Log in
E-mail
Password
Remember
Forgot password ?
Become a member for free
Sign up
Sign up
New member
Sign up for FREE
New customer
Discover our services
Settings
Settings
Dynamic quotes 
OFFON

MarketScreener Homepage  >  Equities  >  Nyse  >  Philip Morris International, Inc.    PM

PHILIP MORRIS INTERNATIONAL, INC.

(PM)
  Report
SummaryQuotesChartsNewsRatingsCalendarCompanyFinancialsConsensusRevisions 
News SummaryMost relevantAll newsPress ReleasesOfficial PublicationsSector news

PHILIP MORRIS INTERNATIONAL : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K)

share with twitter share with LinkedIn share with facebook
share via e-mail
02/07/2020 | 06:50am EDT
The following discussion should be read in conjunction with the other sections
of this Annual Report on Form 10-K, including the consolidated financial
statements and related notes contained in Item 8, and the discussion of risks
and cautionary factors that may affect future results in Item 1A. Risk Factors.




Description of Our Company

We are leading a transformation in the tobacco industry to create a smoke-free
future and ultimately replace cigarettes with smoke-free products to the benefit
of adults who would otherwise continue to smoke, society, the company and its
shareholders. We are a leading international tobacco company engaged in the
manufacture and sale of cigarettes, as well as smoke-free products and
associated electronic devices and accessories, and other nicotine-containing
products in markets outside the United States. In addition, we ship a version of
our Platform 1 device and its consumables authorized by the U.S. Food and Drug
Administration ("FDA") to Altria Group, Inc., for sale in the United States
under license. We are building a future on a new category of smoke-free products
that, while not risk free, are a much better choice than continuing to smoke.
Through multidisciplinary capabilities in product development, state-of-the-art
facilities and scientific substantiation, we aim to ensure that our smoke-free
products meet adult consumer preferences and rigorous regulatory requirements.
Our IQOS smoke-free product brand portfolio includes heat-not-burn tobacco and
nicotine-containing vapor products.

We manage our business in six operating segments:

European Union ("EU");


• Eastern Europe ("EE");

Middle East & Africa ("ME&A"), which includes our international duty free

business;

• South & Southeast Asia ("S&SA");

East Asia & Australia ("EA&A"); and

Latin America & Canada ("LA&C"), which includes transactions under license

with Altria Group, Inc. for the distribution of our Platform 1 product in

       the United States.



Our cigarettes are sold in more than 180 markets, and in many of these markets
they hold the number one or number two market share position. We have a wide
range of premium, mid-price and low-price brands. Our portfolio comprises both
international and local brands. In addition to the manufacture and sale of
cigarettes, we are engaged in the development and commercialization of
reduced-risk products ("RRPs"). RRPs is the term we use to refer to products
that present, are likely to present, or have the potential to present less risk
of harm to smokers who switch to these products versus continuing smoking.

We use the term net revenues to refer to our operating revenues from the sale of
our products, including shipping and handling charges billed to customers, net
of sales and promotion incentives, and excise taxes. Our net revenues and
operating income are affected by various factors, including the volume of
products we sell, the price of our products, changes in currency exchange rates
and the mix of products we sell. Mix is a term used to refer to the
proportionate value of premium-price brands to mid-price or low-price brands in
any given market (product mix). Mix can also refer to the proportion of shipment
volume in more profitable markets versus shipment volume in less profitable
markets (geographic mix).

Our cost of sales consists principally of: tobacco leaf, non-tobacco raw
materials, labor and manufacturing costs; shipping and handling costs; and the
cost of the IQOS devices produced by third-party electronics manufacturing
service providers. Estimated costs associated with IQOS warranty programs are
generally provided for in cost of sales in the period the related revenues are
recognized.

Our marketing, administration and research costs include the costs of marketing
and selling our products, other costs generally not related to the manufacture
of our products (including general corporate expenses), and costs incurred to
develop new products. The most significant components of our marketing,
administration and research costs are marketing and sales expenses and general
and administrative expenses.

Philip Morris International Inc. is a legal entity separate and distinct from
its direct and indirect subsidiaries. Accordingly, our right, and thus the right
of our creditors and stockholders, to participate in any distribution of the
assets or earnings of any subsidiary is subject to the prior rights of creditors
of such subsidiary, except to the extent that claims of our company itself as a
creditor may be recognized. As a holding company, our principal sources of
funds, including funds to make payment on our debt securities, are from the
receipt of

                                       15
--------------------------------------------------------------------------------

dividends and repayment of debt from our subsidiaries. Our principal wholly
owned and majority-owned subsidiaries currently are not limited by long-term
debt or other agreements in their ability to pay cash dividends or to make other
distributions with respect to their common stock that are otherwise compliant
with law.

Executive Summary

The following executive summary provides significant highlights from the Discussion and Analysis that follows.

Consolidated Operating Results

• Net Revenues - Net revenues of $29.8 billion for the year ended December 31,

2019, increased by $0.2 billion, or 0.6%, from the comparable 2018 amount.

The change in our net revenues from the comparable 2018 amount was driven by

the following (variances not to scale with year-to-date results):

                [[Image Removed: chart-d5a1373d21214890bb8.jpg]]
Net revenues, excluding unfavorable currency, increased by 3.8%, mainly
reflecting: a favorable pricing variance, notably in Germany, Indonesia, Japan,
the Philippines and Turkey; and favorable volume/mix, mainly driven by heated
tobacco unit and IQOS device volume in the EU and Russia, and heated tobacco
unit volume in Japan, partly offset by unfavorable volume/mix of cigarettes,
notably in Australia, the EU, Indonesia, Japan and Russia, unfavorable heated
tobacco unit volume in PMI Duty Free, and unfavorable IQOS device volume in
Japan and Korea. The currency-neutral growth in net revenues of 3.8% came
despite the unfavorable impact of $763 million, shown in "Other" above,
predominantly resulting from the deconsolidation of our Canadian subsidiary,
Rothmans, Benson & Hedges, Inc. ("RBH"), effective March 22, 2019. For further
details on the deconsolidation of RBH, see Item 8, Note 18. Contingencies and
Note 22. Deconsolidation of RBH.

Net revenues by product category for the years ended December 31, 2019 and 2018,
are shown below:
[[Image Removed: chart-0e35503389a8527f975.jpg]]    [[Image Removed: chart-866bd228fe9e54f5801.jpg]]


                                       16
--------------------------------------------------------------------------------

• Diluted Earnings Per Share - The changes in our reported diluted earnings per

    share ("diluted EPS") for the year ended December 31, 2019, from the
    comparable 2018 amounts, were as follows:


                                                                          % Growth
                                                            Diluted EPS  

(Decline)

For the year ended December 31, 2018                       $      5.08

2018 Asset impairment and exit costs                                 -
2018 Tax items                                                    0.02
    Subtotal of 2018 items                                        0.02

2019 Asset impairment and exit costs                             (0.23 )
2019 Canadian tobacco litigation-related expense                 (0.09 )
2019 Loss on deconsolidation of RBH                              (0.12 )
2019 Russia excise and VAT audit charge                          (0.20 )
2019 Fair value adjustment for equity security investments        0.02
2019 Tax items                                                    0.04
    Subtotal of 2019 items                                       (0.58 )

Currency                                                         (0.13 )
Interest                                                          0.04
Change in tax rate                                               (0.04 )
Operations                                                        0.22
For the year ended December 31, 2019                       $      4.61     (9.3 )%




Income taxes - The 2018 Tax items that decreased our 2018 diluted EPS by $0.02
per share in the table above represented a current income tax charge of $185
million primarily due to an increase in our final 2017 transition tax liability,
mostly offset by a deferred income tax benefit of $154 million primarily due to
the recognition of deferred tax assets for net operating losses in the state of
New York.

The 2019 Tax items that increased our 2019 diluted EPS by $0.04 per share in the
table above was primarily due to a reduction in estimated U.S. federal income
tax on dividend repatriation for the years 2015-2018 ($67 million).

The change in the tax rate that decreased our diluted EPS by $0.04 per share in
the table above was primarily due to changes in earnings mix by taxing
jurisdiction and U.S. state deferred income tax expense, partially offset by
repatriation cost differences.

For further details, see Item 8, Note 11. Income Taxes.


Asset impairment and exit costs - As a part of the optimization of our global
manufacturing infrastructure, we recorded pre-tax asset impairment and exit
costs of $422 million during 2019, representing $362 million net of income tax
and a diluted EPS charge of $0.23 per share. This charge primarily related to a
cigarette plant closure in Berlin, Germany (approximately $0.19 per share), as
well as the closure of a cigarette plant in Argentina, Colombia and Pakistan.
The total pre-tax charge was included in marketing, administration and research
costs on the consolidated statements of earnings. For further details, see Item
8, Note 21. Asset Impairment and Exit Costs.

Canadian tobacco litigation-related expense - In the first quarter of 2019, we
recorded a pre-tax charge of $194 million, representing $142 million net of tax,
relating to the judgment against RBH in two Québec smoking and health class
actions. The charge of $0.09 per share reflects our assessment of the portion of
the judgment that represents probable and estimable loss prior to the
deconsolidation of RBH and corresponds to the trust account deposit required by
the judgment. The total pre-tax charge was included in marketing, administration
and research costs on the consolidated statements of earnings and was included
in the operating income of the Latin America & Canada segment. For further
details, see Item 8, Note 18. Contingencies and Item 8, Note 22. Deconsolidation
of RBH.


                                       17
--------------------------------------------------------------------------------

Loss on deconsolidation of RBH - Following the judgment in the two Québec
smoking and health class actions, RBH obtained an initial order from the Ontario
Superior Court of Justice granting it protection under the Companies' Creditors
Arrangement Act ("CCAA"), which is a Canadian federal law that permits a
Canadian business to restructure its affairs while carrying on its business in
the ordinary course with minimal disruption to its customers, suppliers and
employees. The administration of the CCAA process, principally relating to the
powers provided to the court and the court appointed monitor, removes certain
elements of control of the business from both PMI and RBH. As a result, we have
determined that we no longer have a controlling financial interest over RBH and
that we do not exert "significant influence" over RBH under U.S. GAAP.
Therefore, we deconsolidated RBH as of the date of the CCAA filing on March 22,
2019, and will account for our continuing investment in RBH as an equity
security, without readily determinable fair value.

A loss on the deconsolidation of RBH of $239 million was included in marketing,
administration and research costs on the consolidated statements of earnings and
was included in the operating income of the Latin America & Canada segment. The
$0.12 per share impact also included a tax benefit of $49 million within the
provision for income taxes, as discussed above, related to the reversal of a
deferred tax liability on the unremitted earnings of RBH. For further details,
see Item 8, Note 18. Contingencies and Item 8, Note 22. Deconsolidation of RBH.

Russia excise and VAT audit charge - As a result of the final tax assessment for
the 2015-2017 financial years received by our Russian affiliate, in the third
quarter of 2019, PMI recorded a pre-tax charge of $374 million in marketing,
administration and research costs in the consolidated statements of earnings,
representing $315 million net of income tax and a diluted EPS charge of $0.20.
The pre-tax charge of $374 million was included in the operating income of the
Eastern Europe segment. For further details, see Item 8, Note 18. Contingencies.

Fair Value adjustment for equity security investments - In the fourth quarter of
2019, PMI recorded a favorable fair value adjustment for its equity security
investments of $35 million after tax (or $0.02 per share increase in diluted
EPS).  The fair value adjustment for its equity security investments was
included in equity investments and securities (income)/loss, net ($44 million
income) and provision for income taxes ($9 million expense) on the consolidated
statements of earnings in 2019. For further details, see Item 8, Note 16. Fair
Value Measurements.

Currency - The unfavorable currency impact during 2019 results from the
fluctuations of the U.S. dollar, especially against the Euro, Russian ruble and
Turkish lira. This unfavorable currency movement has impacted our profitability
across our primary revenue markets and local currency cost bases.

Interest - The favorable impact of interest was due primarily to our ongoing
efforts to optimize our capital structure following the passage of the U.S. Tax
Cuts and Jobs Act. This included the decision to use existing cash to repay $2.5
billion and $4.0 billion of long-term debt that matured in 2018 and in 2019,
respectively.

Operations - The increase in diluted EPS of $0.22 from our operations in the table above was due primarily to the following segments:

European Union: Favorable volume/mix and favorable pricing, partially

offset by higher marketing, administration and research costs and higher

manufacturing costs;

• South & Southeast Asia: Favorable pricing and lower manufacturing costs,

       partially offset by unfavorable volume/mix and higher marketing,
       administration and research costs;


•      Middle East & Africa: Favorable pricing, lower manufacturing costs and
       lower marketing, administration and research costs, partially offset by
       unfavorable volume/mix; and

East Asia & Australia: Favorable pricing and lower manufacturing costs,

partially offset by unfavorable volume/mix and higher marketing,

administration and research costs;



partially offset by
•      Latin America & Canada: Unfavorable impact resulting from the

deconsolidation of RBH, as well as unfavorable volume/mix, partially

offset by lower marketing, administration and research costs, favorable

pricing and lower manufacturing costs; and

Eastern Europe: Higher marketing, administration and research costs and

higher manufacturing costs, partially offset by favorable volume/mix and

       favorable pricing.



For further details, see the Consolidated Operating Results and Operating Results by Business Segment sections of the following Discussion and Analysis.

                                       18
--------------------------------------------------------------------------------

Discussion and Analysis

Critical Accounting Estimates

Item 8, Note 2. Summary of Significant Accounting Policies to our consolidated
financial statements includes a summary of the significant accounting policies
and methods used in the preparation of our consolidated financial statements. In
most instances, we must use a particular accounting policy or method because it
is the only one that is permitted under U.S. GAAP.

The preparation of financial statements requires that we use estimates and
assumptions that affect the reported amounts of our assets, liabilities, net
revenues and expenses, as well as our disclosure of contingencies. If actual
amounts differ from previous estimates, we include the revisions in our
consolidated results of operations in the period during which we know the actual
amounts. Historically, aggregate differences, if any, between our estimates and
actual amounts in any year have not had a significant impact on our consolidated
financial statements.

The selection and disclosure of our critical accounting estimates have been
discussed with our Audit Committee. The following is a discussion of the more
significant assumptions, estimates, accounting policies and methods used in the
preparation of our consolidated financial statements:

Revenue Recognition - We recognize revenue as performance obligations are
satisfied. Our primary performance obligation is the distribution and sales of
cigarettes and other nicotine-containing products, including reduced-risk
products. Our performance obligations are typically satisfied upon shipment or
delivery to our customers. The company estimates the cost of sales returns based
on historical experience, and these estimates are immaterial. Estimated costs
associated with warranty programs for IQOS devices are generally provided for in
cost of sales in the period the related revenues are recognized, based on a
number of factors, including historical experience, product failure rates and
warranty policies. The transaction price is typically based on the amount billed
to the customer and includes estimated variable consideration where applicable.
Such variable consideration is typically not constrained and is estimated based
on the most likely amount that PMI expects to be entitled to under the terms of
the contracts with customers, historical experience of discount or rebate
redemption, where relevant, and the terms of any underlying discount or rebate
programs, which may change from time to time as the business and product
categories evolve.

Inventories - Our inventories are valued at the lower of cost or market based
upon assumptions about future demand and market conditions. The valuation of
inventory also requires us to estimate obsolete and excess inventory.  We
perform regular reviews of our inventory on hand, as well as our future purchase
commitments with our suppliers, considering multiple factors, including demand
forecasts, product life cycle, current sales levels, pricing strategy and cost
trends. If our review indicates that inventories of raw materials, components or
finished products have become obsolete or are in excess of anticipated demand or
that inventory cost exceeds net realizable value, we may be required to make
adjustments that will impact the results of operations.

Goodwill and Non-Amortizable Intangible Assets Valuation - We test goodwill and
non-amortizable intangible assets for impairment annually or more frequently if
events occur that would warrant such review. While the company has the option to
perform a qualitative assessment for both goodwill and non-amortizable
intangible assets to determine if it is more likely than not that an impairment
exists, the company elects to perform the quantitative assessment for our annual
impairment analysis. The impairment analysis involves comparing the fair value
of each reporting unit or non-amortizable intangible asset to the carrying
value. If the carrying value exceeds the fair value, goodwill or a
non-amortizable intangible asset is considered impaired. To determine the fair
value of goodwill, we primarily use a discounted cash flow model, supported by
the market approach using earnings multiples of comparable global and local
companies within the tobacco industry. At December 31, 2019, the carrying value
of our goodwill was $5.9 billion, which is related to ten reporting units, each
of which consists of a group of markets with similar economic characteristics.
The estimated fair value of each of our ten reporting units exceeded the
carrying value as of December 31, 2019. To determine the fair value of
non-amortizable intangible assets, we primarily use a discounted cash flow model
applying the relief-from-royalty method. We concluded that the fair value of our
non-amortizable intangible assets exceeded the carrying value. These discounted
cash flow models include management assumptions relevant for forecasting
operating cash flows, which are subject to changes in business conditions, such
as volumes and prices, costs to produce, discount rates and estimated capital
needs. Management considers historical experience and all available information
at the time the fair values are estimated, and we believe these assumptions are
consistent with the assumptions a hypothetical marketplace participant would
use. Since the March 28, 2008, spin-off from Altria Group, Inc., we have not
recorded a charge to earnings for an impairment of goodwill or non-amortizable
intangible assets.

Marketing Costs - We incur certain costs to support our products through programs that include advertising, marketing, consumer engagement and trade promotions. The costs of our advertising and marketing programs are expensed in accordance with U.S. GAAP. Recognition of the cost related to our consumer engagement and trade promotion programs contain uncertainties due to the judgment

                                       19
--------------------------------------------------------------------------------

required in estimating the potential performance and compliance for each
program. For volume-based incentives provided to customers, management
continually assesses and estimates, by customer, the likelihood of the
customer's achieving the specified targets, and records the reduction of revenue
as the sales are made. For other trade promotions, management relies on
estimated utilization rates that have been developed from historical experience.
Changes in the assumptions used in estimating the cost of any individual
marketing program would not result in a material change in our financial
position, results of operations or operating cash flows.

Employee Benefit Plans - As discussed in Item 8, Note 13. Benefit Plans to our
consolidated financial statements, we provide a range of benefits to our
employees and retired employees, including pensions, postretirement health care
and postemployment benefits (primarily severance). We record annual amounts
relating to these plans based on calculations specified by U.S. GAAP. These
calculations include various actuarial assumptions, such as discount rates,
assumed rates of return on plan assets, compensation increases, mortality,
turnover rates and health care cost trend rates. We review actuarial assumptions
on an annual basis and make modifications to the assumptions based on current
rates and trends when it is deemed appropriate to do so. As permitted by U.S.
GAAP, any effect of the modifications is generally amortized over future
periods. We believe that the assumptions utilized in calculating our obligations
under these plans are reasonable based upon our historical experience and advice
from our actuaries.

Weighted-average discount rate assumptions for pension and postretirement plan obligations at December 31, 2019 and 2018 are as follows:

                     2019  2018
Pension plans        0.83% 1.61%
Postretirement plans 3.28% 3.97%



We anticipate that assumption changes will increase 2020 pre-tax pension and
postretirement expense to approximately $256 million as compared with
approximately $201 million in 2019, excluding amounts related to employee
severance and early retirement programs. The anticipated increase is primarily
due to higher amortization of unrecognized actuarial gains/losses of $73
million, coupled with higher service cost of $48 million, partially offset by
lower interest cost of $49 million and higher expected return on plan assets of
$18 million and other movements of $1 million.

Weighted-average expected rate of return and discount rate assumptions have a
significant effect on the amount of expense reported for the employee benefit
plans.  A fifty-basis-point decrease in our discount rate would increase our
2020 pension and postretirement expense by approximately $65 million, and a
fifty-basis-point increase in our discount rate would decrease our 2020 pension
and postretirement expense by approximately $58 million. Similarly, a
fifty-basis-point decrease (increase) in the expected return on plan assets
would increase (decrease) our 2020 pension expense by approximately $36 million.

Income Taxes - Income tax provisions for jurisdictions outside the United
States, as well as state and local income tax provisions, are determined on a
separate company basis, and the related assets and liabilities are recorded in
our consolidated balance sheets.

The extent of our operations involves dealing with uncertainties and judgments
in the application of complex tax regulations in a multitude of jurisdictions.
The final taxes paid are dependent upon many factors, including negotiations
with taxing authorities in various jurisdictions and resolution of disputes
arising from federal, state, and international tax audits. In accordance with
the authoritative guidance for income taxes, we evaluate potential tax exposures
and record tax liabilities for anticipated tax audit issues based on our
estimate of whether, and the extent to which, additional taxes will be due. We
adjust these reserves in light of changing facts and circumstances; however, due
to the complexity of some of these uncertainties, the ultimate resolution may
result in a payment that is materially different from our current estimate of
the tax liabilities. If our estimate of tax liabilities proves to be less than
the ultimate assessment, an additional charge to expense would result. If
payment of these amounts ultimately proves to be less than the recorded amounts,
the reversal of the liabilities would result in tax benefits being recognized in
the period when we determine the liabilities are no longer necessary.

We are required to assess the likelihood of recovering deferred tax assets
against future sources of taxable income.  If we determine, using all available
evidence, that we do not reach the more likely than not threshold for recovery,
a valuation allowance is recorded.  Significant judgment is required in
determining the need for and amount of valuation allowances for deferred tax
assets including estimates of future taxable income in the applicable
jurisdictions and the feasibility of on-going tax planning strategies, as
applicable.

The effective tax rates used for interim reporting are based on our full-year
geographic earnings mix projections. Changes in currency exchange rates or
earnings mix by taxing jurisdiction could have an impact on the effective tax
rates. Significant judgment is required in determining income tax provisions and
in evaluating tax positions.

For further details, see Item 8, Note 11. Income Taxes to our consolidated financial statements.

                                       20
--------------------------------------------------------------------------------

Hedging - As discussed below in "Market Risk," we use derivative financial
instruments principally to reduce exposures to market risks resulting from
fluctuations in foreign currency exchange and interest rates by creating
offsetting exposures. For derivatives to which we have elected to apply hedge
accounting, gains and losses on these derivatives are initially deferred in
accumulated other comprehensive losses on the consolidated balance sheet and
recognized in the consolidated statement of earnings into the same line item as
the impact of the underlying transaction and in the periods when the related
hedged transactions are also recognized in operating results. If we had elected
not to use the hedge accounting provisions, gains (losses) deferred in
stockholders' (deficit) equity would have been recorded in our net earnings for
these derivatives.

Fair value of non-marketable equity securities - For further details, see Item 8, Note 22. Deconsolidation of RBH.


Contingencies - As discussed in Item 8, Note 18. Contingencies to our
consolidated financial statements, legal proceedings covering a wide range of
matters are pending or threatened against us, and/or our subsidiaries, and/or
our indemnitees in various jurisdictions. We and our subsidiaries record
provisions in the consolidated financial statements for pending litigation when
we determine that an unfavorable outcome is probable and the amount of the loss
can be reasonably estimated. The variability in pleadings in multiple
jurisdictions, together with the actual experience of management in litigating
claims, demonstrate that the monetary relief that may be specified in a lawsuit
bears little relevance to the ultimate outcome. Much of the tobacco-related
litigation is in its early stages, and litigation is subject to uncertainty. At
the present time, except as stated otherwise in Item 8, Note 18. Contingencies,
while it is reasonably possible that an unfavorable outcome in a case may occur,
after assessing the information available to it: (i) management has not
concluded that it is probable that a loss has been incurred in any of the
pending tobacco-related cases; (ii) management is unable to estimate the
possible loss or range of loss for any of the pending tobacco-related cases; and
(iii) accordingly, no estimated loss has been accrued in the consolidated
financial statements for unfavorable outcomes in these cases, if any. Legal
defense costs are expensed as incurred.


Consolidated Operating Results Our net revenues and operating income by segment were as follows: (in millions)

            2019      2018      2017

Net Revenues European Union$ 9,817$ 9,298$ 8,318Eastern Europe

            3,282     2,921     2,711

Middle East & Africa 4,042 4,114 3,988 South & Southeast Asia 5,094 4,656 4,417 East Asia & Australia 5,364 5,580 6,373 Latin America & Canada 2,206 3,056 2,941 Net revenues

           $ 29,805$ 29,625$ 28,748
Operating Income
European Union         $  3,970$  4,105$  3,691
Eastern Europe              547       902       887

Middle East & Africa 1,684 1,627 1,884 South & Southeast Asia 2,163 1,747 1,514 East Asia & Australia 1,932 1,851 2,608 Latin America & Canada 235 1,145 997 Operating income $ 10,531$ 11,377$ 11,581

Items affecting the comparability of results from operations were as follows:

Russia excise and VAT audit charge - See Item 8, Note 18. Contingencies for

details of the $374 million pre-tax charge included in the Eastern Europe

segment for the year ended December 31, 2019.

• Asset impairment and exit costs - See Item 8, Note 21. Asset Impairment and

Exit Costs for details of the $422 million pre-tax charge for the year ended

December 31, 2019, as well as a breakdown of these costs by segment.

• Canadian tobacco litigation-related expense - See Item 8, Note 18.

Contingencies and Note 22. Deconsolidation of RBH for details of the $194

million pre-tax charge included in the Latin America & Canada segment for the

    year ended December 31, 2019.



                                       21
--------------------------------------------------------------------------------

• Loss on deconsolidation of RBH - See Item 8, Note 22. Deconsolidation of RBH

for details of the $239 million loss included in the Latin America & Canada

segment for the year ended December 31, 2019.

Our net revenues by product category were as follows:

          PMI Net Revenues by Product Category
(in millions)                 2019      2018      2017
Combustible Products
European Union              $  8,093$  8,433$  8,048
Eastern Europe                 2,438     2,597     2,657
Middle East & Africa           3,721     3,732     3,893
South & Southeast Asia         5,094     4,656     4,417
East Asia & Australia          2,693     3,074     3,156
Latin America & Canada         2,179     3,037     2,937
Total Combustible Products  $ 24,218$ 25,529$ 25,107
Reduced-Risk Products
European Union              $  1,724$    865$    269
Eastern Europe                   844       324        55
Middle East & Africa             321       382        94
South & Southeast Asia             -         -         -
East Asia & Australia          2,671     2,506     3,218
Latin America & Canada            27        19         4

Total Reduced-Risk Products $ 5,587$ 4,096$ 3,640

Total PMI Net Revenues $ 29,805$ 29,625$ 28,748

Note: Sum of product categories or Regions might not foot to total PMI due to rounding.


Net revenues related to combustible products refer to the operating revenues
generated from the sale of these products, including shipping and handling
charges billed to customers, net of sales and promotion incentives, and excise
taxes. These net revenue amounts consist of the sale of our cigarettes and other
tobacco products combined. Other tobacco products primarily include
roll-your-own and make-your-own cigarettes, pipe tobacco, cigars and cigarillos
and do not include reduced-risk products.

Net revenues related to reduced-risk products refer to the operating revenues
generated from the sale of these products, including shipping and handling
charges billed to customers, net of sales and promotion incentives, and excise
taxes. These net revenue amounts consist of the sale of our heated tobacco
units, IQOS devices and related accessories, and other nicotine-containing
products, which primarily include our e-vapor products.

We recognize revenue when control is transferred to the customer, typically either upon shipment or delivery of goods.


Revenues from shipments of Platform 1 devices, heated tobacco units and
accessories to Altria Group, Inc., commencing in the third quarter of 2019, for
sale under license in the United States, are included in Net Revenues of the
Latin America & Canada segment.

References to "Cost/Other" in the Consolidated Financial Summary table of total
PMI and the six operating segments throughout this "Discussion and Analysis"
reflects the currency-neutral variances of: cost of sales (excluding the
volume/mix cost component); marketing, administration and research costs
(including asset impairment and exit costs, the Canadian tobacco
litigation-related expense, the charge related to the deconsolidation of RBH in
Canada, and the Russia excise and VAT audit charge); and amortization of
intangibles. "Cost/Other" also includes the currency-neutral net revenue
variance, unrelated to volume/mix and price components, attributable to fees for
certain distribution rights billed to customers in certain markets in the ME&A
Region, as well as the impact of the deconsolidation in RBH.


                                       22
--------------------------------------------------------------------------------


Our shipment volume by segment for cigarettes and heated tobacco units was as
follows:
                PMI Shipment Volume (Million Units)
                                            2019     2018     2017
Cigarettes
European Union                            174,319  179,622  187,293
Eastern Europe                            100,644  108,718  119,398
Middle East & Africa                      134,568  136,605  136,759
South & Southeast Asia                    174,934  178,469  171,600
East Asia & Australia                      49,951   56,163   62,653
Latin America & Canada                     72,293   80,738   84,223
Total Cigarettes                          706,709  740,315  761,926
Heated Tobacco Units
European Union                             12,569    5,977    1,889
Eastern Europe                             13,453    4,979      674
Middle East & Africa                        2,654    3,403      907
South & Southeast Asia                          -        -        -
East Asia & Australia                      30,677   26,866   32,729
Latin America & Canada (1)                    299      147       27
Total Heated Tobacco Units                 59,652   41,372   36,226
Cigarettes and Heated Tobacco Units
European Union                            186,888  185,599  189,182
Eastern Europe                            114,097  113,697  120,072
Middle East & Africa                      137,222  140,008  137,666
South & Southeast Asia                    174,934  178,469  171,600
East Asia & Australia                      80,628   83,029   95,382
Latin America & Canada                     72,592   80,885   84,250

Total Cigarettes and Heated Tobacco Units 766,361 781,687 798,152

(1) Includes shipments to Altria Group, Inc., commencing in the third quarter of 2019, for sale in the United States under license.


Following the deconsolidation of our Canadian subsidiary, we will continue to
report the volume of brands sold by RBH for which other PMI subsidiaries are the
trademark owners. These include HEETS, Next, Philip Morris and Rooftop, which
together accounted for approximately 40% of RBH's total shipment volume in 2018.

Heated tobacco units ("HTU") is the term we use to refer to heated tobacco consumables, which for us include our HEETS, HEETS Marlboro and HEETS FROM MARLBORO, defined collectively as HEETS, as well as Marlboro HeatSticks and Parliament HeatSticks.

Shipment volume of heated tobacco units to the United States is included in the heated tobacco unit shipment volume of the Latin America & Canada segment.


References to total international market, defined as worldwide cigarette and
heated tobacco unit volume excluding the United States, total industry, total
market and market shares throughout this "Discussion and Analysis" are our
estimates for tax-paid products based on the latest available data from a number
of internal and external sources and may, in defined instances, exclude the
People's Republic of China and/or our duty free business. In addition, to
reflect the deconsolidation of RBH, effective March 22, 2019, PMI's total market
share has been restated for previous periods.

In-market sales ("IMS") is defined as sales to the retail channel, depending on the market and distribution model.

                                       23
--------------------------------------------------------------------------------

North Africa is defined as Algeria, Egypt, Libya, Morocco and Tunisia.

The Gulf Cooperation Council ("GCC") is defined as Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE).

Unless otherwise stated, references to total industry, total market, our shipment volume and our market share performance reflect cigarettes and heated tobacco units.


From time to time, PMI's shipment volumes are subject to the impact of
distributor inventory movements, and estimated total industry/market volumes are
subject to the impact of inventory movements in various trade channels that
include estimated trade inventory movements of PMI's competitors arising from
market-specific factors that significantly distort reported volume disclosures.
Such factors may include changes to the manufacturing supply chain, shipment
methods, consumer demand, timing of excise tax increases or other influences
that may affect the timing of sales to customers. In such instances, in addition
to reviewing PMI shipment volumes and certain estimated total industry/market
volumes on a reported basis, management reviews these measures on an adjusted
basis that excludes the impact of distributor and/or estimated trade inventory
movements. Management also believes that disclosing PMI shipment volumes and
estimated total industry/market volumes in such circumstances on a basis that
excludes the impact of distributor and/or estimated trade inventory movements
improves the comparability of performance and trends for these measures over
different reporting periods.


2019 compared with 2018

The following discussion compares our consolidated operating results for the year ended December 31, 2019, with the year ended December 31, 2018.

Estimated international industry cigarette and heated tobacco unit volume, excluding China and the United States, of 2.7 trillion, decreased by 2.0%, due to the EU, EE, S&SA, EA&A and LA&C, as described in the Regional sections below.

Our total shipment volume decreased by 2.0%, due to:

Middle East & Africa, primarily reflecting lower cigarette shipment volume,

notably in Turkey, partly offset by Egypt and Saudi Arabia, and lower heated

tobacco unit shipment volume in PMI Duty Free;

• South & Southeast Asia, reflecting lower cigarette shipment volume, primarily

in Indonesia, Pakistan and the Philippines, partly offset by Thailand;

East Asia & Australia, primarily reflecting lower cigarette shipment volume

in Japan and lower cigarette and heated tobacco unit shipment volume in

Korea, partly offset by higher heated tobacco unit shipment volume in Japan;

and

Latin America & Canada, reflecting lower cigarette shipment volume,

principally in Argentina, Canada (primarily due to the impact of the

deconsolidation of RBH) and Venezuela. Excluding the volume impact from the

RBH deconsolidation of approximately 4.3 billion units (reflecting the volume

of RBH-owned brands from March 22, 2018 through December 31, 2018), our total

shipment volume in the Region decreased by 5.2%;

partly offset by • the EU, reflecting higher heated tobacco unit shipment volume across the

Region, notably in Italy, partly offset by lower cigarette shipment volume,

primarily in France, Germany and Italy; and

Eastern Europe, reflecting higher heated tobacco unit shipment volume across

the Region, notably in Kazakhstan, Russia and Ukraine, partly offset by lower

cigarette shipment volume, primarily in Russia and Ukraine.




Excluding the volume impact from the RBH deconsolidation of approximately 4.3
billion units (reflecting the volume of RBH-owned brands from March 22, 2018
through December 31, 2018 and including Duty-Free sales of these brands in
Canada), PMI's total shipment volume decreased by 1.4%.

Impact of Inventory Movements


Excluding the volume impact from the deconsolidation of RBH, and the net
favorable impact of estimated distributor inventory movements of approximately
1.1 billion units, our total in-market sales declined by 1.5%, due to a 3.7%
decline of cigarettes, partly offset by a 35.3% increase in heated tobacco
units.


                                       24
--------------------------------------------------------------------------------

The net favorable impact of estimated distributor inventory movements of
approximately 1.1 billion units reflected a 2.7 billion favorable impact from
heated tobacco units (driven primarily by Japan, mainly reflecting a favorable
comparison with 2018 in which IQOS consumable inventories were reduced, partly
offset by PMI Duty Free), partially offset by a 1.6 billion unfavorable impact
from cigarettes (due primarily to Japan, North Africa and Thailand, partly
offset by the EU Region and Saudi Arabia).

Our cigarette shipment volume by brand and heated tobacco unit shipment volume was as follows:

            PMI Shipment Volume by Brand (Million Units)
                                                   Full-Year
                                             2019     2018  Change
Cigarettes
Marlboro                                  262,908  264,423    (0.6 )%
L&M                                        92,873   89,789     3.4  %
Chesterfield                               57,185   59,452    (3.8 )%
Philip Morris                              49,164   49,864    (1.4 )%
Parliament                                 38,723   41,697    (7.1 )%
Sampoerna A                                35,133   39,522   (11.1 )%
Dji Sam Soe                                32,435   29,195    11.1  %
Bond Street                                28,025   32,173   (12.9 )%
Lark                                       19,602   23,021   (14.9 )%
Fortune                                    12,831   16,596   (22.7 )%
Others                                     77,830   94,583   (17.7 )%
Total Cigarettes                          706,709  740,315    (4.5 )%
Heated Tobacco Units (1)                   59,652   41,372    44.2  %

Total Cigarettes and Heated Tobacco Units 766,361 781,687 (2.0 )%

(1) Includes shipments to Altria Group, Inc., commencing in the third quarter of 2019, for sale in the United States under license. Note: Sampoerna A includes Sampoerna; Philip Morris includes Philip Morris/Dubliss; and Lark includes Lark Harmony.

Our cigarette shipment volume of the following brands decreased:

Marlboro, mainly due to Italy and Japan, partly reflecting the impact of

out-switching to heated tobacco units, as well as France, partially offset by

the Philippines, Saudi Arabia and Turkey;

• Chesterfield, mainly due to Argentina, Italy, Russia and Venezuela, partly

offset by Brazil;

• Philip Morris, notably due to Argentina, partly offset by Indonesia and

Russia;

Parliament, mainly due to Japan, Korea and Russia;

• Sampoerna A in Indonesia, mainly reflecting the impact of retail price

increases resulting in widened price gaps with competitors' products;

Bond Street, mainly due to Russia and Ukraine;

• Lark, mainly due to Japan and Turkey;

• Fortune in the Philippines, mainly reflecting up-trading to Marlboro

resulting from narrowed price gaps with the below premium price segment; and

• "Others," notably due to: the impact of the deconsolidation of RBH in Canada;

mid-price Sampoerna U in Indonesia, partly reflecting the impact of

above-inflation retail price increases; and low-price brands, notably Morven

    in Pakistan and Next/Dubliss in Russia, partly offset by Jackpot in the
    Philippines.



The increase in our heated tobacco unit shipment volume was mainly driven by:
the EU (notably Italy and Poland), Eastern Europe (notably Kazakhstan, Russia
and Ukraine) and Japan, partly offset by Korea and PMI Duty Free.

                                       25
--------------------------------------------------------------------------------

Our cigarette shipment volume of the following brands increased:

• L&M, mainly driven by Egypt and Thailand, partly offset by Russia and Turkey;

and

• Dji Sam Soe in Indonesia, driven by the strong performance of the DSS Magnum

Mild 16 variant and the introduction of 20s and 50s variants.

2019 International Share of Market (excluding China and the United States)


Our total international market share (excluding China and the United States),
defined as our cigarette and heated tobacco unit sales volume as a percentage of
total industry cigarette and heated tobacco unit sales volume, increased by 0.1
point to 28.4%, reflecting:
•   Total international heated tobacco unit market share of 2.2%, up by 0.6

points; and

• Total international cigarette market share of 26.2%, down by 0.5 points.



Our total international cigarette market share, defined as our cigarette sales
volume as a percentage of total industry cigarette sales volume, was down by 0.3
points to 26.9%, mainly reflecting: out-switching to heated tobacco units,
notably in the EU and Japan; and lower cigarette market share, notably in
Argentina, Indonesia, Korea and Turkey.
In 2019, we owned six of the world's top 15 international cigarette brands, with
international cigarette market shares as follows: Marlboro, 10.0%; L&M, 3.5%;
Chesterfield, 2.2%; Philip Morris, 1.9%; Parliament, 1.5%; and Bond Street,
1.1%.



                                       26
--------------------------------------------------------------------------------

Key Market Data


Key market data regarding total market size, our shipments and market share were
as follows:
                                                    PMI Shipments (billion units)                    PMI Market Share (%)(1)
                                                                                        Heated                        Heated
                   Total Market                                                         Tobacco                       Tobacco
    Market        (billion units)            Total                  Cigarette            Unit          Total           Unit
                   2019    2018         2019       2018          2019       2018       2019 2018    2019  2018       2019 2018
Total             2,703.6 2,757.7      766.4      781.7         706.7      740.3       59.7 41.4    28.4  28.3       2.2  1.6
European Union
France             37.9    40.9         17.0       18.5          16.9       18.4       0.1   -      45.0  45.5       0.2  0.1
Germany            73.3    75.2         27.9       28.1          27.0       27.7       0.9  0.4     38.0  37.3       1.2  0.5
Italy              67.9    69.0         34.9       35.2          31.4       33.5       3.5  1.7     51.8  51.8       4.8  2.2
Poland             46.2    43.2         19.0       17.9          17.9       17.6       1.1  0.4     41.2  41.5       2.5  0.9
Spain              45.3    45.0         14.5       14.1          14.1       13.9       0.3  0.2     31.3  32.1       0.7  0.4

Eastern Europe
Russia             226.5   238.9        68.0       68.0          58.8       64.6       9.2  3.4     30.1  28.3       3.8  1.0

Middle East & Africa
Saudi Arabia       20.8    20.6         9.2        7.4           9.2        7.4         -    -      43.0  41.5        -    -
Turkey             118.9   118.5        51.9       55.0          51.9       55.0        -    -      43.7  46.4        -    -

South & Southeast Asia
Indonesia          306.8   303.6        98.5      101.4          98.5      101.4        -    -      32.1  33.4        -    -
Philippines        70.5    73.2         49.7       51.2          49.7       51.2        -    -      70.5  69.9        -    -

East Asia & Australia
Australia          12.0    12.8         3.3        3.8           3.3        3.8         -    -      27.5  29.7        -    -
Japan              158.0   167.3        52.4       52.3          26.6       30.8       25.8 21.4    34.5  34.0       17.1 15.5
Korea              68.6    69.5         15.5       17.4          10.8       12.0       4.6  5.4     22.6  25.0       6.8  7.8

Latin America & Canada
Argentina          33.4    35.0         23.3       25.8          23.3       25.8        -    -      70.0  73.8        -    -
Mexico             35.5    35.5         23.8       24.2          23.8       

24.2 - - 67.1 68.0 - -

(1) Market share estimates are calculated using IMS data Note: % change for Total Market and PMI shipments is computed based on millions of units; PMI Market Share estimates for previous periods are restated to reflect RBH deconsolidation and exclude RBH-owned brands.



















                                       27
--------------------------------------------------------------------------------
                                                    Financial Summary
Financial Summary -                                       Change                             Variance
Years Ended                                            Fav./(Unfav.)                      Fav./(Unfav.)
December 31,
                                2019       2018       Total    Excl.       Total     Cur-     Price     Vol/     Cost/
(in millions)                                                  Curr.                rency               Mix     Other(1)
Net Revenues                 $ 29,805$ 29,625       0.6  %   3.8  %   $   180$ (937 )$ 1,483$  397$   (763 )
Cost of Sales                 (10,513 )  (10,758 )     2.3  %  (0.5 )%       245      302         -     (309 )      252
Marketing, Administration
and Research Costs (2)         (8,695 )   (7,408 )   (17.4 )% (22.0 )%    (1,287 )    340         -        -     (1,627 )
Amortization of                   (66 )      (82 )    19.5  %  15.9  %        16        3         -        -         13
Intangibles
Operating Income             $ 10,531$ 11,377      (7.4 )%  (4.9 )%   $ 

(846 ) $ (292 )$ 1,483$ 88$ (2,125 )



(1) Cost/Other variance includes the impact of the RBH deconsolidation.
(2) Unfavorable Cost/Other variance includes asset impairment and exit costs of
$422 million in 2019, the Russia excise and VAT audit charge of $374 million in
2019, the 2019 loss on deconsolidation of RBH of $239 million, and the 2019
Canadian tobacco litigation-related expense of $194 million, as well as the
impact of the RBH deconsolidation.
Note: Net Revenues include revenues from shipments of Platform 1 devices, heated
tobacco units and accessories to Altria Group, Inc., commencing in the third
quarter of 2019, for sale under license in the United States.

Net revenues, excluding unfavorable currency, increased by 3.8%, mainly
reflecting: a favorable pricing variance, notably in Germany, Indonesia, Japan,
the Philippines and Turkey; and favorable volume/mix, mainly driven by heated
tobacco unit and IQOS device volume in the EU and Russia, and heated tobacco
unit volume in Japan, partly offset by unfavorable volume/mix of cigarettes,
notably in Australia, the EU, Indonesia, Japan and Russia, unfavorable heated
tobacco unit volume in PMI Duty Free, and unfavorable IQOS device volume in
Japan and Korea. The currency-neutral growth in net revenues of 3.8% came
despite the unfavorable impact of $763 million, shown in "Cost/Other,"
predominantly resulting from the deconsolidation of RBH.

The unfavorable currency in net revenues was due primarily to the Euro, Russian ruble and Turkish lira.


Net revenues include $5.6 billion in 2019 and $4.1 billion in 2018 related to
the sale of RRPs. In 2019, approximately $0.7 billion of our $5.6 billion in RRP
net revenues were from IQOS devices.

Operating income decreased by 7.4%. Excluding unfavorable currency ($292
million), asset impairment and exit costs ($422 million) in 2019 related to
plant closures in Argentina, Colombia, Germany and Pakistan as part of global
manufacturing infrastructure optimization, the 2019 Russia excise and VAT audit
charge ($374 million), the 2019 loss on deconsolidation of RBH ($239 million)
and the 2019 Canadian tobacco litigation-related expense ($194 million),
operating income increased by 5.9%, primarily reflecting: a favorable pricing
variance; favorable volume/mix, mainly driven by heated tobacco units in the EU,
Japan and Russia, partly offset by unfavorable volume/mix of cigarettes, notably
in Australia, the EU, Indonesia, Japan and Russia, as well as unfavorable heated
tobacco unit volume in PMI Duty Free; and lower manufacturing costs; partly
offset by higher marketing, administration and research costs, reflecting
increased investment behind reduced-risk products (mainly in the EU and Eastern
Europe), and the net unfavorable impact resulting from the deconsolidation of
RBH shown in "Cost/Other."

Interest expense, net, of $570 million decreased by $95 million (14.3%), due
primarily to our ongoing efforts to optimize our capital structure following the
passage of the Tax Cuts and Jobs Act. This included the decision to use existing
cash to repay $2.5 billion and $4.0 billion of long-term debt that matured in
2018 and 2019, respectively.

Our effective tax rate increased by 0.3 percentage points to 23.2%. The
effective tax rate for the year ended December 31, 2019, was unfavorably
impacted by changes in earnings mix by taxing jurisdiction and U.S. state
deferred income tax expense, partially offset by the reversal of a deferred tax
liability on the unremitted earnings of our Canadian subsidiary, RBH ($49
million), a reduction in estimated U.S. federal income tax on dividend
repatriation for the years 2015-2018 ($67 million), and other repatriation cost
differences. We estimate that our 2020 effective tax rate will be approximately
23%, excluding discrete tax events. Changes in currency exchange rates, earnings
mix by taxing jurisdiction, or dividend repatriation costs may have an impact on
the effective tax rates, which we monitor each quarter. Significant judgment is
required in determining income tax provisions and in evaluating tax positions.
For further details, see Item 8, Note 11. Income Taxes.


                                       28
--------------------------------------------------------------------------------

We are regularly examined by tax authorities around the world, and we are
currently under examination in a number of jurisdictions. It is reasonably
possible that within the next 12 months certain tax examinations will close,
which could result in a change in unrecognized tax benefits along with related
interest and penalties. An estimate of any possible change cannot be made at
this time.

Net earnings attributable to PMI of $7.2 billion decreased by $726 million or
9.2%. This decrease was due primarily to lower operating income as discussed
above, partially offset by a lower interest expense, net. Diluted and basic EPS
of $4.61 decreased by 9.3%. Excluding an unfavorable currency impact of $0.13,
diluted EPS decreased by 6.7%.


2018 compared with 2017


For a discussion comparing our consolidated operating results for the year ended
December 31, 2018, with the year ended December 31, 2017, refer to Part II, Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operation - Discussion and Analysis - Consolidated Operating Results in our
Annual Report on Form 10-K for the year ended December 31, 2018, which was filed
with the U.S. Securities and Exchange Commission on February 7, 2019.


Operating Results by Business Segment


Business Environment
Taxes, Legislation, Regulation and Other Matters Regarding the Manufacture,
Marketing, Sale and Use of Tobacco Products
The tobacco industry and our company face a number of challenges that may
adversely affect our business, volume, results of operations, cash flows and
financial position. These challenges, which are discussed below and in
"Cautionary Factors That May Affect Future Results," include:

• regulatory restrictions on our products, including restrictions on the

packaging, marketing, and sale of tobacco or other nicotine-containing

products that could reduce our competitiveness, eliminate our ability to

communicate with adult consumers, or even ban certain of our products;


•      fiscal challenges, such as excessive excise tax increases and
       discriminatory tax structures;


•      illicit trade in cigarettes and other tobacco products, including
       counterfeit, contraband and so-called "illicit whites";


•      intense competition, including from non-tax paid volume by certain local
       manufacturers;


•      pending and threatened litigation as discussed in Item 8, Note 18.
       Contingencies; and

• governmental investigations.

Regulatory Restrictions: The tobacco industry operates in a highly regulated environment. The well-known risks of smoking have led regulators to impose significant restrictions and high excise taxes on cigarettes.


We support a comprehensive regulatory framework for tobacco products based on
the principle of harm reduction, including mandated health warnings, minimum age
laws, restrictions on advertising, and public place smoking restrictions. We
also support regulatory measures that help reduce illicit trade.

Much of the regulation that shapes the business environment in which we operate
is driven by the World Health Organization's ("WHO") Framework Convention on
Tobacco Control ("FCTC"), which entered into force in 2005. The FCTC has as its
main objective to establish a global agenda for tobacco regulation, with the
purpose of reducing tobacco use. To date, 180 countries and the European Union
are Parties to the FCTC. The treaty requires Parties to have in place various
tobacco control measures and recommends others. The FCTC governing body, the
Conference of the Parties ("CoP"), has also adopted non-binding guidelines and
policy recommendations related to certain articles of the FCTC that go beyond
the text of the treaty. In October 2018, the CoP recognized the need for more
scientific assessment and improved reporting to define policy on heated tobacco
products. Similar to its previous policy recommendations on e-cigarettes, the
CoP invited countries to regulate, restrict or prohibit heated tobacco products,
as appropriate under their national laws.

In July 2019, the WHO issued the Report on the Global Tobacco Epidemic 2019.
While citing insufficient independent studies regarding the benefits and the
unknown long-term health impacts of electronic nicotine delivery systems and
heated tobacco products, the WHO has taken the position that such products are
not risk-free and should be regulated in the same manner as cigarettes and in
line with the FCTC provisions.

                                       29
--------------------------------------------------------------------------------

It is not possible to predict whether or to what extent measures recommended by the WHO, including the FCTC guidelines, will be implemented.


We agree that all tobacco and nicotine-containing products, including our RRPs,
need to be regulated; however, we continue to seek to engage in a dialogue with
regulators with respect to those measures that we do not believe would protect
public health and, if implemented, could disrupt competition, severely limit our
ability to market and sell our products (including our RRPs) to adult smokers,
or increase illicit trade. We advocate for measures that would accelerate
switching to better alternatives to continued smoking and embrace a regulatory
framework that recognizes a risk continuum of tobacco and other
nicotine-containing products.

Certain measures are discussed in more detail below and in the Reduced-Risk Products (RRPs) section.


Fiscal Challenges: Excessive and disruptive excise, sales and other tax
increases and discriminatory tax structures are expected to continue to have an
adverse impact on our profitability, due to lower consumption and consumer
down-trading to non-premium, discount, other low-price or low-taxed combustible
tobacco products such as fine cut tobacco and illicit cigarettes. In addition,
in certain jurisdictions, some of our combustible products are subject to tax
structures that discriminate against premium-price products and manufactured
cigarettes. We believe that such tax policies undermine public health by
encouraging consumers to turn to illicit trade, and ultimately undercut
government revenue objectives, disrupt the competitive environment, and
encourage criminal activity. Other jurisdictions have imposed, or are seeking to
impose, levies or other taxes specifically on tobacco companies, such as taxes
on revenues and/or profits.

EU Tobacco Products Directive: In April 2014, the EU adopted a significantly
revised EU Tobacco Products Directive (TPD), which entered into force in May
2016. All Member States have adopted laws transposing the TPD.  The TPD sets
forth a comprehensive set of regulatory requirements for tobacco products,
including:

• health warnings covering 65% of the front and back panels of cigarette

packs, with an option for Member States to further standardize tobacco

       packaging, including the introduction of plain packaging;


•      a ban on characterizing flavors in some tobacco products, with a
       transition period for menthol expiring in May 2020;

• security features and tracking and tracing measures that became effective

on May 20, 2019; and

• a framework for the regulation of novel tobacco products and e-cigarettes,

       including requirements for health warnings and information leaflets, a
       prohibition on product packaging text related to reduced risk, and the

introduction of notification requirements or authorization procedures in

advance of commercialization.




Plain Packaging and Other Packaging Restrictions: Plain packaging legislation
bans the use of branding, logos and colors on packaging other than the brand
name and variant that may be printed only in specified locations and in a
uniform font. To date, plain packaging laws have been adopted in certain markets
in all of our operating segments, including the key markets of Australia,
France, Saudi Arabia and Turkey, and are in various degrees of implementation.
Some countries, such as Canada, New Zealand and Israel, adopted plain packaging
regulations that apply to all tobacco products, including RRPs. Other countries
are also considering plain packaging legislation.

Some countries have adopted, or are considering adopting, packaging restrictions
that could have an impact similar to plain packaging. Examples of such
restrictions include standardizing the shape and size of packages, prohibiting
certain colors or the use of certain descriptive phrases on packaging, and
requiring very large graphic health warnings that leave little space for
branding.

Restrictions and Bans on the Use of Ingredients: The WHO and others in the
public health community have recommended restrictions or total bans on the use
of some or all ingredients in tobacco products, including menthol. Broad
restrictions and ingredient bans would require us to reformulate our American
blend tobacco products and could reduce our ability to differentiate these
products in the market in the long term. Menthol bans would eliminate the entire
category of mentholated tobacco products. The European Union has banned flavored
tobacco products, subject to an exemption until May 2020 for menthol. Other
countries may follow the EU's approach. For instance, Turkey has banned menthol
as of May 2020. Broader ingredient bans have been adopted by Canada and Brazil.
In Brazil, an ingredient ban is currently on appeal by a tobacco industry union,
of which our Brazilian subsidiary is a member. It is not possible to predict the
outcome of these legal proceedings.


                                       30
--------------------------------------------------------------------------------

Bans on Display of Tobacco Products at Retail: In a number of our markets, including, but not limited to, Australia and Russia, governments have banned the display of tobacco products at the point of sale. Other countries are considering similar bans.


Bans and Restrictions on Advertising, Marketing, Promotions and Sponsorships:
For many years, the FCTC has called for, and countries have imposed, partial or
total bans on tobacco advertising, marketing, promotions and sponsorships,
including bans and restrictions on advertising on radio and television, in print
and on the Internet. The FCTC's non-binding guidelines recommend that
governments prohibit all forms of communication with adult smokers.

Restrictions on Product Design: Some members of the public health community are
calling for the further standardization of tobacco products by requiring, for
example, that cigarettes have a certain minimum diameter, which would amount to
a ban on slim cigarettes, or requiring the use of standardized filter and
cigarette paper designs. In addition, at its meeting in November 2016, the CoP
adopted non-binding guidelines recommending that countries regulate product
design features that increase the attractiveness of tobacco products, such as
the diameter of cigarettes and the use of flavor capsules.

Restrictions on Public Smoking: The pace and scope of public smoking
restrictions have increased significantly in most of our markets. Many countries
around the world have adopted, or are likely to adopt, regulations that restrict
or ban smoking in public and/or work places, restaurants, bars and nightclubs.
Some public health groups have called for, and some countries, regional
governments and municipalities have adopted or proposed, bans on smoking in
outdoor places, as well as bans on smoking in cars (typically, when minors are
present) and private homes.

Other Regulatory Issues: Some regulators are considering, or in some cases have
adopted, regulatory measures designed to reduce the supply of tobacco products.
These include regulations intended to reduce the number of retailers selling
tobacco products by, for example, reducing the overall number of tobacco retail
licenses available or banning the sale of tobacco products within specified
distances of certain public facilities.

In a limited number of markets, most notably Japan, we are dependent on governmental approvals that may limit our pricing flexibility.


The EU Single-Use Plastics Directive, which will require tobacco manufacturers
and importers to cover the costs of public collection systems for tobacco
product filters, entered into force on July 2, 2019, after which Member States
will have two years to transpose it into national law. While we cannot predict
the impact of this initiative on our business at this time, we are monitoring
developments in this area.

Illicit Trade: Illicit tobacco trade creates a cheap and unregulated supply of
tobacco products, undermines efforts to reduce smoking prevalence, especially
among youth, damages legitimate businesses, stimulates organized crime,
increases corruption and reduces government tax revenue. Excluding China and the
U.S., illicit trade may account for as much as 10% of global cigarette
consumption; this includes counterfeit, contraband and the growing problem of
"illicit whites," which are cigarettes legally produced in one jurisdiction for
the sole purpose of being exported and illegally sold in another jurisdiction
where they have no legitimate market. We estimate that illicit trade in the
European Union accounted for approximately 10% of total cigarette consumption in
2019.

A number of jurisdictions are considering actions to prevent illicit trade. In
November 2012, the FCTC adopted the Protocol to Eliminate Illicit Trade in
Tobacco Products (the "Protocol"), which includes supply chain control measures,
such as licensing of manufacturers and distributors, enforcement in free trade
zones, controls on duty free and Internet sales and the implementation of
tracking and tracing technologies. To date, 58 Parties, including the European
Union, have ratified it. The Protocol came into force in September 2018. Parties
must now start implementing its measures via national legislation. In October
2018, the first Meeting of the Parties to the Protocol decided to produce a
comprehensive report on good practices for the implementation of tracking and
tracing systems and to prepare a conceptual framework for global information
sharing to combat illicit tobacco trade. We welcome this decision and expect
that other Parties will ratify the Protocol.

We devote substantial resources to help prevent illicit trade in combustible
tobacco products and RRPs. For example, we engage with governments, our business
partners and other stakeholders to implement effective measures to combat
illicit trade and, in some instances, pursue legal remedies to protect our
intellectual property rights.

The tracking and tracing regulations for cigarettes and roll-your-own products
manufactured or destined for the EU became effective on May 20, 2019. The
effective date for other tobacco-containing products, including some of our RRPs
such as heated tobacco units, is May 20, 2024. While we expect that this
regulation will increase our operating expenses, we do not expect this increase
to be significant.

In 2009, our Colombian subsidiaries entered into an Investment and Cooperation
Agreement with the national and regional governments of Colombia to promote
investment in, and cooperation on, anti-contraband and anti-counterfeit efforts.
The agreement provides $200

                                       31
--------------------------------------------------------------------------------

million in funding over a 20-year period to address issues such as combating
illegal cigarette trade and increasing the quality and quantity of locally-grown
tobacco.

In May 2016, PMI launched PMI IMPACT, a global initiative that supports
third-party projects dedicated to fighting illegal trade and related crimes such
as corruption, organized criminal networks and money laundering. The centerpiece
of PMI IMPACT is a council of external independent experts in the fields of law,
anti-corruption and law enforcement. The experts are responsible for evaluating
and approving funding proposals for PMI IMPACT grants. PMI has pledged $100
million to fund projects within PMI IMPACT over three funding rounds.

Reduced-Risk Products (RRPs)


Our Approach to RRPs: We recognize that smoking cigarettes causes serious
diseases and that the best way to avoid the harms of smoking is never to start
or to quit. Nevertheless, it is predicted that over the next decade the number
of smokers will remain largely unchanged from the current estimate of 1.1
billion, despite the considerable efforts to discourage smoking.

Cigarettes burn tobacco, which produces smoke. As a result of the combustion
process, the smoker inhales various toxic substances. In contrast, RRPs do not
burn tobacco and produce an aerosol that contains significantly lower levels of
harmful and potentially harmful constituents ("HPHCs") than found in cigarette
smoke.

For smokers who would otherwise continue to smoke, we believe that RRPs, while
not risk-free, offer a much better consumer choice. Accordingly, our key
strategic priorities are: to develop and commercialize products that present
less risk of harm to adult smokers who switch to those products versus continued
smoking; and to convince current adult smokers who would otherwise continue to
smoke to switch to those products.

We recognize that this transformation from cigarettes to RRPs will take time and
that the speed of transformation will depend in part upon factors beyond our
control, such as the willingness of governments, regulators and other policy
groups to embrace RRPs as a desired alternative to continued cigarette smoking.
We also recognize that our part in this transformation must be funded from our
existing cigarette business. For as long as a significant number of adult
smokers continues to smoke, it is critical that the industry be led by
responsible and ethical manufacturers. Therefore, during the transformation, we
intend to remain a leading international cigarette manufacturer.

We have a range of RRPs in various stages of development, scientific assessment
and commercialization. We conduct rigorous scientific assessments of our RRP
platforms to substantiate that they reduce exposure to HPHCs and, ultimately,
that these products present, are likely to present, or have the potential to
present less risk of harm to adult smokers who switch to them versus continued
smoking. We draw upon a team of expert scientists and engineers from a broad
spectrum of scientific disciplines and our extensive learnings of adult consumer
preferences to develop and assess our RRPs. Our efforts are guided by the
following key objectives:

•      to develop RRPs that adult smokers who would otherwise continue to smoke
       find to be satisfying alternatives to smoking;

• for those adult smokers, our goal is to offer RRPs with a scientifically

       substantiated risk-reduction profile that approaches as closely as
       possible that associated with smoking cessation;

• to substantiate the reduction of risk for the individual adult smoker and

the reduction of harm to the population as a whole, based on scientific

evidence of the highest standard that is made available for scrutiny and

review by external independent scientists and relevant regulatory bodies;

and

• to advocate for the development of science-based regulatory frameworks for

the development and commercialization of RRPs, including the communication

       of scientifically substantiated information to enable adult smokers to
       make better consumer choices.



Our RRP Platforms: Our product development is based on the elimination of
combustion via tobacco heating and other innovative systems for aerosol
generation, which we believe is the most promising path to providing a better
consumer choice for those who would otherwise continue to smoke. We recognize
that no single product will appeal to all adult smokers. Therefore, we are
developing a portfolio of products intended to appeal to a variety of distinct
adult consumer preferences.

Four RRP platforms are in various stages of development and commercialization readiness:

    Platform 1 uses a precisely controlled heating device incorporating our IQOS
HeatControl technology, into which a specially designed and proprietary tobacco
unit is inserted and heated to generate an aerosol. We have conducted a series
of clinical studies for this platform, the results of which were included in our
submission to the U.S. Food and Drug Administration ("FDA") described below.

                                       32
--------------------------------------------------------------------------------

The results of the first six-month term of the 6+6 month exposure response study
were received at the end of 2017, and the related report was completed and
submitted to the FDA in the second quarter of 2018. The study showed that all
eight of the co-primary clinical risk endpoints moved in the same direction in
the group that switched to our Platform 1 product as observed for smoking
cessation, with statistically significant changes in five of the eight endpoints
compared with on-going smoking. The results of the second six-month term of the
6+6 month exposure response study were received for analysis in the second
quarter of 2018; we are analyzing the results, and expect to finalize the report
later this year. In addition, as set out in our submission to the FDA referenced
above, we completed an 18-month combined chronic toxicity and carcinogenicity
study in mice, which was on-going at the time of our FDA submission. We shared
the results with the FDA in August 2018.

  Platform 2 uses a pressed carbon heat source which, when ignited, generates a
nicotine-containing aerosol by heating tobacco. The results of our
pharmacokinetic study (that measured the nicotine pharmacokinetic profile as
well as subjective effects) and of our five-day reduced exposure study indicate
that this platform could be an acceptable substitute for adult smokers who seek
an alternative to cigarettes. The reduced exposure study results showed a
substantial reduction in relevant biomarkers of exposure to the measured HPHCs
in those who switched to Platform 2 compared to those who continued to smoke
cigarettes over a five-day period. The sustainability of this reduction as well
as changes in clinical risk markers were assessed in a three-month reduced
exposure study. The results of this study were received at the end of 2017, and
the related report was finalized in the second quarter of 2018.

  Platform 3 provides an aerosol of nicotine salt. We have explored two routes
for this platform, one with electronics and one without, and conducted nicotine
pharmacokinetic studies with both versions. The results of the pharmacokinetic
study related to the version without electronics were received, and the related
report was finalized in the fourth quarter of 2018. The results indicate this
product's potential as an acceptable alternative to continued cigarette smoking
in terms of product satisfaction. We are conducting a product use and adaptation
study in adult smokers and expect the results in 2020.

  Platform 4 covers e-vapor products, which are battery-powered devices that
produce an aerosol by vaporizing a nicotine-containing liquid solution. Our
e-vapor products comprise devices using current generation technology and our
new e-vapor mesh technology that addresses certain challenges presented by some
e-vapor products currently on the market. Our IQOS MESH products are designed to
ensure the consistency and quality of the generated aerosol. We conducted a
nicotine pharmacokinetic study in 2017. The results of this study were received
in the second quarter of 2018 for analysis, and the related report was finalized
in the fourth quarter of 2018. The results of this study indicate that IQOS MESH
products are an effective means of nicotine delivery while being a satisfying
alternative for e-cigarette users. In March 2019, a six-month pre-clinical study
in mice evaluating the impact of e-cigarette vapor on the risks of pulmonary and
cardiovascular disease compared to cigarette smoke was completed; this study did
not pertain to a specific product. The study demonstrated that e-cigarette
vapors induce significantly lower biological responses associated with
cardiovascular and pulmonary diseases compared with cigarette smoke. We will
also initiate a clinical study to measure selected biomarkers of exposure to
HPHCs and assess changes in clinical risk markers.

After we receive the results of our scientific studies mentioned above, in accordance with standard scientific practices, we intend to share the conclusions in scientific forums and to submit them for inclusion in peer-reviewed publications.


The research and development expense for our RRP portfolio accounted for 98%,
92% and 74% of our total research and development expense for the years ended
December 31, 2019, 2018 and 2017, respectively.  The research and development
expense for the years ended December 31, 2019, 2018 and 2017, is set forth in
Item 8, Note 14. Additional Information to the consolidated financial
statements.

Commercialization of RRPs: We are building a new product category and tailor our
commercialization strategy to the characteristics of each specific market. We
focus our commercialization efforts on consumer retail experience, guided
consumer trials and customer care, as well as digital communication programs.
In order to accelerate switching to our Platform 1 product, our initial market
introductions typically entail one-on-one consumer engagement and introductory
device discounts.  These initial commercialization efforts require substantial
investment, which we believe will moderate over time.

In 2014, we introduced our Platform 1 product in pilot city launches in Nagoya,
Japan, and in Milan, Italy. Since then, we have continuously expanded our
commercialization activities, and the product is currently available for sale in
52 markets in key cities or nationwide.

We estimate that only a very small percentage of adult smokers who convert to our Platform 1 product switch back to cigarettes.


We have integrated the production of our heated tobacco units into a number of
our existing manufacturing facilities, are progressing with our plans to build
manufacturing capacity for our other RRP platforms, and continue to optimize our
manufacturing infrastructure.

An adequate supply chain for our RRP portfolio, including the supply of
electronic devices, is important to our business. We work with two electronics
manufacturing service providers for the supply of our Platform 1 and IQOS MESH
devices and a small number of other

                                       33
--------------------------------------------------------------------------------

providers for other products in our RRP portfolio and related accessories.
Although we work closely with these service providers on monitoring their
production capability and financial health, the commercialization of our RRPs
could be adversely affected if they are unable to meet their commitments. The
production of our RRP portfolio requires various metals, and we believe that
there is an adequate supply of such metals in the world markets to satisfy our
current and anticipated production requirements. However, some components and
materials necessary for the production of our RRPs, including those for the
electronic devices, are obtained from single or limited sources, and can be
subject to industry-wide shortages and price fluctuations. Our inability to
secure an adequate supply of such components and materials could negatively
impact the commercialization of our RRPs.

Our Platform 1 and IQOS MESH devices are subject to standard product warranties
generally for a period of 12 months from the date of purchase or such other
periods as required by law. We discuss product warranties in more detail in Item
8, Note 5. Product Warranty. The significance of warranty claims is dependent on
a number of factors, including device version mix, product failure rates,
logistics and service delivery costs, and warranty policies, and may increase
with the number of devices sold.

Product quality may affect consumer acceptance of our RRPs.

Our commercialization efforts for the other RRP platforms are as follows:

• We currently market our e-vapor products in Ireland and the U.K. In July

2018, we pilot-launched IQOS MESH, one of our Platform 4 products, in

London, U.K. In light of the current confusion in the e-vapor category, we

have postponed our planned launch of an improved version of this product

       until the third quarter of 2020, when we expect to reach the optimal
       capacity for commercialization at scale.


• We completed a small-scale city test of TEEPS, our Platform 2 product,

that we had initiated in December 2017 in Santo Domingo, the Dominican

Republic. We are finalizing our improvements to this product and plan to

       conduct a consumer test by the end of 2020.



•      Depending on the outcome of the use and adaptation study described above
       as well as consumer research, we plan to conduct a consumer test of our
       Platform 3 product by the end of 2020.



RRP Regulation and Taxation: RRPs contain nicotine and are not risk-free. We
therefore support science-based regulation and taxation of RRPs. Regulation and
taxation should differentiate between cigarettes and products that present, are
likely to present, or have the potential to present less risk of harm to adult
smokers who switch to these products versus continued smoking and should
recognize a continuum of risk for tobacco and other nicotine-containing
products. Regulation should provide minimum standards for all RRP categories and
specific rules for product assessment methodologies, ingredients, labeling and
consumer communication, and should ensure that the public is informed about the
health risks of all combustible and non-combustible tobacco and
nicotine-containing products. Regulation, as well as industry practices, should
reflect the fact that youth should not consume nicotine in any form.

Some governments have banned or are seeking to ban or severely restrict emerging
tobacco and nicotine-containing products such as our RRPs and communication of
truthful and non-misleading information about such products. These regulations
might foreclose or unreasonably restrict adult consumer access even to products
that might be shown to be a better consumer choice than continuing to smoke. We
oppose such blanket bans and unreasonable restrictions of products that have the
potential to present less risk of harm compared to continued smoking. By
contrast, we support regulation that sets clear standards for all RRP categories
and propels innovation to benefit adult smokers who would otherwise continue to
smoke.

In the United States, an established regulatory framework for assessing
"Modified Risk Tobacco Products" and "New Tobacco Products" exists under the
jurisdiction of the FDA. We submitted to the FDA a Modified Risk Tobacco Product
Application ("MRTPA") for our Platform 1 product in December 2016, and a
Premarket Tobacco Product Application ("PMTA") for our Platform 1 product in
March 2017.

On April 30, 2019, the FDA determined that a version of our Platform 1 product
is appropriate for the protection of public health and authorized it for sale in
the United States. The FDA's decision followed its comprehensive assessment of
our PMTA.

The FDA's marketing order does not mean that the agency "approved" our Platform
1 product.  The authorization is subject to strict marketing, reporting and
other requirements and is not a guarantee that the product will remain
authorized, particularly if there is a significant uptake in youth initiation.
The FDA will monitor the marketing of the product.

We plan to file a PMTA application for the IQOS 3 device in the coming months.

                                       34
--------------------------------------------------------------------------------

In May 2017, the FDA formally accepted and filed our MRTPA for substantive
scientific review and, in June 2017, the FDA opened the period for the public to
provide comments on our application. The FDA closed the public comment period on
February 11, 2019. In late 2019, we provided a response to the FDA's request for
clarification regarding our mice study described above. Following our response,
the FDA re-opened a public comment period ending February 24, 2020.

The FDA referred our MRTPA to the Tobacco Product Scientific Advisory Committee
("TPSAC"). TPSAC held a meeting on January 24 and January 25, 2018 to discuss
our MRTPA. The recommendations and votes of TPSAC are not binding on the FDA. By
regulation, the FDA's decision on our MRTPA will take into account, in addition
to the views of TPSAC, scientific evidence as well as comments, data and
information submitted by interested persons.

The FDA review of our MRTPA is on-going.


Separately, in July 2017, the FDA issued a policy announcement aiming to explore
the potential of nicotine reduction in cigarettes in conjunction with the
availability of less harmful products that deliver nicotine for adults who
choose to use such products. In July 2018, as part of a public consultation
procedure, we submitted our views on this topic to the FDA. It is not possible
to predict the regulatory measures that may be recommended by the FDA as a
result of this policy.

In the U.S., tobacco and nicotine-containing products that were not commercially
marketed as of February 15, 2007 are subject to review and authorization by the
FDA.  Following a rise in the use of e-vapor products among minors in the U.S.
and an outbreak of lung injuries alleged to be associated with the use of
certain e-vapor products in many states, on January 2, 2020, the FDA announced
an enforcement policy against the sale of e-vapor products sold without FDA
authorization, prioritizing enforcement against the sale of cartridge-based
e-vapor products with flavors other than tobacco and menthol, and sale of any
nicotine-containing products to minors and where the manufacturer fails to take
adequate measures to prevent access by minors.

While we do not sell e-vapor products in the U.S. and therefore are not subject
to these actions, we continue to support regulation and industry practices that
reflect the fact that youth should not consume nicotine in any form.

Future FDA actions may influence the regulatory approach of other governments.


Until recently, there were no countries with specific product standards for
heat-not-burn products. Effective July 2017 and March 2018, respectively, Russia
and Ukraine adopted standards that set minimum quality and safety requirements
for the consumables and defined methods for demonstrating the absence of
combustion, and the product standards in Kazakhstan that came into force in
March 2019 also cover devices. In the UAE, a product standard on minimum quality
and safety of electronic nicotine-containing products, including heat-not-burn
products, was approved in March 2019. Effective December 2019, Jordan adopted a
national standard for heat-not-burn products (both devices and consumables), and
defined a method for demonstrating the absence of combustion in these products.
We expect and encourage other governments to consider similar product standards
going forward.

In the EU, all EU Member States have transposed the EU Tobacco Products
Directive, including the provisions on novel tobacco products, such as heated
tobacco units, and e-cigarettes. Most of the EU Member States require a
notification submitted six months before the intended placing on the market of a
novel tobacco product, while some require pre-market authorizations for the
introduction of such products. To date, we have filed a comprehensive dossier
summarizing our scientific assessment of our Platform 1 product in over 20
Member States.

In addition, in Italy, in April 2018, we submitted under recent legislation an
application for HEETS, used with the IQOS device, requesting regulatory
recognition of the reduction of toxic substances and potential risk reduction
resulting from switching to this product compared to continued cigarette
smoking. In January 2019, our application was not granted primarily on the
grounds of insufficient data and questions of methodology.  Due to the
constraints of the review process, we had been unable to supplement the
application with all the data we subsequently filed with the FDA and to address
methodological questions during the review. We plan to submit a new application
where we will clarify the concerns raised by the decision and further strengthen
our application by submitting additional evidence that became available since we
submitted our first application, consistent with our FDA filing. We are
confident that our evidence supports our application.

To date, several governmental agencies have published their scientific findings that analyze the harm-reduction potential of certain RRPs versus continuing smoking, including:


In December 2017, at the request of the U.K. Department of Health and Public
Health England, the U.K. Committee on Toxicity published its assessment of the
risk of heat-not-burn products relative to cigarette smoking. This assessment
included analysis of scientific data for two heat-not-burn products, one of
which was our Platform 1 product. The assessment concluded that, while still
harmful to health,

                                       35
--------------------------------------------------------------------------------

compared with the known risks from cigarettes, heat-not-burn products are
probably less harmful. Subsequently, in February 2018, Public Health England
published a report stating that the available evidence suggests that
heat-not-burn products may be considerably less harmful than cigarettes and more
harmful than e-cigarettes.

In May 2018, the German Federal Institute for Risk Assessment ("BfR") published
a study on the Platform 1 aerosol relative to cigarette smoke using the Health
Canada Intense Smoking Regimen. BfR found reductions in selected HPHCs in a
range of 80-99%. This publication indicates that significant reductions in the
levels of selected toxicants are likely to reduce toxicant exposure, which BfR
stated might be regarded as a discrete benefit compared to combustible
cigarettes.

In May 2018, the Dutch National Institute for Public Health and Environment
("RIVM") published a factsheet on novel tobacco products that heat rather than
burn tobacco, focusing on our Platform 1 product. RIVM analyzed the aerosol
generated by our Platform 1 product and concluded that the use of this product,
while still harmful to health, is probably less harmful than continued smoking.

In June 2018, the Korean Food and Drug Administration ("KFDA") issued a
statement on products that heat rather than burn tobacco. The KFDA tested three
heat-not-burn products, one of which was our Platform 1 product. The KFDA
confirmed that the levels of the nine HPHCs tested in the aerosol of these
products were on average approximately 90% lower compared to those measured in
the cigarette smoke of the top five cigarette brands in South Korea. However,
the KFDA stated that it could not establish that the tested heat-not-burn
products are less harmful than cigarettes. In October 2018, our Korean affiliate
filed a request with a local court seeking information underlying KFDA's
analysis, conclusions and public statements.

In August 2018, the Science & Technology Committee of the U.K. House of Commons
published a report of its inquiry into e-cigarettes and heat-not-burn products.
The report concluded that e-cigarettes are significantly less harmful to health
than smoking tobacco. The report also observed that for those smokers who don't
accept e-cigarettes, heat-not-burn products may offer a public health benefit
despite their relative risk. The report called for a risk-proportionate
regulatory environment for both e-cigarettes and heat-not-burn products and
noted that e-cigarettes should remain the least taxed, cigarettes the most
taxed, with heat-not-burn products falling between the two. The U.K. Committee
on Advertising Practice announced the removal of a prohibition of health claims
in the advertising of e-cigarettes in the U.K. effective November 2018, with a
review of the impact of this decision on market practices 12 months thereafter.

In November 2018, the Eurasian Economic Commission (regulatory body of the Eurasian Union consisting of Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia) published the results of its commissioned study on novel nicotine-containing products, including our Platform 1 product. The study confirms significantly lower levels of HPHCs in the aerosol generated by this product compared to cigarette smoke.


In January 2019, scientific media published the results of the study of the
China National Tobacco Quality Supervision and Test Centre ("CNTQST") comparing
the aerosol generated by our Platform 1 product with cigarette smoke. The CNTQST
found that the former contained fewer, and lower levels of, harmful constituents
than the latter and concluded that the lower temperature of heating tobacco in
our Platform 1 product contributed to the difference. The CNTQST stated that the
reduction in emissions of harmful constituents cannot be interpreted as
equivalent to a proportionate harm/risk reduction for smokers.

We make our scientific findings publicly available for scrutiny and peer review
through several channels, including our websites. From time to time, adult
consumers, competitors, members of the scientific community, and others inquire
into our scientific methodologies, challenge our scientific conclusions or
request further study of certain aspects of our RRPs and their health effects.
We are committed to a robust and open scientific debate but believe that such
debate should be based on accurate and reliable scientific information. We seek
to provide accurate and reliable scientific information about our RRPs;
nonetheless, we may not be able to prevent third-party dissemination of false,
misleading or unsubstantiated information about these products. The
dissemination of scientifically unsubstantiated information or studies with a
strong confirmation bias by third parties may cause confusion among adult
smokers and affect their decision to switch to better alternatives to continued
smoking, such as our RRPs.

To date, we have been largely successful in demonstrating to regulators that our
heated tobacco units are not cigarettes due to the absence of combustion, and as
such they are generally taxed either as a separate category or as other tobacco
products, which typically yields more favorable tax rates than cigarettes.
Although we believe that this is sensible from the public health perspective, we
cannot guarantee that regulators will continue this approach.

There can be no assurance that we will succeed in our efforts to replace cigarettes with RRPs or that regulation will allow us to commercialize RRPs in all markets, to communicate about our RRPs, including making scientifically substantiated risk-reduction claims, or to treat RRPs differently from cigarettes.

                                       36
--------------------------------------------------------------------------------

Legal Challenges to RRPs: We face various administrative and legal challenges
related to certain RRP activities, including allegations concerning product
classification, advertising restrictions, corporate communications, product
coach activities, scientific substantiation, product liability, and unfair
competition.  While we design our programs to comply with relevant regulations,
we expect these or similar challenges to continue as we expand our efforts to
commercialize RRPs and to communicate publicly. The outcomes of these matters
may affect our RRP commercialization and public communication activities and
performance in one or more countries.

Our RRP Business Development Initiatives: In December 2013, we established a
strategic framework with Altria Group, Inc. ("Altria") setting out terms on how
the parties would collaborate to develop and commercialize e-vapor products and
commercialize two of our RRPs in the U.S. In late 2018, Altria announced that it
will participate in the e-vapor category only through another e-vapor company in
which Altria acquired a minority interest. Regarding heat-not-burn products, as
discussed above, the FDA has authorized a version of our Platform 1 product for
sale in the U.S., and we are seeking authorization for our MRTP submission.
These efforts are not affected by Altria's e-vapor announcement. In September
2019, Altria's subsidiary, Philip Morris USA Inc., began commercialization of a
version of our Platform 1 product in the U.S.

In January 2020, we announced an agreement with KT&G, a leading tobacco and
nicotine company in South Korea, for the commercialization of KT&G's smoke-free
products outside of South Korea on an exclusive basis.  For more information,
see Acquisitions and Other Business Arrangements below.

Other Developments: In September 2017, we announced our support of the
Foundation for a Smoke-Free World. We agreed to contribute $80 million per year
over the next 12 years, as specified in the agreement. We made an initial
contribution of $4.5 million in 2017, the first annual contribution of $80
million in the first quarter of 2018 and the second annual contribution of $80
million in the first quarter of 2019. The Foundation is an independent body and
is governed by its independent Board of Directors. The Foundation's role, as set
out in its corporate charter, includes funding research in the field of tobacco
harm reduction, encouraging measures that reduce the harm caused by smoking, and
assessing the effect of reduced cigarette consumption on the industry value
chain.

Governmental Investigations


From time to time, we are subject to governmental investigations on a range of
matters, including tax, customs, antitrust, advertising, and labor practices. We
describe certain matters pending in Thailand, Russia and South Korea in Item 8,
Note 18. Contingencies.

In November 2010, a WTO panel issued its decision in a dispute relating to facts
that arose from August 2006 between the Philippines and Thailand concerning a
series of Thai customs and tax measures affecting cigarettes imported by PM
Thailand into Thailand (see Item 8, Note 18. Contingencies for additional
information). The WTO panel decision, which was upheld by the WTO Appellate
Body, concluded that Thailand had no basis to find that PM Thailand's declared
customs values and taxes paid were too low, as alleged by the DSI in 2009. The
decision also created obligations for Thailand to revise its laws, regulations,
or practices affecting the customs valuation and tax treatment of future
cigarette imports. Thailand agreed in September 2011 to fully comply with the
decision by October 2012. The Philippines asserts that to date Thailand has not
fully complied with the WTO panel decision. The Philippines has repeatedly
expressed concerns with ongoing investigations by Thailand of PM Thailand,
including those that led to the criminal charges described in Item 8, Note 18.
Contingencies, and has commenced two formal proceedings at the WTO to challenge
criminal charges against PM Thailand arguing that the criminal charges appear to
be based on grounds not supported by WTO customs valuation rules and
inconsistent with several decisions already taken by Thai Customs and other Thai
governmental agencies. On November 12, 2018 and July 12, 2019, the WTO issued
its decisions agreeing with the Philippines that the criminal charges against PM
Thailand and its former and current employees in connection with import entries
of cigarettes from the Philippines and Indonesia, respectively, described in
Item 8, Note 18. Contingencies, are inconsistent with WTO customs valuation
rules. In January 2019 and September 2019, Thailand appealed the WTO's decision
related to the criminal charges in connection with import entries of cigarettes
from the Philippines and Indonesia, respectively. It is not possible to predict
any future developments in these proceedings while the WTO Appellate Body is not
operational.


U.S. GAAP Treatment of Argentina as a Highly Inflationary Economy


Following the categorization of Argentina by the International Practices Task
Force of the Center for Audit Quality as a country with a three-year cumulative
inflation rate greater than 100%, the country is considered highly inflationary
in accordance with U.S. GAAP. Consequently, we began to account for the
operations of our Argentinian affiliates as highly inflationary, and to treat
the U.S. dollar as the functional currency of the affiliates, effective July 1,
2018.




                                       37
--------------------------------------------------------------------------------

Asset Impairment and Exit Costs

We discuss asset impairment and exit costs in Item 8, Note 21. Asset Impairment and Exit Costs to our consolidated financial statements.


As part of our transformation to a smoke-free future, we also seek to optimize
our organizational design. In January 2020, we commenced the first phase of a
two-phase restructuring project in Switzerland. This phase may impact
approximately 265 existing positions that will be eliminated or relocated, and
we initiated consultation procedures for the impacted employees as required
under the law. The second phase of this restructuring project is expected to
commence in the second quarter of 2020.


Acquisitions and Other Business Arrangements

We discuss our acquisitions in Item 8, Note 6. Acquisitions to our consolidated financial statements.


On August 27, 2019, we announced that we were in discussions with Altria Group,
Inc. regarding a potential all-stock, no premium merger of equals, and on
September 25, 2019, we announced that the merger discussions had ended and that
both companies agreed to focus on launching our Platform 1 product in the United
States.

Global Collaboration Agreement with KT&G


In January 2020, PMI announced a global collaboration agreement with the leading
tobacco and nicotine company in South Korea, KT&G, to commercialize KT&G's
smoke-free products outside of the country. The agreement will run for an
initial period of three years. The two companies plan for global collaboration
with the intention to actively expand to cover many markets, based on commercial
success. The agreement allows PMI to distribute current KT&G smoke-free
products, and their evolutions, on an exclusive basis, and does not restrict PMI
from distributing its own or third-party products. KT&G's smoke-free product
brand portfolio includes heat-not-burn tobacco products (e.g., Lil Mini and Lil
Plus), hybrid technologies that combine heat-not-burn tobacco and e-vapor
technologies (e.g., Lil Hybrid), and e-vapor products (e.g., Lil Vapor). PMI
will be responsible for the commercialization of smoke-free products supplied
under the agreement.

Products sold under the agreement will be subject to careful assessment to
ensure they meet the regulatory requirements in the markets where they are
launched, as well as our standards of quality and scientific substantiation of
their harm reduction potential. PMI and KT&G will seek any necessary regulatory
approvals that may be required on a market-by-market basis. There are no current
plans to commercialize KT&G products in the United States.


Investments in Unconsolidated Subsidiaries and Equity Securities


We discuss our investments in unconsolidated subsidiaries and equity securities
in Item 8, Note 4. Related Parties - Investments in Unconsolidated Subsidiaries,
Equity Securities and Other and Item 8, Note 16. Fair Value Measurements to our
consolidated financial statements.


Trade Policy


We are subject to various trade restrictions imposed by the United States of
America and countries in which we do business ("Trade Sanctions"), including the
trade and economic sanctions administered by the U.S. Department of the
Treasury'sOffice of Foreign Assets Control and the U.S. Department of State. It
is our policy to comply fully with these Trade Sanctions.

Tobacco products are agricultural products under U.S. law and are not technological or strategic in nature. From time to time we make sales in countries subject to Trade Sanctions, either where such sanctions do not apply to our business or pursuant to exemptions or licenses.


A subsidiary sells products to distributors that, in turn, sell those products
to duty free customers that supply U.N. peacekeeping forces around the world,
including those in the U.N. peacekeeping mission located in Abyei, a special
administrative territory in Sudan. We do not believe that these sales, which are
not subject to Trade Sanctions, and are de minimis in volume and value, present
a material risk to our shareholders, our reputation or the value of our shares.
We have no employees, operations or assets in the Sudan.

To our knowledge, none of our commercial arrangements results in the governments of any country identified by the U.S. government

                                       38
--------------------------------------------------------------------------------

as a state sponsor of terrorism, nor entities controlled by those governments, receiving cash or acting as intermediaries in violation of U.S. laws.


We do not sell products in Iran, North Korea and Syria. From time to time, we
explore opportunities to sell our products in one or more of these countries, as
permitted by law.

Certain states within the U.S. have enacted legislation permitting or requiring
state pension funds to divest or abstain from future investment in stocks of
companies that do business with certain countries that are sanctioned by the
U.S. We do not believe such legislation has had a material effect on the price
of our shares.

2019 compared with 2018

The following discussion compares operating results within each of our operating segments for 2019 with 2018.


Unless otherwise stated, references to total industry, total market, our
shipment volume and our market share performance reflect cigarettes and heated
tobacco units.

European Union:

Financial Summary -                            Change                        Variance
Years Ended                                Fav./(Unfav.)                   Fav./(Unfav.)
December 31,                                        Excl.               Cur-            Vol/   Cost/
(in millions)           2019     2018       Total   Curr.     Total    rency    Price   Mix    Other
Net Revenues          $ 9,817$ 9,298      5.6  %  11.6 %   $  519$ (563 )$  288$ 794  $    -
Operating Income      $ 3,970$ 4,105     (3.3 )%   4.8 %   $ (135 )$ (330 )$  288$ 587$ (680 )



Net revenues, excluding unfavorable currency, increased by 11.6%, reflecting a
favorable pricing variance, driven principally by France and Germany, partly
offset by Poland; and favorable volume/mix, primarily driven by heated tobacco
unit and IQOS device volume, notably in the Czech Republic, Germany, Greece,
Italy and Poland, partly offset by lower cigarette volume, notably in France and
Italy, and unfavorable cigarette volume/mix in Germany.

The net revenues of the European Union segment include $1,724 million in 2019 and $865 million in 2018 related to the sale of RRPs.


Operating income decreased by 3.3%. Excluding asset impairment and exit charges
of $342 million in 2019 related to the plant closure in Germany and unfavorable
currency of $330 million, operating income increased by 13.1% mainly reflecting:
a favorable pricing variance; favorable volume/mix, primarily driven by heated
tobacco unit volume, notably in the Czech Republic, Germany, Greece, Italy and
Poland, partly offset by lower cigarette volume, notably in France and Italy,
and unfavorable cigarette volume/mix in Germany; partially offset by higher
manufacturing costs and higher marketing, administration and research costs,
notably related to increased investment behind reduced-risk products.

                                       39
--------------------------------------------------------------------------------

European Union - Total Market, PMI Shipment and Market Share Commentaries


Total market, PMI shipment volume and market share performance are shown in the
table below:
European Union Key Data                         Full-Year
                                                           Change
                                         2019      2018    % / pp
Total Market (billion units)            482.5     484.5      (0.4 )%

PMI Shipment Volume (million units)
Cigarettes                            174,319   179,622      (3.0 )%
Heated Tobacco Units                   12,569     5,977   +100.0%
Total European Union                  186,888   185,599       0.7  %

PMI Market Share
Marlboro                                 18.0 %    18.5 %    (0.5 )
L&M                                       6.7 %     6.9 %    (0.2 )
Chesterfield                              5.8 %     5.9 %    (0.1 )
Philip Morris                             2.7 %     2.9 %    (0.2 )
HEETS                                     2.5 %     1.2 %     1.3
Others                                    3.1 %     3.1 %       -
Total European Union                     38.8 %    38.5 %     0.3



The estimated total market in the EU decreased by 0.4% to 482.5 billion units,
notably due to:
•   France, down by 7.4%, primarily reflecting the impact of significant excise

tax-driven price increases and a higher prevalence of illicit trade;

Germany, down by 2.5%, primarily reflecting the impact of price increases in

2018 and March 2019; and

Italy, down by 1.5%, primarily reflecting the impact of price increases in

2018 and the first quarter of 2019;

partly offset by • Poland, up by 6.8%, primarily reflecting a lower prevalence of illicit trade;

and

Spain, up by 0.8%, partly reflecting a lower prevalence of illicit trade.

Our total shipment volume increased by 0.7% to 186.9 billion units, reflecting: • higher heated tobacco unit shipment volume across the Region (notably Italy),

driven by higher market share;

partly offset by • lower cigarette shipment volume, mainly in France, due to the lower total

market and lower cigarette market share, as well as Germany and Italy, partly

reflecting out-switching to heated tobacco units.

Our Regional market share increased by 0.3 points to 38.8%, with gains in the Czech Republic, Germany, Greece and Portugal, partly offset by declines in France, Poland and Spain.




                                       40
--------------------------------------------------------------------------------

Eastern Europe:
Financial Summary -                            Change                          Variance
Years Ended                                 Fav./(Unfav.)                   Fav./(Unfav.)
December 31,
                                                    Excl.                Cur-             Vol/   Cost/
(in millions)           2019     2018      Total    Curr.      Total    rency    Price    Mix    Other
Net Revenues          $ 3,282$ 2,921     12.4  %  16.1  %   $  361$ (108 )$    85$ 384  $    -
Operating Income      $   547$   902    (39.4 )% (41.9 )%   $ (355 )$   23$    85$ 109$ (572 )



Net revenues, excluding unfavorable currency, increased by 16.1%, reflecting a
favorable pricing variance, mainly driven by Russia and Ukraine, and favorable
volume/mix, predominantly driven by heated tobacco unit and IQOS device volume
in Russia and Ukraine, and heated tobacco unit volume in Kazakhstan, partly
offset by unfavorable cigarette volume/mix in Russia and lower cigarette volume
in Ukraine.

The net revenues of the Eastern Europe segment include $844 million in 2019 and $324 million in 2018 related to the sale of RRPs.


Operating income decreased by 39.4%. Excluding the unfavorable impact of $374
million related to the Russia excise and VAT audit charge, and favorable
currency of $23 million, operating income decreased by 0.4%, due to: higher
marketing, administration and research costs, notably reflecting increased
investments behind reduced-risk products (primarily in Russia in support of
geographic expansion); and higher manufacturing costs; partly offset by a
favorable pricing variance; and favorable volume/mix, predominantly driven by
heated tobacco unit volume in Kazakhstan, Russia and Ukraine, partly offset by
unfavorable cigarette volume/mix in Russia.

Eastern Europe - Total Market, PMI Shipment Volume and Market Share Commentaries


The estimated total market in Eastern Europe decreased by 5.4% to 397.4 billion
units, notably due to:
•   Russia, down by 5.2%, primarily reflecting the impact of price increases, as

well as an increase in the prevalence of illicit trade; and

Ukraine, down by 12.0%, primarily reflecting the impact of excise tax-driven

price increases, as well as an increase in the prevalence of illicit trade;

partly offset by • Kazakhstan, up by 5.7%, partly reflecting a lower prevalence of illicit trade.

Our Regional market share increased by 1.6 points to 28.7%.

PMI Shipment Volume (million units) Full-Year

                                       2019     2018   Change
Cigarettes                          100,644  108,718     (7.4 )%
Heated Tobacco Units                 13,453    4,979  +100.0%
Total Eastern Europe                114,097  113,697      0.4  %



PMI's total shipment volume increased by 0.4% to 114.1 billion units, notably
reflecting:
•   Kazakhstan, up by 11.6%, reflecting the higher total market and a higher

market share of heated tobacco units;

partly offset by • Ukraine, down by 3.0%, reflecting the lower total market, partly offset by a

    higher market share of heated tobacco units.




                                       41
--------------------------------------------------------------------------------

Middle East & Africa:
Financial Summary -                            Change                         Variance
Years Ended                                 Fav./(Unfav.)                   Fav./(Unfav.)
December 31,
                                                     Excl.              Cur-             Vol/    Cost/
(in millions)           2019     2018       Total    Curr.     Total   rency    Price    Mix     Other
Net Revenues          $ 4,042$ 4,114      (1.8 )%   2.2 %   $ (72 )$ (162 )$  207$ (113 )$  (4 )
Operating Income      $ 1,684$ 1,627       3.5  %   6.8 %   $  57$  (53 )$  207$ (128 )$  31



Net revenues, excluding unfavorable currency, increased by 2.2%, mainly
reflecting: a favorable pricing variance, primarily driven by Egypt, the GCC,
PMI Duty Free and Turkey, partly offset by Morocco; partially offset by
unfavorable volume/mix, mainly due to heated tobacco unit and cigarette volume
in PMI Duty Free, as well as cigarette volume in Kuwait, partly offset by
favorable cigarette volume in Egypt and favorable cigarette volume/mix in
Algeria and Saudi Arabia.

The net revenues of the Middle East & Africa segment include $321 million in 2019 and $382 million in 2018 related to the sale of RRPs.


Operating income, excluding unfavorable currency, increased by 6.8%, mainly
reflecting a favorable pricing variance; lower manufacturing costs; and lower
marketing, administration and research costs, notably in the GCC; partly offset
by unfavorable volume/mix, mainly due to the same factors as for net revenues
noted above.

Middle East & Africa - Total Market, PMI Shipment Volume and Market Share Commentaries


The estimated total market in the Middle East & Africa was essentially flat at
592.4 billion units, notably reflecting:
•   Algeria, up by 7.0%, partly reflecting the timing of estimated trade

inventory movements in 2019 compared to 2018; and

Egypt, up by 1.6%, mainly due to the timing of estimated trade inventory

movements in 2019 related to anticipated price increases;

offset by • Duty Free, down by 1.6%, mainly reflecting lower purchases by travelers to

China; and

Morocco, down by 16.0%, primarily reflecting the impact of significant excise

    tax-driven price increases in 2019.



Our Regional market share decreased by 0.2 points to 23.5%.

PMI Shipment Volume (million units) Full-Year

                                       2019     2018  Change
Cigarettes                          134,568  136,605    (1.5 )%
Heated Tobacco Units                  2,654    3,403   (22.0 )%
Total Middle East & Africa          137,222  140,008    (2.0 )%


Our total shipment volume decreased by 2.0% to 137.2 billion units, notably in: • PMI Duty Free, down by 7.0%. Excluding the net unfavorable impact of

estimated distributor inventory movements of 0.4 billion units, PMI's

in-market sales decline was 4.6%, mainly reflecting lower market share and

the lower total market; and

Turkey, down by 5.6%, mainly reflecting lower market share, primarily driven

by the timing of retail price increases in April 2019 compared to

competition;

partly offset by • Egypt, up by 12.2%, primarily reflecting higher market share, driven by L&M,

    as well as the higher total market; and



                                       42
--------------------------------------------------------------------------------

Saudi Arabia, up by 24.9%. Excluding the net favorable impact of estimated

distributor inventory movements of 1.5 billion units, mainly attributable to

the timing of shipments compared to 2018, PMI's in-market sales grew by 4.1%,

    primarily reflecting higher market share.




South & Southeast Asia:
Financial Summary -                            Change                        Variance
Years Ended                                Fav./(Unfav.)                  Fav./(Unfav.)
December 31,
                                                    Excl.             Cur-             Vol/    Cost/
(in millions)           2019     2018       Total   Curr.     Total   rency   Price    Mix     Other
Net Revenues          $ 5,094$ 4,656       9.4 %   9.6 %   $  438$ (10 )$  583$ (135 ) $   -
Operating Income      $ 2,163$ 1,747      23.8 %  22.8 %   $  416$  17$  583$  (99 )$ (85 )



Net revenues, excluding unfavorable currency, increased by 9.6%, reflecting: a
favorable pricing variance, principally driven by Indonesia and the Philippines,
partly offset by unfavorable volume/mix, largely due to Indonesia, partly offset
by favorable volume in India and Thailand, as well as favorable mix in the
Philippines.

Operating income increased by 23.8%. Excluding asset impairment and exit costs
of $20 million related to a plant closure in Pakistan in the first quarter of
2019 as part of our global manufacturing infrastructure optimization, and
favorable currency of $17 million, operating income increased by 24.0%, mainly
reflecting: a favorable pricing variance and lower manufacturing costs, partly
offset by unfavorable volume/mix, reflecting the same factors as for net
revenues noted above, and higher marketing, administration and research costs,
partly due to the Philippines.

South & Southeast Asia - Total Market, PMI Shipment Volume and Market Share Commentaries


The estimated total market in South & Southeast Asia decreased by 1.2% to 738.1
billion units, notably due to:
•   Pakistan, down by 14.0%, mainly reflecting the impact of excise tax-driven

price increases;

the Philippines, down by 3.7%, primarily reflecting the impact of price

increases in the below premium segment in the fourth quarter of 2018, as well

as price increases in the third quarter of 2019; and

Vietnam, down by 5.2%, mainly reflecting the impact of excise tax-driven

    price increases;


partly offset by • Indonesia, up by 1.1%, reflecting the absence of an excise tax increase in

2019; and

Thailand, up by 5.8%, primarily reflecting on-going recovery from the

September 2017 excise tax reform.

Our Regional market share decreased by 0.1 point to 23.7%.

PMI Shipment Volume (million units) Full-Year

                                       2019     2018  Change
Cigarettes                          174,934  178,469    (2.0 )%
Heated Tobacco Units                      -        -       -  %
Total South & Southeast Asia        174,934  178,469    (2.0 )%



Our total shipment volume decreased by 2.0% to 174.9 billion units, notably due
to:
•   Indonesia, down by 2.9%, mainly reflecting lower market share, primarily due

to the widened retail price gap of Sampoerna A to competitive brands

following its price increase in October 2018, partly offset by the higher

total market;

Pakistan, down by 8.6%, mainly reflecting the lower total market, partly

    offset by higher market share driven by favorable retail price gaps with
    competitors' brands; and



                                       43
--------------------------------------------------------------------------------

the Philippines, down by 2.9%, mainly reflecting the lower total market,

partly offset by higher market share, notably of Marlboro;

partly offset by • Thailand, up by 18.0%, mainly reflecting higher market share, driven by the

    continued strong performance of L&M 7.1 and the favorable impact of
    distribution expansion in 2018, as well as the higher total market.




East Asia & Australia:
Financial Summary -                            Change                        Variance
Years Ended                                Fav./(Unfav.)                   Fav./(Unfav.)
December 31,
                                                    Excl.              Cur-             Vol/    Cost/
(in millions)           2019     2018      Total    Curr.     Total    rency   Price    Mix     Other
Net Revenues          $ 5,364$ 5,580     (3.9 )% (3.4 )%   $ (216 )$ (26 )$  230$ (420 ) $    -
Operating Income      $ 1,932$ 1,851      4.4  %  2.4  %   $   81$  37$  230$ (292 )$  106



Net revenues, excluding unfavorable currency, decreased by 3.4%, reflecting:
unfavorable volume/mix, mainly due to lower cigarette volume in Australia, Japan
and Korea, lower IQOS device volume in Japan, and lower heated tobacco unit
volume and IQOS device volume in Korea, partly offset by higher heated tobacco
unit volume in Japan. The unfavorable volume/mix was partly offset by a
favorable pricing variance, predominantly driven by Australia and Japan.

The net revenues of the East Asia & Australia segment include $2,671 million in 2019 and $2,506 million in 2018 related to the sale of RRPs.


Operating income, excluding favorable currency, increased by 2.4%, mainly
reflecting: a favorable pricing variance and lower manufacturing costs,
primarily related to Japan and Korea, partly offset by unfavorable volume/mix,
mainly reflecting the same drivers as for net revenues noted above, as well as
higher marketing, administration and research costs.

East Asia & Australia - Total Market, PMI Shipment Volume and Market Share Commentaries


The estimated total market in East Asia & Australia, excluding China, decreased
by 4.0% to 299.2 billion units, notably due to:
•   Australia, down by 5.9%, or by 8.9% excluding the impact of estimated trade

inventory movements, mainly reflecting the impact of excise tax-driven retail

price increases;

Japan, down by 5.6%, mainly reflecting the impact of the October 1, 2018

excise tax-driven retail price increases, as well as out-switching to the

cigarillo category;

Korea, down by 1.4%, reflecting the secular decline of the cigarette

category, partly offset by the growth of the heat-not-burn category; and

Taiwan, down by 1.9%, continuing to reflect the impact of significant excise

tax-driven retail price increases in June 2017, as well as an increase in the

prevalence of illicit trade.

Our Regional market share, excluding China, decreased by 0.5 points to 26.9%.

PMI Shipment Volume (million units) Full-Year

                                      2019    2018  Change
Cigarettes                          49,951  56,163   (11.1 )%
Heated Tobacco Units                30,677  26,866    14.2  %
Total East Asia & Australia         80,628  83,029    (2.9 )%


PMI's total shipment volume decreased by 2.9% to 80.6 billion units, notably in:

                                       44
--------------------------------------------------------------------------------

Korea, down by 11.1%, principally due to lower cigarette and heated tobacco

unit market share, as well as the lower total market;



partly offset by
•   Japan, up by 0.3%, reflecting the net favorable impact of estimated

distributor inventory movements of approximately 2.6 billion units (comprised

of approximately 3.4 billion heated tobacco units, partially offset by

approximately 0.8 billion cigarettes), mainly due to a favorable comparison

with 2018 in which IQOS consumable inventories in Japan were reduced.

Excluding the impact of these inventory movements, PMI's in-market sales

declined by 4.2%, primarily reflecting the lower total market, partly offset

    by higher heated tobacco unit market share.




Latin America & Canada:
Financial Summary -                                     Change                             Variance
Years Ended                                          Fav./(Unfav.)                      Fav./(Unfav.)
December 31,
                                                             Excl.                Cur-               Vol/      Cost/
(in millions)                  2019      2018       Total    Curr.      Total    rency     Price     Mix     Other(1)
Net Revenues                 $ 2,206$ 3,056     (27.8 )% (25.6 )%   $ (850 )$  (68 )$    90$ (113 )$    (759 )
Operating Income             $   235$ 1,145     (79.5 )% (80.7 )%   $ (910 )$   14$    90$  (89 )$    (925 )


(1) Unfavorable Cost/Other variance includes the impact of the RBH
deconsolidation.
Note: Net Revenues include revenues from shipments of Platform 1 devices, heated
tobacco units and accessories to Altria Group, Inc., commencing in the third
quarter of 2019, for sale under license in the United States.

Net revenues, excluding unfavorable currency, decreased by 25.6%, predominantly
due to: the unfavorable impact shown in "Cost/Other," resulting from the
deconsolidation of RBH; and unfavorable volume/mix, mainly due to lower
cigarette volume in Argentina and Canada, partly offset by a favorable pricing
variance, notably in Brazil, Canada, Colombia and Mexico, partially offset by
Argentina, mainly due to the adoption of highly inflationary accounting.

The net revenues of the Latin America & Canada segment include $27 million in 2019 and $19 million in 2018 related to the sale of RRPs.


Operating income decreased by 79.5%. Excluding the loss on deconsolidation of
RBH ($239 million), the Canadian tobacco litigation-related expense ($194
million), asset impairment and exit costs ($60 million) related to plant
closures in Argentina and Colombia as part of our global manufacturing
infrastructure optimization, and favorable currency ($14 million), operating
income decreased by 37.6%. This decline was predominantly due to the unfavorable
impact, shown in "Cost/Other," resulting from the deconsolidation of RBH; an
unfavorable volume/mix, mainly due to lower cigarette volume in Argentina and
Canada, partially offset by a favorable pricing variance, lower manufacturing
costs and lower marketing, administration and research costs.

Latin America & Canada - Total Market, PMI Shipment Volume and Market Share Commentaries


The estimated total market in Latin America & Canada decreased by 4.3% to 194.1
billion units, notably due to:
•   Argentina, down by 4.6%, primarily due to the impact of cumulative price

increases and the impact of the economic downturn as of the second half of

2018;

Canada, down by 7.7%, primarily due to the impact of cumulative price

increases, as well as the growing prevalence of e-vapor products; and

Venezuela, down by 61.6%, mainly reflecting the deterioration of the

socioeconomic environment and the impact of inflation-driven price increases.

Our Regional market share decreased by 0.4 points to 36.9%.

                                       45
--------------------------------------------------------------------------------

PMI Shipment Volume (million units) Full-Year

                                      2019    2018   Change
Cigarettes                          72,293  80,738    (10.5 )%
Heated Tobacco Units                   299     147  +100.0%
Total Latin America & Canada        72,592  80,885    (10.3 )%


Our total shipment volume decreased by 10.3% to 72.6 billion units, or by 5.2% excluding the impact of the RBH deconsolidation, notably due to: • Argentina, down by 9.4%, primarily reflecting the lower total market, as well

as lower market share; and

Venezuela, down by 74.8%, primarily reflecting the lower total market.




2018 compared with 2017

For a discussion comparing our consolidated operating results within each of our
operating segments for the year ended December 31, 2018, with the year ended
December 31, 2017, refer to Part II, Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operation - Operating Results by
Business Segment in our Annual Report on Form 10-K for the year ended December
31, 2018, which was filed with the U.S. Securities and Exchange Commission on
February 7, 2019.


Financial Review
[[Image Removed: chart-7afa3067cb17c8da6dc.jpg]][[Image Removed: chart-6a2df93042cb84ab17b.jpg]][[Image Removed: chart-5cdaf24be4761f417f9.jpg]]
                                              For the Years Ended December 

31,

(in millions)                                  2019            2018        

2017

Net cash provided by operating activities $ 10,090$ 9,478$ 8,912 Net cash used in investing activities

           (1,811 )         (998 )   (3,083 )
Net cash used in financing activities           (8,061 )       (9,651 )   (2,769 )






                                       46
--------------------------------------------------------------------------------

2019 compared with 2018

• Net Cash Provided by Operating Activities




Net cash provided by operating activities of $10.1 billion for the year ended
December 31, 2019, increased by $0.6 billion from the comparable 2018 period.
Excluding unfavorable currency movements of $1.0 billion, net cash provided by
operating activities increased by $1.6 billion, due to lower working capital
requirements of $1.3 billion and other movements of $0.3 billion. The
unfavorable currency movements represented the impacts on net earnings coupled
with the currency impacts on subsidiary working capital movements and the
related inter-company positions from the fluctuations of the U.S. dollar in 2018
and 2019, especially against the Euro, Mexican peso, Russian ruble and Turkish
lira.

The lower working capital requirements were primarily due to higher cash
provided by accrued liabilities and other current assets related to the timing
of excise tax-paid inventory movements and excise tax payments, and higher cash
provided by accounts payable reflecting a combination of extended payment terms
from vendors in 2019 and higher 2018 payments for IQOS device purchases in the
fourth quarter of 2017, partially offset by more cash used for accounts
receivable primarily due to the timing of cash collections.

The other movements of $0.3 billion, excluding currency, was driven by the net
impact of the net earnings decline of $0.4 billion adjusted for the add-back of
the non-cash items of $0.7 billion, comprised of $0.3 billion related to the
2019 Canadian tobacco litigation-related expense and the 2019 loss on
deconsolidation of RBH and $0.4 billion related to the 2019 asset impairment and
exit costs.  While the asset impairment and exit costs were largely non-cash
charges in 2019, approximately $0.2 billion of employee separation costs will be
paid by the end of 2021 - see Item 8, Note 21. Asset Impairment and Exit Costs
for additional information.

Net Cash Used in Investing Activities




Net cash used in investing activities of $1.8 billion for the year ended
December 31, 2019, increased by $0.8 billion from the comparable 2018 period.
This increase in net cash used in investing activities was due principally to
the reduction of cash resulting from the deconsolidation of RBH, partly offset
by lower capital expenditures. For further details on deconsolidation of RBH,
see Item 8. Note 22. Deconsolidation of RBH.

Our capital expenditures were $0.9 billion in 2019 and $1.4 billion in 2018. The
2019 expenditures were primarily related to our ongoing investments in RRPs. We
expect total capital expenditures in 2020 of approximately $1.0 billion
(including capital expenditures related to our ongoing investment in RRPs), to
be funded by operating cash flows.

Net Cash Used in Financing Activities




Net cash used in financing activities of $8.1 billion for the year ended
December 31, 2019, decreased by $1.6 billion from the comparable 2018 period.
The decrease in net cash used in financing activities was due primarily to 2019
proceeds from long-term debt issuances ($3.8 billion proceeds from our U.S.
dollar and Euro debt issuances in 2019) and the purchase of the remaining 49%
interest in our Costa Rican affiliates in 2018, partially offset by higher
long-term debt repayments and higher repayments of short-term borrowing. For
further details on the purchase of the remaining 49% interest in our Costa Rican
affiliates, see Item 8, Note 6. Acquisitions.

Dividends paid in 2019 and 2018 were $7.2 billion and $6.9 billion, respectively.



2018 compared with 2017

For a discussion comparing our net cash activities (operating, investing and
financing) for the year ended December 31, 2018, with the year ended December
31, 2017, refer to Part II, Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation - Financial Review in our Annual
Report on Form 10-K for the year ended December 31, 2018, which was filed with
the U.S. Securities and Exchange Commission on February 7, 2019.


Ÿ Debt and Liquidity


We define cash and cash equivalents as short-term, highly liquid investments,
readily convertible to known amounts of cash that mature within a maximum of
three months and have an insignificant risk of change in value due to interest
rate or credit risk changes. As a policy, we do not hold any investments in
structured or equity-linked products. Our cash and cash equivalents are
predominantly held in demand deposits with institutions that have
investment-grade long-term credit rating. As part of our cash management
strategy and in order to

                                       47
--------------------------------------------------------------------------------

manage counterparty exposure, we also enter into reverse repurchase agreements.
Such agreements are collateralized with government or corporate securities held
by a custodial bank and, at maturity, cash is paid back to PMI, and the
collateral is returned to the bank. For 2018, we had an average balance of $0.3
billion, and we had a zero balance at December 31, 2018. For 2019, the activity
for such reverse repurchase agreements was not material.

We utilize long-term and short-term debt financing, including a commercial paper
program that is regularly used to finance ongoing liquidity requirements, as
part of our overall cash management strategy. Our ability to access the capital
and credit markets as well as overall dynamics of these markets may impact
borrowing costs. We expect that the combination of our long-term and short-term
debt financing, the commercial paper program and the committed credit
facilities, coupled with our operating cash flows, will enable us to meet our
liquidity requirements.

Credit Ratings - The cost and terms of our financing arrangements as well as our
access to commercial paper markets may be affected by applicable credit ratings.
At February 6, 2020, our credit ratings and outlook by major credit rating
agencies were as follows:
                  Short-term Long-term Outlook
Moody's              P-1        A2     Stable
Standard & Poor's    A-1         A     Stable
Fitch                 F1         A     Stable



Credit Facilities - On January 31, 2020, we entered into an agreement to amend
and extend the term of our $2.0 billion 364-day revolving credit facility from
February 4, 2020, to February 2, 2021.

At February 6, 2020, our committed credit facilities were as follows: (in billions) Type

                                                        Committed
                                                             Credit
                                                           Facilities

364-day revolving credit, expiring February 2, 2021$ 2.0 Multi-year revolving credit, expiring February 28, 2021

            2.5
Multi-year revolving credit, expiring October 1, 2022              3.5
Total facilities                                          $        8.0

At February 6, 2020, there were no borrowings under the committed credit facilities, and the entire committed amounts were available for borrowing.


All banks participating in our committed credit facilities have an
investment-grade long-term credit rating from the credit rating agencies. We
continuously monitor the credit quality of our banking group, and at this time
we are not aware of any potential non-performing credit provider.

All but the $2.0 billion 364-day revolving credit facility in the table above
require us to maintain a ratio of consolidated earnings before interest, taxes,
depreciation and amortization ("consolidated EBITDA") to consolidated interest
expense of not less than 3.5 to 1.0 on a rolling four-quarter basis. At
December 31, 2019, our ratio calculated in accordance with the agreements was
11.2 to 1.0. These facilities do not include any credit rating triggers,
material adverse change clauses or any provisions that could require us to post
collateral. We expect to continue to meet our covenants. The terms "consolidated
EBITDA" and "consolidated interest expense," both of which include certain
adjustments, are defined in the facility agreements previously filed with the
U.S. Securities and Exchange Commission.

We plan to replace our existing $2.5 billion multi-year revolving credit
facility, expiring February 28, 2021 with a new $2.0 billion revolving credit
facility expiring February 10, 2025. The new credit facility, which is expected
to close on February 10, 2020, will not include the consolidated EBITDA to
consolidated interest expense ratio covenant discussed above.
In addition to the committed credit facilities discussed above, certain of our
subsidiaries maintain short-term credit arrangements to meet their respective
working capital needs. These credit arrangements, which amounted to
approximately $2.7 billion at December 31, 2019,

                                       48
--------------------------------------------------------------------------------

and $3.3 billion at December 31, 2018, are for the sole use of our subsidiaries.
Borrowings under these arrangements amounted to $338 million at December 31,
2019, and $730 million at December 31, 2018.

Commercial Paper Program - We continue to have access to liquidity in the
commercial paper market through programs in place in the U.S. and in Europe
having an aggregate issuance capacity of $8.0 billion. At December 31, 2019, and
December 31, 2018, we had no commercial paper outstanding. The average
commercial paper balance outstanding during 2019 and 2018 was $2.3 billion and
$3.4 billion, respectively.

Sale of Accounts Receivable - To mitigate credit risk and enhance cash and
liquidity management we sell trade receivables to unaffiliated financial
institutions. These arrangements allow us to sell, on an ongoing basis, certain
trade receivables without recourse. The trade receivables sold are generally
short-term in nature and are removed from the consolidated balance sheets. We
sell trade receivables under two types of arrangements, servicing and
nonservicing.

Our operating cash flows were positively impacted by the amount of the trade
receivables sold and derecognized from the consolidated balance sheets, which
remained outstanding with the unaffiliated financial institutions. The trade
receivables sold that remained outstanding under these arrangements as of
December 31, 2019, 2018 and 2017, were $0.9 billion, $1.0 billion and $1.1
billion, respectively. The net proceeds received are included in cash provided
by operating activities in the consolidated statements of cash flows.

For further details, see Item 8, Note 20. Sale of Accounts Receivable to our consolidated financial statements.


Debt - Our total debt was $31.0 billion at December 31, 2019, and $31.8 billion
at December 31, 2018. Our total debt is primarily fixed rate in nature. For
further details, see Item 8, Note 7. Indebtedness. The weighted-average all-in
financing cost of our total debt was 2.5% in 2019 and 2018. See Item 8, Note 16.
Fair Value Measurements to our consolidated financial statements for a
discussion of our disclosures related to the fair value of debt. The amount of
debt that we can issue is subject to approval by our Board of Directors.

On February 14, 2017, we filed a shelf registration statement with the U.S.
Securities and Exchange Commission, under which we may from time to time sell
debt securities and/or warrants to purchase debt securities over a three-year
period. During February 2020, we plan to file a new shelf registration statement
with the Securities and Exchange Commission.

Our debt issuances in 2019 were as follows:

(in millions)
      Type                    Face Value              Interest Rate      Issuance         Maturity

U.S. dollar notes (a)            $900                    2.875%             May 2019        May 2024
U.S. dollar notes (b)            $750                    3.375%             May 2019     August 2029
   EURO notes     (c)  €500 (approximately $557) (d)     0.125%          August 2019     August 2026
   EURO notes     (c)  €750 (approximately $835) (d)     0.800%          August 2019     August 2031
   EURO notes     (c)  €750 (approximately $835) (d)     1.450%          August 2019     August 2039



(a) Interest on these notes is payable semi-annually in arrears beginning in
November 2019.
(b) Interest on these notes is payable semi-annually in arrears beginning in
August 2019.
(c) Interest on these notes is payable annually in arrears beginning in August
2020.
(d) USD equivalents for foreign currency notes were calculated based on exchange
rates on the date of issuance.

The net proceeds from the sale of the securities listed in the table above have
been and will be used for general corporate purposes, including repayment of
outstanding commercial paper and refinancing of outstanding 2.000% Notes due
2020, outstanding Floating Rate Notes due 2020 and outstanding Euro denominated
1.750% Notes due 2020.

The weighted-average time to maturity of our long-term debt was 10.2 years at the end of 2019 and 9.6 years at the end of 2018.

• Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

We have no off-balance sheet arrangements, including special purpose entities, other than guarantees and contractual obligations discussed below.

                                       49
--------------------------------------------------------------------------------

Guarantees - At December 31, 2019, we were contingently liable for $0.5 billion
of guarantees of our own performance, of which $0.3 billion related to our
obligations under indemnity agreements to enable appeals of customs assessments
against our distributors, and $0.2 billion were primarily related to excise
taxes on the shipment of our products. There is no liability in the consolidated
financial statements associated with these guarantees. At December 31, 2019, our
third-party guarantees were insignificant.

Aggregate Contractual Obligations - The following table summarizes our contractual obligations at December 31, 2019:

                                                                      Payments Due
                                                                                            2025 and
(in millions)                            Total       2020      2021-2022     2023-2024     Thereafter
Long-term debt (1)                      $30,962$4,051$5,779$4,890$16,242
Interest on borrowings (2)               10,124        877         1,534         1,273          6,440
Operating leases (3)                        949        222           286           158            283
Purchase obligations (4):
Inventory and production costs            3,493      2,199           885           409              -
Other                                     2,180        977           578           213            412
                                          5,673      3,176         1,463           622            412
Other long-term liabilities (5)           1,992        278           408           661            645
                                        $49,700$8,604$9,470$7,604$24,022



(1) Amounts represent the expected cash payments at the face value of our
long-term debt and finance lease obligations. For further details, see Item 8,
Note 7. Indebtedness to our consolidated financial statements.
(2) Amounts represent the expected cash payments of our interest expense on our
long-term debt, including the current portion of long-term debt. Interest on our
fixed-rate debt is presented using the stated interest rate. Interest on our
variable debt is estimated using the rate in effect at December 31, 2019.
Amounts exclude the amortization of debt discounts, the amortization of loan
fees and fees for lines of credit that would be included in interest expense in
the consolidated statements of earnings.
(3) Amounts represent the maturity of PMI"s operating lease liabilities, on an
undiscounted basis.
(4) Purchase obligations for inventory and production costs (such as raw
materials, indirect materials and supplies, packaging, co-manufacturing
arrangements, storage and distribution) are commitments for projected needs to
be utilized in the normal course of business. Other purchase obligations include
commitments for marketing, advertising, capital expenditures, information
technology and professional services. Other purchase obligations also include
the expected future contributions to the Foundation for a Smoke-Free World. 

For

further details see Business Environment-Other Developments. Arrangements are
considered purchase obligations if a contract specifies all significant terms,
including fixed or minimum quantities to be purchased, a pricing structure and
approximate timing of the transaction. Amounts represent the minimum commitments
under non-cancelable contracts. Any amounts reflected on the consolidated
balance sheet as accounts payable and accrued liabilities are excluded from the
table above.
(5) Other long-term liabilities consist primarily of transition tax (as
discussed in Item 8, Note 11. Income Taxes to our consolidated financial
statements), postretirement health care costs, accruals established for
employment costs and accruals established for Exit activities (for further
details, see Note 21. Asset impairment and Exit Costs). The following long-term
liabilities included on the consolidated balance sheet are excluded from the
table above: accrued pension and postemployment costs, tax contingencies,
insurance accruals and other accruals. We are unable to estimate the timing of
payments (or contributions in the case of accrued pension costs) for these
items. Currently, we anticipate making pension contributions of approximately
$77 million in 2020, based on current tax and benefit laws (as discussed in Item
8, Note 13. Benefit Plans to our consolidated financial statements).

Ÿ Equity and Dividends

We discuss our stock awards as of December 31, 2019, in Item 8, Note 9. Stock Plans to our consolidated financial statements.

During 2019, 2018 and 2017, we did not repurchase any shares under a share repurchase program, and we do not presently intend to repurchase shares of our common stock in 2020.


Dividends paid in 2019 were $7.2 billion. During the third quarter of 2019, our
Board of Directors approved a 2.6% increase in the quarterly dividend to $1.17
per common share. As a result, the present annualized dividend rate is $4.68 per
common share.


                                       50
--------------------------------------------------------------------------------

Market Risk


Ÿ Counterparty Risk - We predominantly work with financial institutions with
strong short- and long-term credit ratings as assigned by Standard & Poor's and
Moody's. These banks are also part of a defined group of relationship banks.
Non-investment grade institutions are only used in certain emerging markets to
the extent required by local business needs. We have a conservative approach
when it comes to choosing financial counterparties and financial instruments. As
such we do not invest or hold investments in any structured or equity-linked
products. The majority of our cash and cash equivalents is currently invested in
demand deposits maturing within less than 30 days.

We continuously monitor and assess the credit worthiness of all our counterparties.


Ÿ Derivative Financial Instruments - We operate in markets outside of the U.S.,
with manufacturing and sales facilities in various locations throughout the
world. Consequently, we use certain financial instruments to manage our foreign
currency and interest rate exposure. We use derivative financial instruments
principally to reduce our exposure to market risks resulting from fluctuations
in foreign exchange and interest rates by creating offsetting exposures. We are
not a party to leveraged derivatives and, by policy, do not use derivative
financial instruments for speculative purposes.

See Item 8, Note 15. Financial Instruments, Item 8, Note 16. Fair Value
Measurements and Item 8, Note 19. Balance Sheet Offsetting to our consolidated
financial statements for further details on our derivative financial instruments
and the related collateral arrangements.

Ÿ Value at Risk - We use a value at risk computation to estimate the potential
one-day loss in the fair value of our interest-rate-sensitive and foreign
currency price-sensitive derivative financial instruments. This computation
includes our debt and foreign currency forwards, swaps and options. Anticipated
transactions, foreign currency trade payables and receivables, and net
investments in foreign subsidiaries, which the foregoing instruments are
intended to hedge, were excluded from the computation.

The computation estimates were made assuming normal market conditions, using a
95% confidence interval and a one-day holding period using a "parametric
delta-gamma" approximation technique to determine the observed
interrelationships between movements in interest rates and various currencies
and in calculating the risk of the underlying positions in the portfolio. These
interrelationships were determined by observing interest rate and forward
currency rate movements primarily over the preceding quarter for determining
value at risk at December 31, 2019 and 2018, and primarily over each of the four
preceding quarters for the calculation of average value at risk amounts during
each year.

                                       Fair Value Impact
                                  At
(in millions)             December 31, 2019   Average     High     Low
Instruments sensitive to:
  Foreign currency rates         $18$20$24$18

Interest rates                  $301$247$346$169

                                       Fair Value Impact
                                  At
(in millions)             December 31, 2018   Average     High     Low
Instruments sensitive to:
  Foreign currency rates         $19$20$23$19

Interest rates                  $142$132$152$96




The value at risk computation is a risk analysis tool designed to statistically
estimate the maximum probable daily loss from adverse movements in interest and
foreign currency rates under normal market conditions. The computation does not
purport to represent actual losses in fair value or earnings to be incurred by
us, nor does it consider the effect of favorable changes in market rates. We
cannot predict actual future movements in such market rates and do not present
these results to be indicative of future movements in market rates or to

                                       51
--------------------------------------------------------------------------------

be representative of any actual impact that future changes in market rates may have on our future results of operations or financial position.

Contingencies

See Item 3 and Item 8, Note 18. Contingencies to our consolidated financial statements for a discussion of contingencies.

Cautionary Factors That May Affect Future Results


Forward-Looking and Cautionary Statements
We may from time to time make written or oral forward-looking statements,
including statements contained in filings with the SEC, in reports to
stockholders and in press releases and investor webcasts. You can identify these
forward-looking statements by use of words such as "strategy," "expects,"
"continues," "plans," "anticipates," "believes," "will," "estimates," "intends,"
"projects," "goals," "targets" and other words of similar meaning. You can also
identify them by the fact that they do not relate strictly to historical or
current facts.
We cannot guarantee that any forward-looking statement will be realized,
although we believe we have been prudent in our plans and assumptions. Our RRPs
constitute a new product category in its early stages that is less predictable
than our mature cigarette business. Achievement of future results is subject to
risks, uncertainties and inaccurate assumptions. Should known or unknown risks
or uncertainties materialize, or should underlying assumptions prove inaccurate,
actual results could vary materially from those anticipated, estimated or
projected. Investors should bear this in mind as they consider forward-looking
statements and whether to invest in or remain invested in our securities. In
connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, we are identifying important factors that,
individually or in the aggregate, could cause actual results and outcomes to
differ materially from those contained in any forward-looking statements made by
us; any such statement is qualified by reference to the following cautionary
statements. We elaborate on these and other risks we face throughout this
document, particularly in Item 1A. Risk Factors and Business Environment of this
section. You should understand that it is not possible to predict or identify
all risk factors. Consequently, you should not consider this discussion of
potential risks or uncertainties to be complete. We do not undertake to update
any forward-looking statement that we may make from time to time, except in the
normal course of our public disclosure obligations.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

The information called for by this Item is included in Item 7, Market Risk.

                                       52

--------------------------------------------------------------------------------

© Edgar Online, source Glimpses

share with twitter share with LinkedIn share with facebook
share via e-mail
Latest news on PHILIP MORRIS INTERNATIONA
04/04BRITISH AMERICAN TOBACCO : Big Tobacco Joins Race for Coronavirus Vaccine
DJ
04/02GLOBAL MARKETS LIVE: Redundancy plan at Boeing, Amazon wins lawsuit in Europe..
03/23PHILIP MORRIS INTERNATIONAL INC. : Regulation FD Disclosure, Financial Statement..
AQ
03/23PHILIP MORRIS INTERNATIONAL INC. : Announces Temporary Suspension of Operations ..
BU
03/20PHILIP MORRIS INTERNATIONAL, INC. : Ex-dividend day for
FA
03/19PHILIP MORRIS INTERNATIONAL : Medicago develops a plant-based vaccine for Corona..
PU
03/13Philip Morris Names First Chief Diversity Officer
DJ
03/13PHILIP MORRIS INTERNATIONAL : Demonstrates Commitment to Developing an Inclusive..
BU
03/10GLOBAL MARKETS LIVE: The US shale oil industry is under scrutiny, so are airl..
03/10PHILIP MORRIS INTERNATIONAL : Why This Major Cigarette Company is Going 'Smoke-F..
AQ
More news