Q4 2022 Philip Morris International Inc Earnings Call

Please go ahead Sir.

Speaker 1: Welcome. Thank you for joining us.

Speaker 2: strides towards a smoke free future.

Speaker 3: 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.

Speaker 4: Our thoughts also continue to be with those affected by the war in Ukraine and the recent tragedy in Turkey and Syria.

Speaker 5: In 2022, PMI delivers its second consecutive year of total volume growth, reflecting continued IECOS progress and broadly stable cigarette volumes.

Speaker 6: Folier smoke-free net revenues reach almost one-third of total PMI and over 50% in 70 markets.

Speaker 7: This is impressive progress towards our ambition of becoming a predominantly smoke-free company by net revenues in 2025.

Speaker 8: Icos, outstanding results continued with over 21% full year growth in both shipment volumes and in market sales, excluding Russia and Ukraine.

Speaker 9: This reflects broad-based momentum in the European Union region, Japan and emerging markets.

Speaker 10: Icoziluma continues to generate excellent growth in its launch markets with upgrades from existing users and new user acquisition outperforming our initial expectations.

Speaker 11: The success is supported by the increasing deployment of a two-tier, heated tobacco unit portfolio, providing adult smokers with an expanding range of innovative and highly and high-quality alternatives to cigarettes.

Speaker 12: In combustibles, we deliver the robust performance with a 3.7% growth in organic net revenues and 0.3 percentage points higher share of segments, excluding Russia and Ukraine.

Speaker 13: Despite the impact of adult smokers moving to smoke free products.

Speaker 14: We also achieved critical strategic milestones this year, reaching an agreement to take full control of ICOs in the US in 2024, and successfully completing the acquisition of Swedish March.

Speaker 15: Disachievements will accelerate our smoke free journey and further position us to to deal the transformation of the wider industry.

Speaker 16: Clearly, currency had been extremely strong and weighed on our US dollar performance, but although volatility remains, I am pleased that they seem to significantly obey in 2023.

Speaker 17: Overall, 2022 was a pivotal year and we look forward with confidence to 2023 and beyond.

Speaker 18: Let me now take a moment to cover our key strategic priorities for the coming year.

Speaker 19: With the acquisition of Swedish March and securing the rights to Icos in the US, we are now at Global Smoke Free Champions.

Speaker 20: The addition of the world's biggest market and the leading nicotine pouch brands in alongside Icos provides us with significant untapped opportunities to further accelerate the growth of smoke-free products.

Speaker 21: As the strength of our ICOs business continues to grow rapidly.

Speaker 22: The full global roll out of ICO ZILOVA is a major priority and we expect to make substantial progress on this in 2023.

Speaker 23: The success of Yluma in launch markets so far demonstrates the importance of ground-breaking consumer-centric innovation, and we continue to broaden our portfolio with new science-backed offerings.

Speaker 24: This includes bonds by ICOs, our latest Kidnaught Bern device, aim at low and middle income adult smokers.

Speaker 25: 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 learning from the markets before deploying on a wider scale.

Speaker 26: Following a successful first three years of partnership with KTNG, we also recently extended our long-term agreement to commercialize the innovative smokefree portfolio outside South Korea.

Speaker 27: I am very pleased to welcome Swedish match to the Pia Mai family.

Speaker 28: In particular, the fast growing potential of ZEIN is an incredibly exciting addition to our company.

Speaker 29: We are focused on supporting the Swedish match team to continue and accelerate since outstanding success in the US.

Speaker 30: We also leverage in PMI commercial capabilities to prepare for international expansion of nicotine pouches.

Speaker 31: Icos and Zen are premium brands leading the global categories.

Speaker 32: In the US, Zen is helping Americans small cars live together behind and offers great growth prospects.

For ICOs, the world's biggest smoke free market is a fully untouched 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 March and deploying our commercial mobile digital engine, organization and any process but axial search access will ruler.

We continue to expect to file an FDA application for LOMA in the second half of 2023.

Logically, the International Expansion of Pouches, US ICOs penetration and replacement of ICOs through Velloma, Intel additional investment this year, which combined with inflationary pressure will wait temporarily on our margins.

Indeed, many of the illumas related costs are one of in nature as a manual 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 product 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 smokefree business, the averaging and growing dividend.

Finally and importantly, shaping tobacco harm reduction by providing better alternatives to smokers. An 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 CAGNE 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.

particular 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.

Our business driven by the strengths of our innovative and expanding smoke-free portfolio generated excellent top and bottom line 2022 growth despite a very difficult operating environment and currency headwinds.

Our full year-nature revenues grew organically by plus 7.7 percent, excluding Russia and Ukraine, and by plus 7.1 percent for total PMI, despite the impact of hyperinflationary accounting in Turkey.

This reflects the continued strength of Icos, accelerating pricing and the recovery of combustibles in many markets against a pandemic-affected comparison, notably in H1.

I call devices that concert for approximately 5% of our fully-smoked Greenwich revenue both including and excluding Russian Ukraine.

Our net revenue per unit is a group plus 4.4% organically excluding Russian 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 makes 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 Edwins were partially mitigated by the growth of ICOs, pricing and ongoing cost saving.

In 2022, we delivered a gross saving of $800 million 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 current to neutral adjusted deleted EPS growth of plus 11.9 percent to $5.34 excluding Russia and Ukraine.

This includes unfavourable 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 DILOTE DPS 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 the LTS group by plus 20.8% to $1.23, excluding Russian Ukraine, and plus 15.3% in total to $1.39 and 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 2020 Sphere Outlook.

We expect to deliver very strong organic net revenue growth of plus seven to plus eight point five percent.

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 exclude 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 teams as its business continues to deliver strong performance.

We expect excellent Icos momentum to increase our HDL 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 base of Iluma 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 organics more green at revenue growth to have an aligned proportion with the rate of HTO volume growth this year, which less distortion from device revenues.

including Swedish match and at constant currency we expect to deliver around 13.5 billion dollars in smoke free net revenue compared to 10 billion dollars in 2022 and to approach 40% of total PMI net revenue 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 Q&T 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 matched debt and planned investment.

This translates into an adjusted diluted EPS range of $6.25 to $6.37, including 15 cents of unseverable 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 the Tobacco product effective in Germany as of 2022.

We continue to account for the excise-sort charge in our result and outlook, however, the obligation to pay the sort charge is currently suspended.

If favorable,

The difference to our forecasted 2023 excise payments would increase our net revenue by around 1% and adjusted deleted EPS growth by around 3 points, thereby increasing our forecast currency neutral growth range to plus 10 to plus 12%.

In this scenario, we will 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 cigarettes and heated tobacco units excluding China and the US to decline by minus one to minus two percent.

Given our leadership in smoke-free product 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 fully a capital expenditure of around $1.3 billion as compared to $1.1 billion in 2022, reflecting increased investment behind our smoke-free platform, including ILLUMMA 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 in stationary pressures were a drug, the largest impact came from the combination of the rapid growth of Illuma and planetary 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 devices are positive for acquisition, retention and full conversion. However, devices are margin delutive and this dynamic is likely to continue on the temporary basis as we roll out to more markets this year and consumers upgrade for micro-splayed.

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, I've read gross margin on HTUs remain around 10% at points higher than for cigarettes on the Ironnet Revenue Per Unit.

This is a fundamental long-term positive margin driver through the growing HTU volumics 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&E costs which declined by 150 basis points of net revenues due primarily to cost efficiency, cost margin 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 cuts for the cigarette business as leaf, acetate tau, salaries and energy costs increase. An acceleration in combustible pricing and lower effort costs.

will serve to mitigate this exceptional inflation. However, the timeline is built into our projections.

Importantly, while cost inflation is also a red win for Icos, the 2023 margin impact of our heat not burned business is expected to be favorable due to the positive impact of increased HTU volume at higher net revenue per unit.

planned eluma efficiency and a more measured increase in divide volumes.

Overall, this underlying strength from ICOs 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 even other business, we have an increasingly visible

positive impact as we approach 2024. 2023 SG&A costs would include incremental investment to drive future growth including the commercialization of Ilumba

Also included is around 150 million dollar with a broadly even split between the US, where we are preparing our organization capability for the launch of ICAUSE and wellness and the scare investment in product development and clinical trials.

In addition to inflation, this means an SG&E 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-fraid costs throughout the year.

In addition, investment are expected to be front loaded and we know that the rollout of Filumac can lead to a short period of slower user acquisition as consumer weight 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 language and soft margin.

Shipment timing and Illuma launch impact are expected to be pronounced and we accordingly expect HTU shipment volume of around 26 to 28 billion.

We also face a comparison with a significantly lower impact from more related disruption.

We forecast adjusted the dealty of $1.28 to $1.33, including tens of un favorable currency at prevailing rates.

Importantly, we expect margin to improve as we approach 2024, as Edwin's Relent, and the fundamental margin-accretive driver of our smoke-free transformation continue in the form of hitter tobacco unit growth, pricing and cost-optimization on Iluna.

Our cash flow generation remains strong. We deliver $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 items of around OPPLui Billion of Larts.

Given non-recuring 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 Iowa working capital requirements due to growth, global inflation and the reversal of one of timing benefits.

This put us on track to deliver our 21-23 target of a round-certified $1 billion given in February 2021 at Zen Prevelling Ridge.

While our net debt is 2.9 times adjusted EBDA on the 12 month straightening 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 EBD growth which combined with strong cash flow allows us to focus on leveraging while continuing to invest in innovation and the growth of our business.

In addition, our commitment to our progressive development policy is unwavering and in line with our long-term commitment to return cash to shareholders.

Turning back to our 2022 results, both our HPU and in market sales volume increased by around 21.5%.

Supporting total volume growth of 3.2% excluding Russia and Ukraine.

Q4 HTU shipments volume grew by plus 37.5%, partly reflecting the replenishment of inventory for Illuma in Japan following lower shipments earlier in the year and favorable shipment timing in the EU, notably in advance of new Illuma launches.

Supported by very solid-segued performance, we deliver total volume growth for the second consecutive year, both including and including Russia and Ukraine.

Focusing now on combustible.

Our portfolio delivered robust organic net revenue growth of plus 3.7% for the full year, excluding Russia and Ukraine.

Compustible pricing increased in H2 as we continue to adjust to the inflationary environment.

This resulted in Q4 organic pricing of plus 4.8% excluding Russia and Ukraine and yielded fully a 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% point, excluding Russian 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 0.2% share of segment growth.

In addition, while we have not yet seen any meaningful acceleration in down trading, our share in the low price segment increased by plus 0.6% point, excluding Russian Ukraine.

As I 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.

TMI heated tobacco units continue to strengthen their position towards becoming the largest nicotine brand in markets where Icos is present and reached the number 2 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 user as of December 31, excluding Russian Ukraine.

This reflects growth of around 3.5 million for the full year. For total PMI, we estimate there were almost 25 million iCoS users as of year-end.

Consistence with comments in our recent disclosure, user growth in October and November was slower, due to higher than expected impact from the Eruz commercial activity and lower acquisition for high-cost-blad product in anticipation of the launch of Illumine's certainty market.

However, we saw a strong rebound in December as Illuma launches continued, that even Robust used a growth of plus 0.8 million for the quarter. This...

was actually close to our initial expectation and we look forward with confidence to 2023 as ILLUMMA continues to be deployed.

Iluma is driving volume and share growth across its market, supporting our strong position indeed not been category.

We launched in 8 new markets in Q4, including the Czech Republic, Italy, Portugal and South Korea, bringing the total to 16. Markets with Illumah launched now represent more than half of our total HTU volumes.

Illuma delivers a superior consumer experience as evidenced by net promoter scores.

which on average increased by more than 10 points across its different market archetypes and higher conversion rates compared to ICO 3DO.

While the rates of acceleration differ by market, in both Switzerland and the more recently launch 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

Focusing now on the European Union, where smoke-free net revenue exceeded 40% of the region for the food year.

Our fourth quarter, HTU, share increased by plus 2.4 points to reach 8.8% of total cigarette and HTU in the street volume with a modest flattering effect from tiny factors.

IEM's volume continues 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 TCTs, including Vilnius with over 43% here, as well as Athens and Rome with over 25%.

In Japan.

The heat not burn category now represents close to 35% of total tobacco with high cost increasingly driving heat growth. In Q4 the adjusted total tobacco share for our H2 brands increased by plus 2.6 point to 24.5%.

with off-tech shares in Tokyo surpassing 30%.

Our two-tier consumer portfolio continues to deliver strong results.

IMS again grew sequentially to reach a record eye of 8.8 billion units on the four-quarter moving average as a number of Japanese icos user cross a remarkable 7.5 million adult consumers.

In addition to strong high-cost gains 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.

This robust performance reflects success across many markets, including Egypt, where U-Bankero 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 years from Glee. Further confirming our beliefs that this combination will be accretives 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 financial statement.

Swadish Match delivered excellent performance following the acquisition with strong net revenue and adjusted operating income.

Most impressive was the phenomenal US growth of zine, which I will come back to on the next slide.

In other US smoke-free products, moistness also performs well, gaining almost 1% point share of segment and growing 2022 volume within a declining category.

In Scandinavia, the overall smoke free market and the Swedish match continued to grow, albeit held by year-round trade and venture movement, the rate of a January-excite 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 the strong 2022 results from Swedish Match, which also included positive pricing across all Smokefree categories.

We look forward to reporting our combined results going forward.

Now, let's discuss Zins 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 I.

The inscategory volume share grew sequentially by 1% each point compared to the third quarter and by 2.2% each point compared to the prior year, further strengthening its position as the clear number 1 nicotine potge brand, despite continued heavy competitive discounting from less premium offering.

Importantly, Retail Value Share for Zine 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 employee and leading all all nicotine portfolio into the PMI family to create a global smoke free champion and we will look we will work together to create value as we accelerate so our shared vision of the smoke free future. In particular, bringing Zinn and I close together in both the US

this match existing operation.

A key focus this year will be supporting and further driving strong zinc 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, we will be actively enhancing Swedish Match's US distribution and commercial capabilities for the launch of Icos in 2024.

PMI and Swedish Match have shared vision and values. Compination helps us further accelerate toward achieving our purpose, transforming for good to make cigarette obsolete and maximize the benefit of smoke-free products. Our goal for best-in-class ESG performance is align, as we seek to address the environmental impact of our product, eradicate child labour, reduce our carbon footprint and provide more inclusive and empowered working environment for all our employees.

In December , we published a standalone report detailing our new biodiversity and water ambitions. For biodiversity, we aim to achieve no net loss on ecosystem 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 toward a positive impact on water resources by 2033 and contribute toward 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 triple A.

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 Yetsek for concluding remarks. Thank you, Manuel. Overall, our business delivered both strong, forth quarter and full year performance, despite many challenging headwinds. We achieved excellent top and bottom line growth with double digit currency neutral adjusted 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 Hidnaud Bern and the fastest growing category of oral nicotine.

We expect 2020-03. We expect 2020-03.

To be a landmark year.

For our smoke-free transformation, we've 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 fundamental remains strong and we look forward with 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-kager targets of more than 5% organic net revenue growth, more than 9% in currency neutral adjusted diluted DPS growth.

and broadly stable shipment volumes. Finally, our strong growth outlook and highly-cached generative business enables us to deliver it 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.

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 1 on your touch tone phone.

In the interest of fairness in 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 Grow with Steeple.

Hi, good morning.

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. And we know about $150 million of investment you've outlined for.

the US 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?

So maybe I start and Emmanuel will chip in, I guess. Yes, it's $115 million between the US 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 see.

start seeing some improvements in 2023 and especially as we go towards the second half of the year, I think we should start normalize the use of the air freight which will then obviously continue to the 2024. Now you have the inflationary pressure on the COGS, I think Emmanuel mentioned in his remarks that…

So on a moving average, Valuations, I mean at 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.

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 consumers level. But with the very clear view now that we have a very nice paper going forward with the accelerated acquisition.

on combustible going to increase price but it's not going to be sufficient to offset this impact. And just to give you a call or Yatek was alluding to energy price. We're not talking about even WD inflation. I mean, energy price between 23 and 21, we are talking about close to a 3x factor. So it's a big increase with a big impact on the PNL.

All the 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 SGNA 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 23 with a lot of salary increase and probably the basis of comparison were more favorable. In 23, we expect to grow our SGMA 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 user digital investment.

We talk about the US and wellness and their scare 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 a low single digit acquisition 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.

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 heat tobacco, unit growth, expectation of that 15 to 19%. I just want to get an understanding on two spaces of that. Is Russia Ukraine down likely in 2023 giving you not investing there?

And then just to what degree is capacity limited today? If you had more alumna capacity, could that grow even faster? Thank you for your time. Okay, so actually Russia and Ukraine, and obviously Russia due to its weight even more, they were drug on our performance.

both in 2022 and will be as far to as you know be a drug in a 2023. As you know, our decisions, strong decisions today invest and essentially you know, Illumas for example is the key you know technology advancements which we will have which we decided not to roll out in Russia has an impact right.

So, the numbers which we now just for the visibility to the investors of the business assets today were including Russia and Ukraine, but both are very much Russia not contributing to the growth. So one good thing opposite, you know, putting Russia in Ukraine, our growth rates would be...

would be at the higher level, on a comparable level. Capacity, I think we are guiding the market that we expect the better results in the second half of the year, and that partially reflects the moment when we think we will be beyond the bottleneck with regards to the capacity around the E-Luma. So we really managing the business.

afraid, etc. because all of these things are consequences about the riding on a very, very tight supply. That makes sense. Thank you.

We'll take our next question from Bonnie Herzog with Goldman Sachs. All right, thanks. Hi. Good morning, Bonnie. Good morning. Hi, Bonnie. My first question is on your off margin guidance and the implied deliverance. Maybe you could break down the headwinds you highlighted just a bit further and think about in the context of what you can control, like the investment you're making to drive future growth. Could you help frame that for us? 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 west. It will take place this year versus next year and well aware of the investments you need to roll out aluminum.

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 will 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 this G&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 as DNA to grow

broadly in line with top line. There is a huge impact on inflation. I mean, I don't need to explain that inflation is in most countries around I-Single-Degit 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.

Okay, that's helpful. And then just a second question, if I may. It's just related to the user growth and Q4 on icos. Could you maybe talk through some of the puts and takes that you saw in the quarter? I mean, it seems to accelerate relative to Q3 despite, you know, some of the headwinds you have.

recently highlighted and then you did mention that Aluma drives higher conversion rates than I go through duo so could you possibly quantify that for us? I guess I'm trying to think through when that platform scales do you expect your overall conversion to grow meaningfully possibly above your current 70% rate? Yeah so I may be taking the Luma

which essentially means the way we measure conversion that 10% of the devices sold through acquisition of new users.

and they should generate the recurring demand for the consumables.

So there's also a better productivity on the user acquisitions and the device is solved.

I want to just bridge back to your previous question Bonnie if you allow me. When we look at the US investment, we highlight it including the wellness healthcare about 150 million but we shouldn't just look at the investment from the lenses of IECOs because part of the investment which we already started was...

favor enhancing the capabilities of Swedish WADs and I believe that the opportunities for zooming the US, you know, they had a spectacular of phenomenal growth, depends which objective 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 gonna, you know.

prepare us for the IECO stake back in 24, but also in the meantime can further can be a further boost to the to the to the Now to your question also about the future rollout of the IECOs alone in the US. I think, you know, September when we met

I hope during the investors they will be in a position to give a more precise plan. So we obviously take in a consideration the expected timelines vis-à-vis of from FDA. We said that we're going to file I because Ziloma which is our the best flagship and the best propositions we have today.

and obviously our objective prime objective would be to enter markets, US 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.

Okay, that's super helpful. I appreciate it.

Okay, that's super helpful. I appreciate it. Thank you, Bernie.

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

All right, been morning. I got a problem.

Hi, Manuel. So, you know, the first step on this step up in cigarette pricing, so it was 5% last year. You are saying it will be 6% in FY23. The Japan had 5% pricing last year. This year it will be 0. So clearly, X Japan cigarette pricing is accelerating from 4 to 7 approximately.

So very correctly is this biggest step of happening in cigarette prices. At 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 on 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, plus the European markets also come with a strong pricing.

that 6% which we assume for this year is just a reflection of this. Now, depends what's happened 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 when visibility for obvious reason is very limited.

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 a guidance?

I mean it's one of the events which nobody ever experienced. We have some sort of a similarities with the flavor bands including menthol and the combustible cigarettes you may recall a few years ago and frankly speaking that has not had any

material sort of impact on the cigarette volume. So I think here...

Okay, well, see what's going to happen. We're thinking it's going to be a manager book.

what's going to happen. We think it's going to be manageable. Sure, thank you so much.

Thank you, Gaurav. We'll take our next question from Payne LaKovman with Morgan Stanley .

Hi, good morning. Hi, fam. Good morning, boss.

Can you discuss your strategy for the US market this year for Swedish Match and what your key priorities are? And what are your plans for the international rollout of the timeline?

So obviously, the focus is to continue and enhance the spectacular momentum of pouches in grove in the US. I mentioned this before answering another question that part of the investments we are locating to US. As I believe also will benefit the current.

business of a Swedish march.

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, how we will approach high-cost commercialization the moment when we fully take it back in 2024....

You know, we know what sort of actual capabilities are missing at the Swedish March level, so we are 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 margins, you recall, leveraged design Basics Tour for Swedish

the base and of growth opportunity in the US is a huge relief in a sense of a preparedness for ICOs, but also I believe the Categore has the quite potential in the RRP in the reviews of this product based on international bases. We have infrastructure.

In most of the markets, I'm not disclosing any strategy confidential matters. Obviously, Vycos is present in a 70 plus market. This is where the developed infrastructure is most developed and very likely.

the market for ZIN products will be within the list of these markets.

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?

Yeah, I mean it brought the role out of the bonds, 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 Icosine Loma product.

This is by far the prime focus. But I think the early results which we get from the Philippines and Colombia, I mean...

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 expectations as well. The proposition essentially, we knew that the moment when we'll be going more into the future.

and on the device with somehow adjust 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.

And essentially it also helps I go to continue on a extremely successful history of occupying this premium or medium-class space. This is this mega brand which we're trying to build while preparing ourselves that.

billion plus smokers in the world. I mean, they're going across the different various price segments from the premium, meat, low, super low, et cetera. And we need to provide the relevant propositions there. So I think bonds is on the track and this is how we're gonna play strategically in the portfolio.

Thank you, that's very helpful. Thank you.

We'll take our next question from Vivian Azer with Gowan. Thank you. Good morning. I was hoping to talk about the ICHOs outlook, please, in terms of the sticks, and in particular, what impact is the removal of care?

who have a cigarette, combustible cigarette in the past.

is the only reference point we have today. As you recall, the mental and adverse ban in Europe didn't really impact in any material way the volumes of the cigarettes. I think here, one can expect a similar sort of a manageable.

impact if you like of that bad. The second thing it's worth of also reminding everyone that I cause by far today is the best tobacco flavor proposition. Yes, there are some flavors which you have in our portfolio in the market.

that proportions might be different, but by far, I cause 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 eco strength. So there is a portion of a portfolio which will be impacted.

but by far I cause on the pure tobacco flavor and this is by the way where the bulk of the cigarette market dressed in essential oil geographies. I mean this is an ICO strength. So there is a portion of a portfolio which will be impacted.

I think for the vast majority of the small cars, existing compared to the Eikos users and the small cars which are still on the combustibles. Eikos still offers today best in class the taste and the flavor experience which is in the core of the tobacco flavor.

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 US ahead of your requiring the commercial rights to that proposition, both in terms of the consumables as well as the devices? Thank you. Yeah, I think there was like, you know, we're looking also.

I was also looking at it not only on the ICOs on the standard, but on the basis of the ICOs and other parts of the Swedish business. I believe that the question of the optimal distribution, and I believe this can very well say any enhancements or a to the distribution.

not only in a future Icos, but can and will serve actually in a growth opportunities today. There is the whole digital aspect, there is a better management of the pricing, promotions, the whole consumer piece which is so strong behind Icos success.

I mean, that's the something which we are preparing the infrastructure for. Okay, thank you. Thank you, Vivian.

We'll take our next question from Owen Bennett with Jeffries.

afternoon, Jen. Hope all well. Good afternoon, O'Him.

Yeah, my question's more a bigger picture longer term one around the US 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 sizeable when reintroduced into the US? Obviously, bearing in mind the limited traction it got with Altria. And then just link to these US RRP plans, any update on timing for a PMTA submission with your vape product. Thank you.

Yeah, so I start with the last one, we plan to submit the Icos Ilo Ma.

to the MTA to have D.A. in the second half of this year. Now we've regards to the potential, we think, that the Nycos strength, which is really if you go to the core of the smokers today, when they really...

you know, enjoy this pure, unaffected, buy-any flavors, etc. Tabaco flavor and so on is undisputed. Every market you go, Icos, exactly the levers on the flavor, pays expectations to this audience. And that's also, I believe, a critical factor in Icos, high conversion rate. I know how many people fully adopt Icos.

Not only that they're leaving cigarettes fully behind them, they don't even attempt it on occasional basis to go back to cigarettes. So that's the core and I believe for the audience which were the smoking audience which we have in the US, Icos perfectly fits into this whole thing. See the other platforms which offer you the different ritual different.

experience, they figure out and the pouches. You see that it usually, you know.

more driven by the flavors, obviously absence 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 the products are under development and they're getting better. And Pouch is actually on the risk continuum of the product. I mean, it's another important offering for the consumers who really want to.

you know, reduce significantly exposure and potentially the harm by while enjoying the product. So I think that with this complementary, there is this complementary role of each of these platforms with, you know, also that we're working on our...

platform for what we have now, which is a brief and the Viva products, the electronic cigarette segment going through its own dynamics, is 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.

that there is room for every platform at the different moments for different consumers. And our job is at the right time to deploy these platforms and to leverage the opportunities and the benefit to the smoke.

Great, thanks Jadis. And just a follow up, the question on the PMTA was not for Aluma. I think previously for Viv you said you targeted first half of 23. Just any update on Viv PMTA submissions.

Yeah, I think we're also thinking about the 2023, but now having also the ZIN and knowing what the Luma can do and knowing that before we also need to make sure that we have the right PMTA submission strategy, right? Because an effort behind each of them and we need to prioritize. Hmm. Yeah.

from Andre Contra with UBS.

Hi everyone, thank you for taking my question. Just one from me. Hi. I'm sticking to U.S. Icos. We know that the U.S. mental ban from the FDA proposed standards allows 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?

I think you're quoting my words, yes, I still believe that I cost by 2030, knowing how it performs on many other international markets. The 10% is not out of... you know...

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 being that there might be some flavors or mental bands on other products. But you rightly notice that I cost today, today.

is two variants of ICOs authorized with the mental flavor. Will this be an accelerating factor or not? Look, I mean, the future will tell, but I still believe that ICOs is in a current environment due to its strength and the satisfaction in gifts to smokers, et cetera.

has that big potential in front of us. I see, very clear, thank you. Thank you Andrei. We'll take our last question from Jared Enes with JP Morgan.

Yeah, thanks, I guess. Thank you, Raid. 5. 10.

A couple for me please. First, given the step-up and topics that you expect for this year, I just wanted to ask, how should we be thinking about CAPEX levels beyond 23? Is next year kind of a one-off given the international expansion plans? Look, I think you should expect this of course.

investment. So you see that in the 1.3. I would say we are going to regularly invest on the capacity for the Swedish match all-world business. So I'm not able yet at that stage, you know, I'm not giving items on 24. I certainly believe that there is.

This transition moment where we are building the capacity on ILUMA, then of course, that will be accompanying the growth of ILUMA. And we are very ambitious, as you know, on growing oral product. So that will come with investment. But of course, there are not of the same magnitude as the one that we've been making in order to be the capacity on ICO.

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? Yeah, I mean, look, obviously and...

investment being in a medical space of a cannabinoid, etc. So all of these programs, they are great established milestones in terms of the...

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 historically ambitious targets of achieving disability.

dollars rather than you'll buy 2025. There is a pipeline of the product but you know the more interesting actually is you know what's gonna happen with that business beyond 25 because it's a longer term longer term investment obviously when we allocate the capital

We allocate the capital behind those things which are in the near and the mid-term for us and it's obviously hit, not burn, high cost, ILUMA expansions to the US and I can go through the long list of opportunities. But keeping also the night that this business is covered quite a bit.

have a look on this thing. I think when we meet in September of this year for the Investors Day, we'll start obviously opening a much more longer-term horizon of the management, how we see the future of PMI, not just in the next year or two, but with a longer time of a perspective and this is the moment when I guess we will share a...

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 we open a 10-year horizon for Philip Morris. We'll have to touch upon that capital allocation component as well.

Great, that's helpful. Thank you. Thank you. 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.

Thank you. Before closing our call, I would like to remind you that we will 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. Thank you, talk to you soon. Thank you.

That concludes today's teleconference. Thank you for your participation. You may now disconnect.

The C.

I I have.

qu.