Emmanuel Babeau
Chief Financial Officer at Philip Morris International
Of the $2.1 billion of Q1 RRP pro forma net revenue, reflecting higher year-over-year device volume as supply constraints ease and ILUMA perform strongly. We delivered organic growth of plus 10% in Q1 pro forma net revenue on shipment volume growth of plus 4.9%. This growth reflects the twin-engine driving our top line. The first is pricing led by combustible. The second is increasing mix of reduced risk product in our business at higher net revenue per unit, which continue to deliver substantial growth and increasingly powerful driver as our transformation accelerates.
Let's now turn to the drivers of our Q1 pro forma OI margin, which declined by 40 basis points. Our pro forma gross margin decreased organically by 250 basis points reflecting the factors I mentioned earlier. Conversely, our pro forma adjusted marketing administration and research costs were 210 basis points better organically, due to the positive operating leverage of IQOS growth and successful cost efficiency programs.
We generated around $180 million in gross cost savings in the first quarter with around $80 million in COGS productivity and $100 million from SG&A. This makes over $1 billion since the start of 2021 already over halfway towards our target of around $2 billion for '21-23. This allows us to invest in top-line growth and mitigate inflationary pressures, while continuing to deliver solid margin progression. We continue to accelerate investment in our commercial programs, digital engine and R&D, as well as a number of growth opportunities across categories and geographies. As reflected in our full year guidance, we expect our operating margin progression to improve over the course of the year as temporary headwinds and tough comparisons ease.
Our convertible portfolio performed well in Q1 with robust pro forma growth in volume and organic net revenues. This notably reflects a further recovery in Indonesia and the Philippines, supporting an expectation of organic net revenue growth and broadly stable volume in our South and Southeast Asia region this year. Increased travel also supported volume growth in Spain and Duty Free. Our share of the combustible category continued to recover with a plus 0.4 pro forma gain in Q1 on a year-over-year basis. This includes gain in Japan, Turkey and Duty Free as our portfolio initiatives bear fruit and social consumption resumes with Marlboro share 0.3 points higher. While the category is declining over time, our leadership in combustibles helps to maximize switching to smoke-free products, and we continue to target a stable category share over time, despite the impact of IQOS cannibalization.
In terms of our overall market share, ongoing gains for our IQOS portfolio create continued positive momentum. We delivered pro forma share growth in Q1 as expected, including gains in Italy, Duty Free, Egypt, Germany and Poland. PMI HTUs are now the second-largest nicotine brand in the markets where they are present, with a 7.5% share excluding Russia and Ukraine. This includes the number one position in six markets.
Moving now to IQOS performance, we estimate there were approximately 17.9 million IQOS users as of March 31st, excluding Russia and Ukraine which had an estimated 4.8 million users at December 31, 2021. This reflects pro forma growth of more than 1 million users, a phenomenal performance by historic standards. This was driven by the resumption of consumer programs in many markets as device supply constraints receded, capitalizing on the strong underlying demand for the brand, as also evident in the very impressive start of IQOS ILUMA.
We estimate that 71% of total IQOS users outside Russia and Ukraine or 12.7 million adult smokers have switched to IQOS and stopped smoking, with the balance in various stages of conversion. We were also very encouraged by the FDA's recent MRTP order for IQOS 3, with the full range of authorized IQOS products now classified as modified risk tobacco products.
In the EU Region, first-quarter HTU share reached 7.6% of total cigarette and HTU industry volume, representing a first quarter share gain of 2.0 points, including a small benefit from the timing of inventory movement. Adjusted IMS volumes also continue to exhibit robust sequential growth, and we expect this to continue in the second quarter, noting that the usual seasonality of the combustible market combined with the reversal of Q1 inventory movements is expected to result in a lower sequential share in Q2. This very good performance include strong user and volume growth across
The region, with especially notable contributions from Italy and Poland. I also want to again highlight Hungary and Lithuania where our Q1 national HTU share exceeded 25%.
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 continues to lead the way, approaching 40% share, Budapest, Rome and Athens are also well into the mid-to-high 20s. Elsewhere, we are especially pleased by Vienna more than doubling to 5%, the strong traction in London at over 6% share, and a further acceleration in Zurich with the introduction of ILUMA.
In Japan, the adjusted share for our HTU brands increased by 1.9 points to a record 22.7% in Q1. This performance reflects the strength of our portfolio and the launch of IQOS ILUMA, which is also driving notable gains in Tokyo and other key cities. We expect strong offtake trends to continue in Q2, reaching around 24% market share, despite seasonality effects. Conversely, as I touched on earlier, supply chain constraints will likely result in Q2 HTU shipments below the prior year. With HTU inventories consequently reduced in the second quarter, we expect the replenishment in H2 to deliver a substantial recovery. Notwithstanding such quarterly volatility, with substantial commercial activity planned and excellent underlying momentum, we expect strong double-digit HTU shipment volume growth in Japan this year.
In addition to strong progress in developed countries, we see very promising IQOS growth in low and middle income market. The share of our HTU brands in the 28 such markets launched by December 31, 2021, excluding Russia and Ukraine, grew by plus 0.8 points compared to the prior year to reach 2.7%. Given the large size of these markets, the premium position of the existing IQOS portfolio and the relatively early stage of commercialization, this represents excellent progress. As mentioned last quarter we also intend to bring a new complementary range of heat-not-burn devices and HTUs tailored to emerging markets towards the end of this year.
A prime example of this is Egypt, where offtake exit share in Cairo is approaching 5% within eight months of launch, as compared to total Q1 share of 4.3%. Other notable successes including the recently launched market of Morocco as well as Lebanon, Jordan, the Dominican Republic and the Philippines, despite pandemic restriction in Manila.
Moving now to IQOS ILUMA, we are delighted to report the further outstanding success since its launch, with sales performance and consumer reactions still exceeding our expectations. In Japan, the uptake of ILUMA devices and consumables among both existing IQOS users and legal-age smokers has been rapid, with more than 30% of the large user base up-trading since the August 2021 launch, and over 20% of sales remain to legal-age smokers new to IQOS. Moreover, the enhanced and consistently high-quality user experience, better reliability and no need for cleaning has led to significant observed increases in conversion rates, retention rates and Net Promoter Score. This bodes well for volumes, with premium-priced TEREA consumables the fastest-growing launch in the smoke-free category, reaching an offtake share of 12% within six months of national launch, overtaking Marlboro Heatsticks and HEETS combined to
Become the number one smoke-free brand.
We now have all three IQOS ILUMA devices in the market following the launch of ILUMA ONE, which provides multiple consecutive use at a more affordable price point. We are also introducing a new HTU brand called SENTIA for use with ILUMA, in select prefectures at a mainline price point comparable to HEETS. Results in Switzerland have again been even more remarkable, with significant sales to new users, and TEREA making up almost two-thirds of HTU sales after only five months of commercialization. Our HTU share growth has accelerated from less than 6% in Q3 to 9% this quarter, with notable success in the German-speaking majority of the country.
Our newest ILUMA launch was in Spain last month. While very early days the signs are also very positive with device sales to new users increasing plus 50% compared to the prior run rate, 10% of existing users upgraded within the first month, and TEREA exiting March at over one quarter of total HTU offtake. These results across 3 markets with differing consumer characteristics and levels of RRP maturity are clearly very encouraging for the wider roll-out of ILUMA around the world. While device supply constraints are easing, the timing of HTU availability for new ILUMA markets has been somewhat delayed given the rapid uptake in the initial markets, and the resulting need for greater supply for each new market than was originally anticipated.
In addition, the cancellation of our investment in the production of TEREA HTUs in our Russian facility has a short-term impact. As a result, further market launches are now mostly expected towards the end of H2. With ILUMA, IQOS 3 DUO and LIL, we now have three heat-not-burn technologies under the IQOS umbrella to serve different consumer needs and segment the market. We have an exciting pipeline of innovation on devices and consumables at different price tiers.
In e-vapor, IQOS VEEV's promising results in the first group of markets continue. VEEV is a premium proposition, with an average price premium to competitive devices of 20% to 30%, making these results especially encouraging as we pursue a differentiated and profitable category leadership position over time.
We see further success in Italy reaching almost 20% offtake share of closeds-ystem pods, with rapid progress also visible in Croatia within eight months of launch. In the Czech Republic, after some temporary supply disruption at the start of the quarter which affected Q1 share, rapid growth has resumed. VEEV was present in seven markets at March 31st, and we plan to add more this year, with timing subject to device availability. Separately, our relaunched commercialization of nicotine pouches under the Shiro brand in the Nordics is progressing well, with positive consumer feedback.
Moving to sustainability and our ESG priorities, I'm happy to share two important developments published in our 2022 proxy statement. Firstly, our board of directors updated our company's statement of purpose, expanding it beyond smoke-free, to better reflect the role of wellness and healthcare in our corporate strategy and transformation. Second, the introduction of a bespoke Sustainability Index explicitly links our ESG performance to 30% of long-term compensation. Further details will be
Shared in our Integrated Report on May 17, and further dedicated disclosures.
Product health impact remains one of our most critical ESG priorities, and the growing penetration of smoke-free products around the world is accelerating the end of cigarettes, as legal-age smokers switch to better alternatives. There is a growing body of scientific and real-world evidence of the substantial risk reduction potential of smoke-free products compared with smoking. While challenges in some market are to be expected, we continue to support regulatory and fiscal framework that recognize the positive impact tobacco harm reduction policy can have on public health. A recent example of this is Italy, which has established distinct excise tax categories for heat-not-burn, e-vapor and nicotine pouches.
Thank you. I'll now turn it back to Jacek.
