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Philip Morris International (NYSE: PM)
Q3 2024 Earnings Call
Oct 22, 2024, 9:00 a.m. ET
Overview of the Call
- Prepared Remarks
- Questions and Answers
- Call Participants
Opening Statements
Operator
Good day, and thank you for standing by. Welcome to the Philip Morris International Inc. 2024 third-quarter results conference call. [Operator instructions] Please be advised that today’s conference is being recorded.
I would now like to hand the conference over to your speaker today, James Bushnell, vice president of investor relations and financial communications. Please go ahead.
James Bushnell — Vice President, Investor Relations and Financial Communications
Welcome. Thank you for joining us. Earlier today, we released a press statement detailing our 2024 third-quarter results. You can find this information on our website at pmi.com.
A glossary of terms, which includes definitions for smoke-free products, along with other calculations and reconciliations to U.S. GAAP measures, is available in Exhibit 99.2 to our Form 8-K dated today, and also on our investor relations site. Today’s comments may include forward-looking statements about future results. I encourage you to review the cautionary statements in today’s presentation for factors that could cause actual outcomes to differ significantly.
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It is now my pleasure to introduce Emmanuel Babeau, our Chief Financial Officer. Over to you, Emmanuel.
Emmanuel Babeau — Chief Financial Officer
Thank you, James, and hello to everyone. Following a strong first half, our Q3 performance was impressive. Key business segments exceeded expectations, leading to double-digit organic growth, improved margins, and a significant increase in adjusted diluted earnings per share. As anticipated, both IQOS and ZYN demonstrated a strong sequential growth trend.
During Q3, IQOS saw a major increase in HTU-adjusted IMS volume, even though this quarter typically suffers from seasonality. Our adjusted IMS volume was nearly 15% higher compared to the previous year, with notable growth coming from Japan, a revitalization of momentum in Europe, and encouraging results from other global markets. For ZYN, our efforts to expand U.S. production capacity have met strong demand, stabilizing performance, and enabling an improvement throughout the quarter.
This resulted in over 40% year-on-year growth for U.S. volumes, despite facing some capacity constraints. Additionally, nicotine pouch can volumes soared by almost 70% outside the U.S. Our traditional cigarette business also experienced high single-digit growth in revenue and gross profit, thanks to robust pricing, solid volume, and effective cost management strategies.
The strong Q3 results serve as a testament to our strategic direction, showcasing substantial momentum across all product categories. This momentum, combined with advantages from cost-efficiency measures, allowed us to hike our full-year guidance. Now about our key Q3 financial metrics: we reported a solid organic revenue growth of 11.6%, driven by a 2.9% increase in shipment volume, a positive mix in smoke-free products, and strategic pricing decisions.
The positive performance at the top line, along with the favorable smoke-free product mix, led to a remarkable 13.8% growth in organic operating income and an 18% increase in currency-neutral adjusted diluted earnings per share. These figures exclude a negative currency impact of $0.06 due to variations in several currencies, including the Egyptian pound, Argentine peso, and a strong Swiss franc, although this was partly offset by the Japanese yen. Despite these currency challenges, our proactive pricing measures and rapid cost-cutting efforts produced an 11.2% increase in dollar terms for adjusted operating income and a 14.4% increase in adjusted diluted earnings per share, reaching a record $1.91. The better-than-expected earnings were driven by high-end shipments of IQOS and ZYN and a robust performance in the combustible segment.
Additionally, we benefited from lower net financing costs, including more interest income and favorable mark-to-market gains on our derivatives, reflective of currency management strategies amid interest rate fluctuations. Combining these results with our strong H1 yields a commendable 17.2% year-to-date currency-neutral growth in adjusted diluted earnings per share, alongside a 190 basis point increase in organic operating income margin. When accounting for currency impacts, we still achieved close to 8% growth in adjusted earnings per share, underscoring our focus on delivering strong dollar performance.
Looking at Q3 financials by category, both segments delivered notable results. Smoke-free products witnessed organics growth in net revenue and gross profit of 16.8% and 20.2%, respectively, resulting in a gross margin expansion of 200 basis points. This robustness reflects strong performance from IQOS, increased manufacturing productivity, and ongoing growth from ZYN as well as emerging contributions from VEEV. In Q3, smoke-free gross margins were over 450 basis points higher than combustible margins and greater by 200 basis points year to date. Meanwhile, combustible net revenue and gross profit growth rose to nearly 9% organicaly.
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Steady Growth and Positive Margins Mark Strong Q3 for Major Tobacco Company
Continued Expansion in Smoke-Free Products and Shipping Volumes
Gross margin saw a positive change, improving by 10 basis points organically and 20 basis points in dollar terms. This marks the second consecutive quarter of growth after a challenging start to 2023. The company remains focused on expanding its combustible gross margin for the year, aiming for progress in both organic and dollar terms. This growth is being supported despite rising costs, including those from the EU’s single-use plastic directive, thanks to effective pricing strategies and ongoing cost efficiencies.
Volume Growth on Track for Fourth Straight Year
Our business reported a strong performance, achieving around 3% total shipment growth for Q3 and year-to-date. Across all categories and regions, there was growth during these periods. The third quarter saw HTU-adjusted IMS growth of 14.8%, highlighting the robust dynamics of our IQOS business, particularly in Japan and a resurgence in Europe. HTU shipments reached 35.3 billion units, nearing the upper limit of our expectations. Notably, our smoke-free business experienced a Q3 shipment volume increase of 22.2%, contributing to a significant 41.4% growth in the U.S. market.
E-Vapor and Cigarette Performance Shows Positive Trends
Our e-vapor segment maintained steady growth, reaching the equivalent of 1.2 billion units year-to-date. Cigarette shipment growth in Q3 was recorded at 1.3%, which outpaces the estimated 0.5% growth of the international cigarette industry when excluding China and the U.S. Noteworthy growth was observed in markets like Turkey, India, and Brazil, alongside a decrease in illicit volume in several regions, influenced by geopolitical factors.
Revenue Surge Driven by Smoke-Free Innovations
Significant contributions came from Turkey, India, and Italy, reflecting strong market performance amid competitive pricing. Our impressive Q3 revenue can be attributed to our key growth pillars: volume, pricing strategies, and a shift towards smoke-free products. Building on solid volume growth, pricing increased by 7.5 points, driven largely by combustible pricing boosts of 9.7%, and a 3% increase for IQOS HTUs, along with significant input from ZYN.
Margin Growth and Cost Management Strategies in Place
The Q3 organic margin expanded by 90 basis points and 110 basis points in dollars, resulting from our higher-margin smoke-free business and ongoing productivity improvements. Organic gross margin increased by 80 basis points, with a 70 basis point rise in dollar terms. Despite a planned increase in commercial activity, organic costs rose in line with revenue growth, yielding a 40 basis point margin expansion in adjusted dollar terms.
Year-to-Date Performance Shows Positive Trends
Year-to-date, our adjusted operating income margin demonstrated encouraging results, featuring a 190-basis-point organic expansion and a 40-basis-point increase in dollars. We remain well-positioned to achieve our full-year growth objectives.
Celebrating 10 Years of IQOS Success
Our IQOS business recently celebrated its tenth anniversary since launching in Japan and Italy. It has now become the world’s leading smoke-free product, generating over $10 billion in annual net revenues. Despite its significant growth, there remains vast potential as more of the world’s smokers transition to better alternatives. Robust growth has been the theme for this year, supported by various commercial initiatives celebrating this milestone.
New Innovations Driving Future Growth
The third quarter marked a 14.8% year-on-year increase in HTU-adjusted IMS for IQOS, alongside a remarkable rise of 1.8 billion units compared to the previous quarter, which is particularly impressive given the seasonality usually affecting this period. Strong performance was observed in Europe, Japan, and globally, with anticipation for continued growth into Q4. This success is attributed to technology advancements, effective branding, and innovation in both devices and consumables. Following a successful launch, we are rolling out the IQOS ILUMA i device in markets including Italy, Greece, Portugal, Romania, and Switzerland.
Positive Momentum in European Markets
In Europe, Q3 adjusted in-market sales growth reaccelerated to 11.3%, following a pause in Q2, as the market adjusted to the flavor ban. Strong growth returned in markets like Greece, Romania, and Portugal, with Italy also demonstrating positive volume growth driven by new HTU offerings. We see continued upward momentum in Germany, Spain, and the U.K., indicating balanced growth across various markets regardless of IQOS penetration.
Japan Achieves Consistent Growth Milestones
In Japan, we achieved our eighth consecutive quarter of double-digit growth, with adjusted HTU IMS increasing by 14%, totaling 10.9 billion units. Our commercial programs continue to yield positive results, with market share rising by 3.2 points to 29.8% in Q3, crossing the 30% mark in September. This growth reflects innovations in devices, including the IQOS ILUMA i device launched earlier in the year, which has significantly enhanced consumer satisfaction.
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Strong Growth Signals in Heat-Not-Burn and Nicotine Markets
Recent data indicates that Tokyo’s share of the heat-not-burn category has reached a significant milestone, now accounting for 50%. This trend is expanding to eight other cities, including Yokohama, Kawasaki, Sendai, and Fukuoka, with more cities quickly catching up.
Global Expansion and Market Penetration
This growth highlights the robust potential of a market already showing high penetration rates. A broader international view reveals impressive growth in various global markets, as seen with the TCT of tech shares. Cities such as Cairo in Egypt have approached a 10% market share, while Jakarta has also crossed the 5% threshold, showcasing the strong acceleration of our brand in Indonesia. Our portfolio continues to expand geographically, including the introduction of clove TEREA HTU variants.
Duty-Free Segment Thriving
The travel recovery has positively impacted our duty-free segment, with heightened interest in our multi-category portfolio, notably ZYN and VEEV, which are increasingly offered alongside IQOS products. ZYN, the leading U.S. smoke-free brand, has demonstrated strong underlying momentum. In Q3, shipments increased to 149 million cans as we overcame initial supply constraints. Interestingly, despite a price increase of $0.15 per can in September, the category share for ZYN stabilized and began to grow again during the quarter. We anticipate shipments will align with consumer demand as we enter the fourth quarter.
Production and Sustainability Initiatives
While assessing underlying demand is challenging, we prioritize existing consumer needs over acquiring new users from other nicotine categories. We are actively working to boost our U.S. production capacity to approximately 900 million cans by 2025, with plans for further expansion from a new Colorado facility beyond that date. Our commitment to preventing underage access remains strong, supported by rigorous marketing codes that prohibit influencer partnerships, age verification technologies on our websites, and collaboration with organizations like WeCard and TruAge.
Combatting Illicit Trade
Addressing the trade of illicit tobacco and nicotine products is a priority, and we allocate substantial resources towards this goal. Strong governance and supply chain controls are in place, enabling us to restrict sales to specific customers in both traditional and online markets. We closely monitor illicit imports and will take appropriate action in partnership with authorities to prevent illegal commercialization.
Nicotine Pouches and Market Reach
Our focus with nicotine pouches, particularly ZYN, emphasizes responsible growth in international markets. Increased awareness and interest among legal-age users have resulted in a presence in 30 markets, including the Philippines and Mexico. Despite limited distribution in some areas, traction remains strong in markets such as Pakistan, South Africa, and the UK.
Advancements in E-Vapor Products
The e-vapor category also witnessed improvement in Q3, achieving profitability at the product contribution level in September. Europe leads this segment as closed pods gradually shift market share away from disposables. In several markets, like Italy and Romania, our flagship VEEV ONE closed-pod system maintains a strong presence, showing repeat purchases in a challenging competitive environment.
New Product Pilots in the U.S.
We are investing in VEEV for future profitability in key markets, while our first IQOS 3 consumer pilots have begun in the U.S., particularly in Austin, Texas. This initiative focuses on engaging adult consumers and enhancing interest in legal-age smoker communities. However, we do not expect any commercial volumes from these pilots in 2024, as insights gained will help devise our strategy leading up to the planned launch of IQOS ILUMA, with FDA authorization anticipated in H2 2025.
Divestment from Vectura Group
In September, we announced an agreement to sell Vectura Group, expecting to finalize the deal by the end of the year. While Vectura has played a crucial role in enriching our expertise in inhaled therapeutics, increasing opposition to PMI’s ownership suggests that its future is better secured under new management. We are also establishing master service agreements to support our inhaled therapeutics pipeline’s ongoing development.
Combustibles Performance and Market Dynamics
Turning to combustibles, our portfolio showed robust financial results, with net revenues rising by 8.6% driven by a pricing uptick of 9.7% during Q3. Egypt, Turkey, and Germany were leading markets in this growth. This healthy pricing led to a significant increase in gross profit by 8.7%. With year-to-date pricing up by 8.8%, we now project a full-year pricing growth of 8% to 9%. Global cigarette volumes remained resilient, largely due to markets where smoke-free products are still developing or not permitted.
Interestingly, our cigarette category share increased by 0.1 points in Q3, maintaining that trend year-to-date. Both Marlboro and our broader global brands recorded their highest quarterly share since the 2008 spin-off, positively influencing our value share. Recent developments also indicate progress in resolving long-standing litigation claims related to cigarettes in Canada. Our Canadian affiliate, RBH, has engaged in a mediation process under the CCAA, with a proposed settlement amounting to around $23.5 billion for the industry to be funded through cash reserves and future profits from combustible products in the country.
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RBH Reports Strong Financial Outcomes Amid Continued Product Transition
Financial Projections and Strategic Outline
The financial results of RBH following the implementation of its new strategy will ultimately depend on the finalized terms of the proposed plan and U.S. Generally Accepted Accounting Principles (GAAP). We estimate that reconsolidation would positively affect PMI’s cash and cash equivalents, cash flow, adjusted EBITDA, adjusted operating income, and adjusted earnings per share (EPS).
As a recap, further details can be found in last week’s press release. Now, let’s focus on sustainability initiatives. We are making notable progress towards our goals for product transformation, specifically regarding access to smoke-free products. Currently, our smoke-free offerings are available in 92 markets, which aligns us well with our aim of 100 by 2025.
Challenges and Progress in Market Expansion
It’s essential to note that there are still many markets where smoke-free products are unavailable due to regulatory hurdles. Excluding China, these areas account for nearly one-fifth of industry volumes, as discussed at our investor day last year. We are also making headway in ensuring that low- and middle-income countries constitute over 50% of our smoke-free product markets. Our initiatives aim to provide legal-age nicotine users with access to smoke-free products while addressing the issue of underage nicotine use. We are encouraged by results from the U.S. 2024 National Youth Tobacco Survey, which showed youth usage of nicotine pouches remains below 2%, with no significant change year-over-year despite overall category growth. Such success is attributed to careful management of the category, and we remain dedicated to setting high standards for youth access prevention through collaborative efforts.
Another vital component of our sustainability strategy is addressing the company’s environmental impact. We are striving for carbon neutrality in our direct operations, targeting certification for all manufacturing locations. To date, we have certified four additional sites this year, bringing our total to 52%. We have solid plans to achieve our goal of 100% certification by 2025. Furthermore, we are advancing towards the Alliance for Water Stewardship standard, having certified one additional factory this year, reaching 86% of our goal of 100% by 2025. By enhancing our environmental initiatives and ensuring thorough reporting, we are well-prepared for upcoming regulatory requirements, including the EU Corporate Sustainability Reporting Directive.
Positive Year-End Projections
Now, let’s discuss our outlook for the full year. Due to stronger-than-expected performance so far, we are updating our forecasts: volume, organic sales growth, organic operating income (OI) growth, and bottom-line currency-neutral and U.S. dollar predictions all reflect this positive trend. We are targeting a record organic growth of plus 2% to plus 3% in total shipments.
Within this, we anticipate adjusted IMS HTU volume growth of approximately plus 13%, projecting shipment volumes around 140 billion. This estimate accounts for the EU flavor ban’s impact of just over 2 billion units and suspends shipments in Taiwan, pending regulatory approval. For the U.S. market, our ZYN shipment volume forecasts hover between 570 million and 580 million cans, driven by strong demand and recent capacity expansions.
Robust performance is also expected in combustibles, supported by a resilient market category. As a result of higher volumes, accelerated pricing, and an increased smoke-free product mix, we are boosting our organic net revenue growth estimate to around plus 9.5%. This growth, along with substantial double-digit organic increases in smoke-free net revenue, should total close to $15 billion for the year. Consequently, we are raising our forecast for adjusted organic operating income growth to between plus 14% and plus 14.5% for the year.
Our targeted growth strategy includes expanding adjusted gross margins for both smoke-free products and combustibles, as well as on total PMI operating income, in both organic and dollar terms. Thus, we are raising our forecast for currency-neutral adjusted diluted EPS growth to between plus 14% and plus 15%, factoring in slightly lower financing costs. This results in a projected EPS range of $6.45 to $6.51, noting an unfavorable currency impact of approximately $0.40 for the year at current rates. The revised $0.06 increase in anticipated currency headwinds reflects ongoing trends we’ve witnessed in Q3.
In U.S. dollar terms, these forecasts indicate robust growth between plus 7% and plus 8%. Looking ahead, we anticipate another strong delivery in Q4, despite challenging comparisons in shipment mixes across categories. Adjusted gross and operating margin expansions are expected to continue, alongside planned increases in our investments behind smoke-free brands.
Although net financing costs for Q4 are likely to rise sequentially, the overall outlook remains strong with an unchanged operating cash flow expectation of around $11 billion for the annual period. Additionally, following the latest currency movements, we are now targeting an improvement in our net debt-to-adjusted EBITDA ratio, looking toward a target ratio of about two times by the end of 2026. Share buybacks will be considered, subject to board approval, as we progress towards this objective.
Conclusion: A Promising Future
In summary, we have delivered another strong quarter, reflecting solid business momentum and proactive strategies aimed at promoting growth. Key metrics indicate outstanding volume and pricing results along with considerable margin and earnings expansion on both reported and dollar bases. Our growth outlook for 2024 is now exceptional, with growth projections comfortably exceeding our 2024-2026 targets. While industry dynamics may impact combustible volumes specifically in 2024, the core elements driving our growth are both structural and sustainable.
Legal-age smokers are increasingly seeking smoke-free alternatives, and we are establishing robust, profitable premium brands such as IQOS, ZYN, and VEEV to spearhead the smoke-free market. As we advance in our smoke-free transition, significant opportunities remain, both domestically and internationally. It is noteworthy that we raised our dividend in September for the 17th consecutive year, adhering to our progressive policy.
Our strong and growing cash generation profile permits reinvestment in future growth while allowing for substantial returns to shareholders. We appreciate your attention and are ready to address your inquiries.
Questions & Answers:
Operator:
[Operator Instructions] Our first question comes from Bonnie Herzog with Goldman Sachs. Your line is open.
Bonnie Herzog — Analyst
Thank you. Hi, Emmanuel. Hope you are doing well.
Emmanuel Babeau — Chief Financial Officer
Good morning, Bonnie.
Bonnie Herzog — Analyst
I have a question regarding IQOS. Could you comment on the expected volume trajectory for IQOS? I noticed that shipment volume growth slowed to the high single-digit range in Q3 from previous double-digit results. Were there specific timing impacts or seasonal factors affecting this change? Can you provide any updates?
IQOS and ZYN: Key Insights and Future Projections
Continued Growth for IQOS in Q3
Emmanuel Babeau, CFO, addressed questions about IQOS sales in East Asia and the outlook for Q4. He emphasized the importance of monitoring adjusted in-market sales as a strong indicator of consumer demand. According to Babeau, there has been a notable increase in IQOS sales, nearly reaching 15%. Japan showed a robust 14% growth in adjusted sales, maintaining a strong double-digit trend, while South Korea also reported positive growth. European markets have started to recover from the impact of a flavor ban and show renewed momentum, particularly in Italy, which has seen strong growth in Q3.
Expansion Beyond Japan and Europe
The company is witnessing a promising trajectory in various global markets including Indonesia, Saudi Arabia, Mexico, and Egypt. Babeau noted the potential for further growth in these regions as IQOS continues to gain market traction. This outlook is encouraging, indicating that the growth experienced is not limited to Japan and Europe, but is expanding to other parts of the world.
Shipments and Consumer Demand Dynamics
Babeau explained that shipments have not aligned perfectly with consumer demand. Strong shipment growth in earlier quarters was influenced by year-over-year comparisons and disruptions like those in the Red Sea. As the company approaches Q4, expected shifts in shipment patterns will be influenced by these prior disruptions, along with high comparisons from last year as the company built inventory for the flavor ban transition in Europe. Nevertheless, he conveyed confidence in parallel growth for adjusted sales and shipments moving forward.
Addressing Supply Constraints for ZYN
Regarding ZYN, Babeau indicated that supply constraints are easing, suggesting that the company will meet market demand in Q4, although full inventory restoration may take longer, extending potentially into 2025. The company aims to reach a capacity of 900 million cans by the end of 2025, which will be achieved gradually. As more ZYN becomes available, market share recovery will take time. Interestingly, it has been observed that when ZYN is unavailable, consumers often choose not to switch to a competitor’s brand, impacting the overall category sales.
Market Dynamics and Future Pricing Insights
Gaurav Jain of Barclays asked Babeau about international cigarette markets and the increased pricing guidance, now set at 8% to 9%. He highlighted that favorable market conditions, such as reduced illegal sales in Brazil and Turkey, could sustain positive volume trends into FY 2025. Babeau confirmed that these factors were likely to persist, illustrating the complexities and challenges in the tobacco industry.
International Cigarette Volume and Pricing Outlook: CFO Insights
Looking Ahead: Future Projections for Fiscal Year 2025
Emmanuel Babeau — Chief Financial Officer
Thank you for your inquiry, Gaurav. Currently, I prefer not to speculate about the year 2025. We will provide insights on that as the time approaches. However, I can confirm that our focus for 2024 is well outlined.
The demographics in certain markets significantly influence the consumption of cigarettes. India, for example, shows promising trends due to its favorable demographics, but predicting long-term outcomes remains challenging. While we should approach the 2025 forecast with caution, it is evident that our business model allows for volume growth, increased market share, and effective pricing strategies, all indicative of our brand’s resilience. Notably, our price increase of 9.7% in Q3 stands out.
Although this figure should not be seen as guidance for Q4, it reflects positively on our strategy focused on combustible products while transitioning toward smoke-free alternatives. Our approach to combustion products is yielding results, accompanied by expected improvements in cost of goods, which should reduce headwinds for profitability in combustible cigarettes moving forward.
While we anticipate continued price increases, we advise against considering the recent 8% to 9% rise as a baseline. Our long-term outlook remains in the mid-single digits regarding pricing. Additionally, we expect less cost of goods pressure, contributing positively to combustible cigarette profitability. Regarding excise tax changes, I presently have no significant updates. Discussions are ongoing, particularly as many decisions tend to be finalized in November or December, so we hope to have more clarity by the year’s end.
Gaurav Jain — Barclays — Analyst
Thank you. I have a follow-up about your e-cigarette shipments. You mentioned shipping 1.2 billion sticks this year. Given that one milliliter equates to 10 sticks, if we assume one pod is 0.7 milliliters, you are likely shipping around 160 million pods. This would suggest an e-cigarette revenue run rate of approximately $300 million to $400 million, where the contribution base breaks even. Am I in the right ballpark?
Emmanuel Babeau — Chief Financial Officer
Yes, I can confirm that one milliliter translates to 10 sticks, or cigarettes. Your calculations are reasonably close to the actual volume figures. However, I won’t provide specifics on revenue at this stage.
Gaurav Jain — Barclays — Analyst
Thank you again.
Emmanuel Babeau — Chief Financial Officer
Thank you.
Operator
Thank you. Our next question comes from Faham Baig with UBS. Your line is open.
Faham Baig — UBS — Analyst
Hello, Emmanuel and James. Thank you for taking my questions. I have two topics to discuss.
First, regarding vapor products, one of your competitors mentioned that vaping is more effective in converting smokers than heated tobacco in Europe. I’d like your insights on this situation and if you are observing greater vapor adoption as you launch VEEV in multiple markets. My second question concerns nicotine pouches in the U.S., particularly with the rise of illicit products in the market that may infringe on your patents. What measures are you taking in this regard, and how do you foresee this environment evolving compared to vaping in the U.S.?
Emmanuel Babeau — Chief Financial Officer
Absolutely, Faham. On the topic of vaping’s effectiveness in converting smokers, we have not observed a generalized success narrative. The experiences of vaping and heated tobacco are markedly different. Generally, it appears that moving from smoking to heat-not-burn products leads to a more compelling transition than vaping. While our IQOS product illustrates some success, we have not identified significant acceleration in vaping adoption. The vaping landscape is currently impacted by various regulatory changes and challenges. An area of concern includes irresponsible marketing practices that may fuel underage consumption.
Regarding illicit products in the U.S., I want to emphasize that PMI commits substantial resources to combat the issue of illicit trade globally, including in the U.S. When we identify potential infringements of our patents, we take action. This can involve ceasing sales to specific sources and collaborating with distributors to curb the spread of illicit products. We also issue cease-and-desist notices when necessary, and we actively partner with regulators in our fight against illicit activity. This remains a top priority for us.
Faham Baig — UBS — Analyst
Thanks, Emmanuel.
Emmanuel Babeau — Chief Financial Officer
Thank you.
Operator
Thank you. [Operator instructions] Our next question comes from Priya Ohri-Gupta with Barclays. Your line is now open.
Priya Ohri-Gupta — Barclays — Analyst
Hello, Emmanuel. Thank you for allowing me to ask a question.
Emmanuel Babeau — Chief Financial Officer
Hello, Priya.
PMI’s Financial Outlook: Key Insights from Recent Analyst Questions
Analyst Questions on Deleveraging and Refinancing
Priya Ohri-Gupta from Barclays raised two significant questions during the conference call. First, she noted a slight reduction in the top end of Philip Morris International’s (PMI) deleveraging guidance for the year. She inquired about the factors influencing this adjustment. Second, Ohri-Gupta pointed out PMI’s substantial maturities due in 2025 and asked whether some refinancing could be moved forward to take advantage of current market conditions.
CFO’s Response on Deleveraging and Cash Flow
Emmanuel Babeau, CFO of PMI, addressed the concerns. He clarified that the narrower guidance on deleveraging reflects the strength of the euro against the dollar at the end of September, as a significant portion of PMI’s debt is euro-denominated. This creates a unique situation where fluctuations in currency can impact cash flow calculations. Babeau mentioned that PMI generated $8.2 billion in cash flow, which is $2.3 billion more than at the same time last year, showcasing strong business momentum. He left open the possibility of proactive refinancing before the year’s end based on market opportunities.
Clarity on Canadian Litigation Settlement
Gaurav Jain, also from Barclays, continued the discussion by asking about PMI’s ongoing Canadian litigation settlement. He sought to know whether the associated payments would be tax-deductible and when a resolution might occur in this prolonged legal issue.
Babeau responded that it’s too early to confirm any tax implications regarding the settlement. He emphasized that PMI is still waiting for several key elements of the proposed solution from mediators to be finalized. Once more information is available, PMI will provide updates on the settlement’s impact.
Engaging Conclusion
As the call came to a close, James Bushnell, Vice President of Investor Relations, encouraged attendees to reach out for further inquiries and wished everyone a productive earnings season. Babeau expressed anticipation for future discussions and thanked participants for their engagement.
Attendees:
James Bushnell — Vice President, Investor Relations and Financial Communications
Emmanuel Babeau — Chief Financial Officer
Bonnie Herzog — Analyst
Gaurav Jain — Barclays — Analyst
Faham Baig — UBS — Analyst
Priya Ohri-Gupta — Barclays — Analyst
This article is a transcript of the earnings call produced for The Motley Fool. While we strive for accuracy, there is a possibility of errors. We recommend doing your own research, including listening to the call and reviewing the company’s SEC filings. For more details, refer to our Terms and Conditions.
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