Emmanuel Babeau
Chief Financial Officer at Philip Morris International
Thank you, Jacek. Let's start with the headline numbers. We finished the year strongly with Q4 organic net revenue growth of plus 8.3%. This includes plus 14% growth from smoke-free products despite slower HTU shipment growth due to comparison effects and also plus 5% growth from combustibles. Pricing was a strong driver for both categories, with smoke-free pricing including the impact of retail price increases on HTUs. While Swedish Match was only included in organic metrics as of November 12, it contributed plus 0.8 percentage points to Q4 organic top line growth and grew by an excellent plus 26% on a pro forma basis. Operating income grew organically by a very good plus 8%, including a Swedish Match contribution of plus 2.2 points. As expected, Q4 margins were broadly stable organically and grew, excluding the technical effect mentioned by Jacek. This enabled our business to deliver another quarter of double-digit currency-neutral adjusted diluted EPS growth at plus 12.2%. This exceeded our prior expectations, with ZYN's remarkable growth as a notable contributor.
Despite this strong currency-neutral result, Q4 adjusted diluted EPS of $1.36 was adversely affected by a greater-than-expected currency impact of $0.20. This includes a $0.09 balance sheet-related impact under hyperinflationary accounting in Argentina, following the devaluation of the peso in mid-December. As with the previously mentioned impact in Q3, this reflects the depreciation of monetary net assets denominated in pesos, which are subject to capital controls. By its nature, this does not carry forward to future periods. Turning to the full year. Net revenue grew by plus 7.8% organically, representing the third straight year of high single-digit growth. Similar to Q4, this reflects continued excellent IQOS momentum and strong combustible pricing. In 2023, Swedish Match, led by ZYN, grew pro forma ex currency net revenues by plus 20%. Operating income grew by plus 3.7% organically, reflecting a challenging first half followed by strong growth in H2. We delivered expansion in both adjusted gross margin and operating income margin in H2, driven by the strong progress of smoke-free products.
With the impact of accelerated device sales from the ILUMA rollout in the base and a return to sea freight to Japan, the effect of growing HTU volume and ongoing cost optimization are clearly visible. As expected, OI margin organically contracted 150 basis points for the full year, primarily due to acute cost and supply chain headwinds in H1. As flagged in prior quarters, full year margin includes a 40 basis point headwind from the accounting treatment of third-party manufacturing in Indonesia and Ukraine, primarily reflecting the Indonesia excise tax gross-up of around $250 million growth in both net revenue and cost of sales. While headwinds in combustibles have not fully abated, our smoke-free business is delivering excellent profit growth and our organic results will include the strong contribution from Swedish Match going forward. We successfully mitigated inflationary pressure and supported investment with efficiency.
Across our total operating cost base, we delivered an incremental $100 million in gross cost efficiency in Q4 and $2.2 billion for 2021-2023 overall, surpassing our $2 billion target. We target an additional $2 billion over the next three years. These positive factors allowed us to deliver very strong currency-neutral adjusted diluted EPS growth of plus 11%, ahead of our prior expectations. Adjusted diluted EPS of $6.01 includes unfavorable currency of $0.63, primarily reflecting the Japanese yen, Russian ruble and specific Argentine peso dynamic I just explained. We include a slide in the appendix to this presentation with more detail. Focusing now on volumes. We comfortably achieved a third consecutive year of shipment growth driven by a plus 15% increase for IQOS HTUs in addition to a resilient combustible performance.
Our smoke-free volumes made up over 20% of total PMI in Q4, and with continued mid-teens of better growth expected here, we are very well positioned to continue growing volumes over the mid and long term. 2023 HTU shipment volume of 125.3 billion units were at the lower end of our targeted range due to delayed launches in Saudi Arabia and Taiwan, combined with lower-than-expected underlying growth in Russia and Ukraine. For IQOS HTUs, we believe the best indicator of underlying growth is adjusted IMS as the closest metric to consumer offtake. For the full year, adjusted in-market sales volume and shipment growth were in line at plus 15%. In the fourth quarter, HTU shipment growth of plus 6% reflects trade inventory buildup in the prior year quarter and the plus 14% adjusted IMS growth is, therefore, a more reliable measure of continued strong growth momentum. Excluding Russia and Ukraine, adjusted in-market sales grew by more than plus 17% for the year.
For context, across the two years before the war began in 2022, these markets made up 23% of HTU shipment volume and exceeded the company's growth rate by a notable margin. These smoke-free volume growth rates exclude the excellent development of our oral nicotine portfolio, driven by ZYN, with shipment volumes up by plus 23% in Q4 and plus 17% in 2023 on a pro forma basis. Cigarette shipments declined by a modest 1.4% in 2023, outperforming the international category decline of 2.4%. Turning to profits. Organic operating income growth stepped up in H2 to plus 10% following the exceptional headwinds of H1. We believe this is more representative of the underlying momentum of our business and in line with our '24-'26 CAGR target range of plus 8% to plus 10%. Focusing now on some key drivers of our full year operating income. Smoke-free gross profit grew organically by an excellent plus 19%, expanding gross margin by 340 basis points. This reflects part of the operating leverage of IQOS I already mentioned, with a notable contribution from Swedish Match overall oral nicotine in the last 50 days of Q4 with organic operating profit growth of over 50%.
With smoke-free commercial costs also increasing by less than net revenue, this clearly bodes well for 2024 as we continue to benefit from scale effects and manufacturing optimization. Despite very strong pricing, there was only marginal organic growth in combustible gross profit. This partly reflects the negative geographic mix I already mentioned, with greater volume decline in higher-margin markets like Japan as adult smokers switch to smoke-free product, and better volume trends in lower-margin geographies where smoke-free products are small or not available, such as T rkiye. There were also significant inflationary pressures on leaf, direct materials and other manufacturing costs. Cost increases on leaf, where inventory cover multiple crop years, and wages are likely to carry over into 2024 and should ease thereafter. Moving now to Swedish Match, which delivered outstanding performance in its first full year as part of PMI with adjusted pro forma currency-neutral top line growth of plus 26% in Q4 and plus 20% in 2023.
When we announced our offer for Swedish Match in 2022, we targeted a return on investment in excess of our cost of capital within five years. With the growth of ZYN surpassing our expectations, we now expect to achieve this well ahead of time. ZYN delivered another remarkable U.S. performance with plus 78% volume growth in Q4 and plus 62% in 2023. Internationally, we have launched or relaunched ZYN in 10 markets as planned as we continue to focus on building a truly global brand. U.S. cigars posted robust 2023 results, growing net revenues and profit. This was driven by strong pricing following an increase in April, partially offset by volume decline, which reflect lagged competitor pricing and comparison effects. ZYN's excellent U.S. progress continued in Q4 with plus 15% sequential growth in 12-months rolling shipments. Impressively, category volume share grew for the third consecutive quarter to 72.8%, an increase of plus 5.4 points year-on-year and plus two points sequentially. Retail value share also grew during the quarter to 77.4%, highlighting ZYN's premium positioning and superior brand equity.
This accelerated growth again reflects a broad step-up in nationwide store velocity and gradual distribution expansion as the category gained strong traction with adult nicotine users for its convenience and pleasurable experience. Now focusing on IQOS, starting with user growth. We estimate there were 28.6 million IQOS users as of December 31, representing growth of 1.2 million users in the quarter and plus 3.7 million for the full year, a nice acceleration compared to 2022. This includes notable progress in Japan and Europe in addition to a broad range of other geographies. ILUMA is now available in essentially all major markets outside Russia and Ukraine, with over 70 million estimated adult users as of December 31, 2023. This reflects the switching of existing IQOS user and the acquisition of adult smokers. We expect ILUMA to drive continued strong IQOS user growth in 2024 and beyond.
Considering the seasonal fluctuation and volatility in quarterly user estimation, we plan to report this metric on a semiannual basis going forward. With the addition of ZYN to portfolio and the smaller but growing VEEV e-vapor business, we also intend to provide a more holistic view of our total smoke-free user base to investors. Moving now to IQOS in the Europe region, where smoke-free products made up more than 45% of Q4 net revenues. Our Q4 adjusted HTU share increased by plus 1.2 points to 9.6% of total cigarette and HTU industry volume. A key driver is the growing uptake of ILUMA, which is available to around 90% of IQOS users in the region after eight further launches during the quarter. In the EU, 11 markets, making up nearly 30% of regional IQOS volumes, adopted the Delegated Directive to implement a characterizing flavor ban on heated tobacco product and implemented clean-shelf policies in October. While still early days, we estimate only a small impact on offtake as consumers adjust, as well as on trade inventory levels.
Indeed, adjusted IMS volume continue to exhibit very good sequential growth and reached a record high 12.4 billion unit on a 4-quarter moving average. This reflects double-digit year-on-year progression of plus 13% in Q4 despite the lack of growth in Ukraine. We expect the remaining EU markets to adopt the characterizing flavor ban in 2024 and estimate a full year consumer adjustment impact of around two billion units on both shipment and IMS, representing less than 5% of regional volume and less than 2% of total PMI. This is consistent with other past flavor restrictions such as the EU ban applied to combustibles in 2020. Based on the initial data from market that have enacted the ban, our fundamental view remains the same. We do not expect a meaningful change in the structural trajectory of the category and indeed, expect Europe adjusted IMS progression to be broadly in line with the group growth rate in 2024.
Europe is also an important geography for innovation. LEVIA zero-tobacco HTUs were launched in the Czech Republic in mid-October through limited channels with an encouraging initial response. We plan a broader Czech rollout later this month and further market launches this year. In Japan, the heat-not-burn category now represents close to 40% of the total industry, with IQOS driving its growth and reaching over 8.5 million adult users. In Q4, the adjusted total tobacco share for our HTU brands increased by 3.1 points to 27.6%, with offtake shares surpassing 34% in Tokyo. Adjusted IMS volume increased by plus 14.5% year-over-year for 2023 and plus 13.4% in Q4 alone, reaching a record high of almost 10 billion units on a 4-quarter moving average. Such impressive growth in a market with already high category penetration is a clear testament to the sustainable potential of IQOS around the world.
HTU shipment volume returned to a more normalized state in the fourth quarter as compared to a tough prior year inventory comparison following the substantial completion of the transition back to sea freight in Q3. In addition to strong IQOS share gain in developed countries, we continue to see very promising growth in low and middle-income markets. This slide highlights a selection of Q4 key city offtake shares across markets in Eastern Europe, Africa, Asia and Latin America. Egypt continues to impress with Cairo offtake share up plus three points to 9.4%, also noting encouraging results elsewhere in the region, such as Morocco and Lebanon. Indonesia also saw notable progress in its capital city, especially given limited commercialization. We continue to see dynamic offtake volume growth across these important future markets, with the city shares towards the right of this chart, an indication of the exciting potential.
While we have already covered the margin dynamic on combustibles, our 2023 commercial performance was very robust with organic top line growth of plus 5.5%. This reflects both strong pricing with notable contribution from Germany and Indonesia, and positive share performance within a resilient international category. Our cigarette category share grew by plus 0.1 points in Q4 and plus 0.2 in 2023, with notable contribution from Egypt, Poland and T rkiye. Although flattered by competitor supply constraint in Egypt, which may normalize in '24, we again achieved our ongoing objective of stable category share excluding this effect, despite the impact of IQOS cannibalization. This remains key as our leadership in combustibles helps to maximize switching to smoke-free products. This combustible share performance combined with the structural growth of IQOS, led to an increase of plus 0.6 points of international cigarette and HTU share for the full year.
As mentioned previously, our superior share of smoke-free products gives us a formidable platform for sustainable share gains with superior unit economics. Before we turn to the 2024 outlook, let me briefly reflect on our strong delivery over the past three years in spite of a number of substantial headwinds. The performance was clearly positive compared to our currency-neutral 2021-2023 target of more than 5% organic top line and more than 9% bottom line growth supported by overall growing volumes. For the next three years, we target a similar strong volume delivery, a plus 6% to plus 8% organic net revenue CAGR and a step-up in organic operating income growth to plus 8% to plus 10%. We target an adjusted EPS CAGR of plus 9% to plus 11% ex currency growth at constant 2023 corporate tax rate, including an increase in net financing costs, which skews towards the first year of the period in 2024. Okay.
This brings me to the outlook for 2024, where we expect a strong acceleration in smoke-free performance across IQOS volume, smoke-free net revenue and gross profit. We forecast the highest-ever absolute increase in HTU adjusted IMS volumes to deliver plus 14% to plus 16% growth in percentage terms despite the inclusion of an estimated impact of around two billion units from consumer adjustment to the EU characterizing flavor ban I mentioned earlier and essentially no offtake growth in Russia. For shipment volume, we target more than 140 billion units, subject to the usual inherent volatility of shipment timing, new market launches and potential supply chain disruption, such as the ongoing situation in the Red Sea. While shipment growth rates naturally follow adjusted IMS over time, there is a possibility of some lower inventory level compared to 2023 given the substantial completion of ILUMA launches and opportunities for working capital optimization. We expect continued excellent U.S. ZYN volume growth to around 520 million cans.
We have also accelerated our capacity expansion plan to support this further significant step up in volume and to manage inventory levels, which are naturally affected by the recent level of growth. Such a strong outlook for IQOS and ZYN means we expect to deliver an acceleration in organic smoke-free top line growth compared to 2023, reaching close to $15 billion in net revenue at prevailing exchange rates. This supports a total PMI forecast of plus 6.5% to plus 8% organic net revenue progression, including a fourth consecutive year of total volume growth and mid-single-digit combustible pricing. We also forecast an acceleration in smoke-free gross profit growth from the organic plus 19% delivered in 2023 as IQOS profitability expands and ZYN's excellent economics continue. We expect smoke-free to again drive the lion's share of our forecast organic OI growth of plus 8% to plus 9.5%, notably given the enduring cost pressure and negative geographic mix in combustible I just mentioned.
This naturally implies organic margin expansion, even factoring in the ongoing technical dilution impact of third-party manufacturing in Indonesia. We expect a meaningful organic improvement in overall gross margin, excluding technical impact, and a very limited currency impact on adjusted OI margin. This forecast includes notable capability investment in the U.S. But as mentioned at Investor Day, we still expect to deliver strong double-digit operating income growth in this market. As flagged at last year in Investor Day, we anticipate an increased net financing expense this year as debt is renewed at higher rates. We forecast a range of $1.3 billion to $1.4 billion as compared to $1.1 billion in 2023. We also assume a higher effective corporate tax rate due to Russia suspension of certain double tax treaties and earnings mix. These tax and interest factors combined impact our currency-neutral adjusted diluted EPS growth projection by around two percentage points.
Accordingly, we forecast currency-neutral adjusted diluted EPS growth of plus 7% to plus 9%. This translates into an adjusted diluted EPS range of $6.32 to $6.44, including an unfavorable currency impact of $0.11 at prevailing rates. This notably includes the net favorable impact of $0.13 related to the revaluation of monetary balances in hyperinflationary economies in 2023, skewed to the second half comparison. Moving to the shape of expected 2024 performance on a quarterly basis. We anticipate good double-digit growth in adjusted IMS HTU growth every quarter, supporting the full year forecast of plus 14% to plus 16%. We forecast a strong Q1 overall with HTU shipment volume of 31 million to 32 billion and continued strong volume growth from ZYN. We expect organic top line and operating income growth to be broadly consistent with the full year outlook, which implies organic margin expansion as with the full year.
We project strong Q1 currency-neutral adjusted diluted EPS growth of plus 7% to plus 10%. This translates to a range of $1.37 to $1.42, including a negative currency variance of $0.10 at prevailing rates, with currency comparisons improving in the second half as we lap the Argentina impact of 2023. Our business remains highly cash generative. However, the $9.2 billion in 2023 operating cash flow was lower than expected. This was due to currency effects on net earnings including the Argentine peso devaluation, other year-end currency impact and higher-than-expected working capital needs. In 2024, we target between $10 billion and $11 billion in operating cash flow at prevailing exchange rate and subject to working capital requirements. We continue to prioritize investing in innovation and the growth of our smoke-free portfolio. In 2024, we expect capital expenditure of around $1.2 billion, including the ZYN capacity expansion I just mentioned.
Deleveraging remains a key priority for us. And as expected, our 2023 net debt to adjusted EBITDA ratio was around three times given the 2023 purchase of the remaining Swedish Match minorities and the final U.S. IQOS payment to Altria. We target much better progress of 0.3 to 0.5 times deleverage in 2024, driven by continued EBITDA growth and strong cash flow generation. We continue to target a ratio of around two times by the end of 2026, driven with buybacks to be considered once confirmed we are on track. Finally, our commitment to our progressive dividend policy is unwavering and in line with our long-term commitment to return cash to shareholders.
I will now turn it back to Jacek for concluding remarks.
