© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome to the Philip Morris International Fourth Quarter 2021 Year-End Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by Philip Morris International management and the question-and-answer session. [Operator Instructions] Media representatives on the call will also be invited to ask questions at the conclusion of questions from the investment community.
I will now turn the call over to Mr. Nick Rolli, Vice President of Investor Relations and Financial Communications. Please go ahead, sir.
Welcome, and thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2021 fourth-quarter and full year results. You may access the release on www.pmi.com.
A glossary of terms, including the definition for reduced-risk products, or RRPs, as well as adjustments, other calculations and reconciliations to the most directly comparable U.S. GAAP measures and additional heated tobacco unit market share data are at the end of today's webcast slides, which are posted on our website.
Unless otherwise stated, all references to IQOS are to our IQOS heat-not-burn products and all references to smoke-free products are to our RRPs.
Growth rates presented on an organic basis reflect currency-neutral underlying results. Following the acquisitions of Fertin Pharma, OtiTopic and Vectura Group, PMI added the other category in the third quarter of 2021. Business operations for the other category are evaluated separately from the geographical operating segments.
Today's remarks contain forward-looking statements and projections of future results. I direct your attention to the forward-looking and cautionary statements disclosure in today's presentation and press release for a review of the various factors that could cause actual results to differ materially from projections or forward-looking statements. Please also note the additional forward-looking and cautionary statements related to COVID-19.
It's now my pleasure to introduce Jacek Olczak, our Chief Executive Officer; and Emmanuel Babeau, our Chief Financial Officer. Over to you, Jacek.
Thank you, Nick, and welcome, everyone. I hope you all say on well. Our business delivered an excellent performance in 2021, reaching record net revenues, adjusted diluted EPS and cash flow with growth in overall volumes, high single-digit organic net revenue growth and strong double-digit adjusted EPS growth.
This illustrates the sustainable nature of our growth based on new products and innovation, as demonstrated by the continued strength of IQOS, which delivered 31% full year organic growth in RRP net revenues. Smoke-free products surpassed 30% of total net revenues in Q4, as we progress towards our ambition of becoming a predominantly smoke-free company by 2025.
We were especially pleased by the reacceleration of our business in Q4 to deliver a better-than-expected result. This reacceleration was visible in organic net revenues, IQOS user growth, heated tobacco unit market shares across developed and emerging markets, innovation in devices and consumables, and commercial investments and combustible share.
IQOS user growth recovered in Q4 to reach an estimated 21.2 million total users, despite ongoing tightness in device supplies in the second half of the year. Full year heated tobacco unit shipment volumes grew 25% to reach 95 billion units, with broad-based growth for both our volumes and the category across key geographies, with an especially positive rebound in the EU.
The growth outlook for IQOS remains very positive, with outstanding initial results from IQOS ILUMA in Japan and Switzerland, the only two launches so far, and growing traction for IQOS VEEV in early launch markets. In combustibles, we essentially reached our goal of stable category share in the fourth quarter despite the impact of IQOS cannibalization.
During the year, we laid the foundations for our long-term growth ambitions beyond nicotine in Wellness and Healthcare, including the milestone acquisitions of Fertin and Vectura, which provide essential capabilities for future product development. And last, bolstered by strong operating cash flow, we continued to prioritize returns to shareholders through a 4.2% increase in the dividend and ongoing share repurchases.
Turning to the headline numbers. Our full year adjusted net revenues grew organically by 7.6% or 10.3% in dollar terms, including positive currency. This reflects the continued underlying strength of IQOS and the ongoing recovery of the combustible business in many markets compared to the pandemic affected prior year.
Our net revenue per unit grew 5.3% organically driven by the increasing proportion of IQOS in our sales mix and pricing. Combustible pricing was in line with our expectations at 2.7% or around 4%, excluding Indonesia. Our adjusted operating income margin increased by 200 basis points on an organic basis, in line with our expectations, with continued positive effects from the increasing size and profitability of IQOS, pricing and productivity savings.
Through first half expansion -- although strong H1 expansion was tempered in the second half by the expected initial higher unit cost of IQOS ILUMA, geographic and category expansion investment and the Q4 resumption of consumer programs in a number of markets.
Our resulting adjusted diluted EPS of $6.08 represents 17.6% growth in dollar terms and 15.3% currency-neutral growth, which is well above our prior guidance as IQOS user growth, the launch of Illuma and total industry volumes exceeded our expectations.
Finally, we generated operating cash flow of $12 billion, reflecting excellent underlying cash conversion in addition to strong Q4 business results and certain timing factors. Looking at our Q4 performance, net revenues grew by 8.4% organically. This reflects the sequential improvement in IQOS user acquisition the initial success of ILUMA in Japan and strong overall volumes, including a further recovery in combustibles.
We delivered robust organic net revenue per unit growth of 4.1%, again reflecting our shift in business mix. We achieved this despite softer pricing on combustibles of 1.4% due to the factors flagged previously of continued pandemic-related challenges in certain markets as well as comparison effects in Germany and Australia.
Our Q4 adjusted operating income margin declined by 10 basis points on an organic basis, primarily due to the same factors mentioned for the second half as accelerating business performance opened more opportunities for investment in future growth. Despite that, our currency-neutral adjusted diluted EPS, again grew strongly by 11.9%, also reflecting a lower interest cost and effective tax rate.
Turning now to 2022 guidance. After the temporary slowdown in IQOS user growth in the second half of 2021, the device supply situation is gradually improving. While the situation remains fluid, we now expect a more limited impact, allowing us to gradually return to prior rates of user progression over the coming quarters.
With the remarkable success of ILUMA in its first market, a number of other innovations planned and promising growth for IQOS in low and middle income markets, our 2022 growth fundamentals are strong, and we look forward to an exciting year.
We note that the slower user growth in the second half of 2021, particularly in the third quarter, will have an estimated carryover effect on our growth this year of around 4 billion to 5 billion cubic tobacco units. This is reflected in our 2022 expectations of 113 million to 118 billion H2 shipment volume. Given this continued growth, we expect our full year H2 shipments to again be ahead of IMS volumes.
We expect to deliver between 4% and 6% organic net revenue growth keeping us well on track to deliver our 2021 -- 2021, 2023 compound annual growth rate target of more than 5%. This range prudently incorporates the continuing uncertainty on full device availability and the pace of the ongoing pandemic recovery. For Duty Free, we assume no meaningful pickup in Asian travel, but a continued gradual recovery in other geographies.
We expect our adjusted operating income margin to expand between 50 and 150 basis points as the positive effects of our product transformation continues, despite the expectation of a moderately lower gross margin. This is essentially attributable to temporary ILUMA related factors such as the higher initial weight and cost of TEREA consumables and the cost of devices, which we expect to decrease over the 18 to 24 months post-launch as we have experienced in previous -- with previous major innovations.
We also account for higher logistic costs, where the tremendous uptake of ILUMA in Japan has led to increased use of air freight investments to grow capacity across our smoke-free platforms and inflation in certain supply chain elements. Operating income margin expansion and continued growth opportunities and in wellness and healthcare R&D will again be supported by our ongoing efficiency programs. We remain on track to deliver around $2 billion in gross savings by 2023.
Accordingly, we forecast currency-neutral adjusted diluted EPS growth of 8% to 11%. This translates into an adjusted diluted EPS range of $6.12 to $6.30, including an estimated unfavorable currency impact of around $0.45 at prevailing rates. This is primarily due to translation effects, and this currency impact reflects notably the appreciation of the euro, Japanese yen and Turkish lira versus the dollar.
This guidance includes the impact of $785 million of share repurchases made in 2021, which were somewhat restricted by blackout periods. It does not reflect the impact of repurchases in 2022 as we continue to take an opportunistic approach within our target of between $5 billion to $7 billion over three years. Our guidance also reflects the impact of acquired businesses, which we expect to generate underlying operating income in line with our business plan, but with an operating loss of around $150 million or approximately 1% of adjusted diluted EPS, which we'll come back to explain later.
As outlined in today's release, there are a number of other assumptions underpinning our outlook. We expect the total industry volume of cigarettes and to cubic tobacco units, excluding the U.S. and China to decline between minus 1% and minus 2%. Given our leadership in smoke-free product, the structural growth of the category and its growing proportion in our business, we expect to gain share a target broadly stable total PMI shipment volumes within the range of minus 1% to plus 1%. We assume full year combustible pricing of 3% to 4% with a softer first half and a stronger second half of the year. And this is clearly above 2021 levels. The pricing environment is improving but still challenging central markets with ongoing pandemic related impacts.
Our balance sheet is strong. We delivered excellent operating cash flow of $12 billion in 2021, reflecting robust underlying cash conversion in addition to favorable timing and one-off impact of around $0.5 billion. With further strong organic profit growth expected in 2022, we expect to generate around $11 billion of operating cash flow, subject to year-end working capital requirements and after accounting for the reversal of timing benefits and using prevailing exchange rates.
As a result, we raised our 2021 to '23 operating cash flow target communicated at the February 2021 Investor Day at $35 billion to the range of $36 billion to $37 billion. We also expect full year capital expenditures of around $1 billion, reflecting increased capacity investments behind our smoke-free platforms, including ILUMA and enhancing our digital commercial engine in addition to certain projects, which were delayed due to the pandemic.
Lastly, looking specifically to the first quarter of 2022, we expect adjusted diluted EPS of $1.50 to $1.55, including $0.15 of unfavorable currency at prevailing rates. We expect robust organic top line growth and operating margins comparisons, which reflect above the very strong prior year quarter, which benefited from a high level of productivity savings and relatively low levels of investment and the Q1 of 2022 dynamics of commercial investments, ILUMA related costs and increases in some inputs such as freight.
Let me now hand over to Emmanuel, who will give you more details of our performance in 2021.
Thank you, Jacek. Turning back to our 2021 results. Total shipment volumes increased by plus 4.2% in Q4 and by plus 2.2% for the year. This reflects continued strong broad-based growth from HTUs of plus 25% or 18.9 billion units for the full year, comfortably exceeding the decline of 3.6 billion cigarettes. The plus 2.4% increase in our Q4 cigarette volumes reflect the continued sequential recovery of the total industry and of our category share, in addition to a 2.7 billion stick favorable inventory movement, which mainly reflects inventory reduction in the prior year quarter.
Due to the remarkable performance of IQOS, inter tobacco units comprised almost 14% of our total shipment volume in the fourth quarter and 13.2% for the year, as compared to 11% in full year 2020, 8% in 2019 and 5% in 2018. Our sales mix is evolving rapidly, putting us on track to become a majority smoke-free company by 2025. Smoke-free net revenues made up over 30% of our adjusted total revenue in Q4 and 29% for the year as compared to 24% in 2020.
In 10 markets, we have already surpassed 50%. IQOS devices accounted for over 6% of the $9.1 billion of 2021 RP net revenues with a step up in H2, reflecting the IQOS ILUMA launch, outweighing the effect of supply constraint on the IQOS versions.
We delivered plus 7.6% organic growth in 2021 net revenues on shipment volume growth of plus 2.2%, reflecting the twin engines driving our top line. The first is pricing on combustible and in certain markets on HTUs. Second is the increasing mix of HTUs in our business at higher net revenue per unit, which continues to deliver substantial growth and increasingly powerful driver as our transformation accelerates.
Let's now turn to the driver of our 2021 margin expansion. Our gross margin increased by 190 basis points on an organic basis due to product mix, pricing and cost savings, while our adjusted marketing, administration and research costs were 10 basis points better as a percentage of adjusted net revenues.
We generated over $800 million in gross cost savings in 2021 with around $550 million in manufacturing and supply chain productivity and more than $250 million in SG&A efficiency before inflation. This represents strong progress towards our target of around $2 billion for 2021, 2023 and allows us to reinvest in top line growth while continuing to deliver robust margin progression.
While OI margin expansion was lower in H2, this reflects the positive dynamic of our business and the ability to return to normalized investment levels compared to the pandemic affected prior year. ILUMA device and HTU shipments commenced with higher initial unit cost and we reaccelerated investments in our commercial program, digital engine and R&D as well as a number of growth opportunities across categories and geographies. We intend to continue investing in such opportunities in 2022. But with the benefit of scale, operating leverage and accelerated efficiencies we continue to target organic SG&A increases below the rate of sales growth.
Moving now to market share. Our share of the combustible category recovered and was essentially stable in Q4 on a year-over-year basis, as our portfolio initiatives bear fruit and pandemic-linked restrictions received in many markets. Our leadership in combustible helps to maximize switching to smoke-free products and we continue to target a stable category share over time despite the impact of IQOS cannibalization. Aside consumer growth, we accelerate, we target at first a slightly decline in 2022.
For the combustible category overall, the improving total market backdrop includes notable Q4 recoveries in Indonesia, Mexico and Turkey, close to stable industry volume in the EU region and a modest recovery in duty free driven by sales outside Asia. Daily consumption remains below pre-coded level in certain markets such as the Philippines, where our share of market is influenced by mobility and social consumption.
In Indonesia, our share was again broadly stable on a sequential basis despite the continued growth of the below Tier 1 segment and our volumes grew over 4% for the year. The reduction from 10 to 8 excise tax year in 2022 represents a step in the right direction, and the industry weighted average excise increase of around plus 13% is slightly below the prior year. However, the playing field remained unequaled between industry players and the pricing environment remains challenging.
In terms of our overall share, ongoing gain for our IQOS portfolio create positive momentum going into this year, and we expect to resume overall share growth as well as achieving broadly stable total shipment volume. PMI HTUs now have a 7.1% share in the markets where they are present, making them the third largest tobacco brand. This includes the number one position in five markets, and the number two in a further six markets.
Moving now to IQOS performance. We estimate there were approximately 21.2 million IQOS users as of December 31. The improved growth of plus 0.8 million in Q4 reflects our agile commercial model, which allowed us to rapidly adjust our consumer program and assortment. As demonstrated by the performance of ILUMA in Japan and Switzerland, the underlying momentum of the IQOS brand remains strong.
While we don't yet have full visibility over the full year of 2022, as device shortages ease, we expect to gradually return to user growth at or above the prior run rate of around 1 million per quarter. We estimate that 72% of total users or 15.3 million adult smokers have switched to IQOS and stopped smoking with the balance in various stages of conversion.
In the EU region, Fourth quarter HTU share reached 6.4% of total cigarette and HTU industry revenue, 1.4 points higher than Q4 last year. Underlying IMS growth trends remain excellent. This very good performance included strong growth across the region, with Italy reaching the milestone of 2 million users and positive contribution from Germany and Poland. I also want to highlight Hungary where our Q4 national HTU share exceeded 20%, following Japan and Lithuania enriching this important threshold.
To give some further color on our progress in the EU region, this slide shows a selection of the latest key city of offtake shares. While Vilnius continued to lead the way with 37.5% share, the 20% level was also reached in Budapest, Rome and Athens. With strong progress across the region, we are especially pleased by Vienna, almost doubling to 4%, the strong traction in London at almost 6% share, and an acceleration in Zurich with the introduction of IQOS ILUMA. We show further HTU share data in the appendix to these slides.
Share growth continued in Russia with our Q4 TU share up by plus 0.8 points to reach 8%. For both Russia and the overall region, sequential growth in adjusted IMS slowed in the last two quarters, partly reflecting the more acute device shortage and lead on commercial program. In addition, the region was affected by the halting of sales in Belarus, which impacted sequential IMF growth in Q4.
In this context, as mentioned in last quarter, we have seen some increased discounted competitor offerings and disposable e-vapor products. We continue to see high interest in the category and with a pipeline of exciting innovations plan, including the launch of ILUMA, we aim to resume strong growth this year.
In Japan now, the adjusted total tobacco share for our HTU brands increased by plus-1.7 points to a record 21.8% in Q4. And an offtake exit share approaching 23%, with Q4 adjusted IMS sequential trends, incorporating the pull forward of consumer uptake into Q3 before the price increase. This performance reflects the strength of our portfolio and the launch of IQOS ILUMA, which I will come back to shortly.
The overall heated tobacco category continues to grow, making up over 31% of the adjusted total Japanese tobacco market in Q4; with IQOS maintaining a high share of segment and capturing the majority of the category's 2021 growth.
In addition to the strong progress in developed countries, we see very promising IQOS growth in low and middle income market. A prime example of this is Egypt where offtake share in Cairo is approaching 4% within six months of launch with other notable successes, including Lebanon, Jordan, the Dominican Republic and the Philippines despite funding in retraction in Manila.
This low and middle-income market key city performance is especially encouraging as we achieved it despite the premium position of the current IQOS portfolio. We do intend to bring a new complementary range of heat-not-burn products tailored to emerging markets towards the end of this year, which I will come back to.
With this potential in mind, we continue to drive the geographic expansion of our smoke-free products as we aim to be in 100 markets by 2025. During the quarter, we launched IQOS in both Morocco and Tunisia. This takes the total number of markets where PMI smoke-free products are available for sale to 71, of which 30 are in low and middle-income markets.
We plan to add more market this year as we also meaningfully broaden our product offer and price segmentation within existing geography. This includes the expansion of feel and feet, which are now available in over 20 markets across multiple regions and our expansion of e-vapor and nicotine pouches.
Following the implementation of the ITC's importation ban, IQOS is not currently available in the U.S. We continue to work on contingency plans, including domestic manufacturing and hope to be able to resume U.S. supply in the first half of 2023. It is important to remember that the ITC's decision on this patent is an outlier.
We were encouraged by the U.S. patent office recent invalidation of one of the two patents included in the ITC ruling, and we expect a decision on the second patent by April 2, though this decision are subject to an appeal process. BAT has been universally unsuccessful in asserting the same two patent families against IQOS in Europe.
Separately, in December, a German court ruled that BAT's GLO HYPER dual-coil heat-not-burn device infringes our patents and that we are entitled among other things to an injunction against BAT sales cells of the device.
Moving now to IQOS ILUMA. We are delighted to report the outstanding success since its launch in Japan and Switzerland with sales performance and consumer reaction exceeding our expectation.
In Japan, the uptake of ILUMA devices and consumables among both existing IQOS users and legal-adult smoker has been rapid with more than 20% of the large user base switching since the August launch and over 20% of sales to legal age smokers due to IQOS. Moreover, the enhanced and consistently high-quality user experience, better reliability and no need for cleaning has led to significant observed increases in conversion rate, retention rate and Net Promoter Score.
This bodes well for volume growth and indeed, premium-priced TEREA consumables have been the fastest-growing launch in the small free category reaching an offtake share in the three main convenience store shares change of 8% within three months of national launch and driving the growth of the heat-not-burn category following the October tax-driven price increase.
Early results in Switzerland have been even more remarkable with over one-third of sales to new user and TEREA making up over one-third of HD sales after only two months of commercialization. Our HTU share growth has accelerated accordingly from 6% in September to 7.9% in December. These results are very encouraging for the wider rollout of ILUMA in the EU region and around the world, and we plan to roll out gradually to more markets this year, mostly in H2.
While we continue to manage device supply constraints, the unprecedented growth in Japan also means we have had to accelerate both the supply of TEREA consumable using airfreight and the conversion of our production line to support new market launches. With ILUMA, IQOS 3 DUO and LIL, we now have three heat-not-burn technologies under the IQOS umbrella to serve different consumer needs and segment the market.
We have an exciting pipeline of innovation on devices and consumables across our technology at different price tiers. As I mentioned, we also plan to enhance our portfolio for future growth with the introduction of a new complementary technology towards the end of this year. This will be targeted at smokers in low and middle income market, catering to the consumer need of simple high-quality, affordable devices and consumable and specific local test performances.
In terms of HTUs, after launching over 15 new ILUMA SKUs in Q4, we plan to continue expanding our portfolio across platforms, geography and price point this year. We continue to commercialize IQOS VEEV with very promising results in the first group of markets where we started in our own channel with a limited range of test variants and nicotine levels.
IQOS VEEV is a premium product, providing a superior experience and the commercial faster of IQOS allows us to deploy efficiently and our scale through a bespoke route-to-market approach.
As we start to expand distribution and the consumable offering, we observed signs of increased uptake and clear positive consumer feedback relative to competitive product. We see encouraging success in Italy and the Czech Republic, reaching double-digit offtake shares of close to 10 points with rapid progress also visible in Croatia within three months of launch.
After launching in Canada and Ukraine in the fourth quarter, we plan to add more markets in 2022 with timing subject to device availability. We also continued preparation to apply for a PMTA from the U.S. FDA and now prudently assume readiness for filing in early 2023, given further clarity on the required preparatory steps.
An additional exciting midterm growth opportunity is in the nicotine pouch category, where we aim to become a leading player with a Shiro brand. Nicotine pouches provide convenient smoke-free alternative for adult smokers. And while still early in many markets, we see Shiro playing an important role in our smoke-free portfolio over the coming years.
Following the acquisition of AG Snus and Fertin Pharma, we have established a base of product development and manufacturing expertise. Although we are still learning about the promising category, our IQOS commercial infrastructure allows for a fast rollout and we plan a number of launches over the coming quarters.
The first major activity is the full re-launch of the revitalized Shiro portfolio in the Nordic this month from its more limited prior presence with full commercial activity and a broad portfolio of flavors and strength variance. Separately, following feedback from the 2021 consumer test of our Platform 2 carbon product, the design of our current technology has been discontinued. We are assessing alternative design for this consumer segment.
Turning now to our nascent business beyond nicotine, the 2021 acquisitions of Fertin, Vectura and OtiTopic provide the base for building critical respiratory and overall product development capabilities in tandem with our existing expertise. This opened up opportunity to deliver the positive effect of existing wellness and health care molecules in a fast and effective manner.
For the time being, our reported number in the other segment showed the existing acquired business, which delivered $101 million in net revenue in the fourth quarter and a marginal operating loss of $1 million. The underlying performance is in line with our expectation with reported operating expenses reflecting the amortization of intangible, deal-related items and our planned investments.
Around 39% of Q4 revenue were derived from Fertin's smoking cessation product and nicotine pouch operations. While we intend to continue the CDMO activities of the acquired companies, the most significant value to PMI is in this ability to develop and commercialize new products in the wellness and healthcare segment over time.
We plan important R&D investment over the course of the coming years to support the aim of delivering meaningful incremental revenue starting two to three years from now as we pursue our ambition of at least $1 billion of net revenue from wellness and healthcare products by 2025.
As I mentioned earlier, we expect an operating loss of around $150 million in 2022, with revenue of around $250 million, including smoking cessation products. We recognized investor interest in our future product line in these new areas and plan to provide more color at our CAGNY conference presentation on February 23.
Moving to sustainability and our ESG priorities, I'm happy to share that we recently completed a new sustainability feasibility assessment to update and recalibrate our priorities in accordance with our biggest impact on society, double maturity and extensive stakeholder inputs. While addressing the health impact of our product remained by far the biggest focus, we also identified a number of topics, which are emerging in importance or required an evolved approach.
We will publish the results next week. It is increasingly important to align management incentives with sustainability materiality, performance and impact. We will strengthen this link in 2022 with the new sustainability index and plan to provide more details in the near future. Our progress on sustainability continues to be recognized by leading external stakeholders with repeated inclusion in both the Dow Jones Sustainability Index North America and the Bloomberg Generic-Quality Index, and receiving CDP's AAA score for the second year running.
We also published an agricultural labor practices report, making 10-year -- marking 10 years of the program. Since its introduction, we have successfully eradicated systemic issue related to child labor, while improving living condition of farmers and farm workers. It also outlined our ambition targets such as 100% farmers supplying tobacco to PMI, making the leasing income by 2025.
On our most critical priority of product impact, the grown penetration of smoke-free products around the world is accelerating the end of cigarettes as legal age smokers reach to better alternative. I am also pleased to report further recent positive regulatory development. For example, as part of its beating cancer plan, the European Parliament special committee recognized and featured harm reduction in its last report for which the plenary vote will take place next week.
In New Zealand, the government published its more action plan, expressly excluding small free product from the proposed measures. In addition, the number of countries, including Poland and Russia have announced new multiyear excise tax plan with taxation of smoke-free products clearly differentiated from cigarettes, making 15 markets globally with such plans.
There is a growing body of scientific and real-world evidence of the substantial reduction potential of smoke-free product compared with smoking. While challenges in some markets are to be expected, we continue to support regulatory and fiscal framework that recognize this critical harm reduction opportunity.
I will now turn back to Jacek for some concluding remarks.
Thank you, Emmanuel. Overall, we are very pleased to have delivered excellent growth in last year in 2021 with a strong underlying momentum for IQOS as well as the record adjusted EPS, net revenues and cash generation. In the consistent quality and sustainability of our organic top and bottom line delivery has been clearly demonstrated over the last two years, which I believe we all acknowledge with pretty to volunteers.
With an improving outlook for device supply, although still were an element of agility, the exceptional initial success of ILUMA and the number of innovations and growth initiatives. We look forward to 2022 with a tremendous excitement. At the same time, we're building -- we will be building our development capabilities in wellness and healthcare for targeted investment in order to support the next driver of our long-term growth.
Our balance sheet is strong, and we have increased cash returns to shareholders through a higher dividend and our share repurchase program, in line with our objective to deliver sustainable value and returns to investors as we continue our smoke-free transformation. In short, we continue to see a bright future of our business. Following a very strong 2021, we remain confident in our '21 to '23 growth targets and in our ambition to be majority smoke-free by net revenues in 2025.
Thank you all for your attention. Emmanuel and myself will be happy to answer your questions.
Thank you. We will now conduct the question-and-answer portion of the conference. [Operator Instructions] Our first question will come from Bonnie Herzog with Goldman Sachs. Please go ahead.
Hi, Jacek and Emmanuel. I hope you're both doing well. I have a question on your EPS guidance this year. It's quite a wide range at 8% to 11% on a currency-neutral basis. So I was hoping you could highlight some of the key assumptions or drivers that put you maybe at the low end of that range versus what needs to happen for you to get to the 11% growth? For instance, 11% is possible even if the chip shortage situation doesn't get resolved for the next few months?
I think Emmanuel.
I'm going to take this. So, obviously, and we've been trying it in our preliminary remarks, we are still facing a number of uncertainties. The COVID does not disappear even if things seem to be improving. We don't have full visibility on the IT shortage and on the supply chain globally. And that is obviously what is behind with some certainly cautiousness on the guidance that we are giving on the top line.
And then from there, we, of course, are driving a business that is seeing a good momentum. We have the traditional driver of price increase. We're going to be very efficient on cost savings. You can see what we've been delivering in 2021, already more than $800 million of efficiency on our cost. We're going to continue in 2022. And I know that is going to drive the difference between the revenue growth and the adjusted EPS organic growth.
One of the headwinds that we're going to face this year, which I think we should see as very positive because it's coming from the growth, and we are managing a very nice potential of growth is that we are investing for exciting outlook. It starts, of course, with ILUMA in Japan, but globally, the launch of ILUMA, but certainly with a big impact in Japan, where we know that when we launch a new product, this is having some impact on the cost of goods because we are not at the same level in terms of efficiency on the supply chain.
The productivity is not at its maximum, and we've been explaining that in our remarks. And that is going to have some impact at the launch. We talked about air freight as well and that is to have an impact. We said it with probably what we see today is a moderate decrease of the gross margin rate. Without that, it would have been from what we see today, another year of growth of the gross margin rate. But that's really what is driving the guidance. So we have some uncertainty, but we are very excited by the potential of growth that we see with all this innovation that is coming up.
We have the traditional driver of efficiency that are going to help. We have some headwind, which was absolutely planned because we are coming with innovation, and we need to invest to launch this innovation. And I should add in terms of innovation, but it's certainly the fact that we are also expanding in terms of geography, what we see in Egypt bode extremely well for the potential in emerging countries, but we need to invest, of course, to build the capacity. We need to develop our commercial tools. We need to invest on the new platform, vaping and nicotine pouches.
So what I think is great in this guidance and in our ambition for 2022 is that it's a year with a lot of investment for an exciting growth, but we are still able to deliver a good dynamic top line. We are able to deliver nice margin improvement, good organic growth at a good level. And as you have seen, we are hugely cash generative, and we do that at the same time, again, while investing for the future.
Okay. That's super helpful and honestly makes a lot of sense. So clearly, a lot of puts and takes, but you've got a lot of levers to pull. For my second question, I maybe wanted to switch gears a bit and just kind of asked a little bit about the situation in the U.S. and just maybe an update. It sounds like you expect to get back in the market next year with IQOS. So maybe love to hear a little more color on this. And will the build out of the production in the U.S., will that be your financial responsibility? And then Altria mentioned some issues between you two in terms of the agreement you have in their fourth quarter press release. So just was hoping to better understand what that could mean. For instance, I guess, Altria fails to meet the terms of the agreement, would you then pursue distribution of IQOS in the U.S. yourselves? And/or, I guess, find another distribution partner? Can you kind of walk through that for us? And then I'm thinking on tech of a potential solution for VEEV in the U.S., assuming it gets approved.
Yes. So Bonnie, as we're working on the -- bringing the manufacturing capacity for IQOS on the U.S. territory. And that's our main mitigation plan or reaction plan to where we are today post the ITC event. As we said, we think that the summer at the beginning of the next year, we should be in a position to resume the shipments in the U.S. As we and the Altria is this close, we have some disagreements with regards whether Altria has fulfilled the certain milestones in the current contract, and we're currently in negotiations or discussions with Altria to resolve it.
And so, I believe in a good faith, we should be finding some solutions. I wouldn't do know beyond speculating what other options and how we would approach the IQOS going forward in the U.S. I mean, our partner results, and I think we should see some amicable solution between both partners.
Now I have said it on a number of occasions in the U.S. market is as a few other markets in which we have a very negligible and more presence of strategic importance. So obviously, you've heard us in the past, I believe that that pre-ITC ruling IQOS performance in U.S. and you know how we perform with IQOS across all essential geographies I mean it's really well below what I would expect at this stage or characterize the potential of IQOS.
And if I take into this, the fact that this is then inhalable FDA authorized product, you don't really have a competition and the size of the market, et cetera, I think it's fair to say that the expectations were much beyond where we are today. But I will stop here and I believe we will find a good resolution, which will, on the one hand, enable the American smokers, cigarette smokers to have our access to that technology, and also something which will be accretive to us with the partners' results there.
We'll take our next question from Chris Growe with Stifel. Please go ahead. Your line is open.
I just wanted to ask, first of all, on IQOS, and you had a nice acceleration in the number of IQOS users in the fourth quarter. I just want to -- and I know you talked about an acceleration of getting back to that roughly 1 million users sequentially. Can that not happen until the second half of '22? Or will supply be sufficient to where you could start to see that level of user growth in the first half of '22? I'm just trying to get a sense of that availability of devices to understand the growth in '22.
Yes. Look, the Q4, reacceleration of coming back to the previous user growth is highly encouraging. I just confirmed that IQOS had that ability of a continued growth. Obviously, it's very much hinges on the fact that though we have unrestricted availability of the devices. And remember IQOS today has had a heat-not-burn propositions, which we have today consist of the few versions of IQOS blade product.
I should mention real product coming through the other partnership with TMG and IQOS ILUMA. And all of that also rather create certain portfolio of proposition for the various target in the various consumers growth. So we regain a little bit of a flexibility of recomposing the full portfolio in Q4. And hence, Europe we've all seen the spectacular regain in the user acquisition.
It is somehow reflected in our 4% to 6% growth target and the heated tobacco unit target for this year that for how many months or for many weeks in a year, we think we can have unrestricted access to the full product portfolio of the devices very much. I believe that actual IQOS can fly is higher if we're in the unrestricted moot, but some have in the product as for the next year, we should have bigger scenario, which is maybe more on the moderate side, et cetera.
If this was the -- if we wouldn't have all these constraints coming from a device as a couple of other things in the supply chain, I believe would be looking at the different numbers. But at this stage, it's difficult to start taking this into something which we think we can we can deliver. So I think I'm saying the IQOS has a higher potential that growth rate, but when you really have to be the moment when we can go unconstrained.
Needless to say that part of our growth is coming from Asia region. And although European Union was less than part of the one that you like, seems like it's moving COVID behind, we're still not at the stage in Japan and a few other locations. So we also have to start factoring this in. But I'm very optimistic that we can deliver 2022 and frankly speaking, knowing how much headwind we need to take on our test in 2022. I start looking actually excited about the '23.
Just to complement on your question on, can we reach 1 million. I think we are simply we see rather a ramp up today. It doesn't mean that we cannot reach 1 million in one of the quarter in H1, but it's true that we see a ramp-up and an acceleration as we go through the year.
Okay. And I did just have a quick question on the U.S. to follow on Bonnie's question. Is there a scenario where you prevail on the patent office review that would allow you to start importing the product again before the first half of '23? So you're getting your supply chain ready in the U.S., but is there a chance that you could win on the patents and not -- and be able to import the product again?
Well, there it. But the whole process is -- I think it deserves separate conversations about the patent laws and the processes around this whole thing and unfortunately, we have to cope with this. I mean, every, we prevail on the invalidation of some patents, obviously, the other party, in this case, if they have a right to repeal. So the whole process is really extended in time. And by -- you need another couple of years, frankly speaking, until you have when of the parties actually can claim the full victory.
Then you have to go to the ITC and establish the restrictions, if you like, which are now imposed on us. I think the fastest -- absent any other resolutions, right, the fastest route back to the U.S. is reactivating that our domestic capacity and resupplying the market from that. And then maybe that later on, we are constrained, which means that the U.S. market could be supplied from the both international and from the domestic. But I think the near-term opportunity for us is to go the route which we discussed.
We'll take our next question from Pamela Kaufman with Morgan Stanley. Please go ahead. Your line is open.
I have a question about your outlook for combustible pricing in 2022. Pricing in 2021 was below your historical rate of growth, given headwinds in Indonesia. But can you talk about your expectations for pricing, pricing environment in 2022? And how you're prioritizing price realization versus market share in combustibles?
Yes. So we're looking for, as we said, we're looking at the 3% to 4% pricing variance this year, which is better, stronger than the last year. I think some Asian geographies to the variety of factors are still presumably driving as lower on what we think we could have normally realized a bit comparing at least to the historical trends we have there. Indonesia, you're absolutely rightly pointed out is on the negative, although the tax increases, which the industry has to pass on.
I mean, give some hope that we can end up with that maybe Indonesia can return to that pricing is the important component of the growth there. But we also have to take it from the considerations of impact of recovery, the volumes and presumably talking more about the Philippines. We see how much of this thing we can unwind in 2022. And having reaching the benefits in '22 and how much we can build at a pace for '23. It's going in the right direction, but a bit of a more is needed.
The last of the pricing environment, okay, so as difficult to predict, but as we characterize it's improving on all our geographies. And we have a pretty good visibility at this stage, obviously, about the taxes that is in the major volume or profit market to Emmanuel in his part of the remarks, was talking about this more and more countries are taking to the multiyear approach, which gives us better visibility and planning around.
As you know, in some countries, the tax increases cannot be passed into consumers in one step. You need to have some preparatory, take some pricing before some pricing after -- so it is going into the right direction, especially if we take it in a context that every country, every market is having a huge pressure on the public finances due to the COVID situation, et cetera. So, I think we -- I mean, as far navigated pretty well there.
Right, thank you. My second question is on ILUMA uptake. And if you can provide some more color on how much of the new user growth in Japan has been driven by ILUMA for IQOS? And what observations you have around the user base and the interaction with prior versions of IQOS?
Yes. So -- but you might have -- if I remember that from the very beginning of ILUMA was personally very excited about that innovation. And I am so happy that it delivers on my expectations, actually is not even beating by expectations. So I will continue if you allow me to present enthusiastic voice. ILUMA does generate, obviously, the IQOS user, Blade product users, you appreciate the benefit of ILUMA the first moment, you have it in your hands and you have your fist experience. And the response from the consumers in Japan is phenomenal.
Obviously, the ILUMA goes to the existing users, but we also already having the benefit of existing IQOS users switching to ILUMA because they have uninterrupted consumption during every moment a day when they or they're willing to use the product. And this also has an impact on the volumes. In other sense, if I give you the device, which is much more informative to use, reliable, much, much, much more reliable, you will have a tendency to increase the consumption versus what you have on a blade, we the patients failed to allow for having that experience. So that's a very good thing.
Second thing is ILUMA, after all of these initial months, we observed a very solid higher level of conversions. And if you know, it is a very important component in the business model. I have many devices will fully convert smokers combustible smokers. How many of them will stay because it releases the pressure going forward also on the margins, et cetera.
And the third one is, at this stage, I remember the number likely about 20% of the user of the ILUMA cells is coming from the people who are never in the category, not in cost. And also what I start serving recently, you also start taking back users who have temporary and migrated from IQOS to competitive products. So in whatever aspect of performance of ILUMA look like, it really delivers on every axis.
So the question is again, and I know that for some might be body, do we have availability of the devices? And can we continue supplying the market and the rest, I believe so far so far is really going in the right direction.
We'll take your next question from Vivian Azer with Cowen. Please go ahead. Your line is open.
My first question is on pricing. Certainly encouraging to hear that your outlook for 2022 contemplate an improvement in pricing relative to last year, I was wondering, however, if you could just comment on how you're thinking about price gap management between your combustible cigarettes and your heated tobacco units, please?
Well, we essentially, in most or all markets, we maintain the same sort of a positioning of IQOS today versus the cost of combustible reference point. As you know, most of the tax systems actually have that conversion mechanism baked in. So if there is a tax increase on a combustible somehow proportionally this triggers the increase on the heated tobacco units, which translates at the consumer price gaps essentially untouched.
We obviously complement depend on the market situation, our portfolio, for example, KT&G, the real proposition and I think it works very nicely, especially in the geographies when IQOS reaches the levels which are above, for example, premium -- equivalent of the premium price segment in the combustible market. So we need to take affordability to the equation as well, so instead of doing something about the pricing of IQOS and the heats.
We're actually expanding the portfolio to the below, but also to the above in some geographies when we think there is a bus premium versus IQOS versus heat that the opportunity. We did it very successfully in Russia in a few European markets. So I think the whole thing is that the broader we have a portfolio of horizontally from a price perspective and vertically from taste, flavor, et cetera, perspective, we're increasingly creating more attractiveness for the cigarette smokers to switch to heat-not-burn.
Perfect. And my follow-up question decision to discontinue Platform 2 TEEPS. Certainly, that product has been under evaluation for a number of years. And I was just curious to hear kind of the key take away from the consumer test. Is the problem that consumers are using a live heat force, and that's just creating a lot of confusion in terms of the reduced risk proposition? Was it product performance? Just any other color would be helpful.
Now actually, I think that like allow me the language, it was more on the user interface rather than anything else. I don't think the past the number of the market test the proposition, the livability of the propositions in terms of the -- is the better alternative to smoking and everything goes there. The issue actually pertains to the heat pipe. As you remember, the design at the very end of the cigarette-like looking product, you have the heat size, which requires lighting, okay?
And this was -- to face open this from the paper cup lighting this. And that is the question, how you extinguish the product, right, because you need to pay attention how you extinguish the product. And this was actually in our opinion, what the consumers' opinion actually, not the leading to that adoption levels, which we would wish to have an especially comparing our experience from other platforms and the mainly T1 platform.
So I think we reached the moment the design of that product and this part of the technology around the heat source and operating asking the consumers, how the intern operate around this whole thing led us to the conclusion that we are seeing that design component we shut down. And I think still the proposition makes sense is understood by the consumer has the potential, but we cannot offer the product to the consumers, which they will not find convenient to use.
And the convenience is either name of what the consumers want these days, and I think we need to deliver on this one, especially that our ambitions would be to also leverage the equity, which we build around the IQOS, and IQOS cannot afford product, which has this one. So I think we will come back one day to the P2. From the very beginning, you may recall our annually Investors Day when we start talking about the vision of growing smoke-free and how many platforms will be needed to compare the 1 billion small cars worldwide.
This is a proposition which is more for the more conservative audience, the people who really don't want to completely walk away from the ritual experience when the combustible cigarettes are delivering. So I think in terms of our growth prospects for the item I don't think it's that much of an issue that we will be working on that by using a different approach to the design and the technology going forward, going forward. So I hope it answers your question, Vivien.
We'll take our next question from Gaurav Jain with Barclays. Please go ahead.
So I have a couple of questions. So first one is on your guidance. So your volume growth is minus 1:1. You are saying cigarette pricing will be three to four. And then category price mix in that slide that you have, it is plus three, assuming it is a three. So it should come to plus 5% to plus 8% on revenue growth for FY '22, but you are saying 4% to 6%. So that will imply that the category mix uplift will be less in FY '22 than was the case in FY '21. So can you just help us understand why that will be the case.
I'm happy to try to add to, Gaurav, certainly what we are expecting in 2022 is to have another very nice difference between the volume growth and the revenue growth. And indeed, for the volume, we've been guiding to -- from minus 1% to plus 1%. So then the question is how much are we going to generate in terms of extra growth, there is this price where we have in 2% to 4%. Remember, we've done 2.7% in 2021. So, the low end of the bracket is not massively above what we did in 2021. But it's true that it could be better, and it's certainly something that we are factoring in the high end.
And then there is impact of the growth of the IQOS business and it's on category where we have this positive mix impact that is playing. But here, the mix and with the launch in many new economies and new geographies and emerging country that is potentially having an impact on the differential. So, we do expect a very strong differential again, but not necessarily at the same level as the difference that we generated in 2021.
Last but not least, we referred to the fact that we have, at the beginning, and its temporary higher weight on the consumables for IQOS ILUMA Ontario. And this is having an impact because the excise duty in the country where the excise duty, are based on weight is higher, and therefore, because we are coming with the same price for the consumable than it. That can generate when we have a switch but temporary. Again, I see from the fact that it's temporary, decrease -- a slight decrease on per steak. So that can have an impact as well.
So that is really what you're going to have plus potentially some impact on the price which will depend on the volume of the device that we sell also on the mix of the device that we sell and also on the commercial aggressiveness that we want to have on the price of the device. So you have to take a number of things into account.
Now at the end of the day, as you can see between the minus 1% to plus-1% and the 4% to 6%, we are definitely targeting to have another year with a very nice differential between volume and organic revenue growth, which is exactly how we end up.
Okay. That's very helpful. And my second question is on the beyond nicotine segment where you will have $150 million of operating losses this year and you make also the comment that you will invest in it in future years so that you can hit the $1 billion revenue target. So does it mean that the losses we should expect to be higher in FY '23 than what they will be in FY '22? Or when could we expect that segment to break even?
Well, I think there will be an investment for the next few years, not a couple but a few years, which we are willing to do. I think if you stay with us and wait until the CAGNY when we will give you more insight of what we have, what is our thinking about is beyond nicotine wellness and healthcare business because then we will be in a position to show which products, concrete products or programs we're willing to go after what is the size of an opportunity and what sort of investment is in terms. But I think the number which we gave for this year, for 2022 in the guidance, about the ballpark sort of the investment, which we will be calling for the couple of years.
It's not a one-off. It could go a bit higher, but I don't expect an explosion here. I think you have a good calibration of the cutout that we're going to invest over a few years.
We'll take our next question from Jared Dinges with JPMorgan. Please go ahead.
First, I want to touch a bit more on the nicotine pouches. How should we be thinking about the scale of that initial launch in the Nordics? And how should we think about the future market launches that you guys touched on a bit? Are you considering launching nicotine pouches in markets maybe that don't have a nicotine pouch presence today, like some of your emerging markets? And also, just looking at the potential in the U.S., would you consider a PMT application there as well?
Yes, I would leave the U.S. aside for a second. I think nicotine pouches can play a very important role in, if you like the smoking smokers, okay? They demonstrated their variability that has that proposition in many markets. Initially, we're essentially taking share as we acquire this.
And after remaking of the product and the packaging, et cetera, we'll go in the market when there was some sales of a share, obviously, not very high, but we start where we already were present. And we build on this as always, in our innovations who will look at the consumers' feedback see what else we have to improve. And we also have some product pipeline behind the initial offering which we now could accelerate to the large extent, thanks to the acquisition of the therapy.
Now, Fertin gives us much broader opportunities than just the pouches because Fertin seats on the very interesting delivery systems in -- for the oral delivery. And we know that Fertin is the manufacturer of the nicotine replacement therapies like the gums, nicotine gums, but they also have interesting other technologies. So, we will be thinking we start with the pouches, but I think over a period of time, 2022.
i think the oral way of delivering nicotine as a substitute to smoking is actually a very attractive opportunity, which we are very excited to start working on. So, we will go into the geographies, obviously, when the pouches are not present today. I mean, as you know, we have a geographical footprint in addition to this 70-plus markets where they have acquired quite a meaningful IQOS infrastructure.
You're back in the shops, you're back in digital. You're having one in CRM, commercial consumer engagement. I believe we can start adding to that our portfolio of the propositions to smokers to the oral category -- broader oral category than just the pouches. So we focus this year on the pouches. We will be extending the presence, but I think that is more than just the pouches and the very pleased that we concluded the acquisition of rating because it gives us -- it accelerates our development by a quite good few years, which others would have to take organically.
Got it. So just to follow up on that. So you would consider the U.S. PMT application?
I think I answered that question to Bonnie. U.S. is a very attractive market, and I believe this other strategic importance to us. And I do believe that in the market of the size of the U.S., we need to have all platforms, frankly speaking, because of the one platform which can guarantee the full success of proceeding of an opportunity. So ultimately, yes, but our focus today is somewhere else.
Got it. And the second one, going back towards cigarettes and IQOS. Are you guys worried at all about potential impacts of price elasticity especially with lower income consumers given the inflationary environment and where you guys are positioned in most markets, and we're usually more at the premium end. So maybe you can give a comment on that?
Yes. So the price elasticity is always the concern, and as we know very well, sometimes is price elasticity on the tobacco nicotine product is elevated due to the pressures or income pressures on the consumers. So, we're now having that situation in a few markets that consumers have a pressure on the income. I mean I believe some of these pressures will unwind as the COVID will be becoming a sort of the past and I don't think it's anything systemic.
It's very interesting you're asking this question because if we look in the market where we're taking pricing on cigarettes and the HeatSticks and the market has a pretty robust set of data from the past increases. I think today, products like IQOS or alternatives to smoking, tends to have a better elasticity, price elasticity than the conventional cigarette. And as you know, I guess, very well, the price elasticity on cigarettes and discard by other factors was pretty attractive, and this was a part of the building as a business model.
And actually, at this stage, looks with alternative even for the -- not high but better elasticity than a combustible cigarette. Separately, not from the elasticity perspective, but from the pure affordability perspective, we were already pretty successful with IQOS in the so-called low middle income countries. But we also know that in order to make the more significant inroads. We need to come with the proposition, which directly addresses the need below-price, price segment.
And we will not deliver the smokers behind alone. And before the end of this year, we having the plans to test another technology which would allow for the both devices and consumables to be more accessible from an affordability perspective, while there we're going to have reduction potential as I course as we know it today. So, we're taking those things into the very serious consideration. So thank you for your question.
And there are no further questions at this time. I will turn the call back over to the management team for any closing remarks.
Well, this was a call longer than expected, but we also delivered the results last year better than we expected. I think somehow we match it. Thank you very much for your attention. We invite you to our CAGNY presentation, which will be in a position to give the more light, more details on the few aspects like what we discussed today, wellness healthcare, but also how we look here in a much broader in terms of the development of these categories.
And I think we got filling in our, my voice and Emmanuel's voice how excited we are that '21, we delivered in that shape and form. And despite the number of headwinds, which I believe we articulate pretty well. We're still looking into the very successful and rewarding for both of us 2022. So thank you very much for your attention and hope to see most of you, if not all the recovered CAGNY presentation. Thank you, all.
Thank you all. See you soon.
Thank you very much. If you have any follow-up questions, please contact the Investor Relations team, and just a reminder that the slides and scripts are available on the PMI website.
Thank you very much. Have a great day.
Thank you. And this does conclude today's Philip Morris International fourth quarter 2021 year-end earnings conference call. At this time, you may disconnect and have a wonderful day.