Emmanuel Babeau
Chief Financial Officer at Philip Morris International
Thank you, Jacek. Our business is 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 hyperinflationary accounting in Turkey. This reflects the continued strength of IQOS, accelerating pricing, and the recovery of combustible 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 units in our overall volumes at high yield 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-savings. 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 margins 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%, $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, as 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 with both 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 continued 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 significant progress in Russia, given our decision to restrict investment and innovation.
As mentioned previously, the base of ILUMA launches has also been constrained by supply-chain disruption and the outstanding ticket in initial launch markets. We expect these constraints 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 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 pressures 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 increase interest cost on our non-Swedish Match debt and planned investments. This translates 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 charge in our results and outlook. However, the obligation to pay the surcharge is currently suspended. If favorable, the difference to our forecasted 2023 excise payments would increase our net revenue by around 1% and adjusted diluted EPS growth by around 3 points, 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 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 volume of cigarette and heated tobacco unit excluding China and the US 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 a 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 airfreight. ILUMA drove accelerated device replacement from existing user in Japan and other launch market. Such devices are positive for acquisition, retention and food consumption. 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 cigarette 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 add a plus 110 basis-point favorable impact in 2022. Our two other key long-term margin drivers of pricing and productivity 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 and acceleration in combustible pricing and lower effort cost will serve to mitigate this exceptional inflation. However, the timeline is built into our projections. Importantly, while cost inflation is also a 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 efficiency and a more measured increase in device volumes.
Overall, these underlying strengths 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, we have an increasingly visible positive impact as we approach 2024. 2023 SG&A cost will include incremental investment to drive future growth, including in the commercialization of ILUMA, also included is around $150 million with a broadly even split between the US, where we are preparing our organization capability for the launch of IQOS and wellness and care investment in product development and clinical trials. In addition to inflation and SG&A cost increase, more in-line with net revenue growth is likely with limited margin impact.
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 effort cost throughout the year. In addition, investments are expected to be front-loaded and we know that the rollout of ILUMA can lead to a shortage of slower user acquisition, as consumer wait for the launch. Combined with the timing of shipments 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 top-line 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 includes a favorable timing of certain financing item of around $1.3 billion. Given nonrecurring item and working capital movements 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 of timing benefit. 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-month trailing basis, this reflects only 50 days of Swedish Match results including a full-year contribution for Swedish Match would clearly result in lower ratio. We target robust EBITDA growth, which combined with strong cash-flow allows us to focus on delivering, 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.
Now turning back to our 2022 results, both our HTU an 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 in the EU and 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 hyper-inflationary accounting.
In 2022, our share of the cigarette category increased by plus 0.3 percentage points excluding Russia and Ukraine, following category share decline 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 Sigman groups. In addition, while we have not yet seen any meaningful acceleration in downtrading, 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 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 units continued 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 was an estimated 20.3 million IQOS user as of December 31st, excluding Russia and Ukraine. This reflects growth of around plus 3.5 million for the full year. For total PMI, we estimate there were almost 25 million IQOS user as of year-end. Consistent with comments in our recent disclosure, user growth in October and November were slower due to higher-than-expected impact from commercial activity and lower acquisition for IQOS blade 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 was actually 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 launch now represents more than half of our total HTU volumes. ILUMA delivers a superior consumer experience as evidenced by net promoter scores, which on average increased by more than 10 points across the different market architects and higher conversion rate compared to IQOS 3 DUO. While the rates of acceleration differ by market, in both Switzerland and the more recently launched United Arab Emirates, off-take 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 modest flattering effect from tiny factors. IMS volume continued to grow sequentially and reached a record-high of 9.3 billion units on the focus on moving average. This reflects success across many markets and TCT including Venice with over 43% share, as well as Athens and Rome with over 25%.
In Japan, the heat-not-burn category now represent close to 35% of total tobacco with IQOS increasingly driving its growth. In Q4, the adjusted total tobacco share for our H2 brands increase by plus 2.6 points to 24.5% with off-take share in 2Q surpassing 30%. Our two-tier considerable portfolio continued to deliver strong results. IMS again grew sequentially to reach a record-high of 8.8 billion units on the four-quarter moving average as a number of Japanese IQOS user cross a remarkable 7.5 million adult consumers.
In addition to strong IQOS gain in developed markets, 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 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 result 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 US growth of ZYN, which I will come back to on the next slide.
In other US smoke-free product, moist snuff also perform well gaining almost one percentage point share of segment and going 2022 volume within a declining category. In Scandinavia, the overall smoke-free market and Swedish Match continued to grow, albeit helped by year-end trade inventory movement, the weight of the January excise tax increase in Sweden. The cigar business delivered a robust performance too and a challenging year with growth in volume and category share. We are very pleased with a 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 US performance in more detail. Excellent progress continues with shipment volume growth of plus 37% in 2022 and plus 35% in Q4, reaching record quarterly high. ZYN's 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 competitive discounting from less premium offering. Importantly, the retail value share for ZYN remain 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 welcome Swedish Match employee and leading oral nicotine portfolio into the PMI family to create a global smoke-free champion. And we will work together to create value, as we accelerate our shared vision of a smoke-free future. In particular, bringing ZYN and IQOS together in both the US and international markets, presents a significant opportunity to drive accelerated growth and switching of adult smokers 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 ZYN growth in the US. In addition, we are now preparing for the international expansion of nicotine pouches, leveraging Swedish Match product portfolio and PMI's extensive smoke-free commercial infrastructure. In parallel, we will be actively enhancing Swedish Match US distribution and commercial capabilities for the launch of IQOS in 2024.
Moving now to sustainability. As we transform our company, our business and sustainability strategy, our advancing hand-in-hand with increasing momentum. PMI and Swedish Match have shared vision and ideas. The combination helps us further accelerates 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 mental impact of our product, eradicate child labor, reduce our carbon footprint and provide 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 net loss on ecosystem connected to our value chain by 2033 and contributes to a net positive impact on nature by 2015. For Water Stewardship, we aim to scale solutions to the positive impact on water resources by 2033 and contributes to our positive impact on water resources by 2015. I am also proud to share that for the third consecutive year, we have been awarded CDP's triple-A. CDP score nearly 15 on the climate change, forest, and water security disclosures, of which only 12 received this prestigious score. In addition, I am excited to share that we are included in the 2023 Bloomberg Gender Equality Index for the third year running.
I'll now turn it back to Jacek for concluding remarks.
