PHILIP MORRIS INTERNATIONAL, INC. 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 adultswho would otherwise continue to smoke, society, the company, its shareholders and its other stakeholders. We are a leading international tobacco company engaged in the manufacture and sale of cigarettes, as well as smoke-free products, associated electronic devices and accessories, and other nicotine-containing products in markets outsidethe United States . In addition, versions of our Platform 1 device and consumables have received marketing authorizations from theU.S. Food and Drug Administration ("FDA") under the premarket tobacco product application ("PMTA") pathway; the FDA has also authorized the marketing of a version of our Platform 1 device and its consumables as a Modified Risk Tobacco Product ("MRTP"), finding that an exposure modification order for these products is appropriate to promote the public health. 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. We describe the PMTA and MRTP orders in more detail in the "Business Environment" section of this Item 2. 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 smoke-free product portfolio includes heat-not-burn products, nicotine-containing vapor products and oral nicotine products.
In the third quarter of 2021, our former
We currently manage our business in six geographical segments and an Other category:
•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");
•Americas ("AMCS"); and
•Other, which includes our third quarter 2021 acquisitions of Fertin Pharma A/S ,
Vectura Group plc. and OtiTopic, Inc. For further details, see Note 7. Segment
Reporting and Note 17. Acquisitions.
Our cigarettes are sold in more than 175 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. IQOS is the leading brand in our smoke-free
product portfolio. As of September 30, 2021 , our smoke-free products are
available for sale in 70 markets in key cities or nationwide.
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 devices produced by third-party electronics manufacturing service
providers. Estimated costs associated with device warranty programs are
generally provided for in cost of sales in the period the related revenues are
recognized.
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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 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 that are otherwise compliant with law. Executive Summary The following executive summary provides the business update and significant highlights from the "Discussion and Analysis" that follows.
Consolidated Operating Results for the Nine Months Ended
•Net Revenues - Net revenues of
[[Image Removed: pm-20210930_g1.jpg]] For the nine months endedSeptember 30, 2021 , net revenues, excluding favorable currency, increased by 6.1%, mainly reflecting: favorable volume/mix, primarily driven by higher heated tobacco unit volume (notably in the EU, particularlyGermany ,Hungary ,Italy andPoland , as well asJapan andRussia ), partly offset by lower cigarette volume (mainly in theEU Region , notably theCzech Republic ,France andGermany , as well asJapan ,Kuwait ,North Africa ,the Philippines ,Russia andUkraine , partially offset byIndonesia , PMI Duty Free, andTurkey ); and a favorable pricing variance (notably driven by theCzech Republic ,Germany ,Japan ,Kazakhstan ,North Africa ,the Philippines ,Russia andTurkey , partly offset byIndonesia ,Poland andUkraine ); partially offset by the unfavorable impact of theSaudi Arabia customs assessments of$246 million , included in "Other" and further described in the following "Diluted Earnings Per Share" discussion.
This net revenue growth reflects the continued strength of IQOS, and the recovery of the combustible business in many markets from the low base in 2020 due to the impact of COVID-19.
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Net revenues by product category for the nine months ended
[[Image Removed: pm-20210930_g2.jpg]] [[Image Removed: pm-20210930_g3.jpg]]
•Diluted Earnings Per Share - The changes in our reported diluted earnings per
share ("diluted EPS") for the nine months ended September 30, 2021 , from the
comparable 2020 amounts, were as follows:
Diluted EPS % Growth
For the nine months ended September 30, 2020 $ 3.90
2020 Asset impairment and exit costs
0.04
2020 Fair value adjustment for equity security investments 0.04
2020 Tax items (0.06)
Subtotal of 2020 items 0.02
2021 Asset impairment and exit costs (0.09)
2021 Saudi Arabia customs assessments
(0.14)
2021 Asset acquisition cost
(0.03)
2021 Equity investee ownership dilution 0.02
2021 Tax items -
Subtotal of 2021 items (0.24)
Currency 0.18
Interest (0.01)
Change in tax rate 0.07
Operations 0.56
For the nine months ended September 30, 2021 $ 4.48 14.9 %
Asset impairment and exit costs - During the nine months ended September 30,
2021 , we recorded pre-tax asset impairment and exit costs of $170 million ,
representing $143 million net of income tax and a diluted EPS charge of $0.09
per share, related to the organizational design optimization plan, primarily in
Switzerland , and the product distribution restructuring in South Korea . During
the nine months ended September 30, 2020 , we recorded pre-tax asset impairment
and exit costs of $71 million , representing $57 million net of income tax and a
diluted EPS charge of $0.04 , related to the organizational design optimization
plan, primarily in Switzerland . The total pre-tax charges were included in
marketing, administration and research costs on the condensed consolidated
statements of earnings. For further details, see Note 16. Asset Impairment and
Exit Costs.
Fair Value adjustment for equity security investments - During the nine months
ended September 30, 2020 , we recorded an unfavorable fair value adjustment for
our equity security investments of $62 million after tax (or $0.04 per share
decrease in diluted EPS). The fair value adjustment for our equity security
investments was included in equity investments and securities
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(income)/loss, net (
Income taxes - The 2020 Tax items that increased our 2020 diluted EPS by$0.06 per share in the table above were due to finalU.S. tax regulations under the Global Intangible Low-Taxed Income ("GILTI") provisions of the Internal Revenue Code for years 2018 and 2019 ($93 million ). The change in the tax rate that increased our diluted EPS by$0.07 per share in the table above was primarily due to the corporate income tax rate reduction inthe Philippines (enacted in the first quarter of 2021), as well as changes in earnings mix by taxing jurisdiction.Saudi Arabia customs assessments - InJune 2021 , the Customs Appeal Committee inRiyadh notified our distributors inSaudi Arabia of its decisions to largely reject their challenges of theSaudi Arabia Customs General Authority assessments as described in Note 8. Contingencies. On the basis of these decisions and in line with arrangements with the distributors, we recorded a pre-tax charge of$246 million in the second quarter of 2021 (representing$215 million net of income tax and a diluted EPS charge of$0.14 per share). The pre-tax charge was recorded as a reduction of net revenues on the condensed consolidated statement of earnings for the nine months endedSeptember 30, 2021 and was included in theMiddle East &Africa segment results. Asset acquisition cost - InAugust 2021 , we acquired 100% ofOtiTopic, Inc. , aU.S. respiratory drug development company with a late-stage dry powder inhalation aspirin treatment for acute myocardial infarction. We accounted for this transaction as an asset acquisition since the acquired in-process research and development ("IPR&D") of the dry powder inhalation aspirin treatment represented substantially all of the fair value of the gross assets acquired. At the date of acquisition, we determined that the acquired IPR&D had no alternative future use. As a result, we recorded a pre-tax charge of$51 million (representing a$0.03 charge to diluted EPS) to research and development costs within marketing, administration and research costs in the condensed consolidated statements of earnings for the nine months endedSeptember 30, 2021 . For further details, see Note 17. Acquisitions. Equity investee ownership dilution - InJuly 2021 , our equity method investee,Medicago Inc , initiated an additional round of equity funding in which we did not participate. As a result, our share of holdings inMedicago Inc. was reduced to approximately 25% as ofSeptember 30, 2021 . The ownership dilution resulted in a$0.02 favorable impact to diluted EPS and income of$38 million to Equity investments and securities (income)/loss, net in the condensed consolidated statements of earnings for the nine months endedSeptember 30, 2021 . For further details, see Note 8. Contingencies. Currency - The favorable impact of$0.18 per share during the reporting period primarily results from the fluctuations of theU.S. dollar, especially against the Euro. This favorable currency movement has impacted our profitability across our primary revenue markets and local currency cost bases.
Operations - The increase in diluted EPS of
•European Union: Favorable volume/mix, lower manufacturing costs and favorable pricing, partially offset by higher marketing, administration and research costs; •East Asia &Australia : Favorable pricing, lower manufacturing costs and favorable volume/mix, partially offset by higher marketing, administration and research costs; •Eastern Europe: Favorable volume/mix, lower manufacturing costs, and favorable pricing; •Middle East &Africa : Favorable pricing, favorable volume/mix and lower manufacturing costs, partially offset by lower fees for certain distribution rights and higher marketing, administration and research costs; and •Americas: Favorable pricing and lower marketing, administration and research costs, partially offset by higher manufacturing costs; partially offset by •South &Southeast Asia : Unfavorable volume/mix and higher marketing, administration and research costs. 51
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Consolidated Operating Results for the Three Months Ended
•Net Revenues - Net revenues of
[[Image Removed: pm-20210930_g4.jpg]]
During the quarter, net revenues, excluding favorable currency, increased by
7.6%, mainly reflecting: favorable volume/mix, primarily driven by higher heated
tobacco unit volume (notably in the EU, particularly Germany , Italy and Poland ,
as well as Japan , PMI Duty Free and Russia ) and higher device volume (primarily
in Japan , driven by the launch of IQOS ILUMA), partly offset by lower cigarette
volume (mainly in Australia , France , Germany , Italy and the Philippines , partly
offset by Indonesia , Japan , PMI Duty Free and Turkey ) and unfavorable cigarette
mix (mainly in Germany , Japan and Russia ); and a favorable pricing variance
(notably driven by Japan , the Philippines , Russia and Turkey , partly offset by
Indonesia , Poland and Ukraine ).
This net revenue growth reflects the continued strength of IQOS, and the recovery of the combustible business in many markets from the low base in 2020 due to the impact of COVID-19.
Net revenues by product category for the three months ended
[[Image Removed: pm-20210930_g5.jpg]] [[Image Removed: pm-20210930_g6.jpg]]
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•Diluted Earnings Per Share - The changes in our reported diluted EPS for the three months endedSeptember 30, 2021 , from the comparable 2020 amounts, were as follows: Diluted EPS % Growth For the three months endedSeptember 30, 2020 $
1.48
2020 Asset impairment and exit costs
-
2020 Fair value adjustment for equity security investments -
2020 Tax items (0.06)
Subtotal of 2020 items (0.06)
2021 Asset impairment and exit costs (0.02)
2021 Asset acquisition cost
(0.03)
2021 Equity investee ownership dilution 0.02
2021 Tax items -
Subtotal of 2021 items (0.03)
Currency 0.04
Interest 0.01
Change in tax rate 0.04
Operations 0.07
For the three months ended September 30, 2021 $ 1.55 4.7 %
Income Taxes - The 2020 Tax items that increased our 2020 diluted EPS by $0.06
per share in the table above were due to final U.S. tax regulations under the
GILTI provisions of the Internal Revenue Code for years 2018 and 2019 ($93
million ). The change in the tax rate that increased our diluted EPS by $0.04 per
share in the table above was primarily due to the corporate income tax rate
reduction in the Philippines (enacted in the first quarter of 2021), as well as
changes in earnings mix by taxing jurisdiction.
Asset impairment and exit costs - In the third quarter of 2021, we recorded
pre-tax asset impairment and exit costs of $43 million , representing $38 million
net of income tax and a diluted EPS charge of $0.02 per share, related to the
organizational design optimization plan, primarily in Switzerland , and the
product distribution restructuring in South Korea . The total pre-tax charge was
included in marketing, administration and research costs on the condensed
consolidated statements of earnings. For further details, see Note 16. Asset
Impairment and Exit Costs.
Asset acquisition cost - In August 2021 , we acquired 100% of OtiTopic, Inc. , a
U.S. respiratory drug development company with a late-stage dry powder
inhalation aspirin treatment for acute myocardial infarction. We accounted for
this transaction as an asset acquisition since the acquired in-process research
and development ("IPR&D") of the dry powder inhalation aspirin treatment
represented substantially all of the fair value of the gross assets acquired. At
the date of acquisition, we determined that the acquired IPR&D had no
alternative future use. As a result, we recorded a pre-tax charge of $51 million
(representing a $0.03 charge to diluted EPS) to research and development costs
within marketing, administration and research costs in the condensed
consolidated statements of earnings for the three months ended September 30,
2021 . For further details, see Note 17. Acquisitions.
Equity investee ownership dilution - In July 2021 , our equity method investee,
Medicago Inc , initiated an additional round of equity funding in which we did
not participate. As a result, our share of holdings in Medicago Inc. was reduced
to approximately 25% as of September 30, 2021 . The ownership dilution resulted
in a $0.02 favorable impact to diluted EPS and income of $38 million to Equity
investments and securities (income)/loss, net in the condensed consolidated
statements of earnings for the three months ended September 30, 2021 . For
further details, see Note 8. Contingencies.
Currency - The favorable impact of $0.04 per share during the reporting period
primarily results from the fluctuations of the U.S. dollar, especially against
the Euro. This favorable currency movement has impacted our profitability across
our primary revenue markets and local currency cost bases.
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Operations - The increase in diluted EPS of
•Middle East &Africa : Favorable volume/mix, favorable pricing and lower manufacturing costs, partially offset by lower fees for certain distribution rights and higher marketing, administration and research costs; •Eastern Europe: Favorable volume/mix, favorable pricing and lower manufacturing costs; •East Asia &Australia : Favorable pricing, favorable volume/mix and lower manufacturing costs, partially offset by higher marketing, administration and research costs; •European Union: Favorable volume/mix and lower manufacturing costs, partially offset by higher marketing, administration and research costs; and •Americas: Favorable pricing, partially offset by higher manufacturing costs and higher marketing, administration and research costs; partially offset by •South &Southeast Asia : Unfavorable volume/mix and higher manufacturing costs, partially offset by favorable pricing.
For further details, see the "Consolidated Operating Results" and "Operating Results by Business Segment" sections of the following "Discussion and Analysis."
IQOS Device Supply The current global semiconductor shortage is resulting in a tightness in IQOS device supply. This is affecting the availability and assortment of IQOS devices in certain markets, which is hampering the company's ability to operate at full commercial and competitive capacity to fully meet demand. This has been reflected in lower IQOS user growth rates in the third quarter of 2021. At this stage, supply forecasting remains volatile. PMI therefore assumes that the tight supply situation will persist into the first half of 2022 and, where necessary, the company will prioritize device replacements for existing IQOS users over device sales targeting user acquisition. PMI is also adjusting its launch timeline for IQOS ILUMA outsideJapan , with additional major launches now assumed for the second half of 2022.
PMI views this as a temporary phenomenon and expects IQOS user growth to re-accelerate once shortages ease, as consumer demand remains.
Acquisitions
During the third quarter of 2021, PMI acquired the following companies:
•Fertin Pharma A/S, a Danish company that is a leading developer and manufacturer of innovative pharmaceutical and well-being products based on oral and intra-oral delivery systems;
•Vectura Group plc, an inhaled therapeutics company based in the
•OtiTopic, Inc., a
For further details on these acquisitions, see Note 17. Acquisitions.
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Discussion and Analysis
Consolidated Operating Results
See pages 95-104 for a discussion of our "Cautionary Factors That May Affect
Future Results." Our net revenues and operating income by segment are shown in
the table below:
For the Nine Months Ended For the Three Months Ended
(in millions) September 30, September 30,
2021 2020 2021 2020
Net revenues:
European Union $ 9,250 $ 7,960 $ 3,192 $ 2,950
Eastern Europe 2,632 2,470 941 899
Middle East & Africa 2,306 2,348 945 768
South & Southeast Asia 3,284 3,211 1,065 1,071
East Asia & Australia 4,509 4,045 1,523 1,358
Americas 1,320 1,216 456 400
Net revenues $ 23,301 $ 21,250 $ 8,122 $ 7,446
Operating income (loss):
European Union $ 4,811 $ 3,924 $ 1,680 $ 1,588
Eastern Europe 913 610 338 245
Middle East & Africa 739 819 388 261
South & Southeast Asia 1,208 1,290 348 402
East Asia & Australia 2,041 1,792 631 637
Americas 367 328 121 110
10,079 8,763 3,506 3,243
Other (51) - (51) -
Operating income $ 10,028 $ 8,763 $ 3,455 $ 3,243
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Our net revenues by product category are shown in the table below:
PMI Net Revenues by Product Category
For the Three Months Ended September
(in millions) For the Nine Months Ended September 30, 30,
2021 2020 Change 2021 2020 Change
Combustible Products
European Union $ 6,283 $ 6,099 3.0 % $ 2,170 $ 2,244 (3.3) %
Eastern Europe 1,681 1,681 - % 635 636 (0.2) %
Middle East & Africa 2,208 2,296 (3.9) % 901 768 17.3 %
South & Southeast Asia 3,277 3,211 2.1 % 1,061 1,071 (0.9) %
East Asia & Australia 1,850 1,876 (1.4) % 591 605 (2.2) %
Americas 1,278 1,196 6.9 % 438 393 11.4 %
Total Combustible Products $ 16,577 $ 16,360 1.3 % $ 5,796 $ 5,716 1.4 %
Reduced-Risk Products
European Union $ 2,967 $ 1,861 59.5 % $ 1,022 $ 706 44.7 %
Eastern Europe 951 789 20.5 % 306 263 16.4 %
Middle East & Africa 98 52 90.2 % 44 - - %
South & Southeast Asia 7 - - % 4 - - %
East Asia & Australia 2,659 2,169 22.6 % 932 753 23.7 %
Americas 42 20 +100% 18 7 +100%
Total Reduced-Risk Products $ 6,724 $ 4,890 37.5 % $ 2,326 $ 1,730 34.5 %
Total PMI Net Revenues $ 23,301 $ 21,250 9.7 % $ 8,122 $ 7,446 9.1 %
Note: Sum of product categories or Regions might not foot to total PMI due to roundings.
Items affecting the comparability of results from operations were as follows:
•Asset impairment and exit costs - See Note 16. Asset Impairment and Exit Costs for a breakdown of these costs by segment for the nine months and three months endedSeptember 30, 2021 and 2020. •Saudi Arabia customs assessments - See Note 8. Contingencies for the details of the$246 million reduction in net revenues of combustible products included in theMiddle East &Africa segment for the nine months endedSeptember 30, 2021 . •Asset acquisition cost - See Note 17. Acquisitions for the details of the$51 million pre-tax charge associated with the asset acquisition ofOtiTopic, Inc. included in Other within the operating income table above for the nine months and three months endedSeptember 30, 2021 . 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, heat-not-burn devices and related accessories, and other nicotine-containing products, which primarily include our e-vapor and oral nicotine products.
PMI's heat-not-burn products include licensed KT&G heat-not-burn products.
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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 inthe United States , are included in Net Revenues of theAmericas segment. References to "Cost/Other" in the Consolidated Financial Summary table of total PMI and the six geographical 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); 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 theME&A Region and theSaudi Arabia customs assessment net revenue adjustment. Our shipment volume by segment for cigarettes and heated tobacco units is shown in the table below: PMI Shipment Volume (Million Units) For the Nine Months Ended September 30, For the Three Months Ended September 30, 2021 2020 Change 2021 2020 Change Cigarettes European Union 120,238 126,142 (4.7) % 41,965 45,179 (7.1) % Eastern Europe 67,771 70,737 (4.2) % 25,020 25,661 (2.5) % Middle East & Africa 93,155 88,087 5.8 % 35,166 30,903 13.8 % South & Southeast Asia 105,787 108,179 (2.2) % 35,578 37,238 (4.5) % East Asia & Australia 33,450 35,154 (4.8) % 11,120 10,784 3.1 % Americas 46,092 45,542 1.2 % 15,994 15,699 1.9 % Total Cigarettes 466,493 473,841 (1.6) % 164,843 165,464 (0.4) %
Heated Tobacco Units
European Union 20,405 14,069 45.0 % 7,058 5,181 36.2 %
Eastern Europe 18,594 14,374 29.4 % 6,119 4,882 25.3 %
Middle East & Africa 1,485 834 78.1 % 577 179 +100%
South & Southeast Asia 151 10 +100% 79 10 +100%
East Asia & Australia 28,478 24,799 14.8 % 9,435 8,601 9.7 %
Americas 466 316 47.5 % 221 114 93.9 %
Total Heated Tobacco Units 69,579 54,402 27.9 % 23,489 18,967 23.8 %
Cigarettes and Heated Tobacco Units
European Union 140,643 140,211 0.3 % 49,023 50,360 (2.7) %
Eastern Europe 86,365 85,111 1.5 % 31,139 30,543 2.0 %
Middle East & Africa 94,640 88,921 6.4 % 35,743 31,082 15.0 %
South & Southeast Asia 105,938 108,189 (2.1) % 35,657 37,248 (4.3) %
East Asia & Australia 61,928 59,953 3.3 % 20,555 19,385 6.0 %
Americas 46,558 45,858 1.5 % 16,215 15,813 2.5 %
Total Cigarettes and Heated Tobacco Units 536,072 528,243 1.5 % 188,332 184,431 2.1 %
Heated tobacco units ("HTU") is the term we use to refer to heated tobacco
consumables, which include our HEETS, HEETS Creations, HEETS Dimensions, HEETS
Marlboro and HEETS FROM MARLBORO (defined collectively as HEETS), Marlboro
Dimensions, Marlboro HeatSticks, Parliament HeatSticks and TEREA, as well as the
KT&G-licensed brands, Fiit and Miix (outside of South Korea ).
Market share for HTUs is defined as the total sales volume for HTUs as a percentage of the total estimated sales volume for cigarettes and HTUs.
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Shipment volume of heated tobacco units to
References to total international market, defined as worldwide cigarette and heated tobacco unit volume excludingthe 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, excludethe People's Republic of China and/or our duty free business. 2020 and 2021 estimates for total industry volume and market share in certain geographies reflect limitations on the availability and accuracy of industry data during pandemic-related restrictions.
In-market sales ("IMS") is defined as sales to the retail channel, depending on the market and distribution model.
References to total industry, total market, our shipment volume and our market
share performance reflect cigarettes and heated tobacco units, unless otherwise
stated.
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.
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Key market data regarding total market size, our shipments and market share are shown in the tables below:
For the Nine Months Ended September 30,
PMI Shipments (billion units) PMI Market Share (%)(1)
Total Market
Market (billion units) Total Cigarette Heated Tobacco Unit Total Heated Tobacco Unit
2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020
Total 1,946.1 1,897.3 536.1 528.2 466.5 473.8 69.6 54.4 27.3 27.9 3.5 2.9
European Union
France 26.3 28.0 11.6 12.7 11.4 12.5 0.2 0.1 43.7 44.9 0.6 0.5
Germany 56.5 56.4 21.6 22.0 20.0 20.8 1.7 1.2 38.3 38.9 3.0 2.1
Italy 53.0 50.8 28.9 26.7 22.4 22.8 6.5 4.0 52.9 52.0 11.1 7.6
Poland 37.2 35.0 13.9 13.6 11.7 12.1 2.2 1.6 37.4 38.9 5.9 4.5
Spain 32.2 31.7 10.2 10.1 9.8 9.8 0.4 0.3 31.5 31.5 1.2 1.0
Eastern Europe
Russia 163.7 163.4 52.0 51.6 40.4 42.3 11.7 9.3 31.5 32.3 7.2 6.1
Middle East & Africa
Saudi Arabia 16.2 15.8 6.6 6.2 6.4 6.2 0.2 - 41.5 38.5 0.9 0.2
Turkey 92.1 86.4 40.4 35.3 40.4 35.3 - - 43.9 40.8 - -
South & Southeast Asia
Indonesia 217.4 201.4 60.8 58.3 60.8 58.3 - - 28.0 28.9 - -
Philippines 41.2 47.0 25.6 32.1 25.5 32.1 0.1 - 62.2 68.4 0.3 -
East Asia & Australia
Australia 7.1 8.3 2.3 2.5 2.3 2.5 - - 32.4 29.6 - -
Japan 107.3 111.4 41.6 38.8 16.8 17.7 24.7 21.1 38.6 36.7 23.0 20.0
South Korea 54.1 54.8 10.7 11.3 7.2 7.8 3.5 3.5 19.7 20.7 6.4 6.4
Americas
Argentina 26.1 24.3 14.6 14.9 14.6 14.9 - - 55.8 61.5 - -
Mexico 22.6 21.9 14.1 13.6 14.1 13.6 0.1 - 62.5 62.0 0.3 0.2
(1) Market share estimates are calculated using IMS data Note: % change for Total Market and PMI shipments is computed based on millions of units. "-" indicates volume below 50 million units and market share below 0.1%
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For the Three Months Ended September 30,
PMI Shipments (billion units) PMI Market Share (%)(1)
Total Market
Market (billion units) Total Cigarette Heated Tobacco Unit Total Heated Tobacco Unit
2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020
Total 679.6 674.3 188.3 184.4 164.8 165.5 23.5 19.0 28.0 28.0 3.6 3.0
European Union
France 9.0 9.8 3.7 4.2 3.6 4.1 0.1 - 44.0 45.3 0.6 0.5
Germany 20.5 20.4 7.3 7.4 6.8 7.0 0.6 0.4 35.8 36.4 2.8 1.9
Italy 19.2 18.8 9.4 9.7 7.3 8.2 2.1 1.5 52.9 52.1 10.8 7.8
Poland 14.0 13.5 5.3 5.1 4.5 4.5 0.8 0.6 38.0 37.8 6.0 4.7
Spain 12.1 11.7 3.4 3.7 3.2 3.6 0.1 0.1 32.1 32.2 1.1 0.9
Eastern Europe
Russia 59.3 59.8 18.8 18.6 15.0 15.5 3.8 3.1 32.0 31.8 6.9 5.8
Middle East & Africa
Saudi Arabia 5.4 5.5 2.3 2.4 2.3 2.4 - - 40.8 36.9 1.1 0.4
Turkey 36.1 32.1 16.0 13.5 16.0 13.5 - - 44.2 42.0 - -
South & Southeast Asia
Indonesia 74.3 70.1 20.8 19.8 20.8 19.8 - - 28.0 28.2 - -
Philippines 14.4 17.5 8.9 11.7 8.9 11.7 - - 61.9 66.8 0.3 -
East Asia & Australia
Australia 2.3 3.2 0.8 1.0 0.8 1.0 - - 33.7 29.8 - -
Japan 39.7 40.8 13.6 11.9 5.4 4.6 8.2 7.3 38.3 36.9 22.9 20.4
South Korea 19.2 20.2 3.7 3.9 2.5 2.7 1.2 1.2 19.2 19.5 6.1 6.0
Americas
Argentina 8.4 8.6 4.8 4.9 4.8 4.9 - - 56.6 56.8 - -
Mexico 7.8 7.7 5.0 4.8 5.0 4.8 - - 64.6 62.7 0.3 0.2
(1) Market share estimates are calculated using IMS data Note: % change for Total Market and PMI shipments is computed based on millions of units. "-" indicates volume below 50 million units and market share below 0.1%
Consolidated Operating Results for the Nine Months Ended
The following discussion compares our consolidated operating results for the nine months endedSeptember 30, 2021 , with the nine months endedSeptember 30, 2020 . Our total shipment volume increased by 1.5%, driven by: •the EU, reflecting higher heated tobacco unit shipment volume across the Region, particularly inGermany ,Hungary ,Italy andPoland , partly offset by lower cigarette shipment volume, notably in theCzech Republic ,France ,Germany andHungary ; •Eastern Europe, reflecting higher heated tobacco unit shipment volume, primarily inRussia andUkraine , partly offset by lower cigarette shipment volume, mainly inRussia andUkraine ; •Middle East &Africa , reflecting higher cigarette shipment volume (primarily in PMI Duty Free andTurkey , partly offset byNorth Africa ), as well as higher heated tobacco unit shipment volume across the Region; •East Asia &Australia , reflecting higher heated tobacco unit shipment volume driven byJapan , partly offset by lower cigarette shipment volume, predominantly inJapan andSouth Korea ; and 60
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•Americas, mainly reflecting higher cigarette shipment volume, primarily inBrazil andMexico , partially offset byArgentina ; partly offset by •South &Southeast Asia , primarily reflecting lower cigarette shipment volume, mainly inthe Philippines , partially offset byIndonesia andPakistan .
Impact of Inventory Movements
Excluding the net favorable impact of estimated distributor inventory movements of approximately 5.0 billion units, our total in-market sales increased by 0.5%, driven by a 23.3% increase in heated tobacco units, partly offset by a 2.1% decrease in cigarettes. The net favorable impact of approximately 5.0 billion units reflected: •A net favorable impact of 2.8 billion cigarettes, mainly driven by 2020 movements inJapan , PMI Duty Free andRussia ; and •A net favorable impact of 2.2 billion heated tobacco units, primarily driven by 2020 movements inJapan .
Our total heated tobacco unit in-market sales volume in the nine months year-to-date was 68.8 billion units.
Our cigarette shipment volume by brand and heated tobacco units shipment volume are shown in the table below:
PMI Shipment Volume by Brand (Million Units)
Nine Months Year-to-Date
2021 2020 Change
Cigarettes
Marlboro 177,287 175,638 0.9 %
L&M 64,028 69,215 (7.5) %
Chesterfield 43,021 39,274 9.5 %
Philip Morris 31,881 34,823 (8.4) %
Parliament 30,535 25,575 19.4 %
Sampoerna A 27,601 23,801 16.0 %
Dji Sam Soe 16,644 18,344 (9.3) %
Bond Street 12,200 18,481 (34.0) %
Lark 11,851 12,059 (1.7) %
Next 6,556 6,703 (2.2) %
Others 44,889 49,928 (10.1) %
Total Cigarettes 466,493 473,841 (1.6) %
Heated Tobacco Units 69,579 54,402 27.9 %
Total Cigarettes and Heated Tobacco Units 536,072 528,243 1.5 %
Note: Lark includes Lark Harmony; Next includes Next Dubliss; Philip Morris includes Philip Morris/Dubliss; and Sampoerna A includes Sampoerna.
The increase in our heated tobacco unit shipment volume was mainly driven by the
EU (notably
Our cigarette shipment volume of the following brands increased: •Marlboro, mainly driven byMexico , PMI Duty Free,Russia andTurkey , partly offset byFrance , the GCC,Japan andthe Philippines ; •Chesterfield, primarily driven byBrazil ,the Philippines andRussia , partly offset bySaudi Arabia ; 61
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•Parliament, mainly driven byRussia ,Saudi Arabia andTurkey , partly offset byJapan andSouth Korea ; and •Sampoerna A inIndonesia , primarily driven by premium A Mild. Our cigarette shipment volume of the following brands decreased: •L&M, mainly due toEgypt ,Germany ,Poland ,Russia andTurkey ; •Philip Morris, primarily due toIndonesia ,Italy andRussia , partly offset byJapan ; •Dji Sam Soe inIndonesia , mainly due to Dji Sam Soe Magnum Mild; •Bond Street, primarily due toKazakhstan ,Russia andUkraine ; •Lark, mainly due toJapan ; •Next, primarily due toCanada andUkraine , partly offset byRussia ; and •"Others," notably due to: mid-price Fortune (Philippines ) and Sampoerna U (Indonesia ); and low-price Jackpot (Philippines ) and More (Philippines ); partly offset by mid-price Sampoerna Hijau (Indonesia ) and low-price Morven (Pakistan ). International Share of Market (excludingChina andthe United States ) Our total international market share (excludingChina andthe 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, decreased by 0.6 points to 27.3%, reflecting: •Total international market share for cigarettes of 23.8%, down by 1.1 points; and •Total international market share for heated tobacco units of 3.5%, up by 0.6 points. Our total international cigarette sales volume as a percentage of total industry cigarette sales volume was down by 0.9 points to 24.9%, mainly reflecting lower cigarette market share and/or an unfavorable geographic mix impact, notably inJapan ,the Philippines ,Russia andUkraine , partly offset byIndonesia andTurkey . Financial Summary Financial Summary - Change Variance Nine Months Ended September 30, Fav./(Unfav.) Fav./(Unfav.) 2021 2020 Total Excl. Total Cur- Acqui-sitions Price Vol/ Cost/ (in millions) Curr. rency Mix Other Net Revenues (1)$ 23,301 $ 21,250 9.7 % 6.1 %$ 2,051 $ 752 $ 2$ 590 $ 983 $ (276) Cost of Sales (7,223) (6,997) (3.2) % 0.5 % (226) (260) (1) - (329) 364 Marketing, Administration and Research Costs (2) (5,995) (5,435) (10.3) % (8.2) % (560) (112) (1) - - (447) Amortization of Intangibles (55) (55) - % 1.8 % - (1) - - - 1 Operating Income$ 10,028 $ 8,763 14.4 % 10.1 %$ 1,265 $ 379 $ -$ 590 $ 654 $ (358) (1) Cost/Other variance includes a$246 million reduction in net revenues in 2021 related to theSaudi Arabia customs assessments. For more details, see Note 8. Contingencies. (2) Cost/Other variance includes charges in 2021 and 2020 of$170 million and$71 million , respectively, for asset impairment and exit costs. Cost/Other variance in 2021 also includes the pre-tax charge of$51 million associated with the asset acquisition cost ofOtiTopic, Inc. For more details, see Note 16. Asset Impairment and Exit Costs and Note 17. Acquisitions. For the nine months endedSeptember 30, 2021 , net revenues, excluding favorable currency, increased by 6.1%, mainly reflecting: favorable volume/mix, primarily driven by higher heated tobacco unit volume (notably in the EU, particularlyGermany ,Hungary ,Italy andPoland , as well asJapan andRussia ), partly offset by lower cigarette volume (mainly in theEU Region , notably theCzech Republic ,France andGermany , as well asJapan ,Kuwait ,North Africa ,the Philippines ,Russia andUkraine , partially offset byIndonesia , PMI Duty Free, andTurkey ); and a favorable pricing variance (notably driven by the 62
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Czech Republic ,Germany ,Japan ,Kazakhstan ,North Africa ,the Philippines ,Russia andTurkey , partly offset byIndonesia ,Poland andUkraine ); partially offset by the unfavorable impact of theSaudi Arabia customs assessments of$246 million , shown in "Cost/Other". Excluding the unfavorable impact of theSaudi Arabia customs assessments of$246 million , net revenues increased by 10.8%, or 7.3% excluding favorable currency of$752 million . The favorable currency in net revenues was due primarily to the Euro, Indonesian rupiah, Japanese yen, Mexican peso and Philippine peso, partially offset by the Russian ruble and Turkish lira. Net revenues include$6.7 billion in 2021 and$4.9 billion in 2020 related to the sale of RRPs. For the nine months endedSeptember 30, 2021 , IQOS devices accounted for over 6% of RRP net revenues, with a step-up in the third quarter reflecting the IQOS ILUMA launch. Operating income, excluding favorable currency, increased by 10.1%, primarily reflecting: favorable volume/mix, mainly driven by the same factors as for net revenues noted above; a favorable pricing variance; and lower manufacturing costs (driven by productivity gains related to reduced-risk and combustible products); partly offset by the unfavorable impact of theSaudi Arabia customs assessments (as noted above for net revenues); and higher marketing, administration and research costs, including higher asset impairment and exit costs (mainly related to organizational design optimization, as well as product distribution restructuring inSouth Korea ) and asset acquisition costs related toOtiTopic, Inc.
Interest expense, net, of
Our effective tax rate increased by 0.6 percentage points to 22.0%. We estimate that our full-year 2021 effective tax rate will be around 22%, excluding discrete tax events. For further details, see Note 9. Income Taxes.
Net earnings attributable to PMI of$7.0 billion increased by$936 million or 15.4%. This increase was due primarily to higher operating income as discussed above, partially offset by a higher effective income tax rate. Basic EPS of$4.49 increased by 15.1%. Diluted EPS of$4.48 increased by 14.9%. Excluding a favorable currency impact of$0.18 , diluted EPS increased by 10.3%. Consolidated Operating Results for the Three Months EndedSeptember 30, 2021 The following discussion compares our consolidated operating results for the three months endedSeptember 30, 2021 , with the three months endedSeptember 30, 2020 .
Our total shipment volume increased by 2.1%, driven by:
•Eastern Europe, reflecting higher heated tobacco unit shipment volume across the Region, primarily inRussia andUkraine , partly offset by lower cigarette shipment volume, mainly inRussia andUkraine ; •Middle East &Africa , mainly reflecting higher cigarette shipment volume, primarily in PMI Duty Free andTurkey , partly offset byNorth Africa (particularlyEgypt ); •East Asia &Australia , reflecting higher heated tobacco unit shipment volume, primarily inJapan , and higher cigarette shipment volume, mainly inJapan , partly offset byAustralia andSouth Korea ; and •Americas, mainly reflecting higher cigarette shipment volume, notably inMexico ; partly offset by •the EU, reflecting lower cigarette shipment volume, mainly inFrance ,Italy andSpain , partly offset by higher heated tobacco unit shipment volume across the Region, notably inItaly ; and •South &Southeast Asia , primarily reflecting lower cigarette shipment volume, mainly inthe Philippines , partly offset byIndonesia .
Impact of Inventory Movements
Excluding the net favorable impact of estimated distributor inventory movements
of approximately 2.8 billion units, our total in-market sales increased by 0.6%,
driven by a 20.2% increase in heated tobacco units, partly offset by a 1.8%
decrease in cigarettes.
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The net favorable impact of approximately 2.8 billion units reflected: •A net favorable impact of 2.4 billion cigarettes, mainly driven by 2020 movements inJapan and PMI Duty Free; and •A net favorable impact of 0.4 billion heated tobacco units, notably reflecting 2020 movements in PMI Duty Free.
Our total heated tobacco unit in-market sales volume in the quarter was 24.6 billion units, reflecting sequential growth of 7.2% compared to the second quarter of 2021.
Our cigarette shipment volume by brand and heated tobacco units shipment volume are shown in the table below:
PMI Shipment Volume by Brand (Million Units)
Third-Quarter
2021 2020 Change
Cigarettes
Marlboro 65,139 61,581 5.8 %
L&M 21,564 24,189 (10.9) %
Chesterfield 15,994 13,768 16.2 %
Philip Morris 11,107 12,254 (9.4) %
Parliament 11,556 9,540 21.1 %
Sampoerna A 9,717 7,999 21.5 %
Dji Sam Soe 5,518 6,372 (13.4) %
Bond Street 3,042 6,441 (52.8) %
Lark 4,070 3,846 5.8 %
Next 2,388 2,327 2.7 %
Others 14,748 17,147 (14.0) %
Total Cigarettes 164,843 165,464 (0.4) %
Heated Tobacco Units 23,489 18,967 23.8 %
Total Cigarettes and Heated Tobacco Units 188,332 184,431 2.1 %
Note: Lark includes Lark Harmony; Next includes Next Dubliss; Philip Morris
includes Philip Morris/Dubliss; and Sampoerna A includes Sampoerna.
The increase in our heated tobacco unit shipment volume was mainly driven by the
EU (notably Italy ), Eastern Europe (notably Russia ) and Japan .
Our cigarette shipment volume of the following brands increased:
•Marlboro, mainly driven by PMI Duty Free, Russia and Turkey , partly offset by
Italy and the Philippines ;
•Chesterfield, primarily driven by Russia ;
•Parliament, mainly driven by Saudi Arabia and Turkey ;
•Sampoerna A in Indonesia , primarily driven by premium A Mild;
•Lark, mainly driven by Japan ; and
•Next, primarily driven by Russia .
Our cigarette shipment volume of the following brands decreased:
•L&M, primarily due to
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•"Others," primarily due to: mid-price Fortune (
International Share of Market (excludingChina andthe United States ) Our total international market share (excludingChina andthe United States ) was flat at 28.0%, reflecting: •Total international market share for heated tobacco units of 3.6%, up by 0.6 points; and •Total international market share for cigarettes of 24.4%, down by 0.6 points. Our total international cigarette sales volume as a percentage of total industry cigarette sales volume was down by 0.4 points to 25.6%, mainly reflecting lower cigarette market share and/or an unfavorable geographic mix impact, notably inEgypt ,France ,Japan ,the Philippines ,Russia andUkraine , partly offset byIndonesia , PMI Duty-Free andTurkey . Financial Summary Financial Summary - Change Variance Quarters Ended September 30, Fav./(Unfav.) Fav./(Unfav.) 2021 2020 Total Excl. Total Cur- Acqui-sitions Price Vol/ Cost/ (in millions) Curr. rency Mix Other Net Revenues$ 8,122 $ 7,446 9.1 % 7.6 %$ 676 $ 107 $ 2$ 158 $ 439 $ (30) Cost of Sales (2,596) (2,416) (7.5) % (5.8) % (180) (40) (1) - (211) 72 Marketing, Administration and Research Costs (1) (2,053) (1,769) (16.1) % (15.9) % (284) (2) (1) - - (281) Amortization of Intangibles (18) (18) - % - % - - - - - - Operating Income$ 3,455 $ 3,243 6.5 % 4.5 %$ 212 $ 65 $ -$ 158 $ 228 $ (239) (1) Cost/Other variance includes charges in 2021 of$43 million for asset impairment and exit costs. Cost/Other variance in 2021 also includes the pre-tax charge of$51 million associated with the asset acquisition cost ofOtiTopic, Inc. For more details, see Note 16. Asset Impairment and Exit Costs and Note 17. Acquisitions. During the quarter, net revenues, excluding favorable currency, increased by 7.6%, mainly reflecting: favorable volume/mix, primarily driven by higher heated tobacco unit volume (notably in the EU, particularlyGermany ,Italy andPoland , as well asJapan , PMI Duty Free andRussia ) and higher device volume (primarily inJapan , driven by the launch of IQOS ILUMA), partly offset by lower cigarette volume (mainly inAustralia ,France ,Germany ,Italy andthe Philippines , partly offset byIndonesia ,Japan , PMI Duty Free andTurkey ) and unfavorable cigarette mix (mainly inGermany ,Japan andRussia ); and a favorable pricing variance (notably driven byJapan ,the Philippines ,Russia andTurkey , partly offset byIndonesia ,Poland andUkraine ).
The favorable currency in net revenues was due primarily to the Euro and Mexican pesos, partially offset by the Japanese yen and Turkish lira.
Net revenues include
Operating income, excluding favorable currency, increased by 4.5%, primarily reflecting: favorable volume/mix, primarily driven by higher heated tobacco unit volume, partly offset by lower cigarette volume and unfavorable cigarette mix (each mainly reflecting the same geographies as for net revenues noted above); a favorable pricing variance; and lower manufacturing costs (driven by productivity gains related to reduced-risk products); partly offset by higher marketing, administration and research costs (due mainly to investments behind reduced-risk products, asset acquisition costs related toOtiTopic, Inc. and higher asset impairment and exit costs due to organizational design optimization and product distribution restructuring inSouth Korea ).
Interest expense, net, of
Our effective tax rate increased by 1.5 percentage points to 22.4%. The effective tax rate for the three months endedSeptember 30, 2020 was favorably impacted by a reduction of estimatedU.S. federal and state income tax liabilities for years 2018 and 2019 mostly due to final regulations under the GILTI provisions of the Internal Revenue Code ($93 million ), partially offset by 65
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a decrease in deductions related to foreign-derived intangible income for the years 2018 and 2019. For further details, see Note 9. Income Taxes.
Net earnings attributable to PMI of$2.4 billion increased by$119 million or 5.2%. This increase was due primarily to higher operating income as discussed above, partially offset by a higher effective tax rate. Diluted and basic EPS of$1.55 increased by 4.7%. Excluding a favorable currency impact of$0.04 , diluted EPS increased by 2.0%.
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 and nicotine-containing 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 Note 8. 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.
Much of the regulation that shapes the business environment in which we operate is driven by theWorld Health Organization's (the "WHO")Framework Convention on Tobacco Control (the "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, 182 countries and theEuropean 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. InOctober 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. InMay 2021 , theWHO study group on tobacco product regulation issued its Eighth Report addressing novel and emerging nicotine and tobacco products, such as electronic nicotine delivery systems ("ENDS"), electronic non-nicotine delivery systems ("ENNDS") and heated tobacco products ("HTPs"). Although the Report presents some industry and independent research showing that heated tobacco products have the potential to reduce harm for smokers,WHO 's overall assessment is that these products are not risk-free and should be regulated in the same manner as tobacco products and in line with the FCTC provisions. The Report also recommends governments both to rely on independent research and data on the public health impact of use of heated tobacco products, and to analyze tobacco industry funded data. InAugust 2021 , theWHO FCTC Secretariat published two reports on novel and emerging tobacco products to the ninth session of the CoP of the FCTC, one on the research and evidence on novel and emerging tobacco products, and the other on their recommended classification. According to the provisional agenda, these reports should be presented for information and that related substantive discussions should be deferred toCOP10 , in 2023. It is not possible to predict whether or to what extent measures recommended by theWHO 's reports will be implemented as the reports are not binding to theWHO Member States. 66
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We believe that when better alternatives to cigarettes exist, the discussion should not be whether these alternatives should be made available to the more than one billion peoplewho smoke today, but how fast, and within what regulatory framework to maximize their adoption while minimizing unintended use. Therefore, we advocate for regulatory frameworks that recognize a significant difference on a risk continuum between combustible tobacco on the one hand and non-combustible tobacco and other nicotine-containing products on the other. Regulation should include measures that will accelerate switching to non-combustible products, for example, by allowing adult consumerswho would not otherwise quit to receive truthful and non-misleading information about such products to enable them to make informed decisions and by applying uniform product standards to enable manufacturers to demonstrate the safety of these products, as well as the absence of combustion. Regulation should also include specific rules for 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. Importantly, regulation must include measures designed to prevent initiation by youth and non-smokers. We support mandated health warnings, minimum age laws, restrictions on advertising, and public place smoking restrictions. We also support regulatory measures that help reduce illicit trade.
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. World Customs Organization Developments: In 2020, theWorld Customs Organization (the "WCO") amended the harmonized system nomenclature to introduce dedicated custom codes for novel tobacco and nicotine products, including heated tobacco products, e-cigarettes and other nicotine-containing products. The amendments will be effective as ofJanuary 1, 2022 . These amendments require WCO member states to transfer products from customs codes in the current nomenclature to the new one. These amendments are not expected to significantly impact current customs duty rates. EU Tobacco Products Directive: InApril 2014 , the EU adopted a significantly revised EU Tobacco Products Directive (the "TPD"), which entered into force inMay 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 that expired inMay 2020 ; •security features and tracking and tracing measures that became effective inMay 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. InMay 2021 , theEuropean Commission published its first report on the application of the TPD. The report identifies significant progress made due to the implementation of the TPD and where there is still room for improvement. Most notably, it finds that the EU legislation has enhanced tobacco control, contributed to protecting the health of EU citizens by providing Member States with strong rules to address the use of tobacco products in the EU. The TPD reportedly achieved the 2% reduction target of the impact assessment with decreased smoking prevalence among youth. The report also concludes that there is scope for improvement in certain areas, such as enforcement at national level, assessment of ingredients, and a better consideration for novel and emerging products. EU Tobacco Excise Directive:The EU Commission is preparing a legislative proposal for the revision of the 2011 EU Tobacco Excise Directive that may include definitions and tax treatment for novel tobacco and nicotine-containing products, including heated tobacco products and e-cigarettes. The proposal is expected to be finalized by the end of 2021. The adoption of the proposal will require unanimous agreement by all EU member states. 67
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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 ofAustralia ,France ,Saudi Arabia andTurkey . Some countries, such asCanada ,Denmark ,Israel andNew Zealand , 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: TheWHO 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. In many countries, menthol bans would eliminate the entire category of mentholated tobacco products. TheEuropean Union banned cigarettes and roll-your-own tobacco products with characterizing flavors. Other tobacco products, including heated tobacco products, are exempted from this flavor ban.The EU Commission is required to withdraw this exemption for a particular product category if it determines that there is a substantial change of circumstances, such as a significant increase of EU-wide sales volumes in such product category. Other countries may follow the EU's approach.Turkey banned menthol as ofMay 2020 . Broader ingredient bans have been adopted byBrazil andCanada .
Bans on Display of Tobacco Products at Retail: In a number of our markets,
including, but not limited to,
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 inNovember 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 and Use of Nicotine-Containing Products in Public: The pace and scope of restrictions on the use of our products 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 and use of nicotine-containing products 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 addition,South Africa banned the sale of tobacco products, e-cigarettes, and electronic devices that heat tobacco for several months during the COVID-19 pandemic. The ban, which was lifted onAugust 17, 2020 , resulted in a significant increase of illicit trade of tobacco products.
In a limited number of markets, most notably
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, under Extended Producer Responsibility ("EPR") schemes, entered
into force on July 2, 2019 . To date, some member states transposed the Directive
into national legislation. We expect remaining member states to transpose the EU
Single-Use Plastics Directive into national legislation including EPR schemes by
January 2023 . While we cannot predict the impact of this initiative on our
business at this time, we are monitoring developments in this area.
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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 and intellectual property rights, stimulates organized crime, increases corruption and reduces government tax revenue. We generally estimate that, excludingChina and theU.S. , illicit trade may account for as much as 12% of global cigarette consumption; this includes counterfeit, contraband and the persistent 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. Currently, we estimate that illicit trade in theEuropean Union accounted for approximately 8% of total cigarette consumption in 2020. A number of jurisdictions are considering actions to prevent illicit trade. InNovember 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 of these control measures in free trade zones, controls on duty free and Internet channels and the implementation of tracking and tracing technologies. To date, 63 Parties, including theEuropean Union , have ratified it. The Protocol came into force inSeptember 2018 . Parties must start implementing its provisions in their national legislation. InOctober 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 onMay 20, 2019 . The effective date for other tobacco-containing products, including some of our RRPs such as heated tobacco units, isMay 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 ofColombia to promote investment in, and cooperation on, anti-contraband and anti-counterfeit efforts. The agreement provides$200 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. InMay 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 by 2025 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 therefore contain significantly lower levels of harmful and
potentially harmful constituents ("HPHCs") than found in cigarette smoke.
For adult 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.
For as long as a significant number of adult smokers continues to smoke,
responsible leadership of the category is critical. We aim to maintain our
competitive position in the cigarette market through selective investment. As a
leading international cigarette manufacturer, we will continue to accelerate
this
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transformation by using our regulatory and commercial expertise and extensive commercial and distribution infrastructure as an effective platform for the commercialization of our RRPs and communication with adult smokers and trade partners about the benefits of switching to our RRPs.
While seeking to remain competitive in the cigarette market, we are judiciously reallocating resources from cigarettes to RRPs and are streamlining our cigarette portfolio.
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 smokerswho 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 smokerswho 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, which we believe are the most promising path to providing a better consumer choice for thosewho 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 PMI-developed 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. We
completed a 6+6 month exposure response study and shared the results with the
FDA in April 2020 . The study showed that for the group that switched to our
Platform 1 product, the eight clinical risk endpoints that were tested as
co-primary endpoints in the first six-month term moved in the same direction as
observed for smoking cessation after 12 months of use of this product. In
addition, 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 . In addition to the original version of
Platform 1 which relies on a heating technology using a blade, a new version of
Platform 1 is now available using induction. All studies referenced above were
conducted with the blade version of Platform 1. There is full comparability
between the versions, therefore the data from these studies remain valid.
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, which was completed in 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 our pharmacokinetic
study related to the version without electronics indicate this product's
potential as an acceptable alternative to continued cigarette smoking in terms
of product satisfaction. In February 2020 , we completed a one-month product use
and adaptation study in adult smokers for the product variant without
electronics. The results of the study indicated that while during the study
period,
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the adult smokers did not fully switch from smoking cigarettes to this Platform 3 product, on average, they used this product on a daily basis and significantly reduced their daily consumption of cigarettes. We are working on product modifications to enable switching by those adult smokerswho are looking for better alternatives to cigarettes. Platform 4 covers e-vapor products, which are battery-powered devices that produce an aerosol by vaporizing a nicotine-containing liquid solution. In 2020, our e-vapor products comprised devices with the "coil and wick" technology as well as our e-vapor mesh technology designed to ensure the consistency and quality of the generated aerosol compared to the products with the "coil and wick" technology. Recently, we discontinued the commercialization of devices with the "coil and wick" technology. We conducted a nicotine pharmacokinetic study with respect to products with our e-vapor mesh technology in 2017. The results of this study indicate that these products are an effective means of nicotine delivery while being a satisfying alternative for e-cigarette users. InMarch 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 aim to expand our brand portfolio and market positions with additional RRPs. In addition, we are continuing to use our expertise, technology and capabilities to explore new growth opportunities beyond our current business, including products that do not contain nicotine or tobacco. After we receive the results of our scientific studies, including those mentioned above, in accordance with standard scientific practices, we share the conclusions in scientific forums and submit them for inclusion in peer-reviewed publications. 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, and increasingly, digital communication programs and e-commerce. In order to accelerate switching to our Platform 1 products, our initial market introductions typically entail one-to-one consumer engagement (in person or by digital means) and device discounts. These initial commercialization efforts require substantial investment, which we believe will moderate over time and further benefit from the increased use of digital engagement capabilities. During the COVID-19 pandemic, we accelerated our investments in, and pivot to, digital consumer engagement.
As of
In 2014, we introduced our Platform 1 product in pilot city launches in
We believe that only a very small percentage of adult smokers
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 four electronics
manufacturing service providers for the supply of our Platform 1 and Platform 4
devices and a small number of other providers for other products in our RRP
portfolio and related accessories. Due to the COVID-19 pandemic, the operations
of our two main electronic manufacturing service providers were temporarily
suspended at different times. Even though these suspensions did not materially
affect our operations, if one or more of these service providers were
significantly constrained at the same time, the supply of the devices could be
disrupted. Although we work closely with these service providers on monitoring
their production capability and financial health, we cannot guarantee that they
will remain capable of meeting their commitments, particularly during the
COVID-19 pandemic; if they will not, the commercialization of our RRPs could be
adversely affected. 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.
While we were successful in maintaining adequate supply of such components and
materials so far, we may not be able to secure such supply going forward,
particularly during the COVID-19 pandemic; this could negatively impact the
commercialization of our RRPs. For details on the impact of COVID-19 on our
production and supply chain, see the "Executive Summary" section of this MD&A.
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In addition, we are also exposed to a world-wide shortage of semiconductors, which continues to put constraints on our device supplies for RRPs. The overall impact of this shortage remains manageable, and we have adjusted our device assortments to limit the effect on consumer availability of our RRPs. We discuss product warranties in more detail in Note 14. 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 PMI-developed RRP platforms are as follows:
•We started commercializing an improved version of our IQOS MESH product inNew Zealand ,Italy ,Finland , theCzech Republic ,Croatia andCanada under the IQOS VEEV or VEEV brand names. We currently plan to launch this product in additional markets.
•With respect to TEEPS, our Platform 2 product, we finalized our improvements to this product and will conduct a consumer test in the last quarter of 2021.
•Following the consumer test conducted in 2020 and the results of the product use and adaptation study described above, we are incorporating our learnings into our plans to improve our Platform 3 product.
Due to the COVID-19 pandemic, these plans may be delayed.
RRP Regulation and Taxation: RRPs contain nicotine and are not risk-free. As we describe in more detail above, we support science-based regulation and taxation of RRPs and believe that 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 smokerswho switch to these products versus continued smoking and should recognize a continuum of risk for tobacco and other 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. During the COVID-19 pandemic, some governments have been and may continue to be temporarily unable to focus on the development of science-based regulatory frameworks for the development and commercialization of RRPs or on the enforcement or implementation of regulations that are significant to our business. We oppose 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 smokerswho would otherwise continue to smoke. Inthe 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 inDecember 2016 , and a Premarket Tobacco Product Application ("PMTA") for our Platform 1 product inMarch 2017 . OnApril 30, 2019 , the FDA determined that a version of our Platform 1 product, namely, IQOS 2.4 and three related consumables, is appropriate for the protection of public health and authorized it for sale inthe United States . TheFDA's decision followed its comprehensive assessment of our PMTA. OnDecember 7, 2020 , the FDA reached the same determination for the IQOS 3 device and authorized that version of our Platform 1 product for sale inthe United States .
On
"AVAILABLE EVIDENCE TO DATE:
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•the IQOS system heats tobacco but does not burn it. •this significantly reduces the production of harmful and potentially harmful chemicals. •scientific studies have shown that switching completely from conventional cigarettes to the IQOS system significantly reduces your body's exposure to harmful or potentially harmful chemicals."
We must request and receive authorization from the FDA in order to continue marketing this product with the same modified exposure information after the present order expires in four years from the date of the orders.
OnMarch 18, 2021 , we submitted to the FDA a supplemental MRTPA ("sMRTPA") for IQOS 3 requesting authorization to market this version of the device as a Modified Risk Tobacco Product with reduced exposure information like IQOS 2.4. InJune 2021 , the FDA formally accepted and filed our sMRTPA for substantive scientific review and, already inMay 2021 , the FDA opened the period for the public to provide comments on our application. The public comment period, which was initially scheduled to be closed onAugust 2, 2021 , was extended onJuly 20, 2021 to provide time for the public to review application materials that were not previously posted by FDA. At this time there is no deadline for public comments. There are two types of MRTP orders the FDA may issue: a "risk modification" order or an "exposure modification" order. We had requested both types of orders for IQOS 2.4 and an initial selection of 3 consumables' variants. After review, the FDA determined that the evidence did not support issuing a "risk modification" order at this time but that it did support issuing an "exposure modification" order for the product. This determination included a finding that issuance of the exposure modification order is expected to benefit the health of the population as a whole.
We look forward to working with the FDA to provide any additional information they may require in order to market this product with reduced risk claims.
TheFDA's PMTA and MRTP orders do not mean that the agency "approved" our Platform 1 product. These authorizations are subject to strict marketing, reporting and other requirements and are not a guarantee that the product will remain authorized, particularly if there is a significant uptake in youth or non-smoker initiation. The FDA will monitor the marketing of the product.
Some states and municipalities in the
InMarch 2020 , we requested a clarification from the FDA regarding the applicability of its new health warning requirements to our heated tobacco units sold inthe United States . InJune 2021 , the FDA responded to our letter and requested additional information regarding the applicability of the cigarette health warnings rule to the IQOS System and HeatSticks.Philip Morris Products S.A. is committed to providing adult consumers of tobacco products with complete, accurate and non-misleading information regarding the health risks associated with the use of the IQOS System and HeatSticks. We are currently working on a submission to share our views on the applicability of new health warnings to our products. In theU.S. , tobacco and nicotine-containing products that were not commercially marketed as ofFebruary 15, 2007 are subject to review and authorization by the FDA. Manufacturers of all non-authorized products currently on the market were required to file a PMTA with the FDA bySeptember 9, 2020 . The FDA announced onSeptember 9, 2020 that it will prioritize enforcement against any tobacco and nicotine-containing product sold without a PMTA. OnOctober 5, 2021 , FDA published its final PMTA rule in theFederal Register , which is effectiveNovember 4, 2021 . All future applications will have to comply with the requirements in the PMTA rule, which is substantially similar to the version of the final PMTA rule which was posted onAdvanced Federal Register onJanuary 19, 2021 .
FDA actions may influence the regulatory approach of other governments.
OnSeptember 29, 2021 , theInternational Trade Commission ("ITC") issued its Final Determination ("FD"), Limited Exclusion Order ("LEO") and Cease and Desist Order ("CDO"). The ITC upheld the finding of infringement in the ID and found a subsequent violation. The ITC issued a LEO prohibiting the importation of infringing tobacco heating articles and components thereof and cease and desist orders againstPhilip Morris USA, Inc. andAltria Client Services, LLC . The case now moves to a 60-day Presidential review period. We will appeal the patent issues at the appropriate time. Furthermore, lawsuits based on the 73
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same patent families have been repeatedly and universally rejected in European courts and theEuropean Patent Office . The decision has no bearing outsidethe United States . Until recently, there were no countries with specific product standards for heat-not-burn products. Currently, national standards setting minimum quality and safety requirements for such products have been adopted in several countries with technical heat-not-burn specifications and/or methods for demonstrating the absence of combustion. They are mandatory inEgypt ,Jordan ,Saudi Arabia ,Tunisia , theUAE andUzbekistan , and voluntary in theArmenia ,Costa Rica ,Indonesia ,Kazakhstan ,Kyrgyzstan ,Russia ,Tajikistan ,Vietnam , theU.K. andUkraine . InJapan , a voluntary standard sets minimum safety requirements for tobacco heating devices. We expect other governments to consider similar product standards and encourage making them mandatory. 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 such products, 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, inItaly , inApril 2018 , we submitted 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. InJanuary 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 filings. We are confident that our evidence supports our application. OnOctober 31, 2019 , our Australian subsidiary, Philip Morris Limited ("PML"), submitted an application to theScheduling Committee of theTherapeutic Goods Administration of Australia ("TGA") seeking to exempt heated tobacco products from being prohibited inAustralia . InAugust 2020 , the TGA issued its decision denying the application and stating that it did not present compelling evidence to establish a public health benefit from greater access to nicotine in heated tobacco products.
To date, several governmental agencies have published their scientific findings that analyze the harm-reduction potential of certain RRPs versus continuing smoking, including:
InDecember 2017 , at the request of theU.K. Department of Health andPublic Health England , theU.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, compared with the known risks from cigarettes, heat-not-burn products are probably less harmful. Subsequently, inFebruary 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. InMay 2018 , theGerman 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. InMay 2018 , theDutch 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. InJune 2018 , theKorean 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 inSouth Korea . However, the KFDA stated that it could not establish that the tested heat-not-burn products are less harmful than cigarettes. InOctober 2018 , our Korean subsidiary filed a request with a local court seeking information underlying KFDA's analysis, conclusions and public statements. InMay 2020 , the court ordered KFDA to produce certain records. 74
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InAugust 2018 , theScience & Technology Committee of theU.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 smokerswho do not 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 theU.K. effectiveNovember 2018 .
In
InJanuary 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 a harm/risk reduction for smokers in the same proportion. In 2020, theSuperior Health Council of Belgium ("SHC") published results of its inquiry into heat-not-burn products. The SHC concluded that heat-not-burn products, while not safe, have a more favorable toxicity profile than cigarettes. However, in light of the uncertainty of such products' short and long-term impacts, the toxic effects of the dual use with cigarettes, and the existence of approved smoking cessation tools, the SHC recommended that current regulations for cigarettes should apply to heat-not-burn products.
The foregoing scientific findings of government agencies may not be indicative of the measures that the relevant government authorities could take in regulating our products.
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 and 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.
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 markets. Our RRP Business Development Initiatives: InDecember 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 theU.S. In late 2018, Altria announced that it will participate in the e-vapor category only 75
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through another e-vapor company in which Altria acquired a minority interest. InSeptember 2019 , Altria's subsidiary,Philip Morris USA Inc. ("PM USA "), began commercialization of a version of our Platform 1 product in theU.S. PM USA is responsible for the marketing of this product in theU.S. and communication of the reduced exposure information authorized by the FDA in its MRTP marketing order described above. InJanuary 2020 , we announced an agreement with KT&G, a leading tobacco and nicotine company inSouth Korea , for the commercialization of KT&G's smoke-free products outside ofSouth Korea on an exclusive basis. For more information, see Acquisitions and Other Business Arrangements below. Other Developments: InSeptember 2017 , we announced our support of theFoundation for a Smoke-Free World . InSeptember 2020 , our pledge agreement with the Foundation was amended. We contributed$45 million in 2020,$40 million in 2021, and expect to contribute$35 million annually from 2022 through 2029, as specified in the amended pledge agreement. To date, we contributed a total of$249.5 million . 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 inSouth Korea andThailand in Note 8. Contingencies. InNovember 2010 , aWTO panel issued its decision in a dispute relating to facts that arose fromAugust 2006 betweenthe Philippines andThailand concerning a series of Thai customs and tax measures affecting cigarettes imported by PMThailand intoThailand (see Note 8. Contingencies for additional information). TheWTO panel decision, which was upheld by the WTO Appellate Body, concluded thatThailand had no basis to find that PM Thailand's declared customs values and taxes paid were too low, as alleged by theDepartment of Special Investigations of the government ofThailand ("DSI") in 2009. The decision also created obligations forThailand to revise its laws, regulations, or practices affecting the customs valuation and tax treatment of future cigarette imports.Thailand agreed inSeptember 2011 to fully comply with the decision byOctober 2012 .The Philippines asserts that to dateThailand has not fully complied with theWTO panel decision and commenced challenges at the WTO Appellate Body. The WTO Appellate Body is not operational, and the appeals byThailand are suspended indefinitely. InDecember 2020 ,the Philippines andThailand agreed to pursue facilitator-assisted discussions aimed at progressing and resolving outstanding issues. It is not possible to predict any future developments in these proceedings or the outcome of these discussions. The Public Prosecutor's office ofRome, Italy , notified our Italian subsidiary, Philip Morris Italia S.r.l. ("PM Italia"), as well as three former or current employees and a former external consultant of PM Italia inJuly 2020 andMarch 2020 , respectively, that it concluded a preliminary investigation against them for alleged contravention of anti-corruption laws and related disruption of trade freedom. The Public Prosecutor alleges that the individuals involved promised certain personal favors to government officials from January to July of 2018 in exchange for favorable treatment for PM Italia, and that PM Italia lacked appropriate organizational controls to prevent the alleged actions by the individuals. At the first trial hearing held onSeptember 22, 2021 , BAT filed a civil claim against PM Italia claiming vicarious liability for any wrongdoing of its former or current employees. BAT claimsEUR 50 million in damages. The court admitted the claim as a matter of course and issued summons for PM Italia to appear as civil party in the case. The next trial hearing is scheduled forDecember 15, 2021 . PM Italia believes the charges brought against it by the Public Prosecutor are without merit and will defend them vigorously.
Asset Impairment and Exit Costs
We discuss asset impairment and exit costs in Note 16. Asset Impairment and Exit Costs to our condensed consolidated financial statements.
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Acquisitions and Other Business Arrangements
We discuss our acquisitions in Note 17. Acquisitions to our condensed consolidated financial statements.
KT&G
InJanuary 2020 , PMI announced a global collaboration agreement with the leading tobacco and nicotine company inSouth 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 are 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 to confirm the absence of combustion and significant reductions of emissions of harmful chemicals compared to cigarettes. 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 inthe United States .
In the third quarter of 2020, we launched commercial initiatives for licensed KT&G products in select markets.
Equity Investments
We discuss our equity investments in Note 12. Related Parties - Equity Investments and Other to our condensed consolidated financial statements.
We are subject to various trade restrictions imposed bythe United States of America and countries in which we do business ("Trade Sanctions"), including the trade and economic sanctions administered by theU.S. Department of the Treasury's Office of Foreign Assets Control and theU.S. Department of State . It is our policy to comply fully with these Trade Sanctions.
Tobacco products are agricultural products under
From time to time, a subsidiary sells products to distributors that, in turn, sell those products to duty free customers that supplyU.N . peacekeeping forces around the world, including those in theU.N . peacekeeping mission located in Abyei, a special administrative territory inSudan . 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 inSudan . We do not sell products inIran ,North Korea andSyria . From time to time, we explore opportunities to sell our products in one or more of these countries, as permitted by law.
We sell cigarettes in
Certain states within theU.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 theU.S. Because we do business in certain of these countries, these state pension funds may have divested of our stock or may not invest in our stock. We do not believe such legislation has had a material effect on the price of our shares.
PMI is also subject to various Trade Sanctions imposed by the EU and other jurisdictions ("Trade Sanctions"). We comply
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fully with these Trade Sanctions.
The EU imposed new sanctions regarding theRepublic of Belarus ("Belarus") onJune 21, 2021 , including the designation of additional EU sanctions targets (individuals and legal entities) inBelarus . OnJune 24, 2021 , the EU council introduced additional sectoral economic sanctions aimed at specific sectors of theBelarus economy, including restrictions on the trade of goods used for the production or manufacture of tobacco products. Subsequently, six non-EU countries (Norway ,Iceland ,Liechtenstein ,North Macedonia ,Montenegro , andAlbania ) announced that they "aligned themselves" with the EU sanctions ofJune 21 . OnJuly 6, 2021 ,Switzerland imposed sanctions on Belarusian individuals and legal entities effectiveJuly 7, 2021 . The Swiss sanctions are similar in scope to the EU sanctions ofJune 21, 2021 . Further, onAugust 9, 2021 , theU.K. introduced sectoral economic sanctions similar in scope to the EU sectoral sanctions ofJune 24, 2021 . Also onAugust 9, 2021 , theU.S. imposed blocking sanctions on certain individuals and entities pursuant to an Executive Order adding them to OFAC's List of Specially Designated Nationals and Blocked Persons (the "SDN List"). The Executive Order expanded the bases for the imposition of sanctions, including, among others, by authorizing the imposition by OFAC of blocking sanctions on persons operating in the tobacco sector of theBelarus economy, as well as for providing material support or assistance to any SDN. PMI complies with all applicable laws and regulations, including sanctions, in the markets where it operates. We have taken appropriate actions in response to the latest sanctions to ensure full compliance with the relevant restrictions.
Operating Results - Three Months and Nine Months Ended
The following discussion compares operating results within each of our geographical segments and Other category for the three months and nine months endedSeptember 30, 2021 , with the three months and nine months endedSeptember 30, 2020 . Unless otherwise stated, references to total industry, total market, our shipment volume and our market share performance reflect cigarettes and heated tobacco units. Estimates for total industry volume and market share in certain geographies reflect limitations on the availability and accuracy of industry data.European Union : Financial Summary - Change Variance Quarters Ended Fav./(Unfav.) Fav./(Unfav.) September 30, Excl. Cur- Vol/ Cost/ (in millions) 2021 2020 Total Curr. Total rency Acqui-sitions Price Mix Other Net Revenues$ 3,192 $ 2,950 8.2 % 3.9 %$ 242 $ 128 $ 2$ (5) $ 117 $ - Operating Income$ 1,680 $ 1,588 5.8 % 0.8 %$ 92 $ 79 $ -$ (5) $ 102 $ (84) For the three months endedSeptember 30, 2021 , net revenues, excluding favorable currency, increased by 3.9%, reflecting: favorable volume/mix, mainly driven by higher heated tobacco unit volume (notably inGermany ,Hungary ,Italy andPoland ), partly offset by lower cigarette volume (notably inFrance ,Germany andItaly ) and unfavorable cigarette mix (primarily inGermany ). Pricing variance was slightly unfavorable, reflecting lower pricing for reduced-risk products (notably for heated tobacco units inPoland and devices inGermany andItaly ), partly offset by higher combustible pricing (notably inGermany , partially offset byPoland ). Operating income, excluding favorable currency, increased by 0.8%, primarily reflecting: favorable volume/mix, driven by the same factors as for net revenues noted above; and lower manufacturing costs; partly offset by higher marketing, administration and research costs. 78
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Table of Contents Financial Summary - Change Variance Nine Months Ended Fav./(Unfav.) Fav./(Unfav.) September 30, Excl. Cur- Vol/ Cost/ (in millions) 2021 2020 Total Curr. Total rency Acqui-sitions Price Mix Other Net Revenues$ 9,250 $ 7,960 16.2 % 8.0 %$ 1,290 $ 651 $ 2$ 67 $ 570 $ - Operating Income$ 4,811 $ 3,924 22.6 % 12.1 %$ 887 $ 413 $ -$ 67 $ 507 $ (100) For the nine months endedSeptember 30, 2021 , net revenues, excluding favorable currency, increased by 8.0%, reflecting: favorable volume/mix, mainly driven by higher heated tobacco unit volume (notably inGermany ,Hungary ,Italy andPoland ), partly offset by lower cigarette volume (notably in theCzech Republic ,France andGermany ) and unfavorable cigarette mix (primarily inGermany andPoland ); and a favorable pricing variance, driven by higher combustible pricing (mainly inGermany andPortugal , partly offset byFrance andPoland ) and higher heated tobacco unit pricing (notably in theCzech Republic , partially offset byPoland ), partly offset by lower device pricing (notably inGermany andItaly ). Operating income, excluding favorable currency, increased by 12.1%, primarily reflecting: favorable volume/mix, driven by the same factors as for net revenues noted above; lower manufacturing costs (driven by combustible and reduced-risk products); and a favorable pricing variance; partly offset by higher marketing, administration and research costs (including higher asset impairment and exit costs, mainly related to organizational design optimization).
Total market and market share performance are shown in the table below:
European Union Key Data Third-Quarter Nine Months Year-to-Date
Change Change
2021 2020 % / pp 2021 2020 % / pp
Total Market (billion units) 132.4 132.6 (0.1) % 360.5 358.1 0.7 %
PMI Market Share
Marlboro 16.5 % 17.5 % (1.0) 16.7 % 17.6 % (0.9)
L&M 5.6 % 6.0 % (0.4) 5.7 % 6.3 % (0.6)
Chesterfield 5.5 % 5.5 % - 5.5 % 5.6 % (0.1)
Philip Morris 2.2 % 2.5 % (0.3) 2.2 % 2.5 % (0.3)
HEETS 5.3 % 3.9 % 1.4 5.5 % 3.9 % 1.6
Others 3.1 % 3.0 % 0.1 3.0 % 3.0 % -
Total European Union 38.2 % 38.4 % (0.2) 38.6 % 38.9 % (0.3)
Note: HEETS includes HEETS Dimensions.
In the third quarter, the estimated total market in the EU decreased by 0.1% to
132.4 billion units, mainly due to:
•Czech Republic, down by 9.0%, primarily reflecting the impact of excise
tax-driven price increases; and
•France, down by 8.0%, mainly reflecting the impact of excise tax-driven price
increases and higher cross-border (non-domestic) purchases due to the easing of
pandemic-related measures;
partly offset by
•Poland, up by 3.4%, primarily reflecting the impact on adult smoker average
daily consumption and border sales of the easing of pandemic-related measures;
and
•Romania, up by 7.1%, mainly reflecting the impact on adult smoker average daily
consumption of the easing of pandemic-related measures, as well as increased
in-bound travel.
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For the nine months year-to-date, the estimated total market in the EU increased
by 0.7% to 360.5 billion units, primarily driven by:
•Italy, up by 4.2%, notably reflecting the impact on adult smoker average daily
consumption of the easing of pandemic-related measures; and
•Poland, up by 6.4%, primarily reflecting the impact on adult smoker average
daily consumption and border sales of the easing of pandemic-related measures,
as well as a lower prevalence of illicit trade;
partly offset by
•Czech Republic, down by 10.1%, mainly reflecting the impact of excise
tax-driven price increases and the impact, in the first quarter of 2021, of
lower border sales due to pandemic-related lockdown measures; and
•France, down by 6.1%, primarily reflecting the same factors as in the quarter.
[[Image Removed: pm-20210930_g7.jpg]]
In the third quarter, our total shipment volume decreased by 2.7% to 49.0
billion units, primarily due to:
•Czech Republic, down by 9.5%, mainly reflecting the lower total market;
•France, down by 10.8%, primarily reflecting the lower total market and a lower
market share of cigarettes;
•Italy, down by 3.1%. Excluding the net unfavorable impact of estimated
distributor inventory movements, total in-market sales volume increased by 3.6%,
reflecting a higher total market and a higher market share driven by heated
tobacco units; and
•Spain, down by 9.1%. Excluding the net unfavorable impact of estimated
distributor inventory movements, total in-market sales volume increased by 3.0%,
mainly reflecting a higher total market;
partly offset by
•Poland, up by 3.8%, mainly reflecting the higher total market.
Excluding the net unfavorable impact of estimated distributor inventory
movements, our total in-market sales volume decreased by 0.5%.
For the nine months year-to-date, our total shipment volume increased by 0.3% to
140.6 billion units, primarily driven by:
•Italy, up by 8.1%, mainly reflecting the higher total market and a higher
market share driven by heated tobacco units;
partly offset by
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•Czech Republic, down by 12.2%, mainly reflecting the same factor as in the quarter; and •France, down by 8.3%, mainly reflecting the same factors as in the quarter. Excluding the net favorable impact of estimated distributor inventory movements, our total in-market sales volume was essentially stable.Eastern Europe : Financial Summary - Change Variance Quarters Ended Fav./(Unfav.) Fav./(Unfav.)September 30 , Excl. Cur- Vol/ Cost/ (in millions) 2021 2020 Total Curr. Total rency Acqui-sitions Price Mix Other Net Revenues$ 941 $ 899 4.7 % 6.1 %$ 42 $ (13) $ -$ 22 $ 33 $ - Operating Income$ 338 $ 245 38.0 % 25.7 %$ 93 $ 30 $ -$ 22 $ 27 $ 14 For the three months endedSeptember 30, 2021 , net revenues, excluding unfavorable currency, increased by 6.1%, reflecting: favorable volume/mix, driven by higher heated tobacco unit volume (primarily inRussia andUkraine ), partly offset by unfavorable cigarette volume/mix (primarily inRussia ); and a favorable pricing variance, mainly driven by higher combustible pricing (notably inRussia ), partly offset by lower heated tobacco unit pricing (primarily inUkraine , partly offset byRussia ). Operating income, excluding favorable currency, increased by 25.7%, primarily reflecting: favorable volume/mix, driven by the same factors as for net revenues noted above; a favorable pricing variance; and lower manufacturing costs (primarily related to reduced-risk products, mainly inRussia ). Financial Summary - Change Variance Nine Months Ended Fav./(Unfav.) Fav./(Unfav.) September 30, Excl. Cur- Vol/ Cost/ (in millions) 2021 2020 Total Curr. Total rency Acqui-sitions Price Mix Other Net Revenues$ 2,632 $ 2,470 6.6 % 9.6 %$ 162 $ (74) $ -$ 68 $ 168 $ - Operating Income$ 913 $ 610 49.7 % 50.0 %$ 303 $ (2) $ -$ 68 $ 140 $ 97 For the nine months endedSeptember 30, 2021 , net revenues, excluding unfavorable currency, increased by 9.6%, reflecting: favorable volume/mix, driven by higher heated tobacco unit volume (mainly inRussia andUkraine ), partly offset by unfavorable cigarette volume (primarily inRussia andUkraine ) and unfavorable cigarette mix (mainly inRussia ); and a favorable pricing variance, mainly driven by higher combustible pricing (primarily inKazakhstan ,Russia andUkraine ), partially offset by lower device pricing (mainly inRussia ) and lower heated tobacco unit pricing (primarily inUkraine , partly offset byRussia ). Operating income, excluding unfavorable currency, increased by 50.0%, primarily reflecting: favorable volume/mix, driven by the same factors as for net revenues noted above; lower manufacturing costs (mainly related to reduced-risk products, primarily inRussia ); and a favorable pricing variance.
In the third quarter, the estimated total market inEastern Europe decreased, mainly due to: •Russia, down by 0.9%, or by 2.5% excluding the net favorable impact of estimated trade inventory movements, primarily reflecting the impact of excise tax-driven price increases and a higher prevalence of illicit trade; and •Ukraine, down by 9.6%, mainly reflecting the impact of excise tax-driven price increases and a higher prevalence of illicit trade. 81
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For the nine months year-to-date, the estimated total market inEastern Europe decreased, primarily due to: •Ukraine, down by 9.6%, mainly reflecting the impact of excise tax-driven price increases and a higher prevalence of illicit trade. [[Image Removed: pm-20210930_g8.jpg]] In the third quarter, our total shipment volume increased by 2.0% to 31.1 billion units, notably driven by: •Russia, up by 0.7%. Excluding the net favorable impact of estimated distributor inventory movements, our in-market sales decreased by 0.3%, reflecting the lower total market, partly offset by a higher market share driven by heated tobacco units; and •Southeast Europe, up by 15.5%, primarily reflecting a higher total market and a higher market share, driven by heated tobacco units and cigarettes, partly offset by •Ukraine, down by 3.2%, mainly reflecting the lower total market, partly offset by a higher market share driven by heated tobacco units. For the nine months year-to-date, our total shipment volume increased by 1.5% to 86.4 billion units, notably driven by: •Russia, up by 0.9%. Excluding the net favorable impact of estimated distributor inventory movements, PMI's total in-market sales volume was down by 2.1%, mainly reflecting a lower market share (due to cigarettes, partly offset by heated tobacco units); and •Southeast Europe, up by 8.0%, primarily reflecting a higher market share (driven by heated tobacco units and cigarettes) and a higher total market; partly offset by •Ukraine, down by 2.0%, mainly reflecting the lower total market, partly offset by a higher market share driven by heated tobacco units.
Excluding the net favorable impact of estimated distributor inventory movements, our total in-market sales volume decreased by 0.5%.
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Table of ContentsMiddle East &Africa : Financial Summary - Change Variance Quarters Ended Fav./(Unfav.) Fav./(Unfav.)September 30 , Excl. Cur- Vol/ Cost/ (in millions) 2021 2020 Total Curr. Total rency Acqui-sitions Price Mix Other Net Revenues$ 945 $ 768 23.0 % 26.6 %$ 177 $ (27) $ -$ 64 $ 169 $ (29) Operating Income$ 388 $ 261 48.7 % 59.8 %$ 127 $ (29) $ 64 $ 135 $ (43) For the three months endedSeptember 30, 2021 , net revenues, excluding unfavorable currency, increased by 26.6%, primarily reflecting: favorable volume/mix, mainly driven by higher cigarette volume (primarily in PMI Duty Free andTurkey , partly offset byNorth Africa ), higher heated tobacco unit volume (mainly in PMI Duty Free) and favorable cigarette mix (notably in PMI Duty Free); and a favorable pricing variance, driven by combustible pricing (mainly inTurkey ); partly offset by lower fees for certain distribution rights billed to customers in certain markets, shown in "Cost/Other". Operating income, excluding unfavorable currency, increased by 59.8%, mainly reflecting: favorable volume/mix, mainly driven by the same factors as for net revenues noted above; a favorable pricing variance; and lower manufacturing costs; partly offset by lower fees for certain distribution rights, as noted above for net revenues; and higher marketing, administration and research costs. Financial Summary - Change Variance Nine Months Ended Fav./(Unfav.) Fav./(Unfav.) September 30, Excl. Cur- Vol/ Cost/ (in millions) 2021 2020 Total Curr. Total rency Acqui-sitions Price Mix Other Net Revenues$ 2,306 $ 2,348 (1.8) % 1.0 %$ (42) $ (66) $ -$ 191 $ 110 $ (277) Operating Income$ 739 $ 819 (9.8) % (0.7) %$ (80) $ (74) $ -$ 191 $ 70 $ (267) For the nine months endedSeptember 30, 2021 , net revenues, excluding unfavorable currency, increased by 1.0%, despite the unfavorable impact of theSaudi Arabia customs assessments of$246 million , shown in "Cost/Other". Excluding the unfavorable impact of theSaudi Arabia customs assessments and unfavorable currency, net revenues increased by 11.5%, primarily reflecting: a favorable pricing variance, mainly driven by combustible pricing (mainly inEgypt andTurkey ); and favorable volume/mix, primarily driven by favorable cigarette mix (mainly in PMI Duty Free,Saudi Arabia andTurkey ), higher heated tobacco unit volume (mainly inEgypt ,Jordan and PMI Duty Free) and higher cigarette volume (primarily in PMI Duty Free andTurkey , partly offset byKuwait andNorth Africa ); partially offset by lower fees for certain distribution rights billed to customers in certain markets, shown in "Cost/Other". Operating income, excluding unfavorable currency, decreased by 0.7%, predominantly due to the unfavorable impact of theSaudi Arabia customs assessments, as noted above for net revenues. Excluding the unfavorable impact of theSaudi Arabia customs assessments and unfavorable currency, operating income increased by 29.5%, mainly reflecting: a favorable pricing variance; favorable volume/mix, driven by the same factors as for net revenues noted above; and lower manufacturing costs (primarily related to combustible products); partly offset by lower fees for certain distribution rights, as noted above for net revenues; and higher marketing, administration and research costs.
In the third quarter, the estimated total market in theMiddle East &Africa increased, mainly driven by: •International Duty Free, up by 15.4%, reflecting the impact of reduced government travel restrictions and increased passenger traffic in certain geographies; and •Turkey, up by 12.5%, mainly reflecting the impact on adult smoker average daily consumption of the easing of pandemic-related measures, coupled with increased in-bound tourism (particularly by Turkish expatriates); partly offset by 83
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•Tunisia, down by 30.1%, primarily reflecting an increased estimated prevalence of illicit trade (mainly due to market disruptions impacting product availability and the impact of price increases in July 2021).
For the nine months year-to-date, the estimated total market in theMiddle East &Africa increased, mainly driven by: •Egypt, up by 14.3%, primarily reflecting a favorable comparison due to pandemic-related supply chain shortages for competitors' products in 2020, as well as the favorable impact of adult smoker in-switching to cigarettes (mainly in the low-tax tier) from other combustible tobacco products; •South Africa, up by 26.9%, mainly reflecting a favorable comparison versus the second and third quarters of 2020, in which the total market was impacted by the pandemic-related ban on all tobacco sales fromMarch 27th through August 17th , partly offset by a higher estimated prevalence of illicit trade stemming from the ban; and •Turkey, up by 6.6%, primarily reflecting the same factors as for the quarter, partly offset by a higher estimated prevalence of illicit trade; partly offset by •International Duty Free, down by 17.2%, primarily reflecting the impact of government travel restrictions and reduced passenger traffic since the start of the pandemic inMarch 2020 . [[Image Removed: pm-20210930_g9.jpg]] In the third quarter, our total shipment volume increased by 15.0% to 35.7 billion units, notably driven by: •PMI Duty Free, up by +100%, or by 43.8% excluding the net favorable impact of estimated distributor inventory movements, reflecting a higher market share and the higher total market; and •Turkey, up by 18.4%, primarily reflecting the higher total market and a higher market share, driven by adult smoker up-trading (mainly benefiting Marlboro andParliament ); partly offset by •Egypt, down by 12.4%, primarily reflecting a lower market share mainly due to adult smoker down-trading to products in the low-tax tier.
Excluding the net favorable impact of estimated distributor inventory movements, our total in-market sales volume increased by 8.5%.
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For the nine months year-to-date, our total shipment volume increased by 6.4% to 94.6 billion units, notably driven by: •PMI Duty Free, up by 25.1%. Excluding the net favorable impact of estimated distributor inventory movements (principally due to cigarettes), our in-market sales volume was down by 3.6%, primarily reflecting the lower total market, partly offset by a higher market share driven by Marlboro; and •Turkey, up by 14.6%, mainly reflecting the same factors as in the quarter; partly offset by •Egypt, down by 6.5%, mainly reflecting a lower market share (due primarily to the same factor as in the quarter), partly offset by the higher total market. South &Southeast Asia : Financial Summary - Change Variance Quarters Ended Fav./(Unfav.) Fav./(Unfav.)September 30 , Excl. Cur- Vol/ Cost/ (in millions) 2021 2020 Total Curr. Total rency Acqui-sitions Price Mix Other Net Revenues$ 1,065 $ 1,071 (0.6) % (1.1) %$ (6) $ 6 $ -$ 14 $ (26) $ - Operating Income$ 348 $ 402 (13.4) % (14.4) %$ (54) $ 4 $ -$ 14 $ (42) $ (30) For the three months endedSeptember 30, 2021 , net revenues, excluding favorable currency, decreased by 1.1%, reflecting: unfavorable volume/mix, due to lower cigarette volume (primarily inthe Philippines , partly offset byIndonesia ); partially offset by a favorable pricing variance, driven by combustible pricing (mainly inthe Philippines , partly offset byIndonesia ). Operating income, excluding favorable currency, decreased by 14.4%, primarily reflecting: unfavorable volume/mix, due to the same factors as for net revenues noted above; and higher manufacturing costs; partly offset by a favorable pricing variance. Financial Summary - Change Variance Nine Months Ended Fav./(Unfav.) Fav./(Unfav.) September 30, Excl. Cur- Vol/ Cost/ (in millions) 2021 2020 Total Curr. Total rency Acqui-sitions Price Mix Other Net Revenues$ 3,284 $ 3,211 2.3 % (0.9) %$ 73 $ 102 $ -$ (4) $ (25) $ - Operating Income$ 1,208 $ 1,290 (6.4) % (9.1) %$ (82) $ 36 $ -$ (4) $ (81) $ (33) For the nine months endedSeptember 30, 2021 , net revenues, excluding favorable currency, decreased by 0.9%, reflecting: unfavorable volume/mix, mainly due to lower cigarette volume (primarilythe Philippines , partly offset byIndia andIndonesia ), partially offset by favorable cigarette mix (mainly inIndonesia andthe Philippines ). Pricing variance was slightly unfavorable, reflecting lower pricing for combustible products (notably inIndonesia , largely offset bythe Philippines ). Operating income, excluding favorable currency, decreased by 9.1%, primarily reflecting: unfavorable volume/mix, due to the same factors as for net revenues noted above; and higher marketing, administration and research costs.
South &
In the third quarter, the estimated total market in South &Southeast Asia increased, mainly driven by: •Bangladesh, up by 29.9%, primarily reflecting a favorable comparison versus the third quarter of 2020, during which pandemic-related restrictions impacted tobacco product availability; 85
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•India, up by 8.3%, mainly reflecting a favorable comparison versus the third quarter of 2020, during which pandemic-related restrictions impacted the movement of certain products, including tobacco; •Indonesia, up by 6.0%, primarily reflecting the growth of the tax-advantaged 'below tier one' segment and the impact on adult smoker consumption of the easing of pandemic-related measures compared to the prior year period; and •Pakistan, up by 29.3%, or by 14.1% excluding the net favorable impact of estimated trade inventory movements, notably reflecting a lower prevalence of illicit trade (partly due to pandemic-related supply disruptions for illicit products); partly offset by: •thePhilippines , down by 17.7%, or by 8.7% excluding the net unfavorable impact of estimated trade inventory movements, primarily reflecting the impact of industry-wide price increases in the fourth quarter of 2020. For the nine months year-to-date, the estimated total market in South &Southeast Asia increased, mainly driven by: •Bangladesh, up by 13.6%, primarily reflecting the same factor as in the quarter; •India, up by 13.8%, mainly reflecting the same factor as in the quarter; •Indonesia, up by 7.9%, primarily reflecting the same factors as in the quarter; •Pakistan, up by 18.9%, notably reflecting the same factor as in the quarter; and •Vietnam, up by 7.2%, mainly reflecting a lower prevalence of illicit trade due to pandemic-related supply disruptions for illicit products; partly offset by: •thePhilippines , down by 12.3%, primarily reflecting the same factor as in the quarter. [[Image Removed: pm-20210930_g10.jpg]] In the third quarter, our total shipment volume decreased by 4.3% to 35.7 billion units, mainly due to: •thePhilippines , down by 23.8%, primarily reflecting the lower total market and a lower market share (mainly due to mid-price Fortune, reflecting the impact of price increases in the fourth quarter of 2020, partly offset by Marlboro); partly offset by: •Indonesia, up by 5.1%, primarily reflecting the higher total market. 86
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For the nine months year-to-date, our total shipment volume decreased by 2.1% to 105.9 billion units, notably due to: •thePhilippines , down by 20.3%, mainly reflecting the same factors as in the quarter; partly offset by: •Indonesia, up by 4.3%, primarily reflecting the higher total market, partly offset by a lower market share (mainly due to adult smoker down-trading to the 'below tier one' segment as a result of significantly lower retail prices, partly offset by share growth for PMI's premium and hand-rolled portfolio); and •Pakistan, up by 14.2%, mainly reflecting the higher total market, partly offset by a lower market share.East Asia &Australia : Financial Summary - Change Variance Quarters Ended Fav./(Unfav.) Fav./(Unfav.)September 30 , Excl. Cur- Vol/ Cost/ (in millions) 2021 2020 Total Curr. Total rency Acqui-sitions Price Mix Other Net Revenues$ 1,523 $ 1,358 12.2 % 12.7 %$ 165 $ (7) $ -$ 47 $ 125 $ - Operating Income$ 631 $ 637 (0.9) % 2.7 %$ (6) $ (23) $ -$ 47 $ 3 $ (33) For the three months endedSeptember 30, 2021 , net revenues, excluding unfavorable currency, increased by 12.7%, reflecting: favorable volume/mix, mainly driven by higher heated tobacco unit volume and favorable device volume/mix (predominantly inJapan , driven by the launch of IQOS ILUMA), partly offset by unfavorable cigarette mix (primarily inJapan ) and lower cigarette volume (particularly inAustralia , partly offset byJapan ); and a favorable pricing variance, primarily driven by higher heated tobacco, combustible and device pricing inJapan . Operating income, excluding unfavorable currency, increased by 2.7%, mainly reflecting: a favorable pricing variance; and lower manufacturing costs (primarily related to reduced-risk products inJapan ); partly offset by higher marketing, administration and research costs (notably due to the launch of IQOS ILUMA inJapan and higher asset impairment and exit costs, mainly related to product distribution restructuring inSouth Korea ). Volume/mix was slightly favorable, notably reflecting higher heated tobacco unit and cigarette volume inJapan , largely offset by lower cigarette volume inAustralia and unfavorable cigarette mix inJapan . Financial Summary - Change Variance Nine Months Ended Fav./(Unfav.) Fav./(Unfav.) September 30, Excl. Cur- Vol/ Cost/ (in millions) 2021 2020 Total Curr. Total rency Acqui-sitions Price Mix Other Net Revenues$ 4,509 $ 4,045 11.5 % 9.0 %$ 464 $ 101 $ -$ 240 $ 123 $ - Operating Income$ 2,041 $ 1,792 13.9 % 14.2 %$ 249 $ (6) $ -$ 240 $ 21 $ (6) For the nine months endedSeptember 30, 2021 , net revenues, excluding favorable currency, increased by 9.0%, mainly reflecting: a favorable pricing variance, primarily driven by higher heated tobacco and combustible pricing inJapan , partly offset by lower combustible pricing inAustralia ; and favorable volume/mix, mainly driven by higher heated tobacco unit volume and favorable device volume/mix inJapan (driven by the launch of IQOS ILUMA), partly offset by lower cigarette volume (primarily inAustralia ,Japan andSouth Korea ) and unfavorable cigarette mix (mainly inAustralia andJapan ). Operating income, excluding unfavorable currency, increased by 14.2%, mainly reflecting: a favorable pricing variance; lower manufacturing costs (primarily related to reduced-risk products inJapan ); and favorable volume/mix, driven by higher heated tobacco unit volume inJapan , partly offset by lower cigarette volume (primarily inAustralia ,Japan andSouth Korea ), unfavorable cigarette mix (mainly inAustralia andJapan ) and unfavorable heated tobacco unit mix inJapan ; partially offset by higher marketing, administration and research costs (notably reflecting the same factors as in the quarter). 87
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In the third quarter, the estimated total market inEast Asia &Australia , excludingChina , decreased, primarily due to: •Australia, down by 28.0%, or by 18.3% excluding the net unfavorable impact of estimated trade inventory movements, mainly reflecting the impact of the ending of the pandemic-related wage subsidy by the government, coupled with the impact of pandemic-related restrictions in the quarter; •Japan, down by 2.8%, primarily reflecting the impact of theOctober 2020 excise tax-driven price increases; •South Korea, down by 5.2%, or by 0.9% excluding the net unfavorable impact of estimated trade inventory movements, mainly reflecting the structural market trend; and •Taiwan, down by 10.8%, primarily reflecting impact of pandemic-related restrictions in the quarter. For the nine months year-to-date, the estimated total market inEast Asia &Australia , excludingChina , decreased, mainly due to: •Australia, down by 14.5%, primarily reflecting the same factors as in the quarter; •Japan, down by 3.7%, mainly reflecting the same factor as in the quarter; and •South Korea, down by 1.4%, primarily reflecting the same factor as in the quarter, partly offset by the impact of pandemic-related subsidies on adult smoker average daily consumption. [[Image Removed: pm-20210930_g11.jpg]] In the third quarter, our total shipment volume increased by 6.0% to 20.6 billion units, mainly driven by: •Japan, up by 14.6%, or by 1.0% excluding the net favorable impact of estimated distributor inventory movements, primarily reflecting a higher market share (driven by heated tobacco units), partly offset by the lower total market; partly offset by •South Korea, down by 5.9%, mainly reflecting the lower total market and a lower market share (due to cigarettes). Excluding the net favorable impact of estimated distributor inventory movements, our total in-market sales volume declined by 1.7%. 88
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For the nine months year-to-date, our total shipment volume increased by 3.3% to 61.9 billion units, mainly driven by: •Japan, up by 7.2%, or by 1.3% excluding the net favorable impact of estimated distributor inventory movements, primarily reflecting the same factors as in the quarter; partly offset by •South Korea, down by 5.3%, mainly reflecting the same factors as in the quarter.
Excluding the net favorable impact of estimated distributor inventory movements, our total in-market sales volume declined by 0.6%.
Americas : Financial Summary - Change Variance Quarters Ended Fav./(Unfav.) Fav./(Unfav.)September 30 , Excl. Cur- Vol/ Cost/ (in millions) 2021 2020 Total Curr. Total rency Acqui-sitions Price Mix Other Net Revenues$ 456 $ 400 14.0 % 9.0 %$ 56 $ 20 $ -$ 16 $ 21 $ (1) Operating Income$ 121 $ 110 10.0 % 6.4 %$ 11 $ 4 $ -$ 16 $ 3 $ (12) For the three months endedSeptember 30, 2021 , net revenues, excluding favorable currency, increased by 9.0%, reflecting: favorable volume/mix, mainly driven by higher cigarette volume (primarily inColombia andMexico ) and higher device volume (notably inCanada ); and a favorable pricing variance driven by combustible products (notably inArgentina andMexico ). Operating income, excluding favorable currency, increased by 6.4%, primarily reflecting: a favorable pricing variance; partly offset by higher manufacturing costs; and higher marketing, administration and research costs. Financial Summary - Change Variance Nine Months Ended Fav./(Unfav.) Fav./(Unfav.) September 30, Excl. Cur- Vol/ Cost/ (in millions) 2021 2020 Total Curr. Total rency Acqui-sitions Price Mix Other Net Revenues$ 1,320 $ 1,216 8.6 % 5.4 %$ 104 $ 38 $ -$ 28 $ 37 $ 1 Operating Income$ 367 $ 328 11.9 % 8.2 %$ 39 $ 12 $ -$ 28 $ (3) $ 2 For the nine months endedSeptember 30, 2021 , net revenues, excluding favorable currency, increased by 5.4%, mainly reflecting: favorable volume/mix, primarily driven by higher cigarette volume (mainly inBrazil andMexico ) and higher device volume (notably inCanada ); and a favorable pricing variance, driven by higher combustible pricing (notably inArgentina andColombia ). Operating income, excluding favorable currency, increased by 8.2%, primarily reflecting: a favorable pricing variance; and lower marketing, administration and research costs; partly offset by higher manufacturing costs.
In the third quarter, the estimated total market inAmericas decreased, notably due to: •Argentina, down by 2.1%, primarily reflecting the impact of price increases; 89
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•Canada, down by 12.7%, notably reflecting the impact of price increases and out-switching from cigarettes to e-vapor products; partly offset by •Colombia, up by 13.4%, primarily reflecting the impact on adult smoker average daily consumption of the easing of pandemic-related measures. For the nine months year-to-date, the estimated total market inAmericas increased, notably driven by: •Argentina, up by 7.5%, primarily reflecting a lower estimated prevalence of illicit trade and a favorable comparison related to retail out-of-stock in the second quarter of 2020 (due to temporary factory shutdowns related to the pandemic), partly offset by the impact of price increases; •Brazil, up by 5.4%, mainly reflecting a lower estimated prevalence of illicit trade due to: reduced price gaps with legal products and the impact of border restrictions imposed as a result of the pandemic; and •Mexico, up by 3.0%, primarily reflecting the impact on adult smoker average daily consumption of the easing of pandemic-related measures coupled with the impact of increased in-bound tourism; partly offset by •Canada, down by 8.5%, mainly reflecting the same factors as in the quarter. [[Image Removed: pm-20210930_g12.jpg]] In the third quarter, our total shipment volume increased by 2.5% to 16.2 billion units, notably driven by: •Colombia, up by 11.0%, primarily reflecting the higher total market; and •Mexico, up by 3.9%, mainly reflecting a higher market share driven by Marlboro. partly offset by •Argentina, down by 2.5%, primarily reflecting the lower total market. For the nine months year-to-date, our total shipment volume increased by 1.5% to 46.6 billion units, primarily driven by: •Brazil, up by 6.4%, mainly reflecting the higher total market and a higher market share driven by Chesterfield; and •Mexico, up by 3.9%, primarily reflecting the higher total market and a higher market share driven by Marlboro; partly offset by 90
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•Argentina, down by 2.4%, mainly reflecting a lower market share (primarily due to adult smoker down-trading to ultra-low-price brands produced by local manufacturers).
Other: As previously discussed in the Description of Our Company section of this MD&A, Other includes our third quarter 2021 acquisitions ofFertin Pharma A/S , Vectura Group plc. andOtiTopic, Inc. Business operations for the Other category are evaluated separately from the geographical segments. Due to the timing of the Fertin Pharma and Vectura acquisitions, we did not record the immaterial results of operations from these two acquisitions in our condensed consolidated statements of earnings from the acquisition date throughSeptember 30, 2021 . For the three months and nine months endedSeptember 30, 2021 , we accounted for theOtiTopic, Inc. transaction as an asset acquisition. As a result, PMI recorded a pre-tax charge of$51 million to research and development costs within marketing, administration and research costs of the Other category. For further details, see Note 7. Segment Reporting and Note 17. Acquisitions. Financial Review
Cash Flow Highlights [[Image Removed: pm-20210930_g13.jpg]][[Image Removed: pm-20210930_g14.jpg]][[Image Removed: pm-20210930_g15.jpg]]
For the Nine Months Ended September 30,
(in millions) 2021 2020
Net cash provided by operating activities $ 7,935 $ 6,650
Net cash used in investing activities (2,018) (568)
Net cash used in financing activities (8,176) (8,031)
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Net Cash Provided by Operating Activities
During the first nine months of 2021, net cash provided by operating activities increased by$1.3 billion compared with the first nine months of 2020. Excluding favorable currency movements of$0.8 billion , net cash provided by operating activities increased by$0.5 billion , due primarily to higher net earnings, partially offset by higher working capital requirements of$0.2 billion and higher pension plan contributions. The higher working capital requirements in the first nine months of 2021 as compared with the first nine months of 2020 were primarily due to the timing of excise tax-paid inventory movements and excise tax payments, as well as lower usage of our factoring arrangements to sell trade receivables, partially offset by more cash provided by inventories primarily due to COVID-19 pandemic related build-up of inventory levels across our supply chain in 2020. For further details on our factoring arrangements to sell trade receivables, see Note 13. Sale of Accounts Receivable.
During the first nine months of 2021, net cash used in investing activities increased by$1.5 billion as compared to the first nine months of 2020. This increase was due to$1.9 billion of cash used in 2021 for our acquisitions, net of acquired cash, partially offset by favorable movements of$0.4 billion in cash collateral exchanged with financial institutions to secure derivatives designated as net investment hedges of Euro assets principally related to changes in exchange rates between the Euro and theU.S. dollar. For further detail on our 2021 acquisitions and derivatives designated as net investment hedges, see Note 17. Acquisitions and Note 5. Financial Instruments. Capital expenditures of$0.5 billion during the first nine months of 2021 were essentially flat as compared with the first nine months of 2020. The 2021 capital expenditures were primarily related to our ongoing investments in RRPs. We expect total capital expenditures in 2021 to be approximately$0.6 billion .
During the first nine months of 2021, net cash used in financing activities
increased by
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 with institutions that have investment-grade long-term credit rating. As part of our cash management strategy and in order to 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 the nine months endedSeptember 30, 2021 and the full-year 2020, the activities for such reverse repurchase agreements were 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. InAugust 2021 , we published a business transformation-linked financing framework ("Framework"), which integrates the company's smoke-free transformation into its financing strategy. The Framework outlines the guidelines that we will follow in issuing business transformation-linked financing instruments in the debt capital and loan markets, which may include public notes offerings, private placements, loans, and other relevant financing instruments. 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. AtSeptember 30, 2021 , our credit ratings and outlook by major credit rating agencies were as follows: 92
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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 29, 2021 , we entered into an agreement to amend
and extend the term of our 364-day revolving credit facility from February 2,
2021 , to February 1, 2022 in the amount of $1.8 billion .
On January 29, 2021 , we entered into an agreement, effective February 10, 2021 ,
to amend and extend the term of its $2.0 billion multi-year revolving credit
facility, for an additional year covering the period February 11, 2025 to
February 10, 2026 .
On September 29, 2021 , we entered into a new $2.5 billion multi-year revolving
credit facility, expiring on September 29, 2026 . This credit facility is our
first financing instrument following the issuance of our Framework, and contains
business transformation-linked pricing adjustments that may result in the
reduction or increase in both the interest rate and commitment fee under the
credit agreement if PMI achieves, or fails to achieve, certain specified targets
based on its business transformation goals. The new credit facility replaced the
$3.5 billion multi-year revolving credit facility, which was terminated
effective September 29, 2021 . We had no borrowings outstanding under the
terminated facility, which was due to expire on October 1, 2022 .
At
Committed
Credit
Type Facilities
364-day revolving credit, expiring February 1, 2022 $ 1.8
Multi-year revolving credit, expiring February 10, 2026 2.0
Multi-year revolving credit, expiring September 29, 2026 2.5
Total facilities $ 6.3
At September 30, 2021 , there were no borrowings under the committed credit
facilities, and the entire committed amounts were available for borrowing.
Subject to market conditions, PMI currently expects to request a further
extension of the terms of its 364-day revolving credit facility and its $2.0
billion multi-year revolving credit facility for an additional one-year period,
in accordance with and subject to the terms and conditions of the relevant
revolving credit facility agreement.
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.
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.
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 $2.4 billion at September 30, 2021 and $2.7 billion at
December 31, 2020 , are for the sole use of our subsidiaries. Borrowings under
these arrangements and other bank loans amounted to $223 million at
September 30, 2021 , and $244 million at December 31, 2020 .
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 September 30, 2021 and
December 31, 2020 , we had no commercial paper outstanding. The average
commercial paper balance outstanding during the first nine months of 2021 was
$1.1 billion . The average commercial paper balance outstanding during 2020 was
$1.2 billion .
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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 condensed 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 condensed consolidated balance sheets, which remained outstanding with the unaffiliated financial institutions. The trade receivables sold that remained outstanding under these arrangements as ofSeptember 30, 2021 , andSeptember 30, 2020 were$0.7 billion and$0.6 billion , respectively. The net proceeds received are included in cash provided by operating activities in the condensed consolidated statements of cash flows.
For further details, see Note 13. Sale of Accounts Receivable to our condensed consolidated financial statements.
Debt - Our total debt was
OnFebruary 11, 2020 , we filed a shelf registration statement with theU.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. Guarantees - AtSeptember 30, 2021 , we have guarantees of our own performance, which are primarily related to excise taxes on the shipment of our products. There is no liability in the condensed consolidated financial statements associated with these guarantees. These guarantees have not had, and are not expected to have, a significant impact on PMI's liquidity. InOctober 2020 , we guaranteed an obligation for an equity method investee. For further details, see Note 8. Contingencies to our condensed consolidated financial statements."
Equity and Dividends
We discuss our stock awards as of
During 2020 and the first six months of 2021, we did not repurchase any shares under a share repurchase program. OnJune 11, 2021 , our Board of Directors authorized a new share repurchase program of up to$7 billion , with target spending of$5 billion to$7 billion over a three-year period. OnJuly 22, 2021 , we began repurchasing shares under this new share repurchase program. FromJuly 22, 2021 throughSeptember 30, 2021 , we repurchased 0.9 million shares of our common stock at a cost of$94 million . Dividends paid in the first nine months of 2021 were$5.6 billion . During the third quarter of 2021, our Board of Directors approved a 4.2% increase in the quarterly dividend to$1.25 per common share. As a result, the present annualized dividend rate is$5.00 per common share. Market Risk Counterparty Risk - We predominantly work with financial institutions with strong short- and long-term credit ratings as assigned byStandard & 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 with maturities of less than 30 days. We continuously monitor and assess the credit worthiness of all our counterparties. Derivative Financial Instruments - We operate in markets outside ofthe United States of America , 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 Note 5. Financial Instruments to our condensed consolidated financial statements for further details on our derivative financial instruments and the related collateral arrangements. 94
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Contingencies
See Note 8. Contingencies to our condensed 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 theSEC , 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," "aspires," "estimates," "intends," "projects," "aims," "goals," "targets," "forecasts" 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 the "Business Environment" section. You should understand that it is not possible to predict or identify all risk factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties. 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. Overall Business Risks Consumption of tax-paid cigarettes continues to decline in many of our markets. This decline is due to multiple factors, including increased taxes and pricing, governmental actions, the diminishing social acceptance of smoking and health concerns, competition, continuing economic and geopolitical uncertainty, and the continuing prevalence of illicit products. These factors and their potential consequences are discussed more fully below and in the "Business Environment" section. Cigarettes are subject to substantial taxes. Significant increases in cigarette-related taxes have been proposed or enacted and are likely to continue to be proposed or enacted in numerous jurisdictions. These tax increases may disproportionately affect our profitability and make us less competitive versus certain of our competitors. Tax regimes, including excise taxes, sales taxes and import duties, can disproportionately affect the retail price of cigarettes versus other combustible tobacco products, or disproportionately affect the relative retail price of our cigarette brands versus cigarette brands manufactured by certain of our competitors. Because our portfolio is weighted toward the premium-price cigarette category, tax regimes based on sales price can place us at a competitive disadvantage in certain markets. As a result, our volume and profitability may be adversely affected in these markets. Increases in cigarette taxes are expected to continue to have an adverse impact on our sales of cigarettes, due to resulting lower consumption levels, a shift in sales from manufactured cigarettes to other combustible tobacco products and from the premium-price to the mid-price or low-price cigarette categories, where we may be under-represented, from local sales to legal cross-border purchases of lower price products, or to illicit products such as contraband, counterfeit and "illicit whites." 95
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Our business faces significant governmental action aimed at increasing regulatory requirements with the goal of reducing or preventing the use of tobacco products. Governmental actions, combined with the diminishing social acceptance of smoking and private actions to restrict smoking, have resulted in reduced industry volumes in many of our markets, and we expect that such factors will continue to reduce consumption levels and will increase down-trading and the risk of counterfeiting, contraband, "illicit whites" and legal cross-border purchases. Significant regulatory developments will continue to take place over the next few years in most of our markets, driven principally by theWorld Health Organization's Framework Convention on Tobacco Control (the "FCTC"). Since it came into force in 2005, the FCTC has led to increased efforts by tobacco control advocates and public health organizations to promote increasingly restrictive regulatory measures on the marketing and sale of tobacco products to adult smokers. Regulatory initiatives that have been proposed, introduced or enacted include: • restrictions on or licensing of outlets permitted to sell cigarettes; • the levying of substantial and increasing tax and duty charges; • restrictions or bans on advertising, marketing and sponsorship;
• the display of larger health warnings, graphic health warnings and other labeling
requirements;
• restrictions on packaging design, including the use of colors, and mandating plain
packaging;
• restrictions on packaging and cigarette formats and dimensions; • restrictions or bans on the display of tobacco product packaging at the point of sale
and restrictions or bans on vending machines; • requirements regarding testing, disclosure and performance standards for tar, nicotine,
carbon monoxide and other smoke constituents; • disclosure, restrictions, or bans of tobacco product ingredients, including bans on the
flavors of certain tobacco products; • increased restrictions on smoking and use of tobacco and nicotine-containing products
in public and work places and, in some instances, in private places and outdoors;
• restrictions or prohibitions of novel tobacco or nicotine-containing products;
• elimination of duty free sales and duty free allowances for travelers;
• encouraging litigation against tobacco companies; and
• excluding tobacco companies from transparent public dialogue regarding public
health and other policy matters.
Our financial results could be materially affected by regulatory initiatives resulting in a significant decrease in demand for our brands. More specifically, requirements that lead to a commoditization of tobacco products or impede adult consumers' ability to convert to our RRPs, as well as any significant increase in the cost of complying with new regulatory requirements could have a material adverse effect on our financial results. Changes in the earnings mix and changes in tax laws may result in significant variability in our effective tax rates. Our ability to receive payments from foreign subsidiaries or to repatriate royalties and dividends could be restricted by local country currency exchange controls and other regulations. We are subject to income tax laws inthe United States and numerous foreign jurisdictions. The results of the 2020 U.S. presidential and congressional elections could lead to changes in theU.S. tax system, including significant increases in theU.S. corporate income tax rate and the minimum tax rate on certain earnings of foreign subsidiaries. If ultimately enacted into law, such changes could have a material adverse impact on our effective tax rate thereby reducing our net earnings. Further changes in the tax laws of foreign jurisdictions could arise as a result of the base erosion and profit shifting project undertaken by theOrganisation for Economic Co-operation and Development , which recommended changes to numerous long-standing tax principles. If implemented, such changes, as well as changes in taxing jurisdictions' administrative interpretations, decisions, policies, or positions, could also have a material adverse impact on our effective tax rate thereby reducing our net earnings. In future periods, our ability to recover deferred tax assets could be subject to additional uncertainty as a result of such developments. Furthermore, changes in the earnings mix or applicable foreign tax laws may result in significant variability in our effective tax rates. Because we are aU.S. holding company, our most significant source of funds is distributions from our non-U.S. subsidiaries. Certain countries in which we operate have adopted or could institute currency exchange controls and other regulations that 96
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limit or prohibit our local subsidiaries' ability to convert local currency intoU.S. dollars or to make payments outside the country. This could subject us to the risks of local currency devaluation and business disruption. Risks Related to our International Operations Because we have operations in numerous countries, our results may be adversely impacted by economic, regulatory and political developments, natural disasters, pandemics or conflicts. Some of the countries in which we operate face the threat of civil unrest and can be subject to regime changes. In others, nationalization, terrorism, conflict and the threat of war may have a significant impact on the business environment. Natural disasters, pandemics, economic, political, regulatory or other developments could disrupt our supply chain, manufacturing capabilities or distribution capabilities, and our business continuity plans and other safeguards might not always be effective to fully mitigate their impact. In addition, such developments could increase costs of our materials and operations and lead to loss of property or equipment that are critical to our business in certain markets and difficulty in staffing and managing our operations, all of which could reduce our volumes, revenues and net earnings. We discuss risks associated with the COVID-19 pandemic below. In certain markets, we are dependent on governmental approvals of various actions such as price changes, and failure to obtain such approvals could impair growth of our profitability. In addition, despite our high ethical standards and rigorous control and compliance procedures aimed at preventing and detecting unlawful conduct, given the breadth and scope of our international operations, we may not be able to detect all potential improper or unlawful conduct by our employees and partners. Such improper or unlawful conduct (actual or alleged) could lead to litigation and regulatory action, cause damage to our reputation and that of our brands and result in substantial costs. Our reported results could be adversely affected by unfavorable currency exchange rates, and currency devaluations could impair our competitiveness. We conduct our business primarily in local currency and, for purposes of financial reporting, the local currency results are translated intoU.S. dollars based on average exchange rates prevailing during a reporting period. During times of a strengtheningU.S. dollar, our reported net revenues, operating income and EPS will be reduced because the local currency translates into fewerU.S. dollars. During periods of economic crises, such as during the ongoing COVID-19 pandemic, foreign currencies may be devalued significantly against theU.S. dollar, reducing our margins. Actions to recover margins may result in lower volume and a weaker competitive position. Risks Related to Legal Challenges and Investigations Litigation related to tobacco use and exposure to environmental tobacco smoke could substantially reduce our profitability and could severely impair our liquidity. There is litigation related to tobacco products pending in certain jurisdictions in which we operate. Damages claimed in some tobacco-related litigation are significant and, in certain cases inBrazil ,Canada , andNigeria , range into the billions ofU.S. dollars. We anticipate that new cases will continue to be filed. The FCTC encourages litigation against tobacco product manufacturers. It is possible that our consolidated results of operations, cash flows or financial position could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation. See Note 8. Contingencies to our condensed consolidated financial statements for a discussion of pending litigation and "Business Environment-Reduced-Risk Products (RRPs)-Legal Challenges to RRPs." From time to time, we are subject to governmental investigations on a range of matters. Investigations include allegations of contraband shipments of cigarettes, allegations of unlawful pricing activities within certain markets, allegations of underpayment of income taxes, customs duties and/or excise taxes, allegations of false and misleading usage of descriptors, allegations of unlawful advertising, and allegations of unlawful labor practices. We cannot predict the outcome of those investigations or whether additional investigations may be commenced, and it is possible that our business could be materially affected by an unfavorable outcome of pending or future investigations. See Note 8. Contingencies-Other Litigation and "Management's Discussion and Analysis of Financial Condition and Results of Operations-Operating Results by Business Segment-Business Environment-Governmental Investigations" for a description of certain governmental investigations to which we are subject. 97
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We may be unable to adequately protect our intellectual property rights, and disputes relating to intellectual property rights could harm our business. Our intellectual property rights are valuable assets, and their protection is important to our business. If the steps we take to protect our intellectual property rights globally, including through a combination of trademark, design, patent, trade secrets and other intellectual property rights, are inadequate, or if others infringe or misappropriate our intellectual property rights, notwithstanding legal protection, our business could be adversely impacted. Moreover, failing to manage our existing and/or future intellectual property may place us at a competitive disadvantage. Intellectual property rights of third parties may limit our ability to commercialize our products or improve product quality in one or more markets. Competitors or other third parties may claim that we infringe their intellectual property rights. Any such claims, regardless of merit, could divert management's attention, be costly, disruptive, time-consuming and unpredictable and expose us to litigation costs and damages, and impede our ability to manufacture, commercialize and improve our products. If, as a result, we are unable to manufacture or sell our RRPs or improve their quality in one or more markets, our ability to convert adult smokers to our RRPs in such markets would be adversely affected. See Note 8. Contingencies- Other Litigation to our condensed consolidated financial statements for a description of certain intellectual property proceedings.
Risks Related to our Competitive Environment
We face intense competition, and our failure to compete effectively could have a material adverse effect on our profitability and results of operations. We are subject to highly competitive conditions in all aspects of our business. We compete primarily on the basis of product quality, brand recognition, brand loyalty, taste, R&D, innovation, packaging, customer service, marketing, advertising and retail price and, increasingly, adult smoker willingness to convert to our RRPs. The competitive environment and our competitive position can be significantly influenced by weak economic conditions, erosion of consumer confidence, competitors' introduction of lower-price products or innovative products, higher tobacco product taxes, higher absolute prices and larger gaps between retail price categories, and product regulation that diminishes the ability to differentiate tobacco products and restricts adult consumer access to truthful and non-misleading information about our RRPs. Competitors include three large international tobacco companies, new market entrants, particularly with respect to innovative products, several regional and local tobacco companies and, in some instances, state-owned tobacco enterprises, principally inAlgeria ,Egypt , the PRC,Taiwan ,Thailand andVietnam . Industry consolidation and privatizations of state-owned enterprises have led to an overall increase in competitive pressures. Some competitors have different profit, volume and regulatory objectives, and some international competitors are susceptible to changes in different currency exchange rates. Certain new market entrants may alienate consumers from innovative products through inappropriate marketing campaigns, messaging and inferior product satisfaction, while not relying on scientific substantiation based on appropriate R&D protocols and standards. The growing use of digital media could increase the speed and extent of the dissemination of inaccurate and misleading information about our RRPs. 98
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We may be unable to anticipate changes in adult consumer preferences.
Our business is subject to changes in adult consumer preferences, which may be
influenced by local economic conditions.
To be successful, we must:
• promote brand equity successfully;
• anticipate and respond to new adult consumer trends;
• ensure that our products meet our quality standards;
• develop new products and markets and broaden brand portfolios;
• improve productivity;
• convince adult smokers to convert to our RRPs;
• ensure effective adult consumer engagement, including communication about product
characteristics and usage of RRPs;
• provide excellent customer care;
• ensure adequate production capacity to meet demand for our products; and
• be able to protect or enhance margins through price increases.
In periods of economic uncertainty, adult consumers may tend to purchase lower-price brands, and the volume of our premium-price and mid-price brands and our profitability could be materially adversely impacted as a result. Such down-trading trends may be reinforced by regulation that limits branding, communication and product differentiation.
Our ability to grow profitability may be limited by our inability to introduce
new products, enter new markets or improve our margins through higher pricing
and improvements in our brand and geographic mix.
Our profit growth may be adversely impacted if we are unable to introduce new
products or enter new markets successfully, to raise prices or to improve the
proportion of our sales of higher margin products and in higher margin
geographies.
We may be unable to expand our brand portfolio through successful acquisitions
or the development of strategic business relationships, and the intended
benefits from our investments may not materialize.
One element of our growth strategy is to expand our brand portfolio and market
positions through selective acquisitions and the development of strategic
business relationships. Acquisition and strategic business development
opportunities are limited and present risks of failing to achieve efficient and
effective integration, strategic objectives and/or anticipated revenue
improvements and cost savings. There is no assurance that we will be able to
acquire attractive businesses or enter into strategic business relationships on
favorable terms ahead of our competitors, or that such acquisitions or strategic
business development relationships will be accretive to earnings or improve our
competitive position. In addition, we may not have a controlling position in
certain strategic investments or relationships, which could impact the extent to
which the intended financial growth and other benefits from these investments or
relationships may ultimately materialize.
Our ability to achieve our strategic goals may be impaired if we fail to
attract, motivate and retain the best global talent and effectively align our
organizational design with the goals of our transformation.
To be successful, we must continue transforming our culture and ways of working,
align our talent and organizational design with our increasingly complex
business needs, and innovate and transform to a consumer-centric business. We
compete for talent, including in areas that are new to us, such as digital,
information technology, life science and pharmaceutical, with companies in the
consumer products, technology and other sectors that enjoy greater societal
acceptance. As a result, we may be unable to attract, motivate and retain the
best global talent with the right degree of diversity, experience and skills to
achieve our strategic goals.
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Risks Related to the Impact of COVID-19 on our Business
Our business, results of operations, cash flows and financial position will be
adversely impacted during the continuation of the COVID-19 pandemic.
The COVID-19 pandemic has created significant societal and economic disruption,
and resulted in closures of stores, factories and offices, and restrictions on
manufacturing, distribution and travel, all of which have and will continue to
adversely impact our business, results of operations, cash flows and financial
position while the pandemic continues. Our business continuity plans and other
safeguards may not be effective to mitigate the impact of the pandemic.
Currently, significant risks include our diminished ability to convert adult
smokers to our RRPs, significant volume declines in our duty-free business and
certain other key markets, disruptions or delays in our manufacturing and supply
chain, increased currency volatility, and delays in certain cost saving,
transformation and restructuring initiatives. Our business could also be
adversely impacted if key personnel or a significant number of employees or
business partners become unavailable due to the COVID-19 outbreak. The
significant adverse impact of COVID-19 on the economic or political conditions
in markets in which we operate could result in changes to the preferences of our
adult consumers and lower demand for our products, particularly for our
mid-price or premium-price brands. Continuation of the pandemic could disrupt
our access to the credit markets or increase our borrowing costs. Governments
may temporarily be unable to focus on the development of science-based
regulatory frameworks for the development and commercialization of RRPs or on
the enforcement or implementation of regulations that are significant to our
business. In addition, messaging about the potential negative impacts of the use
of our products on COVID-19 risks may lead to increasingly restrictive
regulatory measures on the sale and use of our products, negatively impact
demand for our products and the willingness of adult consumers to switch to our
RRPs, and adversely impact our efforts to advocate for the development of
science-based regulatory frameworks for the development and commercialization of
RRPs.
The impact of these risks also depends on factors beyond our knowledge or
control, including the duration and severity of the COVID-19 pandemic in general
and specifically in the jurisdictions in which we operate, its recurrence in our
key markets, actions taken to contain its spread and to mitigate its public
health effects, and the ultimate economic consequences thereof.
Risks Related to Sourcing of Materials, Products and Services
Use of third-party resources may negatively impact quality and availability of
our products and services, and we may be required to replace third-party
contract manufacturers or service providers with our own resources.
We increasingly rely on third-party resources and their subcontractors/
suppliers to manufacture some of our products and product parts (particularly,
the electronic devices and accessories) and to provide services, including to
support our finance, commercialization and information technology processes.
While many of these arrangements improve efficiencies and decrease our operating
costs, they also diminish our direct control. Such diminished control may have
an adverse effect on the quality and availability of products or services, our
supply chain, and the speed and flexibility in our response to changing market
conditions and adult consumer preferences, all of which may place us at a
competitive disadvantage. In addition, we may be unable to renew these
agreements on satisfactory terms for numerous reasons, including government
regulations, and our costs may increase significantly if we must replace such
third parties with our own resources.
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Government mandated prices, production control programs, shifts in crops driven by economic conditions and the impact of climate change may increase the cost or reduce the quality of the tobacco and other agricultural products used to manufacture our products. As with other agricultural commodities, the price of tobacco leaf and cloves can be influenced by imbalances in supply and demand and the impacts of natural disasters and pandemics such as COVID-19. Furthermore, crop quality may be influenced by variations in weather patterns, including those caused by climate change. Tobacco production in certain countries is subject to a variety of controls, including government mandated prices and production control programs. Changes in the patterns of demand for agricultural products could cause farmers to produce less tobacco or cloves. Any significant change in tobacco leaf and clove prices, quality and quantity could affect our profitability and our business. Risks Related to the Success of our Reduced-Risk Products The financial and business performance of our reduced-risk products is less predictable than our cigarette business. Our RRPs are novel products in a new category, and the pace at which adult smokers adopt them may vary, depending on the competitive, regulatory, fiscal and cultural environment, and other factors in a specific market. There may be periods of accelerated growth and periods of slower growth for these products, the timing and drivers of which may be more difficult for us to predict versus our mature cigarette business. The impact of this lower predictability on our projected results for a specific period may be significant, particularly during the early stages of this new product category, during the COVID-19 pandemic and as a result of unpredictability due to shortage of key components in our supply chain. We may be unsuccessful in our attempts to introduce reduced-risk products, and regulators may not permit the commercialization of these products or the communication of scientifically substantiated information and claims. Our key strategic priorities are: to develop and commercialize products that present less risk of harm to adult smokerswho switch to those products versus continued smoking; and to convince current adult smokerswho would otherwise continue to smoke to switch to those RRPs. For our efforts to be successful, we must: • develop RRPs that such adult smokers find acceptable alternatives to smoking; • conduct rigorous scientific studies to substantiate that they reduce exposure to
harmful and potentially harmful constituents in smoke and, ultimately, that these
products present, are likely to present, or have the potential to present less risk of
harm to adult smokers
for the development and commercialization of RRPs, including communication of
scientifically substantiated information to enable adult smokers to make better
consumer choices.
We might not succeed in our efforts. If we do not succeed, but others do, or if heat-not-burn products are inequitably regulated compared to other RRP categories without regard to the totality of the scientific evidence available for such products, we may be at a competitive disadvantage. In addition, actions of some market entrants, such as the inappropriate marketing of e-vapor products to youth, as well as alleged health consequences associated with the use of certain e-vapor products, may unfavorably impact public opinion and/or mischaracterize all e-vapor products or other RRPs to consumers, regulators and policy makers without regard to the totality of scientific evidence for specific products. This may impede our efforts to advocate for the development of science-based regulatory frameworks for the development and commercialization of RRPs. We cannot predict whether regulators will permit the sale and/or marketing of RRPs with scientifically substantiated information and claims. Such restrictions could limit the success of our RRPs. TheWHO study group on tobacco product regulation ("TobReg") published their eighth report on the scientific basis of tobacco product regulation inMay 2021 . The report is based on a review of scientific evidence related to novel and emerging nicotine and tobacco products, such as electronic nicotine delivery systems ("ENDS"), electronic non-nicotine delivery systems ("ENNDS") and heated tobacco products ("HTPs") on a number of scientific topics. The report concludes by making a number of policy recommendations on HTPs and ENDS that, if implemented, could restrict both the availability of these products, and the access to accurate information about them. InAugust 2021 , theWHO FCTC Secretariat published two reports to the ninth session of the CoP of the FCTC, which are not materially different from theWHO study group report. InAugust 2021 , theWHO Framework Convention on Tobacco Control ("WHO FCTC") published two reports related to HTPs ahead of the ninth Conference of the Party (COP9 ) meeting inNovember 2021 . The reports respond to aCOP8 decision ("FCTC/COP8 (22")), which requested theWHO to work with scientists, experts, and national authorities to prepare a comprehensive overview of the research and evidence on HTPs, and the FCTC Secretariat to examine the challenges posed by classification of HTPs. The first report ("FCTC/COP/9/9") summarizes TobReg's eighth report on the scientific basis of tobacco product regulation fromMay 2021 , for HTPs in particular, and the second report (FCTC/COP/9/10) focuses on 101
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challenges posed by classification of HTPs. Based on the FCTC Secretariat's postulated definitions and terminology of smoke, and the interpretation of the TobReg report, the reports conclude that all FCTC provisions are applicable for HTPs and that HTPs should be classified for regulatory and taxation purposes in the same way as cigarettes, which, if implemented by the Parties, could significantly impact the commercialization of HTPs.
Additionally, any claims, regardless of merit, challenging our research and clinical data available to date, may impact the development of science-based regulatory frameworks for the commercialization of the RRP category and the commercialization of the RRP category in general.
Our RRPs and commercial activities for these products are designed for, and directed toward, current adult smokers and users of nicotine-containing products, and not for non-smokers or youth. We put significant effort in place to restrict access of our products to non-smokers or youth. Nevertheless, technological, regulatory and/or commercial setbacks might prevent us in succeeding the delivery of the necessary infrastructure required to fulfill our commitment of having 100% of our RRP device portfolio equipped with "Age Verification"-technology and device activation features by 2023. If nonetheless there is a significant usage of our products or competitive products among youth or non-smokers, even in situations over which we have no control, our credibility may suffer, and our efforts to advocate for the development of science-based regulatory frameworks for the commercialization of RRPs may be significantly impacted. Moreover, theFDA's premarket tobacco product and modified risk tobacco product authorizations of a version of our Platform 1 product are subject to strict marketing, reporting and other requirements. Although we have received these product authorizations from the FDA, there is no guarantee that the product will remain authorized, particularly if there is a significant uptake in youth or non-smoker initiation. We may be unsuccessful in our efforts to differentiate reduced-risk products and cigarettes with respect to taxation. To date, we have been largely successful in demonstrating to regulators that our RRPs 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. If we cease to be successful in these efforts, RRP unit margins may be adversely affected. Nevertheless, it is unpredictable whether regulators will be issuing new regulations where RRP will be equally taxed in line with other tobacco products such as ordinary cigarettes. Risks Related to Illicit Trade We lose revenues as a result of counterfeiting, contraband, cross-border purchases, "illicit whites," non-tax-paid volume produced by local manufacturers, and counterfeiting of our Platform 1 device and heated tobacco units. Large quantities of counterfeit cigarettes are sold in the international market. We believe that Marlboro is the most heavily counterfeited international cigarette brand, although we cannot quantify the revenues we lose as a result of this activity. In addition, our revenues are reduced by contraband, legal cross-border purchases, "illicit whites" and non-tax-paid volume produced by local manufacturers. Our revenues and consumer satisfaction with our Platform 1 device and heated tobacco units may be adversely affected by counterfeit products that do not meet our product quality standards and scientific validation procedures. Risks Related to Cybersecurity and Data Governance The failure of our information systems and systems owned and operated by our business partners to function as intended or their penetration with the intent to corrupt them or our and our business partners failure to adhere to strict data governance and cybersecurity protocols and to comply with privacy laws and regulations could result in business disruption, loss of reputation, litigation and regulatory action, and loss of revenue, assets or personal or other confidential data. We as well as our business partners use information systems to help manage business processes, collect and interpret data and communicate internally and externally with employees, suppliers, consumers, customers and others. Some of these information systems are managed by third-party service providers. We are continuously evolving our approach to business continuity planning and backups to provide appropriate business resilience, particularly in light of the increasing cyber threat landscape. Nevertheless, failure of these systems to function as intended, or penetration of these systems and systems owned and operated by our business partners by parties intent on extracting or corrupting information or otherwise disrupting business processes, could place us at a competitive disadvantage, result in a loss of revenue, assets, including our intellectual property, personal or other sensitive data, result in litigation and regulatory action, cause damage to our reputation and that of our brands and result in significant remediation and other costs. Failure to protect personal data, respect the rights of data subjects, and adhere to strict 102
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data governance and cybersecurity protocols could subject us to substantial fines and other legal challenges under regulations such as the EU General Data Protection Regulation. As we are increasingly relying on digital platforms in our business, and as privacy laws in the jurisdictions in which we do business become more stringent, the magnitude of these risks is likely to increase.
Risks Related to the Acquisitions of Fertin Pharma and Vectura
As previously disclosed in this Form 10-Q, we have acquired Fertin Pharma and Vectura (with the Fertin Pharma acquisition and the Vectura acquisition being collectively referred to in these Risk Factors as the "Acquisitions").
We may be unable to successfully integrate the businesses that we acquire and unable to realize the anticipated benefits from such Acquisitions.
The successful integration of the acquired businesses and their operations into those of our own and our ability to realize the benefits of the Acquisitions, are subject to a number of risks and uncertainties, many of which are not in our control. The risks and uncertainties relating to integrating the businesses acquired include, among other things: (i) the challenge of integrating complex organizations, systems, operating procedures, compliance programs, technology, networks and other assets of the businesses that we acquire, and the costs related to such integration efforts; (ii) the possibility that we are unable to gain access to differentiated proprietary technology and pharmaceutical development expertise as anticipated by these Acquisitions, and thus fail to realize our desired entry into additional smoke-free and beyond nicotine platforms; (iii) the challenge of integrating the cultures and business practices of each of Fertin Pharma and Vectura to our culture and business practices, which if not managed correctly, could lead to difficulties in retaining key management and other key employees; and (iv) the challenge of achieving a successful integration as a result of PMI's affiliation to its combustible product portfolio. In addition, even if we are able to successfully integrate, the anticipated benefits of the Acquisitions may not be realized fully, or at all, or may take longer to realize than expected. Furthermore, the success of the Acquisition also depends on the success of the research and development efforts of Fertin Pharma and Vectura, including the ability to obtain regulatory approval for new products, and the ability to commercialize or license these new products developed by them. Moreover, PMI's affiliation to its combustible product portfolio may stand in the way of introducing and growing new product categories, and may prevent PMI in being successful in developing a long-term sustainable ecosystem of products in the "Beyond Nicotine" categories.
The businesses that we acquire in the Acquisitions may have liabilities that are not known to us.
The businesses that we have acquired in the Acquisitions may have liabilities that we were unable to identify, or were unable to discover, in the course of performing our due diligence investigations during the Acquisitions thereof. We cannot assure you that the indemnification available to us under the respective acquisition agreements that we have negotiated or will negotiate, as applicable, will be sufficient in amount, scope or duration to fully offset the possible liabilities associated with the respective business or property that we will assume upon consummation of each acquisition. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our business, financial condition and results of operations.
Acquisition accounting adjustments related to the Acquisitions could adversely affect our financial results.
We have accounted for the completion of the Acquisitions using the acquisition method of accounting. Differences between preliminary estimates and the final acquisition accounting may occur, and these differences could have a material impact on the consolidated financial statements and our future results of operations and financial position in combination with the businesses acquired. Furthermore, given the nature of the assets being acquired in the Acquisitions, we may not be able to avoid future impairments of those assets, which may also have a material impact on our future results of operation and financial position.
PMI, Fertin Pharma and Vectura may be subject to business uncertainties that could adversely affect our respective businesses, and adversely affect the financial results of our combined businesses.
Our success following these Acquisitions will depend in part upon our ability, and the ability of Fertin Pharma and Vectura, respectively, to maintain respective business relationships. Uncertainty about the effect of the Fertin Pharma Acquisition and the Vectura acquisition on customers, suppliers, employees and other constituencies of each of Fertin Pharma and Vectura, may have a material adverse effect on us and/or the businesses that we have acquired with the proposed Acquisitions. Customers, suppliers and otherswho do business with Fertin Pharma or Vectura may delay or defer business decisions, decide to terminate, modify or renegotiate their relationships, or take other actions as a result of our acquisitions of Fertin Pharma and Vectura, respectively, which could negatively affect the revenues, earnings and cash flows of our company or the businesses that we have acquired with these Acquisitions. If we are unable to maintain the business and operational relationships of Fertin Pharma 103
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and/or Vectura, our financial position, results of operations or cash flows upon combining with these companies could be adversely affected.
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