I'm Nick Rowley, Vice President, Investor Relations and Financial Communications. Earlier today, we issued a press release containing information that will be presented during today's event. You may access the release on www.pmi.com for the new PMI Investor Relations app. Today's remarks contain forward looking statements and projections of future results.
Press release. I direct
your attention to the forward looking and cautionary statements disclosure in today's presentation and press release for a review of the various factors that could cause actual results to differ materially from our forward looking projections or statements. Please also note the additional forward looking and cautionary statements related to COVID-nineteen. A glossary of terms including the definition for reduced risk products or RFPs are posted on our website. Please note also that the growth rates presented on an organic basis to reflect currency neutral underlying results and like for like comparisons where applicable. Unless otherwise stated all references to IQOS are to our IQOS heat not burn devices and consumables.
Let's take a quick look at the agenda. We have 3 presentations from senior management. We'll have a 10 minute break in between each presentation and before the Q and A session. This event is a live video webcast. We will post the slides of each presentation at the start of each presentation and following today's meeting, we plan to also post the full transcript including the Q and A session as soon as reasonably practicable to our website.
It's now my pleasure to introduce Andre Kalantzopoulos, our Chief Executive Officer. Andre?
Thank you, Nick, and welcome to all of you. Good morning, good afternoon, depending on the time zone you're in. We'd, of course, have loved to have this meeting in person, but we'll try to do our best looking at the screen to explain our strategy and our midterm outlook. But before that, I would like to first summarize what we achieved so far. It is just over 5 years now since we launched for full scale IQOS and also the beginning of our smoke free transformation.
And I think we've made tremendous progress. We did try many things. We innovated a lot. We invested a lot, as you all know, and learned a lot. But all this I think made us a much better organization, much more prepared and even more confident for the years to come.
So in summary, almost $7,000,000,000 in net revenues coming from IQOS, almost 18,000,000 users, which is just the beginning obviously was scratching the surface with IQOS across 64 markets. We have maintained 80% plus segment share of heated tobacco products with premium positioning and despite all the competitive release. And very importantly, we focus on responsible marketing practices to minimize unintended use because we know from a regulatory in public health perspective, this is a very important subject. PMI and the IQOS brand just as Marlboro is in cigarettes. Actually IQOS is already the number 5 nicotine brand a just after Marlboro by 2023.
I think we are pioneering in tobacco harm reduction and that supports a unique ESG impact story, which we'll elaborate today. And obviously, the product change and switching Smokers out of cigarettes into less harmful alternatives is the biggest contribution we can make to society and public health, but we excel in many other important ESG areas as Emmanuel will explain later on. And finally, this all these achievements didn't come without investments, dollars 8,100,000,000 in cumulative investments in central developments that excludes clearly on commercial activities, and I think we have now built the platform from which we can expand further. Of course, during the last 5 years, we had prolonged currency headwinds on our dollar earnings. And this year, I think we have for the first time a positive currency and I hope it will remain.
That will help us clearly enormously. And the big question still is the effects of the COVID crisis, especially on the combustible to be resilient, although we had obviously some delays compared to our regional plan. So having said all that, What are we going to cover today? We have gathered a lot of investor feedback in preparing this event, and we plan to address the main questions. First of all, what is the RRP category growth outlook?
What are the request and the enablers and I will spend some time on the most important one that is regulation. But reality is we are just at the beginning of the RRPs and I think the potential is still enormous. The second question is, Why do we believe that we will maintain PMI's leadership in smoke free products, which I'm convinced we will and we will explain why. We'll give you more granularity on category economics and profitability, especially on IQOS because there are many questions to understand how the top line translates into bottom line. And of course, we had the questions from investors.
Yes, we do keep an eye on combustibles. I'll explain the strategy we have and the outlook also in a post COVID context. We will talk about capital structure, shareholder returns and especially the resumption of share buybacks. And as I said previously, ESG and sustainability because I think we have a unique story and contribution, and I think we need to do a bit more work or much more work actually with ESG Investors as PMI story and contribution is not fully understood. And I'll pledge upon how we can leverage existing capabilities we have developed in life sciences, preclinical and clinical, in aerosolization capabilities so that we can start expanding beyond nicotine over the longer term, so we are not just a tobacco or nicotine company, but more than that.
I will touch upon all the subject to provide context to the extent possible. And obviously, Jacek and Emmanuel will give much more details and color. So the first, I think, highlight is we aim to reach over 50% of net revenues from smoke free products or non combustible products by 2025. I think we're on the right path to get there. And I think we can we're driving, I would say, new phase of category development.
So far, I think we used only one platform and essentially one technology. I think we can do much more to accelerate in this field. And now we have the infrastructure, know how and product pipeline to do so. We will continue leveraging obviously our leadership in combustibles so that we can support the smoke free expansion. And obviously, Smoke free products don't need financing from combustibles, but still access to smokers and infrastructure, especially for new markets And an accelerator to all these can be a differentiated regulation that applies specifically to smoke free products, both in terms of taxation, ability of communication, on a premarket and postmarket elements so that this can be, I would think, an important accelerator to growth, but we have not taken this into consideration at least for our 'twenty one to 'twenty three on the projections.
So let's come to the numbers now. So we starting from the top obviously, we project more than 5% organic growth at revenue level over the next 3 years, and I will explain how we get to this. We expect an acceleration in margin and EPS growth and target more than 9% earnings per share. Press by 25. The important number here is the heated tobacco shipment volumes of a range of €140,000,000,000 and €160,000,000,000 And we also target on cost efficiencies that Emmanuel will explain, but they come both from manufacturing, I would say half of it and also half of it from SG and A.
And obviously, this is growth. Some of that will be reinvested to fuel the growth of the RRPs. Now let me explain a little bit how we come to this more than 5%. And it may well be higher obviously, and I will explain the factors.
First of all,
we take just as an example, dollars 10,000,000,000 heated tobacco units growth. Then we have to subtract obviously the cannibalization of our own portfolio of tobacco products. So I would say that if we compare the markets we are in and assuming existing pricing and existing tax rates, 10,000,000,000 heated tobacco units for PMI will give incrementally something between $650,000,000 $700,000,000 of net revenues to which we can add 8% to 10% for device sales in terms of revenues. And that would translate to around $525,000,000 to $550,000,000 press release on the financial results and the financial results in gross profit and Emmanuel will come back on how now that can flow to the bottom line. So that's the first thing to remember, and I'm trying here to give as much color as possible so that everybody can easily calculate more easily their numbers.
The if we look now at the range of 140,000,000,000 to 160,000,000,000 units. That gives approximately 1.5 to the impacts of COVID. The first question is when is duty free going to come back? So duty free fully recovery can add up to 1.1% compound average growth rate, But we don't know exactly when it's going to happen, to which extent this is going to happen, 100% or 80%. So I give you the range from 0% to 1.1% CAGR.
Now we said that we lost a lot of consumption last year and some of this volume can come back during the 2021, 2023 period. So I would say the COVID recovery that could be between 0% and 1.4% compound average growth rate. That is all combustible. And then the easier numbers to calculate to see the ranges in which we can be above 5% It's about 1 point minus 1.7 percent. CAGR and a 3% volume decline is minus 2.5 percent CAGR, but typically, we cover and much more than cover these numbers through price.
So that's the parameters to see what ranges we can have. And as you see, there is some degree of uncertainty, press release, especially because of COVID during this period. So I think we spent a lot of time here on this slide, but I thought it was important. Cut in industry to decline about 1% to 2% over the next 3 years. Also, as I said, depending on COVID rebound.
And we assume, I would say, cautiously, 10% of international industry by volume to be smoke free by 2023 and hit no burn to be at least 70% of the category. Now bear in mind that in the markets where IQOS is present, these 2020 percentages are approximately double. And obviously, as I said, this does not assume a major acceleration in regulatory progress. So heated tobacco projects continue operating with the same restrictions in cigarettes in many markets. If we look at differently the retail value, we estimate that overheat not burn was 3% of 3.3% of industry volume.
It was 4.7% of retail value and obviously more at the net revenue level due to higher net revenue per unit. On the contrary, e vapor I mean, conversely, the e vapor is lower because also of the prevalence of open of tax systems that particularly reduced the average value and the absence of excise tax although the trade margins are much higher. So over the next for 5 years, we expect the overall retail value to grow by approximately 4%. This, of course includes pricing and taxation and this includes an over 25% growth in heat no burn and 10% to 15% growth of e vapor depending on the mix of open and closed systems and the conversion rates to full use. So I think this is moving in the right direction and clearly Better regulation and a more unanimous front amongst the industry competitors would accelerate these results.
A different way to look at this is now we look at the markets in the first two columns left and right, both in terms of number of consumers or users and in 1,000,000,000 units. As we can see, just in the current footprint, we have still to go for 150,000,000 people. And if we address The entire footprint in the current markets without even expansion, we have 250,000,000 users potentially and 1,200,000,000,000 units. So just in the markets we are in and of course, we are planning geographic expansion, I think we can we have room to grow. I'm not saying it's the easiest thing on earth, but I think we are well equipped to progress.
Now I'll try to list here what we have learned from commercializing RRPs now for 5 years and what it takes to excel in this category. Obviously, the first one is product. We need to master and the common denominator as we all know of these products is the absence of combustion. I'll come back to this, But that's the problem in cigarettes. So all these products are non combustible products.
Clearly, you need to master aerosolization. And we all know that internal heating gives the best sensory. Of course, you have electronics and electronic supply chains. Update. The second thing is we need to bring to build new brand equity obviously, we need Life Sciences for substantiation and pre and post market surveillance, including very strict surveillance to make sure that youth and other unintended audiences are minimized.
The manufacturing and supply chain is very different because we have electronics, we have 3rd party partners, we have revised logistics and we need investment obviously in new machinery. The consumer journey is completely different because we need own retail, 3rd party retail, customer service, after sales of Care and it's a full journey from category understanding to post market surveillance. As I said, the regulatory landscape is still uncharted except for the U. S. FDA.
Very few countries Have a regulation in place that is comprehensive and I think that is very important. I'll come back to this. And it's very important to have high conversion rates, both from harm reduction perspective and public health, but also because otherwise the infrastructure costs that you have to do to make upfront as we did to have a meaningful entry in the category. If we don't have high conversion and high consumption of consumables, It's scattered though you have dual use. Clearly, it takes you much more time to breakeven.
And all this obviously requires Many new organizational skills as there are very many new areas that you don't have in cigarettes and completely different ways of work. So that's what you need to compete successfully and lead in my view, but the rewards are also significant. Much more positive public health impact obviously, higher profitability and growth potential as we have the ability to gain market share and it's a much more sustainable business model that has potential adjacencies as we now have introduced many new Now what has been my philosophy and I think I have explained this a few times, but I will repeat it because we always get the question why not first e vapor products and so on. And internally heating is much better than any other form of heating the tobacco. So It was natural to launch this product first because he has the highest capability to convert the adult smokers and also build trust in the brand because if you try a product and you don't like it, then obviously your trust And brand equity are not there.
And I think we are succeeding with IQOS having also a first mover advantage. Clearly, IQOS needs still work to build its brand equity, but I think we're on the right path. And our ambition is in a few years we'll be as high up there in the minds of consumers as Malboro and other iconic brands have been. The second thing is to establish all the science and start building public health credentials. And I think an increasing number of countries are recognizing that this product is different than cigarettes and it has harm reduction potential.
And obviously, the PMTA and subsequently modified risk tobacco product authorization of the FDA have held. I talked about upfront investment in order to build profitability later, and I think we are at this stage. Organizational capabilities. So we have all that established and we can leverage all these to have better growth. And a very important thing is the IQOSILUMA and I'll talk about it, But it's a brand new product with new aerosolization technology, always internal heating, but using induction.
And I think that will be a major accelerator, both in terms of consumer adoption, but also doing with lower costs. So overall, if I just start with Hypnot Ber. I think that we will need 2 to 3 technologies. So we have the blade technology. We have obviously now the induction technology and Jacek is going to talk much more about that.
And with maybe in different markets, we also need a different, I would say, technology. I don't know if it's peripheral heating or any other type for the Q3, but it's very unlikely that we'll deploy 3 different technologies in the same market. And then to cover the entire spectrum of price segments. You may need 3 to 5 price points in maximum. In Europe, obviously, 2 to 3 in total to cover everything.
If you go to countries like Indonesia or Russia, we may need 4 press release and The pace of innovation in our view should be hydro utilization engine changes every 4 to 5 years and IQOSI Luma is a very good example because it comes after the blade. Obviously, as consumers interact with the product. You need to constantly upgrade the interface, the user experience, the smaller things that make the life of consumer easier. And the consumer portfolio changed the sensory experiences with expansions and additions every 6 to 12 months. And I think more or less the same philosophy applies to evapour as not one platform and not only one price point of cartridges will win the market over time.
So now if we move to e vapor and the other categories. I think IQOS V device and consumables and we announced the gradual introduction into any markets that are all going to be introduced with premium position. Now the issue here and the focus is different. We don't need to build category understanding and awareness to the extent and by and large not to the extent that we have done for IQOS and HIT NOT BERL. So The second thing here is differentiation.
So we need
to prove our
product is better in terms of usage, experience and also trust and brand loyalty and brand equity than other products. You see here the audiences and I think we will elaborate on this also during the Q and A in Yatsek, but and then addressing the category concerns, especially youth access is fundamental for every platform, but for e vapor products, even more fundamental. And that's why we are now developing technology that the device cannot be activated without age verification, but I will come to all these points a bit later. The key success factor in e vapor, although its economics are good, is minimized dual use, but also the dilution you get as consumers own of 5, 6 different devices from different manufacturers. So an individual manufacturer has very low consumption of their own So the profitability takes a lot of time to come and hardly pays for the infrastructure sometimes.
We believe that over time, consumers need to be offered of different products. They will be predominant of 1, say, hit not burn, and we believe hit not burn for the foreseeable future is going to be the product that can switch consumers most successfully out of cigarettes. But clearly, consumers will use 2 or 3 products as yes, if I take an example from beer, we drink beer from alcohol. I'm sorry, we can we drink beer, we drink wine, we drink whiskey, we're predominant of something, but we also use the others. So we need to enlarge the offering, but we use this offering to the extent feasible and logical under IQOS umbrella for premium and clearly, we may need a second brand in the time for the lower end of the market.
Now if I look at the economics, we aim to, as we said approximately double our heated tobacco unit volume by 2.23 quarter is a range. This means a significant expansion in net revenue per unit, and I explained the economics previously and how to calculate this. Because we have very good reasons to believe we can keep the differentials, but there is room if there are tax increases that closed the differential because the IQOS price productivity is significantly above cigarettes as I will show you in a few slides. And secondly, IQOS because we pass a large part of the tax advantage to the consumers. Also it's kind of mid position on a weighted average price.
So we have also compared to the premium cigarette segment room to grow. But obviously, excise tax differentials are important. They make sense, and we're watching this very closely. Now if we look at below the gross margin, obviously, we think we have capacity to at least cover €150,000,000,000 heated tobacco units. And you have here the number, every €10,000,000,000 costs €150,000,000 in CapEx.
And we got to this number because we also increased substantially productivity. SG and A costs will grow and I don't want to steal a manual standard, so he will explain to you the split between what we consider fixed and what is variable and volume related. And there is always been new market entries. But So overall, we will see expansion also of the operating margin of IQOS and its contribution to PMI in the years to come. Now the VIVE Economics, and I tried to explain a little bit, a slightly different.
It's much less fixed investments needed as we already have the IQOS commercial platform being physical or digital. So the majority of the costs are variable. They are volume related and it's about differentiating so much more classic marketing. And the IQOS brand, we believe, will help add credibility to a category that still is very fragmented. Our objective, as I said, is premium positioning, increasing conversion on minimizing dual use and brand loyalty, so consumers consume our tots and cartridges and not somebody else's.
And if we look at the gross margins, at premium, the e vapor category assuming full conversion and full brand loyalty, it's 1.6 times cigarettes. So it's not bad. And if we avoid fragmentation, profitability can be pretty good, especially since we don't have to amortize infrastructure. The taxation is more favorable than heated tobacco products. Actually, it's 4% compared to 30% of the retail price, 33% of the retail price, if I'm not mistaken.
And but the trade margins are much higher. Sometimes they are 3x that those of cigarettes, so they act a little bit like an ad valorem tax, but over time, I think this can be reduced. Now There is always a big conversation of why we don't have unanimous acceptance of harm reduction through smoke free alternatives. And I'll come to why there is opposition, but let's get a rationale and a factual look. I think that that 1,000,000,000 people that smoke today in the world.
And the projection is there's going to be the same number of smokers by 20 25 based on the World Health Organization. So the current fiscal regulatory measures are not truly accelerating cessation. So without stopping them, clearly, a second pillar is required and absolutely actually necessary makes sense for our public health. And harm reduction is not a new concept. It's applied in many industries.
We have on climate change and we incentivize people and we promote alternative energy, solar panels, Aeolian for electric cars. It's not that these products have no impact on the environment or they don't use energy. Of course they do because you need to build them, you need to maintain them, you need to transport them and so on. But they are better than burning coal. So better income reduction is good.
And the same applies to So scientifically substantiated products can play a very important role and can switch consumers out of cigarettes much faster than restrictive measures only. Now we absolutely differentiated regulatory frameworks if we want to be successful and have acceleration. By differentiated, I mean differentiated on taxation and there we are fairly successful, but also differentiated communication because in many markets, it's It was impossible to speak to consumers if we apply cigarette restrictions. Of course, we don't talk about some free for all situation. It has to be highly regulated with the right post market and pre market reviews, but a notch better can give information to people that they need to make their own decisions and switch.
So The key here is to put the interest of the 1,000,000,000 people who smoke at the center of the conversation, not politics and ideology. So I would say we must stop debating whether RRP should be made available, but how fast and how best to minimize unintended use so that we can help the men and women that would otherwise continue smoking. Now here is the first problem of confusion, nicotine. Nicotine is not the real problem in cigarettes as tobacco is not. Combustion is.
Yes, nicotine is addictive, but does not directly cause disease. Yet 70% of smokers almost and also the vast majority of regulators think that nicotine is the problem. So that needs to be diffuse and as you've seen there is small print underneath, that's clearly the position of the FDA issued in September 2017. Clearly stating that nicotine is not directly responsible. It's a small created by combustion that is the issue.
And when we have NGOs and people in public health creating confusion, clearly that does not incentivize the people who smoke to switch because all the smoke free products do contain nicotine as well. Now the other issue is on what is going to be the reduction in morbidity and mortality. It's pretty clear logically that the 90% to 95% reduction to the exposure in harmful chemicals 99 plus for e vapor products will result in better public health outcomes. But to be absolutely precise, we need long term epidemiology. And to establish long term epidemiology, we obviously need protocols because today if we go to a doctor, it's very unlikely that they ask you whether you use an e vapor product or a heat tobacco product.
You are either a smoker or a smoker. If we just have this device, it's difficult to establish repeatability. Now let's look at first signs, I would say. If we take Japan, we all know that in Japan, The advent of heated tobacco products led by IQOS has resulted in the highest reduction in cigarette use ever seen of especially any market of this size. So you would expect to see some fair signs and what we did this is not epidemiology clearly, but we did what we call an ecological study just looking at admissions in hospitals of COPD exacerbations or and you see the line that changes direction in a way that is rather significant after 2016.
And the only intervening event is the introduction of hit not burn. Now, so it's a first indication is not epidemiology, but it's an encouraging sign that positive effects will occur. And we have an open PMI Open Science event in February 17, so you can follow a bit more this and the other work we are doing already in this field. As I said, there is a position and I will not going to read the slide, but there are 2 important things here. And that's its ideologies, politics, and many things.
But what we start seeing over the last 2 years and many of you experienced also with the vapor controversies in the U. S. We have a lot of ideologically biased research that confuses both the consumers and regulators. And We got to a point where 50%, 60% of smokers believe that evapro products are equally bad or worse than cigarettes, which is not something that makes sense and people should be held accountable for that. The second is the World Health Organization, which truly has anachronistic positions and its special interest influence, NGO influence and by and large not facts and science.
So it is about time that we see the World Health Organization looking at real facts, real evidence, reads the research and doesn't just listen to extremists in order to define their positions. And if that happens, clearly, we can have an enormous acceleration in people switching out of cigarettes. The other thing is there is wrong focus on companies, not 1,000,000,000 people who smoke. And the thing is if we ban completely or recommend that all these products are strictly regulated or banned. Then essentially, everybody perpetuates smoking.
And I think that's what NGOs, The World Health Organization and people in public health have to understand. So we have to stop the confusion because if the confusion stops, we can have the acceleration I talked about. Now I think I covered these subjects in my previous intervention. But I think The right regulation, first of all, eliminates confusion in the minds of consumers, increases consumer confidence in the products that have been through the right pre and post market process and more information gives them knowledge to make the right sales. Obviously, as I said, closed markets can reopen if we have clarity like Singapore and others and some have.
And growth can be accelerated in what we call restricted markets, markets like, I don't know the U. K. Or Canada or so on where essentially there is very little to do if you don't differentiate smoke free products from cigarettes. And you can do it also with much lower cost from a company perspective. So it makes sense for consumers.
To give short term pre market notification at least with product standard in place, post market monitoring of use and designed the epidemiological studies so they're going to have the long term effects. And once the products are in place and sufficient penetration of the smoke free products has occurred, then we can think of supply side measures like cap and trade, taxation based on share of combustibles, nicotine reduction or not probably the best measure as the FDA suggested, but these are all stick and carrot policies so that the manufacturers innovate and put their heart behind these products as we did. And I think then we can prevention is very important. And here I listed all the things that need to be done. And I think we're all familiar from age verification, age limits, education at schools because so far we're told teenagers don't smoke and they can rightly say that's not smoking.
So no use of nicotine. And the right post market surveillance systems as the FDA has imposed in the U. S. For a very simple reason. It's you can easily take any activity that is commercial and say, that may influence teenagers.
But it's only by measuring What the actual effect is with the right way that we can define whether this is a problem or not. And that's the only way through an interactive process where we measure intended audiences, we measure unintended audiences and then we accentuate the intended communication if we're not achieving awareness and go the other way obviously if we have any problem with teenagers. That's the only way to maximize adoption and minimize unintended. And the good news for us is that I think I talked about engaging with Various stakeholders, I think we are making progress. There is more and more national authorities that recognize The science behind our heated tobacco products, obviously, the FDA was the precursor.
And also as consumers adopt the product, governments have to listen to what people say. And This is a long journey. This is not done. Progress is there. It could be much faster and much better.
And we will continue the dialogue with governments and different groups in the public health sphere and use consumer advocacy where needed because we need to resolve the regulatory issues as fast as possible. Now on combustibles, I think our combustible portfolio is sufficiently invested. But clearly, Jacek will talk more about that. Clearly, we may need some more investment depending on how the post COVID impacts unfold. I think in particular, we need to focus on price cap management as we did in 2,008 crisis.
We need to continue putting some effort to grow share in the low price segment as we may have some temporary down trading and we'll continue the progress on SKU consolidation and also in the efficiency of our new product launches. We have much fewer but much more successful ones. So we're on the right path. If I talked about variations we can have in volumes, when I gave the explanations on the guidance. Overall, if we look at the fiscal environment, okay, for 2021 is well known, but the most important thing is that fiscal structures in terms of more specific continue to improve.
That helps our portfolio, but also helps price productivity. Overall, the price elasticities do remain around minus 0.4. Combustible pricing will continue, as I said previously. And overall, As IQOS volume grown, it has more importance in the mix. Price productivity will increase despite cannibalization for the reason you see here.
If we look at the evolution over the last 10 years and we look here at incidents and also composition of the tax. The specific has increased over time and the ad valorem has decreased, but obviously is not as good as the heated tobacco units where The taxation is mostly specific and it's only in Japan we have Advaloren taxation. And as Japan gross less in the mix. Obviously, we will have even further improvement. So overall, I think The environment is good.
And during the last week, we discussed the specific of the excise tax outlook for 2021. We had an above average increase in Russia, but we have a minimum pricing that helps price gap management. The increase in Indonesia was significant, but for us a bit smaller because of the favorability we have for the hand rolled critics. We have an excise structure improvement in Turkey. So overall, the environment is good.
What obviously we need to watch out is as governor on bigger deficits that we have gradual tax increases as we have normally and not fast and once that created contra bond and other undesired effects. I would like to spend 2 minutes on the organization. I described previously all the success factors. Obviously, this need organization and people to make them happen. So we started at the top.
We have 45% external talent coming at the senior management team in the last 3 years, a lot of new skills. Our ways of working have changed. We are organized on a project basis because nobody can deal with the complexity and malfunction individually. All our work and practices are along the consumer journey and the performance management has changed. So overall, I wouldn't say where we want to be, but we made an enormous progress and that's transformation is a continuous thing.
It doesn't stop. And we are also making very good progress in terms of for diversity, inclusion and equity. You can read the numbers here. We're equally salary satisfied sorry, certified and satisfied. Where named at the Bloomberg Gender Equality Index.
So good progress, much more to be done here. Now this is our projection of how we will fare in the years to come. We have 28% of the value of combustibles, and I think we can maintain it. And clearly, we will have an increasing share of RRPs, including e vapor products. I think we have the innovation capability sometimes with partnerships.
We have the brand equity and the 1st mover advantage and we have the engine to continue growing with the category and expanding the other in the other new categories of e vapor and pouches or P3. Finally, a few words about new avenues for adjacencies. As I said, we do have developed new capabilities in certain areas. So we are looking at leveraging these capabilities so that we bring new products or services to consumers. So we look at as a first cut in 3 specific areas.
First, botanicals in the broader term, and I will explain the focus areas in a second, either to extend RRP consumables into new sesorian experiences. And here we can think of a lot of things, the obvious cloths, but also star anise, chamomile and so on, but also moving into botanicals that have no nicotine and they can apply more broadly and using our expertise in substrates. Respiratory drug delivery is an interesting area. I think we understand for inhalable delivery and here is not to become a pharma company to be clear. This is about taking existing drugs, existing molecules, where a respiratory delivery can increase the bioavailability of the molecule by an enormous factor that can be very vital in certain conditions.
If I use an obvious example, if you have a myocardial infarction, the first thing you do is take ASPIR. It takes 30 minutes, 25 to 30 minutes to act. If you take it through a respiratory way, assumingly, Then you can have bioavailability in 1 or 2 minutes and I can save a lot of life just by a different way of delivery. So our business model in this area is not to build everything from upstream to downstream, stay at the center with our clinical capabilities, our formulation capabilities, our delivery capabilities and then partner, outsource and orchestrate an ecosystem that that has the skills we don't have. So we are trying to minimize investment here, but maximize what we can offer to these new products.
And here is some indication of the initial areas of focus and the projected addressable market value. Of course, that's the beginning and areas of opportunity in botanicals is sleep aid, energy and focus, calm control and I described respiratory drug delivery. And finally, but very importantly, is sustainability or PMI. So Emmanuel is going to talk more about that. But clearly, there are 4 things that are important to retain here.
First of all, we have a statement of purpose that covers for all stakeholders of the company that describes the impact on all constituencies of our transformation process to a smoke free company. We have established a rigorous materiality analysis. So we have identified 4 areas: Innovating for better products, operating with excellence, caring for people who work with us and protecting the environment. And we have established for all these Tier 1 topics 2025 roadmaps with KPIs that we will every year publish in our annual integrated reporting. I think the bottom line here is product is clearly, as I said previously, the most important part, but we are doing extremely well in many other areas, for example, our CDPA list on water, on waste on forests and obviously on carbon.
And we have a target by 2,030, probably earlier, hopefully, to be which is our own facilities, I would say. So Our product can have the biggest impact on society and the sustainability of our business. Beyond nicotine products obviously play in the same ground and Emmanuel would explain all the other areas and how we prioritize them. So I would conclude my part by saying, smoking future is within reach. I think that can be with the right frameworks and dialogue, on countries where we can stop cigarettes in 10 to 15 years and replace them for the people who would continue smoking with smoke free products.
I think we have an ambitious goal of reaching 50% of our net revenues by 2025. I think our profitability both at the revenue line and at the bottom line will continue growing. And superior shareholder returns as we will be successful in these areas. So that's all from me.
Press release. Welcome back to PMI's 2021 Investor Day. Our next speaker will be Jacek Olczyk, our Chief Operating Officer.
Thank you, Nick. Good morning, good afternoon. Nice to be with you here, although this virtual arrangement is not my preferred style, But I guess we have no other options or choices at this moment. For an hour or so, I will be talking about how we are leading industry transformation with IQOS. There will be some repetition to what Andre have told you at the moment ago, but this is intentional repetitions and I hope I'm going to add you some granularity to some of the points which are which Andre has highlighted in his remarks.
I will be talking about how our commercial approach maximizes consumer that serves consumer needs along the entire consumer journey. I will also cover how we are scaling profitably along 3 vectors, so innovative products and a range of consumables across
the platforms, including brand marketing and
campaigns, the deeper forms including brand marketing and campaigns, the deeper geographic and the consumer segment penetration in existing IQOS markets I will also talk about our strong leadership in combustibles to drive performance on how do we leverage our strong position in combustibles to support our smoke free strategy. Before I start with PMI Leadership in Industry Transformation, let us have
a
look at progress so far from a different and broader perspective. And I do admit it is more for the illustrative for purposes, but we took an attempt to compare the speed of penetration of other industries where a new technology is replacing existing consumptions. I pick here very much the solar power, energy and hybrid and electric cars. Of IQOS in this case of Russia and Italy over the same period of time in terms of a measure by the share of market penetration. Another interesting observation is that the hybrid electric car, DMSOR, also examples, if you like of a harm reduction strategies, which unlike IQOS so far actually enjoyed the regulatory and political support, although it was confronted at the beginning with some controversy as well.
So we can see clearly that Daika's adoption is at least on par, and please note that I have not put IQOS performance in Japan and some other to very fast growing markets on this chart. Our transformation is led by the product, which Andre highlighted very well for the reasons obviously that this is the biggest positive impact on a Harm Reduction. We are the segment leader. We have the strongest brand and obviously we are leveraging the first mover benefits. And this is not all given obviously, this is all earned and from the very beginning, we were very serious about this opportunity.
The highest investments from our side are parallel with internal transformation. We built from scratch or significantly enhanced capabilities, which were not needed in the combustible business, which is very much business to business type of arrangements. And obviously, it is being conducted at the maturity of the category. The rigor and scientific validation standards was prioritized from the very beginning. The fact that we have successfully passed the bar of FDA PMTA, ultimately MRTPA authorization and it comes without saying that the responsible and sustainable marketing practices are a backbone of everything press release, which we do.
You all familiar with this chart from our last week earnings call. We're approaching 80,000,000 users of IQOS. Very importantly, more than 70 of them are fully left smoking behind them, I. E. They're fully converted as about the 13,000,000 smokers at the year end of 2020.
A very Heat Not Burn is the biggest and fastest growing smoke free category of size. With above 80% of category share of our leadership is undisputable. Our value share is even higher and stands at around 60% for total RRP. Building a strong brand is a key component of our strategy. And as there are big categories in its early stages, strong brands bring so much needed credibility to consumers.
Taking into considerations that IQOS is merely 6 years old, these are very spectacular results. If I compare it later on to Marlboro, which have 5 decades of marketing, of support, international presence, etcetera. The gap to the next strongest competitor is even more meaningful as currently there is no other competition brand so broadly available with one uniform look, and experience. Arcos is already number 3 brands in a market where it is present. Considering Marlboro again as the reference brand with 13% share and more than 5 decades of history, IQOS with already more than a half of Malbrasher and 5 years of history is again a testimony of a very strong result.
And if you want to be serious about and believe in the opportunity, you need to put adequate resources behind, which we did from the day 1 and they continue doing so. This chart presents our cumulative resources stand behind the because the hit behind the hit not burn platform from the very beginning of our journey. So we exceeded $8,000,000,000 this covers this spend covers the product and marketing development, scientific substantiation, including regulatory reviews, As we move forward, the annual increments, which you see at the bottom of this chart, are somehow moderating As many of the big ticket items has been already addressed, our new initiative, frankly speaking, are leveraging on the past learnings and developments. Let me move to IQOS performance. We have delivered very strong and repeated share gains in key geographies.
You have here Russia, Japan release. These results are leading us to more balanced geographical contributions to IQOS growth. So you remember for the 1st 2 or 3 years, we've been a very much secure essentially dependent only on Japan and now buy additions and opening IQOS to other geographies, few first markets
in the EU region,
Russia, other markets in the in the EU region, Russia, other markets in the Eastern Europe, Latin America and Canada and so on. We expanded IQOS. We're now in the 64 markets, dollars 76,000,000,000 unit sales and it gives us more balanced geographical footprint. So IQOS enjoys the growth by the mix of expansions into new markets. IQOS is able to meet consumer taste expectations across various markets' archetypes.
I am really here focusing on the taste type of an archetype. So I brought here these 5 markets, which are fairly good which constitute a good representation of the markets, which are very much for flavor skewed like a Portugal in Malaysia, more mental skewed. So you have here Japan and Poland And the common denominator across all of these markets is, if you like, that IQOS has already produced a significant inroads press release. So in addition to meeting the PACE expectation of IQOS, IQOS also responds well across level of affordability, works in emerging and developed markets, works in e vapor markets and our old tobacco markets. And during the next few slides, I will show you IQOS penetration level across the very long list of key cities, which are representative of various archetypes, which I just mentioned, which is again the e vapor markets, oral to the nicotine products, different affordability levels and again different spectrums of the traditional for flavor lights on mental segmentations.
So I start with the very strong double digit penetrations market charge in key cities. You have here Ville News when we crossed the Magic onethree of the market, Tokyo, which is approaching in a well, actually exceeded almost 25%, so a quarter of the market, Kyiv, Athens and so on and so on. You've seen some of the slides during, I believe, Manuel's earnings call. But I thought that we can look at this also by visualizing the underlying market archetypes behind these markets to demonstrate that IQOS has a potential across the number coming through the combustible market due to the seasonality of pandemic related factors. We can if you're interested more into this, we can cover this during Q and A.
Strong growth in Western Europe, finding right formula Amid the stricter regulations and more skeptical consumers and the long awaited good progress in London when we were approaching for SharePoint, and key I brought a couple of markets across the coming from Asia, Latin America and Eastern Europe. And also is very pleased with the fast recovery in Cape Town in South Africa following the most drastic restrictions, which we have being confronted with during a cause when essentially there was a ban on sale on any nicotine product for quite a good few months over last year and you see very strong recovery of IQOS in the geography. 2020, as you know, very well offered us a plenty of challenges. This makes us and me very pleased with IQOS performance in the geographies which we entered last year. So I'm very satisfied with a good progress in Mexico.
We just focus on the Mexico City. Very quickly, we start climbing to the almost one for SharePoint on the Mexico City. Greater example in Stockholm and I would read this as the first proof that IQOS also can have significant inroads in oral tobacco market. Press release and a fast progress in Vietnam was one of the few European Union markets, which we didn't enter with the 1st waves of other rollouts. And this was despite this very severe COVID restrictions and also excellent progress in Georgia, obviously Georgia in Eastern Europe, not the Georgia in the U.
S, but very strong progress in a very short period of time. We have also started in Philippines and in line with our strategy tested in other geographies, with remaining razor focus on Metro Manila first before we start going to the remaining geographies in Philippines. So obvious question is if IQOS had such a spectacular growth, what is in front of us and how far we can go with our IQOS heat not burn. I have put on a chart here key select geographies with the national and key city market of shares in the Q4 of 2018 and the Q4 of 2020. The national shares in all of these markets now are above Key City shares of 2 years ago and Key City shares continue growing as we know.
So to illustrate, if this was repeated over the next 3 years from Q4 of 2020, we would already be very close to our targeted range of 140,000,000,000 to 160,000,000,000 units in 2023. I admit this is a bit of oversimplification. However, this also assumes that there would be no further growth in key cities, which I I think is highly unrealistic. And obviously, with further geographical expansion within our existing markets, we are moving to new consumer groups with different profiles. We are moving to a less urban territories.
However, with cover and continuously evolving portfolio of IQOS proposition. It's a strong brand and a recognizable and strong brand and infrastructure tested to operate at scale. This target is within our reach. This led me to this slide where I am showing in a more granularity how the expansion within a country looks like. And I have obviously brought here Russia, which is the best market to demonstrate how that expansion focused expansion strategy work and serve us well so far.
We had so far 3 waves of expansion. Functions to the next 27 largest cities and a year later with another 40 cities. So altogether, we are now present in Russia with more than 70 cities, which represents about the 90% coverage of cities with population more than to 150,000 citizens. This gives us today a coverage of about a half of legal aid smokers in Russia. And again, the most important takeaway from that slide is that as we were continuing, as we were expanding, We continue our growth across all waves of expansion.
So you see on the wave 1, we started with 1 100,000 users went to the 600,000, 1,300,000 and the last year we closed with 1.7 while obviously adding new geographies and they continue to continue growing. So I think this is a good example how that focus expansion request and I believe we can all use it as a proxy how we will be and we are and how we will be expanding further IQOS where we are today with IQOS and our transformation if we didn't put consumer at the center. We all, as consumers of many other products and services experience our own consumer journeys. Consciously or not, press concept of a consumer journey is not new to us, right? Many consumer centric companies are applying But bringing the consumer journey to this industry is new.
Remember, we're going for the combustible business, which is very much based on a business to business model and we're transforming this company to the business into the business to consumer model. Again in additions to a great product, understanding consumer needs at this stage of the journey, ability to listen to and act upon consumer feedback along critical consumer journey episodes from awareness to retention release, in our opinion, a critical contributing factor to adoption and conversion. And this is especially more paramount for the product or categories which did not exist before, which are new to the world. So consumer journey in our case drives downstream commercializations like channels, programs, other enablers and upstream activities like product and a consumables and a brand marketing development. So this is how we're using a consumer journey of essentially net promoter score surveys, while covering more than 1,600,000 unique consumers.
If you remember on the scale of the consumer base which we have where we definitely are above any industry norms at least at this stage. In addition to this and this is the most interesting part of the belief, in addition to this we conducted 180,000 callbacks and the callbacks is nothing else than the longer format conversations, 20, 30, 1 or 30 minutes, 1 hour, 2 hours on occasions with our consumers performed directly by our frontliners and by management. And that's the interesting thing which you never had in a Philly Boris before and I doubt you will find it in another companies in our industry. This allows us to get firsthand feedback from a consumer. Over 600 improvements so far as improvement initiatives on product changes, consumer engagements and other operations were actually coming from that direct contact with our consumers.
And needless to say, how happy our consumers when they receive a call from us, which is without any strings attached. It is not a promotional call. It is a genuine curiosity on how well are we serving them, how well our channels perform, how our product is perceived, is that anything which continues bothering our consumers and do they have any recommendations. So we tried to incorporate it and serve it back to our customers. You're very familiar how we have funded the portfolio of IQOS devices.
This is one of the examples how we are applying to the real life consumer feedback translated into insights and converted into product or service feature. So you see on the chart IQOS 3, which many of us already almost don't remember, compared to the IQOS 2.4 plus increase our conversion rate by 6 points and when we come about 2 years ago with IQOS Duo, we managed to lift our conversion rates by addition 5 percentage points. This is obviously release, if you like, from that productivity and also efficiency. So in many other improvements or additions beyond the products, which are physical products, which I'm showing you here. And these programs are covering referral programs, the surge engine optimizations, bridging initiatives, which are very important to accelerate bridging within the existing IQOS device families, but also bridging from combustible product to IQOS device lending, a new feature which we roll out about 18 months ago, where consumers can take the product home for the week, 2, 3 weeks And having a piece of his in his home, proper trial, we offer support via on virtual coaches which can connect with the consumers and with all results that the consumers are getting better educated and they successfully migrating to the full usage of our proposition.
Now the one of the remaining major opportunities in existing markets, which lies in front of us is obviously moving the on the journey. We see on this chart and this is the group of 7 key markets so far for IQOS. And we all aware, we all remember the already significant market share when IQOS generates in all of these geographies. But here I'm showing how many users smokers, adult smokers in a given geography are still not even aware the DAICOS or category exists, okay? So you see in case of Russia, 41% of the consumers and other words, smokers are not the word that IQOS exists, follow Poland 60% is the most extreme type of a case.
Obviously, on the one hand, this is a reflection of our geographical focus in the given geography and on the other hand is a result of relatively restricted to the full channels to communicate to talk with smokers. So while continuously working on awareness of IQOS, even more important, however, is the consumer understanding of category. And Andre highlighted a couple of few issues, which are pretty painful at this stage and I that would argue slows even accelerated growth and adoption of this catheter. So everyone knows that the smoking that causes lung cancer and other serious disease, but there are misperceptions about what are exactly the causes of this hog. Some misperceptions of tobacco harm risk is evident on this chart when we conducting the research in a number of the European markets in Japan.
And clearly you can see that nicotine is perceived by smokers as most harmful or one of most harmful. And we all know that this is not the case and there is enough of the scientific evidence to confirm that this is not the nicotine, which is a prime cause of a harm created by smoke. It's a star, but look what the star is in the consumer understand. So Obviously, the category understanding is improving on what we call the educated awareness that people understand the benefits and how the category works among IQOS users. However, burning for example still runs low.
And the same unfortunately also applies to electronic cigarettes. And this obviously leads or may lead that the wrong choices made by consumers, by smokers who clearly are unaware that as long as if they wish to continue smoking, that we should definitely consider the better alternatives which are available today. Now as legal aid smokers go through the consumer journey, their perception of harm gets closer to reality. However, even among IQOS users, we see here, the perceptions are relatively high compared to what the science would tell us. Clearly, this is a territory which requires concerted effort by all for stakeholders, obviously, it's us, industry, regulators and NGOs and Andre was talking about.
However, still today in too many places, unfortunately, consumers are confronted with contradicting messages being a mix of science of science backed facts and they are mixed with opinions which are serving nothing else than the old entrenched political views. Now this slows down the progress or even worse as we have experienced in a few places. You may remember what we have an counter some time ago, for example, in Korea or Romania, where we have experienced in a few places that consumers Confused now by the messages coming from the very much regulators and NGO, we just go back to compostable cigarettes, which from the harm perspective from the harm reduction perspective is frankly speaking a disaster. So as we continue to engage with regulators and other key record. We're also doing our part of building category benefits understanding.
So, K is an example of our release of new lead launched developed launch campaign. It's a more lighter approach focusing on understanding the combustion is a triggering point in causing harm. For some people who are more on the vegetarian side that picture on the left on the yellow background is the sausage. I was told that this is closer to the German sausage. However, whatever origin of that sausage is, the fact is that it tastes better if this is not bad.
And the same applies to IQOS that is tobacco is better if you don't burn tobacco. We have another example here. I have another example here of a more lighter approach, focus again on a burning versus heating and delivering on a satisfaction. So so you can deliver the satisfaction with heating and the burning is essentially not needed here. And for those people who don't like previous animal, we also have a version with another animal.
But you understand which directions we're going. It is less about the creating the brand. Obviously, it is more about creating the basic principles of a category and informing consumers what is the real problem of a smoking where this coming from a combustion generation of tar and allowing them to consider, try and hopefully adopt on the vendor reduce risk. I think the progress is visible, but not sufficient yet. And I believe that the next 3 years that will be a pivotal in recognizing the RRP category as largest opportunity in accelerating and finally solving the problem of smoking once release and for everyone.
Let's now move to our commercial model. IQOS business model is built on consumer journey. I mentioned press release already a few times. It covers all key critical episodes and experiences from how adult smokers can learn about the category, can do her own research and evaluation, can try the product and eventually move through to buy and use and become a brand advocate. If you do this exercise well, which I believe we're doing well, you're essentially creating a very happy consumers who solve the problem of smoking.
They are willing to share their experiences with others and this whole commercial engine starts really working very well. All the episodes or steps for the journey are taking place across the multiple channels and cover obviously online and offline. And the right combination and almost seamless connections between of channels, creates a great experience, which is appreciated and rewarded by consumers. So very often we have these conversations, I get the questions, Can you just go online? Is online not cheaper?
Or can you just stay with an offline and use your existing retail type of infrastructure? The answer is very simple. If you want to deliver on this unique experience, I believe you need to be both in online and offline. Frankly speaking, I think we have a parallelism in many other industries that this is not just the one solution which fits all, is the combinations and around blend of the solutions which creates this unique experience, which serves in our case on the one hand of obviously having the highest conversions because we do to take care of the consumers along this journey. We don't leave them unattended.
On the other hand, the consumers are very willing and very open to advocate to other smokers around them to consider and to try the IQOS. So it is not enough to be present in a multichannel environment is how do we make an omnichannel and the experience really matters. So we have 1 IQOS brand with 1 consolidated digital platform across all markets with consistent branding experience and communication and it's very critical. This provides for brand experience, content, support for engagement, awareness and understanding. So we cover all these territories.
And it is not just about transactions. I think this is the biggest mistake Some people are very excited. I bought the device, doesn't matter with eBay or IQOS. And then people don't understand, people don't have a proper conversations, people don't get the smokers don't get the proper support and the devices land in the drawers and So icos.com is our number one flagship store and is undergoing now its final platform consolidation, which we should be completed with by 2022 next year and it offers consumers this connectivity with offline channels. So it is about digital first approach and very often most of us, wherever we're looking for The first place to go is not that we're strolling the streets and knocking at the door of any outlet, which is going to Google, we're going to Internet, we're doing our own research, but then there's the right mix and the ease of finding, okay, in our case, IQOS, etcetera, starts playing an important role.
So our infrastructure altogether, both digital and physical, enables us enables our significant competitive advantage. You have key numbers here, how many stores we're operating in a different format. For another platforms. This also allows us to roll the programs like, for example, lending, which I mentioned before. And also obviously said for them the extensions of an IQOS both vertically and the horizontal.
As we digitalize or established our presence in a given geography. We're adjusting our infrastructure. So you can see on this slide that by changing mix on on the slide, which is reflected when we changed the mix in other formats. So you have less of exclusive IQOS retail touch points versus prior year, less of that to the commercial people, so demand activities. But at the same time, we increased the on digital to total solution.
Also moving within direct retail expansions drives our region efficiency and this was the case when we started expanding very much in the 3rd phase of expansion in Russia. Solar better execution is Obviously, the critical driver in generating consumer satisfaction. IQOS brand experience increasing this week for itself. I mentioned number of times that this consumer satisfactions and earning the consumer satisfactions throughout the journey pays back at the end when we move release to the advocacy and this chart shows percentage of our total user acquisition coming now in an organic way. So we have Italy of almost 3 quarters of the user acquisitions coming organically.
So it's consumers who've heard about the IQOS, call recommended to IQOS by already converted users. They were confronted with so called word-of-mouth, etcetera, driven, as I said, by word-of-mouth and the general awareness of the brand. And obviously, ease of finding IQOS and this is what is physical, also for infrastructure plays a role is very important in this whole exercise and this accelerates clearly the growth and lowers our cost. So many of you are familiar with this slide as we use it during our last at least the last investor meeting. On scale efficiency, growing organic acquisitions allow us to significantly reduce further cost per user over the last years.
You are familiar with format of our slides. We use the 1st year on the slide as the index is the 100 and we're showing the relative progress over the last 2 years. Acquisition cost per user is higher obviously in the early launch phase and obviously diminished significantly over time and you could see this across our major or key geographies as is also the cost of retention. And obviously, this will vary or it does vary across the markets and is depending on the stage of maturity of the market and on category and competitive environment. This is what we have achieved so far.
And this is again a key support to our margin expansions, which I believe very happily Emmanuel will expand on. We're working on the category for more than 5 years and clearly gave us opportunity to learn, So obviously, this is on the positive tone, which also means that we have made some mistakes. But usually when question is not about the making mistakes, but how quickly you stop making something wrong, how quickly you learn from the mistakes and the correct deal activities going forward. So we are trying to incorporate these learnings when we enter the new geographies. Here you have a 3 exemplary for the first cohort of the markets from a period 2015, 2016.
And I am adding here the cohorts of the markets from 2017 2018 and you could see that our path to the more significant market share that has been significantly shortened versus the initial group of the markets. And obviously, if I add that The last wave of 2019, 2020, I think it's very well visible how we're applying the learnings and how we're getting better and better with a time and opening the new geographies. So improvements in our ability to achieve success earlier It's a very important component. Andrey mentioned this, this driver was that initially, do you remember I was myself saying that we need about the 2 years or so to achieve the breakeven. We can now do it on the 11th May period and we need Again, there are other factors at play, which impacts these numbers, but I just wanted to focus here only on our executional capability and its excellence.
Let me now move to the next stage of growth. So, so far I was talking about not only success to that with IQOS, but also near term growth opportunities. I use this example of existing markets and on how we can expand in the existing markets. But let's now move to what else PMI can deliver and will deliver on its path to become a smoke free. So I mentioned earlier, brand, to start with the brand is a very, very important component of a sustainable success.
We have started from the very beginning. We've built it with building the brand. This is what we had in mind from the very beginning. We have no brand fragmentation, we have strong brand identity and we start enjoying this very hard to build brand equity and IQOS is by far the leading smoke free brand across all RRP categories. We are working on taking IQOS to the next level from functional benefits, category understanding to brand appeal, highlighting the points of difference and building the emotional connections.
That's very essence of any brand in the world. Okay. As you know, I echo as well. So as we continue building further the brand, we're also cognizant of further opportunities lying in untapped consumer occasions, on segments and geographies. So as shown before, driving awareness among legal aid smokers is a key enabler, broadening and enriching the category that offers further revenues of growth.
So we're expanding the portfolio of the devices, but also in the portfolio of the consumables and this includes the new platforms. Adding premiumizations and extending pricing coverage a of where are the nicotine users, the product users, nicotine users today. So as we know, heat not burn is the most compelling smoke free category for consumers. It's obviously the most compelling from a public health and economics perspective as well. However, we have always said and I vividly remember our investors conference 6 or 7 years ago when we announced that we're opening this completely new chapter in the history of this company of going smoke free.
And we have already at that time said that there will be a place for other formats that just cannot bear, okay. There will be a place for platforms which delivering satisfying different experiences, also satisfying different taste preferences and thus the multi category approach is required. So we have now built IQOS brand and infrastructure that we can now leverage to address consumers looking for variety of our experiences, which did not burn new IQOS in its current statement format cannot deliver. Poly usage in the category is common and we all know about it. Currently, there are significant poly users of RRPs and combustibles.
These consumers are ready in the smoke free category, but and not fully convert. And this creates an opportunity for us. So through offering of a compelling IQOS multi category portfolio, we can migrate these consumers over time to exclusive use of smoke free products and obviously offer more opportunity to start smoke free journey importantly for 66% of exclusive combustible smokers, which are not who are not at this stage interacting in any statement for any of the reduced risk alternatives available in the market. Now to seize the opportunity, we need great technology. I think if you have a great technology, obviously, link and translated into the winning products, which we have demonstrated both on the development and substantiation on scientific substantiation side, but also when it comes from the user experience point of view.
So technology expansions, which we now have in mind, which Andre highlighted at the beginning is from the blade internal heating, Frupin, which is our collaborations with KT and G to internal induction technologies and then we're going to the e vapor and the nicotine pouches. So we will be focusing also on on consumable technologies and innovation allowing for different experiences and tastes. And these innovations drive higher conversion and enables faster expansion at the lower incremental cost as we're leveraging, release. As I indicated earlier on the chart when we had this cumulative $8,000,000,000 spend that many of the learnings from the Platform 1 and the current executions we can apply free of charge to the new platforms. So our RRP offerings provide broad choices and alternatives for legal aid smokers and support also legal aid users in all of the moments.
So we are moving from a single product brand to multi category portfolio master brands. IQOS is becoming sort of an umbrella brand over the many platforms. Hit Not Burn is obviously our flagship platform and is at the forefront of our innovation for the reasons that it offers the closest experience to combustible and hence also backed by dollar to excellence in execution offers the highest conversion rate. We will be evolving from blade to induction. It's a step change in the science based innovation, taking IQOS to the next level, and and I will cover this in a moment.
And our aim is to extend the region also horizontally to cover all critical need spaces and vertically to address the affordability. So
you could
see on this chart, we're going through the very rooted ritual type of expectations, familiarity, authenticity, similarity of the product is very important. Combustible cigarette is very important. And we're going to that growth, which is where The same approach will follow with regards to consumables. We are expanding horizontally to cover all critical need basis and vertically to address affordability, which we know from a combustible business, it's an important component. We are reinforcing the product superiority with a premium price enhanced indulgent taste like its dimensions when you see on the top of the charts, which is the first executions which we did in Russia, very successful.
And we're also fortifying our leadership with new to the world beyond tobacco propositions and some sustainability initiatives and this is in the square box on the right of your chart. So okay, now is the time to talk about the key major initiatives in front of us. And I hope you will appreciate that you are literally the 1st public audience learning about these initiatives. But also please be forgiving that for competitive reasons, I will not be granular enough at this stage. So thank you for your understanding.
Let me move to IQOSILUM. So here is IQOSILUM. It's the next generation of IQOS HITNOT BURN. In my opinion, and you know that I am a very, very, very good user of current IQOS. This is really amazing.
This is truly amazing proposition. If a new word was to be invented to describe what it is, the word would be revolution. Press release. This is still internal heating, but provides the optimum taste and satisfaction, however delivered via smart cord induction internal heating technology. This is same great taste as IQOS has today, but it should not only help us enhancing the experience, the user interface with the device, etcetera, but I think is going to result and I am convinced it's going to result in a higher conversion rates going forward.
As innovators, our job is obviously to enhance consumer delight and address the feedback. I mentioned this before and Illumina does this relatively that does this relative to the very successful IQOS Blade. So the bar was very high for us to go and address still unmet need some people may call it the pain points of what we had on IQOS Blade product, but I think we delivered on the promise and expectations from consumer. So by eliminating Blade, obviously improved our reliability. So there's no accidental Blade breakage.
I know that some of you are the users of as I am the user of Icons of a Blade product, not anymore to be very honest and frank with you. And I have to tell you that is a highly irritating factor that you cannot use your product because that blade that has brought. So superior satisfactions from the first till the last half. It brings next level of simplicity. No maintenance, no cleaning needed.
It offers self activation after stick insertion with stick recognition technology. Remember, we got these questions from you, some investors days ago, when we ever developed the STIG recognition technology, here we are, here IQOS brings us acquisition. And you know I am very excited about this whole thing because I can't wait when we will launch this product into the market. So this is coming from PMI and from IQOS. So obviously, we'll be in a premium design and customization options for enhanced Lifestyle appeal.
We will have 3 devices, 2 in a charger and holder configuration. So it's the same as we have here, the same setup and 1 in mono form factor, all with consecutive use. IQOSILUMA will be accompanied by the new broad range of consumables as consumables between a blade and smart core induction devices are not interchangeable. You hear this from my voice. Release, even in this virtual world, you can sense that how excited I am about this new innovation.
And even more I am excited after seeing results from early user testing. Let me now move to the next link which we're having at Heat Not Burned, which is a little hybrid. We're working on broadening our offer to accelerate user acquisition and grow the category while expanding by expanding target audiences of adult smokers. Thanks to our cooperation with KT and G. We have launched LIL in Russia and Ukraine and LIL Hybrid in Japan last month release last month.
Early market feedback confirms our assumptions that this proposition can deliver on high levels of conversion. We're talking conversion levels, which we enjoy with IQOS Blade product and already started to drive new users. So IQOS endorsement clearly drives awareness and credibility of that proposition and PMI commercial engine, which I talked before, drives take up and retention of these propositions. We will be expanding this proposition into further geographies
this year.
Now let me now move to e vapor. Tag annual growth in users of this category between the 7% to 9%, 7% to 10% over the next 5 years, Albeit concentrated in specific geography. The category offers different consumer or satisfies different consumer experience and occasions obviously compared to the hit not burn for example, part of demand. But category remains low when it comes to the adoption, okay, so the conversion. And this first conversions to the category is very low and within a category is still a very low loyalty to the product or to the brand.
And this results in a high number of devices per user driving up acquisition cost and obviously calls for aggressive retention product. So we're trying to enter this category from a completely different angle. Now I mentioned that on the use and the loyalty to the category and loyalty within the category. And here is an example. Here is the illustration.
Selected markets in select markets from the EU region and how this category user economies looks like. So while obviously brand royalty and full conversion in is currently low, a user switching completely to closed systems, which will hit the 3rd bar from the left, generates a significantly better margin of contribution per user. Now capturing the benefits of these differences require scale to absorb the cost of our commercial infrastructure. So we have a scale, which I believe I demonstrated to you. We also see opportunities to move dual e vapor for combustible users, so people who are mixing e vapor and combustible to do our e vapor heat not burn user, delivering substantial obviously benefit to the consumer and with a better economics for us because we're leveraging on the our presence, our infrastructure.
User economics obviously is and we said it from the very beginning is a key considerations in our portfolio strategy and this inform us on the priorities of which products we enter first the market and subsequent target segments, etcetera, when it comes to the introductions of the next products or the next categories. Now in general, obviously, we see that the smoke free products have a of superior gross profit per user. However, as I said again, the switching, switching and switching smokers fully to the 1 category and the loyalty drives the higher returns. So I think it's a time now for my second video, which will be essentially announcing our entry into e vape category. Can I Okay?
I hope that the quality of the video was and the sound was Okay. This is the whole problem of this virtual setup. We don't really know what is how this being played on the other side, but I'm informed that everything was okay, so I trust my colleagues here. So with introduction of IQOS Wave quickly, we're leveraging IQOS infrastructure with a bespoke group to market approach. We are leveraging the power of IQOS brand.
Smooth, consistent, customized experience. There will be additional feature, responsive draw, which is of a consumer. We see this as a potential accelerator of conversion to IQOS franchise to other people users and dual users with Sigurd. And our plan is to launch IQOS V in about 20 markets this year, Leveraging again on IQOS infrastructure, including the major markets highlighted before, but also markets where it can complement The very important point, the U. S.
Access prevention. So as you know, it's key to our sustainable to the sustainability of the category in Zener is very key to our sustainability. So we're in the final stages of testing and preparing for scaling up the age verification technology, which works in a way that device is only activated remotely after positive age verification. So you're buying a device, you open the box and you cannot use the device unless you're connecting via the NAB, via the digital solutions with us, you go via the age verification process. If you positively verify, we will send the call to the device and activate your device.
I'm pretty revolutionary, I believe this will offer at this stage, I mean, at the highest level of a protection that the product will really not go to underach people, which we all know is something which we cannot accept, tolerate the term. This is also a part of our sustainability efforts, as I mentioned, and we have having all devices covered by this technology by 2023 as is our commitment and we have made it very clear in our last issue of integrated report. Release. This is obviously these efforts on the using of technology to help with the age verifications is obviously in addition to our continued efforts for a good conversion practices, which I hope you remember from our earlier investors meeting. So let's now move to nicotine pouches.
It is a small concentrated but growing category with potential to advance also harm reduction. That is very early in a category development, it's very early stages, offers convenience, discretion, flexibility of use, satisfaction, different sort of experience, different ritual, but may offer satisfaction, does offer attractive economics, that operates today in the very evolving regulatory landscape. And we have a plan to enter this category still this year, later on this year. And very quickly update on our 2 remaining platforms, Platform 2 and Platform 3. So as you remember, Platform 2 is a heated tobacco product, which is closest to conventional cigarettes, a retail and an experience.
And we have, I think, sorted out The problems which we have with the heat source, with the tip of the at the beginning of this product, the cigarette looking product, and we are ready for the new commercial test this year and on platform free, which is electronic free nicotine product, which offers hygiene and the simplicity and the convenience So we are now in the 64 markets worldwide of which over half are outside the OECD. So on over half of the markets are developing markets, which are often being asked. I mean, only offering the skip not burn of smoke free solutions to the on richer countries and it's not true. We're going very systematically in trying to cover a broader geographies. And I do believe that with the current and future portfolio of our various platforms, brand and the commercial engine, we are ready to be present in 100 markets in a 5 year period.
So we're starting with the 64, which we have today, 36 to go, very convenient these products portfolio of our products in a different configuration will be where we see it and we'll bring the solution to combustible smelting in all of this place. I should mention a few words about the U. S, which remains clearly one of the largest opportunity outside our classical international focused markets. You know very well that the U. S.
On consumers use and are interested in the smoke free products. I think I demonstrated already today also that IQOS addresses action preferences, which makes me believing that IQOS potential in the U. S. Is real. We obviously have also had very well defined regulatory environment with very rigorous science based regulations.
So if I compare actually the operating marketing operating environment in the U. S. Compared to many most to many other international markets. The most international markets is actually for regulations in the U. S.
Offered a very clear path to talk about the benefits of this proposition. There were a number of positive IQOS regulatory developments since launch in September 2019. MRTP adding to added obviously to the growing international recognition of IQOS from a harm reduction attributes perspective, and we are continuing with FDA engagement as with IQOS 3 to bring the more the same line of the products which we have on the international to the U. S. Market and we're extending that HTO's guidance.
And I believe you heard about ongoing U. S. Expansion Okay. Let me now move to the combustible part of our business. On the cigarette industry evolutions on the left part of this chart and the cigarette industry evolution in the IQOS market, So obviously, with the penetrations of RRPs, in this case, in case of IQOS, I mean, they will have a different dynamics of how the combustible remaining combustible business is performing.
So obviously, there was a distortion because of COVID in 2020 and it's fair to assume the potential rebound over the next 1 to 2 years. However, I think it is fair to expect that underlying cigarettes, combustible cigarettes volumes, cargoes over the next period is more in the 3% to 4% type of territory than the 2% to 3%, which we remember from the past. And again, this is the we start seeing or reflecting here in these estimates the further penetrations release of RRPs. Now you all know that we had a pretty challenging, very challenging 2020.
And
we said that there was an impact of COVID. But what exactly the impact of COVID come? We had some interruptions with the supply chain in Argentina and a few other places. These things came to act relatively at the normal or pre COVID level. However, let's look at what has happened at the consumer level.
I brought here 5 markets as an example, but they are very sizable markets and they also represent a very dispersed geography, And as we know, the way consumers are consuming cigarettes, right? There is obviously the moments when I am more alone in my home settings, etcetera, which is represented here under this name umbrella label of SOLO, And then obviously, we're consuming these products in some social occasions. The social occasions can be everyday occasions on the way to the office or the way to the work. I have my morning coffee in the corner coffee shops. I enjoy my coffee and I have my sugar, right?
Or I have I also enjoying this product, also Enjoying smoking and some really special social moments. This is parties, events, concerts, sport events, you name it. Now what we see what has happened and this goes across the geographies is that, yes, the fact that all our for most of us, our daily routines were impacted during our continued to be continuously to be impacted during the COVID. Yes, we could compensate and use the product more in our own settings. However,
I mean, the impact on
the consumptions in camp is coming from the impact that we lost this everything which was around our social life essentially, Partially driven by the fact that many people are grounded, I mean, essentially working from home. So obviously, all your daily journeys, physical journeys, the bus stop, the smoking break, the lunch break with our colleagues, the evening, I don't know, beer, in the bar, that all of the screens have almost disappeared during the COVID time and we see the impact of debt consumption here and anything special essentially So this makes me believing that this is fair to expect the rebound in these consumptions should to the normal. Clearly, we are not at this stage yet in essentially all countries, but I believe the social consumption will be a big We also look how is this evolving through the price segmentations in the combustible business. So we see relatively stable over the years, including the quarters of 2020, the COVID time share of the premium at 25%, 26%. Mid segment, which is shrinking and this is this down trading which you observe in some markets.
We have seen it before in some places, some sort of acceleration. For low and super low segments in the last quarter of last year at 51%. And I use for a comparison here what has happened during the economy crisis of 2,008 and the years following how the segments were evolving. So you could see it's a pretty much similar situation. The premium segment was holding and over a period of time actually improved, grew.
And the mid segment was under pressure and that the low price segment somehow was going. Our share, the most important, is that during this economic press release of pressure times in the 2008 through 2011, we were managed with our portfolio at that time to to deliver pretty strong share. Yes, Marlboro was under pressure, but other brands contributed well to grow overall the company compostable shares. I think that whilst the social interactions, the social moments consumers will be allowed to perform, That rebound is going to come. We obviously is going to benefit from that.
And then I feel confident that the portfolio which we have, not just the Marlboro but other brands that will allow us to have a more decent much better performance with regards to SHORP. I look here what is our share, how is our share of combustible performance in at our top RRP markets. This is the blue and the dark blue and the other bar shows the top 30 CCC markets by ROI. And you could see that actually we're doing much better with maintaining or growing actually our share of combustibles in the markets where we have an IQOS then frankly speaking in other markets, when barely the half of this group of 30 markets we have ago. You are familiar with this chart Emmanuel had it during the earnings call.
I mean, we had the big pressure in Indonesia, partially COVID, partially the situations with proliferation of the products which that the certain products below the certain annual volumes allowed to have significantly lower tax. I think portfolio wise, we have a number of initiatives how to address it. I would expect that this year, Indonesia should come with a share recovery, duty free, Andre talked about this. I mean, and that's really most beyond our control. And there was a group of the markets which contributed to the 40 basis points of a decline.
Let's look at the Marlboro. Marlboro had a very good performance until the year until 2019 until pre COVID. We grew Marlboro to historically historical high share 10% and you know what's happened during the quarters of this year. Marlboro is one of these brands which is very much driven and used on this a press special moment. So this occasional type of usage obviously penalized the lack of this situation penalized Marlboro.
On the positive side, the Marlboro Equity, Marlboro's strength as a brand that continues to be phenomenal. And by far, I compare it again to the closest major competitor in the industry. The gap is extremely big, extremely big. You know that we have a very focused portfolio, one of the most focused portfolios from the in the industry with the 3 other key brands, with Morris Chesterfield and L&M. You'll see that they continue doing very well during pre COVID time and a coffee times.
These are the brands that serve us well in the mid, but very much in a low price segment. I talk about the concentration of the global brands in our portfolio, almost 73% is our global brands and we also see here a drastic reductions in the SKUs in the market, which is part of our strategy to take out from the market nonperforming SKUs because the cost maintaining them in the market essentially prohibited to the benefits which we can have, which then creates us also a spy of a continuously where is needed deploying or launching new products. Now we have significantly reduced the number of the new products in production from 160 or even higher before to about 60 to 70 range. However, what we have delivered is a much better strike rate. As you remember, we benchmarked ourselves with a successful launch is being considered if it within 12 months after land 70 basis points and we have a 57% slide rate against the historical high.
So this is just an example of a couple of the product introductions to the markets, which also I think will continue in 2021 release of further support our share recap. This is how do we look across the key segments, new base directions for flavor, for Malbro presence in the segments put our share segment share under pressure and the only segments when Now very often I am being asked, Okay. So why, for example, if you want to go smoke freight, why you're still selling a combustible cigarette? So obviously, I don't want to to remind everyone the economics of the combustible cigarettes and as much as we are extremely happy with 25% of the revenue coming from RRP, 75% of our revenues are coming from a combustibles business at the very attractive margins, a very high for cash conversions, the benefits of the category. But while we're going and supporting the business not to our competitive position versus the rest of the market.
We obviously also looking on that portfolio from a different perspective. The fact that we're selling and continue selling the cigarettes gives us every day access to the smokers. And this is all about what we need in order to accelerate and make any further significant inroads with regards to the smoke free. So obviously, These are smokers of our brands. We know the industry.
We know the trade. And this is where the paths are crossing. So we're using on the park, within the park, etcetera, all to our brands. We're inserting in informations about the alternatives because I believe we also have our duty that the smoker should know that the better alternatives should do exist and should they seriously consider either quitting obviously remember our philosophy or switching because these alternatives exist to RRP's product. We have deployed the ScanPack, which is a digital, semi digital solutions in Turkey markets.
And the last year, it allowed us to reach or engage with 850,000 Legal Aid smokers for the fact that we have an access to our brands. Obviously, I cannot execute that sort of the things on the competitive products, but I can do it on my own products on my We have a huge reach and we are important partner for the trade. And as we're progressing with the digitalization of our relations with the rate. We're also using a trade, for example, as the lead generations for the smokers. So there's nothing else that the trade partners are becoming activators, ambassadors if you like for promoting RFPs in a given period.
And the last thing which we're doing that We're absolutely aware that there is a degree of impact of battery littering on the environment and we about this littering. And so we have a number of these anti littering initiatives under the umbrella of our word is not an ashtray. Essentially, we're prompting consumers to dispose of the cigarette butt in a very thoughtful manner. I put it into ASHRAE, put it into the bid, don't throw it on the street, don't leave this on the beach, etcetera. So this is another aspect how we're leveraging the combustible portfolio not only to continue obviously the economies, enjoying the economies of the category, but also how to leverage this to our overarching strategic objective.
So I don't want to repeat too much here. I think, yes, we are focused on the combustible portfolio. We're doing this differently. I have to admit that we used to do it 5 years ago. We are becoming more focused, learnings which we have internal learnings, the way we organize, etcetera, all of this organizational learnings, which we have learned in the RRP category, obviously, deploying and we're using for the combustibles.
Yes, I mean, the COVID 2020 was very challenging year for us, but I do think there will be recovery. And I do believe that the volume and the few initiatives we have behind us will help me help us recover the share without losing the focus on ultimately the most important objective, which is release to go free. And then I don't need to repeat it that the business model for the combustible cigarettes is obviously for us target at least stable, if not growing share, net of cannibalization and obviously overrated with the pricing. So we have a for the further margin expansion. And this leads me to the last slide of my presentation.
And I'm absolutely shocked because I see on the other screen that I have a 19, 8 in 7 seconds left. I I think it is the first presentations in my career, which spans almost 30 years that they deliver such a lot of presentation on time. So I'm very proud of this. This is a summary of what we're going to do in the near term. And I think this is just the repetitions.
I don't think I have to read through the slides a comment on this thing. And the only thing I want to ensure you that we and the entire management will work relentlessly to achieve our visions, which is to go smoke free. Thank you very much for your attention.
Press release. Welcome back to Philip Morris' 2021 Investor Day. Our next presentation will come from Emmanuel Babboeau. He's our Chief Financial Officer. For Emmanuel.
Nick, good morning, good afternoon, everybody. I'm really thrilled to be with you for the next 30 minutes or so to talk about outlook for our performance. You've been hearing Andre and Jacek talking about strategy, about on how we want to continue and in fact accelerate our journey to Unsmoke the World. They've been mentioning all the very exciting milestone that we have ahead of us. Now let's look at how it translates into outlook for performance and let's look at what's going to be the driver for the performance of PMI in the coming years.
And I think I have to start by rapidly coming back on 2020, Because maybe it was not properly noticed because of the COVID crisis that this has been an absolutely pivotal year for us. And of course, we've been facing very adverse consequences, as we all know. But despite that, we managed to generate a growth of our adjusted EPS and organic growth, almost in line with the at least 8%, which was press release and we are very pleased with our objective until today. And of course, this is not coming from nowhere. This is clearly the success of the development of IQOS and what we managed during this year to develop.
A few milestone were reached during 2020. You know then Q4, we finished with 26% of our revenue based on our RRP business. We've been passing a number of nice milestone in term of reaching 10 countries where our market share for HTU is above 10%, and we have been growing our revenue by more than 30% on IQOS. So we are growing rapidly IQOS within our business. And as you're going to see, this is going to have a number of very positive impact on the company in the future, although they were already visible in 2020.
And if you look at our performance and here we are assuming, of course, the guidance that we've been sharing with you for 2021, Well, you can see that during this 3 year period, we are actually intending to deliver very close, if not above the guidance that we I've been sharing at the beginning of the 2019 2021 period. In term of net revenue, first, you see that we are press release targeting to be at 3% to 4%. So we are slightly below the minimum of 5% that we are targeting despite the COVID crisis. That's really important to note. We are very nicely improving our profitability and we target to have for 2021 to have a growth on an organic growth of our adjusted diluted EPS between 8% 9%.
And we did maintain our objectives to be between 90,000,000,000 and 100,000,000,000 stick on IQOS despite The COVID crisis. And actually, this is of course a testament to the strength of our IQOS model. And as IQOS is growing our journey toward a smoke free world and to increase further our ambition. And here you have our new set of targets and goals for the 2021, 2023 period. And you see that on net revenue, we are now targeting to be above 5% organic growth as a CAGR over that period.
You see that beyond growing faster revenue, we also want to very nicely improve the profitability of our company and we target to deliver on average an organic growth of the operating margin of at least 150 basis points per year. And of course, as we are putting together Nice revenue growth and nice margin expansion. We target to deliver above 9% of organic CAGR growth of the adjusted EPS over the period. That's going to be based, of course, on a very nice growth of our IQOS business. We are targeting to be in 2023 between SEK140,000,000,000 and SEK 160,000,000,000.
And as you're going to see, I mean, the more we are growing the weight of IQOS in the business, as it keeps growing very fast, of course, it overall improved the growth profile even in term of volume and we are targeting to be over the 3 year period broadly stable, which would be an improvement versus the trend that we have been experiencing in the past few years. And last but certainly not least, we are targeting to generate an operating cash flow over this 3 year period of around $35,000,000,000 and that would be, as you can see, a nice improvement versus the 2019 2021 period. As I said, the acceleration of our RRP business and the growth on IQOS is really a strong generator of this performance on the second half of this performance that we intend to accelerate. And we're going to grow through the coming years through 2 very important milestone for that. The first one is that by 2023, we are targeting to have revenue on non combustible business to be around 40%.
So that would be a nice improvement versus a 24% of 2020. And then of course for 2025, we have this landmark ambition of becoming predominantly smoke free company and to have revenue above 50% corresponding to non combustible business. That is, of course, a very nice perspective. And I can tell you, it's a fantastic push for all energy within the company to get to that very important milestone. And I want to be clear, it's not a kind of remote faraway dream that we would say, one day, we'll be above 50% smoke free business.
That is already in the region where we are having a significant presence with IQOS. That is already the reality or close to being the reality. Of course, there is one region where we are already above 50%, in East Asia and Australia at 50 5%. But in Eastern Europe, we have reached already 33%. And in the EU, we are at 25%.
And on average, we are at 35% and 6 markets are already with revenue corresponding to non combustible business above of 50%. Now, let's dig a little bit further on what is the benefit of And there is no better example than to take Japan to illustrate that. In Japan, as you can see, we are already at 67% of our sales that are based on RRP. And as you can see on that chart, as we were growing the percentage of revenue corresponding to non combustible business, we were also nicely improving the margin. And it's of course because IQOS is intrinsically a business of high quality with a potential to deliver even higher margin than the combustible business.
So I want really to elaborate on that and go through the various reason why IQOS is this high quality business I am describing and why it is having some very positive impact, I would say, throughout the P and L down to the cash flow generation. And here, we are listing all the positive impact that IQOS is going to generate. So I'm going to talk, of course, about the nice impact on volume as IQOS keep growing on the fast and with a bigger weight within our portfolio. We will also see that IQOS is coming with a nice impact on the revenue growth because it enjoys a higher per stick revenue. We will see that IQOS is also on the consumable on the HTU business that is presenting a higher gross margin than the combustible business.
So as we are growing IQOS, we are pushing up the gross margin rate of the company. We will see that we are also, of course, progressing. IQOS is still a very young business, but we start to learn, we start to mature in some places, and we are increasing the return on our investment. We're also improving our commercial model and we will elaborate on the full digital end to end model that we are developing. And all these elements put together are designing a very exciting and promising outlook for growth and increased profitability for the coming years.
So let's start now with looking at the volume and Andre has been presenting that chart already. So altogether for the nicotine industry, we are expecting a yearly decline between minus 1 and minus 2% between 20212023. But of course, it's going to be quite differentiated between combustible, where we expect a significant continuation of the decrease. And Yatsa has been alluding to that. And in front of that, of course, we will see a very nice growth of the non combustible.
And in front of the non combustible, among the non combustible, heat not burn is going to take the lion's share of the growth and should move from what it was only 1% of the total nicotine industry in 2017 to be based on our vision, 7% of the total nicotine industry in 2023. And as you can see, when it comes to revenue, it's going to be almost twice the 7% at more than 15%. That's going to be based for us, of course, and that's we're going to be the main contributor to this growth. We are targeting with the bracket that we are giving of $140,000,000,000 to $160,000,000,000 unit. We are targeting CAGR for our volume between 23% 28%.
And here, you have this very impressive, I would say, ramp up of our growth on IQOS and our Eat Not Burn business. You see that we are targeting to double up our market share from 3% to 6% between 2020 20 23. Let's be very clear, in the country where IQOS is, I would say, meaningfully present, we are already nicely above 6% at about 6.7% market share. So in fact, the market share here is not reflecting the real impact of IQOS and our Itnot burn business in the market where we are present. And on the right hand part of the chart, you see the very nice acceleration of our volume for IQOS and you see this acceleration towards this new objective of €140,000,000,000 to €160,000,000,000 stick.
So we've seen the very nice impact on our growth profile for volume that is coming from IQOS growing fast and of course gathering weight in our overall portfolio. Now let's move to revenue and all the difference, the positive difference, The additional growth that we're going to be able to put on top of the volume evolution. And here again, the growth of IQOS is extremely good news. And the reason why the growth of IQOS is extremely good news is that, as you can see on the chart here, we have higher revenue per stick on IQOS versus the average of our combustible portfolio. And this is on average 2.4x Superior, what does it mean?
Well, it means that if you take €10,000,000,000 revenue €10,000,000,000 stick in HTU. It will have the same revenue than CHF 24,000,000,000 stick in the CC business. So you can imagine, of course, that as we are growing fast, our volume, I don't come back on the volume ambition on IQOS, that will be equivalent to a much, much stronger growth if it had been CC volume and therefore with a very powerful impact on driving extra revenue growth versus volume growth. On the left hand part of this slide, I would just like to draw your attention here on the excise incidents. Of course, one of the reason why HTU is having this superior per stick revenue is the fact that it's a more premium business on average and more premium positioning than a lot of our business on CCE and that is, of course, having an impact.
And the other reason, as we all know, is that in many countries, we are enjoying a lower level of excise duty. And Andre explained why we believe it's going to continue to be the case on the long term. Here, what we are showing is that actually when you look at excise duty on HCU, It's significantly higher than e vapor. It's about 5 times higher in the market where there is meaningful presence for the 2. So what does it mean?
I mean, if we believe, as I think it is really the rule normally when it comes to taxation, that you put certain taxes corresponding to certain impact on society or planet. Just to take an example, for the car industry, you put high taxes today on car having a lot of CO2 emission and carbon emission is taxed. And when you get to electric vehicle, most of the time, you don't have any taxes. Sometimes you even have an incentive. It's because you are measuring the impact of one given product or consumption on society and you try to put a tax attached to that.
That's for the exact same reason as we know that HTU deserve a lower tax than the combustible because they have a much better impact on society and on the health of the people than combustible. But e vapor has a similar impact. So one could make the case actually that HTU are actually quite high today in term of taxation, in term of ex aduty versus e vapor for probably a similar broadly impact on Public Health and maybe HCU could be lower if it was aligned on the e vapor reference. Now, I'm coming to the benefit of having this very strong per stick advantage in term of revenue coming from the IQOS business. What does it mean?
Well, it means that we're going to be flying now on 2 engines in term of generating extra growth on revenue versus volume. Traditionally, as you all know, we were able to increase price, mainly on CCE. And that was still the case in 2018, where really Most of the increase on the revenue versus volume was coming from price increase on CC. Press release. In the future, we're going to absolutely keep this pricing power.
Andre elaborated on the short term some headwind that we could have on the couple of market, but nothing is fundamentally changed on the long term. But on top of that, we're going to add this very nice powerful mix impact coming from the growth of IQOS. So as you can see in 2020, we were already nicely flying on these 2 engine, almost by the way for more or less the same impact and the 6.9% extra growth on the per SEK had been generated almost on equal part by increasing price on one side and the positive mix on the other side. Here, we want to just pause for one second to make sure that everybody understand where we are in terms of price positioning for press release on the consumable of our Eat Stick. So of course IQOS and all the consumable that are coming with IQOS that is a premium business.
That's very clear and the experience, the overall experience is a very premium experience. But we are benefiting today, as we said, from in most countries, from lower excise duty. And that is having Two consequences. Well, the first one is that we managed to have, of course, a retail price that is lower for HTU than premium cigarette. And that's a great way to attract new smokers to switch to HTUs.
It's not that it's going to be the only reason for them to switch, it's just an additional on top of all the other benefit that IQOS is providing. And what it means as well that being a premium business, which is probably today as something which is closer to medium price positioning, again, on average, Well, that means that if there was some excise due to increase, we also have the capacity to price up to absorb this excise due to increase. And here, I just wanted you to remember and bear in mind that, of course, we retain very nice on pricing power and productivity on pricing power. Here, we are taking the example of an increase of $0.10 per pack. You have here the average retail price for a pack for the CC business and for our IQOS business.
You see that $0.10 is more or less around inflation on average for country. And you see that the 2, of course, are delivering a very nice productivity on price when it comes to our revenue, plus 6.9% and plus 9% for IQOS. But nevertheless, the productivity on IQOS is 33.0 percent higher than on cigarettes. So it's also very good news for the future. I've been talking about positive impact on volume.
I've been explaining how IQOS on top of prices is going to contribute as well to revenue growth. Now let's move to the margin impact because IQOS is also having a great impact on our margin. And I I think for the first time, we are disclosing the fact that when it comes to the consumable to our HTUs, we are on average and doing a gross margin rate for for our HTUs, which is around 10 percentage points above the one on the CC business on average. So what does it mean? Well, it means that each time that we are growing our consumable on IQOS, and you can see that we are growing them rapidly, press release.
We are creating a very powerful mix positive for the evolution of the gross margin. And you have started to see that press release in 2020. We will continue to see that in the coming years. The other element when it comes to our IQOS business, of course, is The margin that we are making on the devices. Today, let's be very clear, we are having a negative margin on devices.
We think that it is extremely important to put the devices in the end of the smoker to convince them to switch. And therefore, We are not targeting on the long term to have the same kind of gross margin rate on the device and on the consumable, but we are certainly targeting to have a breakeven or slightly positive margin on the long term. And as you can see, reducing the cost of our devices will be one driver to get there. Another very important element when it comes to improving our gross margin rate and our profitability overall will be to generate massive manufacturing productivity. We've been quite good at doing that in 2019 2020.
And in 2021 to 2023, we are targeting to generate another around $1,000,000,000 gross manufacturing productivity. That's going to come from procurement, that's going to come from reducing the waste, that's going to come from optimizing our manufacturing footprint. At €1,000,000,000 is a very powerful growth productivity. And of course, that will allow us to offset So here, it means that we have 3 drivers to improve gross margin on the medium and on the long term. The first one is a traditional one that you have seen for many years, which is increasing price.
And as I said, we retain the same capacity, the same pricing power. The second one press release, which is a very nice positive mix impact that is coming from the growth of the IQOS business. And the third one is the manufacturing productivity. And therefore, when we look at our ambition to generate on average at least 150 basis point organic improvement of our operating margin on a yearly basis. We believe that the gross margin rate improvement should contribute to more than half Now so we've been talking about gross margin rate improvement.
We're going to have a nice second driver to improve profitability, and this is going to be release on an organic basis of our SG and A to revenue ratio. And how are we going to generate that? Well, here again, we have a very nice ambitious about €1,000,000,000 efficiency program on our SG and A. And the fact that we're going to be able to generate this €1,000,000,000 efficiency program will allow us to compensation of course that we estimate to be between 2.5% and 3%, but at the same time to continue to massively to invest in new growth initiative, innovation, R and D, new launches, consumer program, more digital capacity, you name them, but we are going to build this capacity, while once again still decreasing the SG and A on revenue ratio. So how do we split the effort and how are we going to generate this €1,000,000,000 saving?
Well, we thought it was important to lead you through the detail of our SG and A. So sorry for being a bit didactic here, but I hope it's going to be helpful. We are actually splitting the $7,400,000,000 between commercial and R and D about $4,000,000,000 and G and A another 3,400,000,000 On the €4,000,000,000, 1 third roughly, okay, it's of course Rough calculation, onethree roughly correspond to the CC business. Twothree already correspond to the RRP, release that does include R and D. And 70% of these 2 thirds are fixed cost and 30% are variable.
And when we talk about variable, for all the things that are linked with the volume in term of coaches, in term of call center and everything which is going to be influenced by the volume. So on this first part, we intend to generate around $500,000,000 and in one second, I'm going to elaborate on how we intend to do that. And on the G and A, we also intend to generate around $500,000,000 of saving. Press release. Here again, I will describe that in a few slides.
So starting with the commercial efficiency. Moving the way we are working, we keep digitizing the way we operate, we are reaving our processes, we are simplifying things, we are using shared services. So we are working on our fixed costs to reduce them and that's going to generate part of the $500,000,000 saving. On top of that, you should also integrate the fact that and Jacek alluded to that. We've been making big investment to launch IQOS at the beginning.
What we mean by big investment, we've been building the innovation and the product platform. We've been building the commercial infrastructure. And of course, we keep investing on all these fronts. And we're going to generate some efficiency there. The second driver to decrease our commercial cost and make our growth cheaper, if you want, is the fact that we target to develop, of course, our end to end digital model for commercial.
We've been learning a lot sometime under the pressure, but for that purpose, the pressure was good. And we now have a commercial model that is much more efficient. We're using digital and it's not only that we intend to reduce our variable cost by 30%, I think we are also achieving through our digital customer experience a higher level of satisfaction and efficiency in contacting press release, the smoker to teach him about IQOS and to share about IQOS and through the journey of the full conversion and building the loyalty for IQOS. I think that the overall customer experience is also better. So here you have the double positive impact of cheaper, but also better for for our customers.
So that's for the commercial cost. Now let's move to the G and A. And here again, we are nicely targeting €500,000,000 of saving. I guess, it's going to be the traditional efficiency lever. We are going to simplify a lot of the things we do.
We're going to keep overlap, kill overlaps. We digitize, so there is a lot of investment on IT. We standardize. We're going to use much more shared services to generate higher quality and more homogeneous type of work, and we are becoming a fully project based organization that is generating a lot of efficiency. And here again, with this €1,000,000,000 we're going to be able to generate this nice organic decrease of the SG and A on revenue ratio, while of course coping with inflation and reinvesting.
When we talk about capacity to reinvest here, we talk about several $100,000,000 that we'll be able to reinvest and still deliver this reduction on the SG and A on revenue ratio in an organic manner. So just to conclude that part, we are putting together here a very nice ingredient for a strong financial performance. We talked about volume that we target to be broadly stable. We are having nice additional press release and nice growth overall on revenue driven by the IQOS impact and by the continuation of pricing up. You have seen the 2 levers for profitability improvement, the gross margin with 3 pillar, HTU mix impact, pricing and manufacturing productivity is a second driver for improving the profitability of the lower SG and A to sales ratio, and we've been talking about commercial and G and A efficiency.
We remain we retain the capacity to invest for our future. And of course, all that is going to enable us to to deliver on this objective to have at least 150 basis points of improvement on press release on our operating income margin on a per year basis. This is on an organic basis. We grow fast revenue, we improve profitability that is of course going to deliver a nice growth for on the adjusted operating income, the adjusted EPS and the operating cash flow. And precisely rebounding on the operating cash flow, I mentioned to you that we are targeting to generate around $35,000,000,000 for the next 3 years.
It's a nice growth versus press release. Remind you that we still believe that the CapEx should stay broadly stable versus what we used to do, so around 800,000,000 And when it comes to capital allocation, we have to be very clear. The main priority remain the organic investment press release in our business. You see the potential. We think that we can really deliver a lot of value and so we'll continue to invest behind the IQOS business.
We will invest organically as well on our Beyond Nicotine initiative and we I'm going to come back on that for press release in a couple of minutes. But on that one, it's going to be a lot of organic investment. We just don't discount the possibility that at a certain point in time, a bolt on acquisition to further accelerate the move could make sense. Now when it comes to the dividend, we keep our unwavering commitment to the dividend. We absolutely maintain of around 75% of our adjusted EPS.
Now when it comes to a buyback program And provided that the outlook for the year 2021 is confirmed as we progress through the year, Our intention is to launch a 3 year program of $5,000,000,000 to $7,000,000,000 in H2. And to be clear, you should not expect us to be buying the same kind of amount every month. It will be much more tactical and I would say opportunistic program based on what is happening in the market. One word on this Beyond Nicotine ambition. So nothing, of course, in our 2020 1, 2020 3 target guidance that we are sharing with you is taking that into account.
But honestly, we think that given everything we've been consumer expertise. We are legitimate on at least a couple of areas, certainly on the botanicals for lifestyle and well-being product, on the respiratory drug delivery, and therefore, we want to make sure that we build on this potential on this capacity that we've been putting together. And we believe that it is reasonable to target at least $1,000,000,000 in net revenue by 2025 on this beyond nicotine ambition. Now I'm going to move to what is an essential part of our performance and outlook for the coming years. And I want to be very clear, delivering on our sustainability ambition is both a condition and a consequence of a successful journey in UnSmoking the World.
So like everybody, we want to be a best in class player in all the ESG parameter. And that's very clear that we on the environment. I will come back on some of the target that we have. We certainly want to be seen as a reference when it comes to dealing with society matters and we want to have an impeccable governance. So you should expect us to deliver best in class performance on this front.
But of course, we have one specificity and I think we are very proud of this specificity and that is, I think, animating all of us and driving us. We have a unique duty here we say ambition. I think we feel that is also a duty and something we need to bring to people, which is to create better product to improve people else and to allow the smokers, 1,000,000,000 smokers of the planet to go for better alternative for the health. That's when it comes to improving the society, improving the world and of course creating better health environment, that's a specific mission that we have. And I want to be very clear, I am not dissociating for one second our financial performance on our performance on delivering sustainability.
The way we're going to work on the 2 is totally entangled and the 2 are absolutely Now the way we want to do it is to start from this, I think, view that we have that to be successful on delivering with all the capacity that we have on all the sustainability dimension, we need to onboard all the stakeholders. So we talk of course about the government, we talk about the regulators, but we also talk of course about investors. And to onboard all these people, we need to have a very solid frame, very clear, very transparent and where people can see very openly and follow what we are doing. So we want to be clear on the why, on the what and on the how. The why, of course, is why are we starting this journey?
Why are we intending to and smoke the world and deliver this smoke free vision. So this is our statement of purpose and what we think we can deliver through this new product. And we've been sharing that I think in a relatively pioneer way with the outside world. But that starts in a that puts in a very clear manner why we are starting this journey. Then we want to declare on the what, what do we want to deliver through this journey?
Which kind of achievement do we want to bring to the customers through the planet, what are the milestones to get there. And the third element, which is how are we doing in this journey and how Are we performing versus our target? And we're going to do that in a very clear, consistent manner. And we think that is the way we're going to be able to have the biggest positive social impact and drive the highest shareholder return. Here, I'm starting I'm sharing, sorry, some of the key milestone for 2020.
I'm not going to elaborate on all of them. I'm going to come back more on product One second, just in terms of social, I would say milestone, we indeed have been certified equal pay. I think we are very proud of that. We are also very pleased to have been included in the Bloomberg Gender Equality Index. When it comes to the environment, we are absolutely on track to deliver on the carbon neutrality for 2,030.
And actually, we are working on ways to further accelerate that. And we are working to see whether we can anticipate this date of 2,030. When it comes to governance, we've been issuing our first integrated report that I dare to say that I believe it's already a benchmark and a reference in term of quality of the data that we share and also outlook and perspective that we are giving in term of our ambition for sustainability. This one is probably, of course, the one specific and super important for PMI. That is really how we are driving our ambition for a smoke free world.
That start, of course, by investing on innovation almost exclusively. As you can see now, we are virtually at 100% on smoke free product. You see that today, we are also really focusing our marketing cost, 76% on IQOS. I've been talking about the growth in net revenue and of course 12,700,000 people have abandoned smoking to switch to IQOS and we're already very proud of that. But of course, there is still a lot of work to be done, but it's an encouragement to continue and to accelerate.
And now we are working towards 2025 and new goal and you have it for you per usual, so you can of course go through it. I'm just going to take a few of them. We want to have by 2023, 100% of our electronic device with a verification edge verification technology. So we are working on this road map. When it comes to caring for people, we want to ensure that 100% of our partners, farmers are receiving a living income.
And when it comes to protecting the environment, we want by the end of 2025 to have 100% of our Smoke3 devices being Eco design certified, which, of course, will be a tribute to the impact that we are having on the environment and the fact that we have been greatly improving the impact of our product on the planet. And last but not least, back on our specific mission when it comes to sustainability, we said it, we want to have more than 50% of our net revenue to be based on non combustible business by 2025. And that will mean that we are a totally different company at that time. But as a conclusion, I think precisely, I really want to conclude on the fact that we are rapidly becoming press release, a fast growing and increasingly profitable majority smoke free company. So we're becoming a new animal.
I know that we are still called a tobacco company, but I think you see on the ambition that we have that we are evolving very rapidly press release in new territories. And this ambition, this evolution is going to be driven by the growth of IQOS and have been highlighting all the benefit for that. And to this IQOS growth, we're going to add up the price excellent and cost efficiency to deliver, we said it, improved volume dynamic, fast growing revenue, enhanced profitability, The 2 together generating, of course, strong profit and cash flow growth, and we intend to have a major positive impact on sustainability and society. And by doing that, of course, we believe that we can generate strong sustainable financial performance and generate
welcome back. It's now time for the Q and A session. We've allocated a little bit more than an hour for this session and joining Andre Jatick and Emmanuel will be 3 members of the senior management team: Suzanne Rich Folsom, our Senior Vice President and General Counsel with Stefano Volpetti, who is our Chief Consumer Officer and Deepak Mishra, who is our Chief Strategy Officer. As is our practice with the quarterly results, we have invited sell side analysts who cover PMI and other institutional shareholders to ask questions live on video or audio in an interactive session. There's also a question box on your screen on the top left hand corner if you want to submit a question via email.
I'll come back later on in the session and read several of those questions for the senior management team. At this time, I'll turn it over to Mark, who's going to moderate the Q and A for Mark.
Thanks, Nick. Welcome, everybody. As Nick just laid out, we're going to do 2 parts. This one is going to be the live interactive on video mostly and maybe a few audio and then we'll have questions that come in from the Q and A box was in the upper left hand corner release, as Nick just mentioned, and those will go through by email and those will be addressed a little bit later. I'll be moderating the raised hand feature for the analysts.
We're going to start of 3 sell side analysts and moved to a buy and we'll move back and forth. First question of the day will be from Chris Growe from Stifel. And you are welcome to unmute your audio and video and go ahead. Thank you.
Thank you, Mark, and Good afternoon to all of you. Thank you for all the great information today. I had two questions if I could to lead out. And the first one would just be that IQOS has been very successful in broadening the number of markets it's in and the regions that are contributing to its growth. It's more balanced.
So So as I
look at your 2023 targets over the next couple of years, is there a region that you think could be a larger contributor to IQOS' volume and that should help you achieve your growth. I'm thinking the EU is an example of one area where there seems to be a broader ability to grow in that area. But I'd like to understand your viewpoint on that. And I could add my second question and then I can come back to if you forget it. But just to add to that, you have several new products, new platforms.
I guess I want to understand the demographic profile of for the next generation IQOS user. I guess what I'm thinking is how does IQOS Alooma, for example, help you attract more consumers or help you convert more consumers versus say IQOS Duo and Yatsik, I could hear the excitement in your voice when you announced that product.
I think probably Jacek could answer these questions.
Yes. I mean, in the European Union, I mean, the of geography, it's my sizable geographies, which I believe we should look for the ranking IQOS to the higher level. It's obviously France and Spain, There was a number of the challenges which we have. 1, the most predominant is a very Mero is a bottleneck situation with regards to communication, right? So France and Spain, we really don't have that much of ability to talk to consumers.
I actually believe we add IQOSILOMA, which is the much more intuitive, almost called, unquote, audition type of solutions, 3 1 talks and very intuitively, all of a very minimal explanations, you know, how to use it. I think we can make a more significant inroads there. And outside the EU, I see Kennedy is what I had in mind. So it's Indonesia, Philippines, Vietnam, these places. There are a couple of interesting geographies, sizable of and we're working on a fine tuning right regulatory type of framework.
So they are sort of sustainable that we can go with a minimum sort of a communications to consumer. We have opened Philippines, big word open. I think that one almost share point in our Metro Manila tells us that we got something. Most challenging to be very frank, will be presumably Indonesia, but we're working on that as well. I don't think it's going to happen in the beginning of this 3 years period.
That summer in the 3 years period will have something more substantial in Indonesia as well. Vietnam is very interesting, right, if you think about it, but we need to to overcome a couple of regulatory hurdles there. The other parts which are in the region, which we have Japan, Korea, etcetera, just in restricted. So essentially, I'm not allowed to I should actually put it smokers are not allowed to enjoy the alternatives. But I am cautiously optimistic we can open this geography.
It will be a very nice complement and I do believe they will have a very strong start from the very beginning. So this is where it's going to come from the sizable geographies. And the second question was about demographics. Demographics. Okay.
Look, I mean initially, Obviously, you have a bit of this demographics, which is skewed 30 below, legal age to 30 because that's these innovations, they're much more open to experiment with the new things. But as we progress with the time and with the targeting, also geographical targeting, We do see that IQOS starts having a more substantial penetrations in the 40 plus or 50 plus. So this is what you're calling to the core of the smoking population. The product is great. They like consumers in this age cohorts, like ICOSTAYS.
There's no questions about this. But It's not a reliability in terms of how do we execute the device, it's the reliability around the blade that incidentally you may damage, you may break the blade is setting them back. Some people also forget to clean the device that the impacts, the quality of the taste experience, I actually think that the higher technological investment of Illumina offer us to go to this more resistant group of smokers because we will give them essentially hassle free sort of experience while maintaining the great taste profile. So that's my assumptions, but they are not just there was a substance behind these assumptions that this should work like it. I mentioned In my speech that I'm more excited when I look at the consumer feedback from the research.
I know it's a research, it's not a commercial setting. But look, I've seen the research on the IQOS DUO, which really was spectacularly well received, the 3.1 version DUO. Period. Every stick works from the beginning till the end of the 6 minutes experience, which by the way is the longest experience anybody is offering in the category today and a consistent experience with the full satisfaction. I think if we further technology addressed couple of this pain point, On the demographics, just to conclude, you may recall maybe Chris from the past, we've been underrepresented with female audience, right?
This was the initial. It depends on which year you are post the introduction. IQOS almost started resembling sort of the for more natural distributions as you have on the combustible in the combustibles.
That's great. I think let's move on to the next question. Bonnie Herzog, I see that your camera is lit up. Looks like you're ready to go. Are you ready to ask the next question?
If so, unmute yourself and go ahead.
Sure. Hi, everyone. So nice to see you. I just wish it was in person, hopefully next time. I wanted to ask a follow on question regarding Alumna because, yes, Yacic, I think it was great to see how excited you are about this next generation IQOS.
So maybe you could give us a press release. A little bit more color on where this new technology will be positioned relative to some of the existing IQOS platforms that you have in the marketplace. I guess my assumption would be that it will be premium. And then I also would love to better understand On the acquisition costs, I believe you talked about that being lower for this Alumna. So Can you help us understand how meaningful that could be?
Is it quite a bit lower in terms of acquiring new users? And then just your thoughts on how you think about incrementality from this. I assume it could cannibalize, but if it's an up trade proposition within your portfolio. I would look at that as positive. So just any thoughts on that would be helpful.
Yes, sure. Look, yes, we will have a free value on the free versions of the device, one which is really more of the super premium. Release. So you may consider this from the device perspective as an up trade, one which is more or less reflecting the positioning of the $3.1 which we have today in the market and the amount of device which will be a little bit more price accessible. So we also have to statement that the innovations which makes this experience very flawless, simple, also should allow us to to penetrate the cohorts which are around the equivalent of the mid or below segment.
And obviously, there will be a lineup, vertical lineup of a consumable. One thing I said in the remarks, the consumables for Iruma will not work for the IQOS blade and IQOS blade will not activate the Iruma. We will for a period of time maintain the 2 technology in the market, for existing IQOS users, but we know that this may drive them even to the better conversion than we have on an IQOS. So there was a net gain, not necessarily from a price positioning, but from the even higher loyalty to the product. I don't know, Stefano is on the call.
I mean, he's also Yiloma has the few of this innovation. This was his idea to put the inductions into the most micro dimensions ever in the history, but I mean they can ship into this one. I think initially it will go to the IQOS. It's going to take the people who've to try IQOS and didn't adopt IQOS because they didn't run from this cumbersome process. We can go back after to these to consumers, we can now offer them Illumina.
I think it's going to help us on acquisitions pretty soon, not from the day 1, right? So whatever we started this year, Initially, you may take even up to 30% up rate of change within the existing user base and then we will get the incrementality from the better acquisitions. Now this drives the cost down because first on the post purchase service, handling broken blades, etcetera, reverse logistics, all of these things, we can really start scaling down in these markets fast. And second is, that really doesn't require that much of a handholding during an adoption period, okay. It's so intuitive how to put the stick in.
It's so intuitive how to remove the stick after the consumption, after the experience. I mean, so a lot of these things are really Very simple. So I believe this will allow us to reduce the acquisition costs further In addition to what we have achieved already on the current IQOS going forward.
And I would add But you can also get into More remote geographic areas where you because the can you hear me
or Yes. Okay. We can.
Because Today, you need some physical presence to explain to the consumers how to use the product, how to clean it and so on. If the product is intuitive, a little bit like any vapor product, you put the pot in and it works, then you need less infrastructure in the more remote geographic So I think we can have an easier expansion at a lower cost. Now, I think the induction is a great technology. Release, but as I said, we may want to keep also a blade type of heating or a pin type of heating like the LEEL product or combine the 2 technologies and IPs into 1, if we wish so and then You have a leg there for to go even at a different dimension of market or price positioning. So with different consumables.
But in reality, the 2 products will coexist for 2, 3 years because we have a lot of consumers with existing devices of IQOS And some will not trade up immediately. So that's how I see it. And that's why I said, every time we innovate with a major thing, clearly the previous technology is available and may also be available for licensing to others, okay. So because we're as we licensed 1, I think others can license technology. So that's the way I see it going forward.
Okay. That was really helpful. And if I may just ask one other question and it's more of a big picture question. As I Listen to all of you today, great presentation, a lot of information, exciting because the innovation pipeline seems to be Stepping up again as we look into this year and beyond. And as I think about all of that and everything that you guys are trying to execute on, I'd like to ask your confidence level of how you're able to balance all of these different, whether it's new innovation, different initiatives, balance that with the complexities of your organization that seem to be increasing.
So if you could Touch on that, I think that would be really helpful. And then a second part of that is how do you mobilize your employees press release internally and or incentivize them behind some of these different technologies and innovations. Thanks.
Well, I could start and I'm sure So I think that, first of all, our employees are very excited about the success of IQOS. And as you know, success and progress brings excitement. Secondly, we all understand complexity and handling different platforms, both at the consumer contact level, but also with trade and everything. So clearly, there is a lot of infrastructure that can be shared, but also you need dedicated teams to work on e vapor products versus heat not burn also because the problem as we explained this different. In e vapor, you need to differentiate your product and I would say it's more classic marketing.
I don't think we have the intention to open a market piece with the vapor products because we know they don't work as well as heated tobacco products. So where we go, the category is no. So it increases complexity at retail level, okay. And I think, however, that the awareness And I would say the respect that Trade now has for the success of IQOS will help us as this is coming from us and under the IQOS brand name to also get access to retail easier, I would say, than a newcomer would do would have. So but we are all mindful of the complexity and that's why also we changed and we are changing completely our ways of work.
This is a project based organization because individual functions cannot handle the complexity. And we also have a lot of subject matter expertise in the company now
Andrey touched on something important. We never release in the contract between earnings calls and the individual meeting of investors, but even in the time constraint, investors, they like today, We never really had an opportunity to talk about the internal transformation and people take it for granted that it's very easy to put the 1 or 2 or 3 bullet points on a fire point. But this is enormous effort, right, which we're going through. And I think over the last 5 years, we delivered. I have to admit that If I knew, if we knew 5 years ago what we know today, we would be flying in colors.
But we're learning, but this is ours, Okay. We're already flying in colors. But I have to admit, like we had an assumptions, which proven to be wrong, what we learned and the organization is behind it. And And as Andre said, I mean, the prioritizations that on the in every aspect of we're doing is very important. But we have a very strong governance in the company how we reorganize ourselves completely differently, very focused on a product, on a marketing, on the internal processes.
So there's a lot of initiatives, but they do have an owner, they do have a leader, they do have a sponsor and a dedicated resources to the things which really matter. And yes, nothing look, this is not a walk in the park, okay? But I think the motivation is there.
Yes. But reality is, as we said many times, Bonnie, and for the benefit of everybody, at the end of the day, technology is a good thing. But brand, equity and organizational knowledge that's where you get your competitive advantage at the end of the day. And I think we are ahead of everybody in these two areas because also we started
press. Let's do the next question from for Gaurav Jain from Barclays and then Robert Rampton, I see that your video is on. You're going to go after him, okay? Great. Gaurav, go ahead.
Good afternoon, everyone. So I have a couple of questions. Hi. So just trying to understand your guidance press release over FY 2021 to 2023. So you are saying that your volume growth will be flat and you have also highlighted that release to a positive mix shift of about 4% at that level of growth.
And yet the total revenue growth that you're guiding to is only 5%. So above pricing is
about
5%. But what I'm asking is that look, if pricing continues to grow on cigarettes press release and IQOS growth will be in EU, which is your higher sort of ASP region on IQOS, then aren't you looking at rate of 6%, 7% kind of revenue growth rather than 5%.
Well, I tried to give you all the parameters when I was sitting on this algorithm for a while. Yes, we are basically about that. But we are in COVID and I don't know where the rebounds will happen. So I think I gave you that which you can calculate, you can do the math your own, okay? You know the per unit of IQOS as you know the per unit of cigarettes, okay.
So of course, we have to assume some cannibalization in there. If we want to be conservative, we assume 40%, okay. So at the end of the day, if you do the math, you're on 5 to 6.5 based on IQOS. Okay. Then the whole question is what else is going to come and when?
When duty free is going to come back? When any rebound can happen and I said that's I gave the cargos for everyone, right? And then if we take cannibalization out and the COVID effects out, then your normal business. So you can assume 2%, 3% volume decline. We know what CAGR that gives and then pricing compensates and comes on top.
So if everything works well, obviously, in a rebound year, you will be well above. If it delays, we wanted to be also cognizant that we are not out of the woods yet. But I gave you all the parameters that can lead you to much higher if the stars align.
Release. That's very helpful. My second question is on just your 2025 ambition and that 50% plus software revenues will be from Icons, so you will be a small fee company. But if I look at the share in units, it will still be around 30%. Release.
So from that perspective, you will still largely be a cigarette company even in 2025. And You have announced a share repurchase program today. But do you think you need to go even further than that because we know the continuous pressure from on ESG funds who are continuing to pivot away from tobacco and based on the 2,525 production that won't change.
But we didn't say press release that we didn't say or indicated that the 25 is the end of the world and our journey to smoke free. We just picked a moment in time how you set the milestones and we believe that 50% is aspirational, but is attainable with directions where we go. And logic obviously dictates that like once we get to the 50% or sort of the revenue, the things are going to also have a completely different dynamics on the first 50%. I think the directions that there were, the consumer, this is not the work, this is not the industry or manufacturers. The fact that the consumers are looking and deserves and are looking for a better alternatives has been all confirmed.
Okay. The science and the harm reduction strategies, I believe finally will reconcile and will go into one direction. We're not done yet, as Andre and I indicated, but I think with every day, every quarter, we're getting closer there and consumer is there. Okay. So once you think that we will go to that level of penetrations and as we measure in the dollar's revenue to 50%, I think the rest is just this is not as challenging as the first 50%.
Although, I do believe that there will be smokers and we have from the very beginning who will need other set of incentives or disincentives to make the final book because we will be confronted and we know it today with smokers press release, which is a very important question. So we need to figure it out, other solutions how to move the last cohort of the for combustible smoking into these equations. But I believe we will find together with our stakeholders the solutions which will
And as we talk Gaurav about ESG, I think everybody needs to understand that first of all exclusion is not the solution because that's not going to convince any person to stop smoking as it's not going to be any person to stop using fossil fuel. I think the key thing here is to say how we can convince to Yazzic's point and everybody people to change behavior and that's fundamentally in ESG Think. So the fact that If we didn't sell cigarettes, because I get this question very often. Let's assume you dispose, you stop your business, whatever. It doesn't change anything from an impact on the planet of the fact that cigarettes do exist.
Replacing is the solution and I think engagement from the ESG investors with us and understand what we're trying to do put pressure also on our competitors to do the same and on regulators coming in and incentivizing the industry to go in that session. I think that's the right approach to resolve the problem. Otherwise, even if we didn't have cigarettes, somebody else would have them. So the problem is not resolved. So we're trying to resolve the problem and I think that's where we should be focused.
Thank you.
Okay. Robert, Rampton, UBS, are you ready to go?
Yes, ready. Thank you very much for taking my question. Two questions from me. The first is, could you tell us what the margin profile looks like in Korea? And
Want to take this? I mean, we know the tax structures in Korea. Okay. And sorry, go ahead.
No, no, I just wanted to say that we don't enter in the elaboration of comment on margin by market. But I mean, I think you were about to say that and it's not burned. So the profile today is not materially different between the 2 and there is no interest from the local authority today to push better alternatives. So that is certainly paving the way for the CC business to be the one growing and notably with a lot of flavor development in the country.
There was a few percentage points difference between But I guess the question is more about the KT and G than Philip Morris, right,
Fair enough. Thank you very much. Just a second question. So on competition, I appreciate that in most of your markets, competition has had a negligible impact. However, peers are coming with better and better products.
Can you help us understand how you're thinking about the impact of competition on the various top line and margin drivers in the event it gets more effective? Or is your assumption that your lead on all the fronts you've talked about is too big?
I will take it and I guess Andre will finish with this one, okay, because thanks for the question. So it is not that we are not with a competition putting really quite a significant resources behind their products to compete with us. If I take Japan, if I take Russia and a few other geographies, It is not that the competition is slipping. That competition doesn't have an impact on us. We measure this from the fact that I still have 80 plus percent share of segment and we actually even managed to grow by about 100 basis points our share of segment.
So, so far, on the market that's seriously very significant. Resources are going obviously more into discounting devices. So we have press release, which makes me very happy is the IQOS for growth for these rates almost untouched. I remain the high conversion rates and I said that number of times that's the key to the right returns while achieving the oil smoke refuge. Now, there are some competitors and this goes beyond the damage or pressure they put on us from a classical product competition when unfortunately they start confusing the regulators about the categories.
Okay. So, if I cannot achieve my commercial success, I am trying to put all other pull all other strings in order to pull the leg of IQOS of HIT NOTBAG. I think personally is extremely short sighted because instead of focusing and grabbed an opportunity which consumers indicates to us give me good heat not burn products or other RRP's and I will switch. I mean, some people in as I said, in the short sighted type of an approach are essentially pulling the regular Lambda R and R piece. I think on the strategy.
I hope that the strategy will change because this essentially undermines the big purpose of this transformation. And actually, as we have demonstrated our side, which is good not only for the smokers, public health, but also for investors. I don't understand some of the strategies. Andre, I think you want to add something.
As Jacek said, our job is to continue innovating, building our brand and to try to be better than the competition. You have to assume the competition will continue improving their product, okay. But So we are extremely cognizant of the fact that there will be increasing competition as the segment grows and we tried to get ahead and I think Illumina is a very good example of us innovating in this category ahead of everybody else again. And as I told Bonnie, I think as an organization, we've learned a lot and that's a huge competitive advantage. We had the 1st mover advantage with IQOS and it has established credibility.
So I think all this, it's fair commercial gain. For the rest, as Jacek said, I think people should be careful when they go to the regulators and say the dividing line in product should be whether they contain tobacco or not, when everybody knows permanently well, it's the absence of combustion that is the issue And not tobacco or non tobacco. And by the way, that sounds like aligning positions with NGOs and the World Health Organization that are still in the 50s in terms of science. And so I think that's where CARE should be and a long term view should be playing and not to shoot our foot or a company shooting their foot and being so sighted. But I guess, you know, competitors have the right to do whatever they want and we face this situation increasingly this year and I don't think I can point to 1 competitor that had a win in this area.
Okay. We're going to try to go to Tom Russo. Tom Russo, if you're available, you can unmute your audio and video and we'll take a question from you. I think you have multiple questions, so if you can limit it to 2, that would be great if you're ready to go.
I'm all set to go other than the video I think is not, but Thank you for the chance to address the management team and to thank the management as well as the Board for having had the capacity to suffer through $8,000,000,000 worth of investments over the past 10 years release to come to this point where you now have such an extraordinary position. My two questions are first,
press release, just to have a chance to
have Andre share with us maybe the role that digital has played in helping you deliver more for less with more effectiveness and more efficiency across advertising, direct marketing, even auditing your outcomes broadly. And then the second question has to do with your priority with the United States as a market. It did not come up in the response to Chris's question about big markets because this was addressed to the EU. But is the U. S.
A big market for you and what are the steps that will be required to begin the process of realizing those values? Then I'll throw one last question in about the capacity to suffer. Do you have any plans to try to commercialize China going forward. That's actually congratulations on a terrific presentation.
Okay. I'll start. I think in terms of China, I I think the intention is always there, but progress is limited for the moment because I don't think the Chinese deploy this project. But we're always hopeful this will happen. I don't think that's going to happen
for the next 2, 3 years.
I always remind people that how patient we were about certain countries in Eastern Europe opening up and for some men who waited 15, 20 years until they opened. Now clearly on the digital, we are at the beginning, I would say, of the transformation. I think we hinted to both things, how we can use more digital tools and COVID wasn't accelerated in the all the misfortune surrounding the pandemic, at least everybody was forced and we were forced to even accelerate and try digital tools. So overcame a little bit the reluctance of Certain traditionalists, I would say, in our market. And also now we are standardizing much more our internal processes as Emmanuel said.
And when you standardize, you can obviously digitalize. But To me, this is a beginning of a journey. We are not yet a digital company, I would say, that facilitates and reduces cost, but also when we start moving to retention of consumer, which becomes increasingly important As we have a very big number of consumers and competition, then obviously CRM will take a much bigger base, much more knowledge and data on consumers that we can use obviously to accompany them during the journey, But also eventually offered products and services that can add revenues or loyalty of the consumers. And that's where I think Digital will play an important role to have much faster feedback from the market. We have it already, to improve the product and what we offer consumers and eventually potentially monetize Now, sorry, I forgot the third question.
I didn't.
It was the expectations of rolling out North America.
Look, the potential of the U. S. Market is very big, okay. And you know that we have the agreements with Altria. So now we have the authorization for IQOS 3.
Altria have announced their expansion plans and the ball is in their camp to grow for the business in the U. S. So I think that the potential is there and I hope
release. Next, we're going to move on to Adam Spielman from Citi and Michael Lavery, you're going to be on that.
Thank you very much. I'd like to just Follow-up on that question. So, Andre, on Slide 41, you showed and I'm talking about the U. S. Here, You showed how the markets you've launched in 2019, 2020 have grown so well.
And yet frankly, it hasn't worked well in the U. S. It's been in my view, very disappointing. So can you just explain exactly why you think The growth has been so slow in Georgia and the United States relative to Georgia in the form of Soviet Union.
Well, it's difficult to answer this question because I'm not doing the commercialization and the marketing of the product. Item. I don't think
But you say you work together closely with them and they say they work with you?
They do, but we can only introduce the things we think are appropriate based on our experience and other has to realize Certain things. Reality is also that we just got the IQOS 3 authorization. So I think that would be a boost. And the question is always in certain markets, in how many places Do you have to be present before you have the effect? You see, if you have a large country like Japan, if I use it as a proxy, Adam.
We were in Nagoya and the brand was at 1% to 1.5% Once we expanded in Japan, the brand grew very rapidly. So I think you need a certain scale also not in a city, but across in order to get that scale. And Altria has an expansion plan. So we see how this, I would say, synergetic effect works. So just launching in a couple of cities, in my view, based on our experience, is not what maximizes consumer awareness, but also comfort that this is a good product that because they don't see it everywhere.
So that's how I can explain in part and you asked this question in the past. I believe the U. S, Obviously, once we go Altra expands more, it's probably not going to be Japan, Okay. But it certainly can be close to many European countries. That's my view.
But we need to get some scale.
Okay. Thank you. Can I ask about the I wasn't really asking about the $250,000,000,000 plus aspiration for 2025, which you've had for a long time? You've just obviously announced a target of $140,000,000,000 to $160,000,000,000 for 2023. But to me that doesn't fit in with the 250 plus aspiration for 25, which is just either that you don't really believe the 250 plus 2025 or the 140 to 160 is way too low.
Well, We should not forget that we articulated this number in 2018, 2019. And I think it's still in my book becomes an aspiration and it remains an aspiration. On the other side, we also have some slowdown based on COVID. Okay. And I would like to focus more on getting to 50% of revenues as a benchmark.
Sooner or later, we'll get to the 250, okay? If it's a year later or a year earlier, I don't think that should be the criteria. So we'll try to get some realistic numbers. Everybody can put their hands around and their head around. And then once we get to 250, hallelujah.
If it's in 'twenty six, would be in 'twenty six. It also assumes in there other It's not only heated tobacco units, other platforms and there is some degree of assumption in there that regulators will do their job and allowing certain markets a little bit more communication to consumer because it's rather painful and rather expensive to try to be under tobacco law cigarette laws, I'm sorry, and try to have rapid expansion. And that's not, as I said in my intervention, much. Just the ability to talk to people, explain the product and create some awareness and comprehension about the product. So if regulators play their role and that was working assumption by 2025, then we can accelerate it in turn.
Can I just Follow-up on that? I mean, again and again, and I completely understand it, you say you need regulators to play their part. But are there any regulators you can actually point to where things are really changing? I mean, the FDA is where it is. It's been like that for a while, well, since 2,009, but is there actually any movement that you can point to
that's really changed anywhere else?
There has been movement in Italy. There's movement in Greece with appropriate legislation. New Zealand changed their laws Now they authorize this project. So there is movement. The key to me to have a fast impact is If the World Health Organization and the NGOs and special interests that gravitate around it because it's not the as you know, it's the framework convention for tobacco control.
It's not truly the WHO. Then if they change a little bit their views because they are also influencing politically very many countries, I think we can have a major acceleration. And they have to be very conscious, sorry to use rhetoric here, that by trying to restrict all these things, they perpetuate smoke and they are accountable for that.
Thank you very much. Sorry to go through the 3 questions, but thank you.
Michael Lavery, are you ready to go and then Owen Bennett, if you'd be ready behind him.
I just want to come back to some of your color on the IQOS economics. You mentioned that 10,000,000,000 sticks would have about a 650,000,000 to 700,000,000 I believe that's a net contribution. Just want to understand some of that cannibalization. Excuse me?
Sorry, net revenue.
Right, exactly. And just want to understand some of the assumptions around that. You did, if my math is right, about 900,000,000 per 10,000,000,000 sticks last year, obviously that's excluding a cannibalization impact, but that looks like it might imply a 25% cannibalization rate. Is that around the right assumption? And then also as we look ahead versus history, how much should we try to factor in on geographic market mix dilution to pricing or any other variables that would change how you think about the next few years versus the recent past?
Okay. I'll start and others can chip in.
Yes. I can.
Okay. Keep going. To me, the way to look at it is And we should not forget devices, okay? Devices don't have a positive bottom line, but they contribute to revenue. So you have to add the devices for this calculation.
So I mean, you can do the math you've sold and you've done it, okay? You take revenues of IQOS consumables divided by volume. You have 1 unit, then you take cigarettes and I even took the cigarettes in the markets we're in that are higher than the average. And I you can assume between 35% to 40 percent cannibalization rates, worst case scenario, okay. That's how you can come to the number I gave.
And then you can add 10% to that for devices can be 12% as we go higher in pricing in the future with the IQOS device. So your numbers are gross correct, but you have to take out the volume impact on our own portfolio, not only the average, okay? And then down the line, as I said, if you applied a 75% margin, 2 quarter remains, we're between $525,000,000 to $550,000,000 on the gross profit, which is COGS excluded, net impact to the company. So and then Emmanuel gave you the key on how to calculate the variable versus fixed for obviously, chunks of volume. That's how I would look at.
Michael, can you continue?
Yes. On the second part of your question, Michael, on on what you should expect in terms of evolution of the 2.4x multiplier today. I mean, on the foreseeable future in in the 2021, 2023 period. We don't see today a major evolution of that ratio, which is certainly influenced by the mix today. So I think if we were to to try to clean that ratio from the mix impact that is coming from exposure to certain market where IQOS is bigger and where the multiplier is higher.
At the group level, you would probably get ultimately to a multiplier by about 2. But again, it's a difficult calculation to make because IQOS is not present in all countries and therefore it's a kind of rough assumption. But for the next 2 to 3 years, we don't see major evolution on this 2.4x multiplier between CCE and HTU per stick revenue.
And Michael, you can do the math because we give you the regional numbers as well. So it's obvious that is better in Europe, a bit worse in Japan and in the middle in Eastern Europe, Okay. By definition, because the purchasing powers are different. But you can do the math yourself. If you look at the regions, you can.
So you have more. By market, we're not going
Really helpful detail. Thanks for all that color. And I'll Sure to get to the math once we finish. I haven't had a chance to noodle through everything yet. I know even if it shows the way you're aiming for the non nicotine piece would be pretty small relative to the rest of the business.
But just curious some of the thinking there, maybe 2 parts. 1 is just do you see this more as a growth opportunity sort of proactively or is it a little bit of a defensive approach? Just how do you think about that opportunity strategically? And then I'm for sure it's still far enough out, you may not be very specific, but curious when you talk about things like sleep or calm, do you have cannabis derived on the cannabis or biomass that you would be putting on your radar or is that something you would consider out of the consideration set just because it may be controversial in some markets or whatever else.
Yes. Well, I see, 1st of all, adjacencies as an opportunity, okay, because we have I mean adjacency definition is either you use existing capabilities you have to expand or you use consumer permission to give them more. I explained that part, how you monetize CRM and database, but that's more our consumer, okay? Now that's an opportunity that we have not explored because as you get you offer something to consumers, you get permission to offer more and it can be partner products in which you get some margin or something that consumers benefit from, for example, I don't know, having Japan many thousands of restaurants that offer IQOS. If you book through our portal, consumers can get a rebate or something.
So the consumer benefits because you offer them something they not otherwise or something cheaper, but that's pure CRM, okay? Now if we go to the other categories that I was referring to and Emmanuel elaborated, essentially, I see opportunities in 2 areas, something that in this area and I gave the example of aspirin which may sound like a stupid example, but this is very important, which is respiratory delivery increases bioavailability and reduces side effects to deliver very rapidly because you can dose less, you have immediate access and effect and then eventually less damage by using pills and so on because the dose is much higher on the without being very technical. Now the ambition there is not to become pharma. The ambition is where the clinical preclinical regulatory approval capability and then we can outsource or partner for anything else. So we're not going to build a machine.
And as we learn, Now if it's a product that goes to consumers, clearly we can use our own infrastructure, okay? Now I guess you referred to botanicals. And I said many times, there's 2 ways to look at these products. The one is the therapeutical medical route, which is pure fun, okay, be it CBD, be it THC and so on. The other is anything you offer to consumers and there you need to evaluate what are the ways of delivery, what warnings you have to give consumers because there may be side effects and so on.
So we've looked at CBD for example and I'm talking here on pure CBD. First of all, at this stage, there is no, I would say, clinical trial that has proven effect on pain, I don't know, sleep or whatever, okay? And there are also some toxicological concerns because in doses where CBD pure CBD has efficacy, means it binds with the cannabis receptors, then you start having issues with cytotoxicity and other problems. Now that's embryonic first cut. And we also know for medical studies because there is one drug for acute epilepsy that is CBD based and then you do have because of usage, liver effects and other So all I'm saying is the product is not purely innocuous and appropriate warning has to be given to consumers if we have continuous for long term use and we're evaluating all these areas, so we understand better.
What we said as a company, we're a science and technology based company, not a small outfit that just passes under the regulatory radar screen and sell something. So That's all I'm saying. So we're looking at these areas. We also have an investment in a medical device company, which is Saike in Israel that have developed a device for pain relief that uses cannabis THC and CBD combinations, now that's medical route. So we're looking at both categories, but I can't say with determination we've decided to enter the sector until we have some better understanding of efficacy and side effects.
Nick, we have 2 more with raised hands. It's from Owen Bennett, who will be next and then Alan Erskine from Credit Suisse and then maybe go to your Q and A on the toolbar, but I'm also sensitive to The time that you're thinking about, do you want to limit them to 1 question each to keep it going or 2? How do you want to handle it?
No, let's go to those 2 questions. We have a number of them that come in. Some have already been answered on the e mail, I want you to read, yes.
Terrific. So Owen Bennett, Jefferies, you're next. And Alan or Stan, you'll kind of from Credit Suisse close out this card that we may come back to the virtual later after Nick gets through some reading of the questions that are on the toolbox. Thank
you. And afternoon, everyone. And hope all well. So I had a couple of questions around vapor, please, given the rollout plan during the year. First one around the vapor specific gross margin economics that you gave, which are better than What we've seen given by certain peers.
And so just wondering, when you say premium price positioning, is that premium versus other current vapor products or price the same as premium cigarettes? And then also, were we in that gross margin, do the manufacturing costs assume full automation? And then the second question is just around current capacity in vapor in terms of refills and what do you think is a realistic ambition for top line contribution from Vapr in 2023. Thank you.
When we talk about the premium positioning, we had more in mind definitely in mind the device because I believe putting some price which will take the consumers through the serious consideration phase rather than jumping on something which as you know, dollars 10 or below and not using this is undermines the purpose of the size. So the first device with regard to is really a premium device. The cartridges will be at the competitive but on upper end of the market, okay? And again, surely don't want to change blindly the volumes, we'd rather want to change the chase the consumers from the angle of the full conversion. Of our users, Kid Not Burned on some occasions have a need to have a power on demand, etcetera.
So it's a complementary to the IQOS core proposition. Yes, I mean this is how we want to take. With regards to that capacity, we have developed in the process of building or developing that capacity, but it's to some extent is our own in house capacity. For the cartridges. But obviously, I mean, a propriety to us and this is the core of this whole thing is the Well, it's the technology is one thing, the mesh technology, but the liquid and the compositions, etcetera, which goes into the product.
Yes. And last thing, Owen, to answer your margin question. The different margins you saw on the slide Okay. You are a 50% dual user. Then the rest is you are a 100% user at 1.6 combustible, but that assumes that you consume only one company's or one brand's consumable.
And that's the important thing. What I said and Jacek said is the loyalty. Because if you have 7 devices because they were given to you free of charge and at the same time you use different consumables from different Yes, on aggregate for a fully for a pure user, you get 1.6 times, but each individual company gets a 5th or a 10th or a third and that's where the economy start not being very good. Because If on the margin you are really marginal and on top of it you have the infrastructure and the marketing expense to support these products, it's very difficult to make money. So we have the infrastructure and our objective to Yatshak's point is to bring loyalty and trust because of the IQOS brand.
We will learn, Okay. And then we'll take it from there. But the category economics are not bad is the fragmentation of the category and that's why we're hopeful we can do better. So that's the analysis if you wish.
I actually I actually think that there is a group of consumers that if you give them, if they haven't had Hypnotberg ICOS, an eVape ICOS, they're essentially covering 99, if not 100 percent of the daily situational type of needs. Okay. Maybe I'm wrong, but this is how we see this whole thing. Obviously, you'll have the users who will be 100% on the heat not burn, 100% on the vape and the people who still with the one leg left in the combustibles. But I think delivering something under one umbrella, which is essentially a one stop shop, Right.
To solve my smoking problem, I go to the one infrastructure, it's the one brand, it's the one contact point, it's All of these benefits that I don't have to think about where to go, whom to choose. I have a brand, it's a credible, delivers on a science, knowledge that delivers on equality. I think there is a winning proposition. I think there might be a winning proposition. But we'll see.
We go. We will learn. We will comfort.
Okay. Just one follow-up there. So on the cost to produce, I remember a couple of years ago, you said once you got to scale on IQOS. The consumables were a similar cost to produce as a pack of cigarettes. I'm just wondering when you get to scale on vapor for automation.
How would the cost on a pack equivalent basis compare to cigarettes?
On a PAG, it depends on okay. If we assume a cartridge is a PAG, which is a wild assumption. A cartridge can be between if you look at all the competitive landscape between $0.50 per cartridge and $0.80 $0.90 if you have a sophisticated product. Cigarettes are $12 per 1,000, so we divide per pack by $50 Sorry, I'm doing the math with you. So 12 divided by 50, what the heck that is?
Sorry, it's late in the day, but that's the comparison. The difference is the excise taxes on cigarettes are vastly higher obviously. There is very limited taxes on e vapor, but a big chunk is the trade margin. It's 30%, 35% compared to 11% of cigarettes on average. So it's kind as a NatValoren component in addition to VAT if we take European country.
So if you sell at €4 you pocket 2, you take out to make a back 20, okay? Still, better margin than cigarettes, if I can simply apply for you. So obviously, we'll stay and if you stay with the same technology, you will reduce the cost of the cartridges. And I see an opportunity to take the absolute margins at the same level as cigarettes and not having this debilitating Advalora. That's
Alan Erskine, Credit Suisse, you're up.
Good afternoon, everyone.
Just one question
for me really on the Icos ILUMA consumables, 2 parts to it. 1, I think you indicated it was a unique consumable that certainly wasn't interchangeable with the Blade device. So my question is, does it require a specific capacity, a dedicated capacity and if so, how much capacity do you have for this new And then the second part, I think you indicated that there would be some kind of activation code, which meant that only bona fide on consumables could be used in I CorSoLube. And I just wanted to see if you could elaborate on that and how much protection you have around that. Thank you.
Okay. I'll do that. In terms of manufacturing, obviously, there are 3 parts in the cigarette factory that is the primary where you prepare the tobacco mixture, that is the making where you make the sticks and then the pack. So the STIX machines needs adaptation, okay. That's clear because it's a different process to manufacture the product.
All the rest remains the same. Release is the capacity of the new device and the capacity also of what we call the subsector, which is induction in the stick, Okay. But I think we can satisfy the demand based on our launch plan and we took this into consideration. That's for the first item. Yes, I think somebody else wants to answer the second one.
The second one was on
The stick activation.
No, it's the age verification, okay? We started the age verification with the e vapor products more sensitive. We are experimenting in New Zealand release
in New Zealand, we're experimenting. We passed the experiments. The technology is, frankly speaking, It's comparable like you activate your smartphone. You buy the smartphone, but you need to activate it. So you need to register somewhere and a part of this registration release, in our case, the age verification.
And we can blow it, obviously, in a very, very, very short period of time, so this creates minimal type of a disturbance to the consumers. On obviously, consumers cannot just take the product off the shelf or buy it through the retailer and start using. You need to go through the verification. We're essentially solving the problem of all this unintended use, which might be incidental or to create a much bigger problem. For us is very important.
As you know, we have said that by 2023, we'll roll out the technology to our devices. So it's not only before electronic cigarettes but also to IQOS despite the fact that so far in IQOS, we don't observe unintentional, very minimal, unintentional audience, which you would be using very much than underwrite. So this is another We can execute this like this, but I think if we go to the locking devices, it that really gives you 99.999 percent of the assurance that devices are going into the right
Apologies, I think I misread you. I was my question, I thought you said that the Illumina device would only work on consumable because I think one of the issues or one of the opportunities within IQOS is that people can put Existing competitor stakes into the product. So I just wanted to understand how secure you've been able to do this to prevent that happening for Illumas.
Okay. So in every state of Illumas consumables, you will have what Andre called the Saseptor, which is a specially designed developed manufacturer obviously with the very low tolerances piece of a metal if you like, but I oversimplified this whole
But I will not describe it. The reality is that when you introduce the hit stick in the holder, then the holder recognizes the specific profile of that So no other product will work in this device because the susceptor has a very specific characteristic that operates in certain temperatures obviously to avoid combustion and that's the whole secret if you wish of the whole innovation. So competitive products will not operate. If we take an IQOS blade product like the ones we have today, the heat sticks. They will not work with that device.
That's not the problem because consumer will understand very rapidly doing the opposite, taking a hit stick from the new device, Illumina, and putting in an existing IGOS plate. That's not recommended for consumers because not only it's not going to work, it's going to mess out with their blade. So that's the implication we need at the beginning. But on the protection. Clearly, we have the protection we need from 3rd party device from 3rd party consumer.
Okay, Nick, that concludes everybody with a raised hand. So if you want to take the Q and A from the toolbox, it's all yours.
Thank you very much, Mark. Got a few questions here that if we can run through before we close today. The first one is on nicotine pouches. You've highlighted your plan entry into nicotine pouches. What is the strategy for entering this category?
Is it through partnership or internal product development?
It could be both. I cannot disclose, maybe a combination of partnerships and internal development. So We are developing the product and we think we can be in the market towards the end of this year. But as I said, this is about nicotine pouches to avoid unintended use by use. And care in the marketing is very important, because technologically, you can get to the product, but we also have to be very careful on the product.
And that's something to caution everybody in the industry about that
Next question, I think it's probably for Emmanuel. Can you elaborate on your comment around the opportunistic repurchases versus equal monthly amounts?
Well, I can try. What I meant by that is that companies that sometime going for a buyback saying you split the total amount of the program by the number of months and more or less I'm going to be buying that quantity. I think here we're going to be more opportunistic and then it takes the benefit of weakness on the share price to be more active and more present on the market. And that's why I said, don't expect us to go for a kind of regular amount on a monthly basis, but much more to be watching what's happening on the market and come on the market when there will be situation where we see a good opportunity for us to buy back our share.
The next question is on the litigation with BAT. Can you address what's happening in the current intellectual property litigation? On how will it affect your IQOS technology? How strong is your patent in other IP protection for RRP markets? So it's kind of an over encompassing
Yes. Look, I mean patent law and patent litigation, I think, is very new to our industry, but is very common in the tech industry, for example. So typically, all these cases are resolved in 3 possible ways, which are obvious. The one is you litigate to invalidate and asserted claim by a competitor that you are violating their patents or fragments thereof. The second is, if there is actually a violation to work around and find a solution move away from the asserted feature and the third is to fund a Mondus Vivendi between competitors.
So I'm stating the obvious. Now clearly what is happening is, first of all, press release. Our patents are well protected and we have some as you know in the past against certain use of elements of our patents by the certain of our products. But the crux of the issue here is what's happening in patent law and it's new to me is you can take an existing patent and stretch sometimes beyond imagination to prove that some features in your product are violating are violated or vice versa that your patent is violated by some features of your competitor. The second is take the product of your competitor, analyze it and go and find some patent office that doesn't pay much attention and tell you what you call it, divisional, an extension on an existing patent you have functioning or non functioning And try after that, once you get the patent granted and before your competitors validate a patent because It's imitating our own feature and try to get an injunction to put some pressure on your competitor.
And for the injunctions typically are going to use unsophisticated jurisdictions that don't have a history in patent law trying to get that. And BAT is trying to do all of those. I don't think there is merit in their patents, claims or the assertions they make. Button in the time you can invalidate it of 18 months, where there may be somewhere some vulnerability until invalidation happens, and that's how the things are happening. I think it's a very aggressive strategy, But that's what BAT chose to do, and it's in the general context we were discussing previously.
Also, a very short sighted work with regulators and governments. So yes, we can all understand that they are not yet breaking through I think all these things will unfold in the months to come. But regarding our patents, we're very confident that
question on P2. How important is it for the carbon tip disposable to reach lower income consumers, especially in emerging markets? That significantly expand the addressable market for the IQOS portfolio.
Yes, I think it does for more conservative for consumers, not necessarily the lower end of the market because there is not always a correlation between lower end of the market and conservative consumers, but yes, because the ritual is closer, I think there is potential of this product. Release. Now as we've discussed in the past, we need to get the product right. We had a problem with the tip in certain conditions falling off. I think we fixed that problem.
And now we are going to do a test market in Europe Bonnie, I think the potential is there clearly, but we also need to prioritize certain things. So I think TIPS in any significant way after the test market is going to take a year, 1.5 years also to build capacity before we can expand release in any significant amount, but we have enough of our plates with what we have today.
Okay, we'll take the last question here before we go to your closing remarks, Andre. When you say the gross margin on HTUs is 10 percentage points higher than combustible cigarettes. Is that a like for like comparison that reflects combustible cigarettes in your current HTU footprint or is it also impacted by the fact that you're not yet selling HTUs in some lower value a press release.
Well, that's the difference that we observed today with the mix that we have. So that's what you can see when you read our full P and L, that's where we observe is
this concludes the Q and A session. I'll now turn it back to you, Andre, for some closing remarks.
Sorry, I don't know which button to press here. Any case, can somebody press a button to I don't know.
Yes, you don't have to do anything. I'll just
be a blank. Any case, I want to thank you all for joining today. I think that we tried to give you as much color about what our plans are, our strategies are in order to get to our 50% ambition for release of the year of 2025. We explained, I hope, as in the most detailed possible manner, The economics of the various platforms, I think the growth opportunity is real. And yes, we have the uncertainty of the COVID.
But certainly, the algorithm we gave you, It's a pretty strong algorithm with more than 5% net revenue growth, more than 9% EPS and that's before share buybacks and a very strong cash flow of 35,000,000,000 So we're on the right path to achieve a smoke free vision. A little bit of help from regulators, as I explained, would be very welcome because we can drastically accelerate and with the right dialogue with governments in various countries, I think there are countries in this world where we can end the sales of cigarettes in 10 to 15 years if we have the right supply and demand side measures. So thank you all.
Thank you very much, Andre. And thank you all for joining us. This concludes PMI's 2021 Investor Day.