Philip Morris International Inc

Good day everyone and welcome to the Philip Morris International 4th 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. In order to ask a question, please press the star key followed by the number 1 on your touchtone phone at any time. 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 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 8K, dated on today's date 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 Babot, 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 a 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 high-cost business delivered meaningful 2023 operating leverage, mitigating a significant drag from combustibles. I'm also very pleased to report the continued outstanding growth of zinc, which was not included in organic metrics until mid of November last year. 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. VIN delivers 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 oil margins from only 50 days of the period. Our ICOS business continues to deliver excellent results, with 15% adjusted in market sales growth for 50 tobacco units, reflecting broad-based momentum in Europe, Japan, and emerging markets. The rollout of ICOS Illuma is substantially complete and now is present in the 51 markets, representing over 95% of ICOS geographies by volume, excluding Russia and Ukraine. The superior experience and design of Illuma, combined with the strong premium bank-weight equity of ICOS and our commercial infrastructure, enabled ICOS to outgrow the Hidnot Bern category, despite holding a category share of over 75%. Importantly, as we have seen in Japan, the launch of Illuma is a multiyear growth driver consistent with past high-cost innovation. 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 ICOS cannibalization. This was also compounded by the technical impact of third-party manufacturing in Indonesia and Israel. While cost and currency headings 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 the last quarter of last year. First, ICO's net revenues surpassed Marlboro to become the number one international nicotine brand on this measure. This demonstrates the power of innovative smoke-free alternatives to switch adult smokers away from cigarettes and to address the societal issue of combustible tobacco. It is also a testament to our organization's ability to build strong and sustainable brand equity. This also applies to Zune, 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 volume. We're 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, the DJSI North America. In addition, PMI was awarded Carbon Disposal Project's AAA 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 plus 8.3%. This includes plus 14% growth from smoke-free products despite slower HTU shipment growth due to comparison effects and also plus 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 plus 0.8 percentage points to Q4 organic top-line growth and grew by an excellent plus 26% on a pro forma basis. Operating income grew organically by a very good plus 8%, including a Swedish Match contribution of plus 2.2 points. As expected, Q4 margins were broadly stable organically and grew, excluding the technical effect mentioned by YetTech. This enabled our business to deliver another quarter of double-digit currency-neutral adjusted diluted EPS growth at plus 12.2%. We succeeded our prior expectations within remarkable growth as a notable contributor. Despite this strong currency neutral result, Q4 adjusted deleted 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 PESO, which are subject to capital controls. By its nature, this does not carry forward to future periods. Turning to the full year, net revenue grew by plus 7.8% organically, representing the third straight year of high single-digit growth. Similar to Q4, this reflects continued excellent high cost momentum and strong combustible pricing. In 2023, Swedish match led by Zing grew pro forma ex-currency net revenues by plus 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 margin and operating income margin in H2, driven by the strong progress of smoke-free products. With the impact of accelerated devices from the Illuma rollout in the Bayes and a return to sea freight to Japan, the effect of growing HDD volume and ongoing cost optimization are clearly visible. As expected, OI margin 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 margin includes 40 basis point headwinds from the accounting treatment of third-party manufacturing in Indonesia and Ukraine, primarily reflecting the Indonesia Excise Tax Growth Stop of around $250 million growth in both net revenue 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 a strong contribution from Swedish Match going forward. We successfully mitigated inflationary pressure and supported investment with efficiency. Across our total operating cost base, we delivered an incremental $100 million in gross cost efficiency 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 expectation. Adjusted diluted EPS of $6.01 includes unfavorable currency of $0.63, primarily reflecting the Japanese yen, Russian ruble, and specific Argentine peso dynamic 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 plus 15% increase for high-cost 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 volume over the mid and long term. 2023 HTU shipment volume 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 high-cost HTUs, we believe the best indicator of underlying growth is adjusted IMS as the closest metric to consumer off-take. For the full year, adjusted in-market sales volume and shipment growth were in line at plus 15%. In the fourth quarter, HTU shipment growth of plus 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 volume 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 Zin, 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 headwind of H1. We believe this is more representative of the underlying momentum of our business and in line with our 24-26 CAGR target range of plus 8 to plus 10%. Focusing now on some key drivers of our full-year operating income, smoke-free growth profit grew organically by an excellent plus 19%, expanding growth margin by 340 basis points. reflects part of the operating leverage of high cost I already mentioned, with a notable contribution from Swedish Match overall 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 revenue, this clearly bodes well for 2024 as we continue to benefit from scale effects and manufacturing optimizations. Despite very strong pricing, there was only marginal organic growth in combustible gross profit. This partly reflects the negative geographic mix I already mentioned, with greater volume decline in higher margin markets like Japan, as adult smokers wish 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 inventory covers multiple crop years and wedges 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 plus 26% in 2004 and plus 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 Veeam surpassing our expectation, we now expect to achieve this well ahead of time. Veeam delivered another remarkable U.S. performance with plus 78% volume growth in Q4 and plus 62% in 2023. Internationally, we have launched or relaunched Veeam 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 profit. This was driven by strong pricing following an increase in April, partially offset by volume decline, which reflect lagged competitor pricing and comparison effects. These excellent U.S. progress continued in Q4 with plus 15% sequential growth in 12 months volume 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 VIN's premium positioning and superior brand equity. This accelerated growth, again, reflects a growth step-up in nationwide store velocity and gradual distribution expansion as the category gains strong traction with adult nicotine users for its convenience and pleasurable experience. Now, focusing on ICOs, starting with user growth, we estimate there were 28.6 million ICOs users as of December 31st, representing growth of 1.2 million users in the quarter and plus 3.7 million for the full year. It's a nice acceleration compared to 2022. This includes notable progress in Japan and Europe, in addition to a broad range of other geographies. Illuma 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 high-cost users and the acquisition of adult smokers. We expect Illuma to drive continued strong high-cost user growth in 2024 and beyond. Considering the seasonal fluctuation and volatility in quarterly user estimation, We plan to report this metric on a semi-annual basis going forward. With the addition of Zin to our portfolio and the smaller but growing Viv eVapor business, we also intend to provide a more holistic view of our total smoke-free user base to investors. Moving now to ICOS 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 Illuma, which is available to around 90% of high-cost users in the region after eight further launches during the quarter. In the EU, 11 markets, making up nearly 30% of regional high-cost volumes, adopted the delegated directive to implement a characterizing flavor ban on heated tobacco products and implemented clean shelf policy in October. While still early days, we estimate only a small impact on off-tech as consumers adjust, as well as on trade inventory levels. Indeed, adjusted IMS volume continued to exhibit very good sequential growth and reached a record high 12.4 billion units on the four-quarter moving average. This reflects double-digit year-on-year progression of plus 13% in 2004, despite the lack of growth in Ukraine. We expect the remaining EU market to adopt the characterizing flavor ban in 2024 and and estimate a full-year consumer adjustment impact of around 2 billion units on both shipment and IMS, representing less than 5% of regional volume 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. Livia Zero tobacco HTUs were launched in the Czech Republic in mid-October through limited channels with an encouraging initial response. We plan a broader check 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 high-cost driving its growth and reaching over 8.5 million adult users. In Q4, the adjusted total tobacco share for our HTV brand increased by plus 3.1 points to 27.6%, with off-tech shares surpassing 34% in Tokyo. Adjusted IMS volume increased by plus 14.5% year-over-year for 2023, and plus 13.4% in Q4 alone, reaching a record high of almost 10 billion units on the four-quarter moving average. Such increasing growth in a market with already high category penetration is a clear testament to the sustainable potential of ICOs around the world. HTU shipment volume 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 high-cost share gain 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 of tech shares across markets in Eastern Europe, Africa, Asia, and Latin America. Egypt continues to impress, with Cairo of tech 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 of tech volume growth across these important future markets, with the city share toward the right of this chart, an indication of the exciting potential. While we have already covered the margin dynamic on combustible, 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 2004 and plus 0.2 points in 2023, with notable contributions from Egypt, Poland, and Turkey. Although flattered by competitor-supplied 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 high-cost cannibalization. This remains key as our leadership in combustibles helps to maximize switching to smoke-free products. This combustible share performance, combined with structural growth of high cost, 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 give 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 performance, 2021-2023 target 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 plus 8% organic net revenue CAGR, and a step up in organic operating income growth to plus 8% to plus 10%. We target an adjusted EPS CAGR of plus 9 to plus 11% ex-currency growth at constant 2023 corporate tax rate, 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 high-cost volume, smoke-free net revenue, and gross profit. We forecast the highest-ever absolute increase in HTU-adjusted IML volumes to deliver plus 14 to plus 16 percent growth in percentage terms, despite the inclusion of an estimated impact of around 2 billion units from consumer adjustment to the EU-characterizing phaser ban I mentioned earlier. no off-take growth in Russia. For shipment volume, we target more than 140 billion units, subject to the usual inherent volatility of shipment timing, new market launches, and potential supply chain disruption, 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 level compared to 2023, given the substantial completion of Illuma launchers and opportunities for working capital optimization. We expect continued excellent USD in volume growth to around 520 million cans. We have also accelerated our capacity expansion plan to support this further significant step up in volume and to manage inventory level, which are naturally affected by the recent level of growth. Such a strong outlook for high-cost enzyme means we expect to deliver an acceleration in organic smoke-free topline growth compared to 2023, reaching close to $15 billion in net revenue at prevailing exchange rate. 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 high-cost profitability expands and then excellent economics continues. 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 pressure and negative geographic mix in combustible 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 growth margin, excluding technical impact, and a very limited currency impact on adjusted OI margin. This forecast includes notable capability investment in the U.S., but as mentioned at Invest Today, we still expect to deliver strong double-digit operating income growth in this market. As a flag that the last year invested in, we anticipate an increased net financing expense this year as debt is renewed at higher rates. We forecast a range of $1.3 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. The tax and interest factors combined impact our currency neutral adjusted deleted EPS growth projection by around 2 percentage points. Accordingly, we forecast currency neutral adjusted deleted EPS growth of plus 7% to plus 9%. This translates into an adjusted deleted EPS range of $6.32 to $6.44 including an unfavorable currency impact of 11 cents at prevailing rates. This notably includes a net favorable impact of 13 cents related to the revaluation of monetary balances in hyperinflationary economy in 2023, skewed to the second half comparison. Moving to the shape of expected 2024 performance on a quarterly basis, We anticipate good doubled 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 volume of 31 to 32 billion and continued strong volume growth from then. We expect organic top line and operating income growth to be broadly consistent with the full year outlook, which implies organic margin extension as with the full year. We project 1Q1 currency neutral adjusted deleted 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 comparison improving in the second half as we lap the Argentina impact 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 effect on net earnings, including the Argentine peso devaluation, other year-end currency impact, and higher than expected working capital needs. In 2024, we target between $10 and $11 billion in operating cash flow at prevailing exchange rate 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 expenditure of around $1.2 billion, including the ZIN 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 minority and the final U.S. ICO spending 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 buyback 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 will 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 ICOs for continuous innovation. This includes leveraging the role of the VLUMA to maximize user growth while innovating further on both devices and consumables. Second is to continue the strong use growth of Xenon. supported by targeted commercial investment, long-term capacity expansion, and organizational infrastructure, which will also support ICOS. Outside the U.S., we intend to continue developing our integrated multi-category offering to adult decoding users with further launches of ZIL and the relevant ROVs eVapor portfolios. Of course, 2024 will be a landmark year for ICOS in the U.S. While the ultimate launch of ICOS Illuma is the main priority, we continue to prepare for the first CT test of the ICOS free blade product starting in Q2 this year. The small-scale pilot launches will allow us to experiment with different aspects of commercialization and support our drive for a scale commercial success once ILUMA is authorized. While we have no update on the expected PMTA timeline, the Patent Settlement Agreement announced last week allows for commercialization of both blade and induction products while mitigating risks of patent-related disruptions and enables us to leverage the scale optimize cost and flexibility of our global supply chain. In combustibles, we continue to target the stable category share over time, despite the impact of ICOS 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 dividend remains steadfast. Following the acquisition of Swedish Match, the leveraging 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 CAGNI 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 Icos and remarkable growth of Zyn strengthened their position as leading brands with excellent equity. Combined with our unrivaled commercial and innovative capabilities, We have a powerful platform to expedite our smoke-free future as we broaden our portfolio and reach to adult smokers. We expect 2024 to be a year of accelerated growth for smoke-free products and remain confident in our 2024-2026 growth targets. We have exciting opportunities in the U.S. and internationally, which we are fully dedicated to capture as we progress towards our ambition of being sustainably smoke-free by 2030. Finally, and importantly, our strong growth outlook and highly cash-generative business underpins our ability to leverage while returning cash to shareholders. Thank you, and Emmanuel and I are now happy to answer your questions.

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 and then one on your touchtone phone. 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 79%, yet you really did finish out the year a lot stronger, reporting 11% currency neutral EPS growth. So as you look back, you know, what were some of the key areas of outperformance versus your initial expectations? And then as you think about this year, you know, you're initially guiding the 79% FX neutral UPS growth again. So, you know, just trying to understand, you know, how conservative this may be, especially considering, you know, your 9% to 11% midterm growth target.

Well, Bonnie, yeah. With regards to 2023, I think the momentum of what you have and the category it has in Japan is really well worth thinking about. And despite the fact that, as you know, ICOS occupies a very sizable part of the segment, I mean, we capture well above our segment share. I think we capture about 80% of the entire segment growth in Japan. So this is very strong. You know, Japan is on the forefront of a smoke-free transformation. We're approaching the year 10th anniversary of ICOs in Japan. And if I just look over the last few weeks, how categories are continuously expanding in Japan, I think in the Tokyo area, the smoke-free products now about exceeded the size of the cigarette category. So if Icos continues after 10 years participating in this phenomenal growth, this is really worth thinking about. Here we've been, and as we indicated very much, we've been very keen and very pleased that we could conclude the acquisition of Swedish March. It adds the important element of our portfolio of alternatives to smoking, the pouches, and obviously creates a very good opening for us in entering the U.S. market, and as in clearly is growing above the expectations. What is very important as we hear from time to time quite likely conversations about, you know, some unintended consequences about the use of the product, I am so pleased that both ICOS and as in actually delivering of, as they were designed for, going after adult smokers in the U.S. about 21 years. We all are familiar with the CDC data, less than a 2% use usage, as the same is for Icos 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 to be a very focused from a financial perspective with regards to the event. So if I now roll this through to 2024, I think that Japan is on the good momentum. When in the U.S., this continues, this momentum. Europe is doing very strongly, very well. Yes, we have this distortion, maybe potential headwinds, which I think are were very clearly indicated the 2 billion potential impact from that flavor, the flavor bond in the year. But other than that, you know, this key geography and this key geography is also a 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 word. However, one thing which I know that You know, on occasions there might be some conversations around the growth trajectory of ICOs and so on. And you remember during Investors Day, I've been very clear. We're running ICOs in 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 growth and depends how you know in which period they pick up, but easily about the four, maybe even five billion per annual 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 three-year outlist.

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

Yeah, here's one. Emmanuel can chip in with more details. I think in the America segment, there is more the impact of the devaluation in Argentina. which drove the margins down rather than the U.S. market. And specifically about the U.S. market, yes, there is the increased investment also to continue supporting ZIN growth and expansion, but also in preparing Swedish major organizations and pretty much international in the U.S. organizations for being able to handle ICOs soon, and obviously have the organizations, which is up to 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 ICOs process start of the commercialization. Manuel, do you want to?

Yeah, just to answer your question, Benny, and complement what Jacek was saying on what is behind the higher-than-expected performance for 2023, clearly Jacek 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 ICOS and on ZIN being above the average margin on CC. We are making progress on the profitability of the ICOS product, and we have some price increase in Q4 overall. So that was the plan 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 described the fact that the margin of gain in the U.S. is best in class among our portfolio of product. 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, of course, revenue growth. but also at the level of the margin evolution and at the level of the operating economy. It's like the fact that we talk about double-digit growth and very strong double-digit growth. The 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 up margin expansion based on your guidance? It implies op margin.

Yes, we do absolutely believe, yes.

Okay. All right, thank you.

Thank you.

We'll go next to Gaurav Jain with Barclays.

Hi, good morning. Two questions for me. One is just to clarify the Argentinian PISO impact. So you have a 19-cent impact this year, which is linked to balance sheet revaluations. And on the slides, you are using the Argentinian PISO 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 19 cent benefit to EPS. Isn't that the way the math works?

Of course, we cannot speculate on any further duration of the PISO. The reality is that the amount in dollar term has been significantly reduced by the last devaluation. So a further devaluation would impact 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, halved, basically, with the devaluation in December. So any further devaluation would apply to a lower basis. in Argentina and Pesos.

Sure, maybe I can ask it separately. And my second question is around ZIN. 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 ZIN. Flavors will get banned. So how do you plan to get ahead of this entire potential controversy that could emerge around ZIN?

Yeah, so we observed over the last few weeks, you know, a lot of conversations around the ZEN in social media and generally internet and media. I think, look, ZEN is in the U.S. market for 10 years, okay? And if you look even on the CDC, you know, latest data on the usage, et cetera, you know, stays well below 2%, which is the lowest from any product, nicotine, and also other products where there's some age restrictions applied. I think we know what the Swedish March marketing practice is, and we were taking this very seriously during the acquisitions, the durations, etc. We have said that the alignment with Swedish March was not only that you know, 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 with ICOS, with Kidnot Variant International. We have reached out to the few people who have been most vocal in these conversations, Senator Schumer, but also to FDA, and I think, you know, the facts are The facts are different, but sometimes it is trying to be the positions in the media. So the product is helping adult smokers with very strict age verifications. Obviously, when it comes to the conversations among the adults in the social media, that's That's going a little, well, it's going, frankly speaking, in a territory where we don't have controls. When it's not using any paid ambassadors or whatever this is being called in social media. So we think what we're doing is pretty right. Product from the potential of the reduction of the harm and where the product is based on science positioned on the risk reduction continuum It's, frankly speaking, it is the best nicotine alternative to any other nicotine product, very much obviously, versus the cigarettes. We have a pending PMTA with FDA, but I think the science is very, very strong and very conclusive on the side. So I feel very confident. From the very beginning of our transformation, so is Swedish March, we put the marketing and very much a protection of the youth. very, 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 smokers.

Thank you so much. Thank you.

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

Good morning. Morning, Ben. Morning. I have a question about ZIN as well. It's seen phenomenal growth in the U.S. Can you talk about what's driving the acceleration and growth in ZIN in the U.S.? And are there any particular regions where you're seeing stronger growth? And just on the ZIN 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 Zin's growth outlook relative to what we're observing?

Yeah, so the Zin, as you might remember from my investors, the profile of the Zin when it comes to where the smoke over there are coming from, the Zin is sourcing very nicely from a combustible cigarette, obviously sourced from the oral categories, including the the tobacco-containing pouches, the Swedish smooth or similar product, but also resourcing from the EVAP category. So it is being recognized by the growing number of adults the convenience of usage of a ZIN. It is another way of looking at ZIN. It is a natural innovation or extension of the Swedish smooth 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 of maybe constraints, et cetera, and then it's something which looks cleaner and is white, doesn't contain tobacco, which might have been for or might be for some consumer, creates some resistance. So this is what I can say. I think the product has a good... It has a good trajectory. The market is a large market in the U.S. with the well-developed Evade category, obviously still a very sizable combustible cigarettes category, and also many other oral tobacco forms. So it's a nice sourcing for them, which is appealing to these audiences. With regards to your comments, Lavoie, there. number of accounts for a customer which we put into our guidance for next year. We're very well familiar with underlying trends in the US. Can Zoom surprise us to the positive? Yes. Guidance is built on the number of the assumptions. It's global business, multi-category, and There are some headwinds which were, you know, aware today. I'm not sure whether they will all materialize, but I think it's a matter of prudence is that this part of the year, the beginning of the year, to single them out and, you know, be prudent. But there are also some upsides and the tailwinds which were aware of. The year unfolds, we'll come to the Q1. I mean, as every year, you build the confidence as you go through the year.

Yeah, and time 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. I'm looking at the percentage here, versus 23 on 22. So these are similar volume growths. It's true that it's a reduction in the growth rate.

We'll see whether we have things 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 ICOS. How does the settlement influence your ability to import into the U.S., and does it change your manufacturing strategy?

Oh, it actually allows us now to... or connect ICOS in the U.S. to the supply chain, which is, you know, the international supply chain from day one, which is operating with all the benefits of economies of scale, et cetera. So obviously, you know, as the mitigating type of a strategy we have been implementing in parallel you know, the alternative manufacturing in the U.S., but that obviously, you know, is the first factory, first volumes. It would obviously result in the increased or elevated cost both on the devices and the logistics, and it will take a while until U.S. on a standalone basis would close at the same level of the benefits or the cost if you like, as we had on international. So for us, It clears the path for ICOS, both late and in Luma. So we're bringing a lot of, or removing, I should say, uncertainty from today and going forward. And ICOS, you know, because it is U.S., is you know, it's just another market which we added to the geographical family of ICO's presence from a day one, we'll have an access, as I said, to the pipeline of the products and its economy cost benefits as an international market. So for us, actually, it's clarity and acceleration, which we gained through this agreement. And obviously, you know, as we all know, The patent litigation territory has a high degree of uncertainty, and, you know, we're running a very sizable business, and we're planning to have even more sizable business. We're very additional over U.S., and that clarity and the visibility going forward is very important, which I believe is also important for investors.

Thank you. I'll pass it on.

Thank you. Thank you, Donna.

We'll go next to Fahim Bey 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's 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. will do the test market on ICOS 3.0, what we call the ICOS 3.0 blade product, which is literally for us the ICOS, and we're looking forward to get more visibility from FDA with regards to the PMTA, MRTPA for the ICOS, which would allow us to accelerate the broader, more national type of the commercialization. So what we have assumed in 2024 in terms of the volume contribution of ICOS from the U.S. is very minimal. We're more treating this as, you know, testing the engine, commercial, consumer-facing type of solutions rather than go with the current version of the product at the full scale. We have assumed, we made some assumptions with regards of opening the markets in which ICOS today is not allowed. The truth is that Andalusia is obviously Taiwan. Okay, that's, you know, it's other assumptions, and you might be right or wrong, but these are the assumptions we've made. This obviously hinges on the speed of some regulatory decisions and the laws being passed and et cetera. And with regards to you, look, I mean, although I believe that the history has shown with the flavor type of regulations in a different categories in a different places that over a period of time, they don't have much of an impact at all. But, you know, we're going in a period that some markets will be implementing these regulations. So I think we need to be cautious that there might be some distortions. I mean, I would put in a guidelines and they were very transparent, 2 billion cotton shell with headwinds, which we typed in in a volume output for ICOS, but we'll have to see whether this materializes, not materializes, but I think as a matter of prudency, we should, we should, we should, we should talk about this. Other than that, you know, the underlying ICOS growth, if I look at the volume of share evolution, in essentially all European markets is pretty strong. Despite the fact that very much in Central Europe, there is maybe more of the pricing competition from other Hibnot than participants, but we also have a very strong price competition, extremely strong price competition, I should say, both on the devices and the consumables in Japan. And you know, over the period of time, ICOS navigates for this highly, sometimes aggressive competitive pricing environment very well. So that's, that's essentially where we are. Germany grows very nicely. Italy continues with a very strong growth momentum. We got a major climb over Spain. We make the, we start making a significant progress. So,

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 2024? Is that the discrepancy?

Yeah, I mean, look, this is the blended, this moment in time at the beginning of the year, the blended outlook for the group revenues, combustibles, oil, and obviously, the few other smaller things. Look, we have managed last year to deliver a very strong pricing variance. I think, again, it's hard to assume that that level of pricing variance may not be repeatable this year, but there is obviously a pricing potential which we baked in 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, you know, if I compare what Philip Morris is delivering now you know, number of the years when we leave the revenue top line about 7%. And you remember very well the times when we started transformations where 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 leave in a sustainable manner the revenue growth, but obviously important is the quality of the revenue growth. So, you know, having a three-year total growth volumes to start with above, well, no decline, not even a flood, but growing, then you start overlaying this by pricing and managing to, or focusing to avoid the risk of some downgrading, et cetera. I think that's the 7% is the, that 7% revenue growth is the pretty, uh, from a qualitative perspective, not just from the nominal growth perspective, I would think that it's obviously the best.

Just to add to what Jeff has just been saying, I mean, Indeed is taking into account that 2023 was exceptional when it comes to price increase. We've closed to 9% on the combustible portfolio, and we don't intend to repeat that. We are guiding to 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.

Thank you very much. Thank you.

We'll go next to Callan 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 US in 2023 and the UK also driving a steeper volume decline for combustible cigarettes in those markets. Obviously, your combustible cigarette business in those two markets is not huge, if nonexistent, obviously in the US. 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 eBay products? There are a number of factors, right? So one is that I think the category of eBay 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? And we very often forget that the core of the smokers, market by market, with literally few exceptions, are very much on the, what I would characterize as a traditional tobacco type of experience, flavor, et cetera. So this creates, you know, sort of a more dual consumption or occasional consumption. But I think for some smokers, and we know it from our experience of ICOs, actually, you know, triggers curiosity to try, but at the same time triggers the bottleneck in terms of a full-time type of a switching adoption. That's the one of the factors, okay? But there are obviously other factors at play.

I guess I understand that, but why hasn't that, you know, 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?

That is also, you know, the focus, right, because, you know, U.K. was on the forefront, this was U.S., which I remember historically of the forefront of this category. Partially, I guess, also attracted by the underlying margins in the CC category, so you know, obviously people are going with alternatives to the places which create some sort of the, you know, underlying margins opportunity with the relative freedoms also to talk about these products. You know, Europe very much, but also in international, some countries, these products are not very, let me put it that way, warmly welcome. So let's leave aside the hybrid action principles, but, you know, some other countries you know, the opinions and views at play. We know that, you know, when we enter the EVAPE category, that we're trying to be very disciplined, the focus, 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 defocus the company from some other opportunities which we are pursuing, which in our views are more sustainable and offer the good path for the margins and the underlying profitability. But when we enter with this product, we probably check a few other markets. And in our products, despite the fact that we're relatively late from a category history perspective, I mean, we have the double-digit shares in this market in the span of less than 12 months or so. So it also tells you there is a lot of lack of loyalty. Yes, I know that we see the volume, but there's a lot of trials. 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 sort of forced to play by the rules and hold themselves to a certain set of standards, you know, marketing only to existing nicotine users. And, you know, all of us will have seen your video on Zin last week, I would imagine, and 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 tier structure that seems to be forming in a number of markets structurally impairs the attractiveness of your business and your brands, but when it seems like you're just being forced to play on a playing field, which is not level?

Well, obviously, you know, 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 compete is, you know, even what you're asking, grossly different than some other operators or participants in the market, especially companies people who, you know, don't have a view of 10 years or 15 years outlook, but, you know, it's essentially hit and run almost type of operation. And I think we know what has happened, what is happening in the U.S. Yes, I understand some, you know, disciplining the market is now underway, but, thank you, speaking is a long overview because there is a lot of, you know, pardon my language, but a mess created in the market by the fact that regulators, law enforcement, and other, you know, designed for this, designated for these agencies will be the slow. And I think, you know, it's a frankly speaking replica which we have for many years and still in some places have on a cigarette market. And it forms of an illicit type of participation in the market. It's not only marketing practices but also products, product standards. All of these things create completely wrong uh, you know, distortions in the market that they explain. So the legitimate, you know, tobacco category manufacturers and also, you know, they've earned the conversation from, you know, how further we can progress and have reductions and the diverse them into the things which relatively easily should be, should be, should be fixed.

Okay. Thanks, Jessica. Thank you. Our final question will come from Matt Smith with Stiefel.

Thank you, Jacek and Emmanuel. I 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 ZIN would allow you to step that investment level up while still being able to achieve your double-digit profit expectations in the market.

Yeah, so a lot of times, obviously, you know, we try to get adjusted to allow you to go off about our revenue growth. So obviously we are assuming some improvement in the margins. But on the other hand, you know, I think we will have enough of the resources to support that revenue growth. So if we would completely stop investing, obviously the expansions or why growth would be much more significant, margins, expansions would be much more significant, but we are, it is not what is in our strategy. So I think, you know, once you operate at scale, and we do, I think the Zim has said the scale in the U.S., the revenue is very substantial over there, at least by the U.S., by the market standards, and the revenue which we generate from a smoke field, but also combustibles, only internationally with that sort of a revenue, growth rates, I think we have a room to provide for the investments to support today's and tomorrow's growth while also driving the margin expansion. We also have provided here some inflationary pressure, and I think especially on the combustible, we assume that the 24 is sort of the last year of this extra ordinary type of inflation of a pressure and as of 25 and onwards, uh, we should start seeing easing on the Cox pressures. This is about the lead and some other materials. And I think, you know, every incremental ICOs and every incremental ZIN, is obviously requires proportionally less of the investment with the ferric cycles and the ferric series. So, I mean, the scale offers going forward this opportunity for supporting the march.

Thank you, Jacek. I can leave it there and pass it on. Thank you, Matt. Thank you. Thank you, Matt. That concludes today's discussion.

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

Thank you all. Speak to you soon.

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