Emmanuel Babeau
Chief Financial Officer at Philip Morris International
Thank you, Jacek. Turning back to our 2021 reserves, total shipment volumes increased by plus 4.2% in Q4 and by plus 2.2% for the year. This reflects continued strong broad-based growth from HTU of plus 25% or 18.9 billion units for the full year comfortably exceeding the decline of 3.6 billion cigarettes. The plus 2.4% increase in our Q4 cigarette volumes reflect the continued sequential recovery of the total industry and of our category share in addition to 2.7 billion sticks favorable inventory movements, which mainly reflects inventory reduction in the prior year quarter.
Due to the remarkable performance of IQOS, heated tobacco units comprise almost 14% of our total shipment volume in the fourth quarter and 13.2% for the year as compared to 11% in full-year 2020, 8% in 2019%, and 5% in 2018. Our sales mix is evolving rapidly, putting us on track to become a majority smoke-free company by 2025. Smoke-free net revenues made up over 30% of our adjusted total revenue in Q4 and 29% for the year as compared to 24% in 2020.
In 10 markets, we are already surpassed 50%. IQOS devices accounted for over 6% of the $9.1 billion of 2021 RRP net revenues. With a step up, H2 reflecting the IQOS ILUMA launch, outweighing the effect of supply constraint on other acquisitions. We delivered plus 7.6% organic growth in 2021 net revenues on shipment volume growth of plus 2.2%, reflecting the twin engines driving our top line. The first is pricing on combustible and in certain markets on HTUs. Second is the increasing mix of HTUs in our business at higher net revenue per unit, which continues to deliver substantial growth and increasingly powerful driver as our transformation accelerates.
Let's now turn to the driver of our 2021 margin expansion. Our gross margin increased by 190 basis points on an organic basis due to product mix, pricing, and cost savings while our adjusted marketing administration and research costs were 10 basis points better as a percentage of adjusted net revenues. We generated over $800 million in gross cost savings in 2021 with around $515 million in manufacturing and supply chain productivity, and more than $250 million in SG&A efficiency before inflation. This represents strong progress towards our target of around $2 billion for 2021, 2023, and allows us to reinvest in top line growth while continuing to deliver robust margin progression.
While OI margin expansion was lower in H2, this reflects the positive dynamic of our business and the ability to return to normalized investment levels compared to the pandemic-affected prior year. ILUMA device and HTU shipments commence with higher initial unit cost and we reaccelerated investment in our commercial program, digital engine, and R&D, as well as a number of growth opportunities across categories and geographies. We intend to continue investing in such opportunities in 2022, but with the benefit of scale, operating leverage, and accelerated efficiencies, we continue to target organic SG&A increases below the rate of sales growth.
Moving now to market share, our share of the combustible category recovered and was essentially stable in Q4 on a year-over-year basis as our portfolio initiative bear fruit and pandemic-linked restriction recede in many markets. Our leadership in combustible helps to maximize switching to smoke-free product, and we continue to target a stable category share all the time despite the impact of ICQS cannibalization. As I told you the growth reaccelerates, we target IQOS a slightly decline in 2022.
For the combustible category overall, the improving in total market volume backdrop includes notable Q4 recoveries in Indonesia, Mexico and Turkey. Close to stable industry volume in the region and a modest recovery in Duty Free driven by sales outside Asia. Daily consumption remains below pre-COVID levels in certain markets such as the Philippines where our share of market is influenced by mobility and so for consumption. In Indonesia, our share was again broadly stable on a sequential basis despite the continued growth of the below tier one segment and our volumes grew over 4% for the year. The reduction from 10% to 8% excise tax here in 2022 represents a step in the right direction and the industry weighted average excise increase of around plus 13% is slightly below the prior year. However, the playing field aremain unequal between industry player, and the pricing environment remains challenging.
In terms of our overall share, ongoing gain for our IQOS portfolio created positive momentum going into this year and we expect to resume overall share growth as well as achieving broadly stable total shipment volume. PMI HTUs now have a 7.1% share in the markets where they are present, making them the third-largest tobacco brand. This into the number one position in five markets and the number two in a further six markets.
Moving now to IQOS performance. We estimate there were approximately 21.2 million IQOS user as of December 31st. The improved user growth of plus 0.8 million in Q4 reflects our agile commercial model, which allowed us to rapidly adjust our consumer program and assortment. As demonstrated by the performance of ILUMA in Japan and Switzerland, the underlying momentum of the IQOS brand remains strong. While we don't yet have full visibility over the full year of 2022, as device shortages ease, we expect to gradually return to user growth at or above the prior run rate of around 1 million per quarter. We estimate that 72% of total users or 15.3 million adult smokers have switched to IQOS and stop smoking with the balance in various stages of conversion.
In the EU Region, fourth quarter HTU share reached 6.4% of total cigarette and HTU industry volume, 1.4 points higher than Q4 last year. Underlying IMS growth trends remain excellent. This very good performance include strong growth across the region with Italy reaching the milestone of 2 million users and positive contribution from Germany and Poland. I also want to highlight, Hungary, where our Q4 national HTU share exceeded 20% following Japan and Lithuania in reaching this important threshold.
To give some further color on our progress in the EU Region, this slide shows a selection of the latest key city offtake shares. While Vilnius continue to lead the way with 37.5% share, the 20% level was also reached in Budapest, Rome, and Athens. With strong progress across the region, we are especially pleased by Vienna, almost doubling to 4%. The strong traction in London at almost 6% share and an acceleration in Zurich with introduction of IQOS ILUMA. We show further HTU share data in the appendix to the slides.
Share growth continued in Russia with our Q4 share by plus 0.8 points to reach 8%. For both Russia and the overall region, sequential growth in adjusted IMS slowed in the last two quarters, partly reflecting the more accurate device shortage and limit on commercial program. In addition, the region was affected by the halting of sales in Belarus, which impacted sequential IMS growth in Q4.
In this context, as mentioned in last quarter, we have seen some increased consumer trial in Russia of discounted competitor offerings and disposable e-vapor products. We continue to see high interest in the category and with the pipeline of exciting innovations plan including the launch of ILUMA, we aim to resume strong growth this year.
In Japan now. The adjusted total tobacco share for our HTU brand increased by plus 1.7 point to a record 21.8% in Q4 and an offtake exit share approaching 23% with Q4 adjusted IMS sequential trends in corporate teams have pull forward of consumer offtake into Q3 before the price increase. This performance reflects the strength of our portfolio and the launch of IQOS ILUMA, which I will come back to shortly. The overall heated tobacco category continues to grow, making up over 31% of the adjusted total Japanese tobacco market in Q4 with IQOS maintaining a high share of segment and capturing the majority of the category's 2021 growth.
In addition to strong progress in developed countries, we see very promising IQOS growth in low and medium income market. A prime example of this is Egypt where offtake share in Cairo is approaching 4% within six months of launch. The other notable successes including Lebanon, Jordan, The Dominican Republic and the Philippines despite funding inspection in Manila. This low and middle income market key city performance is especially encouraging as we achieved it despite the premium position of the current IQOS portfolio. We do intend to bring a new complimentary range of heat-not-burn products tailored to emerging markets towards the end of this year, which I will come back to.
With this potential in mind, we continue to drive the geographic expansion of our smoke-free product as we aim to be in 100 market by 2025. During the quarter, we launched IQOS in both Morocco and Tunisia. This takes the total number of markets where PMI smoke-free products are available for sale to 71, of which 13 are in low and middle income market. We plan to add more market this year as we also meaningfully broaden our product offer and price segmentation within existing geographies. This includes extension of Cleveland fees, which are now available in over 20 markets across multiple regions and our expansion of e-vapor and nicotine pouches.
Following the implementation of the ITC importation ban, IQOS is not currently available in the U.S. We continue to work on contingency plans including the domestic manufacturing, and hope to be able to resume U.S. supply in the first half of 2023. It is important to remember that the ITC decision on this patent is an outlier. We were encouraged by the U.S. Patent Office recent invalidation of one of the two patents included in the ITC ruling, and we expect the decision on the second patent by half-year, the second though this decision are subject to a natural process.
BAT has been universally unsuccessful in asserting the same two patents against IQOS in Europe. Separately, in December, the German Court ruled that BAT Glo Hyper Holdco device infrigements our patent and that we are entitled among others to an injunction against BAT sales of the device.
Moving now to IQOS Illumina, we are delighted to report the outstanding success since its launch in Japan and Switzerland with sales performance and consumer reaction exceeding our expectation. In Japan, the uptake of ILUMA devices and consumable among both existing IQOS users and legal age smokers has been rapid with more than 20% of the large user base switching since view this launch and over 20% of sales to legal age smokers new to IQOS.
Moreover, and consistently high-quality user experience, better reliability, and newly has led to significant observed increases in conversion rate, retention rate, and net promoter score. This bodes well for volume growth and indeed premium priced consumables has been the fastest growing launch in the smoke-free category reaching an offtake share in the three main convenience store sales chains of 8% within three months of national launch, and driving the growth of the heat-not-burn category following the October tax driven price increase.
Early results in Switzerland have been even more remarkable with over one-third of sales to new user and Terea making up over one third of H2 sales after only two months of commercialization. Our HTU share growth has accelerated accordingly from 6% in September to 7.9% in December. These results are very encouraging for the wider rollout of ILUMA in the EU region and around the world and we plan to roll out gradually to more markets this year mostly in H2.
While we continue to manage device-supply constraints, the unprecedented growth in Japan also means we have had to accelerate both the supply of Terea consumables using air freight and the conversion of our production line to support new market launches. With ILUMA, IQOS 3 DUO, and LIL, we know of three heat-not-burn technology under the IQOS umbrella to sell different consumer needs and segment the market. We have an exciting pipeline of innovation on devices and consumables across our technology at different price tiers.
As I mentioned, we also plan to enhance our portfolio for future growth with the introduction of a new complementary technology towards the end of this year. This will be targeted at smokers in low and middle income market catching to the consumer need of simple, high quality, affordable devices and consumables and specific local test performances.
In term of HTUs, after launching over 50 new ILUMA HTUs in Q4, we plan to continue expanding our portfolio across platforms, geographies, and price points this year. We continue to commercialize IQOS VEEV with very promising results in the first group of markets where we started in our own channel with a limited range of test volumes and equity levels. IQOS VEEV is a premium product, providing a superior experience and the commercial of ICOS allows us to deploy efficiency and at scale through a bespoke route to market approach.
As we start to expand distribution and the consumable offering, we observed signs of increased uptake and clear positive consumer feedback relative to competitive product. We see encouraging success in Italy and the Czech Republic, reaching double-digit offtake share of with rapid progress also visible in Croatia within three months of launch. After launching in Canada and Ukraine in the fourth quarter, we plan to add more markets in 2022 with timing subject to device availability. We also continue preparation to apply for PMTA from the USFDA and now prudently assume readiness for filing in early 2023 for further clarity on the required preparatory steps.
An additional exciting mid-term growth opportunity is in the nicotine pouch category where we aim to become a leading player with our Shiro brand. Nicotine pouches provide a convenient smoke-free alternative for adult smokers and while still early in many markets, we see Shiro opening an important role in our smoke-free portfolio over the coming years. Following the acquisition of AG Snus, and Fertin Pharma, we have established a base of product development and manufacturing expertise. Although we are still learning about the promising category, our IQOS commercial infrastructure allows for a fast rollout and we plan a number of launches over the coming quarters.
The first major activity is the full relaunch of the reutilized portfolio in the Nordics this month from it's more limited prior presence with full commercial activity and a broad portfolio of flavors and strengths variance. Separately, following feedback from the 2021 consumer test of our platform to carbon key product, the design of our current technology has been discontinued. We are assessing alternative design for this consumer segment.
Turning now to our business Beyond Nicotine, the 2021 acquisition of Fertin, Vectura, and OtiTopic provide a base for building critical respiratory and overall product development capabilities in tandem with our existing expertise. This opened up opportunity to deliver the positive effect of existing wellness and healthcare molecules in a fast and effective manner. For the time being, our reported number in the other segment show the existing acquired business which delivered $101 million in net revenue in the fourth quarter and the marginal operating loss of $1 million.
The underlying performance is in line with our expectation with reported operating expenses reflecting the amortization of intangible deal-related item and our planned investments. Around 39% of Q4 revenue were derived from 13 smoking cessation products and nicotine pouch in operations. While we intend to continue the CDMO activities of acquired company, the most significant value to PMI is in this ability to develop and commercialize new products in the wellness and healthcare segment over time. We plan important R&D investment over the course of the coming years to support the aim of delivering meaningful incremental revenue starting two to three years from now as we pursue our ambition of at least $1 billion of net revenue from wellness and healthcare product by 2025.
As I mentioned earlier, we expect an operating loss of around $150 million in 2022 with revenue of around $250 million including smoking cessation products. We recognize investor interest in our future product line in these new areas and plan to provide more color at our CAGNY conference presentation on February 23rd.
Moving to sustainability and our ESG priorities, I'm happy to share that we recently completed a new sustainability materiality assessment to update and recalibrate our priorities in accordance with our biggest impact on society, better materiality, and extensive stakeholder input. While addressing the health impact of our product remained by far the biggest focus. We also identified a number of topics, which are emerging in importance or required an evolved approach. We will publish the results next week. It is increasingly important to align management incentives with sustainability materiality performance, and impact. We will strengthen this link in 2022 with the new Sustainability Index and plan to provide more details in the near future.
Our progress on sustainability continue to be recognized by leading external stakeholders with repeated intrusion in both the Dow Jones Sustainability Index, North America, and the Bloomberg Gender-Equality Index, and receiving CDP's Triple A score for the second year running. We also published an agricultural labor practices report making 10 years -- marking 10 years of the program. Since its introduction, we have successfully eradicated systemic issue related to child labor while improving living condition of farmers and farm workers. It also outlines our ambition targets such as 100% of farmers supply in tobacco to PMI, making a leading income by 2025.
On our most critical priority of product impact, the global penetration of smoke-free products around the world is accelerating the end of cigarette as legal age smokers switch to better alternatives. I am also pleased to report further recent positive regulatory developments, for example, as part of its building concept plan the European Parliament Special Committee recognized and featured harm reduction in its draft report for which the plenary vote will take place next week. In New Zealand, the government its smoke free action plan expressly excluding smoke free product from the proposed measures. In addition, a number of country including Poland and Russia, have announced new multi-year excise tax plan with taxation of smoke-free product clearly differentiated from cigarettes, making 15 market globally with such plans.
There is a growing body of scientific and real-world evidence of the substantial risk reduction potential all smoke-free product compare with smoking. While challenges in some markets are to be expected, we continue to support regulatory and fiscal framework that recognize its critical harm reduction.
I will now turn it back to Jacek for some concluding remarks.
