Philip Morris International Inc

Good day, and thank you for standing by. Welcome to the Philip Morris International Inc. 2024 Third Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. 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.

Welcome. Thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2024 third quarter results. The press release is available on our website at PMI.com. A glossary of terms, including the definition for smoke-free products, as well as adjustments, other calculations, and reconciliations to the most directly comparable US GAAP measures for non-GAAP financial measures cited in this presentation, are available in Exhibit 99.2 to the company's Form 8K, dated on today's date and on our Investor Relations 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 is now my pleasure to introduce Emmanuel Babot, our Chief Financial Officer. Over to you, Emmanuel.

Thank you, James, and welcome, everyone. Following an excellent first half, we delivered another outstanding performance in Q3. All key elements of the business perform at or above expectations, driving strong double digit organic top and bottom line growth, margin expansion and a significant acceleration in adjusted deleted earning pressure growth in dollar terms. As expected, Both ICOS and ZIN accelerated on a sequential basis. ICOS delivered a significant step up in HTU adjusted IMS volume in Q3, which is historically a quarter impacted negatively by seasonality. This reflects a strong underlying momentum of the business with adjusted IMS close to plus 15% ahead versus prior year with another very strong performance from Japan, re-accelerating momentum in Europe and promising results from a number of global markets. Within, we continued our efforts to increase U.S. production capacity in response to strong demand, enabling stabilization of share performance, followed by sequential improvement throughout the quarter. This led to a significant increase in sequential U.S. volumes with over 40% year-on-year growth despite capacity constraints. Outside the US, nicotine pouch can volumes grew by close to 70%. Our combustible business also accelerated to high single digit net revenue and gross profit growth, led by further very strong pricing, resilient volume, and the benefit of our cost actions. Our overall Q3 performance epitomized the soundness of our strategy with underlying momentum across categories with strong volumes, pricing, and smoke-free mix supported by cost efficiency measures. With double digit growth in both adjusted operating income and diluted earning per share in currency neutral and dollar terms, we are raising our full year guidance. Turning now to the headline financials for Q3. we delivered excellent organic revenue growth of plus 11.6%, driven by shipment volume growth of plus 2.9%, positive smoke-free category mix, and pricing. The combination of this positive top line performance with the additional favorable smoke-free mix impact on profit and ongoing cost efficiencies enable us to achieve growth of plus 13.8% in organic operating income and plus 18% in currency-neutral adjusted diluted earning per share. This excludes an unfavorable currency impact of 6 cents, notably due to weakness in the Egyptian pound, Argentine peso, and the strong Swiss franc, partly offset by the Japanese yen. Despite the currency headwind, our proactive measures on pricing and accelerated cost initiatives drove plus 11.2% dollar growth in adjusted operating income and plus 14.4% dollar growth in adjusted diluted earning per share to a record $1.91. This better-than-expected earnings delivery reflects high costs and thin shipment volume at the higher end of our expectation and a very strong combustible performance. In addition, we benefited from a lower net financing cost including increased interest income, as well as mark-to-market gains on derivatives that we use to manage the currency profile of our debt, driven by interest rate volatility. Combined with an excellent H1, this yields an impressive plus 17.2% year-to-date currency neutral growth in adjusted deleted earnings per share. with double-digit organic top-line growth and 190 basis points of organic operating income margin expansion. Including currency, we delivered adjusted earning pressure growth of close to plus 8%, which is a testament to our continued focus on delivering strong performance in dollar terms. Let's turn to the Q3 financial performance by category with both sides of the business producing excellent results. Smoke-free net revenue and gross profit grew organically by plus 16.8% and plus 20.2% respectively, driving 200 basis points of gross margin expansion. This reflects a robust high-cost performance in the quarter, including manufacturing productivities as well as the continued accretion of ZIN and a small but growing contribution from VIVE. Smoke-free growth margins were more than 450 basis points higher than combustible in Q3 and more than 200 basis points higher year-to-date. Combustible net revenue and gross profit growth accelerated to almost plus 9% organically. Combustible gross margin improved by plus 10 basis points organically and by plus 20 basis points in dollar term, marking the second quarter of expansion following a challenging 2023. We continue to target combustible gross margin expansion for the year in organic and dollar terms, as cost pressure, including the impact of the EU single-use plastic directive, are more than offset by pricing and ongoing cost initiatives. Focusing now on volumes, we are well on track for our fourth consecutive year of volume growth. Our business delivered a remarkable performance of around plus 3% total shipment growth, both in Q3 and year to date, with all categories and all four regions growing over both periods. Q3 HTU-adjusted IMS growth of plus 14.8% reflect the underlying dynamism of our ICOS business, with a continued strong performance in Japan and a reacceleration in Europe as expected. Q3 HTU shipments of 35.3 billion units were at the upper end of our expectation, with a superior adjusted in-market sales growth compared to shipments due to shipment phasing as highlighted in H1. Our oral smoke-free business grew Q3 shipment volume by plus 22.2%, within powering U.S. growth of plus 41.4%, and very strong international performance. Our VIV eVapor business exhibited continued volume momentum in the quarter, reaching the equivalent of 1.2 billion units on a year-to-date basis. Q3 cigarette shipments grew by plus 1.3%, outpacing the total estimated international cigarette industry, excluding China and the US, at plus 0.5%. The unusually resilient industry performance this year reflects growing volume in markets where smoke-free products are not permitted, such as Turkey, India, and Brazil, alongside a reduction in illicit volume in a number of markets, driven partly by geopolitical factors. Our growth includes notable contribution from Turkey, India, and Italy, and reflects good category share performance despite robust pricing. Our exceptional Q3 revenue performance reflected our three structural pillars of top-line growth, volume, pricing, and smoke-free mix shift. Building on our very robust volume growth, pricing contributed plus 7.5 points of growth. This was powered by strong combustible pricing of plus 9.7%, plus 3% pricing for high-cost HTUs, and a notable contribution from ZIN. The positive mix impact of our smoke-free business delivered plus 1.4 points despite the strong growth of combustible, given the higher net revenue per unit of both high-cost and ZIN. As in prior quarters, geographic mix was negative, but to a lesser degree, as growth stepped up in Europe and the US. The year-to-date net revenue drivers were very similar, with double-digit organic top-line growth built on positive volumes, smoke-free category mix of more than plus 2 points, and strong pricing. Turning to operating income, we delivered impressive Q3 organic margin expansion of plus 90 basis points and plus 110 basis points in dollar terms. Growth margin increased organically by 80 basis points and by plus 70 basis points in dollar terms. This was again driven by our higher margin smoke-free business, pricing, and ongoing productivity savings across the value chain. Moving now to SG&A. Despite the planned step-up in commercial activity, our organic cost evolution was essentially in line with top-line growth, with plus 40 basis points of margin expansion in adjusted dollar terms supported by cost efficiency actions. As previously communicated, we target an organic increase in SG&A below the rate of net revenue growth for the year, while still supporting our smoke-free expansion with continued commercial investments. We delivered an incremental $180 million in gross cost efficiencies in Q3, reaching almost $490 million year-to-date, with initiatives notably focused on manufacturing and back-office costs. While only the first year, we are progressing nicely towards our 2024-2026 target, of $2 billion in gross savings. On a year-to-date basis, our adjusted operating income margin evolution was also very positive with plus 190 basis points organic expansion and plus 40 basis points in dollar terms. We are well set to meet our full year objective of expansion on both basis. Turning now to our Icos business, which is celebrating the 10-year anniversary of its first launches in Japan and Italy. Icos is the world's leading smoke-free product, generating over $10 billion in annual net revenues. Notwithstanding the incredible growth and success of the brand over that time, there is a very substantial growth runway over the coming years as more of the world's 1 billion legal-edged smokers switch to better alternatives. Indeed, robust growth continues this year. We spoke last quarter about our expectation for a strong H2 delivery with continued user growth momentum supported by our commercial programs, including Evans to celebrate the 10-year milestone. As expected, Q3 momentum accelerated with plus 14.8% year-on-year growth in HTU-adjusted IMS and a very substantial sequential step-up of 1.8% billion unit versus Q2, which is especially impressive in a quarter that is typically negatively impacted by seasonality. This reflects a return to double-digit growth in Europe, a continued excellent trajectory in Japan, and a further acceleration from our global markets. We expect further strong growth in Q4. The success of ICOS is built on technology, commercial capabilities, brand building, and innovation on both devices and consumables. Following the successful launch of the IQOS Illuma Eye device in Japan earlier this year, we are expanding the rollout to more markets, including Italy, Greece, Portugal, Romania, and Switzerland. Focusing now on IQOS in Europe. I am pleased to report a Q3 re-acceleration in adjusted in-market sales growth to plus 11.3% following a slower Q2 progression. This includes the resumption of growth in market passing through the adjustment phase of the characterizing flavor ban. The majority of EU HTLU volume is now covered by the ban, and we observe a return to robust growth in markets such as Greece, Romania, and Portugal. Following the stronger than expected initial impact in Q2, we are pleased to report positive volume momentum in Italy. This was supported by the launch of recent HTU variants, including our mainstream price offering Delia and tobacco-free Livia, jointly accounting for close to 7% of Italy's HTU off-tech three months from launch. In addition, We see excellent momentum in markets such as Germany, Spain, and the UK, and increasingly balanced growth across markets overall, regardless of high cost penetration. Regional Q3 adjusted HTU share was up by 0.8 point year on year to 9.5%, and modestly lower sequentially due to the typical impact of seasonally higher combustible volume in the summer. HTU adjusted IMS volumes reached 13.2 billion units on a four-quarter moving average, maintaining our high share of the category with robust sequential growth. Looking at our key city of tech shares in Europe, we see continued rapid progress in a large number of cities. An increasing number are posting growth of over two points year on year, which is the most meaningful comparison given seasonal factors. Particular call-outs include Budapest, Athens, Bratislava, Bucharest, London, and Amsterdam. Turning now to Japan, we delivered our eighth consecutive quarter of double-digit progression with adjusted HTU-IMS growth of plus 14%. reaching 10.9 billion units on the four-quarter moving average. Our commercial programs continue to drive meaningful results with innovation on devices and consumables, propelling a plus 3.2 point market share increase to 29.8% in Q3 and surpassing the landmark of 30% in September. This includes the impact of the ICOC LumaEye device, which was launched in Q1 and deliver enhanced consumer satisfaction. As shown on the previous slide, high cost HTU of tech shares in key cities such as Tokyo continue to advance rapidly. We have previously flagged that Tokyo of tech share for the overall heat not burn category reached 50% earlier this year. This is also now true in eight cities overall, including Yokohama, Kawasaki, Sendai, and Fukuoka, with several others rapidly approaching the same milestone. This is clearly a positive sign of the enduring growth potential in a market with already high penetration. Taking a more global view, we continue to see very good growth across a number of global markets, as highlighted by key cities of tech shares. This includes cities in Saudi Arabia, Mexico, and Egypt, where Cairo reached close to 10% share. off-tech share of more than 5% in Jakarta is indicative of the strong acceleration in Indonesia as we continue our geographic and portfolio expansion, including a growing offer of closed-area HTU variants. Finally, I would like to call out Duty Free, where the ongoing travel recovery combined with the strength of our multi-category portfolio delivered dynamic growth within Enviv increasingly offered alongside ICOS. Moving now to Zin, the number one US smoke-free brand continues to see very strong underlying momentum. As flagged previously, we are working to progressively increase our production volumes, and this was reflected in a sequential acceleration to 149 million cans shipped in Q3. As we continued working through this supplied constraint, these category shares stabilized and then resumed growth on a sequential basis through the quarter, despite a further 50 cents per can list price increase taken at the start of September. We continue to expect shipments to match consumer demand at some point during the fourth quarter. While gauging the level of underlying demand is not an exact science in the current circumstances, Our promotional and commercial activity has naturally been lower as we prioritize meeting existing consumer needs over growing the legal edge user base from other nicotine categories. With ongoing efforts to increase our U.S. production capacity to around 900 million cans for the full year of 2025 and significant expansion beyond 2025 from our planned new facility in Colorado, We believe we are well positioned to capture Zin's potential over the coming years. We remain committed to driving industry standards in under 21 prevention with policies and initiatives designed to prevent youth access. Our robust U.S. marketing code prohibits social media influencers and we refuse requests for such partnerships. All our own product websites use edge verification technology, and we partner with WeCard and TrueEdge to support edge restriction checks for retail sales. Overall, we are encouraged by the results of our efforts, which I'll come back to. Combating trade in illicit tobacco and nicotine products remain a top priority, and we dedicate a significant level of resources to support these efforts. We have strong governance and supply chain control in place, and we take appropriate action where necessary, including limiting and or terminating sales to certain customers in both the online and traditional trade, and we are continuously improving these control measures. We also closely monitor import of product, which may be illicit or infringing our patent. And we are committed to act on our own or in conjunction with the authorities to prevent this product being illegally commercialized. Our multi-category approach continues to gain momentum as we leverage the strengths of our leading brands whilst expanding the reach of our smoke-free portfolio. For nicotine pouches, we are focused on responsibly building the category with ZIN in international markets. Increasing category awareness and interest among legal-edge nicotine users is driving positive traction in a growing number of geographies. We have increased ZIN's presence year-on-year to 30 markets, including the Philippines, Mexico, several European markets, as well as within duty-free. Despite still limited distribution in some markets, we see continued strong traction in Mexico, Pakistan, South Africa, the UK, and duty-free. The category also continues to grow robustly in Scandinavia. EVAPO performance remained dynamic in Q3, and we reached profitability at product contribution level in September on the back of excellent volume momentum and cost-of-good-sale improvements. Europe is at the forefront as closed pods continue to take share from disposable and we lead the category with our flagship Viv1 closed pod system in several markets, including Italy, Romania, and the Czech Republic. We are seeing good repeat purchase and regular usage within a competitive environment as we continue to build distribution and brand awareness. Outside Europe, We are investing behind VIV for future profitability in a number of focus markets. We are underway with the first stage of our ICO3 consumer pilot in the US with the launch of our Be the First campaign in Austin, Texas. As explained previously, the focus is on adult consumer engagement, building awareness through category and brand education in legal edge smoker communities. We do not anticipate any commercial volume in 2024. The learnings from these pilots in Austin and other cities will be used to fine-tune our approach in anticipation of the at-scale launch of ICOS Iluma, where we continue to assume an FDA authorization in H2 2025. Finally, a brief comment on our wellness and healthcare business. As we disclosed in September, we have entered into an agreement to sell Vectura Group and expect the transaction to close by the end of the year. Our ownership of Vectura was important to develop the required skill and scientific expertise to advance our in-health therapeutics pipeline. Significant progress has been made on this front. However, given that Vectura's scientific engagement and commercial CDMO relationships were being impacted by unwarranted opposition to PMI's ownership, we believe the overall future of Vectura will be better served under its new ownership. Together with the divestment, we announced the establishment of master service agreements to support the continued development of our in-health therapeutic proprietary pipeline. Our wellness and health care strategy continues, and we look forward to updating you on future developments, including launches of consumer wellness products. Moving now to combustibles, where our portfolio delivered a very strong financial performance. Net revenue grew plus 8.6%, driven by Q3 pricing of plus 9.7%. This includes pricing taken during the quarter as we continue to focus on value maximization and was led by markets such as Egypt, Turkey, and Germany. As covered earlier, this drove a very robust plus 8.7% increase in gross profit. With better than expected pricing of plus 8.8% on the year-to-date basis, we now forecast full year pricing of plus 8 to plus 9%. Cigarette volumes were resilient as global industry trends remain benign. As I touched on earlier, this can be largely attributed to markets where smoke-free products are not allowed or are early in their development, as well as the impact of significant industry efforts and geopolitical factors on global illicit trade in a number of markets. Our cigarette category share grew by plus 0.1 points in Q3 and yet to date. Both Marlboro and our overall global brands achieved their highest quarterly share since the 2008 spinoff, with a corresponding positive impact on value share. As announced last week, there has been some long-awaited progress towards resolution of the decades-old cigarette-related litigation claims in Canada. Our Canadian affiliate AirBH was deconsolidated in 2019 after entering the mediated CCAA process. The mediator's proposed plan would entail a settlement of around $23.5 billion for the industry, payable from cash and cash equivalent in Canada, and future combustible profit in Canada. The reconciliation of RBA's financial result after the plan is implemented would be subject to the final term of the proposed plan and US GAAP. We estimate reconsolidation would be incremental to PMI cash and cash equivalent, cash flow and adjusted EBITDA, adjusted operating income, and adjusted EPS number. I direct you to last week's press release for further details. Moving now to sustainability. we are making continued strong progress towards our product transformation targets, including on access to smoke-free products. Our smoke-free products are now available in 92 markets, placing us on track for our aspiration of 100 by 2025. As a remainder, there remain a notable number of markets where smoke-free products are not yet available due to regulatory constraints which is a case of heated tobacco make up close to one fifth of industry volume, excluding China, as covered at our investor day last year. We are also moving nicely towards our objective for low and middle income countries to comprise over 50 percent of smoke free product market. Our efforts to increase access to smoke-free products are specific to legal-age nicotine users, and tackling underage nicotine use is a critical area of focus. We are encouraged by the results of the U.S. 2024 National Youth Tobacco Survey, which reported youth usage of nicotine pouches remained very low, at less than 2%, with no statistically significant change year on year, despite the strong growth of the overall category. Such results can only be achieved through responsible stewardship of the category and we are committed to continue driving standards in new success prevention through a multi-stakeholder approach. Addressing our company's environmental impact is another key pillar of our sustainability strategy. We are working towards carbon neutrality in our direct operation including certification of all our manufacturing facilities as carbon neutral. Year to date, we certified four additional sites, bringing us to a total of 52%. We have concrete plans for the remainder of our footprint in order to achieve the 100% aspiration by 2025. Additionally, we are progressing with the Alliance for Water Stewardship standard, certifying one additional factory year-to-date to places at 86% against our goal of 100% by 2025. Combining our ongoing initiative to address our environmental impact with robust and rigorous reporting processes, we believe we are well prepared for upcoming reporting requirements, including the EU Corporate Sustainability Reporting Directive. OK, turning now to our outlook for the full year. Following this stronger than expected year-to-date performance, we are raising our full year volume, organic sales growth, organic OI growth, and bottom line currency neutral and US dollar forecasts. First two volumes, where we target record organic growth and increase our outlook to plus 2% to plus 3% total shipment progression. Within this, we continue to expect adjusted IMS HTU volume growth of around plus 13% and shipment volumes of around 140 billion. This forecast continues to assume an impact from the EU characterizing flavor ban of just over 2 billion units and no volumes in Taiwan where we continue to await regulatory approval. For US ZIN, We forecast shipment volume at the upper end of our prior guidance in the range of 570 to 580 million cans, reflecting the progress made on capacity expansion as well as continued strong demand. Our outlook also factors in a robust combustible performance driven by a resilient total category as previously outlined. Given the combination of strong volume with accelerated pricing and continued smoke-free mix, we are increasing our forecast organic net revenue growth to around plus 9.5%. This includes strong double-digit organic growth in smoke-free net revenue and should result in close to $15 billion in total for the year. With the impact of this improved top line performance coupled with high cost and ZIN operating leverage and further cost efficiency, we now also raise our forecast adjusted organic OI growth to plus 14 to plus 14.5% for the year. We continue to target adjusted growth margin expansion for both smoke-free product and combustible and adjusted OI margin expansion for total PMI all in both organic and dollar terms. Accordingly, we are raising our forecast for currency-neutral adjusted diluted EPS growth to plus 14% to plus 15%, which also factors in lower than anticipated net financing costs, including higher interest income. This translates into a range of $6.45 to $6.51, including an unfavorable currency impact of $0.40 for the year at prevailing rates. The $0.06 increase in expected currency headwind largely reflects the same factor as Q3. On a US dollar basis, this forecast represents very robust growth of approximately 7% to 8%. As reflected in this forecast, we expect another robust delivery in Q4, despite a more challenging top-line comparison on the mix of shipments between categories. We also target another quarter of adjusted growth and operating margin expansion, including a planned increase in commercial investment behind our smoke-free brands. Q4 net financing costs are likely to be sequentially higher, notably given the mark-to-market benefit in Q3 from the volatility in the interest rate market I mentioned earlier. Our expectation for strong operating cash flow of around $11 billion for the year are unchanged. And factoring in the most recent currency move, we now target a 0.3, 0.4 time improvement in our net debt to adjusted EBITDA ratio in 2024. This places us well on track for our target ratio of around two times by the end of 2026, with buybacks to be considered subject to board approval once we are within sight of this goal. In conclusion, we delivered another outstanding quarter, reflecting the strong underlying momentum of our business, coupled with our proactive step to support super growth in dollar terms. We are delivering on all key metrics with best-in-class volume and pricing, in addition to substantial margin expansion and earning growth on both reported and dollar basis. We are raising our growth outlook for an exceptional 2024 with growth rates comfortably above our 2024-2026 targets. While the industry dynamics affecting combustible volumes may be specific to 2024, the key drivers of our growth are both structural and sustainable. Legal hedge smokers are looking for smoke-free alternatives, and we are building strong and profitable premium brands with high-cost Zin and Viv to lead the smoke-free category. As we continue our powerful smoke-free transformation, we have significant further opportunity both in the US and internationally. Importantly, we raised our dividend in September for the 17th successive year in line with our progressive policy. we retain a strong and growing cash generation profile, which enables both reinvestment in long-term growth and the capacity for substantial shareholder returns. Thank you very much for your attention, and we are now very happy to answer your questions.

As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from Bonnie Herzog with Goldman Sachs. Your line is open.

All right. Thank you. Hi, Emmanuel. Hope you're well. Good morning, Bonnie. I have a question on ICOS. I wonder if you could maybe comment a little bit further on the expected volume trajectory for ICOS. ICOs, you know, shipment volume growth did decelerate to the high single digit range in Q3 from, you know, double digit history. So I know there were some timing impacts and seasonality, but just could you maybe update us a little bit further on, you know, that in the quarter, then maybe how that will reverse in Q4? And then also hoping for more color on volume that is in East Asia, which is also decelerated, just the drivers of that and whether you expect shipments to improve in the region in Q4.

Sure, Bonnie, with pleasure. And you're giving me the opportunity to maybe be back on the fact that when you look at ICOs, I really urge you to watch at the in-market sales, the adjusted in-market sales, which is the best proxy we can have from consumer of tech. And on that indicator, the good news is was the confirmation of the re-acceleration that we were expecting and we had been flagging the fact that we're expecting accelerated momentum on ICOS in H2. And we are indeed seeing that in our Q3 adjusted in market sales because we are almost at 15%. You were asking the question about East Asia. Actually, Japan delivered again around 14% of adjusted in-market sales. So the market for ICOS remains extremely dynamic, despite the fact that we have, of course, already close to 30% market share. But we continue with strong double digit, and that was a very good news. What happened in Q3 to explain the acceleration is, as I said, continued very strong dynamism in Japan. By the way, South Korea is also doing well. I think we are showing the number in Seoul where we are nicely growing the market share. Then there was the re-acceleration in Europe, and I know that we receive a lot of questions, you know, okay, how confident can you be in the fact that Europe is going to re-accelerate? We knew that we were going to this transition phase for the flavor ban, and we see the market progressively exiting the disruption of the ban with the reacceleration. Italy was, of course, during the third quarter, the country with the reacceleration. And that was nice to see Italy clearly restarting on a very strong foot the growth on ICOs. And we resumed double-git growth on adjusted AMS in Europe in Q3. And then you have a number of other markets. the world and I would say we see momentum here building up which is very good news for the future I could mention of course Indonesia Saudi Arabia Mexico I think you know EAU as well. I mean, we see a number of markets where there is, and of course Egypt, but Egypt has been now for more than a year with growth, where we see real momentum emerging behind high costs with, of course, you know, we're just at the beginning, so a lot of potential, but that is very encouraging on the fact that we have nice growth relay outside Japan and EU for the future. So that's really what we've seen in Q3. Now you have the question on the shipment. Well, we've been flagging the fact that a trajectory would be disconnected from the consumer of tech. We had some very strong growth in the first two quarters, which was notably driven by comparison year on year. of course, the Red Sea disruption that generated some shipment in the first part of the year. And therefore, today we have shipments that are a bit lower for the third quarter than that the adjusted IMS. And we're just, if you want, here for the nine months going to a situation where gradually we are equalizing adjusted IMS and the shipment. So that's what we are seeing. And in Q4, we're going to be with more equalization because we're going to be facing two elements. The first one regarding the Red Sea disruption we're going to have some reversal in Q4. So that will play negatively on the shipment. And we also are facing some icons last year as we are building inventory to prepare the transition for the flavor ban in Europe. So that's icons in terms of shipment last year. But at the end of the day, you should expect adjusted IMS and shipment through a certain period to evolve in a parallel way. And as we said, we continue to expect for Q4 a renewed momentum on a consumer of tech or what we call adjusted market sales, which is really what matters. That's what's important because that's what is talking about the health of ICOs.

Okay, all of that makes sense and is really helpful. Thank you. And then maybe a second question on ZEN. So, you know, the supply constraints appear to be easing, which is great. So just wanted to confirm that. Emmanuel, that you are on track to fully restore supply levels this quarter, or is there a chance this bleeds into maybe early next year? And then when this happens, how quickly do you expect Xen to recapture some of the lost market share? And just curious, what role will potential stepped up promos play, I guess, if at all? How are you thinking about that? Thank you.

Sure. On Xen, Bonnie, We said somewhere in Q4, we will have the supply to the market meeting consumer demand, which, to clarify again, doesn't mean that we will have fully been replenishing all level of inventory. Here at that point, we believe for what we can assess of the consumer demand, that what we bring to the trade will correspond to what the consumer will take from the trade, will buy from the trade. But then there will certainly be, and I'm not able to tell you when it's going to happen during this quarter, but I think we are still in this perspective. Then, but that's probably more for 2025, there will be a replenishment of the out-of-stock situation. And we will gradually, but that's going to happen only gradually probably through 2025. put back the level of inventory to what it should be normally. And that certainly will take some months as we continue to increase the capacity. Remember, we said that for the full year 2025, we are targeting an overall capacity of around 900 million can. Of course, that is a capacity that we are going to build gradually. It won't be there at the beginning of the year. And I would say the replenishment and being back to a fully normal situation is gonna happen only gradually through 2025. And of course, when we can be more specific about that, we will be more specific with the topic. So that's for supply. When it comes to regaining shares, so what we've seen is that, in fact, when the availability of ZIN went down, we've seen the category slowing down because obviously it seems that a number of buyer of Zin are not intending to buy another brand. And therefore, when they don't find their Zin, they are maybe polyusing or consuming something else. But that probably has been slowing down a bit the category. We will see how we gradually recover. We've seen in the second part of the Q3 some improvement sequentially on our market share, which is good news. We believe that we have some positive outlook as we regain availability for the product, but it's difficult to be more specific than that at that stage.

All right. Thank you. I'll pass it on.

Thank you.

Thank you. And our next question comes from Gaurav Jain with Barclays. Your line is open.

Hi. Good morning, Emmanuel. Hope you're well. Good morning, Gaurav. A couple of questions from me. So just looking at the cigarette markets internationally, you know, your pricing guidance, you have increased to 8% to 9%, and yet volumes are positive. The factors that you're mentioning, why volumes are so strong, which is lack of NGPs in Brazil and Turkey, lack of smuggling property from, you know, Russia, Belarus, all these countries, they should continue in FY25. So shouldn't then FY25 also be a pretty strong year for cigarette volumes and pricing internationally? And within that context, can you also touch on if there are any disruptive excise tax hikes happening in the next few months?

Thanks, Gaurav, for your question. I don't want to enter now into commenting 2025. And of course, in due course, we'll share with you all the outlook for the year. I think what we are seeing in 2024 is well identified. We talk about a number of markets where smoke-free products are not allowed. Sometimes you have increasing the prevalence. Sometimes you have demographics that are playing positively for the consumption of cigarettes. I think India is a clear market when it comes to demographic, for instance. And it's difficult to say how long all that is going to play and what's going to be the continuation of this trajectory. I think we need to be a bit cautious on the outlook. But it's true that I cannot say that everything will finish on the 31st of December 24. So we don't know what's going to be the trajectory in 25. What is certainly good is to see that we are able to actually grow volume, grow share of segment, and at the same time, increase price in a very dynamic manner, which is a tribute to the strength of our brand. And it's true that the 9.7% in Q3 was a remarkable price increase. Don't take that for Q4 as a guidance, but that was very good in Q3. And that shows that in this category, I think we've been clear on our objective, which is really to maximize the performance on combustible in order to accompany and help the fastest transition to smoke-free. I think this strategy on combustible is working and delivering. And remember, we also said that in 2025, we expect a number of positive solutions for combustible cigarettes when it comes to cost of goods, where we'll have a lower level of headwinds. So there will be continuation of price increase in the future, without doubt. Nevertheless, don't take the 8 to 9 as the guidance for the future. We always said that we were more mid-single digits on the medium term. And we should see less headwind on cost of goods, which is probably good for the combustible cigarette profitability. On excise tax, at that stage, there is nothing really material I can report. I would say traditional discussion, but we're still a bit early. You know that many, many decisions are made in November, if not in December. So probably we'll know more at the end of the year. But so far, I would say nothing specific or unusual to flag.

Sure. Thank you. And my second question is on your e-cigarette comments. So what you told us is that you have shipped 1.2 billion sticks year to date. And if I understand correctly, you are using the conversion factor as 1 ml as 10 sticks. And if I assume one pod is 0.7 ml, then you are shipping 160 million pods. So that will suggest that your e-cigarette revenue is under $300 to $400 million, at which your contribution base will break even. So am I ballpark correct in all these numbers I have done?

Yeah, I can certainly confirm that one milliliter equates to 10 sticks, 10 cigarettes. That's the equivalence. And I would say that ballparks, you know, I'm not going to consume exactly, but you are not a million miles away from the reality on volumes. On revenue, I won't comment.

Sure. Thank you so much.

Thank you.

Thank you. Our next question comes from Faham Big with UBS. Your line is open.

Hi, Emmanuel. Hi, James. Thanks for taking my questions. A couple from me, please. I want to start with vapor, particularly because one of your peers highlighted that in Europe, vapor is seeing greater success in sort of fully converting smokers than heated tobacco. I know I've asked this before, but I wanted to get your latest thoughts on this topic. as well as whether you're seeing an acceleration in vapor adoption as you sort of roll out to veve in several markets. And the second question goes back to nicotine pouches in the U.S. I noted in your prepared remarks you've also seen some illicit products coming into the market, some that may be infringing your patents. Could you just maybe expand on what measures you are currently taking or expect to take, and how do you think this will differ from the current environment we see in vapor in the U.S., please?

Sure, with pleasure. So on greater success from vaping in convincing smokers, we don't see any of that. The experience is very different. It's quite obvious that versus Eat Not Burn, eating a liquid which has no tobacco is delivering very, very different experiences. And I think all markets are pointing to the fact that there is clearly a much, much higher and much better conversion from smokers to heat not burned and to vaping. And I think the success of ICOS is brightly illustrating that, I have to say. I'm not coming back on the performance on ICOS. I don't think we are really seeing an acceleration in the adoption of vaping. The vaping market, the vaping category is impacted today by many, many regulation evolution or potential evolution. We know that One of the problems of the vaping category is that you have a responsible player going for fancy flavor, unacceptable marketing behavior that can generate underage consumption that can be creating some We know that notably the disposable category has been generating some of that. But if you look at what we can assess of the legal age nicotine user, I don't think that we can report any acceleration that would be meaningful from vaping. Regarding the nicotine pouch in the U.S. and your question on what we do. Can you first allow me a general comment? I think that PMI is at the forefront, at the very forefront when it comes to fighting illicit trade. And that is true for the US, that is true everywhere in the world. We commit huge resources I mean, investment in fighting illicit trade, working with authorities, regulators in many countries to do that. And for us, it's a very, very important battle, a very important fight. make no exception. And yes, when we are aware of an illicit, when we are aware of product infringing potentially our patent, we are acting. I think that in my remarks, I signal some of the things that we do. You know, when we identified sources that are potentially outside the U.S., we could go to even you know terminating sales to these sources i said it we are working with distributor it can be you know informing creating the awareness for illicit product writing to distributor it can be sending seas and disease later to distributor retail where we see an issue and we do that on our own or working with the regulator as i said in the us like everywhere in the world. So you can be sure that we take that extremely seriously.

Thanks, Emmanuel.

Thank you very much.

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. Again, that is star 1-1 to ask a question. Our next question comes from Priya Origupta with Barclays. Your line is now open.

Hi, Emmanuel, thank you so much for squeezing me in. Just two quick ones for me. First, it does look like you modestly sort of took down the top end of your potential deleveraging for this year by a little bit. So if you could address sort of what drove that. And then secondly, you do have a fairly sizable amount of maturities over the course of 2025. Any thoughts on pulling some of that refinancing forward into the remainder of this year, just given where markets are opportunistically? Thank you.

Yeah, taking these two questions with pleasure. slightly and very modestly narrowing the guidance for deleveraging. It's because of the euro strength at the end of September. That was because, as you know, we have a significant part of the debt in euro and therefore in the euro is going up versus the dollar that can have a kind of one-off element because we always have this discrepancy between an EBIT that is calculated on an average rate for the year when the debt is going to be calculated on the spot on the 31st of December. So we'll see where we land. But the trajectory is clear and you may have seen that at the end of the third quarter, we have generated a cash flow of $8.2 billion. And that is simply $2.3 billion above the cash flow generation at the end of Q3 2023. So we are highly generating cash, of course, on the back of a very strong momentum in the business. But that's good news. Yeah, I'm certainly not going to discard the possibility for us to be active on the refinancing market in the coming months. I'm not going to elaborate now on that. And we have a number of options that are open to us. But you can be sure that we're already working on how to put in place the best refinancing, again, in the coming months for PMI. Great. Thank you so much. Thank you.

Thank you. Our next question comes from Gaurav Jain with Barclays. Your line is open.

Hi. Just a follow-up on the Canadian litigation settlement. Would these payments be tax deductible? And when do you think something final will happen in this long-running sort of court case?

Thank you, Gaurav. On the Canadian litigation, so you have what we can say at that stage in our press release that we have issued last week. It's too preliminary, and as I said, I'm not able to tell you whether it's going to be tax deductible. Of course, as soon as we know, we will let you know. But for the time being, I'm not able to say. And as you may have seen in our release, where we shared what we can share at that stage, there are still a number of elements in this proposed solution put on the table by the mediators to be finalized. And of course, once we have the final terms, we'll come back to you with this answer, of course, but also all the questions on what's going to be the impact for PMI of a final settlement.

Thank you so much.

Thank you.

Thank you. I'm showing no further questions at this time. I would now like to turn it back to James Bushnell for closing remarks.

Thank you for joining us today. Please reach out to the investor relations team if you have any follow-up questions. I'm wishing you a good rest of the week and earnings season.

Look forward to speaking to you soon. Thank you. Have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.