Philip Morris International Inc. (NYSE:PM) Q4 2022 Earnings Conference Call February 9, 2023 9:00 AM ET
Company Participants
James Bushnell – VP, IR and Financial Communications
Jacek Olczak – CEO
Emmanuel Babeau – CFO
Conference Call Participants
Chris Growe – Stifel
Bonnie Herzog – Goldman Sachs
Gaurav Jain – Barclays
Pamela Kaufman – Morgan Stanley
Vivien Azer – Cowen
Owen Bennett – Jefferies
Andrei Condrea – UBS
Jared Dinges – JPMorgan
Operator
Good day, and welcome to the Philip Morris International Fourth Quarter 2022 and Full Year Earnings Conference Call. Today’s call is scheduled to last about one hour, including remarks by Philip Morris International Management and the question-and-answer session. [Operator Instructions]
I will now turn the call over to Mr. James Bushnell, Vice President of Investor Relations and Financial Communications. Please go ahead, sir.
James Bushnell
Welcome. Thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2022 fourth quarter and full year results. You may access the release on pmi.com.
A glossary of terms including the definition for the smoke-free products as well as adjustments, other calculations and reconciliations to the most directly-comparable U.S. GAAP measures and additional smoke-free volume and net revenue data are at the end of today’s webcast slides, which are posted on our website.
Growth rates presented on an organic basis reflect currency-neutral adjusted results excluding acquisitions and disposals. As such figures and comparisons presented on an organic basis exclude Swedish Match up until November 11, 2023. As mentioned previously, starting in the second quarter of 2022 and on a comparative basis, PMI excludes amortization and impairment of acquired intangibles from its adjusted results.
Today’s remarks contain forward-looking statements and projections of future results. I direct your attention to the Forward-Looking and Cautionary Statements disclosure in today’s presentation and press release for a review of the various factors that could cause actual results to differ materially from projections or forward-looking statements.
I’m joined today by Jacek Olczak, Chief Executive Officer; and Emmanuel Babeau, Chief Financial Officer. Over to you, Jacek.
Jacek Olczak
Thank you, James and welcome everyone.
We had a remarkable year for our smoke-free transformation in 2022. Despite the exceptional challenges of the war in Ukraine, severe supply-chain disruptions and global inflation, we delivered very strong financial performance and took two major strategic strides towards a smoke-free future.
I would like to express my deepest thanks to all my colleagues who spared no effort to drive excellent business results during these unprecedented times. Our thoughts also continue to be with those affected by the war in Ukraine and the recent tragedy in Turkey and Syria.
In 2022, PMI delivered its second consecutive year of total volume growth, reflecting continued IQOS progress and broadly stable cigarette volumes. Full-year smoke-free net revenues reached almost one third of total PMI and over 50% in 17 markets. This is impressive progress towards our ambition of becoming a predominantly smoke-free company by net revenues in 2025.
IQOS outstanding results continued with over 21% full-year growth in both shipment volumes and in market sales excluding Russia and Ukraine. This reflects broad-based momentum in the European Union Region, Japan and emerging markets. IQOS ILUMA continues to generate excellent growth in its launch markets with upgrades from existing users and new user acquisition outperforming our initial expectations.
The success is supported by the increasing deployment of a two-tier heated tobacco units portfolio providing adult smokers with an expanding range of innovative and high quality alternatives to cigarettes.
In combustibles, we delivered a robust performance with a 3.7% growth in organic net revenues and 0.3 percentage points higher share of segment excluding Russia and Ukraine despite the impact of adult smokers moving to smoke-free products. We also achieved two critical strategic milestones this year, reaching an agreement to take full control of IQOS in the U.S. in 2024 and successfully completing the acquisition of Swedish Match.
These achievements will accelerate our smoke-free journey and further position us to lead the transformation of the wider industry. Clearly currency headwinds were extremely strong and weighed on our U.S.s dollar performance but although volatility remains, I am pleased that they seem to significantly abate in 2023.
Overall, 2022 was a pivotal year and we look forward with confidence to 2023 and beyond. Let me now take a moment to cover our key strategic priorities for the coming year. With the acquisition of Swedish Match and securing the rights to IQOS in the U.S., we are now a global smoke-free champion.
The addition of the world’s biggest market and the leading nicotine pouch brand ZYN alongside IQOS provides us with significant untapped opportunities to further accelerate the growth of smoke-free products. As the strength of our IQOS business continues to grow rapidly, the full global rollout of IQOS ILUMA is a major priority and we expect to make substantial progress on this in 2023.
The success of ILUMA in launch market so far demonstrates the importance of groundbreaking consumer-centric innovation and we continue to broaden our portfolio with new science backed offerings. This includes BONDS by IQOS, our latest heat-not-burn device aimed at low and middle-income adult smokers.
Pilot city launches in Colombia and the Philippines in the last quarter of last year show encouraging early results and we intend to take the learnings from these markets before deploying on a wider scale. Following a successful first three years of partnership with KT&G, we also recently extended our long-term s their innovative smoke-free portfolio outside South Korea.
I am very pleased to welcome Swedish Match to the PMI family. In particular, the fast-growing potential of ZYN is an incredibly exciting addition to our company. We are focused on supporting the Swedish Match team to continue and accelerate ZYN’s outstanding success in the U.S. while also leveraging PMI commercial capabilities to prepare for the international expansion of nicotine pouches.
IQOS and ZYN are premium brands, leading the global categories. In the U.S., ZYN is helping the American smokers leave cigarettes behind and offers great growth prospects. For IQOS, the world’s biggest smoke-free market is a fully untapped opportunity and our plans are well underway in anticipation of our commercialization in the second-quarter of 2024.
We will be leveraging the sales and distribution capabilities of Swedish Match and deploying our commercial model digital engine organization and infrastructure for a successful rollout. We continue to expect to file an FDA application for ILUMA in the second half of 2023.
Logically, the international expansion of pouches, U.S. IQOS preparation and the replacement of IQOS 3 with ILUMA entail additional investments this year, which combined with inflationary pressures will weigh temporarily on our margins. Indeed, many of the ILUMA related costs are one-off in nature as Emmanuel will explain shortly.
In combustibles, we continue to target a stable category share over time, despite the impact of IQOS cannibalization, while taking judicious pricing actions. As we have explained previously, maintaining our leadership in combustibles helps us maximize switching to smoke-free products through the connection to adult smokers and the retail trade.
In terms of our financials, the strength of our business provides a robust operating cash flow, which we intend to maximize to provide reinvestment in our smoke-free business, deleveraging and growing the dividend. Finally and importantly, shaping tobacco harm reduction by providing better alternative to smokers and advocating for science-based regulation is critical to accelerate the end of smoking.
Harm reduction is also at the core of our transformation, as we lead on sustainability to achieve a positive impact. We will be expanding on some of these topics at the CAGNY conference on February 22nd and we also plan to host an Investor Day in September this year, where we will go into greater detail on our strategies and future vision particularly with regard to –with regards to the U.S.
Now, I will hand it over to Emmanuel, to discuss our results in 2023 and outlook in more detail.
Emmanuel Babeau
Thank you, Jacek.
Our business driven by the strength 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 net revenues grew organically by plus 7.7% excluding Russia and Ukraine and by plus 7.1% for total PMI, despite the impact of hyper-inflationary accounting in Turkey. This reflect the continued strength of IQOS, accelerating pricing and the recovery of combustibles in many markets against a pandemic affected comparison, notably in H1.
IQOS devices accounted for approximately 5% of our full-year smoke-free net revenue, both including and excluding Russia and Ukraine. Our net revenue per unit grew plus 4.4% organically, excluding Russia and Ukraine and by plus 5.5% in total. This was driven by combustible pricing of plus 4%, excluding Russia and Ukraine and plus 5% overall and the positive mix impact of an increasing proportion of HTUs heated tobacco unit in our overall volumes at higher net revenue per unit.
Our 2022 operating income margin contracted organically by 60 basis-points, excluding Russia and Ukraine, and by 70 basis-points in total due to a number of headwinds, which I will come back to. These headwinds were partially mitigated by the growth of IQOS, pricing and ongoing cost-saving.
In 2022, we delivered 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 currency-neutral adjusted diluted EPS growth of plus 11.9% to $5.34, excluding Russia and Ukraine.
This includes unfavorable currency of $0.85 and a small contribution from Swedish Match net of financing cost for the 50 days of consolidated results. For total PMI, we delivered adjusted diluted EPS of $5.98. We also had a strong finish to the year. We delivered excellent Q4 organic net revenue growth of plus 7.9%, excluding Russia and Ukraine.
Again, reflecting continued strong IQOS 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 the total PMI basis, organic margin were flat including the impact of a challenging comparison in Ukraine and shipment timing in Russia.
Fourth quarter currency-neutral adjusted diluted EPS grew by plus 20.8% to $1.23, excluding Russia and Ukraine and plus 15.3% in total to $1.39, an excellent performance. Before discussing our 2023 guidance, I would like to provide an update on our Ukraine and Russia businesses.
We continue to support our employees in Ukraine. I would like to personally thank them for their tremendous efforts to secure our business continuity during these extremely difficult times. In Russia, the environment for divestment has become increasingly challenging and complex, especially given recent December 2022 regulatory developments.
To provide more clarity to investors on the full extent of our business, we will now include both Ukraine and Russia in our 2023 outlook and reporting. Now turning to the 2023 outlook, we expect to deliver very strong organic net revenue growth of plus 7% to plus 8.5%, supported by a step-up in combustible pricing and another year of rapid progress from IQOS.
This would represent the third consecutive year of organic top-line growth above plus 7% and excludes the impact of Swedish Match for the large majority of the year. Including Swedish Match, we expect our reported currency-neutral net revenues to grow into the teens as its business continue to deliver strong performance.
We expect excellent IQOS momentum to increase our HTU volume growth on the total PMI basis supported by the growing presence of ILUMA across our key markets. We forecast between 125 billion and 130 billion HTU shipment volumes, representing plus 15% to plus 19% growth.
This reflects an acceleration compared to the total PMI growth rate in 2022 despite an expectation of no significant progress in Russia given our decision to restrict investment and innovation. As mentioned previously, the pace of ILUMA launches has also been constrained by supply-chain disruption and the outstanding take up in initial launch markets.
We expect these constraint to gradually improve through the first half as we progressively roll-out to more geographies. We expect organic smoke-free net revenue growth to have an aligned progression with the rate of HTU volume growth this year with less distortion from device revenues.
Including Swedish Match and at constant-currency, we expect to deliver around $13.5 billion in smoke-free net revenue compared to $10 billion in 2022 and to approach 40% of total PMI net revenues this year. While our topline outlook is very strong, like many other global companies, we are facing significant margin pressure from the intensifying inflationary environment in addition to a number of specific transitory factors and investment, which I will come back to shortly.
As a result, we expect our adjusted operating income margin to contract between 50 to 150 basis-points organically. Accordingly, we forecast currency-neutral adjusted diluted EPS growth of plus 7% to plus 9%. This includes a full year’s positive contribution from Swedish Match net of the related interest expense.
However, this benefit is offset by the increased interest cost on our non-Swedish Match debt and planned investments. This translate into an adjusted diluted EPS range of $6.25 to $6.37, including $0.15 of unfavorable currency at prevailing rates. This forecast notably, does not factor any potential favorable court ruling in Germany regarding the legality of the surcharge on the existing excise tax on heated tobacco product effective in Germany. as of 2022.
We continue to account for the excise surcharge in our results and outlook. However, the obligation to pay the surcharge is currently suspended. If favorable the difference to our forecasted 2023 excise payment would increase our net revenue by around 1% and adjusted diluted EPS growth by around three point, thereby increasing our forecast currency-neutral growth range to plus 10% to plus 12%.
In this scenario, we would expect our operating cash flow would move towards the upper half of our forecast range. We expect a judgment towards the end of the year. There are a number of other assumptions underpinning our outlook, we expect total international industry volumes of cigarettes and heated tobacco units excluding China and the U.S. to decline by minus 1% to minus 2%.
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 the third consecutive year of growth. While we seek to maintain our share of the combustible category, given the current inflationary environment, we assume combustible pricing will accelerate to around plus 6% on an organic basis compared to the plus 5% realized in 2022.
We also expect full-year capital expenditure of around $1.3 billion as compared to $1.1 billion in 2022, reflecting increased investment behind our smoke-free platform including ILUMA and Swedish Match portfolio. Let me now come back to the various factors impacting our margins.
In 2022, total PMI gross margin contracted by 220 basis points organically. While growing inflationary pressures were a drag, the largest impact came from the combination of the rapid growth of ILUMA and transitory factors such as supply-chain disruption and the need to use air-freight.
ILUMA drove accelerated device replacement from existing user in Japan and other launch market. Such devices sales are positive for acquisition, retention and full conversion. However, devices are margin-dilutive and this dynamic is likely to continue on a temporary basis, as we roll out to more markets this year and consumers upgrade from IQOS blade.
The initially higher weight and cost of ILUMA consumable also played a role and this meant that the overall impact of our heat-not-burn business including devices was margin-dilutive in 2022. Importantly, average gross margin on HTUs remain around 10 percentage points higher than for cigarettes on the higher net revenue per unit.
This is a fundamental long-term positive margin driver through the growing HTU volume mix in our business and this had a plus 110 basis-point favorable impact in 2022. Our two other key long-term margin drivers of pricing and productivities also continued to contribute favorably.
Gross margin headwinds were mitigated at the operating income margin level by SG&A cost which declined by 150 basis-points of net revenues, due primarily to cost-efficiency, operating leverage and comparison effect.
The picture for 2023 is quite different while our gross margin will face increased inflationary pressure, this is now primarily due to COGS for the cigarette business as leaf, acetate tow, salaries and energy cost increase. An acceleration in combustible pricing and lower air freight cost will serve to mitigate this exceptional inflation. However, a time lag is built into our projections.
Importantly, while cost inflation is also headwind for IQOS, the 2023 margin impact of our heat-not-burn business is expected to be favorable due to the positive impact of increased HTU volume at higher net revenue per unit, planned ILUMA efficiencies and a more measured increase in device volumes.
Overall, this underlying strength from IQOS combined with pricing will not be sufficient to offset combustible cost inflation in 2023, however, we expect a lower organic gross margin decline compared to last year and for our heat-not-burn business, to have an increasingly visible positive impact as we approach 2024.
2023 SG&A cost would include incremental investments to drive future growth, including in the commercialization of ILUMA. Also included is around $150 million with a broadly even split between the U.S., where we are preparing our organization capability for the launch of IQOS and wellness and healthcare investment in product development and clinical trials.
In addition to inflation, this mean an SG&A cost increase more in line with net revenue growth is likely with limited margin impacts. A few words now on 2023 phasing. We expect margin pressures to be weighted to the first half, particularly given the challenging Q1 2022 comparison and a progressive decrease in airfreight cost throughout the year.
In addition, investment are expected to be front loaded and we know that the rollout to ILUMA can lead to a short period of slower user acquisition as consumer wait for the launch. Combined with the timing of shipment and cost saving, we expect our 2023 top and bottom line delivery to be heavily H2 weighted.
Indeed, we expect the first quarter to be the most challenging with low-single digit organic topline growth and soft margin. Shipment timing and ILUMA launch impact are expected to be pronounced and we accordingly expect HTU shipment volume of around 26 billion to 28 billion HTUs.
We also face a comparison with a significantly lower impact from war related disruption. We forecast adjusted diluted EPS of $1.28 to $1.33, including $0.10 of unfavorable currency at prevailing rates.
Importantly, we expect margin to improve as we approach 2024 as headwinds relent and the fundamental margin-accretive driver of our smoke-free transformation continue in the form of heated tobacco unit growth, pricing and cost optimization on ILUMA.
Our cash flow generation remains strong. We delivered $10.8 billion in 2022 operating cash flows representing plus 3% growth on a currency-neutral basis. This include a favorable timing of certain financing item of around $0.3 billion. Given nonrecurring item and working capital movement benefited 2021 by around $1 billion, this was an excellent result.
In 2023, we forecast $10 billion to $11 billion in operating cash-flow despite the notable expected impact from higher working capital requirements due to growth, global inflation and the reversal of one-off timing benefits. This put us on track to deliver our ’21, ’23 target of around $35 billion given in February 2021 at then prevailing rates.
While our net debt is 2.9 times adjusted EBITDA on a 12 months trailing basis, this reflects only 50 days of Swedish Match results, including a full-year contribution for Swedish Match would clearly result in a lower ratio. We target robust EBITDA growth, which combined with strong cash flow allows us to focus on deleveraging, while continuing to invest in innovation and the growth of our business.
In addition, our commitment to our progressive dividend policy is unwavering and in line with our long term commitment to return cash to shareholders. Turning back to our 2022 results, both our HTU and in-market sales volume increased by around 21.5% supporting total volume growth of plus 3.2%, excluding Russia and Ukraine.
Q4 HTU shipment volume grew by plus 37.5%, partly reflecting the replenishment of inventory for ILUMA in Japan, following lower shipment earlier in the year and favorable shipment timing in the EU, notably in advance of new ILUMA launches. Supported by very solid cigarette performance, we delivered total volume growth for the second consecutive year, both including and excluding Russia and Ukraine.
Focusing now on combustibles. Our portfolio delivered robust organic net revenue growth of plus 3.7% for the full-year excluding Russia and Ukraine. Combustible pricing increased in H2 as we continue to adjust to the inflationary environment. This resulted in Q4 organic pricing of plus 4.8%, excluding Russia and Ukraine and yielded full-year pricing in line with our expectation with notable contribution from Germany, the Philippines and Turkey, despite the impact of hyperinflationary accounting.
In 2022, our share of the cigarette category increased by plus 0.3 percentage points excluding Russia and Ukraine following category share declines 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 IQOS cannibalization with plus 0.2 percentage point 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 percentage points excluding Russia and Ukraine.
As Jacek mentioned earlier, maintaining our leadership in the cigarette category is a key enabler in accelerating smokers switching to better alternative. Our robust cigarette share combined with the growth of IQOS delivered an overall market-share gain of plus 0.6 point in 2022, excluding Russia and Ukraine, with notable contribution from Egypt, Italy, Japan and Poland.
PMI heated tobacco unit continue to strengthen the position towards becoming the largest nicotine brand in markets where IQOS is present and reached the number two position in 2022 with a record-high share of 8.5% in Q4. Now focusing on IQOS user growth, there were an estimated 20.3 million IQOS user as of December 31st, excluding Russia and Ukraine.
This reflect growth of around plus 3.5 million for the full year. For total PMI, we estimate there were almost 25 million IQOS users as of year-end. Consistent with comments in our recent disclosures, user growth in October and November was slower due to higher-than-expected impact from commercial activity and lower acquisition for IQOS brand product in anticipation of the launch of ILUMA in certain key markets. However, we saw a strong rebound in December as ILUMA launches continued delivering robust user growth of plus $0.8 million for the quarter.
This actually was close to our initial expectation and we look forward with confidence to 2023 as ILUMA continues to be deployed. ILUMA is driving volume and share growth across its market supporting our strong position in heat-not-burn category. We launched in eight new markets in Q4, including the Czech Republic, Italy, Portugal, and South Korea, bringing the total to 16 markets with ILUMA launched now represent more than half of our total HTU volume.
ILUMA 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 rate compared to IQOS. While the rate of acceleration differ by market in both Switzerland and the more recently launched United Arab Emirates offtake share has almost doubled since launch.
Importantly, as I mentioned earlier, the benefit of scale and optimization should allow us to bring down the cost of ILUMA overtime starting in the second half of 2023. Focusing now on the European Union where smoke-free net revenue exceeded 40% of the region for the full year.
Our fourth quarter HTU share increased by plus 2.4 points to reach 8.8% of total cigarette and HTU industry volume with a modest flattering effect from timing factor. IMS volumes continue to grow sequentially and reached a record high of 9.3 billion units on the four-quarter moving average.
This reflects success across many markets and key cities including Vilnius with over 43% share, 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 IQOS increasingly driving its growth
In Q4, the adjusted total tobacco share for our HTU brands increased by plus 2.6 points to 24.5% with offtake share in Tokyo surpassing 30%. Our two-tier consumable portfolio continued to deliver strong results. IMS again grew sequentially to reach a record-high of 8.8 billion units on a four-quarter moving average as the number of Japanese IQOS users crossed a remarkable 7.5 million adult consumers.
In addition to strong IQOS gain in developed countries, we continue to see very promising growth in low and middle-income market. In 2022, our HTU shipments grew by almost 50% excluding Russia and Ukraine. This robust performance reflects success across many markets, including Egypt where Urban Cairo exit offtake share surpassed 7% Bulgaria and Malaysia where Q4 offtake share reached 14% in both capital cities.
Let’s now move on to Swedish Match which finished the year strongly further confirming our belief that this combination will be accretive to our growth and margin profile over the coming years. Please note for housekeeping purposes, that my comments on Swedish Match Financial Results are based on publicly available information through September 30th and from November 11th when it was consolidated in PMI’s financial statements.
Swedish Match delivered excellent performance following the acquisition, with strong net revenue and adjusted operating income. Most impressive was the phenomenal U.S. growth of ZYN which I will come back to on the next slide. In other U.S. smoke-free products, moist snuff also performed well gaining almost one percentage point share of segment and growing 2022 volumes within a declining category.
In Scandinavia, the overall smoke-free market and Swedish Match continued to grow, albeit helped by year end trade inventory movements ahead of a January excise tax increase in Sweden. The cigar business delivered robust performance to end a 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 smoke-free category. We look forward to reporting our combined results going forward. Now let’s discuss ZYN’s recent U.S. performance in more detail.
Excellent progress continues with shipment volume growth of plus 37% in 2022 and plus 35% in Q4, reaching a record quarterly high. ZYN category volume share grew sequentially by one percentage point compared to the third quarter and by 2.2 percentage points compared to the prior year, further strengthening its position as the clear number one nicotine pouch brand despite continued heavy competitive discounting from less premium offerings.
Importantly retail value share for ZYN 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 oral 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 towards our shared vision of the smoke-free future.
In particular, bringing in ZYN and IQOS together in both the U.S. and international markets present a significant opportunity to drive accelerated growth and switching of adult smoker to better alternative. As a well-run and successful business we expect continued strong performance from Swedish Match existing operation.
A key focus this year will be supporting and further driving strong in growth in the U.S. In addition, we are now preparing for the international expansion of nicotine pouches leveraging Swedish Match rich product portfolio and PMI’s extensive smoke-free commercial infrastructure.
In parallel, we will be actively Swedish Match U.S. distribution and commercial capabilities for the launch of IQOS in 2024. Moving to sustainability. As we transform our company our business and sustainability strategies are advancing hand-to-hand with increasing momentum. PMI and Swedish Match have a shared vision and values.
The combination helps us further accelerate towards achieving our purpose, transforming for good to make cigarettes obsolete and maximize the benefit of smoke-free products. Our goal for best in class ESG performance is aligned as we seek to address the environmental impact of our product, eradicate child labor, reduce our carbon footprint and provide a more inclusive and empowered working environment for all our employees.
In December, we published a standalone report detailing our new biodiversity and water ambitions. For biodiversity we aim to achieve no low net loss on ecosystem connected to our value chain by 2033 and contribute towards to a net positive impact on nature by 2050.
For Water Stewardship we aim to scale solutions towards a positive impact on water resources by 2033 and contribute towards a positive impact on water resources by 2050. I am also proud to share that for the third consecutive year we have been awarded CDP’s Triple A. CDP scored nearly 15,000 companies on their climate change forest and water security disclosures, of which only 12 received this strategic prestigious score. In addition I am excited to share that we are included in the 2023 Bloomberg GenderEquality Index for the third year running.
I’ll now turn back to Jacek for concluding remarks.
Jacek Olczak
Thank you, Emmanuel.
Overall, our business delivered both a strong fourth quarter and full-year performance despite many challenging headwinds. We achieved excellent top and bottomline growth with double-digit currency-neutral adjusted diluted EPS growth and almost $6 of adjusted EPS for total PMI.
The consistent quality and sustainability of our organic top and bottomline delivery has been clearly demonstrated over the last three years. Most impressive was the continued outstanding performance of IQOS, which is now complemented by the remarkable growth of ZYN. Combined with Swedish Match we will have a comprehensive global smoke-free portfolio with leadership positions in heat-not-burn and the fastest-growing category of oral nicotine.
We expect 2023 to be a landmark year for our smoke-free transformation with smoke-free net revenues of around $13.5 billion at constant currency, approaching 40% of our company. We have exciting opportunities for growing nicotine pouches in the U.S. and internationally, along with the U.S. commercialization of IQOS next year.
We expect margin headwinds will persist in 2023 before improving in 2024. However, our underlying growth fundamentals remain strong and we look forward with – and we look forward with confidence. With an excellent performance over the past two years and our strong 2023 outlook, we expect to comfortably exceed our three year minimum CAGR targets of more than 5% organic net revenue growth, more than 9% in currency-neutral adjusted diluted EPS growth and broadly stable shipment volumes.
Finally, our strong growth outlook and highly cash-generative business enables us to deleverage 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.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] We’ll take our first question from Chris Growe with Stifel.
Chris Growe
Hi, good morning.
Jacek Olczak
Good morning, Chris.
Emmanuel Babeau
Hi, Chris.
Chris Growe
Good morning. I want to ask you first of all, you gave some great color there and 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 U.S. in your health and wellness division. What are the costs do you foresee in some of the supply-chain costs and use of air-freight available, how much are those burdening your cost for the year, if you can give some color on that?
Jacek Olczak
So maybe I start and Emmanuel will chip in, I guess. Yes, it’s a 115 between the U.S., $115 million between the U.S. and the wellness healthcare, almost evenly spread between the two. Now, you have the air freight and this is more of the thing, which I think, we should start seeing some improvement 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 with the 2024.
Now you have the inflationary pressure on the COGS, I think Emmanuel mentioned in his remarks, the leaf. Leaf, obviously is – due to our duration of inventories of the leaf and the way the leaf prices are rolling through the P&L is something which last usually longer right you have a three years above the duration of inventory. So, on a moving average, valuations I mean the spreads over the period of time you have energy, which is obviously the big hit across the number of directly or indirectly through the materials.
Now we start seeing energy prices easing at least at this stage, but also you bind it by some contractual arrangements, et cetera. So I don’t think that’s helping ’23, but I remain cautiously optimistic that as of ’24, we should start seeing reversal of those. Obviously, you have a cost of the IQOS ILUMA roll out because we are at the year end, we’ve been at the 16 markets out of 73 markets total IQOS. So there is a bulk of a market in front of us in ’23 and we don’t want to stop or slow down the rollout of ILUMA.
So obviously, you have a pressure on the margin coming from the extra sales of the devices, right, which obviously had a drag on the margins, and which 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, better consumption, better conversion rates. And that’s the key items. So Emmanuel, did I miss something important.
Emmanuel Babeau
No, I think you were very exhaustive clearly, Jacek. Just sort of couple of further detail and clearly, in ’23, we’ve been flagging it. We expect our heat-not-burn business to contribute positively at the level of the gross margin rate evolution. So in ’23 it’s really inflation impacting us very negatively at the level of all cost of goods, but on combustible, we are going to increase price that is not going to be sufficient to offset this impact.
And just to give you a color, Jacek was alluding to energy price. We’re not talking about even the double-digit 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 the big impact on the P&L. Over time with price increase, we’re going to overcome that, but there is just a lag as we said on matching that. Then there is a big difference also on our SG&A cost evolution.
In 2022, we were flat, because we’ve been generating a lot of efficiencies, inflation was not as others is going to be in ’23 with a lot of salary increase and probably on the basis of comparison were more favorable. In ’23, we expect to grow our SG&A in line with top-line, more or less which one would expect. We continue to invest a lot in order to support the growth of the business to acquire new user, digital investment.
We talk about the U.S. and wellness and healthcare and there would still be efficiency, but not at the same level. Last element that I have to add, the cost of the debt, I’m not talking about the debt of acquisition of Swedish Match because for Swedish Match, we are in line with expectation i.e. low single-digit accretion on the EPS. But clearly for the existing debt, there is also an increase in the cost and that is having an impact on the evolution of the adjusted EPS. I think with that, Chris, we are giving all the information we can on what we are facing in term of evolution on our cost.
Chris Growe
That was sure exhaustive. Thank you for that. It was very, very helpful. I had just one quick follow-up, which will be that, you have heated tobacco unit growth expectation of that 15% to 19%. I just want to get an understanding on two specs of that, is Russia, Ukraine down likely in 2023, given you’re not investing there. And then, just to what degree, its capacity limited today? If you had more ILUMA capacity, could that grow even faster? Thank you for your time.
Jacek Olczak
Okay, so actually the Russia and Ukraine and obviously, Russia due to its weight even more, there were drag on our performance both in ’22 and will be – and it’s fair to assume will be a drag in 2023. As you know is, our decision, strong decisions today investor and essentially ILUMA is for example, is the key technology advancements, which will have, which we decided not to rollout in Russia, because it has an impact right.
So that, the numbers which we now just for the visibility to the investors of the business, as is today, we’re including Russia and Ukraine but above five very much Russia not contributing to the growth. So one good thing opposite excluding Russia and Ukraine, our growth rates would be at a higher level, on a comparable level, capacity, we will. I think we have – we are guiding the market that we expect the better result in the second half of the year.
And that’s partially reflects the moment when we think, we will be beyond the bottleneck with regards to the capacity around ILUMA. So we really managing the business on a very tight supply chain for still this year, sorry 2022 and for first half of ’23 and the second half of ’23, we should be okay. I could actually – again – I can bridge back to the famous air freight, et cetera, because all of these things are consequences of us riding on a very, very tight supply chain.
Chris Growe
That makes sense. Thank you.
Operator
We’ll take our next question from Bonnie Herzog with Goldman Sachs.
Bonnie Herzog
All right, thanks, hi.
Emmanuel Babeau
Good morning, Bonnie.
Jacek Olczak
Hi Bonnie.
Bonnie Herzog
Good morning, I guess my question is on your op margin guidance and the implied deleverage. Maybe you could breakdown the headwinds you highlighted just a bit further and thinking about in the context of what you can control like the investments, 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, I’m trying to get a sense of how much of the investments required to essentially roll-out IQOS in the U.S., it will take place this year versus next year. And I’m well aware of the investments you need to roll out ILUMA, but anything there would be helpful?
Emmanuel Babeau
I’m please to take that one, Bonnie. So I think, on the U.S., we’ve been clear on the fact that we expect something like half of around $150 million, of course it’s a rounding of extra investment in the U.S. as we prepare the launch of IQOS in the U.S. 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 SG&A evolution. On a relatively regular basis, we are investing an extra few $100 million in ILUMA to be more specific, because, of course, very sensitive information behind the acceleration of IQOS and it’s going to come, of course, behind IQOS ILUMA in 2023.
So the growth, when we say, we expect SG&A to grow broadly in line with topline, there is a huge impact of inflation. I mean, I don’t need to explain that inflation is in most country around high single digit 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 focus behind ILUMA in 2023.
Bonnie Herzog
Okay, that’s helpful. And then just a second question if I may, it’s just related to the user growth in Q4 and IQOS, could you maybe talk through some of the puts and takes that you saw in the quarter. I mean, it seem to accelerate relative to Q3, despite some of the headwinds you had recently highlighted and then you did mention that ILUMA drives higher conversion rates than IQOS 3 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?
Jacek Olczak
Yes, so I maybe take the ILUMA conversion rates in the markets at this stage, [technical difficulty] run-rate conversion rates before an IQOS blade will be somewhere up in the range of a 10 percentage points. Okay, so obviously, different markets, there is some difference between the markets, but as a rule of thumb is about the 10 percentage point, which essentially means, the way we measure conversion at 10% of the devices sold through acquisition of new users, AG Snus and they should, and they are generating the recurring demand for the consumables. So this also has the – there’s a better productivity on the user acquisitions and devices sold. I want to just bridge back to the – your previous question, Bonnie, if you allow me. When we look at the U.S. investment, we’ve highlighted, including the wellness and healthcare, about $150 million.
But we shouldn’t just look at the investment from the lenses of IQOS, because part of the investments, which we already started, once we committed to make this year, I believe will also benefit further growth opportunity for ZYN, okay, for Swedish Match. So it’s not that we’re really running business – two separate type of a businesses.
We try to look at this from the leveraging and further enhancing the capabilities of Swedish Match and I believe the opportunities for ZYN in the U.S., they had a spectacular or phenomenal growth, depends which adjective you like better.
But I think, there is more to come on this one. So the way we’re looking at allocating the results is that, it is not just going to prepare us for the IQOS stake back in ’24, but also in the meantime, can further – can be a further boost to the ZYN. Now, to your question also about the future rollout of the IQOS alone in the U.S., I think September when we meet, I hope during the Investors Day, we will be in a positions to give a more precise plan.
So we obviously taking considerations the expected timelines vis a vis from FDA. We said that we’re going to file IQOS ILUMA which is our – the best flagship and the best propositions we have today. And obviously, our objective – prime objective would be to enter markets, U.S. markets with a very big momentum coming from international on the best what we have, but I think, by September, this year, we should have more details and more visibility about this.
Bonnie Herzog
Okay, that’s super helpful. I appreciate it.
Emmanuel Babeau
Thank you, Bonnie.
Jacek Olczak
Thank you, Bonnie.
Operator
We’ll take our next question from Gaurav Jain with Barclays.
Gaurav Jain
Hi, good morning. So the first is on the step up in cigarette pricing, so it was 5% last years, you are saying it will be 6% in FY ’23. Now Japan had 5% pricing last year, this year it will be 0, so clearly ex-Japan cigarette pricing is accelerating from four to seven approximately. So, where exactly is this biggest step-up happening in cigarette pricing?
Jacek Olczak
Japan, you pretty good single out Japan in this case, right, this is the biggest pricing from the unknow, right and it’s difficult to make any assumptions in Japan, but we have already this year working pretty well with the good results on the – reversing the pricing trend in Indonesia.
As you may recall, and I believe we’re really turning 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.
So that 6%, which we assume in the – for this year is just the 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 under market when visibility for obvious reason is very limited to.
Gaurav Jain
Sure, thank you. And then on this EU heated tobacco flavor ban, which is expected to come later this year, how should we think about it? And how is it factored in your guidance?
Jacek Olczak
I mean, it’s one of the events which nobody ever experienced. We have a – some sort of similarities with the flavor bans including menthol on the combustible cigarettes you may recall few years ago. And frankly speaking, that has not had any material sort of a impact on the cigarette volume, so I think here – okay we will see, what’s going to happen.
We think, it’s going to be manageable.
Gaurav Jain
Sure, thank you so much.
Jacek Olczak
Thank you, Gaurav.
Operator
We’ll take our next question from Pamela Kaufman with Morgan Stanley.
Pamela Kaufman
Hi, good morning.
Emmanuel Babeau
Hi Pams.
Jacek Olczak
Good morning, Pam.
Pamela Kaufman
Can you discuss your strategy for the U.S. market this year for Swedish Match and what you – what your key priorities are? And then what are your plans for the international rollout of ZYN and the timeline?
Jacek Olczak
So obviously, you know the focus is to continue and enhance the spectacular momentum of pouches, ZYN growth in the U.S. I mentioned this before answering another question that part of the investments we are allocating to U.S., I believe also will benefit the current business of Swedish Match. I think, there should be a bigger, 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 long-term, the big question obviously is how we will approach IQOS commercialization, the moment when we fully take it back in that in 2024.
And we know what sort of actually capabilities are missing at the Swedish Match level. So we adding them. But the real big commercial spend, I mean, it will depend on the timing and the dense and the intensity of our rollout plans, which we will share, I guess, around September, during the Investors – September this year, around the Investors Day.
When it comes to the pouches, on international, I think Swedish Match and us now together have a plans, how to start addressing some share pressure especially in the Nordics, okay 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 that was the whole purpose of acquisition of Swedish Match, as you recall, leveraged the base and our growth opportunity in the U.S., is the – is a huge relief in a sense of preparedness for IQOS but also I believe the category has the – quite a potential in there or in the regions of this product space on international basis.
We will have infrastructure in most of the markets, it’s – I’m not releasing really – disclosing any strategic confidential matters, obviously IQOS is present in 70 plus markets. This is where the developed infrastructure is most developed and very likely, the markets for ZYN products will be – which in the list of this markets.
Pamela Kaufman
Thanks. And then can you just talk about your strategy with the bonds product that you launched in test markets and what your early observations are and then how are you thinking about a broader rollout over time?
Jacek Olczak
Yes. I mean it’s a broader rollout of the bonds is more the – we’ve 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 IQOS and ILUMA 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 are very strong, actually they are very strong, obviously our expectations after a seven or so years of experience with IQOS 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 will be going more into the emerging markets, lower-income, when the afford – consumer affordability might be at a bottleneck in achieving our smoke-free ambitions.
We had to also come up with a technology both on a consumables and on the device which 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 economies because across the spectrum of the smoker’s audience, obviously, they also group of people who, for whom the affordability might create some constraint.
So that will be a very nice complement – complementary propositions in our portfolio. And essentially it also help IQOS to continue on its extremely successful history of occupying this premium or medium plus space. This is – this mega brand, which we’re trying to build, while preparing our self that one billion plus smokers in the world, I mean they are going across the different various price segments from the premium, mid, 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 are going to play strategically in the portfolio.
Pamela Kaufman
Thank you. That’s very helpful.
Jacek Olczak
Thank you, Pam. Thank you.
Operator
We’ll take our next question from Vivien Azer with Cowen.
Vivien Azer
Thank you, good morning.
Jacek Olczak
Hi Vivien
Vivien Azer
Hi. I was hoping to talk about the IQOS outlook, please, in terms of the stakes and in particular, what impact is the removal of characterizing flavors on HTUs in the EU, impacting your outlook. How are you accounting for that? And what’s the expected timing of that, please. Thank you.
Jacek Olczak
Yes, so I partially answered that question before, Vivien. But the characterizing flavor, we had that – we had an experience with the cigarettes – combustible cigarettes in the past and it’s the only reference point we might – we have today. And as you recall, the menthol and others ban in Europe, didn’t really impact in any material way the volumes of the cigarette, so I think here, one can expect a similar sort of a manageable impact if you like of that ban.
The second thing, it’s very – but also reminding everyone that IQOS by far today is the best tobacco flavor proposition. Yes, there are some flavors, which we have in our portfolio, in the market , that propulsions might be different, but by far, IQOS on the pure tobacco flavor and this is by the way, were the bulk of the cigarette market, the rest in essentially all geographies.
I mean this is an IQOS strength, so there was a portion of a portfolio, which will be impacted. But and I think for the vast majority of the smokers existing of sorry existing comparative to IQOS users and the smokers, which are still on a combustible, I mean IQOS still offers to date best in class taste and a flavor experience which is in the core of the tobacco flavor.
Vivien Azer
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 IQOS in the U.S. ahead of your reacquiring the commercial rights to that proposition, both in terms of the consumables as well as the devices? Thank you.
Jacek Olczak
Yes. I think there was look – there was a – we’re looking also both as a – we are also looking at this, not only on IQOS on a standard basis but IQOS and the ZYN and other parts of the Swedish Match business. And I believe, the obvious, the questions of the optimal distribution and I believe this can pair very well and enhancements already to the distribution which serves not only in a future IQOS but can and will serve actually in growth opportunities today, there is the whole digital aspect, there is a better management of the pricing promotions.
The whole consumer piece, right, which is so strong behind an IQOS success. I mean, that’s something which we are preparing the infrastructure for.
Vivien Azer
Okay, thank you.
Jacek Olczak
Thank you, Vivien.
Operator
We’ll take our next question from Owen Bennett with Jefferies.
Owen Bennett
Afternoon, gents. Hope you all well.
Jacek Olczak
Good afternoon, Owen.
Owen Bennett
Yes my question is more a bigger picture, longer term, one around the U.S. and the overall RRP space, now you’ve got control of your own destiny. I was hoping to get your thoughts on how you see RRP overall develop longer-term across the different categories? Whether you see some more attractive than all these. And do you still think you could envisage or when we introduce into the U.S., obviously bearing in mind, the limited traction it got with Altria, and then just linked to these U.S. RRP plans, any update on timing for a PMTA submission with your VEEV product. Thank you.
Jacek Olczak
Yes, so I start with the last one. We plan to submit the IQOS ILUMA to PMTA to FDA in the second half of this year. Now with regards to the – to potential, look, we think that an IQOS strength, which is really if you go to the core of the smokers today, when they really enjoy this pure unaffected by any flavors et cetera, tobacco flavor and so on is undisputed. Every market you go, IQOS exactly delivers on the flavor, taste expectations to this audience.
And that’s also I believe a critical factor in IQOS high conversion rate. And how many people fully adopt the IQOS and not only that they are leaving cigarettes fully behind them, they don’t even attempt it on occasional basis to go back to cigarettes, okay, so that’s the core and I believe for the audience which with the smoking audience, which you have in the U.S., IQOS perfectly fitting into this whole thing obviously the other platforms, which offer you the different ritual, different experience, the e-cigarettes and the pouches.
The e-cigarettes usually more driven by the flavors, and obviously absence the pure tobacco natural type of a flavor, it’s – that’s the challenge, which partially in our opinion is behind more of the dual consumption that 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 an average important offering for the consumers, who really want to reduce significantly exposure and potentially the harm by – while enjoying the product.
So I think, there is this complementary, there is this complementary role of each of these platforms with, you know, also that we’re working on our platform forward because technically which is Leaf and the Viva products, the electronic cigarette segments going through this own dynamics, is this mix of the flavors, disposable et cetera, it’s not necessarily great for the economics, but partially also because of the slower conversion rate compared to the other platforms.
So we have said it from the very beginning of our transformation, if you follow us seven, eight years ago, I recall that the – one of the first investors conferences, when we announced the purpose of that we want to go smoke free, we have said that there is the room for every platform at the different moments for different consumers and our job is at the right time to deploy this platforms and the leverage, the opportunities and the benefit to the smokers.
Owen Bennett
Great, fantastic. And just – sorry, a follow-up, the question on the PMTA was not for ILUMA, I think previously for VEEV you said, you targeted first half of ’23, just any update on VEEV, PMTA submission?.
Jacek Olczak
Yes as I think, we’re also thinking about the 2023, but now having also the ZYN and knowing what ILUMA can do and knowing that before we also need to make sure that we have a right PMTA submission strategy, right, it was an effort behind each of them and we need to prioritize, but the – I mean the way we are thinking, we are – sorry thinking, is more than a thinking, we are working on bringing our P4 to the U.S. as well.
Owen Bennett
Great, thanks guys, appreciate it.
Jacek Olczak
Thank you, Owen.
Operator
We’ll take our next question from Andrei Condrea with UBS.
Andrei Condrea
Hi everyone, thank you for taking my question, just one from me.
Jacek Olczak
Hi Andrei.
Andrei Condrea
Sticking to – hi, sticking to U.S. IQOS. We know that the U.S. menthol ban from the FDA proposed standards allows – potentially will allow for some exceptions to it. And thinking that your IQOS has the MRTP designation, which is rather unique versus all its peers, would — were you factoring this in when you set out your ambition of I believe 10% market share by 2030 if I’m not mistaken?
Jacek Olczak
Yes, you were – I think you’re quoting my words, this is Jacek here. Yes, I still do believe that IQOS by 2030 knowing how it performs on the many other international markets. The 10% is not out of – it can be a realistic ambitious – ambition or 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 menthol bans on other products.
But you rightly noticed that IQOS today is two variants of IQOS outdoor iced with the menthol flavor, will this be an accelerating factor or not? Look I mean the future will tell, but I still believe that IQOS as is in the current environment due to its strength and the satisfaction it gives to smokers, et cetera has the – that big potential in from the person.
Andrei Condrea
I see very clear. Thank you.
Jacek Olczak
Thank you, Andrei.
Operator
We’ll take our last question from Jared Dinges with JPMorgan.
Jared Dinges
Yes, thanks. Hi, guys.
Jacek Olczak
Thank you, hi.
Jared Dinges
A couple from me please, first, given the CapEx, step-up in CapEx 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 ZYN international expansion plans?
Emmanuel Babeau
Look I think, you should expect us of course to accompany the growth we are growing volume within more capacities, so the CapEx will reflect that. There is certainly, when it comes to ILUMA, a moment where we build the capacity for ILUMA and that is translating into a significant investment. So you see that in the 1.3.
I would say, we are going to certainly regularly invest on the capacity for the Swedish Match overall business, so I’m not able to get at that stage. I’m not giving guidance 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 – and we are very ambitious, as you know, on growing overall product.
So that will come with investment, but, of course, they are not of the same magnitude as the one that we’ve been making in order to be the capacity on IQOS, smaller volume, smaller base. So notwithstanding back on the long-term anyway.
Jared Dinges
Okay, that’s clear. And for the second one and maybe just on the Healthcare and Wellness segment, I mean, 2023 will be another investment year. I know you guys have talked about that that probably being a multiyear investment cycle. But I don’t know if you can give any indication on when you think that business could potentially start to contribute to growth and maybe also, could you guys talk about your learnings so far in those businesses that you have acquired?
Jacek Olczak
Yes I mean, look, they obviously, been very clear about this from the very beginning, I mean, in order to develop and bring to the market of a couple of the programs and products, which we have it in mind, I mean we have to go for the investments, we talked about us prefer also have a very promising investment in the medical of – in the medical space be cannabinoids et cetera.
So all of this programs that they agree to establish milestones in terms of the – the development of these products including the series of clinicals and meeting of different regulatory expectation, so that’s about what’s going to be. We have said historically our ambitious target of achieving this $1 billion revenue by 2025, there is a pipeline of the product but the more interesting actually, what’s going to happen with that business beyond ’25, because it’s the longer-term, longer-term investment.
Obviously, when we allocate the capital, we look first with – we allocate the capital behind the — those things, which are in the near and mid-term for us and it’s obviously heat-not-burn and IQOS, ILUMA expansions to the US, and I can go through the long list of an opportunities but they’re keeping also denied. This businesses have a quite – wellness and healthcare offers us a very interesting opportunities in the longer run, when we very well leverage both our scientific life science expertise capabilities combined with the commercial et cetera.
So, this is how I would look on this thing. I think when we meet on the – in September of this year for the Investors Day, we will start, obviously opening a much more longer-term horizon, how the management, how we see the future of PMI not just in the next year or two, but with the longer time of a perspective.
And this is the moment when, I guess, we will share more details, by the way, also I think we’ll be able to answer more precisely your first questions to Emmanuel, about the CapEx, because obviously, we open a 10 years horizon for Philip Morris, we will have to touch upon that capital allocation component as well.
Jared Dinges
Great, that’s helpful. Thank you.
Emmanuel Babeau
Thank you.
Jacek Olczak
Thank you.
Operator
It appears, we have no further questions at this time. I will now turn the program back over to management for any additional or closing remarks.
James Bushnell
Thank you. Before closing our call, I would like to remind you that we will be presenting at the CAGNY conference on February 22. 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.
Jacek Olczak
Thank you. Talk to you soon.
Emmanuel Babeau
Thank you.
Operator
That concludes today’s teleconference. Thank you for your participation, you may now disconnect.
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