Dear Shareholder,
In 2022, PMI delivered an excellent performance despite a challenging operating environment linked to the war in Ukraine, significant supply chain disruptions, and global inflationary pressures. This performance reflected the continued strong growth of IQOS – enhanced by the roll-out of ILUMA in initial launch markets – and positive momentum for the combustible business.
We also reached two critical strategic milestones last year: the finalization of an agreement to take full control of IQOS in the U.S. as of April 30, 2024, and the successful completion of the Swedish Match acquisition. These developments will accelerate our smoke-free journey and further position PMI to lead the transformation of the wider industry, including in the U.S.
The company’s achievements in 2022 were the product of the collective skills, drive, and innovative thinking of the entire organization. We salute our nearly 80,000 employees globally and thank them for another year of their dedication and hard work.
2022 vs. 2021 Results
Total international industry volume for cigarettes and heated tobacco units (HTUs) increased by 0.2%. Excluding Russia and Ukraine, total international industry volume increased by 0.9%, driven by volume recoveries in many markets as the lingering effects of the pandemic dissipated.
Total cigarette and HTU shipment volume increased by 1.6%, to 731.1 billion units, representing a second consecutive year of volume growth for PMI. Excluding Russia and Ukraine, total shipment volume increased by 3.2%, driven by a 21.5% increase in HTUs and a 0.8% increase in cigarettes.
Total cigarette and HTU market share increased by 0.4 percentage points, to 27.6% of the international market. Excluding Russia and Ukraine, total international share increased by 0.6 percentage points, to 27.3%, driven by the strong performance of our HTU brands (also up by 0.6 percentage points) and stable share for cigarettes.
Net revenues of $31.8 billion increased by 1.1%. Excluding Russia and Ukraine, adjusted net revenues increased by 7.7% on an organic basis, driven primarily by HTU shipment volume growth and a corresponding positive product mix impact, as well as favorable combustible tobacco pricing.
Operating income (OI) of $12.2 billion decreased by 5.6%. Excluding Russia and Ukraine, adjusted OI increased by 6.2% on an organic basis, driven by adjusted net revenue growth, partly offset by a contraction in adjusted operating margin of 0.6 percentage points on the same basis. The margin decline was mainly due to inflationary pressures on cost of sales, transitory cost impacts related to the roll-out of ILUMA, and higher air freight costs due to supply chain disruptions, less the favorable impact of productivities and cost efficiencies.
Diluted EPS of $5.81 decreased by 0.3%. Excluding Russia and Ukraine, adjusted diluted EPS of $5.34 increased by 11.9% excluding currency.
Operating cash flow of $10.8 billion decreased by 9.7%. On a currency-neutral basis, operating cash flow increased by 3.0%, driven primarily by higher net earnings.
In September, the Board of Directors approved a 1.6% increase in the quarterly dividend, to an annualized rate of $5.08 per share. This represented the fifteenth consecutive year in which we increased our dividend since becoming a public company in 2008.
War in Ukraine
The war in Ukraine has presented a number of unprecedented challenges for the company, and our focus has naturally been on supporting our employees and their families who are impacted.
Our business in Ukraine was heavily disrupted last year. We suspended production at our manufacturing facility in Kharkiv, which was supplying both the domestic market and a number of important export markets. Following an initial suspension of our broader commercial activities in the market, we subsequently resumed some retail activities, where safety allowed, and began to supply the market from production centers outside Ukraine, as well as through a local contract manufacturing arrangement.
In Russia, we took a range of concrete steps in 2022 to suspend planned investments and scale down manufacturing operations. PMI is continuously assessing the evolving situation in Russia, including: recent regulatory constraints in the market that entail very complex terms and conditions that must be met for any divestment transaction to be granted approval by the authorities; and restrictions resulting from international regulations.
Delivering a Smoke-Free Future
In 2022, our smoke-free portfolio accounted for 32.1% of total net revenues, with 17 markets generating more than 50% of their total net revenues from smoke-free products. As of year-end, our smoke-free products were available in 73 markets, of which 30 are classified as low- and middle-income markets.
IQOS continues to drive the strong growth of our smoke-free product portfolio. The estimated number of total IQOS users increased by 3.2 million in 2022 to reach 24.9 million as of year-end, with an estimated 17.8 million of these users – or around 71% – having switched to IQOS and stopped smoking. This performance reflected IQOS user growth across key geographies, including the EU Region, Japan, and low- and middle-income markets broadly.
ILUMA generated excellent growth in its initial launch markets in 2022, with upgrades from existing IQOS users and new-user acquisition outperforming our expectations. The acceleration in heat-not-burn category growth in the diverse launch geographies highlights its exciting future growth opportunity across the world. While the speed of ILUMA market launches was impacted by supply constraints for its HTU consumables, the product was available in 16 markets as of year-end, including Italy and Korea.
To complement IQOS, PMI continues to invest in a broader range of innovative and high-quality heat-not-burn alternatives across multiple price tiers. This includes licensed lil products, which were available in over 30 markets as of year-end and are delivering high levels of adult smoker conversion while successfully competing in lower price segments. In January 2023, we extended our successful commercial relationship with KT&G through a long-term agreement.
Additionally, in the fourth quarter, PMI introduced BONDS by IQOS – our new proprietary heat-not-burn device with external heating technology – through pilot launches in Colombia and the Philippines. The product, with its BLENDS consumables, is tailored to low- and middle-income markets, and offers a simple, convenient, and affordable heat-not-burn proposition, which can cater to local taste preferences without compromising on harm reduction.
In e-vapor, we complemented our VEEV closed-system products with a range of disposable products under the VEEBA brand, based on licensed technology. As of year-end, VEEBA was available in four markets, including Canada and the U.K. The launches were supported by responsible marketing practices, a rigorous focus on preventing unintended use, and a sustainability take-back program.
Last year will be remembered for the achievement of two major milestones in our smoke-free journey that unlock significant new growth opportunities. First, following an agreement with our existing U.S. partner for heat-not-burn products, PMI will have the full rights to commercialize IQOS in the U.S. – the world’s largest total nicotine market (and largest smoke-free market) by value, with an estimated industry profit pool of around $20 billion – as of April 30, 2024.
Second, the acquisition of Swedish Match positions us as the clear multicategory leader globally for smoke-free products, with IQOS and ZYN the leading brands in their respective categories. Swedish Match also provides a substantial operating platform in the U.S., which we intend to leverage for the commercialization of IQOS, while we harness PMI’s international capabilities for the expansion of Swedish Match’s oral nicotine brands. Please see the inside back cover of this report for additional information related to the acquisition.
Smoke-Free Product Regulation
The regulatory environment for smoke-free products remains complex, as many tobacco-control advocates, non-governmental organizations and the World Health Organization continue to radicalize the discourse around such products. Nevertheless, we remain at the forefront of the debate, aiming to increase category understanding and advance Tobacco Harm Reduction (THR) among regulators and consumers.
Importantly, there have been a number of encouraging international developments related to smoke-free product regulation over the past year. Most notably, the government in the Philippines passed a new law clearly differentiating combustible and non-combustible tobacco products.
There were also a few negative regulatory developments, most notably the European Union's ban on the use of characterizing flavors in heated tobacco products (effective later this year), which was formulaic under existing regulation resulting from HTU sales reaching a predefined threshold.
Combustible Tobacco Product Portfolio
Maintaining our competitive position in the combustible tobacco category as we transition to a smoke-free future is critical, as it best positions us to significantly accelerate our smoke-free journey.
Our combustible tobacco business delivered a very robust performance in 2022, with 0.8% growth in our cigarette shipment volume, a 0.3 percentage point increase in cigarette category share and 3.7% growth in organic net revenues (all metrics exclude Russia and Ukraine).
In 2022, we celebrated Marlboro's 50th anniversary as the world’s leading cigarette brand. Marlboro remains extremely resilient despite the recent pressure on disposable income in many markets, as well as its over-indexing to IQOS cannibalization. The brand’s share of the international cigarette category in 2022 reached 10.3%, up by 0.2 percentage points, excluding Russia and Ukraine.
Organization
There were a number of important organizational developments at PMI in 2022. Following our establishment of a new category management structure in 2021, we designed and implemented accountabilities and decision-rights, overall governance, and change management. This has positioned our organization to become more focused – seamlessly delivering on what matters, at the right speed, quality, and cost – and ensures greater end-to-end accountability from development to deployment.
In addition, as announced late last year, we are realigning our regional structure and operations with existing and emerging business opportunities, resulting in a reduction to four regions (from six). This will further position the company for success, with regions organized by similarity of consumer needs, opportunities for growth, and geographic proximity.
The new structure will better position us to further grow and build our leadership in smoke-free products across the globe. Additionally, it will boost our speed of innovation and deployment as we become a multicategory business. It will also enhance our ability to identify and grow talent, deepening the bench of leaders who will spearhead PMI’s smoke-free future for years to come.
In 2022 we also continued to build the development engine of our new wellness and healthcare business with the creation of Vectura Fertin Pharma. The new company combines the capabilities of Vectura, Fertin Pharma and PMI with the aim of delivering innovative, best- or first-in-class inhalable and oral products that can have a net positive impact on society.
Sustainability
Progress against our sustainability strategies continues apace as we seek to tackle the impacts of both (i) our products (what we produce) and (ii) our operations (how we produce). Below are some of our 2022 sustainability highlights.
From a product perspective, we continued to: make progress towards our transformation, focus on ensuring that our products do not reach unintended audiences, and put in place youth access prevention safeguards in our direct and indirect retail channels. We also made progress in implementing end-of-life take-back programs for our smoke-free devices and consumables, while also increasing our repair capabilities.
With regard to our operations, we published a strengthened Commitment to Human Rights and completed our sixth and seventh human rights impact assessments, in Brazil and Malaysia. In addition, we were recognized by CDP with a Triple A score for climate, forest, and water security for the third consecutive year and had 13 PMI factories certified as carbon neutral. We will continue to focus on areas where we faced challenges in 2022, including reducing our scope 3 greenhouse gas emissions and improving our gender balance in senior roles.
To further strengthen our commitment to sustainability, last year we introduced a new bespoke Sustainability Index comprised of 19 KPIs across our most material sustainability issues, weighted toward product health impact. The index, which provides additional transparency on how we define success and measure ESG performance, has been integrated into our long-term executive compensation to further align management incentives with our smoke-free transformation.
For more information on PMI’s sustainability progress and ambitions, we invite you to read our 2022 Integrated Report, which we plan to publish in the coming weeks.
Board of Directors
In January 2023, Lucio A. Noto informed the Board that he would not stand for re-election this year. On behalf of the entire organization, we would like to thank Lou for his invaluable contributions to the company throughout his 15 years as a Director of PMI since the company’s spin-off in 2008, including his service as Interim Chairman, Lead Independent Director and Chair of the Audit Committee. We also sincerely thank Frederik Paulsen, who joined the Board in 2014 and will also not stand for re-election this year, for his valued contributions to the company as a Director and Chair of the Product Innovation and Regulatory Affairs Committee.
Looking Ahead
Last year brought new and unexpected challenges for the world and PMI, including those related to the war in Ukraine. In response, we believe the organization demonstrated enormous solidarity, agility, resilience and learning ability. Our people spared no effort to deliver excellent business performance, while achieving major milestones in the company’s smoke-free transformation.
We are confident in our strong position as the global smoke-free champion and our ability to lead the industry’s transformation. Our smoke-free portfolio now includes the world’s leading heat-not-burn brand, IQOS, and the world’s leading nicotine pouch franchise, ZYN. We have a rich pipeline of smoke-free innovation, as well as the foundation in place to drive further growth in wellness and healthcare over the long term. We are excited to continue our journey toward a smoke-free future and firmly believe that we are well positioned to achieve our bold smoke-free ambitions.
Jacek Olczak,
Chief Executive Officer
March 10, 2023
André Calantzopoulos,
Executive Chairman of the Board
Read the original letter here.
