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Philip Morris International Inc  (NYSE:PM)
Q4 2018 Earnings Conference Call
Feb. 07, 2019, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Philip Morris International Fourth Quarter 2018 and Year-end Earnings Conference Call. Today's call is scheduled to last about 1 hour including remarks by Philip Morris International management and the question-and-answer session. (Operator Instructions)

I will now turn the call over to Mr. Nick Rolli, Vice President of Investor Relations and Financial Communications. Please go ahead sir.

Nicholas Rolli -- Vice President of Investor Relations and Financial Communications

Welcome and thank you for joining us. Earlier today we issued a press release containing detailed information on our 2018 fourth quarter and full year results. You may access the release on www.pmi.com or the PMI Investor Relations app.

A glossary of terms, including the definition for reduced-risk products, or RRPs, as well as adjustments, other calculations and reconciliations to the most directly comparable US GAAP measures, are at the end of today's webcast slides, which are posted on our website.

Today's remarks contain forward-looking statements and projections of future results. I direct your attention to the Forward-Looking and cautionary statements disclosure in today's presentation and press release for a review of the various factors that could cause actual results to differ materially from projections or forward-looking statements.

It's now my pleasure to introduce Andre Calantzopoulos, our Chief Executive Officer. Martin King, our Chief Financial Officer will join Andre for the question-and-answer period. Andre?

Andre Calantzopoulos -- Chief Executive Officer

Thank you, Nick, and welcome, ladies and gentlemen. I would like to begin with some general thoughts on our performance in 2018. We achieved robust results from our combustible tobacco portfolio and nearly doubled our heated tobacco unit in-market sales volume, driven by growth in all IQOS markets. We fell short of our initial full-year net revenue growth target provided in February last year, which was almost entirely attributable to lower than-anticipated IQOS consumer acquisition in Japan and related distributor heated tobacco unit inventory adjustment.

In our view, this overshadowed an otherwise robust financial and strategic performance across the business. Clearly, and understandably, this contributed to the overall decline in our share price, which was also pressured by broader market concerns surrounding the industry and the consumer staples sector generally. While we recognize that the market is the ultimate judge, we find it difficult to understand the share price impact of certain developments in the industry last year, particularly those that were very US-centric and arguably less relevant to our international business.

Entering 2019, I believe that we have laid the foundation for a better business performance this year and beyond, thanks to significant investments in product portfolio development and organizational capabilities, including a state-of-the-art digital infrastructure to fuel our expansion. As I will cover in my remarks in a moment, the underlying strength of our combustible product portfolio remains undoubtedly intact, and our smoke-free products are the catalyst to accelerate our overall business growth.

Let me now take you through the main elements of our full-year results, starting with volume. Our total cigarette and heated tobacco unit shipment volume declined by 2.1%, notably reflecting the reduction in distributor heated tobacco unit inventory in Japan, which we explained during our third-quarter 2018 results call. Excluding estimated net distributor inventory movements, total shipment volume was flat -- our best annual performance since 2012 -- with strong growth in heated tobacco units offsetting a decline in cigarettes. This performance compares favorably to an estimated decline in total industry volume of 1.6%, on the same basis.

Our cigarette shipment volume declined by 2.8%. The decrease was due mainly to lower industry volume, notably in Russia and Saudi Arabia, coupled with the impact of consumer switching from cigarettes to heated tobacco products, particularly in Japan, Korea and the EU Region. Increased shipment volume, notably in Pakistan and Turkey, driven by higher industry volume, and in Thailand, driven by higher market share, served as a partial offset.

Heated tobacco unit shipment volume increased by 14.2% to 41.4 billion units, despite estimated net distributor inventory movements in Japan of approximately 17 billion units. More importantly, our in-market sales volume for heated tobacco units nearly doubled, reaching 44.3 billion units, a significant achievement driven by all IQOS launch markets, including Japan and Korea.

Turning to our 2018 financial results, net revenues increased by 3.4%, excluding currency, driven by strong pricing of our combustible tobacco portfolio and heated tobacco unit shipment volume growth. Reduced-risk product net revenues reached $4.1 billion, or 13.8% of total net revenue, with IQOS devices and accessories accounting for approximately $0.9 billion, or 22%. For reference, last year's distributor inventory adjustment in Japan of an estimated 4.5 billion units adversely impacted our total net revenue growth, excluding currency, by approximately 1.2 points. The move to highly inflationary accounting in Argentina further impacted growth by approximately 0.6 points.

Our 2018 combustible tobacco pricing variance represented 7.6% of prior year combustible tobacco net revenues, with positive contributions from all six of our regions. Pricing was particularly strong in Canada, Germany, Indonesia, the Philippines and Russia. The strong pricing performance in Russia benefited from a very favorable comparison, following essentially no net pricing in the market in 2017. Also, in the Philippines, we benefited from improved industry pricing dynamics following the significant decrease in non-taxed product availability.

On a currency-neutral basis, adjusted operating income was essentially flat, while our adjusted operating income margin decreased by 1.3 points. The margin decline primarily reflected the impact of our net incremental RRP investments of approximately $600 million. For reference, the factors mentioned previously for Japan and Argentina had an adverse combined impact on our currency-neutral adjusted operating income growth and margin of approximately 3.3 and 1.1 percentage points, respectively.

Our adjusted diluted earnings per share of $5.10 increased by 8.1%, driven by both a lower effective tax rate and net interest expense. Excluding adverse currency of $0.11, which occurred in the second-half of the year, adjusted diluted EPS increased by 10.4%. The lower effective tax rate and net interest expense were both driven by the 2017 US Tax Cuts and Jobs Act.

Our 2018 effective tax rate decreased to approximately 23%, slightly better than the 24% that we had assumed as part of our guidance in November, and around five to six points below our effective tax rate in the years prior to tax reform. The decrease in net interest expense resulted from greater flexibility on cash repatriation and capital structure optimization provided by the reform.

Our operating cash flow of $9.5 billion increased by over $500 million, or 6.4%, principally driven by higher net earnings, partly offset by unfavorable currency. Capital expenditures of $1.4 billion came in below our full-year assumption, primarily reflecting continued improvement in heated tobacco unit investment efficiency, as equipment productivity rises.

Turning now to market share, our total international share of 28.4% increased by 0.5 points, our highest organic growth since 2008, driven by heated tobacco units, which reached a share of 1.6%. Remarkably share grew in all six of our regions, underlining the strength of our combined portfolio.

Our share of the international cigarette category was flat at 27.4%, demonstrating our success in maintaining cigarette market leadership while transitioning our product portfolio and transforming our overall organization. Further, despite over-indexed IQOS out-switching and the impact of the sizable volume contraction in Saudi Arabia, during the first half of the year, Marlboro's international share of the cigarette category was also flat, reflecting share growth in a number of markets, including France, Indonesia, Mexico, the Philippines and Turkey.

With the performance of IQOS being top-of-mind for investors, let me also highlight some of the latest results and developments, beginning with an overall view followed by some market-specific commentary. As seen on this slide, the total estimated number of IQOS users reached 9.6 million in the fourth quarter, continuing the positive quarterly sequential growth trend. Importantly, nearly 70% of the total -- an estimated 6.6 million users -- have already stopped smoking by switching to IQOS, while the balance are in conversion.

IQOS user growth in the quarter was especially driven by the EU Region and Russia. Approximately one-third of the total IQOS user base is now in markets outside Asia, which highlights the broadening geographic success of the brand's proposition.

As announced last year, we began the global launch of our IQOS 3 devices in mid-November, starting with our own retail and e-commerce channels. Though still early, as full device availability and expansion to our main distribution channels has only occurred in the past couple of weeks, we are very pleased with the initial consumer reaction to the new device line-up across IQOS markets.

I will now turn to the performance of IQOS in specific geographies, beginning with Japan. As discussed during our earnings call in October, there were sizable trade and consumer purchases of both cigarettes and heated tobacco units across the industry during the third quarter, in advance of the excise tax-driven price increases on October 1. This led to a distortion in heated tobacco unit in-market sales in both the third and fourth quarters. The same distortion is reflected in our market share progression between the third and fourth quarter, when equalized for the purchase patterns, our estimated share each quarter was approximately 15.4%.

Looking to 2019, we are encouraged that the favorable heated tobacco unit weekly offtake share trend that we observed during the fourth quarter continued in January. We anticipate increased competitive activity this year, including new heated tobacco product launches. This may accelerate overall category growth, in part by reducing the consumption dilution observed with current competitive device ownership, which I will show shortly. In this context, we believe that the new IQOS 3, and its continued superior sensorial experience, in combination with the range of initiatives that we rolled out during the later part of last year, including the mid-price HEETS brand, will allow us to restore growth.

Importantly, the convenience store channel, which accounts for the vast majority of our volume, began selling IQOS 3 and IQOS 3 MULTI as of last week. But already, IQOS 3 has significantly increased the number of new users acquired by IQOS compared to the 2018 monthly average prior to IQOS 3 launch. Furthermore, the national roll-out of the HEETS brand, which is currently only available in geographies with approximately 25% of the country's tobacco consumers, will begin in the coming weeks.

We remain optimistic about the long-term growth potential of the heated tobacco category in Japan, and of our brands specifically. Japanese adult smokers continue to show a strong and growing interest in heated tobacco products, as demonstrated by device ownership and past-seven-day usage trends. Based on the latest available data, over 45% of Japanese tobacco consumers owned at least one device, while over 40% reported using a heated tobacco product over the past seven days. While these indicators of category interest are not yet fully reflected in the latest category share of consumption of around 23%, this is understandable for a couple of reasons.

First, switching takes time, with a lag between device purchase, use and the full conversion that maximizes heated tobacco share. This is easiest to see through the end of 2017, when IQOS was essentially the only product on the market at scale. Second, and more importantly, other heated tobacco products, which became broadly available over the course of 2017 and 2018, have been far less effective than IQOS in fully converting adult smokers. This is due to relatively low taste satisfaction, leading to mainly situational use that further dilutes the category's share relative to device ownership.

Lower conversion effectiveness is also generating some hesitation among more conservative cigarette smokers to enter the category at this stage. Many users of competitive devices have never tried IQOS, and certain IQOS users also own competitive devices. Both groups represent great opportunities for us with IQOS 3 and IQOS 3 MULTI. Over time, as competitive products improve and more heated tobacco users experience the relative benefits of IQOS, particularly those who began their heated tobacco journey with a competitive product, we expect the gap between total category share and the level of device ownership to narrow.

Turning to Korea, fourth-quarter share for HEETS of 8.5% increased by 3 points compared to the same period in 2017, or by 1.1 points sequentially. It should be noted that our share in the quarter was distorted by trade inventory movements ahead of the change in health warnings on heated tobacco products in late December. We are pleased with our share performance, particularly given the backdrop of additional competitive activity in the heated tobacco category as the year progressed, as well as the confusion among some adult smokers caused by the Korean FDA's comments last year regarding the tar generated by heated tobacco products. In-market sales volume for HEETS increased slightly on a sequential basis to 1.5 billion units.

Looking to 2019, IQOS remains the pre-eminent brand in the category, with HEETS holding over 75% category share in the fourth quarter. This position has been reinforced by the launch of our new devices, giving us confidence in our ability to grow HEETS volume and share further.

In the European Union Region, fourth quarter share for HEETS reached 1.7% of total cigarette and heated tobacco unit industry volume, an increase of 1.1 points compared to the fourth quarter of 2017, supported by all IQOS markets. On a sequential basis, share growth accelerated in the quarter, increasing by 0.5 points. It is worth noting that IQOS is only present in geographic areas representing approximately 47% of industry total volume in the Region.

The favorable share momentum reflects continued growth in the total number of IQOS users, which reached nearly 1.8 million by year-end. Importantly, as of late January, IQOS 3 is, finally, fully available in essentially all IQOS markets across the region. Our HEETS share growth in the EU Region was driven by a number of markets, notably Greece, Portugal, the Czech Republic, Italy, Poland and Germany.

As we have said before, the speed of IQOS adoption will vary by market. This reflects factors such as the underlying disposition of adult smokers to use and recommend innovative tobacco products, as well as the regulations that apply to reduced-risk products, such as those that impact our ability to communicate with adult smokers about better alternatives to continued cigarette smoking. Despite related constraints in certain geographies, IQOS is growing across all EU launch markets, and the fourth-quarter accelerations augur well for 2019.

In Russia, the strong sequential performance of IQOS continued in the fourth quarter, with HEETS market share up by 0.7 points to 1.8% of the total number of IQOS users, reaching 0.8 million. This performance is impressive given the fact that IQOS is present in only seven cities, where the average fourth-quarter share for HEETS was nearly 8%, with share in Moscow approaching double digits. This primarily reflect increased adult smoker interest in and understanding and acceptance of IQOS, as well as our targeted approach to geographic and channel expansion, which has underpinned an improvement in IQOS conversion rates and consumer experience. Given our success in the existing launch cities, we are now expanding into additional geographic areas.

Before I turn to our 2019 outlook, let me remind you of the three-year financial growth targets that we outlined during our Investor Day last September. For the 2019 to 2021 period, we are targeting currency-neutral compound annual growth of at least 5% for net revenues and at least 8% for adjusted diluted EPS.

As detailed in today's press release, we have adjusted the formulation of our annual EPS guidance to reflect the difficulty in determining with precision the speed at which adult smokers will adopt reduced-risk products. At the beginning of each year, we will now forecast our annual reported diluted EPS and the related currency-neutral adjusted diluted EPS growth rate by reference to a minimum threshold of expected performance. As each year unfolds, we intend to provide greater detail.

For 2019, we forecast reported diluted earnings per share to be at least $5.37, at prevailing exchange rates, compared to reported diluted earnings per share of $5.08 in 2018. Excluding an unfavorable currency impact, at prevailing exchange rates, of approximately $0.14 per share, this forecast represents a projected increase of at least 8% versus adjusted diluted earnings per share of $5.10 in 2018.

Our 2019 forecast assumes currency-neutral net revenue growth of at least 5%, which includes an expected adverse impact of approximately 0.6 points, due to the move to highly inflationary accounting in Argentina. We expect IQOS, and heated tobacco unit volume growth in particular, to be the key driver of this growth. Combustible tobacco pricing will remain an important contributor, underpinned by the broadly rational global tobacco excise tax environment and mitigating the impact of the anticipated combustible product volume decline.

As noted earlier, we recorded an exceptional pricing variance in 2018 that creates a challenging pricing comparison this year. We expect our average pricing variance over the 2018 and 2019 two-year period to be in line with our average annual pricing variance from 2008 to 2017. We anticipate a total cigarette and heated tobacco unit shipment volume decline of approximately 1.5% to 2% in 2019. This compares favorably to an estimated total industry decline of around 2.5% to 3% for the year.

Given the challenge of forecasting with precision heated tobacco unit shipment volumes, we are not providing a specific 2019 target at this early stage of the year. That said, we expect positive volume contributions from all IQOS markets in 2019 and we remain confident in our shipment volume target of 90 to 100 billion units by 2021.

Turning to our cost base, our efforts to deliver over $1 billion in annualized cost efficiencies by 2021 are already under way, led by important initiatives related to productivity, zero-based budgeting, a project-based organization model and other cost reduction opportunities. We expect our progress on this front to contribute to an increase in currency neutral operating income margin of at least 100 basis points in 2019.

We anticipate a full-year effective tax rate of approximately 23%, consistent with last year, and a relatively stable net interest expense compared to 2018. We are targeting 2019 operating cash flow of at least $10 billion, subject to yearend working capital requirement. We project total capital expenditures this year of approximately $1.1 billion, reflecting further investment behind RRPs, in particular to support our Platform 4 e-vapor manufacturing capacity.

I will close our 2019 outlook with some comments on the first quarter. While we don't provide quarterly guidance, I believe that it is appropriate to share some additional visibility related to phasing. We currently anticipate reported diluted EPS of approximately $1 in the quarter, or flat compared to last year, subject to the timing of commercial spending associated with some of our IQOS-related projects.

Excluding approximately $0.09 of adverse currency, at prevailing exchange rates, this represents a growth rate of 9% compared to adjusted diluted EPS of $1 in the first quarter of 2018, which itself included a positive contribution from currency of $0.03, or approximately three percentage points.

I will conclude with a few key takeaways from our 2018 performance. As evidenced by our total share growth internationally and our stable share of the cigarette category, we are successfully managing our transition from cigarettes to reduced-risk products. Our combustible tobacco portfolio remains the foundation of our business, and is delivering robust performance and pricing power.

Furthermore, the international cigarette industry volume decline was broadly in-line with historical trends. IQOS continues to grow globally, nearly doubling heated tobacco unit in-market sales volume in 2018, and increasing the number of markets making important contributions to its success. We estimate that, as of year-end, over 6.6 million adult smokers around the world had already stopped smoking and switched to IQOS. We estimate a retail value of approximately $18 billion for the combined heated tobacco and e-vapor category outside China and the US, with heated tobacco representing approximately 70% of the total.

IQOS alone accounts for an estimated 57% of the combined retail value, with unit margins and switching rates superior to any other nicotine product. We expect to increase our share of the e-vapor market through further development and deployment of our product portfolio.

Turning to 2019, we anticipate better underlying business fundamentals, driving currency-neutral net revenue growth of at least 5%. Our 2019 EPS forecast reflects a growth rate of at least 8%, excluding currency, compared to adjusted diluted EPS of $5.10 in 2018. Finally, we remain confident in our strategy for a smoke-free future and are convinced that our RRP portfolio continues to provide us with the single-largest opportunity to accelerate our business growth and generously reward our shareholders over time.

Thank you for listening. Martin and I are now happy to answer your questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Bonnie Herzog from Wells Fargo.

Bonnie Herzog -- Wells Fargo -- Analyst

Hi, Andre.

Andre Calantzopoulos -- Chief Executive Officer

Hi, Bonnie.

Bonnie Herzog -- Wells Fargo -- Analyst

I actually first wanted to ask you about Altria's decision to take a stake in JUUL. I'd really love to hear your thoughts on this and if you think this was a good decision for them. And also given the rapid growth of e-cigs in several markets internationally would you guys consider some type of distribution agreement with JUUL? I think you will answer -- you believe your technology is superior, but couldn't there be a case for you to do both, especially you're still not at a point really to fully roll out your technology?

Andre Calantzopoulos -- Chief Executive Officer

Well, I will start by reminding everyone that because there is a lot of discussion among investors and in the media in general, what is the potential of X product, Y product, JUUL, IQOS and so on. And we have to understand that this is not a binary or a zero-sum game or winner takes all kind of situation. I think you can say there are some form of parallelism with intersections in the trajectory of consumers between e-vapor products, later pure nicotine products and heated tobacco products. We know that heated tobacco products have the highest conversion ability but there are people that in markets where IQOS doesn't exist, that have already switched fully to e-vapor product. And there are people that use both.

So we are going to see very different behaviors that are sometimes complementary and non-exclusive. We will see -- we know that there is dual usage of e-vapor and cigarettes. We have people that may continue using the same amount of cigarettes and have a few additional e-vapor products. And you will also see heated tobacco products like IQOS and e-vapor being used simultaneously. That's why we developed a portfolio of products, that can cater to all consumers and that will see all kinds of combination going forward. So we are ready to compete with everybody, and I think competition in the category and the ability to switch people out of cigarettes is very important. I mentioned in my remarks, Japan where we see that not subsidiary (ph) performing products in terms of sensory experience dilute the category and we welcome products that can.

So I think for us as a matter of principle there is room for all products and there will be no one exclusive user or one competitor in any category. So I think we know sufficiently and we have demonstrated over the past year that we understand all the categories and we understand all the consumers, OK? So in our situation. to a certain degree we're not in the same market as Altria and I will not comment on the Altria decisions because they have to look at their own portfolio and situation. And they took the decision to make the investment which I respect.

I think nothing has changed in the relationship we have with Altria in preparation of the IQOS launch in the US and I think Altria confirmed that they are fully ready once we get FDA approval to go for IQOS. And we are looking forward to this moment. As far as JUUL is concerned, clearly JUUL benefits from a certain degree of awareness due to the US market, in certain English-speaking countries. So we'll see some initial success for sure because there is awareness as we had with IQOS for example in some markets when we have done like Korea.

But then we have to see the sustainability of the product proposition both from a marketing and product performance point of view. But again there is no one winner takes it all OK? So I think we have to go over this initial excitement and discussion who is going to be the winning technology? Who is going to be the winning brand? I think there will be many brands. I believe IQOS is already a very well-established brand as I said in my remarks. If we combine the e-vapor and heated tobacco category and the e-vapor category internationally is essentially in the EU and has been fairly stable, IQOS has 57% of the entire retail value of both categories combined and we're not even in the e-vapor category.

We plan to enter significantly the e-vapor category as of the end of this year, including with the devices we showed in Investors Day that are smaller devices to cater to different consumers' needs. And that's why we have also said we increased a little bit the CapEx so that we have capacity to develop this to commercialize this product. And I think we are ready for competing.

The other thing I would say is JUUL, I hope they learned their lessons regarding certain undesirable target audiences that we are very careful and extremely wise about. And I hope that the Altria participation will increase their attention to unintended audiences. That's all I have to say.

Bonnie Herzog -- Wells Fargo -- Analyst

Now that was helpful. And then if I may, I wanted to ask a little bit more about the new innovation you just put into the market in November that you discussed a bit. But if you could drill down a little bit further for us and talk about if it did in fact meet your expectations or possibly exceed your expectations so far. And then what will the rest of the rollout schedule look like? For instance I think you're still planning to do a phased rollout, but will the bulk of the new devices be in the market by the end of Q1, or is it by the end of Q2?

And then last point on this I'd like to hear from you just a little bit more about the cannibalization you might have been seeing. You mentioned I think it's been quite incremental but just kind of wanted a better understanding of that.

Andre Calantzopoulos -- Chief Executive Officer

Okay. We're talking about two different things, if I understand. The first is the rollout of what we call IQOS 3 devices and IQOS MULTI? And the other, what happens with the second lineup of consumables we have in Japan? Is that correct?

Bonnie Herzog -- Wells Fargo -- Analyst

Yes, yes.

Andre Calantzopoulos -- Chief Executive Officer

Okay. So we are bit limited initially on IQOS 3 and IQOS three MULTI in many markets, so we made the product available only through our own retail and e-commerce. And we also made the product -- so we had limitations and I have to say we're very pleased with the initial reaction. People understand and appreciate also the IQOS MULTI because that was a clear consumers' need. We have combined sales of both and that's very good. And we also continue selling IQOS 2.4.

So although it's a limited sample I would say, because we are not national in every retail channel with IQOS 3, the first indications is things are happening the way we had foreseen are happening. And the comments from the consumers are good. And if you look at more to use Net Promoter Scores we have improved also significantly the Net Promoter Score of IQOS in Japan in particular and in other places.

And at the same time we see new user acquisition even with this limited availability of IQOS 3 increasing. So it's early indications but they are good indications and we see the same in other markets. We'll give a bit more color and granularity in CAGNY because we will have a bit more weeks behind us with full availability. But so far so good.

Now regarding HEETS, our reading is they help from the limited markets again we're in, they help increase consumer acquisition because we cater to people that are a bit more price-sensitive. We have incremental share if you combine both Marlboro heated units and HEETS, in the places we were and that's why we decided to extend. There is obviously a certain cannibalization because we are essentially the only product. But overall we have share increase and that's the encouraging part.

Bonnie Herzog -- Wells Fargo -- Analyst

Okay, thank you.

Operator

Our next question comes from the line of Judy Hong from Goldman Sachs.

Andre Calantzopoulos -- Chief Executive Officer

Judy are you on the call?

Judy Hong -- Goldman Sachs -- Analyst

Hello, can you hear me.

Andre Calantzopoulos -- Chief Executive Officer

We can hear you now, yes, OK.

Judy Hong -- Goldman Sachs -- Analyst

Okay, sorry, sorry about that. So Andre, I guess I wanted to ask a little bit more about the volume outlook for 2019. I know you're not giving specific volume target for IQOS but clearly you're giving the consolidated volume guidance of down 1.5% to 2%. So I think we can kind of back into what you're at least high level expecting for IQOS if we assume combustibles down somewhere around 3% 3.5%.

So maybe a little bit more color just in terms of at a high level how do you see volume kind of playing out for IQOS and combustibles. And then more specifically in Japan just based on JT's comment earlier today that they're expecting only 3% category growth for the heat-not-burn this year I'm just wondering if you think that the growth rate could be more robust or is that kind of a more prudent assumption at this point in the year.

Andre Calantzopoulos -- Chief Executive Officer

Look we see clearly growth in all the markets where IQOS is present, OK, volume growth. I mean I would not read too much in the forecast of global combined cigarettes and everything, because frankly speaking we were positively surprised last year by the combustible category as well with more positive volumes than we initially anticipate. All I would say is we are in line with the projection I gave for three years down the line, 90 billion to 100 billion (ph), and I would not venture into more precise volumes this year because they are baked and at least 5% revenue growth OK?

In Japan in particular if you have noticed from the slides I don't know if you had the opportunity to see them we see growth in the share of IQOS actually in Japan. In January the share of IQOS was 16.5%. So that's very nice compared to 15.4% we had in the previous quarters. I would not -- it's in one month and I would not read anything into this but it's a positive development. And EU and Russia as you have seen we have very positive trends. So we are very optimistic but we'll keep you abreast on what's happening as the year unfolds.

Judy Hong -- Goldman Sachs -- Analyst

Got it, OK. And then maybe just a little bit more specific to Russia because obviously that's one market where clearly you've seen improvement, sequentially, both on the volume side and market share side. I guess my questions are number one is that starting to have a bigger impact on the broader combustible category volume certainly in markets like Moscow where you've got a pretty sizable share with IQOS? And then just broadly speaking as you kind of roll out IQOS into additional cities in Russia kind of the cadence of volume trajectory that you're expecting as you implement that strategy going forward.

Andre Calantzopoulos -- Chief Executive Officer

Look I mean, as we expand in different cities we'll see additional volume obviously. We also need to understand we are in the richest and more affluent cities and we see continued growth. As we expand over time maybe the growth trajectories will be a bit slower because we are reaching lower-income consumers. But overall I think Russia piloted a number of practices including using digital tools that show that we can scale up efficiently without necessarily expanding manpower everywhere. And that's something now that we have the digital platforms, as I said, and infrastructure available and we're rolling it out as we speak, should be an accelerator this year and most importantly in the years to come, with also much more cost efficiency underlying the growth trajectories of IQOS.

So I see, I mean we're very pleased with what's happening in Russia. I think it's a very clear demonstration that IQOS has potential everywhere even in markets that have less purchasing power. And the testing of the tools show that we can scale with much more efficiency than before. So all very positive signs.

Judy Hong -- Goldman Sachs -- Analyst

Got it, OK. And then just my last question. Just in terms of your profit guidance or the operating margin being up about 100 basis points, it seems like that's mostly around the half of kind of the incremental spending that you put into place in 2018 kind of not growing again. So I'm just curious if that's sort of the correct interpretation. And I know that IQOS has been pretty volatile just in terms of thinking about the profit performance. So when you kind of look at the 100 basis points market, how comfortable are you that you should be in position to deliver on that target even if volume slows or other things happen from an IQOS kind of volatility standpoint? Thank you.

Andre Calantzopoulos -- Chief Executive Officer

Look we are fairly confident we can deliver on this. It's a combination of, as we said lower spending, much lower spending than last year but still incremental spending. And the second one is an increased volume contribution of IQOS to the overall earnings. And as we know IQOS has better margins. So that's the way I would treat it.

Judy Hong -- Goldman Sachs -- Analyst

Got it. Okay, thank you.

Operator

Our next question comes from the line of Adam Spielman of Citi.

Adam Spielman -- Citi -- Analyst

Thank you very much. So first of all, can I just follow up on -- hi, can you hear me?

Andre Calantzopoulos -- Chief Executive Officer

Yes.

Adam Spielman -- Citi -- Analyst

Yes, so can I just follow up on the answer you gave to Judy, just to make sure I got it absolutely right, with respect to the 100 basis points, it sounds like the majority of that is coming from the efficiencies of rolling out IQOS that you always said you were going to get. So we're talking about right at the beginning of last year, and less of it coming from the new, relatively new use (ph) of $1 billion ZBB savings. Is that the correct way of understanding that last answer?

Andre Calantzopoulos -- Chief Executive Officer

That's correct. We started the ZBB project. But as you can understand it's not going to deliver big amounts of money the first year because we have to go through the whole process and do it properly OK? So I see this participating as of the next year. And we never said, just to be clear that the $1 billion we are targeting is all money that you're going to see on the bottom line but you should see a portion of that to the bottom line. The other help, the incremental investment so the deltas are not as big as they used to be in the previous years.

Adam Spielman -- Citi -- Analyst

Okay, thank you very much. So the real question or the more important question is around IQOS. And I was surprised frankly how strong it was in this quarter relative to the third quarter. And I was just wondering if there were any shipping effects we should be calling out. Clearly Japan was harmed by shipping effects. You called out a positive one in Korea. But for example in Italy and in Russia were there are shipping effects that somehow artificially boosted your IQOS volumes.

Andre Calantzopoulos -- Chief Executive Officer

Okay. There were some shipment in Russia ahead of we're expanding in different cities. So there is it's preparation of the expansion OK? I don't remember exactly how much that was around $1.8 billion something like that, if I can recall correctly, OK? It was planned from the beginning. So it's not something, but there is nothing else in there. The rest is direct in-market sales, OK?

Adam Spielman -- Citi -- Analyst

And so for example if you focus just on Italy, there was a huge jump in market share in Italy in 4Q even relative to 3Q. I was just wondering if you can explain what caused that and how we should think about it going forward as well?

Andre Calantzopoulos -- Chief Executive Officer

That's a very good question. First of all, I think we see momentum in Italy. It took a lot of time, if you remember Adam to get Italy moving, given the restrictions. And I think it's just the fact that there are more consumers of IQOS in Italy, so start having word-of-mouth OK? Again I wouldn't read one quarter as the proxy for the acceleration but the momentum is there.

So I think in Italy finally we start seeing this better than slow linearity of growth and that's exactly what's happening. And this is ahead of us deploying further of the efficiency tools I described. But this is what you read in Italy, it's share of the market. It's nothing to do with inventories and shipments and all these things.

Adam Spielman -- Citi -- Analyst

Perfect. And then one final question for me. And this is about the guidance. Am I correct to understand you're giving guidance in sort of two different sorts of ways. Firstly you're giving flow guidance. So it's a minimum of 5% sales growth. It's a minimum of 8% constant currency EPS. But then when you're talking about things like the volume the combined volume figures, that's more of an expectation. It's not a flow. And is that correct that it's more in the sense, in the style you used to give guidance, this is really what you expect to happen. It might be a little bit worse it might be a little bit better but the EPS isn't really an absolute flow in terms of constant currency.

Andre Calantzopoulos -- Chief Executive Officer

Yes. I mean look volume for the year is a bit difficult to estimate. So we gave a range of 1.5% to 2%, OK? That's our estimate, it can come better or slightly worse, it depends on the combustible as well. So it's just to give you a flavor of what we see compared to total market which means we expect share growth in this whole context, helped obviously by the IQOS units as well. But I mean the key guidance is more than 5% and more than 8% and that's where it stands (multiple speakers), all right. At least, yes.

Martin King -- Chief Financial Officer

At least yes.

Adam Spielman -- Citi -- Analyst

Yes, at least. Can I attempt to sort of give a sort of offering so that you'd be really surprised if let's say it was more than 12% on EPS. Or how big is that at least? I mean how big is it? To me it's very conservative.

Andre Calantzopoulos -- Chief Executive Officer

Well, as the year goes I had -- I think depending on what happens we'll give you better forecast for the remaining year. I would stay to what I said at this stage and that's all I can tell you at this stage, Adam.

Adam Spielman -- Citi -- Analyst

Thank you. Well, a fair attempt too. Thank you very much.

Operator

Our next question comes from line of Vivien Azer of Cowen and Company.

Vivien Azer -- Cowen & Co -- Analyst

Hi, thank you. good afternoon. So I wanted to follow up on the IQOS 3 launch in Japan and I appreciate you want to hold some of this detail back, for when we see you in CAGNY in a couple of weeks. But can you offer any color around like the underlying consumer demographics of the new users that you indicated you've been acquiring? Is it kind of going deeper into that kind of first tranche of consumers, kind of younger, more affluent? Are you finally starting to see early success in terms of penetrating that 55-plus market that have proven a bit elusive?

Andre Calantzopoulos -- Chief Executive Officer

Well, clearly we made first of all and foremost we made these devices available as an option to existing users of IQOS especially part of our -- called the IQOS sphere and exclusive users, OK because I think that's fair to these people to have first access. But we also see now sales from people that have never bought IQOS before. I don't have the demographics to be fair with you -- with me, but we'll provide them in CAGNY. And I would not like -- I wouldn't provide statistics just with one or two weeks of rollout, OK?

So I repeat what I've said before, we also see sales of 2.4 Plus surprisingly because people knew that the new device is coming and still bought 2.4, especially the most price-sensitive consumers, which in my view shows that the strategy works and that there will be people that they will enter the category also through 2.4 Plus. Don't forget we kept the previous version at a lower price and we sell the new devices at a higher price. So we have a dual strategy. And I think this in combination with the HEETS at a lower price than the Marlboro consumables for IQOS will help us increase the penetration of the more price-sensitive consumers, OK?

Vivien Azer -- Cowen & Co -- Analyst

Okay, that sounds great and totally reasonable. And look forward to hearing more about that at CAGNY when you have more data. My other question on the RRP category in Japan just to kind of follow up on Judy's question. I certainly appreciate your point that with a host of product activity from you and your peers that, that should engage more Japanese consumers. The question though that I have is do you have adequately embedded in your guidance increased spend? I know you've got a really favorable comp but given that you've got new products from a host of competitors hitting in 2019 how are you thinking about incremental investment spend in Japan specifically? Thanks.

Andre Calantzopoulos -- Chief Executive Officer

Well we have embedded overall, I would not make specific comments for markets, incremental spending. As I said it's much less than last year but it's still a lot of incremental spending. And I think we're adequately equipped to compete in Japan. At the same time, as I said we're also rolling out digital tools and CRM platforms, we didn't have before. And that should help -- plus the retention which we should not forget, including making existing IQOS users that own multiple devices to go back and exclusively use IQOS, which IQOS 3 helps significantly in achieving this.

So overall I think we're in good shape. We knew the competition is going to come. And I think at the end of the day a better product will increase the full conversion over time. And then over time also the best product will win. But as I said many times we're not going to have 80% of the segment forever in Japan. What is important is that the entire category grows over time and I see no reason why the category will not grow. Every indication from what we showed is with the right product portfolio the category will continue to grow.

Vivien Azer -- Cowen & Co -- Analyst

Okay, thank you very much.

Operator

Our next question comes from the line of Michael Lavery of Piper Jaffray.

Michael Lavery -- Piper Jaffray -- Analyst

Good afternoon. (multiple speakers) You have several markets in Europe now that have around a mid-single-digit or even higher IQOS share. But typically those countries still don't have national expansions. Can you give us both a sense of when that might come? And also in some launch cities or launch areas what the share might look like if you're giving to us now on a national basis what does it look like where it's a little bit more concentrated?

Andre Calantzopoulos -- Chief Executive Officer

Well, I mean, as I said, if you take the European Union we are roughly at 50%, 47% of volume weighted if you want presence. So our share in the European Union will be double in the places where we are present, roughly speaking, OK. So it's 1.7%, I think would be 3.4% (ph) OK?

Michael Lavery -- Piper Jaffray -- Analyst

I understand that math. I guess more specifically, some of the places you've launched first, like Milan, Rome, Prague, Athens not necessarily first, but where there's been either a longer history and/or a more rapid acceleration and better awareness what does the share look like in some of those places that are your better performers that when you give a national share might be masked a little bit by places that -- in that country you still haven't launched yet or that have just -- or that are just getting started?

Andre Calantzopoulos -- Chief Executive Officer

Look I don't have all the numbers. If I recall correctly Athens is well above 10, because I know it's my home city, OK? Actually, yes it is the whole region of Attica including Athens is 14% now, which is pretty high and growing. Milano I don't have it, if somebody can help me here.

Nicholas Rolli -- Vice President of Investor Relations and Financial Communications

Probably, it's about double.

Andre Calantzopoulos -- Chief Executive Officer

Just one second. Milano is actually an interesting experiment because it's where we tried the first ways (ph) in the past. It was very flat. Took us a lot of time to make consumers try the product again. But if I'm not mistaken...

Nicholas Rolli -- Vice President of Investor Relations and Financial Communications

Milan and Rome.

Andre Calantzopoulos -- Chief Executive Officer

Sorry, but in Milano and Rome is 5.3% something like that, OK? We'll give you bit more color in CAGNY a little bit. But for me Milano is probably the most important because it's the most difficult city, because of the previous presence (ph) of IQOS to regain momentum and we did. So that's a very good sign actually.

Michael Lavery -- Piper Jaffray -- Analyst

Okay. No, that's very helpful. And just your thoughts on more national expansions in any other European markets or you've already talked about Russia expanding a little bit more. Is that one that you would expect to go national as well?

Andre Calantzopoulos -- Chief Executive Officer

Look we grow gradually in most of the markets. As I said previously our objective, I mean we are in 43, call it markets today. The priority is to expand nationally to see the full potential in these markets. Now that we can scale up efficiently. And during the year we may open new markets if there's strategic opportunity or the regulation changes. But the focus is to expand nationally the markets where we are, and that's what we are following.

Michael Lavery -- Piper Jaffray -- Analyst

Okay, that's great. And then just a little bit more of a housekeeping question, you talked about the 100 basis points margin expansion ex currency. Do you have any sense of what the transactional currency impact might be, that we should have in mind to factor in there?

Andre Calantzopoulos -- Chief Executive Officer

I don't have the calculation but traditionally our transactional currency is 10% of the total currency impact. If I can use this as a rule of thumb I don't think it's more than that.

Michael Lavery -- Piper Jaffray -- Analyst

Okay, that's helpful. Thank you.

Operator

Our next question comes from the line of Pamela Kaufman from Morgan Stanley.

Pamela Kaufman -- Morgan Stanley -- Analyst

Hi, thank you for the question. You made comments at the beginning of the call that the share price performance, which has partly been impacted by industry concerns that are more US-specific. I wanted to get a sense if this influences your view on timing for reinstating share buybacks.

Andre Calantzopoulos -- Chief Executive Officer

Look we look at the share buyback regularly. And I think for the moment, the conclusion is that we follow the plan. I think Martin explained that if we look at the 3-year period including this year it's in the outer years that we will be in a position, without losing our rating to restore share buybacks. I understand it may be tempting for -- to do this but I think we have to stick to the plan, because I believe that some of the impact on the shares, as I explained, is due to our lower-than-expected initially performance. But the reality is also there is a lot of uncertainty that I've been trying to clarify, and will clarify even better e-cigarette categories, e-vapor worldwide and heat-not-burn and all the interactions in CAGNY.

I think it's a necessary anxiety there. And in this context, I think for us our focus is to deliver the results quarter-after-quarter and get the growth of the products. And I'm sure investors will appreciate these and have the share going up rather than doing very opportunistic share repurchases rather than based on a clear plan when the time is right for that.

Pamela Kaufman -- Morgan Stanley -- Analyst

Okay. And you mentioned that combustible pricing should moderate toward more in line with the historical pricing growth in 2019. What do you see as the puts and takes contributing to your outlook? And are you still anticipating a relatively benign excise tax environment this year?

Andre Calantzopoulos -- Chief Executive Officer

I think the excise tax, if you look globally the excise tax environment is fairly stable. I mean, yes there are occasionally, there are one or two markets that have more than regular increases. On the other side we have the positive surprise of Indonesia where the government decided not to increase excise taxes, OK, so which should help the volume. What I was trying to say in my remarks is we have to see 2018 as a very exceptional year because of Russia comparisons. That's a major contributor to pricing, obviously, given its volume size.

Russia 2018 comparisons were compared to zero almost pricing in 2017. Also in the Philippines because the illicit trade went away we had the opportunity to get very significant pricing in '18. Obviously that would be more regular now that we rebased our pricing in the Philippines. So the overall environment, I think, of pricing has not changed. It's very robust. It's there, but all I said is we have to look at '17 -- '18 and '19 as two. And if you add the two we are very much in line with the rest, OK?

And we have already taken 60%-plus of the pricing so far. There's still a few markets that the price tax situation has not settled, but this is not anything major. I think overall pricing is very much in place and intact.

Pamela Kaufman -- Morgan Stanley -- Analyst

Okay, and thank you. And just lastly how is IQOS MESH performing? And can you provide an update on what progress you've made on your Platform 2 and 3 products' timing?

Andre Calantzopoulos -- Chief Executive Officer

Look IQOS MESH is only in our own e-commerce and a few stores, actually our own stores in London. For us it was the experimenting again to see whether the flavors we offer are acceptable to consumers, whether the product itself is acceptable, and then improve before we go for a much more widespread expansion of the product. So it's very difficult to judge what is the potential. I think we learned what we need to learn.

Obviously we are there with the devices you've seen that caters more to the core and more (ph) big vape or bigger vape consumers. In Investors Day we explained to you that we have also smaller devices that cater to different consumers. And we are investing in manufacturing capacity for those devices and related cartridges. Overall I would say the consumer feedback we receive is very good. They recognize the product is better, much more robust. Batteries -- detection of end of liquid and all these things. Now we need to integrate them in the smaller devices and that's what we're doing just now for rollout.

P3 is a bit, we're preparing the industrial designs for the product. The product is stabilized. Clearly here I see the potential more longer term and more situational use of the product toward full conversion at this stage. So it's not something we roll out immediately, but -- or in very selected basis in order to get better understanding. And in Platform 2 which I think is very promising, as we know we're working on resolving one problem, that in humid climate we had some problems with the heat source that there were some falloffs occasionally and that's even if it's very small it's not acceptable.

So we are now working -- I think we have a solution at lab level. We're working on how to industrialize the solution before rollout. So that's where we stand on all that.

Pamela Kaufman -- Morgan Stanley -- Analyst

All right. Thank you.

Operator

Our next question comes from the line of Robert Rampton of UBS.

Robert Rampton -- UBS -- Analyst

Hi, thank you for taking my question. The first question I have is, you mentioned IQOS has better margin. Could you talk about which markets you've reached breakeven, and in which markets or cities you've achieved profit per stick which is equal or better to cigarettes? Thanks.

Andre Calantzopoulos -- Chief Executive Officer

Well, IQOS in every market we're in, has better margins than cigarette as a matter of fact. There is no one single market where we have lower margin than cigarette.

Robert Rampton -- UBS -- Analyst

Including acquisition costs and retention?

Andre Calantzopoulos -- Chief Executive Officer

Okay, we're talking about marginal contribution here, OK. As we explained many times, in all major markets clearly we are breakeven or above. But it takes, depending on the market, and the difficulty of consumer acquisition, based on the restrictions, we're between one year to two years before we get to breakeven point, OK? So that's how I would read it. I think Jacek showed all the details during Investors Day, on how it's doing in different markets. But that's the rule of thumb if you wish.

Robert Rampton -- UBS -- Analyst

Okay, great. Thank you. And in terms of the upcoming menthol ban in Europe, how does -- how is IQOS treated under that? And how are you guys thinking about that?

Andre Calantzopoulos -- Chief Executive Officer

Well, heated tobacco products are excluded from the menthol ban. So we don't see a problem with this because we need to maintain it. And for cigarettes we are ready clearly to offer consumers some alternatives. But what we saw from markets where there is a menthol ban, nothing happened actually. People switched to the same brands very often with different variants of the brand. So I don't expect any major thing to happen in Europe even with the menthol ban.

Robert Rampton -- UBS -- Analyst

That's superb. Thank, and sorry my final question, in terms of the latest evidence on the IQOS quitting rates in human trials, could we get an update on that? Or is that something you'll give at CAGNY? Thank you.

Andre Calantzopoulos -- Chief Executive Officer

I don't -- nothing new in there. I mean...

Martin King -- Chief Financial Officer

Conversion rates.

Andre Calantzopoulos -- Chief Executive Officer

Conversion rates are the same. And in terms of quitting rates we don't see any change in the trajectories in Japan, which is the biggest market. If you look at cigarette or IQOS, the advent of IQOS has not changed the trajectories of people quitting smoking. So I think we're on the right side there in terms of concerns of regulators and public health people.

Robert Rampton -- UBS -- Analyst

Superb, thank you very much.

Operator

And ladies and gentlemen, we have time for one more question. Our final question will come from the line of Gaurav Jain of Barclays.

Gaurav Jain -- Barclays -- Analyst

Hi, thank you for the opportunity. Your view on superiority of heat-not-burn over e-cigarettes is clear, due to the high conversion rates. Do you think regulators prefer e-cigarettes over heat-not-burn on the risk continuum of risk reduction, which is then getting reflected in higher excise taxes on heat-not-burn versus e-cigarettes in different markets?

Andre Calantzopoulos -- Chief Executive Officer

That's a big question. I think, in principle, my belief has always been that this product should be not taxed at all, OK? I'm just trying to be real, because a reduction of 95% or 98% is a humongous reduction, OK, if you talk heat-not-burn versus e-cigarettes versus everything. Now we have to be also realistic. That's why there will be some taxes. There are taxes on heated tobacco products, some countries tax e-vapor products, because at the end of the day, Ministers of Finance need money.

What is important is that there is a differential and substantial differential between the two. And that's something we have achieved so far in all the markets where IQOS is present. And I think that's something that in the foreseeable future, should be maintained. So now if we look at the two categories, as I explained, consumers will decide at the end of the day how they will behave.

The important thing is they move out of cigarettes. It's -- because the only way to achieve harm reduction in global is to have a very high degree of people switching out of cigarettes and sticking 100% to the product. So far, heated tobacco product has proven to be much more efficient in doing this, but also e-cigarettes played a role. And then there will be people that can use both. And when we have nicotine products, maybe they use all three of them, depending on the situation they are. So you will have exclusive category users, and you have dual category users, as we can see already. And that's why there is room for everybody.

On IQOS, we have various platforms under the IQOS brand. We focused initially on the heated tobacco product because we thought and we have the proof that it has the highest efficiency. And now time has come for us to offer more products to consumers. And as we explained also in Investors Day, eventually, we will also have a product that has -- use the same device with different consumables, e-vapor, heated and potentially nicotine. So consumers have absolute choice without the hassle of changing devices all the time.

Now that's a bit more future music, but that's where we go. And that's why I say there is room for all kinds of product in the consumer journey over years, and within a day (ph) and that's how I see the category.

Gaurav Jain -- Barclays -- Analyst

That is very, very helpful. And if I can have a follow-up on this. So the guidance you have given for 2021 on IQOS volumes, does it include IQOS MESH volumes as well? Or that is just the heat-not-burn product in your view?

Andre Calantzopoulos -- Chief Executive Officer

Well, it will include eventually e-vapor products. But the essence of our projection was based on IQOS to be frank with you, OK. So maybe e-vapor will become incremental on top of this volume.

Gaurav Jain -- Barclays -- Analyst

Okay, this is very helpful, thanks a lot.

Operator

And that was our final question. I'll now turn the floor back over to management for any additional or closing remarks.

Nicholas Rolli -- Vice President of Investor Relations and Financial Communications

Well, thank you very much for joining us today. That concludes the call. And if you have any follow-up questions please contact the Investor Relations group. Have a great day. Thank you.

Operator

Thank you ladies and gentlemen. This does conclude today's conference call. You may now disconnect.

Duration: 74 minutes

Call participants:

Nicholas Rolli -- Vice President of Investor Relations and Financial Communications

Andre Calantzopoulos -- Chief Executive Officer

Bonnie Herzog -- Wells Fargo -- Analyst

Judy Hong -- Goldman Sachs -- Analyst

Adam Spielman -- Citi -- Analyst

Martin King -- Chief Financial Officer

Vivien Azer -- Cowen & Co -- Analyst

Michael Lavery -- Piper Jaffray -- Analyst

Pamela Kaufman -- Morgan Stanley -- Analyst

Robert Rampton -- UBS -- Analyst

Gaurav Jain -- Barclays -- Analyst

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