Good afternoon, good morning, everyone. For our final session of today, we're joined by the very handsome Stefano Volpetti, President of Smoke-Free Products at PM, and also the Chief Consumer Officer. In this session, Stefano will look at leading and transforming through innovation in smoke-free. Remember, there'll be time for Q&A at the end, but you can also enter your questions onto your screen, or you can also email me a question. I'll make sure I pass it on to Stefano.
Before we start, I just have to read a quick disclosure. So members of the media and the press are not authorized to be on this call. If you are from the media or the press, please disconnect from the call now. The content presented on this conference call is proprietary to, and/or subject to the copyrights of Jefferies or third parties.
Further, as a matter of legal compliance, we remind you that you must not attempt to elicit from any speaker at this event any material, non-public information or other confidential information, and accordingly, the speaker may decline to respond to any questions in his or her sole discretion. You may not publish or otherwise publicly disclose the name of or otherwise identify the speakers unless Jefferies permits it in writing.
Please note, this call is being recorded. By attending this event, you agree to all of these restrictions. So with that, I will hand over to Stefano to introduce himself and get things going. So good afternoon, Stefano.
Good afternoon, Owen, and good morning and good afternoon to everyone. Thank you, Owen, for the compliment. I think you forgot to say you kept the best for last, and the best comes in the following shape. It's my pleasure to introduce how Philip Morris International is leading and transforming through innovation in smoke-free products.
I'm the President for the smoke-free category and the Chief Consumer Officer of PMI. With superior smoke-free portfolio, in Philip Morris International, we are driving real fast smoke-free transformation. Let me highlight a few numbers from 2023. This is only within 10 years from the launch of IQOS. Our smoke-free products have commercial presence in 84 markets.
We reached 33 million smoke-free users, and we have a net revenue accounting for 36.5% of the total, with the 39.3 in quarter four 2023 being in smoke-free products. Namely, we also have 25 markets around the world, where smoke-free products net revenue is above 50% of the total. Above 50% of the total.
How do we do that? We started the IQOS portion of the journey towards a smoke-free future from November 2014, when we launched IQOS in Nagoya, Japan, and Milan, Italy, with only 1 device and 2 consumables. Since that moment, we constantly evolved our portfolio with a strong innovation pipeline to deliver superior consumer experience. This, together with our geographic footprint expansion, translated into an impressive user and volume growth.
By the end of 2023, IQOS is present in 71 markets with 28.6 million legal age users, and its market share reached 9.1% in launch markets. It is important to look back 10 years. Our strong IQOS user and volume growth led to an even stronger net revenue contribution to PMI, which exceeded $10 billion in 2023.
Last year will be remembered for the IQOS surpassing Marlboro in terms of net revenues in the fourth quarter, and confirming its position as the leading premium nicotine brand in less than 10 years from launch. Even more importantly, the growth is observed across the continents. Especially in Japan, a big industry milestone was achieved recently, where heated tobacco units monthly offtake share in Tokyo C-stores chains surpassed 50% in January.
Just to give you a benchmark, it took over 30 years in Sweden for smoke-free products to surpass cigarettes, while it only took less than 10 years in Japan, thanks to IQOS. I think you are familiar with this slide. IQOS is showing clear signs of success in many geographies, despite being a premium offer.
There is impressive progress in European key cities that you see shown on this slide. Very strong gains in cities with already high IQOS adoption, such as Rome, Lisbon, Athens, and Budapest, demonstrate the potential for further growth at the national level. The recent acceleration in places like London, Madrid, Munich, and Amsterdam is also very promising for the IQOS brand in these markets and for Europe overall...
Outside of Japan and Europe, we continue to see very promising IQOS growth across the globe, including low- and middle-income markets, as highlighted by the key city offtake shares on this slide. A very important notable call-out is Indonesia, where we have expanded commercialization to targeted areas in new cities, and introduced the clove variants, catering to kretek taste preferences.
We have witnessed an uplift in user growth, and now we have over 150,000 estimated IQOS users in Indonesia. Our city offtake share in urban Jakarta is one indicator of this, with 1.6 points growth to 3.4% in a growing total industry. We are also very pleased to report the acceleration of IQOS growth in South Korea, following the introduction of ILUMA.
TEREA recently became the number one heated tobacco unit brand, as measured by national C-store offtake, and in Seoul, IQOS market share grew by 1.8 points to 12.8%. Now, how is this all happening? Not only we have a IQOS as a clear number one smoke-free brand with 28.6 million legal-age nicotine users, but its success relies on superior consumer experience delivered through three main pillars.
First, superior product and portfolio leading to 72% of IQOS users stop smoking cigarettes and switch to IQOS. Second, a significant investment to build superior brand and superior consumer engagement, resulting in meaningful different index of IQOS being 39% higher than the closest competition as measured by Kantar.
And third, we have built a superior commercial engine that creates a high satisfaction among legal-age smokers and legal-age users, which is indicated by growing/stable Net Promoter Score in markets that are contributing for 85% of the heat-not-burn net revenue. 85% is not only the best-in-class in this industry, but also a very impressive number in consumer goods overall. Consumer-centric innovation is a key growth driver, and our pipeline continues to deliver. IQOS ILUMA marks a historic milestone, brings IQOS to the next level forward.
Breakthrough induction technology provides stronger, bladeless, and effortless experience, and very importantly, next level of tobacco pleasure, no ash and tobacco residue. IQOS ILUMA brought step change in consumer experience, as proved by Net Promoter Score improvement in the launch markets.
Uptake of IQOS ILUMA is a key growth driver, and we are seeing a strong acceleration in a number of historically slower growth markets. By April 2024, IQOS ILUMA is present in 64 markets, with more than 17 million IQOS ILUMA users as of December 2023. IQOS ILUMA sets the new technology benchmark. It is the core platform for multi-year growth and innovation.
We keep innovating on this core platform with broadening heated tobacco units offering and device pipeline. Let me now highlight some recent launches. On March 13, 2024, IQOS ILUMA i went live in Japan. IQOS ILUMA i adds a touchscreen on the device holder, so that it allows users to see experience-relevant information quickly and easily.
IQOS ILUMA i PRIME is designed with elegance and packed with new advanced features, like flexibility, so that you can enjoy your tobacco moment your way. It brings desire and excitement to Japanese adult consumers. They love the features, including pulse mode, they love the design, and we see clearly top sales across the experiential channels so far. We also relentless in our desire to delight our IQOS community, invest in extra efforts to elevate our approach to limited editions, including accessories.
So we do it with an engaging story-led approach, and we do it by expanding our partnership footprint into collaborations with fashion and design brands to maximize lifestyle integration. A few examples, as you can see from the screen, are the Neon Purple, unleash the energy of color; the Star Drift, out of this world... and ILUMA Bright, the vibrant power of color captured in an instant moment.
This is beyond brilliant in consumer's world. We not only innovate in devices, we also innovate in consumables. As introduced in the Investor Day, with multiple years of product development, we bring adult nicotine users who seek tobacco flavor experience with natural sensation, a new-to-the-world sensorial experience. TEREA Crafted, a curated collection of tobacco flavors, perfectly blended with natural botanicals without artificial flavorings.
By blending tobacco and botanicals, such as rosemary, star anise, and clove, TEREA Crafted opens an authentic taste space, reinforcing IQOS taste leadership in the heat-not-burn category. While we further reinforce our leadership on tobacco taste, we also invest in building novel consumables that go beyond tobacco. Levia, zero tobacco, rich flavor discovery. It is designed for early adopters within the IQOS franchise, and for other legal-age nicotine users that are flavor explorers.
It was launched nationwide in Czech Republic and Romania in quarter one 2024, with promising initial results. More markets are planned later this year. It is important to look at capsule heatstick innovation, another great success in Japan. TEREA Oasis Pearl, a menthol cooling and toasted tobacco blend on a click. This is the fastest-growing SKU since the launch in Tokyo in May last year.
The latest C-store data show that this single SKU has reached a share of 3.2% within one year, a clear consumer success. I wanna go back to Indonesia. It is one of the largest tobacco markets, where adult smokers have a unique taste, taste preference for clove. We developed TEREA Edition, catering for kretek taste preference, with tremendous efforts from our R&D colleagues.
We launched two SKUs, TEREA Golden Edition and TEREA Emerald Edition, back in November 2023 in Jakarta. We had good consumer acceptance, and enhanced the conversion of previous kretek adult smokers. Hence, we are rolling it out to 20 cities in Indonesia as at the beginning of 2024, and more importantly, we'll be complementing this lineup with two more SKUs to be launched at the end of April.
They are the Auburn, Mulin, and Berrin SKUs that we will be complementing the TEREA Edition lineup. We talked so far about IQOS. Let's now cover our second-tier heat-not-burn portfolio, with the objective of broadening legal-age smoker reach. Plenty of adult smokers who don't quit have yet to switch. There are 1.1 billion of them around the world.
Many still need to be convinced about the category benefits, and we will continue working on it. There are also many adult smokers who prefer full-flavor cigarettes, and are more value-conscious than IQOS users. Our heat-not-burn portfolio has to cater to their needs, too. We are building a second-tier portfolio to further broaden the reach to mainstream adult nicotine users, addressing the main conversion barriers related to taste satisfaction and affordability.
Lil and Bonds by IQOS are the two heating systems to cover this space. Lil was introduced through the partnership between PMI and KT&G since 2020. It delivers tobacco enjoyment with pin heating technology, and it has been successfully rolled out to more than 30 markets around the world. Bonds by IQOS is our peripheral heating system. It provides IQOS quality at entry price, with strong tobacco notes, addressing, in particular, full-flavor legal-age smokers.
We are leveraging the learnings from our pilots in two markets to further evolve the portfolio and the commercial model. The deployment of the second-tier heat-not-burn portfolio provides flexibility to accelerate the category growth by broadening appeal to a wider range of legal-age smokers. Let me now transition to e-vapor. On e-vapor, we do have a targeted focus strategy, as introduced in the last Investor Day.
Since then, we made very good progress. VEEV is our responsible vaping brand, with two lineups: VEEV Now for disposable, and VEEV One for closed pod system. VEEV One enjoys premium positioning, and it offers a better value for money compared to the disposable products, which make it a great destination for converted vapers who use several pods a week. We proactively encourage adult smokers of disposable vapes to move to VEEV One.
By investing in a reusable device, they reduce their e-waste while continuing to have access to the extensive VEEV portfolio of flavors. VEEV One is well-accepted with premium design and a broad spectrum of flavors. We see a strong share of segment growth in both Italy and Czech Republic. In line with our targeted strategy, we have reached more than one-third of the closed pod segment in these markets. We continue to innovate on e-vapor.
VEEV Accents, this is a PMI-developed consumable innovation that derives genuine tobacco flavors from top-quality tobacco leaves to improve the satisfaction of adult cigarette smokers who value true tobacco taste and help them to fully convert to vaping. It is available in Canada and has shown the improvement in performance compared to regular vaping products. More markets to come in the future. I transition to ZYN, the number one nicotine pouch brand in the world.
Excellent U.S. progress continued in quarter one, with 70% sequential growth in 12-month rolling shipments. Impressively, category volume share grew for the fourth consecutive quarter to 74.3%, an increase of 6.9 points year-on-year, and 1.3 points sequentially, despite premium positioning. Retail value share also grew to 79.3, highlighting ZYN's premium positioning and superior brand equity.
This accelerated growth again reflects a broad step-up in nationwide store velocities and gradual distribution expansion as the category gains strong traction with adult nicotine consumers. As outlined at CAGNY, we remain focused on marketing ZYN responsibly to prevent unintended use. We support the FDA's effort to ensure only consumer over 21 have access to nicotine products. Swedish Match follows a robust U.S. marketing code that prohibits social media influencers and age-gates digital platforms to 21+.
Swedish Match also partners with We Card to help ensure retail sales only to legal-age adults. ZYN is not only a US success. We are in the process of rolling out to more markets in 2023, and more to come this year. Now, let me show you a video to introduce our continuous innovation to champion a smoke-free world. ... I hope you enjoyed the innovation pipeline from the video. We are very excited of the IQOS 10-year anniversary, and confident to the heat-not-burn category outlook.
Meanwhile, we are fully aware of the diversified consumer needs and growing prevalence of other smoke-free alternatives. So we do champion the smoke-free world with a range of multi-category superior alternatives. IQOS, the number one smoke-free brand, ZYN, the number one nicotine pouch brand, and VEEV, a fast-growing, responsible vaping brand. As we say, "Your choice, your way.
Find your better alternatives." This is how we champion a smoke-free world. As presented at CAGNY, with superior portfolio, smoke-free products net revenue expects to approach $15 billion by the end of 2024. And very importantly, propelled by science, innovation, and ambition, we aim to be substantially smoke-free by 2030.
This means more than two-thirds smoke-free net revenue, and about 60 markets with majority smoke-free revenue. Thank you very much for following my presentation. James Bushnell from Investor Relations will join me to take your questions.
Okay, thanks, guys. That was great. I've had a few questions come in on email. First one is: IQOS has clearly shown itself to be the preferred technology in heated tobacco globally. What do you think it is that sets it apart from competitive products on the market currently?
As I shared in my presentation, it is clear that IQOS represent a superior consumer experience. In the journey of conversion from traditional cigarettes to smoke-free alternatives, IQOS is able to provide an experience to smokers that is as close as possible to the one of cigarettes, but at the same time, it eliminates combustion from that experience. Consumer experience is the first one.
Second, very importantly, we built, in the last 10 years, a very important iconic brand with IQOS, and a commercial engine that goes with it. This translates in a very high conversion rate, above 70%. When you put these three things together, consumer experience, brand, and commercial engine, this is clearly the winning proposition out there, and has proven to be winning in multiple geographies that represents different types of smokers around the world.
Great. Thanks, Stefano. And sticking with heated tobacco, another question here: How much further do you think innovation can go in heated tobacco? What are some of the remaining kind of areas or pain points which new technology could potentially address?
So we are on a quest, and the quest is to grow the category, so to bring more traditional cigarette smokers that otherwise will continue to smoke into smoke-free alternatives. This is our quest, and in our quest, we have demonstrated in these 10 years that we have always taken a consumer-centric view.
If you analyze our innovations, that I had in my third chart in the presentation, you see a constant stream of innovation that is working either to eliminate a pain point or to even celebrate more positive experience that we have on the IQOS product. We continue to do that. You have seen us launching IQOS ILUMA less than 3 years ago in Japan and 2 years ago in the rest of the world.
Already in March 2024, we came with the new ILUMA i, that is, the next generation for ILUMA, and we will continue to innovate. We know that, smokers deserve the very best smoke-free alternatives, and this is all we are focused on. If we are able to serve the consumers with the best alternatives, we know we will continue to have a great trajectory of growth.
And the trajectory of growth is, with high potential, both in markets where we are already very developed in the category, like Japan or Europe, but also we see important traction of the IQOS product among smokers in low- and middle-income markets, that is extremely important to realize our smoke-free vision.
Thanks, Stefano, and then next question I got, which following on from that, I guess, well, linked into it, is... You talk about ILUMA i. What are the plans for additional rollout of that into the balance of the year? Is it gonna be Japan only or into other markets?
So, of course, I will not reveal the detailed rollout plan. But conceptually, Japan is the biggest heated tobacco market of the world. This is where we launched the ILUMA first. That's where we launched the ILUMA I first, because that is our testing ground. The start in Japan has been extremely successful.
I have personally witnessed queues in our direct channels in the days following the launch. This is a product that provides more flexibility into the experience and an integration into the lifestyle of people that helps the smoker to have a better transition to smoke-free alternatives. The rollout will happen in due time. We have plans for the second half of the year and beyond. This is clearly a winning proposition, and we will continue to make sure we capitalize on it.
As I said, during my presentation, with the ILUMA, we reached a platform that really delivers a superior consumer experience. We are now nurturing that platform with both device and the consumables innovation for us to be able to extract maximum value from that technology.
Thanks, Stefano. Next question is on a rollout again, which you may not be able to provide too much details, but you spoke about the learnings from the pilots around Bonds. I mean, can we expect that product launched into additional markets this year?
I think it's very important that we capture the learnings from that pilot. I think one of the biggest learnings is that there is still two things that are true. First, we have enormous potential with our Tier 1 proposition.
We continue to see category growth, thanks to the Tier 1 proposition, both in developed and developing markets, so this is a great news. And also, when you are establishing a new category vis-à-vis the consumers, you wanna establish that at premium level, we wanna establish that with the leading brand in the world, IQOS. This is working very well for us, and actually, we have been positively surprised by how much traction on IQOS on Tier 1 we are seeing from low and middle-income markets.
The second truth is that we absolutely need a second-tier technology, and we have two of them, Lil with KT&G, and Bonds by IQOS. We need this second-tier technology to cater to different types of taste preference, but also different types of budget from consumers. As we enter the below-premium segment, this second-tier technology is extremely important. As we always do, we start from the consumers.
This is why we rolled out the Bonds by IQOS technology first in two markets. We roll it out in two markets to gather product learnings and to gather commercial learnings. We are in the process of finalizing those learnings, acting on it, and you will see us rolling out this proposition more and more in the future as we retain appropriate. As I said before, it is a balance between the Tier 1 and the Tier 2, with the objective of creating incremental smokers moving from traditional cigarettes to smoke-free alternatives.
Great. Thanks, Stefano. Next question, somewhat vape, but I think it's more related to... I mean, the vape category now is highly fragmented, with lots of competition, and that's not the case in heated tobacco. The question relates to a lot of this vape technology is coming out of China.
The question is, how do you see a risk? Or there's two questions to this: Why have Chinese firms not really done much around heated tobacco to date? And is there a risk that going forward now they start to put more attention on heated tobacco, and you see more competing heated tobacco products enter the market?
Let me take it in two parts. First, we clearly have a competitive edge on heated tobacco. We are a company that has invested since the start of heated tobacco, more than $12 billion in developing and commercializing IQOS, and we made IQOS a superior product, with a superior consumer experience and a superior commercial engine.
We are very confident about that, and we are very confident in the growth we see in the category. If more players come into the category, frankly speaking, with our share of the category being extremely high, in the 70s%, we are welcoming a growth of the total category. This said, our competitive edge is clearly very prominent in heated tobacco.
When it comes to vape, we said in the past that we are 100% sure that to realize that smoke-free future, we need a portfolio of categories. We need heated tobacco, we need oral nicotine, and we need vape. We also said that we wanna play in vape in a responsible way, responsible from a regulatory standpoint, but also responsible from a financial standpoint, and this is why we focused our strategy to be extremely targeted.
Just few countries with the right regulations, with the right positionings for us to make progress. We have demonstrated in the first countries where we implemented that, for instance, Italy and Czech Republic, that we are able to take on the closed pod system more than 30% of the market.
This is good news for us, because the more we are able to convert vape users from disposable to closed pods, this is good news when it comes to loyalty, but this is also good news when it comes to e-waste, because frankly speaking, this is an important part of deploying a responsible vaping brand.
Thanks, Stefano. Sticking with vape, the next question is on your strategy in vape. It appeared you were trying to do this in-house, and then you switched to third party. Question is, can you kind of talk about what changed this approach? And then second, you've previously spoken about the lack of differentiating technology in vape. How do you see this developing going forward? Do you think there will be differentiation in the years ahead?
Yeah. I think in every category, as PMI, we always take a premium positioning and we always deliver a superior consumer experience. This is what we are after, and this is why, for instance, I have shared today VEEV Accents. This is a PMI-developed technology that extracts from tobacco leaves a liquid that then gets used into a vape.
This is delivering a significantly higher level of satisfaction for those consumers that comes from cigarettes, and therefore, a superior level of conversion to these vape products. Conversion means good news for consumers when it comes to smoke-free world, but conversion also means good news financially because we are able to deploy a better loyalty in our products.
This said, we remain concentrated to create clear value add into all categories by creating a superior consumer experience and being able to deploy that at scale. We are more competitive on heated tobacco. We are very competitive in oral nicotine. We started with a focused strategy on e-vape, but we can see our way there. Reaching, one-third of the category in certain countries is a great vote of confidence that we are heading in the right direction.
Okay, and then the next question relates to your last point there, where you've got one-third of the category, I think it was in Italy and Czech Republic you showed. Question is, are you seeing any movement between heated tobacco into your vape products or shifts between category from these launches?
Okay. In general, I mean, think about it this way: there are 1.1 billion nicotine users around the world, 1.1 billion. With our portfolio of smoke-free alternatives, by the end of 2023, we got 33 million of them, so there is ample opportunity for growth across the world. So this is much less about a fight between categories to gain share.
This is about how do we move more smokers from traditional cigarettes to smoke-free alternatives. Providing a range of options, this range of options being oral nicotine, vape, and heated tobacco, is a much more successful strategy, and this is a data-driven approach, much more successful strategy than just going with one category.
We are clearly seeing that us providing optionality and choice to the smokers is delivering better results in terms of category growth, and this is the way we design our portfolio. Our portfolio is designed to be complementary, complementary heated tobacco, e-vape, and oral nicotine, complementary to provide a choice to smokers to move out of cigarettes and join our smoke-free world.
Thanks, Stefano. Next question, just looking at heated tobacco in the U.S. What drove the decisions in terms of which cities you were going to launch heated tobacco in, and what sort of metrics will you view generally as a success as you roll those products out into those certain cities in the U.S.?
So the U.S. represents a very important market. You recall that we have made a transaction with Altria to get the IQOS franchise back. This is something very, very recent. Our ambition and the potential of heated tobacco in the U.S. is very clear. We see a 10 share in the cigarettes market as a good target for the five years from the authorization of IQOS ILUMA.
So in line with what we have seen in many other markets around the world, we believe with our best technology, IQOS ILUMA, once that is authorized by the FDA, and we are in the process of, five years out, we can get a 10 share of the cigarettes market. This is our ambition. You will see us in the coming months starting to pilot IQOS in the U.S.
This is mostly, like we have done in many other places around the world, consumer interactions, in a very targeted and focused way for us to gain learnings on the product, gain learnings, on our commercial engine. And then, once IQOS ILUMA is authorized by the FDA, that is the moment at which, the bigger investment will come, because we really wanna provide U.S. smokers with the best available technology, that is IQOS ILUMA, and this is the main technology we have by now across the world in 64 countries.
Thanks, Stefano. I think we've got time for one more, and the question is, you guys have previously said that there may be no smokers in certain markets, I think it was between 10-20 years. Do you think this is still possible? And what markets globally do you think are in potentially the best place to, for that to become achievable?
I personally believe that it is totally possible that in the next 10-15 years, we will see the first markets without cigarettes. Now, it is very important to realize we are very committed to it, and this is why we invest and develop and commercialize, with high investment, a full portfolio of smoke-free alternatives. In this, we are not alone.
We need to work with regulators and with... in general, with stakeholders and civil society, for us to be able to make that move in that direction, to provide the smokers that otherwise will continue to smoke traditional cigarettes, better alternatives that are scientifically substantiated to be better for them.
Great. I think we'll wrap things up there. Stefano, I really appreciate your time today. That was awesome, and yeah, thank you once again.
Thank you, Owen, and thank you everyone for following. Thank you.