The operator welcomes everyone to the Philip Morris International Fourth Quarter 2024 and Full Year Earnings Conference Call and introduces James Bushnell, Vice President of Investor Relations and Financial Communications. The call will last about an hour and will include remarks from Philip Morris International Management and a question-and-answer session. James Bushnell provides information on where to find the detailed results and financial information. Jacek Olczak, CEO, and Emmanuel Babeau, CFO, join the call and Jacek highlights PMI's strong operating performance in 2023, with positive volumes and high single-digit organic growth driven by smoke-free products.

In the fourth quarter, smoke-free products contributed significantly to profitability, with IQOS showing strong growth and ZYN exceeding expectations. Smoke-free products accounted for nearly 40% of total PMI net revenues and over 40% of gross profit. The company expects smoke-free products to continue to drive growth in 2024. The launch of IQOS ILUMA has been successful, with the product now available in 51 markets. Despite a margin dilutive performance in combustibles, the company remains confident in the long-term growth potential of smoke-free products.

The paragraph discusses the cost pressures, geographic mix, and cannibalization impact on the company's earnings in 2023. However, the growth and margin profile of smoke-free products are expected to bring sustainable growth and returns in 2024 and beyond. The company has achieved significant milestones in Q4, including IQOS becoming the number one international nicotine brand and ZYN's outstanding performance. The company aims to have smoke-free products account for two-thirds of their net revenues in 2030. Additionally, over 40% of their gross profit came from smoke-free products in the quarter and year, with a higher adjusted gross margin rate than combustibles. The increasing adoption of tobacco harm reduction policies by governments is seen as a positive development, but there is still more work to be done.

In the fourth quarter, PMI saw strong organic net revenue growth of 8.3%, driven by 14% growth in smoke-free products and 5% growth in combustibles. Swedish Match, which was only included in organic metrics in November, contributed 0.8 percentage points to this growth. Operating income and margins were stable, leading to a 12.2% growth in adjusted diluted EPS. However, the overall EPS was affected by a greater than expected currency impact of $0.20, including a balance sheet impact in Argentina due to hyperinflation.

The article discusses the impact of depreciation of monetary net assets on the company's performance in Q3 and the full year. Despite challenges in the first half of the year, the company saw strong growth in net revenues and operating income in the second half, driven by the success of smoke-free products. However, there were also headwinds in the combustibles business. The company has successfully mitigated inflationary pressures and invested in efficiencies, surpassing their target of $2 billion in cost efficiencies. They plan to target an additional $2 billion over the next three years.

In 2023, the company saw a strong growth in currency neutral adjusted diluted EPS, driven by a 15% increase in IQOS HTUs and resilient combustible performance. Smoke-free volumes made up over 20% of total PMI and are expected to continue growing in the mid and long-term. Delayed launches and lower-than-expected growth in certain markets affected 2023 HTU shipment volumes, but adjusted in-market volumes and shipment growth were in line at 15%. Excluding Russia and Ukraine, adjusted in-market sales grew by over 17%. The company also saw strong growth in its oral nicotine portfolio, with ZYN shipment volumes up by 23% in Q4 and 17% in 2023.

The article discusses the decline in cigarette shipments in 2023 and the increase in profits due to the growth of smoke-free products. The company's operating income grew by 10% in the second half of the year, in line with their target range. Smoke-free gross profit saw a significant increase, while combustible gross profit only saw marginal growth due to factors such as geographic mix and inflationary pressures. Swedish Match, which became part of PMI in 2022, saw outstanding performance with a 26% growth in Q4 and 20% growth in 2023. The company's target return on investment for Swedish Match is to exceed their cost of capital within five years.

ZYN, a smokeless nicotine product, has exceeded expectations and is performing well in the U.S. and internationally. In the U.S., ZYN has shown significant volume growth and has gained market share. IQOS, a heated tobacco product, has also seen user growth, with an estimated 28.6 million users as of December 31, 2023. ILUMA, another heated tobacco product, is now available in major markets and is expected to drive further user growth in 2024 and beyond.

The company plans to report user estimation on a semi-annual basis and will provide a holistic view of their total smoke-free user base. In Europe, smoke-free products accounted for 45% of Q4 net revenues and the company's adjusted HTU share increased by 1.2 points. The growing uptake of ILUMA, availability in 90% of IQOS users, and the implementation of characterizing flavor bans in 11 EU markets had a small impact on offtake and trade inventory levels. The company expects the remaining EU markets to adopt the ban in 2024, with an estimated impact of 2 billion units on shipment and IMS. However, the company does not expect a significant change in the category's structural trajectory and predicts that Europe's adjusted IMS progression will be in line with the group's growth rate in 2024.

In Europe, the launch of LEVIA zero-tobacco HTUs in the Czech Republic has received a positive response and will be rolled out in other markets. In Japan, the heat-not-burn category, led by IQOS, has grown significantly and now represents 40% of the total industry. HTU brands have also seen a 3.1% increase in total tobacco share and a 14.5% increase in adjusted IMS volumes. This growth in both developed and developing markets demonstrates the sustainable potential of IQOS. In Q4, there was a return to normalcy in HTU shipment volumes and strong growth in low and middle income markets. Notable progress was seen in key cities in Eastern Europe, Africa, Asia, and Latin America. Overall, the 2023 commercial performance was robust with organic top line growth of 5.5%.

The paragraph discusses the company's strong performance in 2023, with notable contributions from Germany and Indonesia, and positive share performance in the international category. Despite some challenges, the company achieved its objectives of stable category share and saw an increase in combustible and smoke-free product share. The company expects to continue this strong performance in the next three years, with a target of 6-8% organic net revenue growth and 8-10% organic operating income growth. The outlook for 2024 includes a strong acceleration in smoke-free product performance.

The company predicts a significant increase in HTU adjusted IMS volumes, despite the impact of the EU flavor ban and no growth in Russia. They target over 140 billion units in shipment volumes and expect continued growth in the U.S. for ZYN. The company has also accelerated their capacity expansion plans to support this growth. This strong outlook for IQOS and ZYN will lead to an acceleration in organic smoke-free top line growth and an overall increase in net revenues. The company also forecasts an increase in smoke-free gross profit and expects it to drive the majority of their organic OI growth.

The company expects organic margin expansion and improved gross margins, with a limited impact from currency fluctuations. There will be increased financing expenses and a higher effective tax rate, resulting in a 2% impact on currency neutral adjusted diluted EPS growth. The projected EPS growth is 7-9%, with a range of $6.32 to $6.44. Quarterly performance is expected to have double-digit growth, with strong volume growth from ZYN. Q1 is projected to have a strong overall performance with a 7-10% growth in currency neutral adjusted diluted EPS.

In 2024, the company expects to generate between $10 billion and $11 billion in operating cash flow, with a focus on investing in innovation and the growth of their smoke-free portfolio. They also plan to prioritize deleveraging and maintain their progressive dividend policy. Key strategic priorities for 2024 include supporting the growth of IQOS and continuing to innovate in both devices and consumables, as well as maintaining a strong presence in the U.S. market.

Philip Morris International (PMI) plans to continue investing in the growth of ZYN and IQOS, with long-term capacity expansion and organizational infrastructure. They also plan to launch IQOS ILUMA in the U.S. in 2024, with smaller pilot launches of IQOS 3 blade starting in Q2 this year. PMI aims to maintain a stable share in the combustibles market while focusing on sustainability initiatives and reducing their debt. Their main goal is to provide superior alternatives to adult smokers and advocate for science-based regulations.

The speaker discusses the strong performance of their business in 2023, driven by the success of their smoke-free products. They also mention their plans to expand and reach their goal of being smoke-free by 2030. They then address a question about their initial guidance for 2023 and how it compares to their actual performance.

The growth of IQOS in Japan has been strong, capturing 80% of the segment growth. The product has been successful in participating in the smoke-free transformation in Japan and has now exceeded the size of the cigarette category in the Tokyo area. The recent acquisition of Swedish Match has added an important element to the portfolio of alternative smoking products, particularly in entering the U.S. market. Both IQOS and ZYN have been successful in targeting adult smokers and have low rates of youth usage. The company is focused on sustainable growth in the smoke-free product category and is also facing potential headwinds in the EU due to a flavor ban.

The speaker discusses the key geographies and their importance in terms of margin expansion. They note that there may be conversations about the growth trajectory of IQOS, but they are confident in their 3-year outlook. They also comment on the negative margins in the Americas segment, attributing it to the devaluation in Argentina rather than the U.S. market.

The increased investment in the market is supporting ZYN growth and expansion, as well as preparing Swedish Match and Philip Morris International for the launch of IQOS in the U.S. This has resulted in higher-than-expected performance for 2023, with strong volume and margin growth for smoke-free products. Despite ongoing investments, the U.S. market is expected to be highly profitable for the company, contributing to double-digit growth and strong financial performance.

During a recent conference call, Jacek Olczak, CEO of a major tobacco company, discussed the company's expectations for the year, including potential expansion in gross and operating margins. He also addressed the impact of the Argentinian peso on the company's earnings, stating that any further devaluation would apply to a smaller base. Olczak also addressed concerns about potential regulations on the company's ZYN product, stating that it has been on the market for 10 years and has low rates of underage usage.

The speaker discusses the responsible marketing practices of Swedish Match in regards to their nicotine products, specifically ZYN. They state that ZYN has strict age verification processes and does not use paid ambassadors on social media. The product is based on science and is seen as the best alternative to cigarettes. The company has a strong focus on protecting youth and has seen significant growth in their products while remaining sustainable for adult smokers.

Pamela Kaufman from Morgan Stanley asks about the growth of ZYN in the U.S. Jacek Olczak explains that ZYN is seeing growth from multiple sources, including combustible cigarettes, tobacco pouches, and vaping. ZYN is seen as a cleaner and more convenient alternative to traditional tobacco pouches. The U.S. market is large and well-developed, making it a good fit for ZYN. The company's guidance for next year is based on the number of accounts.

The speaker discusses the potential for ZYN to positively surprise in the U.S. market and explains that the company's guidance is based on a number of assumptions. They also mention both potential headwinds and tailwinds in the market. The speaker clarifies that their guidance predicts similar volume growth compared to previous years. They also mention a recent patent settlement with BAT that will allow them to connect their IQOS product to their international supply chain and potentially increase economies of scale.

The company expects an increase in costs due to the addition of the U.S. market, but believes it will ultimately benefit from the expansion of its products and the removal of uncertainty. They expect mid-teens growth in heated tobacco sales, with Europe and potential contributions from Taiwan and Saudi Arabia. The U.S. market is expected to be a significant contributor to this growth.

The company plans to test market a new IQOS 3.0 blade product in the U.S. and is waiting for FDA approval to accelerate national distribution. The expected volume contribution from the U.S. in 2024 is minimal. The company also assumes that markets where IQOS is currently not allowed, such as Taiwan, will open up. In Europe, the company expects some headwinds due to flavor regulations, but overall, the underlying growth of IQOS is strong. There is some pricing competition in Central Europe from other heat-not-burn products.

The company is facing strong price competition in Japan, but they have managed to navigate it well. Germany and Italy are performing well, with Spain being the major driver of growth. The company expects a smoke-free acceleration in 2024, but this may not translate into group net revenue growth. They have managed to deliver strong pricing variance in the past, but it may not be repeatable this year. The company is focused on delivering sustainable and high-quality revenue growth.

The speaker discusses the success of disposable vaping products in the U.S. and U.K. and their potential impact on the company's combustible cigarette business. They note that while the success of these products has not been seen in the company's main markets, there are a number of factors that could contribute to this, such as the focus on flavors and the disposable nature of the products. The speaker also mentions that the company is guiding for a mid-single-digit price increase in 2024, which may affect revenue growth in the combustible business.

The speaker discusses the traditional tobacco market and the challenges of introducing alternative products. They mention the success of these products in the US and UK, but note that in other countries, there are obstacles such as regulations and negative opinions. The company is trying to enter the e-vape category while remaining focused on profitability.

The company does not want to focus on disposable vaping products as they believe there are more sustainable opportunities with better margins. Despite being relatively late to the category, they have gained double-digit shares in markets like Italy and Czech. There is a lack of loyalty in the market and a lot of trial. The speaker also asks if the dual-tiered structure in the market, with big legacy players following rules and smaller businesses doing whatever they want, impairs the attractiveness of the company's business and brands.

Jacek Olczak explains that his company is committed to following regulations and societal expectations and does not engage in hit-and-run operations like some other market participants. He also mentions the need for more discipline in the market and the creation of distortions by illicit practices. In response to a question about investment levels, Emmanuel discusses areas where there will be a significant increase in investment to drive gross and operating profit margin expansion on an organic basis.

Jacek Olczak, CEO of the company, discusses the potential for increased investment in ZYN due to its growth, while still maintaining double-digit profit expectations. He also mentions the importance of supporting revenue growth and driving margin expansion, while factoring in inflationary pressures. He believes that as the company operates at a larger scale, the investments needed for IQOS and ZYN will decrease.

The speaker, James Bushnell, reminds listeners about an upcoming conference and encourages them to attend. He also thanks them for joining the call and provides contact information for any follow-up questions. Jacek Olczak and Emmanuel Babeau also thank the listeners. The operator then ends the call.

This summary was generated with AI and may contain some inaccuracies.