Good day, and welcome to the Philip Morris International 4th Quarter 2020 Year End Earnings Conference Call. Today's call is scheduled for Maybe a representative of the call will also be invited to ask questions at conclusion of questions from the investment community. I would now turn the call over to Suneet Roley, Vice President of Investor Relations and Financial Communications. Please go ahead, sir.
Welcome and thank you for joining us. Earlier today, we issued a press release containing detailed information on our 20 2Q4 and full year results. You may access the release on www.pmi.com. A glossary of terms, including the definition for reduced risk products or RRPs, as well as adjustments, other calculations and reconciliations To the most directly comparable U. S.
GAAP measures and additional heated tobacco unit market data are at the end of today's webcast slides, which are also posted to the website. Unless otherwise stated, all references to IQOS are to our IQOS heat not burn products. Comparisons presented on a like for like basis reflect pro form a 2019 results, which have been adjusted for the deconsolidation of our Canadian subsidiary, Rothmans, Benson and Hedges, Inc, effective March 22, 2019. Please also note that the growth rates presented on an organic basis reflect currency neutral underlying results and like for like comparisons where applicable. Today's remarks contain forward looking statements and projections of future results.
I direct your attention to the forward looking and cautionary statements disclosure In today's presentation and press release, for a full review of the various factors that could cause actual results to differ materially from projections or forward looking statements. Please also note the additional forward looking and cautionary statements related to COVID-nineteen. In addition, please be aware that today's remarks and question and answer session will focus on the performance in 2020 and the outlook for 2021. We plan to address the outlook beyond 2021 at our Virtual Investor Day next week on February 10. It's now my pleasure to introduce Emmanuel Babbo, our Chief Financial Officer Andre Kalantzopoulos, our Chief Executive Officer Ignacio Golczyk, our Chief Operating Officer, will join Emmanuel for the question and answer session.
Emmanuel?
Thank you, Nick, and welcome, ladies and gentlemen. I hope everyone listening to the call is safe and well. Our business delivered a robust performance in 2020 despite the unprecedented challenges of the global pandemic. Most impressive was the continued strong growth of IQOS, which made up over 10% of our volumes and almost 1 quarter of our net revenues for the year. The daily consumption of HTUs by IQOS user So minimal impact from social restriction.
And despite significant constraint, we were able to continue acquiring new user in switching from cigarettes at a very good pace to reach a total of 17,600,000, of which 12,700,000 have switched to IQOS and stopped Smoking. HTU shipment volumes grew 28% compared to the prior year, with record market shares Moreover, 10 markets exited 2020 with double digit national share in December. Our rate of user acquisition was again strong in Q4, propelled by the increasing sophistication of our digital commercial model And the positive word-of-mouth effect from this increasing prominence despite tighter restriction in a number of markets. The most significant pandemic related headwinds we faced were in the combustible business with the highest impact in duty free And Southeast Asia, where we also faced additional challenges in Indonesia due to the excise tax structure. The least impacted region was the EU.
While the timing and duration of the recovery remain uncertain, we expect A rebound in industry volumes over the next 1 to 2 years as the pandemic recedes. Despite these challenges, our operating margins were again significantly ahead in the Q4 and the full year. This reflects the increasing weight and profitability of IQOS and the delivery of our 3 year cost efficiency target 1 year ahead of schedule, which also enables reinvestment in the business. This drove excellent EPS growth and cash generation, where we also exceeded our prior targets. From a product standpoint, we broadened our smoke free portfolio With a wider range of consumables such as Heat, Dimension and Feet and the launch of IQOS VIV in e vapor and LIL in heat not burn.
We also continue to make good progress around the world on the recognition of the positive impact of switching smokers To scientifically substantiated RFPs, the FDA's modified risk tobacco product authorization of a version of IQOS was a major milestone in this regard. This was also followed by the premarket authorization of the IQOS 3 device in December. Turning now to the headline numbers. Our full year net revenue declined by 1.6% on an organic basis. This was an exceptionally resilient performance in the context of the pandemic.
We estimate that duty Free net of partial volume recapture in local markets and Indonesia alone were a mid single digit drag on our top line growth. Despite these factors, we saw strong organic growth of 6.9% in our net revenue per unit, driven by the increasing weight of IQOS in our sales mix. Combustible tobacco pricing was plus 3.7%, reflecting solid pricing in many markets, partially offset by headwinds in Indonesia. Excluding Indonesia, Combustible pricing was around +6 percent. Despite the decline in organic net revenue and combustible volumes, Our adjusted operating income margin increased by 240 basis points on an organic basis.
This reflects the positive impact of IQOS on both our gross margin and the ratio of SG and A to net revenue, which I will come back to. The resulting 7% adjusted diluted organic EPS growth exceeds our previous guidance of around 6% and also reflect a strong end to the year in Japan. This brings me on to the 4th quarter, which had very similar dynamic Organic net revenue declined by 3.5%. While a significant improvement from the decline of almost 10% in Q2, Continued weakness in Indonesia and duty free and the lower total market in the Philippines, including price increase effect, more than offset a strong performance from IQOS. Our net revenue per unit again increased solidly by 5.2 percent due to the same factors as the full year.
Our adjusted operating income margin expanded by 200 basis points to deliver Plus 7.4 percent adjusted diluted EPS growth, all on an organic basis. Before we turn back to the full year, I will now expand on the strong underlying Q4 dynamic in little more detail. Our HTU shipment volumes continue to show strong growth and reached a record 21,700,000,000 units, driven by the EU region, Japan and Russia. In Japan, the industry was weak as expected As consumer and trade deloading following the October tax driven price increase led to a 13% decline in the total tobacco market, including Sigarilos. We outperformed this trend significantly as a strong finish for IQOS Oftech and share gave rise to higher shipment for both in quarter sellout and to provide appropriate inventory for a strong expected start to 2021.
With social restriction starting to tighten towards the end of the quarter in a number of markets in response to a second wave of the pandemic, Combustible volumes and revenue saw some impact from reduced mobility and social occasion, albeit To a significantly lesser degree than the Q2. Nonetheless, the strength of the IQOS business enabled the EU, Eastern Europe and East Asia and Australia region to deliver mid single digit top line growth. As where The continued challenges in Indonesia and Beauty Free against a tough comparison and a lower total market in the Philippines in the immediate Aftermath of a price increase weighed on revenue growth. Despite the ongoing restriction in many markets in the first Quarter of 2021 and a tough prior year comparison, we expect better top line performance, which I'll come back to later. Let me now go into the drivers of our 2020 margin expansion, starting with gross margin, which expanded by 200 basis points on an organic basis.
This is driven by multiple levers. First, Our ongoing transformation is delivering an increasing mix of IQOS consumable in our business. 2nd is pricing on combustible. 3rd is our focus on overall manufacturing and supply chain productivity, which compensated for lower combustible volume exacerbated by impact of the pandemic in addition to inflation, investments and extraordinary COVID related costs in our supply chain. Gross margin expansion was augmented by our focus on SG and A efficiency, with our adjusted marketing, administration and research cost 40 basis points lower as a percentage of net revenue on an organic basis.
This reflects the ongoing Digitalization and simplification of our business processes, including our IQOS commercial engine and more efficient ways of working. Clear focus on cost efficiency allows us to improve profitability while continuing to invest in the growth of IQOS. I am very pleased to report that we have already achieved our 2019 2021 target Of over $1,000,000,000 in annualized gross savings in only 2 years, with $1,100,000,000 delivered by the end of 2020. Over twothree of these savings came from manufacturing and supply chain productivity and device cost, where our focus on efficiency, quality and footprint more than offset inflation, supply chain investments, extraordinary COVID related cost and the effect of lower combustible volumes. The remainder came from commercial efficiency and G and A cost.
Importantly, these savings do not include those resulting from the pandemic, such as reduced travel and the necessary shift of consumer to digital channels. Between higher manufacturing costs and SG and A savings such as these, We estimate a net efficiency of around $150,000,000 due to COVID effect. We Plan to elaborate further on our CUT initiative and the fueling of IQOS growth at next week's Investor Day. The strong uplift in our profitability and excellent earning growth allowed us to deliver nearly $10,000,000,000 in operating cash flow for the year, well above our expectation of at least $9,000,000,000 This represents 3.5% like for like ex currency growth And also reflects ongoing working capital initiative and impressive performance in a year with significant disruption to global supply chain. Our capital expenditures amounted to $600,000,000 below our historic run rate.
Significant improvement in manufacturing performance have translated into lower ongoing requirements. However, we also benefited from the timing of certain investment and expect CapEx of around $800,000,000 in 2021. Aside from reinvesting in the business, the primary use of cash is on return to shareholders, and we raised The quarterly dividend this year to an annualized rate of $4.80 per share. Capital allocation is another topic we will cover at Investor Day. I turn now to industry volumes, which declined around 6% in 2020, excluding the U.
S. And China. This compares to the historic average of a 2% To 3% decline. We estimate the 3% to 4% difference is almost entirely attributable to the effect of the COVID pandemic on the combustible category. As is evident in our results, the smoke free category has displayed remarkable resilience, reflecting its convenience and suitability for different use occasions.
As we have covered in prior quarters, Lower daily consumption in combustible has been driven by 2 main factors. First, the reduction in usage occasion during confinement, especially in markets with a large amount of daily wage worker. And second, the reduced amount of social occasion due to closure of hospitality settings And restriction on social gatherings. Duty free also remains depressed, in line with global travel. We have seen a partial recovery in daily consumption since the most severe period of reduced mobility in Q2, and we expect A gradual improvement as the pandemic recedes.
As we all know, there remain considerable uncertainty on the speed, shape And timing of exiting the pandemic, and at present, many countries are experiencing a serious resurgence in infections. However, Based on our recent experience with renewed lockdown situation, we do not expect to see a repeat of the severe drop in consumption of Q2 2020. However, it is uncertain if any rebound will occur this year, so we assume the historic average decline of 2% to 3% To be the floor for industry trends in 2021. I'll come back to this when discussing guidance assumptions. Turning now to our volume performance.
Weak combustible industry volumes were compounded by our exposure to Indonesia And duty free and the over indexing of our premium portfolio to social consumption occasions. It follows that as pandemic recedes, We should see a better dynamic in our market share, and I'll come to this point shortly. As expected, quarterly fluctuation in inventory level were even out Over the year, with no significant difference between our IMS and shipments. The clear highlight in our volume performance was the shipment of 76,100,000,000 HTUs in 2020. This was just above the upper end of our previously communicated €75,000,000,000 to €76,000,000,000 range and represent twenty 8% growth over the prior year.
HCU net revenues increased by plus 33% on an organic basis, partly reflecting positive mix. We remain well on track to deliver on our target of 90 100,000,000,000 units this year, and we will have more to say on the outlook beyond 2021 next week. This strong performance from IQOS means that each of the tobacco units Made up over 10% of our total shipment volume in 2020 and over 12% in the 4th quarter as compared to approximately 8% in the year of 2019 and 5% in 2018. We continue to expect this proportion to grow over time as the positive momentum on IQOS continues, providing a powerful driver of revenue and margin growth. Our sales Mix is changing rapidly.
Smoke free product made up 26% of our total net revenue in the 4th quarter. IQOS devices accounted for approximately 7% of the $6,800,000,000 of RRP net revenue for the full year, mainly due to a naturally lower ratio of new user to existing user, longer replacement cycle and geographic mix. In some geographies, we still sell a substantial amount of the lower price original IQOS 2.4 plus device, And we have now introduced Lille Solid in Eastern Europe. Focusing now on our total international market Our volume share increased by 0.2 points before the impact of duty free cigarettes in Indonesia. This was driven by higher share for heated tobacco units, which increased by 0.8 points to reach 3%, only partly offset by lower share for cigarettes.
In key markets where IQOS has a meaningful presence, our share increased with very few exceptions. However, our total international market share was negatively impacted by Duty Free and Indonesia. Marlboro remains by far the world's leading brand with 9.5% share of cigarettes in 2020. However, in many markets, it over indexes to social consumption occasion, which are naturally lower during COVID related restriction. Indeed, we saw Aggregate Malboro share movement track pandemic development over the course of the year and expect its recovery to have a similar trend.
In terms of value share, I. E. Our share of total industry net revenue excluding the U. S. And China, which is more closely related to financial performance.
We estimate to be significantly above our volume share given the premium positioning of Marlboro And IQOS. We expect our value share to grow strongly in 2021, driven by IQOS. I turn now to Indonesia. After a difficult We enter 2021 with a sequentially stable share trend, supported by our leadership of the annual CrayTech segment, which is growing again. New exile duty rates will come into force on February 1, with a weighted average increase of around 13% for our portfolio over 2021.
This is broadly in line with the average annual increase prior to 2020. And for PMI, it's a lower average increase than the industry given our over indexing to annual Credex where excise rates are unchanged. Given this higher margin segment, which supports significant employment in Indonesia, is both lower price and less We expect a tailwind for our market share and financial performance over the coming year. Despite the negative consequences for government revenue, there has not yet been a significant move to level the playing field between the Tier 1 and below Tier 1 segments. We remain hopeful that the government will address this issue over time.
With respect to the minimum retail selling price, Enforcement continued to progress slowly given mobility constraints. However, we expect the impact on the market is now likely to be more limited. The large majority of the industry is now above minimum level. And with no change in the minimum price in 2021, The pass on of new excise rate will move the remainder of the industry above compliance levels. We also saw a flattening in the growth of the below Tier 1 segment in the 4th quarter and a gradual improvement in our shipment volume.
As in many other markets, daily consumption improved since Q2, but still below pre pandemic level and remain Sensitive to social restriction. Indonesia was a material drag on our 2020 financial results. While there remain much work to be done on the excise structure and ongoing uncertainty with regard to the pandemic, for 2021, we expect a much less negative industry volume trend, a better market share outlook had a much smaller impact on our overall performance. For the total international cigarette category, we assume a rebound over 20 21, 2022 as the negative impact of COVID on daily consumption reverse. The fundamental of the category also remain intact, including price elasticity, which we estimate at around minus 0.4 on a global average basis.
With regard to our combustible portfolio, investment levels remain adequate. However, incrementally more may be needed in the immediate We will continue investing in the brand equity of Marlboro, which remains by far the world's leading brand. Given the economic environment, the management of price gaps and growing our share of the low price segment will also be a focus. Pricing in combustibles remain an important driver of performance. And while the carryover effect of COVID may impact our 2021 variance, The pricing power of our portfolio remains strong.
Additionally, as HTU volumes grow, This pricing power increases due to the higher price productivity on Itz and our other HTU brands. I would also highlight that pricing is no longer the sole driver of our top line growth, with the increasing weight of IQOS in our sales mix generating significant growth in our average selling price. I move now to IQOS performance. We estimate that there were 17,600,000 legal age IQOS users as of December 31. This represents the addition of around 1,200,000 adult user since the end of Q3 and over 4,000,000 in 2020.
We have notably seen user acquisition accelerate through the second half of the year despite renewed pandemic linked in the Q4 in a number of markets. Our accelerated pivot to digital and remote engagement, combined with strong momentum for the IQOS brand, is paying off. We further estimate that 72% of this total or 12 point 7,000,000 adult smokers have switched to IQOS and stopped smoking with a balance in various stages of conversion. This again reflect widespread user growth momentum across all IQOS geographies, including the EU region, Japan and Russia. As our user base expand in markets such as Japan and Russia, we are increasingly enriching our offer and segmenting the category with new product and more price points.
The addition of Lilsolid in Russia and Ukraine in the second half Help us to reach a broader range of legal aid smokers in this market and bring them into the smoke free category. Though at this early stage, the number of users acquired through the purchase of a Lille device is immaterial in the context of our user base. As we have said previously, we plan to bring more exciting innovation from IQOS in the coming quarters, which we'll elaborate on further next week. In the EU region, 4th quarter share for Itz To reach a record 5% of total cigarette and HTU industry volume. As shown on the slide, this reflects strong sequential and year on Year over year growth in IMS volumes.
I draw your attention to the contrast between the consistent sequential growth in IMS And the progression in sequential quarterly share, which can be distorted by the seasonality of the combustible market in addition to other fluctuation linked to the pandemic such as border closure and other social restriction. It follows that 2021 and future years are also likely to see Undying share gain accentuated in the winter months with a convert dynamic in Q2 and Q4. This excellent performance reflects strong growth in Italy, exiting the year with 10% share, With the large majority of user acquisition coming organically as increasing awareness and prominence of the product build its own momentum. Germany and Poland were also strong contributors. We added a further 600,000 IQOS user in the 4th quarter to reach $5,200,000 a continuation of recent strong performance.
In addition, we saw further progress in Spain And in the UK, where both National and London It's Oftech shares continued to grow, with the latter reaching almost 4% in the quarter. We show here select key cities, which demonstrate the strong traction of IQOS and the excellent potential for national shares across the region. I also refer you to the appendix where we show shares for key EU market and globally key cities. Strong performance continued in Russia with our STU share up by 2.2 points to reach a record 7.2 percent in Q4. As with the EU region, we highlight the effect of the seasonality in the combustible category on quarterly shares.
The seasonal fluctuation in Russia can be significant, and we urge you to bear this in mind when reading our quarterly results in the future. A notable success in the latter part of the year was the expansion of our product portfolio with LISOLID and FEAT consumable to cater to a broader range of adult smokers across the socioeconomic spectrum. In both Russia and Ukraine, the majority of consumer purchasing a lead device are new user with the incrementality contributing to an acceleration in user acquisition with high level of conversion in line with IQOS. The volume of feed consumable sold is broadly commensurate with little device ownership. And at this early stage of commercialization, both are small in the context of the IQOS business in this market.
However, While we have successfully uptraded many legal edge smoker in the medium price segment to IQOS, this bodes well for our ability to reach consumer In certain markets in the medium and below price segment for whom purchasing power may be a barrier to entering the category. The Icons brand also resonates strongly across the Eastern Europe region. Rapid growth and excellent market share are testament to Our agile commercial model and the consumer appetite for smoke free alternative, even in market with lower purchasing power, and again, serve as very encouraging indicators for the continued progression of our national market share. In Japan, our total reported share for heated tobacco units reached 22.1% in the 4th quarter, supported by line extension for both Marlboro Heat Sticks and Eats, such as the recent launch of Marlboro Black Mentor. On a more representative total tobacco basis, including cigarillos and adjusted for trade inventory movement, The share for our hcu brands increased by 2.9 points versus the prior year quarter and by 1.2 points sequentially to 20%.
Both Itz and Marlboro Itzstick grew market share following the October price increase, highlighting the strength of our price tiered portfolio. We are especially pleased by our Q4 Oftech share in Tokyo, which reached the milestone of 25% in December. Q4 2020 adjusted in market sales volume for our H2 brands grew 0.6% sequentially, which we regard as a strong performance given the pull forward of consumer uptake into Q3 before the price increase. The overall heated tobacco category made up over 27% of the total tobacco market in Q4, with IQOS maintaining its high share of segment. We are especially pleased by our Q4 of Techshare in Tokyo, which reached the milestone of 25% in December.
A very similar picture is seen in QCT across Japan, including Sendai. The Korean market has specific Challenges around consumer misperception of the category. And while we continue working to address this issue, it's notable that Kuala Lumpur in Malaysia has already overtaken Seoul in market share terms, crossing double digit in the 3rd quarter. In addition to strong growth in existing markets, the geographic expansion of IQOS continue. We leverage our digital capability to launch In 3 new markets: Estonia, Kuwait and the Maldives.
This takes the total number of markets where IQOS is available for sale to 64, of which over half are outside the OECD. We continue the commercialization of IQOS Vive, our new e vapor product, with the 1st EU market launch in the Czech Republic in December. This follows lead market New Zealand in August 2020, and we will continue to enter new market over 2021, including Italy and Finland in the coming weeks. As we have said previously, the commercial infrastructure of IQOS allows us to deploy Efficiently and at scale. Both the VIVE device and the consumable will be premium position.
We also placed great importance on efforts to guard against youth access for all our product. As we roll out IQOS V, we will be testing Age verification technology in select markets. Switching now to sustainability. I want to again Emphasize that our corporate strategy and our sustainability strategy are deeply aligned. ESG issues are business issues that serve as input to our long term strategy and sit at the core of our mission.
Despite the unprecedented challenges of the global pandemic, we have not deviated from our efforts to be a more Sustainable company, and we achieved a number of key milestone in 2020. By replacing cigarettes with less harmful alternative, we can significantly reduce the negative impact of our product have on the health of our consumer. That's why the core of our strategy focuses on addressing the impact of P product, the first and most critical pillar of our approach to sustainability. This is what differentiates our company and highlight our unique Value proposition as a final piece of our ESG plus P framework. Phasing out cigarettes remain our focus.
And in 2020, we estimate a further 4,100,000 legal aid smoker enter the smoke free category with IQOS, With a total of €12,700,000 now switched and stopped smoking. We also show here Some recent notable achievement across ESG, which we'll come back to in more detail at Investor Day. While there remain much work to do, we believe our transparency and detailed approach to sustainability, materiality and disclosure make PMI an excellent example of impact, which we are achieving through carefully embedding sustainability into business And understanding it as an opportunity for innovation and growth, including our pioneering role in tobacco arm reduction. In other words, our transformation is a unique sustainability story, another topic we will return to next week. I will now turn to guidance for 2021, where we expect a significant recovery.
The main unknown is the speed and shape of the global exit from the pandemic. While COVID was clearly disruptive to our performance In 2020, it is not yet over, and we must factor this uncertainty into our outlook for the coming year. With the rollout of vaccine just starting and lockdown measures currently in place across many markets, we do not any meaningful change in the Q1 where we also face an unfavorable pre COVID prior year comparison. Looking beyond this, there are clearly a range of outcome, and we are reflecting this by providing a range for our assumed organic growth in net revenue and EPS. These ranges assume that even in the event of For launch restriction, we will not see a return to the depressed consumption level of Q2 2020, which is consistent with our observation of a less Severe impact in the 2nd wave.
For Duty Free, the rebound in global travel is likely to lag the improvement of in country mobility. Our guidance assume no meaningful recovery in duty free this year. Despite this assumption, We expect organic net revenue growth in the range of 4% to 7% and organic adjusted diluted EPS growth of plus 9% to plus 11% or plus 14% to plus 16% in dollar terms. This tighter range for EPS reflect the likely higher level of growth investment in the event of a faster recovery, and thus, Our assumption is for at least 150 basis points of margin expansion in all scenario within the range. This reflects the ongoing positive mix effect of IQOS in our business and the accretion of cost efficiency net of continued growth investment.
This projected organic EPS growth, including an estimated favorable currency impact of Approximately $0.25 at prevailing rates translates into an adjusted diluted EPS range of $5.90 to $6 This guidance does not assume share repurchases. This guidance also assumes the achievement of our 3 year HTU shipment volume target of 90,000,000,000 to 100,000,000,000 units. Coming to some of the other key assumptions underpinning this guidance. We expect a total industry volume progression of flat to minus 3% depending on the speed and shape of recovery from the pandemic. We expect to outperform the industry trend, driven by the share gains of IQOS with the resulting PMI volume forecast of +1 percent to minus 2%.
This also incorporates a manageable excise outlook, including a positive structural change in Turkey And above average increase in Russia and the increase in Indonesia, in line with historic averages. As I mentioned earlier, our combustible pricing power remains strong. However, given 2020 carryover effect, In Indonesia and the immediate aftermath of the COVID crisis, we assume combustible pricing of 2% to 3% in 2021 Or around plus 4%, excluding Indonesia. As in 2020, the biggest driver for our top line growth is likely to be the higher weight of the IQOS business, which has significantly higher average net revenue per unit. As laid out in this morning's press release, we assume that our full year effective tax rate will be around 22% and assume that operating cash flow will grow strongly to around $11,000,000,000 at prevailing exchange rate and subject to capital to working capital requirement.
As I already mentioned, we assume capital expenditure of around $800,000,000 Let me now spend a moment on the expectation for the Q1. Our organic net revenue are likely to be around stable to slightly down as we lap a strong Q1 2020, which benefited from inventory buildup in March As the pandemic began to spread in many markets, in addition to being a largely COVID free quarter. This incorporates continued strong year on year growth in the shipment and IMS volumes of HTUs. Due to normal seasonal patterns and the lower number of selling days in Q1, we expect this volume to be sequentially stable to slightly below Q4 2020. We also expect strong sequential HTU share gains on both an underlying and reported basis compared to Q4, noting the seasonal factor in the combustible market I already mentioned.
We expect strong margin progression in Q1, Primarily due to the positive mix effect of IQOS and the effect of the cost efficiency realized in 2020. We believe this should result in an organic adjusted diluted EPS growth of around 8%, which Equates to around $1.40 including an estimated $0.09 favorable currency impact at prevailing rates. Looking beyond the Q1, it will come as no surprise that the easier comparison in Q2 should enable higher than average year over year growth In volumes and net revenues. To conclude, our results were stronger than expected with plus 7 percent organic EPS growth delivered in the term of 2020. We are building a business through IQOS to deliver Superior and sustainable growth over the coming years.
Continued momentum of IQOS through the challenges of the pandemic demonstrate This structural growth characteristic, we are also committed to maintaining the strong leadership And competitiveness of our combustible business. We have a number of levers for growth in our top and bottom line. 1st, the powerful mix effect of IQOS. 2nd, pricing, which remains important for combustible and, A further lever as we continue to hone our business model. Moreover, with the launches of the IQOS VIFF and LIL product, We are broadening and stepping up our product offer and innovation in 2021.
You can also expect us to bring further Exciting innovation to our IQOS heat not burn platform. As I mentioned, sustainability is at the heart of our smoke free strategy, and we continue to work tirelessly to further our mission. Our organization demonstrated extraordinary resilience in 2020, copying and growing and mirrorably through one of the most challenging periods in recent history. At the same time, our business continued to transform, incorporating and leveraging new skills and capabilities. In short, we look forward with confidence, and we will expand on this topic further at our Vistral Investor Day on February 10.
We look forward to seeing you there. Thank you. Andre, Jacek and I are now more than happy to answer your questions.
Thank you. We will now conduct the question and answer portion of the conference. On your touchtone phone. In the interest of fairness and time, we ask that participants keep to a maximum of 2 questions each. Our first question will come from the line of Bonnie Herzog with Goldman Sachs.
Hi, everyone.
Hi, Bonnie. Hello, Bonnie.
Hi.
And congratulations on during Jacek. I guess my first question today would be on margins. And I guess, Emmanuel, I was hoping you could talk a little bit more about your expectations Around margins, I guess, in terms of any favorable fixed cost absorption you expect as you amortize the investment behind IQOS over this increasingly larger accelerating volume base. And then at the time, thinking about that In the context of your variable costs going lower as you touched upon thinking about the progress you've made with digital. So Could you just talk about that and how big of an impact this could be or big of an opportunity this could be in the future?
Thanks.
Sure, Bonnie. Happy to do that. It's going to be only a teaser versus what we're going to see next week. So bear with us, And we elaborate with much more detail. But I can certainly anticipate a few headline on what we'll share Next week.
I think what is obvious in our number for 2020 is the fact that beyond the great performance of IQOS, We have also used efficiency on cost as a powerful lever to generate performance. That's really showing up very clearly in our numbers. So We are delivering in 2 years instead of 3 years the overall at least €1,000,000,000 savings. And what is good is that We are working on cost efficiency on several levels. And many of them, of course, are related To IQOS, but not exclusively to IQOS for some of them.
If you look at the gross margin level, it's quite a view that We are being very successful in generating manufacturing productivity. And that's a great driver for further margin improvement. And here, we are working globally across the portfolio, I would say, on margin improvement. So it's not just on IQOS, even if Probably on IQOS because that's a business that doesn't have the same maturity. We have more runway, if you want, to improve The productivity, and we are certainly making extremely good in road in that respect.
But we are also generating manufacturing productivity on CEC. And then on our SG and A, I think you could identify 2 driver on cost efficiency. 1, I would say, is probably something you're going to find in many companies Today, we are working to be a more efficient and agile company. So we work on being more digitized. We work on simplifying the way we work.
We automate, we standardize, and that is allowing us not to be cost cutter, but just to take cost to be A better company and deliver overall higher performance. And then you have elements that are indeed connected with our commercial Performance and not only to IQOS, but certainly mainly to IQOS. And you have two elements. One is all the investment that we made in the past And that is a great platform on IQOS. And I'm not saying that investment is over.
We're going to keep investing. But of course, We have now an investment that we amortized over a fast growing base, and we are not growing the level of Investment at the speed of the growth of the IQOS business. And then there is this great work that we are doing, Thanks to digital and thanks, of course, to all the learning that we are making on the IQOS business, where we very nicely reduced all the variable per user cost. But I will stop there because we will elaborate on that next week.
Okay. That was really helpful. I appreciate that. And then My second question is all the progress you've made with IQOS and growing the base and it's so large, but as you look out, Could you talk about further segmentation of markets with your different platforms or possibly different price points as you continue To convert more smokers, you touched on that, my guess is you're going to touch on that more next week. But just as I looked at your business, It implies that your user base is probably going to need to double in the next maybe 3 plus years based on our analysis for you to hit your Aspirational target of that $250,000,000,000 unit by 200 or 2025.
So Love to hear any strategy there or insights, because I think about it, I assume more of the conversion is going to come from other reduced risk technologies? And how do you anticipate your mix evolving over time? Thanks.
Yes. I'll give you the first shot. I still believe over the next 3 years, Bonnie, as I said many times, That heated tobacco technology will be the prevailing technology because it has the highest ability in terms of taste and satisfaction To convert people. Now in terms of segmentation, I believe in most markets, we will need 1 or 2 Hit not burn technologies, if I stay with this segment, and probably 2 to 3 over time Consumable price segments, so we can cover mostly the vast majority of the markets. There will be exclusions where you need to Cover 4 price segments, with probably 2 technologies.
And we'll talk next week about The next step in technology for aerosolization in heat mac burn, which will address many of the pain points consumers have today. Now clearly, the heated tobacco product is 1 category. I think that's the fastest growth both in terms of Revenue and bottom line and volume. The second is obviously e vapor. We are entering this market because I believe There is consumers there that want to switch straight to these products.
There is a lot of dual users, and We see also dual users between heat not burn and e vapor that obviously we would like to capture. I think we can also capture Consumers for other vapor products. The key there is clearly To leverage the infrastructure and the brand name of IQOS, I think the product is very good and that's the first reactions we get. But we need to build equity because that's a problem for the category, as you know, and also consumer loyalty Because for the economics to be at best, for e vapor, you don't only need to be premium positioned, But you also need to have loyal consumers because if you discount just products and you sell them and then a consumer has 10 different products from 10 different competitors And consumes half a cartridge of your product per week, it's very difficult to make return and more importantly, it's very difficult to maintain an infrastructure. Now we have the advantage of having a lot of infrastructure with IQOS that we can leverage.
The equity of IQOS is undeniably the best in the RRP, So I think that's helpful. Technology is good. We are premium, so I think we can make inroads in this category. And then obviously, we were also going to expand in the pure nicotine products like nicotine pouches or the P3 over time. Although I think this is more occasional used products than predominant used products.
So that's a little bit and again, sorry to Cut this here, but we are going to elaborate this more extensively next week, okay.
I expected that. So very helpful. Thank you so much.
Thank you, Budd.
The next question will come from the line of Michael Lavery with Piper Sandler.
Good morning. Thank you. Just wanted to touch on IQOS again. And the Philippines, you have a 20 basis points share, which of course is small, but it's very early there. And if I understand it right, you launched there without any stores initially.
You also touched on the call about some digital launches in Estonia and Kuwait and Maldives. And so Just would love a little more sense of how some of those digital efforts work and certainly seems in the Philippines are ready to be pretty quickly effective. Can you just Bring to life a little bit of how you're going to market there?
Yes, it's Jacek here. So, yes, we started this year in Philippines, to be very precise, in the Manila, not even Greater Manila. And the product, as expected, Shailip responded pretty well. This was one of the first fully digital, if I may, Launch also driven by the fact that we had to change the strategy last moment due to the COVID and And the whole COVID impact, and the product starts getting good traction. I think we'll Still stay for a while in Manila, which is, frankly speaking, not the major secret because we're following the same path Well, the same strategy for the rollout in every geographies, right, especially if you go to the sizable geography like Philippines.
But product is well received. I think the taste characteristics, etcetera, fits very well. We're also testing the Different route to consumer models. As you know, we're entering the countries when you have a stick purchase. There was a lot of consumption on trade rather than just off trade.
So we need to come up with good solutions there. But yes, I'm very positive On that part of Asia, which is still unchartered for IQOS.
Okay. Thank you. That's helpful. And just a second one on buybacks, helpful clarity that there's no consideration on that in the guidance. But With some currency tailwinds now and the balance sheet where it is, it certainly seems like that could be could come into play.
Can you give a sense of what you would need to have in place or see before you might trigger resuming those buybacks?
Look, if you bear with us until next week, we'll have a global review of our capital allocation strategy, and we'll address All components at that stage.
Okay. That's no problem. If I could just maybe swap that question then, could you give any sense of where you stand on On 2 with TEPs, any update on that?
On TEPs, on the platform, I mean, we'll be further conducting that this time the market commercial test This year in 2021.
Okay. Thank you very much.
Thank you.
Thank you.
The next question will come from the line of Vivien Azer with Cowen. Hi, thank you. Good afternoon. Hi. I wanted to also I was wondering if you could give us some color on what the mix looks like for the consumables for traditional tobacco flavors and some of the novel flavors that you have in the market?
Thanks.
That's Yaczek here. Hi, Vivien. It varies market by market, okay? Obviously, as you know, we have flavors of Mantle, we have some other flavors. But still, Aiko, frankly speaking, in most of the places is very much Attractiveness is coming from tobacco flavors.
I mean, at the end of the day, most of the segments which we are targeting at this stage And we are operating at scale. I mean, most of the segments are the flavor tobacco flavor type of segments, right? SonaeKos really has a very winning proposition there, also has a great propositions in a mantle in our flavors. So that varies By the country and you can't really I think if I give you the international share of the flavors, it will It will be just misleading. The average doesn't exist.
Yes, but it follows typically if you have a predominant mental market like Japan, the predominance Menthol, if you are predominantly full I mean, cigarette markets without Menthol, then you are predominantly there. A bit sometimes over indexed in Menzel in general because it has a bit more impact for people, so it's easier to switch to. Understood.
Thank you for that. And my follow-up also on IQOS, please. In terms of the market share progression that you saw in Japan, Either in the quarter or over the course of the year, can you contextualize the contribution from the Marlboro brand versus the HEETS brand? Thank you.
The Marlboro brand is still the major contributor of that overall volumes and the growth. So we're very Pleased that on the course of the last year, we continue growing Marlboro. Obviously, HIT, which is priced and also below the Marlboro Had to be the better dynamics than Marlboro, but above actually contributing to the growth. And that's very interesting, Veer, when you're asking, because This is the first market which we tried the dual positioning of the consumables, Marlboro and the HEETS in Japan. As you know very well, we also extended HEETS in the couple of Eastern European geographies in Russia, When first we brought the above premium propositions to HEETS, the HEETS creations and for HEETS Curations contribute, so we like premium rice further feeds in Russia and the feeds curations in Moscow Constitute now about 10% of the overall feeds volume.
So that's very good. And then we complemented on the notch below price segments By bringing the Lille Feeds proposition. So we now in Russia, we're testing can IQOS operate On the free essentially price segments on the devices and the spread is pretty phenomenal because IQOS devices will go from $60 On the premium device and then we go down to the $20 on the Lille device and then we have Coverage on the consumables spreading from RUB170 per pack to RUB 130. So it gives you the hint how broadly we And this is the spike, as you know, that we have a competition in Russia. But frankly speaking, competition in terms of the devices is essentially close So it's a little bit of a very aggressive promotions, but we continue delivering the strong growth On IQOS, Bob, in terms of user acquisitions measured by the device sales and by the HEETS, further expansions On the heat.
And what is also good in places like in Russia is we continue growing in the top cities, which we started few years ago. So we have a continuous growth in the cities and the expansion doesn't need from that growth which we have in the Moscow, St. Petersburg and And the other main cities.
Thank you so much for that color. Appreciate it.
Thank you. Thank you.
The next question will come from the line of bhav jane with Barclays.
Yes, hi, good morning. Thank you for taking my question. Hello. So on the organic margin improvement, which you are guiding to for FY 2021 of 150 basis point, That is on top of 240 basis point improvement in FY 2020. And this saw benefits like reduction in travel expense, There was a cut in German VAT, etcetera.
So what I'm trying to ask is that, is your underlying margin improvement closer to 200 basis point, Not 150 basis point and that is clearly happening because of Icon. So is that how we should be thinking about the next few years as well?
So for the medium term, again, we'll elaborate next week on more outlook. For the year, Gaurav, I let you Make your assumption. I think we are clear on the kind of one off saving that we have seen because of the COVID, so you can factor that in your model. And then I think we are also clear on what are the driver for margin improvement. So it's about the positive impact in
the growth of
IQOS In terms of per stick revenue, in terms of margin and then everything that is happening On cost efficiency, that is really what is driving that has been driving the margin improvement in 2020, and that will continue In 2021, as you can imagine, beyond 2021, but we'll elaborate on that next week.
Sure. My second question is on the European beating cancer plan, which was released earlier this week And they talk of things like flavor bans, plain packaging, increasing taxes on heated tobacco to equal to cigarettes. So how do you think of that and how do you incorporate these sort of risks in your outlook?
Okay. First of all, this is a plan. And there are many positive aspects also in this plan, in my view. First of all, we don't talk about taxes. I mean, this is subject to directives.
The tobacco excise directive that governs the excise Tax and the tobacco product directive that is the regulation of the products, okay? The first is the tobacco excise Directive today does not foresee reduced risk product categories. So it has to be amended under all circumstances, Okay. And we're not talking about increases. It's creating a framework under which member states can tax.
Our view is that absence of combustion, for example, is a key criteria On how to tax differently, cigarettes to other products. And then within that major cliff Of change in toxicity and exposure, member states can have different tax rates for these products, but these products should not be by any means Higher than any combustible category available, okay, as a minimum criteria. But this has to happen. Nobody said that taxes will increase on heated tobacco products, frankly speaking, at this stage or any vapor product, Okay. So all this has to be defined, and the discussions are going to start in the course of this year and continue in next year in any case.
So that's for and then the tobacco product directive in serve, I hope that there will be a bit more Regulatory clarity in there regarding RRPs because any e vapor product, because just now we left it up to the member states to regulate, Which, frankly speaking, is not harmonizing a directive, 1, and secondly, is a pain for all The industry participants because every country has a different regulation. And we always advocated serious regulation on these products provided that these is Differentiated from cigarettes, okay? Now there are voices that say that this product should be the same thing as cigarettes. But at the end of the day, it was very clear also in the cancer plan that all in the Q and A that only based on science and evidence, They will take decisions. So I wouldn't be particularly worried about this at this stage, and I think the outcome may be positive Actually, because it's an opportunity to discuss all these things.
Now in the longer term, we discuss very often. I believe Tax differentials will be maintained because it makes sense for public health. It makes sense for the consumers. And as I we also explained, We have room even to pass taxes if by any chance Differentials closed somehow because IQOS also in order to pass part of the tax benefit to the consumers It's mid price positioned essentially if you take the weighted average of the countries, number 1. And number 2, Its price productivity is much, much higher than cigarettes, so passing on a tax is triggering less price increase than passing on tax on cigarettes.
So that's in a nutshell the way we should look at it. But we have to assume that excise taxes will increase over time also for Our fees as governments need money and that will apply to heated tobacco products that already taxed substantially and potentially in some cases In the future, but that's all baked in the assumptions.
Sure. Thanks. And if I can ask one last question, it's on your minority interest, which has been increasing at a higher rate Then your EBIT and that's driven by Philippines. So is there an opportunity to reduce your minority interest considering your partner in Philippines, A trade off the exchanges at like some 6 times PE?
No, something visit this.
Sure. Thank you.
Not in the period I mean, if our partner wants to sell one day, we can discuss
We are
very happy with our partnership in filling.
The next question will come from the line of Adam Spielman with Citi.
Hello. Hello, Adam. Hi. So first question, I think you said in your guidance So you're expecting to take less pricing variance on combustible cigarettes than usual. Now for years years years, it's been 6%.
And I think you said it's something to do with COVID that you want to take less pricing. I'm really surprised by that. You also said the pricing model hasn't been broken. So I suppose the question is, If you take less pricing in combustibles this year, 2021, what would it take for you to have another Low year in 2022. That will be my first question.
Okay. First of all, we didn't say we will take less pricing. We will also, where is the pricing opportunity, we'll take price. And I think the model Still works very well. Elasticities are the same, everything.
We had to make some, in my view, Reasonable conservative, you may say assumptions regarding what's going to happen in Indonesia and Russia because of the tax increase. And Indonesia has a never get carryover from last year, which makes the comparisons year to year problematic, okay? Plus, In Germany, we had a VAT, I would say, tax break, which we assume is not going to continue this year. So if you exclude all these elements, I think we're still back to a normal pricing in the other markets. So Clearly, in terms of post COVID, I would say, assumptions, We have to watch more carefully the price gaps.
That's clear at the mid to low end of the market. But that doesn't mean that we're going to take any severe pricing decisions At this stage, anywhere. I just this is a watch out. If there is down trading, which is happening between the mid price typically and the low price segment, Also because we have absence of contraband and all these things, that's something to watch in certain markets, But overall, I think we're in good shape. Also, both on IQOS, on heat not burn products And combustible, the excise taxes are now in, if I'm not mistaken, everywhere.
So we have pretty good visibility Of where we are, okay? So I don't think it's super COVID related. What is COVID related in The guidance is a range we gave because if you look Aramark, what happened last year, if we assume 2% to 3% underlying industry decline, even baking in Indonesia, We had a 6.7% industry decline, so we're missing consumption for mathematically 3.7% to 4.7%. That's On average, dollars 100,000,000,000 for the industry. So we don't that will rebound in my view one day, but once the restrictions Finish.
Now we gave the guidance for this year of 0 to minus 3, which is At 0, you have some recovery. At minus 3, you have super underlying negativity, Maybe exaggerated, I don't know at this stage, but that's plusminus20,000,000,000 units for us. So that's plusminus2.5 revenue points. So that's where the volatility is, okay? And if pricing comes better in Russia and Indonesia, That much the better.
We may end up at the high end of the range.
Okay. Well, I think that leads to my next question, Which is to be blunt, I don't really understand the EPS guidance. And there are many aspects that I don't understand about it. So first of all, you're saying in Q1, while your comp is insanely hard, you're going to have Flat organic sales, you're going to have margin expansion, you're going to have 8% like for like EPS growth. You then say because the comp is really easy in Q2, you're going to have a great quarter, or you imply that.
And yet the full year Is only 9% to 11%. And it seems to me that if you can do so well in Q1 and you're going to do well in Q2, then The 9% to 11% is very conservative. And another way of asking the same question, every single time you Given guidance of any sort on EPS since 2018, you'd be submit. This is this quarter, You gave guidance. It wasn't a range.
It was a point estimate. You said you were going to do about 1.20 And you said that in December, and yet you beat it very handsomely. Now that would suggest that the way you give guidance It's systematically incredibly conservative. We're either you can't forecast, which I don't believe, While you're systematically incredibly conservative, that point, the fact you've always been conservative with the fact So well in Q1 against a really tough comp suggests to me that the guidance for the full year is also super conservative. Is that fair?
I wouldn't say conservative, but it's not bullish either, okay? I mean, Adam, I understand what you are saying, but we're at the beginning of the year, okay? Many things can happen Regarding COVID because it's not finished. So last year, as Emmanuel said, we had more than $150,000,000 Exceptional expenses because of COVID, okay? So you need to put some caution in the bottom line regarding unexpected costs.
And if we have a rebound, I would call, not a very gradual recovery, we may need to invest a bit more money Towards the end of the year to accelerate acquisition, you can physically do that. If we physically can't, Then clearly, the money will go to the bottom line. So at this stage, we gave this range, okay, which by the way, if If the dollar stays with disease, it's not bad at all because it's 14% to 16% and the revenue line would be 8% to 11%, which will be phenomenal, I would say, so I don't think this is conservative. It's just I don't have a crystal ball to foresee everything that's happening in every month of this year, Okay. We're still not in normal situation.
That's all. So I understand And I'm just Just in
the sequence, please factor in that, I mean, as we say, we talk about a gradual recovery that we are expecting without being able to, of course, design exactly what is the trajectory. But that would mean certainly more investment in H2. Remember, we've been, of course, limited in commercial activity. As you know, we say H2 could be a better moment overall with a number of restriction being There will be also more investments queued towards the 2nd part of the year. So you have to take that into account.
And that explains as well why Q1 maybe is expected today better than one could have expected initially. But the investment will need to happen in the year.
Any case, I would love to be conservative and as the quarters unfold, we'll get more. But I think I gave the parameters. The pricing that still can come more favorable, that goes straight to the bottom line. If we have it more combustible, that's fine, goes to the bottom line, but we have to assume that. As the quarters pass,
The final question will come from the line of Robert Brampton with UBS.
What?
Hello?
Hello?
Robert, your line is open.
I don't think I'm in the queue actually. Operator, can you put Robert Rampton in queue from UBS, please?
His line is open.
Robert, can you join? Okay. We'll get back to Robert after the call, Operator, if we can just go to the final remarks. Andre, I think you have some closing remarks.
Yes. I mean, thank you all for joining. I think we had a rather complicated 2020, but the results Came out much better than I would have thought when we were talking for the first time in March. I think we look at a Very good recovery in relative terms in 2021. IQOS continues to grow strongly.
The momentum is Excellent in my view, and we will see some rebound hopefully in cigarette volumes in the next 1 to 2 years. I would love to see positive total market, maybe in 2022. And we look forward to Sharing with you more on the long term growth and more on understanding the profitability of IQOS in the next week. So have a very good day, and thank you for listening to each.
Thank you very much. I just wanted to add that, Will, if you have any follow-up questions, you can contact the Investor Relations team and look out our website for the instructions on how to log on to the Investor Day event. It starts at 8:30 Eastern Time on February 10. You can register on our website. And again, thank you very much for joining the call.
Have a nice
day. Bye.
This does conclude today's conference call. We thank you for your participation and ask that you please disconnect your lines.