we've been making in order to build the capacity on ICOS. Smaller volume, smaller base, so not with the same impact on the long term anyway.
Jared Dignas
JP Morgan
Got it. That's clear. And for the second one, maybe just on the healthcare and wellness segment, 2023 will be another investment year. I know you guys have talked about that probably being a multi-year investment cycle, but I don't know if you can give any indication on when... you think that business could potentially start to contribute to growth? And maybe also, could you guys talk about your learnings so far in those businesses that you have acquired?
Jacek Olczak
Chief Executive Officer
Yeah, I mean, look, they've obviously been very clear about this from the very beginning. I mean, in order to develop and bring to the market... of a couple of the programs or products which we have in mind, I mean, I will have to go through the investments. We talk about Aspiry Health, also have a very promising investment in a medical space of cannabinoids, etc. So all of these programs, you know, they are agreed to establish milestones in terms of the, you know, development of these products, including the series of clinicals and meeting the different regulatory expectations. So that's about what's going to be. We have set a historically ambitious target of achieving this $1 billion revenue by 2025. There is a pipeline of the product. But, you know, the more interesting actually is, you know, what's going to happen with that business beyond 25 because it's a longer-term investment. Obviously, when we allocate the capital, we look first, you know, we allocate the capital behind those things which are in the near and mid-term for us. And it's obviously heat not burns in high cost. Illuma expansions to the U.S. and I can go through the long list of opportunities but keeping also denied that these businesses have quite their wellness and healthcare offers us very interesting opportunities in the longer run when we very well leverage both our scientific life science expertise capabilities combined with the commercial etc. So this is how I would look on this thing. I think when we meet on the in September of this year for the investors day, we'll start, you know, obviously opening a much more longer term horizon, how the management how we see the future of PMI, not just in the next year or two, but be the longer time of a perspective. And this is the moment when I guess we will share more details. By the way, also, I think we'll be able to answer more precisely your first questions to Emmanuel about the CAPEX, because obviously if we open a 10-year horizon for Philip Morris, we'll have to touch upon that capital allocation component as well.
Jared Dignas
JP Morgan
Great. That's helpful. Thank you.
Unknown
Sustainability Officer
Thank you. Thank you.
Operator
Moderator
It appears we have no further questions at this time. I will now turn the program back over to management for any additional or closing remarks.
James Bushnell
Vice President of Investor Relations and Financial Communications
Thank you. Before closing our call, I would like to remind you that we'll be presenting at the Cagney Conference on February 22nd. And as we mentioned earlier, we plan to host the September Investor Day in Switzerland. We hope you will be able to join these events either in person or virtually. That concludes our call today. Thank you again for joining us. If you have any follow-up questions, please contact the Investor Relations team.
Emmanuel Barbeau
Chief Financial Officer
Thank you. Talk to you soon.
James Bushnell
Vice President of Investor Relations and Financial Communications
Thank you.
Operator
Moderator
that concludes today's teleconference thank you for your participation
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