PHILIP MORRIS INTERNATIONAL, INC. The following discussion should be read in conjunction with the other sections of this Annual Report on Form 10-K, including the consolidated financial statements and related notes contained in Item 8, and the discussion of risks and cautionary factors that may affect future results in Item 1A. Risk Factors. Description of Our Company We are leading a transformation in the tobacco industry to create a smoke-free future and ultimately replace cigarettes with smoke-free products to the benefit of adults who would otherwise continue to smoke, society, the company and its shareholders. We are a leading international tobacco company engaged in the manufacture and sale of cigarettes, as well as smoke-free products, associated electronic devices and accessories, and other nicotine-containing products in markets outsidethe United States . In addition, we ship versions of our Platform 1 device and consumables to Altria Group, Inc. for sale under license inthe United States , where these products 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. 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 and nicotine-containing vapor products.
We manage our business in six operating segments:
•European Union ("EU");
•Eastern Europe ("EE");
•Middle East & Africa ("ME&A"), which includes our international duty free
business;
•South & Southeast Asia ("S&SA");
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•East Asia & Australia ("EA&A"); and
•Latin America & Canada ("LA&C"), which includes transactions under license with
Altria Group, Inc. for the distribution of our Platform 1 product in the United
States .
Our cigarettes are sold in more than 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.
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.
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.
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--------------------------------------------------------------------------------Executive Summary
The following executive summary provides the business update and significant highlights from the Discussion and Analysis that follows.
Consolidated Operating Results
•Net Revenues - Net revenues of$28.7 billion for the year endedDecember 31, 2020 , decreased by$1.1 billion , or 3.7%, from the comparable 2019 amount, and were impacted by the effects of the COVID-19 pandemic, particularly in the second quarter of 2020 and continuing throughout the second half of the year. The change in our net revenues from the comparable 2019 amount was driven by the following (variances not to scale): [[Image Removed: pm-20201231_g2.jpg]] Net revenues, excluding unfavorable currency, decreased by 2.2%, reflecting: unfavorable volume/mix, primarily due to lower cigarette volume (mainly inArgentina ,Indonesia ,Italy ,Japan ,Mexico ,the Philippines , PMI Duty Free,Poland ,Russia andUkraine , partly offset byGermany ), partially offset by higher heated tobacco unit volume (notably in the EU,Japan ,Russia andUkraine , partly offset by PMI Duty Free); and the unfavorable impact of$253 million , shown in "Cost/Other," mainly resulting from the deconsolidation of our Canadian subsidiary,Rothman, Benson & Hedges, Inc. ("RBH"), effectiveMarch 22, 2019 , and lower fees for certain distribution rights billed to customers in certain markets; partly offset by a favorable pricing variance (notably driven by theGulf Cooperation Council ,Germany ,Japan ,Mexico ,North Africa ,the Philippines , PMI Duty Free,Russia andUkraine , partially offset byIndonesia ,Poland andTurkey ). For further details on the deconsolidation of RBH, see Item 8, Note 17. Contingencies and Note 20. Deconsolidation of RBH.The Gulf Cooperation Council ("GCC") is defined asBahrain ,Kuwait ,Oman ,Qatar ,Saudi Arabia and theUnited Arab Emirates (UAE ). 19 --------------------------------------------------------------------------------
Net revenues by product category for the years ended
[[Image Removed: pm-20201231_g3.jpg]] [[Image Removed: pm-20201231_g4.jpg]]
•Diluted Earnings Per Share - The changes in our reported diluted earnings per
share ("diluted EPS") for the year ended December 31, 2020 , from the comparable
2019 amounts, were as follows:
% Growth
Diluted EPS (Decline)
For the year ended December 31, 2019 $ 4.61
2019 Asset impairment and exit costs
0.23
2019 Canadian tobacco litigation-related expense
0.09
2019 Loss on deconsolidation of RBH
0.12
2019 Russia excise and VAT audit charge
0.20
2019 Fair value adjustment for equity security investments (0.02)
2019 Tax items (0.04)
Subtotal of 2019 items 0.58
2020 Asset impairment and exit costs (0.08)
2020 Brazil indirect tax credit
0.05
2020 Fair value adjustment for equity security investments (0.04)
2020 Tax items 0.06
Subtotal of 2020 items (0.01)
Currency (0.32)
Interest (0.02)
Change in tax rate 0.05
Operations 0.27
For the year ended December 31, 2020 $ 5.16 11.9 %
Asset impairment and exit costs - During 2019, as part of the optimization of
our global manufacturing infrastructure, we recorded pre-tax asset impairment
and exit costs of $422 million , representing $362 million net of income tax and
a diluted EPS charge of $0.23 per share. This 2019 charge primarily related to a
cigarette plant closure in Berlin, Germany (approximately $0.19 per share), as
well as the closure of cigarette plants in Argentina , Colombia and Pakistan .
During 2020, we recorded pre-tax asset impairment and exit costs of $149
million , representing $124 million net of income tax and a diluted EPS charge of
20
--------------------------------------------------------------------------------Canadian tobacco litigation-related expense - In the first quarter of 2019, we recorded a pre-tax charge of$194 million , representing$142 million net of tax, relating to the judgment against RBH in twoQuébec smoking and health class actions. The charge of$0.09 per share reflects our assessment of the portion of the judgment that represents a probable and estimable loss prior to the deconsolidation of RBH and corresponds to the trust account deposit required by the judgment. The total pre-tax charge was included in marketing, administration and research costs on the consolidated statements of earnings and was included in the operating income of theLatin America &Canada segment. For further details, see Item 8, Note 17. Contingencies and Item 8, Note 20. Deconsolidation of RBH. Loss on deconsolidation of RBH - Following the judgment in the twoQuébec smoking and health class actions, RBH obtained an initial order from theOntario Superior Court of Justice granting it protection under the Companies' Creditors Arrangement Act ("CCAA"), which is a Canadian federal law that permits a Canadian business to restructure its affairs while carrying on its business in the ordinary course with minimal disruption to its customers, suppliers and employees. The administration of the CCAA process, principally relating to the powers provided to the court and the court appointed monitor, removes certain elements of control of the business from both PMI and RBH. As a result, we have determined that we no longer have a controlling financial interest over RBH and that we do not exert "significant influence" over RBH underU.S. GAAP. Therefore, we deconsolidated RBH as of the date of the CCAA filing onMarch 22, 2019 , and have accounted for our continuing investment in RBH as an equity security, without readily determinable fair value. A loss on the deconsolidation of RBH of$239 million was included in marketing, administration and research costs on the consolidated statements of earnings for the year endedDecember 31, 2019 , and was included in the operating income of theLatin America &Canada segment. The$0.12 per share impact also included a tax benefit of$49 million within the provision for income taxes, as discussed below, related to the reversal of a deferred tax liability on the unremitted earnings of RBH. For further details, see Item 8, Note 17. Contingencies and Item 8, Note 20. Deconsolidation of RBH.Russia excise and VAT audit charge - As a result of the final tax assessment for the 2015-2017 financial years received by our Russian affiliate, in the third quarter of 2019, PMI recorded a pre-tax charge of$374 million in marketing, administration and research costs in the consolidated statements of earnings, representing$315 million net of income tax and a diluted EPS charge of$0.20 . The pre-tax charge of$374 million was included in the operating income of theEastern Europe segment. For further details, see Item 8, Note 17. Contingencies.Brazil indirect tax credit - Following a final and enforceable decision by the highest court inBrazil inOctober 2020 , PMI recorded a gain of$119 million for tax credits ($79 million net of income tax and$0.05 per share increase in diluted EPS) representing overpayments of indirect taxes for the period fromMarch 2012 throughDecember 2019 ; these tax credits will be applied to future tax liabilities inBrazil . This amount was included as a reduction in marketing, administration and research costs in the consolidated statements of earnings for the year endedDecember 31, 2020 and was included in the operating income of theLatin America &Canada segment. A decision regarding an additional amount of overpaid indirect taxes of approximately$90 million is still pending before this court. Fair Value adjustment for equity security investments - In the fourth quarter of 2019, PMI recorded a favorable fair value adjustment for its equity security investments of$35 million after tax (or$0.02 per share increase in diluted EPS). The fair value adjustment for its equity security investments was included in equity investments and securities (income)/loss, net ($44 million income) and provision for income taxes ($9 million expense) on the consolidated statements of earnings in 2019. During 2020, we recorded an unfavorable fair value adjustment for our equity security investments of$60 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 (income)/loss, net ($76 million loss) and provision for income taxes ($16 million benefit) on the consolidated statements of earnings. For further details, see Item 8, Note 4. Related Parties - Equity Investments and Other. Income taxes - The 2019 Tax items that increased our 2019 diluted EPS by$0.04 per share in the table above were primarily due to a reduction in estimatedU.S. federal income tax on dividend repatriation for the years 2015 - 2018 ($67 million ). 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 ). For further details, see Item 8, Note 11. Income Taxes. The change in the tax rate that increased our diluted EPS by$0.05 per share in the table above was primarily due to changes in earnings mix by taxing jurisdiction, a reduction ofU.S. state tax expense and the corporate income tax rate reduction inIndonesia , 21 --------------------------------------------------------------------------------
partially offset by a decrease in deductions related to foreign-derived intangible income for the years 2018 and 2019 and repatriation cost differences. For further details, see Item 8, Note 11. Income Taxes.
Currency - The unfavorable currency impact during 2020 results from the
fluctuations of the
Interest - The unfavorable impact of interest was due primarily to lower interest earned on cash balances.
Operations - The increase in diluted EPS of
•European Union: Favorable volume/mix, favorable pricing and lower manufacturing costs, partially offset by higher marketing, administration and research costs; •East Asia &Australia : Lower marketing, administration and research costs, lower manufacturing costs and favorable pricing, partially offset by unfavorable volume/mix; and •Eastern Europe: Favorable pricing, favorable volume/mix and lower manufacturing costs, partially offset by higher marketing, administration and research costs ; partially offset by •Middle East &Africa : Unfavorable volume/mix and lower fees for certain distribution rights billed to customers in certain markets, partially offset by favorable pricing, and lower marketing, administration and research costs; •South &Southeast Asia : Unfavorable volume/mix and unfavorable pricing, partially offset by lower marketing, administration and research costs; and •Latin America &Canada : Unfavorable volume/mix, as well as the unfavorable impact resulting from the deconsolidation of RBH, partially offset by favorable pricing and lower marketing, administration and research costs.
For further details, see the Consolidated Operating Results and Operating Results by Business Segment sections of the following Discussion and Analysis.
COVID-19 Impact on Our Business
COVID-19: Business Continuity Update
Since the onset of the COVID-19 pandemic, PMI has undertaken a number of business continuity measures to mitigate potential disruption to its operations and route-to-market in order to preserve the availability of products to its customers and adult consumers.
Currently:
•PMI has sufficient access to the inputs for its products and is not facing any
significant business continuity issues with respect to key suppliers;
•All of of PMI's cigarette and heated tobacco unit manufacturing facilities
globally are operational;
•COVID-related restrictions do not have a significant impact on the availability
of PMI's products to its customers and adult consumers; and
•PMI has sufficient liquidity resources through cash on hand, the ongoing cash
generation of its business, and its access to the commercial paper and debt
markets.
Nonetheless, significant uncertainty remains as the spread of the disease is
increasing in a number of markets, resulting in additional restrictions and
increasing risk of disruptions.
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--------------------------------------------------------------------------------Discussion and Analysis Critical Accounting Estimates Item 8, Note 2. Summary of Significant Accounting Policies to our consolidated financial statements includes a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. In most instances, we must use a particular accounting policy or method because it is the only one that is permitted underU.S. GAAP. The preparation of financial statements requires that we use estimates and assumptions that affect the reported amounts of our assets, liabilities, net revenues and expenses, as well as our disclosure of contingencies. If actual amounts differ from previous estimates, we include the revisions in our consolidated results of operations in the period during which we know the actual amounts. Historically, aggregate differences, if any, between our estimates and actual amounts in any year have not had a significant impact on our consolidated financial statements. The selection and disclosure of our critical accounting estimates have been discussed with our Audit Committee. The following is a discussion of the more significant assumptions, estimates, accounting policies and methods used in the preparation of our consolidated financial statements: Revenue Recognition - We recognize revenue as performance obligations are satisfied. Our primary performance obligation is the distribution and sales of cigarettes and other nicotine-containing products, including reduced-risk products. Our performance obligations are typically satisfied upon shipment or delivery to our customers. The company estimates the cost of sales returns based on historical experience, and these estimates are immaterial. Estimated costs associated with warranty programs for IQOS devices are generally provided for in cost of sales in the period the related revenues are recognized, based on a number of factors, including historical experience, product failure rates and warranty policies. The transaction price is typically based on the amount billed to the customer and includes estimated variable consideration where applicable. Such variable consideration is typically not constrained and is estimated based on the most likely amount that PMI expects to be entitled to under the terms of the contracts with customers, historical experience of discount or rebate redemption, where relevant, and the terms of any underlying discount or rebate programs, which may change from time to time as the business and product categories evolve. Inventories - Our inventories are valued at the lower of cost or market based upon assumptions about future demand and market conditions. The valuation of inventory also requires us to estimate obsolete and excess inventory. We perform regular reviews of our inventory on hand, as well as our future purchase commitments with our suppliers, considering multiple factors, including demand forecasts, product life cycle, current sales levels, pricing strategy and cost trends. If our review indicates that inventories of raw materials, components or finished products have become obsolete or are in excess of anticipated demand or that inventory cost exceeds net realizable value, we may be required to make adjustments that will impact the results of operations.Goodwill and Non-Amortizable Intangible Assets Valuation - We test goodwill and non-amortizable intangible assets for impairment annually or more frequently if events occur that would warrant such review. While the company has the option to perform a qualitative assessment for both goodwill and non-amortizable intangible assets to determine if it is more likely than not that an impairment exists, the company elects to perform the quantitative assessment for our annual impairment analysis. The impairment analysis involves comparing the fair value of each reporting unit or non-amortizable intangible asset to the carrying value. If the carrying value exceeds the fair value, goodwill or a non-amortizable intangible asset is considered impaired. To determine the fair value of goodwill, we primarily use the market approach using earnings multiples of comparable global companies within the tobacco industry, supported by a discounted cash flow model. AtDecember 31, 2020 , the carrying value of our goodwill was$6.0 billion , which is related to ten reporting units, each of which consists of a group of markets with similar operating and economic characteristics. The estimated fair value of each of our ten reporting units exceeded the carrying value as ofDecember 31, 2020 . To determine the fair value of non-amortizable intangible assets, we primarily use a discounted cash flow model applying the relief-from-royalty method. We concluded that the fair value of our non-amortizable intangible assets exceeded the carrying value. These discounted cash flow models include management assumptions relevant for forecasting operating cash flows, which are subject to changes in business conditions, such as volumes and prices, costs to produce, discount rates and estimated capital needs. Management considers historical experience and all available information at the time the fair values are estimated, and we believe these assumptions are consistent with the assumptions a hypothetical marketplace participant would use. Since theMarch 28, 2008 , spin-off from Altria Group, Inc., we have not recorded a charge to earnings for an impairment of goodwill or non-amortizable intangible assets.
Marketing Costs - We incur certain costs to support our products through
programs that include advertising, marketing, consumer engagement and trade
promotions. The costs of our advertising and marketing programs are expensed in
accordance with
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judgment required in estimating the potential performance and compliance for
each program. For volume-based incentives provided to customers, management
continually assesses and estimates, by customer, the likelihood of the
customer's achieving the specified targets, and records the reduction of revenue
as the sales are made. For other trade promotions, management relies on
estimated utilization rates that have been developed from historical experience.
Changes in the assumptions used in estimating the cost of any individual
marketing program would not result in a material change in our financial
position, results of operations or operating cash flows.
Employee Benefit Plans - As discussed in Item 8, Note 13. Benefit Plans to our
consolidated financial statements, we provide a range of benefits to our
employees and retired employees, including pensions, postretirement health care
and postemployment benefits (primarily severance). We record annual amounts
relating to these plans based on calculations specified by U.S. GAAP. These
calculations include various actuarial assumptions, such as discount rates,
assumed rates of return on plan assets, compensation increases, mortality,
turnover rates and health care cost trend rates. We review actuarial assumptions
on an annual basis and make modifications to the assumptions based on current
rates and trends when it is deemed appropriate to do so. As permitted by U.S.
GAAP, any effect of the modifications is generally amortized over future
periods. We believe that the assumptions utilized in calculating our obligations
under these plans are reasonable based upon our historical experience and advice
from our actuaries.
Weighted-average discount rate assumptions for pension and postretirement plan
obligations at
2020 2019
Pension plans 0.56% 0.83%
Postretirement plans 2.84% 3.28%
We anticipate that assumption changes will increase 2021 pre-tax pension and
postretirement expense to approximately $300 million as compared with
approximately $264 million in 2020, excluding amounts related to employee
severance and early retirement programs. The anticipated increase is primarily
due to higher amortization of unrecognized actuarial gains/losses of $50
million , coupled with higher service cost of $24 million , partially offset by
lower interest cost of $18 million and higher expected return on plan assets of
$17 million and other movements of $3 million .
Weighted-average expected rate of return and discount rate assumptions have a
significant effect on the amount of expense reported for the employee benefit
plans. A fifty-basis-point decrease in our discount rate would increase our
2021 pension and postretirement expense by approximately $80 million , and a
fifty-basis-point increase in our discount rate would decrease our 2021 pension
and postretirement expense by approximately $70 million . Similarly, a
fifty-basis-point decrease (increase) in the expected return on plan assets
would increase (decrease) our 2021 pension expense by approximately $40 million .
Income Taxes - Income tax provisions for jurisdictions outside the United
States , as well as state and local income tax provisions, are determined on a
separate company basis, and the related assets and liabilities are recorded in
our consolidated balance sheets.
The extent of our operations involves dealing with uncertainties and judgments
in the application of complex tax regulations in a multitude of jurisdictions.
The final taxes paid are dependent upon many factors, including negotiations
with taxing authorities in various jurisdictions and resolution of disputes
arising from federal, state, and international tax audits. In accordance with
the authoritative guidance for income taxes, we evaluate potential tax exposures
and record tax liabilities for anticipated tax audit issues based on our
estimate of whether, and the extent to which, additional taxes will be due. We
adjust these reserves in light of changing facts and circumstances; however, due
to the complexity of some of these uncertainties, the ultimate resolution may
result in a payment that is materially different from our current estimate of
the tax liabilities. If our estimate of tax liabilities proves to be less than
the ultimate assessment, an additional charge to expense would result. If
payment of these amounts ultimately proves to be less than the recorded amounts,
the reversal of the liabilities would result in tax benefits being recognized in
the period when we determine the liabilities are no longer necessary.
We are required to assess the likelihood of recovering deferred tax assets
against future sources of taxable income. If we determine, using all available
evidence, that we do not reach the more likely than not threshold for recovery,
a valuation allowance is recorded. Significant judgment is required in
determining the need for and amount of valuation allowances for deferred tax
assets including estimates of future taxable income in the applicable
jurisdictions and the feasibility of on-going tax planning strategies, as
applicable.
The effective tax rates used for interim reporting are based on our full-year
geographic earnings mix projections. Changes in currency exchange rates,
earnings mix by taxing jurisdiction or future regulatory developments may have
an impact on the effective tax rates. Significant judgment is required in
determining income tax provisions and in evaluating tax positions.
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--------------------------------------------------------------------------------For further details, see Item 8, Note 11. Income Taxes to our consolidated financial statements.
Hedging - As discussed below in "Market Risk," we use derivative financial instruments principally to reduce exposures to market risks resulting from fluctuations in foreign currency exchange and interest rates by creating offsetting exposures. For derivatives to which we have elected to apply hedge accounting, gains and losses on these derivatives are initially deferred in accumulated other comprehensive losses on the consolidated balance sheet and recognized in the consolidated statement of earnings into the same line item as the impact of the underlying transaction and in the periods when the related hedged transactions are also recognized in operating results. If we had elected not to use the hedge accounting provisions, gains (losses) deferred in stockholders' (deficit) equity would have been recorded in our net earnings for these derivatives.
Fair value of non-marketable equity securities - For further details, see Item 8, Note 20. Deconsolidation of RBH.
Contingencies - As discussed in Item 8, Note 17. Contingencies to our
consolidated financial statements, legal proceedings covering a wide range of
matters are pending or threatened against us, and/or our subsidiaries, and/or
our indemnitees in various jurisdictions. We and our subsidiaries record
provisions in the consolidated financial statements for pending litigation when
we determine that an unfavorable outcome is probable and the amount of the loss
can be reasonably estimated. The variability in pleadings in multiple
jurisdictions, together with the actual experience of management in litigating
claims, demonstrate that the monetary relief that may be specified in a lawsuit
bears little relevance to the ultimate outcome. Much of the tobacco-related
litigation is in its early stages, and litigation is subject to uncertainty. At
the present time, except as stated otherwise in Item 8, Note 17. Contingencies,
while it is reasonably possible that an unfavorable outcome in a case may occur,
after assessing the information available to it: (i) management has not
concluded that it is probable that a loss has been incurred in any of the
pending tobacco-related cases; (ii) management is unable to estimate the
possible loss or range of loss for any of the pending tobacco-related cases; and
(iii) accordingly, no estimated loss has been accrued in the consolidated
financial statements for unfavorable outcomes in these cases, if any. Legal
defense costs are expensed as incurred.
Consolidated Operating Results
Our net revenues and operating income by segment were as follows:
(in millions) 2020 2019 2018
Net Revenues
European Union $ 10,702 $ 9,817 $ 9,298
Eastern Europe 3,378 3,282 2,921
Middle East & Africa 3,088 4,042 4,114
South & Southeast Asia 4,396 5,094 4,656
East Asia & Australia 5,429 5,364 5,580
Latin America & Canada (1) 1,701 2,206 3,056
Net revenues $ 28,694 $ 29,805 $ 29,625
Operating Income
European Union $ 5,098 $ 3,970 $ 4,105
Eastern Europe 871 547 902
Middle East & Africa 1,026 1,684 1,627
South & Southeast Asia 1,709 2,163 1,747
East Asia & Australia 2,400 1,932 1,851
Latin America & Canada (1) 564 235 1,145
Operating income $ 11,668 $ 10,531 $ 11,377 (1) As of
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--------------------------------------------------------------------------------Items affecting the comparability of results from operations were as follows:
•Asset impairment and exit costs - See Item 8, Note 19. Asset Impairment and Exit Costs for details of the$149 million and$422 million pre-tax charges for the years endedDecember 31, 2020 and 2019, respectively, as well as a breakdown of these costs by segment. •Russia excise and VAT audit charge - See Item 8, Note 17. Contingencies for details of the$374 million pre-tax charge included in theEastern Europe segment for the year endedDecember 31, 2019 . •Canadian tobacco litigation-related expense - See Item 8, Note 17. Contingencies and Note 20. Deconsolidation of RBH for details of the$194 million pre-tax charge included in theLatin America &Canada segment for the year endedDecember 31, 2019 . •Loss on deconsolidation of RBH - See Item 8, Note 20. Deconsolidation of RBH for details of the$239 million loss included in theLatin America &Canada segment for the year endedDecember 31, 2019 . •Brazil indirect tax credit - Following a final and enforceable decision by the highest court inBrazil inOctober 2020 , PMI recorded a gain of$119 million for tax credits representing overpayments of indirect taxes for the period fromMarch 2012 throughDecember 2019 ; these tax credits will be applied to future tax liabilities inBrazil . This amount was included as a reduction in marketing, administration and research costs in the consolidated statements of earnings for the year endedDecember 31, 2020 and was included in the operating income of theLatin America &Canada segment. A decision regarding an additional amount of overpaid indirect taxes of approximately$90 million is still pending before this court.
Our net revenues by product category were as follows:
PMI Net Revenues by Product Category
(in millions) 2020 2019 2018
Combustible Products
European Union $ 8,053 $ 8,093 $ 8,433
Eastern Europe 2,250 2,438 2,597
Middle East & Africa 3,031 3,721 3,732
South & Southeast Asia 4,395 5,094 4,656
East Asia & Australia 2,468 2,693 3,074
Latin America & Canada 1,670 2,179 3,037
Total Combustible Products $ 21,867 $ 24,218 $ 25,529
Reduced-Risk Products
European Union $ 2,649 $ 1,724 $ 865
Eastern Europe 1,128 844 324
Middle East & Africa 57 321 382
South & Southeast Asia 1 - -
East Asia & Australia 2,961 2,671 2,506
Latin America & Canada 31 27 19
Total Reduced-Risk Products $ 6,827 $ 5,587 $ 4,096
Total PMI Net Revenues $ 28,694 $ 29,805 $ 29,625 Note: Sum of product categories or Regions might not foot to total PMI due to rounding.
Net revenues related to combustible products refer to the operating revenues
generated from the sale of these products, including shipping and handling
charges billed to customers, net of sales and promotion incentives, and excise
taxes. These net revenue amounts consist of the sale of our cigarettes and other
tobacco products combined. Other tobacco products primarily include
roll-your-own and make-your-own cigarettes, pipe tobacco, cigars and cigarillos
and do not include reduced-risk products.
Net revenues related to reduced-risk products refer to the operating revenues
generated from the sale of these products, including shipping and handling
charges billed to customers, net of sales and promotion incentives, and excise
taxes. These net revenue
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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 products.
PMI's heat-not-burn products include licensed KT&G heat-not-burn products.
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 theLatin America &Canada segment. References to "Cost/Other" in the Consolidated Financial Summary table of total PMI and the six operating segments throughout this "Discussion and Analysis" reflects the currency-neutral variances of: cost of sales (excluding the volume/mix cost component); marketing, administration and research costs (including asset impairment and exit costs, the Canadian tobacco litigation-related expense, the charge related to the deconsolidation of RBH inCanada , and theRussia excise and VAT audit charge); and amortization of intangibles. "Cost/Other" also includes the currency-neutral net revenue variance, unrelated to volume/mix and price components, attributable to fees for certain distribution rights billed to customers in certain markets in theME&A Region , as well as the impact of the deconsolidation in RBH. Our shipment volume by segment for cigarettes and heated tobacco units was as follows: PMI Shipment Volume (Million Units) 2020 2019 2018 Cigarettes European Union 163,420 174,319 179,622 Eastern Europe 93,462 100,644 108,718 Middle East & Africa 117,999 134,568 136,605 South & Southeast Asia 144,788 174,934 178,469 East Asia & Australia 45,100 49,951 56,163 Latin America & Canada 63,749 72,293 80,738 Total Cigarettes 628,518 706,709 740,315 Heated Tobacco Units European Union 19,842 12,569 5,977 Eastern Europe 20,898 13,453 4,979 Middle East & Africa 1,022 2,654 3,403 South & Southeast Asia 36 - - East Asia & Australia 33,862 30,677 26,866 Latin America & Canada (1) 451 299 147 Total Heated Tobacco Units 76,111 59,652 41,372
Cigarettes and Heated Tobacco Units
European Union 183,262 186,888 185,599 Eastern Europe 114,360 114,097 113,697 Middle East & Africa 119,021 137,222 140,008 South & Southeast Asia 144,824 174,934 178,469 East Asia & Australia 78,962 80,628 83,029 Latin America & Canada 64,200 72,592 80,885
Total Cigarettes and Heated Tobacco Units 704,629 766,361 781,687
(1) Includes shipments to Altria Group, Inc., commencing in the third quarter of
2019, for sale in
Following the deconsolidation of our Canadian subsidiary, we will continue to
report the volume of brands sold by RBH for which other PMI subsidiaries are the
trademark owners. These include HEETS, Next, Philip Morris and Rooftop.
27
--------------------------------------------------------------------------------
Heated tobacco units ("HTU") is the term we use to refer to heated tobacco
consumables, which for us include our HEETS, HEETS Creations, HEETS Dimensions,
HEETS Marlboro and HEETS FROM MARLBORO (defined collectively as HEETS), Marlboro
Dimensions, Marlboro HeatSticks and Parliament HeatSticks, as well as the
KT&G-licensed brands, Fiit and Miix (outside of 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.
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. In addition, to reflect the deconsolidation of RBH, effectiveMarch 22, 2019 , PMI's total market share has been restated for previous periods. 2020 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.
Unless otherwise stated, references to total industry, total market, our shipment volume and our market share performance reflect cigarettes and heated tobacco units.
From time to time, PMI's shipment volumes are subject to the impact of distributor inventory movements, and estimated total industry/market volumes are subject to the impact of inventory movements in various trade channels that include estimated trade inventory movements of PMI's competitors arising from market-specific factors that significantly distort reported volume disclosures. Such factors may include changes to the manufacturing supply chain, shipment methods, consumer demand, timing of excise tax increases or other influences that may affect the timing of sales to customers. In such instances, in addition to reviewing PMI shipment volumes and certain estimated total industry/market volumes on a reported basis, management reviews these measures on an adjusted basis that excludes the impact of distributor and/or estimated trade inventory movements. Management also believes that disclosing PMI shipment volumes and estimated total industry/market volumes in such circumstances on a basis that excludes the impact of distributor and/or estimated trade inventory movements improves the comparability of performance and trends for these measures over different reporting periods.
2020 compared with 2019
The following discussion compares our consolidated operating results for the
year ended
Estimated international industry cigarette and heated tobacco unit volume,
excluding
Our total shipment volume decreased by 8.1%, due to:
•the EU, reflecting lower cigarette shipment volume, notably inItaly ,Poland andSpain , partly offset by higher heated tobacco unit shipment volume across the Region, particularly inItaly andPoland ; •Middle East &Africa , reflecting lower cigarette shipment volume, primarily in PMI Duty Free andTurkey , as well as lower heated tobacco unit shipment volume due to PMI Duty Free; •South &Southeast Asia , reflecting lower cigarette shipment volume, primarily inIndonesia ,Pakistan andthe Philippines ; 28 -------------------------------------------------------------------------------- •East Asia &Australia , reflecting lower cigarette shipment volume, predominantly inJapan , partly offset by higher heated tobacco unit shipment volume driven byJapan ; and •Latin America &Canada , reflecting lower cigarette shipment volume, primarily inArgentina andMexico , partially offset byBrazil . Excluding the volume impact from the RBH deconsolidation, our total shipment volume in the Region decreased by 10.3%; partly offset by •Eastern Europe, reflecting higher heated tobacco unit shipment volume across the Region, notably inRussia andUkraine , partly offset by lower cigarette shipment volume, mainly inRussia andUkraine .
Excluding the volume impact from the RBH deconsolidation of approximately 1.0
billion units (reflecting first quarter 2019 volume of RBH-owned brands and
including Duty-Free sales of these brands in
Impact of Inventory Movements
The net impact of estimated distributor inventory movements for the full year
was immaterial. Excluding the volume impact from the deconsolidation of RBH, our
total in-market sales declined by 7.8%.
Our cigarette shipment volume by brand and heated tobacco unit shipment volume
was as follows:
PMI Shipment Volume by Brand (Million Units)
Full-Year
2020 2019 Change
Cigarettes
Marlboro 233,158 262,908 (11.3) %
L&M 91,098 92,873 (1.9) %
Chesterfield 52,139 57,185 (8.8) %
Philip Morris 45,645 49,164 (7.2) %
Parliament 34,737 38,723 (10.3) %
Sampoerna A 32,862 35,133 (6.5) %
Dji Sam Soe 24,754 32,435 (23.7) %
Bond Street 24,113 28,025 (14.0) %
Lark 15,489 19,602 (21.0) %
Next 8,980 8,602 4.4 %
Others 65,543 82,059 (20.1) %
Total Cigarettes 628,518 706,709 (11.1) %
Heated Tobacco Units (1) 76,111 59,652 27.6 %
Total Cigarettes and Heated Tobacco Units 704,629 766,361
(8.1) %
(1) Includes shipments to Altria Group, Inc., commencing in the third quarter of
2019, for sale in
Our cigarette shipment volume of the following brands decreased:
•Marlboro, mainly due toIndonesia ,Italy ,Japan ,Mexico ,the Philippines , PMI Duty Free,Saudi Arabia andTurkey , partly offset byRussia ; •L&M, notably due to PMI Duty Free andPoland , partly offset byMexico andTurkey ; •Chesterfield, mainly due toPoland ,Russia andTurkey , partly offset byBrazil andSaudi Arabia ; •Philip Morris, primarily due toArgentina andItaly , partly offset byRussia ; •Parliament, mainly due to PMI Duty Free,Russia andTurkey ; •Sampoerna A inIndonesia , mainly due to premium A Mild; 29 -------------------------------------------------------------------------------- •Dji Sam Soe inIndonesia , mainly due to Dji Sam Soe Magnum Mild; •Bond Street, largely due toRussia andUkraine ; •Lark, primarily due toJapan andTurkey ; and •"Others," notably due to: the impact of the deconsolidation of RBH inCanada ; mid-price Fortune and Hope inthe Philippines , Muratti inTurkey and Sampoerna U inIndonesia ; and low-price Baronet (morphed to L&M) inMexico , Jackpot inthe Philippines and Morven inPakistan ; partly offset by mid-price Sampoerna Hijau inIndonesia . Our cigarette shipment volume of the following brand increased: •Next, notably driven byIsrael andRussia . The increase in our heated tobacco unit shipment volume was mainly driven by the EU (notablyItaly andPoland ),Eastern Europe (notablyRussia andUkraine ) andJapan , partly offset by PMI Duty Free. 2020 International Share of Market (excludingChina andthe United States ) Our total international market share (excludingChina and theU.S. ), 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 0.7 points to 27.7%, reflecting: •Total international market share for cigarettes of 24.7%, down by 1.5 points; and •Total international market share for heated tobacco units of 3.0%, up by 0.8 points. Our total international cigarette sales volume as a percentage of total industry cigarette sales volume was down by 1.2 points to 25.7%, mainly reflecting: out-switching to heated tobacco units, as well as lower cigarette market share and/or an unfavorable geographic mix impact, notably inIndonesia ,Mexico ,the Philippines and PMI Duty Free, partly offset byBrazil andGermany .
In 2020, we owned five of the world's top 15 international cigarette brands,
with international cigarette market shares as follows:
30
--------------------------------------------------------------------------------Key Market Data
Key market data regarding total market size, our shipments and market share were
as follows:
PMI Shipments (billion units) PMI Market Share (%)(1)
Total Market
Market (billion units) Total Cigarette Heated Tobacco Unit Total Heated Tobacco Unit
2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019
Total 2,548.4 2,705.0 704.6 766.4 628.5 706.7 76.1 59.7 27.7 28.4 3.0 2.2
European Union
France 36.6 37.9 16.3 17.0 16.1 16.9 0.2 0.1 44.9 45.0 0.5 0.2
Germany 74.6 73.3 29.1 27.9 27.4 27.0 1.6 0.9 39.0 38.0 2.2 1.2
Italy 67.4 67.9 34.6 34.9 29.0 31.4 5.6 3.5 52.2 51.8 8.1 4.8
Poland 45.6 46.2 17.8 19.0 15.4 17.9 2.4 1.1 39.0 41.2 5.2 2.5
Spain 41.8 45.4 13.2 14.5 12.8 14.1 0.4 0.3 31.4 31.3 1.0 0.7
Eastern Europe
Russia 219.1 226.5 69.2 68.0 55.6 58.8 13.6 9.2 32.3 30.1 6.3 3.8
Middle East & Africa
Saudi Arabia 21.7 20.8 9.1 9.2 9.0 9.2 0.1 - 39.0 43.0 0.3 -
Turkey 114.8 119.7 47.5 51.9 47.5 51.9 - - 41.3 43.4 - -
South & Southeast Asia
Indonesia 276.3 305.7 79.5 98.5 79.5 98.5 - - 28.8 32.2 - -
Philippines 62.1 70.5 41.7 49.7 41.7 49.7 - - 67.2 70.5 0.1 -
East Asia & Australia
Australia 11.0 12.0 3.3 3.3 3.3 3.3 - - 29.9 27.5 - -
Japan 142.9 157.8 51.1 52.4 22.2 26.6 28.9 25.8 37.1 34.5 20.4 17.1
Korea 71.6 68.6 14.8 15.5 10.2 10.8 4.6 4.6 20.7 22.6 6.5 6.8
Latin America & Canada
Argentina 33.6 33.4 20.5 23.3 20.5 23.3 - - 61.0 70.0 - -
Mexico 30.7 35.5 19.5 23.8 19.5 23.8 0.1 - 63.7 67.1 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; PMI Market Share estimates for previous periods are restated to reflect RBH deconsolidation and exclude RBH-owned brands.
31--------------------------------------------------------------------------------
Financial Summary
Financial Summary - Change Variance
Years Ended Fav./(Unfav.) Fav./(Unfav.)
December 31,
2020 2019 Total Excl. Total Cur- Price Vol/ Cost/Other(1)
(in millions) Curr. rency Mix
Net Revenues $ 28,694 $ 29,805 (3.7) % (2.2) % $ (1,111) $ (469) $ 794 $ (1,183) $ (253)
Cost of Sales (9,569) (10,513) 9.0 % 7.5 % 944 158 - 464 322
Marketing, Administration and Research
Costs (2) (7,384) (8,695) 15.1 % 17.0 % 1,311 (166) - - 1,477
Amortization of Intangibles (73) (66) (10.6) % (13.6) % (7) 2 - - (9)
Operating Income $ 11,668 $ 10,531 10.8 % 15.3 % $ 1,137 $ (475) $ 794 $
(719)
(1) Cost/Other variance includes the impact of the RBH deconsolidation. (2) Favorable Cost/Other variance includes the 2019 Russia excise and VAT audit charge of$374 million , the 2019 Canadian tobacco litigation-related expense of$194 million , the 2019 loss on deconsolidation of RBH of$239 million , the 2019 asset impairment and exit costs of$422 million , the 2020 asset impairment and exit costs of ($149 million ) and the 2020 Brazil indirect tax credit of$119 million , as well as the impact of the RBH deconsolidation. Note: Net Revenues include revenues from shipments of Platform 1 devices, heated tobacco units and accessories to Altria Group, Inc., commencing in the third quarter of 2019, for sale under license inthe United States . Net revenues, excluding unfavorable currency, decreased by 2.2%, reflecting: unfavorable volume/mix, primarily due to lower cigarette volume (mainly inArgentina ,Indonesia ,Italy ,Japan ,Mexico ,the Philippines , PMI Duty Free,Poland ,Russia andUkraine , partly offset byGermany ), partially offset by higher heated tobacco unit volume (notably in the EU,Japan ,Russia andUkraine , partly offset by PMI Duty Free); and the unfavorable impact of$253 million , shown in "Cost/Other," mainly resulting from the deconsolidation of RBH and lower fees for certain distribution rights billed to customers in certain markets; partly offset by a favorable pricing variance (notably driven by the GCC,Germany ,Japan ,Mexico ,North Africa ,the Philippines , PMI Duty Free,Russia andUkraine , partially offset byIndonesia ,Poland andTurkey ).
The unfavorable currency in net revenues was due primarily to the Brazilian real, Indonesian rupiah, Mexican pesos, Russian ruble and Turkish lira, partially offset by the Euro, Japanese yen and Philippine peso.
Net revenues include$6.8 billion in 2020 and$5.6 billion in 2019 related to the sale of RRPs. IQOS devices accounted for approximately 7% of RRP net revenues for the year endedDecember 31, 2020 , mainly due to a naturally lower ratio of new users to existing users, longer replacement cycles and geographic mix. Operating income, excluding unfavorable currency, increased by 15.3%, notably reflecting a favorable comparison, shown in "Cost/Other," of a net charge of$30 million recorded in 2020 related to asset impairment and exit costs of$149 million (associated with organizational design optimization) and theBrazil indirect tax credit of$119 million , to charges recorded in 2019 of$1.2 billion , related to: asset impairment and exit costs ($422 million ), associated with plant closures inArgentina ,Colombia ,Germany andPakistan ), the loss on the deconsolidation of RBH ($239 million ), the Canadian tobacco litigation-related expense ($194 million ), and theRussia excise and VAT audit charge ($374 million ). Excluding these 2020 and 2019 items noted above, and unfavorable currency of$475 million , operating income increased by 3.5%, primarily reflecting: a favorable pricing variance; lower manufacturing costs (driven by productivity gains related to reduced-risk and combustible products) and lower marketing, administration and research costs (partly driven by cost efficiencies); partially offset by unfavorable volume/mix, mainly due to lower cigarette volume (primarily inIndonesia ,Italy ,Japan ,Mexico ,the Philippines , PMI Duty Free,Poland andRussia ), partly offset by higher heated tobacco unit volume (notably in the EU,Japan ,Russia andUkraine , partially offset by PMI Duty Free); and the unfavorable impact of the deconsolidation of RBH, included in "Cost/Other."
Interest expense, net, of
Our effective tax rate decreased by 1.5 percentage points to 21.7%. The effective tax rate for the year endedDecember 31, 2020 was favorably impacted by changes in earnings mix by taxing jurisdiction, a reduction ofU.S. state tax expense, a reduction of estimatedU.S. federal income tax liabilities for years 2018 and 2019 due to final regulations under the GILTI provisions of the Internal Revenue Code ($93 million ) and the corporate income tax rate reduction inIndonesia , partially offset by a decrease in deductions related to 32 -------------------------------------------------------------------------------- foreign-derived intangible income for the years 2018 and 2019 and repatriation cost differences. We estimate that our 2021 effective tax rate will be around 22%, excluding discrete tax events. Changes in currency exchange rates, earnings mix by taxing jurisdiction or future regulatory developments may have an impact on the effective tax rates, which we monitor each quarter. Significant judgment is required in determining income tax provisions and in evaluating tax positions. For further details, see Item 8, Note 11. Income Taxes. We are regularly examined by tax authorities around the world, and we are currently under examination in a number of jurisdictions. It is reasonably possible that within the next 12 months certain tax examinations will close, which could result in a change in unrecognized tax benefits along with related interest and penalties. An estimate of any possible change cannot be made at this time. Net earnings attributable to PMI of$8.1 billion increased by$871 million or 12.1%. This increase was due primarily to higher operating income as discussed above and a lower effective tax rate. Diluted and basic EPS of$5.16 increased by 11.9%. Excluding an unfavorable currency impact of$0.32 , diluted EPS increased by 18.9%. 2019 compared with 2018 For a discussion comparing our consolidated operating results for the year endedDecember 31, 2019 , with the year endedDecember 31, 2018 , refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation - Discussion and Analysis - Consolidated Operating Results in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , which was filed with theU.S. Securities and Exchange Commission onFebruary 7, 2020 .
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 Item 8, Note 17. 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 ("WHO")Framework Convention on Tobacco Control ("FCTC"), which entered into force in 2005. The FCTC has as its main objective to establish a global agenda for tobacco regulation, with the purpose of reducing tobacco use. To date, 181 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. 33 -------------------------------------------------------------------------------- InJuly 2019 , the WHO issued the Report on the Global Tobacco Epidemic 2019. While citing insufficient independent studies regarding the benefits and the unknown long-term health impacts of electronic nicotine delivery systems and heated tobacco products, the WHO has taken the position that such products are not risk-free and should be regulated in the same manner as cigarettes and in line with the FCTC provisions. It is not possible to predict whether or to what extent measures recommended by the WHO, including the FCTC guidelines, will be implemented. 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 men and women who 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 consumers who 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 ("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 (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 onMay 20, 2019 ; and •a framework for the regulation of novel tobacco products and e-cigarettes, including requirements for health warnings and information leaflets, a prohibition on product packaging text related to reduced risk, and the introduction of notification requirements or authorization procedures in advance of commercialization.The EU Commission's Directorate General for Health and Food Safety is preparing a report on the implementation of the TPD, including the evaluation of whether the TPD has achieved its objectives and is still relevant considering scientific, international and technical developments, including in novel tobacco products and e-cigarettes. The report is expected to include recommendations on potential revisions of the TPD to account for such developments. The report is due byMay 2021 . 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. 34 --------------------------------------------------------------------------------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 ,New Zealand ,Israel andDenmark adopted plain packaging regulations that apply to all tobacco products, including RRPs. Other countries are also considering plain packaging legislation. Some countries have adopted, or are considering adopting, packaging restrictions that could have an impact similar to plain packaging. Examples of such restrictions include standardizing the shape and size of packages, prohibiting certain colors or the use of certain descriptive phrases on packaging, and requiring very large graphic health warnings that leave little space for branding. Restrictions and Bans on the Use of Ingredients: The WHO and others in the public health community have recommended restrictions or total bans on the use of some or all ingredients in tobacco products, including menthol. Broad restrictions and ingredient bans would require us to reformulate our American blend tobacco products and could reduce our ability to differentiate these products in the market in the long term. 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 byCanada andBrazil . Bans on Display of Tobacco Products at Retail: In a number of our markets, including, but not limited to,Australia andRussia , governments have banned the display of tobacco products at the point of sale. Other countries are considering similar bans. Bans and Restrictions on Advertising, Marketing, Promotions and Sponsorships: For many years, the FCTC has called for, and countries have imposed, partial or total bans on tobacco advertising, marketing, promotions and sponsorships, including bans and restrictions on advertising on radio and television, in print and on the Internet. The FCTC's non-binding guidelines recommend that governments prohibit all forms of communication with adult smokers. Restrictions on Product Design: Some members of the public health community are calling for the further standardization of tobacco products by requiring, for example, that cigarettes have a certain minimum diameter, which would amount to a ban on slim cigarettes, or requiring the use of standardized filter and cigarette paper designs. In addition, at its meeting 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, entered into force onJuly 2, 2019 , after which member states will have two years to transpose it into national law. While we cannot predict the impact of this initiative on our business at this time, we are monitoring developments in this area. Illicit Trade: Illicit tobacco trade creates a cheap and unregulated supply of tobacco products, undermines efforts to reduce smoking prevalence, especially among youth, damages legitimate businesses and intellectual property rights, stimulates organized crime, 35 -------------------------------------------------------------------------------- increases corruption and reduces government tax revenue. Without accounting for any potential COVID-19-related impact, we generally estimate that, excludingChina and theU.S. , illicit trade may account for as much as 10 to 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 2019. 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, 62 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 over the next decade the number
of smokers will remain largely unchanged from the current estimate of 1.1
billion, despite the considerable efforts to discourage smoking.
Cigarettes burn tobacco, which produces smoke. As a result of the combustion
process, the smoker inhales various toxic substances. In contrast, RRPs do not
burn tobacco and produce an aerosol that contains significantly lower levels of
harmful and potentially harmful constituents ("HPHCs") than found in cigarette
smoke.
For 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.
We also recognize that our part in this transformation must be funded from our
existing cigarette business. For as long as a significant number of adult
smokers continues to smoke, it is critical that the industry be led by
responsible and ethical manufacturers. Therefore, during the transformation, we
intend to remain a leading international cigarette manufacturer.
36
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We have a range of RRPs in various stages of development, scientific assessment
and commercialization. We conduct rigorous scientific assessments of our RRP
platforms to substantiate that they reduce exposure to HPHCs and, ultimately,
that these products present, are likely to present, or have the potential to
present less risk of harm to adult smokers who switch to them versus continued
smoking. We draw upon a team of expert scientists and engineers from a broad
spectrum of scientific disciplines and our extensive learnings of adult consumer
preferences to develop and assess our RRPs. Our efforts are guided by the
following key objectives:
•to develop RRPs that adult smokers who would otherwise continue to smoke find
to be satisfying alternatives to smoking;
•for those adult smokers, our goal is to offer RRPs with a scientifically
substantiated risk-reduction profile that approaches as closely as possible that
associated with smoking cessation;
•to substantiate the reduction of risk for the individual adult smoker and the
reduction of harm to the population as a whole, based on scientific evidence of
the highest standard that is made available for scrutiny and review by external
independent scientists and relevant regulatory bodies; and
•to advocate for the development of science-based regulatory frameworks for the
development and commercialization of RRPs, including the communication of
scientifically substantiated information to enable adult smokers to make better
consumer choices.
Our RRP Platforms: Our product development is based on the elimination of
combustion via tobacco heating and other innovative systems for aerosol
generation, which we believe is the most promising path to providing a better
consumer choice for those who would otherwise continue to smoke. We recognize
that no single product will appeal to all adult smokers. Therefore, we are
developing a portfolio of products intended to appeal to a variety of distinct
adult consumer preferences.
Four 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 .
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 product use and
adaptation study in adult smokers for the product variant without electronics.
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. In
March 2019 , a six-month pre-clinical study in mice evaluating the impact of
e-cigarette vapor on the risks of pulmonary and cardiovascular disease compared
to cigarette smoke was completed; this study did not pertain to a specific
product. The study demonstrated that e-cigarette vapors induce significantly
lower biological responses associated with cardiovascular and pulmonary diseases
compared with cigarette smoke.
37
--------------------------------------------------------------------------------After we receive the results of our scientific studies mentioned above, in accordance with standard scientific practices, we intend to share the conclusions in scientific forums and to submit them for inclusion in peer-reviewed publications.
The research and development expense for our RRP portfolio accounted for 99%, 98% and 92% of our total research and development expense for the years endedDecember 31, 2020 , 2019 and 2018, respectively. The research and development expense for the years endedDecember 31, 2020 , 2019 and 2018, is set forth in Item 8, Note 14. Additional Information to the consolidated financial statements. Commercialization of RRPs: We are building a new product category and tailor our commercialization strategy to the characteristics of each specific market. We focus our commercialization efforts on consumer retail experience, guided consumer trials and customer care, 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. In 2014, we introduced our Platform 1 product in pilot city launches inNagoya, Japan , and inMilan, Italy . Since then, we have continuously expanded our commercialization activities, and as ofDecember 31, 2020 the product has been commercialized in 64 markets in key cities or nationwide. While our Platform 1 products are currently available for sale inMexico , that country banned the importation of e-cigarettes and devices that heat tobacco. We believe that only a very small percentage of adult smokers who convert to our Platform 1 product switch back to cigarettes. We have integrated the production of our heated tobacco units into a number of our existing manufacturing facilities, are progressing with our plans to build manufacturing capacity for our other RRP platforms, and continue to optimize our manufacturing infrastructure. An adequate supply chain for our RRP portfolio, including the supply of electronic devices, is important to our business. We work with two electronics manufacturing service providers for the supply of our Platform 1 and IQOS VEEV 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 electronic manufacturing service providers were temporarily suspended at different times. Even though these suspensions did not materially affect our operations, if both 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 within this Item 7 of this Form 10-K. Our Platform 1 and IQOS VEEV devices are subject to standard product warranties generally for a period of 12 months from the date of purchase or such other periods as required by law. We discuss product warranties in more detail in Item 8, Note 5. Product Warranty. The significance of warranty claims is dependent on a number of factors, including device version mix, product failure rates, logistics and service delivery costs, and warranty policies, and may increase with the number of devices sold.
Product quality may affect consumer acceptance of our RRPs.
Our commercialization efforts for the other RRP platforms are as follows:
•In 2020, we started commercializing an improved version of our IQOS MESH product inNew Zealand and theCzech Republic under the IQOS VEEV brand name. We currently plan to launch this product in additional markets under the IQOS VEEV or VEEV brand names. 38 --------------------------------------------------------------------------------
•With respect to TEEPS, our Platform 2 product, we are finalizing our improvements to this product and plan to conduct a consumer test in 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 smokers who 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. For example, the commercialization of e-cigarettes and heat-not-burn products is prohibited inAustralia , the commercialization of e-cigarettes is prohibited inArgentina , the importation of e-cigarettes and heat-not-burn products is prohibited inTurkey , and the importation of e-cigarettes and devices that heat tobacco is prohibited inMexico . 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, 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. 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 smokers who 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:
•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.
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. 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.
39
--------------------------------------------------------------------------------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
In
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.
FDA actions may influence the regulatory approach of other governments.
Until recently, there were no countries with specific product standards for heat-not-burn products. 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 and theUAE , and voluntary in theU.K. ,Russia ,Ukraine ,Kazakhstan ,Kyrgyzstan ,Vietnam , andIndonesia . 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 a novel tobacco product, while some require pre-market authorizations for the introduction of such products. To date, we have filed a comprehensive dossier summarizing our scientific assessment of our Platform 1 product in over 20 member states. In addition, 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. 40 -------------------------------------------------------------------------------- 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. 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 smokers who 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 equivalent to a proportionate harm/risk reduction for smokers.
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.
41
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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: In December 2013 , we established a
strategic framework with Altria Group, Inc. ("Altria") setting out terms on how
the parties would collaborate to develop and commercialize e-vapor products and
commercialize two of our RRPs in the U.S. In late 2018, Altria announced that it
will participate in the e-vapor category only through another e-vapor company in
which Altria acquired a minority interest. In September 2019 , Altria's
subsidiary, Philip Morris USA Inc. ("PM USA "), began commercialization of a
version of our Platform 1 product in the U.S. PM USA is responsible for the
marketing of this product in the U.S. and communication of the reduced exposure
information authorized by the FDA in its MRTP marketing order described above.
In January 2020 , we announced an agreement with KT&G, a leading tobacco and
nicotine company in South Korea , for the commercialization of KT&G's smoke-free
products outside of South Korea on an exclusive basis. For more information, see
Acquisitions and Other Business Arrangements below.
Other Developments: In September 2017 , we announced our support of the
Foundation for a Smoke-Free World . In September 2020 , our pledge agreement with
the Foundation was amended. We contributed $45 million in 2020 and expect to
contribute $40 million in 2021 and $35 million annually from 2022 through 2029,
as specified in the amended pledge agreement. To date, we contributed a total of
$209.5 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 inThailand ,Russia andSouth Korea in Item 8, Note 17. 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 Item 8, Note 17. 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 theWTO 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. InSeptember 2020 , the Public Prosecutor referred the matter to trial. 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 Item 8, Note 19. Asset Impairment and Exit Costs to our consolidated financial statements.
42
--------------------------------------------------------------------------------Acquisitions and Other Business Arrangements
We discuss our acquisitions in Item 8, Note 6. Acquisitions to our consolidated financial statements.
Global Collaboration Agreement with 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 Item 8, Note 4. Related Parties - Equity Investments and Other to our 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
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. 43
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2020 compared with 2019
The following discussion compares operating results within each of our operating segments for 2020 with 2019.
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 Years Ended Fav./(Unfav.) Fav./(Unfav.) December 31, Excl. Cur- Vol/ Cost/ (in millions) 2020 2019 Total Curr. Total rency Price Mix Other Net Revenues$ 10,702 $ 9,817 9.0 % 8.8 %$ 885 $ 21 $ 187 $ 677 $ - Operating Income$ 5,098 $ 3,970 28.4 % 29.0 %$ 1,128 $ (24) $ 187 $ 663 $ 302 Net revenues, excluding favorable currency, increased by 8.8%, reflecting: favorable volume/mix, mainly driven by higher heated tobacco unit volume across the Region (notably in theCzech Republic ,Germany ,Hungary ,Italy andPoland ), partly offset by lower cigarette volume (notably in theCzech Republic ,Italy ,Poland andSpain , partly offset byGermany ) and lower cigarette mix (mainly inGermany ); and a favorable pricing variance (driven by higher combustible pricing, notably inGermany , partly offset by lower heated tobacco unit and IQOS device pricing). Operating income, excluding unfavorable currency, increased by 29.0%, notably reflecting a favorable comparison, shown in "Cost/Other," of asset impairment and exit costs recorded in 2020 associated with organizational design optimization ($57 million ), to those recorded in 2019 associated with a plant closure inGermany ($342 million ).
Excluding these asset impairment and exit costs, as well as unfavorable currency
of
44
--------------------------------------------------------------------------------Total market, PMI shipment volume and market share performance are shown in the table below:
European Union Key Data Full-Year
Change
2020 2019 % / pp
Total Market (billion units) 472.7 482.8 (2.1) %
PMI Shipment Volume (million units)
Cigarettes 163,420 174,319 (6.3) %
Heated Tobacco Units 19,842 12,569 57.9 %
Total European Union 183,262 186,888 (1.9) %
PMI Market Share
Marlboro 17.5 % 18.0 % (0.5)
L&M 6.2 % 6.7 % (0.5)
Chesterfield 5.5 % 5.8 % (0.3)
Philip Morris 2.4 % 2.7 % (0.3)
HEETS 4.2 % 2.5 % 1.7
Others 3.1 % 3.1 % -
Total European Union 38.9 % 38.8 % 0.1
Note: HEETS includes HEETS Dimensions.
The estimated total market in the EU decreased by 2.1% to 472.7 billion units,
notably due to:
•Czech Republic, down by 10.9%, primarily reflecting lower border sales due to
lockdown measures;
•France, down by 3.6%, mainly reflecting the impact of significant excise
tax-driven price increases, partly offset by the pandemic-related impact of
lower cross-border (non-domestic) purchases and a lower estimated prevalence of
illicit trade due to border restrictions; and
•Spain, down by 7.8%, primarily reflecting lower in-bound tourism and border
sales due to the pandemic;
partly offset by
•Germany, up by 1.9%, notably reflecting the pandemic-related impact of lower
cross-border (non-domestic) purchases and reduced out-bound tourism, partly
offset by the impact of retail price increases in the first quarter of 2020 and
adult smoker out-switching to other combustible tobacco products.
Our total shipment volume decreased by 1.9% to 183.3 billion units, reflecting:
•lower cigarette shipment volume, mainly due to the lower total market and lower
cigarette market share (notably in Italy and Poland , partly reflecting
out-switching to heated tobacco units);
partly offset by
•higher heated tobacco unit shipment volume across the Region (notably in
Germany , Italy and Poland ), driven by higher market share.
Our Regional market share increased by 0.1 point to 38.9%, with gains in Germany
and Italy , partly offset by a decline in Poland .
45
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Eastern Europe :
Financial Summary - Change Variance
Years Ended Fav./(Unfav.) Fav./(Unfav.)
December 31,
Excl. Cur- Vol/ Cost/
(in millions) 2020 2019 Total Curr. Total rency Price Mix Other
Net Revenues $ 3,378 $ 3,282 2.9 % 10.9 % $ 96 $ (263) $ 162 $ 197 $ -
Operating Income $ 871 $ 547 59.2 % +100% $ 324 $ (299) $ 162 $ 146 $ 315
Net revenues, excluding unfavorable currency, increased by 10.9%, reflecting:
favorable volume/mix, predominantly driven by higher heated tobacco unit volume
across the Region (notably in Russia and Ukraine ) and higher heated tobacco unit
mix (mainly in Russia ), partly offset by unfavorable cigarette volume (primarily
in Russia and Ukraine , partially offset by Israel ) and unfavorable cigarette mix
(mainly in Russia ); and a favorable pricing variance, driven by higher
combustible pricing (primarily in Russia and Ukraine ), partly offset by lower
IQOS device pricing (mainly in Russia ).
Operating income, excluding unfavorable currency, increased by over 100%,
primarily reflecting a favorable comparison, shown in "Cost/Other," mainly due
to a charge recorded in 2019 of $374 million , related to the Russia excise and
VAT audit.
Excluding the 2019 Russia excise and VAT audit charge of $374 million , the 2020
charge for asset impairment and exit costs of $15 million and unfavorable
currency of $299 million , operating income increased by 28.7%, reflecting: a
favorable pricing variance; favorable volume/mix, driven by the same factors as
for net revenues noted above; and lower manufacturing costs; partly offset by
higher marketing, administration and research costs (partly related to increased
investments behind reduced-risk products, notably in Russia and Ukraine ).
The estimated total market inEastern Europe decreased by 4.6% to 379.4 billion units, notably due to: •Russia, down by 3.3%, primarily reflecting the impact of price increases, partly offset by a lower estimated prevalence of illicit trade due to pandemic-related border restrictions; and •Ukraine, down by 10.2%, mainly reflecting the impact of excise tax-driven price increases.
Our Regional market share increased by 1.8 points to 30.5%.
PMI Shipment Volume (million units) Full-Year
2020 2019 Change
Cigarettes 93,462 100,644 (7.1) %
Heated Tobacco Units 20,898 13,453 55.3 %
Total Eastern Europe 114,360 114,097 0.2 %
Our total shipment volume increased by 0.2% to 114.4 billion units, mainly due
to:
•Russia, up by 1.8%, or by 3.9% excluding the net unfavorable impact of
estimated distributor inventory movements, primarily reflecting a higher market
share, driven by heated tobacco units, partly offset by the lower total market;
partly offset by
•Ukraine, down by 4.3%, mainly due to the lower total market, partly offset by a
higher market share driven by heated tobacco units.
46
--------------------------------------------------------------------------------Middle East &Africa : Financial Summary - Change Variance Years Ended Fav./(Unfav.) Fav./(Unfav.)December 31 , Excl. Cur- Vol/ Cost/ (in millions) 2020 2019 Total Curr. Total rency Price Mix Other Net Revenues$ 3,088 $ 4,042 (23.6) % (21.7) %$ (954) $ (77) $ 186 $ (1,001) $ (62) Operating Income$ 1,026 $ 1,684 (39.1) % (35.2) %$ (658) $ (65) $ 186 $ (784) $ 5 Net revenues, excluding unfavorable currency, decreased by 21.7%, reflecting: unfavorable volume/mix, mainly due to lower cigarette volume, heated tobacco unit volume and IQOS device volume in PMI Duty Free, as well as lower cigarette volume inSouth Africa andTurkey ; and lower fees for certain distribution rights billed to customers in certain markets, shown in "Cost/Other"; partially offset by a favorable pricing variance, driven by combustible pricing (mainly in the GCC, particularlySaudi Arabia , as well asNorth Africa and PMI Duty Free, partly offset byTurkey ). Operating income, excluding unfavorable currency, decreased by 35.2%, mainly reflecting: unfavorable volume/mix, predominantly due to lower cigarette and heated tobacco unit volume in PMI Duty Free; and lower fees for certain distribution rights as noted above for net revenues; partially offset by a favorable pricing variance; and lower marketing, administration and research costs.
Excluding asset impairment and exit costs of
The estimated total market in theMiddle East &Africa decreased by 8.0% to 546.4 billion units, mainly due to: •International Duty Free, down by 62.0%, reflecting the impact of government travel restrictions and reduced passenger traffic due to the pandemic; •South Africa, down by 35.5%, primarily reflecting the impact of the pandemic-related ban on all tobacco sales fromMarch 27, 2020 , throughAugust 17, 2020 ; •Turkey, down by 4.2%, mainly reflecting the impact of lockdown measures on adult smoker average daily consumption, as well as a higher prevalence of illicit trade related to cut tobacco, particularly during the first-half of 2020, following significant industry-wide cigarette price increases in 2019; and •TheUAE , down by 38.1%, primarily reflecting the adverse impact on low-price brands from the implementation of a minimum excise tax and digital tax stamps in the second half of 2019.
Our Regional market share decreased by 1.4 points to 22.0%.
PMI Shipment Volume (million units) Full-Year
2020 2019 Change
Cigarettes 117,999 134,568 (12.3) %
Heated Tobacco Units 1,022 2,654 (61.5) %
Total Middle East & Africa 119,021 137,222 (13.3) %
Our total shipment volume decreased by 13.3% to 119.0 billion units, notably due to:
•PMI Duty Free, down by 70.8%, or by 58.8% excluding the net unfavorable impact
of estimated distributor inventory movements (principally due to cigarettes),
mainly reflecting the lower total market; and
47
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•Turkey, down by 8.5%, mainly reflecting the lower total market and a lower
market share, notably due to adult smoker down-trading following the 2019 price
increases.
South & Southeast Asia :
Financial Summary - Change Variance
Years Ended Fav./(Unfav.) Fav./(Unfav.)
December 31,
Excl. Cur- Vol/ Cost/
(in millions) 2020 2019 Total Curr. Total rency Price Mix Other
Net Revenues $ 4,396 $ 5,094 (13.7) % (13.3) % $ (698) $ (19) $ (44) $ (635) $ -
Operating Income $ 1,709 $ 2,163 (21.0) % (21.1) % $ (454) $ 2 $ (44) $ (457) $ 45
Net revenues, excluding unfavorable currency, decreased by 13.3%, reflecting:
unfavorable volume/mix, primarily due to lower cigarette volume in Indonesia and
the Philippines , partly offset by favorable cigarette mix in Indonesia ; and an
unfavorable pricing variance, due to combustible pricing in Indonesia , partly
offset by the Philippines .
Operating income, excluding favorable currency, decreased by 21.1%, mainly
reflecting: unfavorable volume/mix, due to the same factors as for net revenues
noted above; and an unfavorable pricing variance; partly offset by lower
marketing, administration and research costs (primarily in
Excluding asset impairment and exit costs of$23 million in 2020 and$20 million in 2019, as well as favorable currency of$2 million , operating income decreased by 20.8%.
South &
The estimated total market in South &Southeast Asia decreased by 8.7% to 672.3 billion units, notably due to: •India, down by 17.9%, mainly reflecting the impact of lockdown restrictions on the movement of certain products, including tobacco; •Indonesia, down by 9.6%, mainly reflecting the impact of excise tax-driven price increases and pandemic-related measures on adult smoker average daily consumption; •Pakistan, down by 10.3%, mainly reflecting the impact of excise tax-driven price increases inJune 2019 and price increases on PMI value brands inFebruary 2020 ; and •thePhilippines , down by 12.0%, mainly reflecting the impact of pandemic-related quarantines, as well as industry-wide price increases in the third quarter of 2019 and the fourth quarter of 2020.
Our Regional market share decreased by 2.2 points to 21.5%.
PMI Shipment Volume (million units) Full-Year
2020 2019 Change
Cigarettes 144,788 174,934 (17.2) %
Heated Tobacco Units 36 - - %
Total South & Southeast Asia 144,824 174,934 (17.2) %
Our total shipment volume decreased by 17.2% to 144.8 billion units, notably due
to:
•Indonesia, down by 19.3%, reflecting the lower total market, as well as a lower
market share, mainly due to: adult smoker down-trading to the tax-advantaged
'below tier one' segment, the impact of elevated price gaps in the tier one
segment (partly due to the
48
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delay in minimum price enforcement), and the disproportionate impact of stricter
public mobility restrictions in urban areas, where PMI's share is higher;
•Pakistan, down by 20.0%, mainly reflecting the lower total market and a lower
market share, mainly due to low-price Morven; and
•the Philippines , down by 16.1%, mainly reflecting the lower total market and a
lower market share, primarily for mid-price Fortune due to the impact of price
increases in the third quarter of 2019 and the fourth quarter of 2020.
East Asia & Australia :
Financial Summary - Change Variance
Years Ended Fav./(Unfav.) Fav./(Unfav.)
December 31,
Excl. Cur- Vol/ Cost/
(in millions) 2020 2019 Total Curr. Total rency Price Mix Other
Net Revenues $ 5,429 $ 5,364 1.2 % 0.6 % $ 65 $ 33 $ 168 $ (136) $ -
Operating Income $ 2,400 $ 1,932 24.2 % 23.1 % $ 468 $ 21 $ 168 $ (68) $ 347
Net revenues, excluding favorable currency, increased by 0.6%, reflecting: a
favorable pricing variance, mainly driven by higher heated tobacco and
combustible pricing in Japan , partly offset by lower IQOS device pricing in
Japan ; and unfavorable volume/mix, mainly due to lower cigarette volume
(primarily in Japan ), unfavorable cigarette mix in Australia , lower device
volume/mix in Japan and lower heated tobacco unit mix in Japan , partly offset by
higher heated tobacco unit volume in Japan .
Operating income, excluding favorable currency, increased by 23.1%, mainly
reflecting: lower marketing, administration and research costs (notably in
Japan ); lower manufacturing costs (mainly related to Japan and Korea ); and a
favorable pricing variance; partly offset by unfavorable volume/mix, mainly due
to lower cigarette volume (primarily in Japan ), unfavorable cigarette mix in
Australia and lower heated tobacco unit mix in Japan , partly offset by higher
heated tobacco unit volume in Japan .
Excluding asset impairment and exit costs of
The estimated total market inEast Asia &Australia , excludingChina , decreased by 3.6% to 288.6 billion units, notably due to: •Australia, down by 8.8%, primarily reflecting the impact of excise tax-driven price increases; and •Japan, down by 9.4%, mainly reflecting the impact of excise tax-driven price increases, reduced adult smoker consumption occasions due to pandemic-related measures, as well as adult smoker out-switching from cigarettes to the cigarillo category; partly offset by •Korea, up by 4.4%, mainly reflecting the shift of adult smokers from duty-free to domestic purchases due to the pandemic-related decline in international travel; and •Taiwan, up by 5.4%, primarily driven by the same factor as forKorea .
Our Regional market share, excluding
49
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PMI Shipment Volume (million units) Full-Year
2020 2019 Change
Cigarettes 45,100 49,951 (9.7) %
Heated Tobacco Units 33,862 30,677 10.4 %
Total East Asia & Australia 78,962 80,628 (2.1) %
Our total shipment volume decreased by 2.1% to 79.0 billion units, notably in: •Japan, down by 2.4%, mainly due to the lower total market, partly offset by a higher market share driven by heated tobacco units; and •Korea, down by 4.3%, primarily due to a lower market share, mainly reflecting the unfavorable impact of the growth of the cigarette new taste dimension segment, in which PMI has a relatively low share, partly offset by the higher total market.Latin America &Canada : Financial Summary - Change Variance Years Ended Fav./(Unfav.) Fav./(Unfav.)December 31 , Excl. Cur- Vol/ (in millions) 2020 2019 Total Curr. Total rency Price Mix Cost/Other(1) Net Revenues$ 1,701 $ 2,206 (22.9) % (15.5) %$ (505) $ (164) $ 135 $ (285) $ (191) Operating Income$ 564 $ 235 +100% +100%$ 329 $ (110) $ 135 $ (219) $ 523 (1) Cost/Other variance includes the impact of the RBH deconsolidation. Note: Net Revenues include revenues from shipments of Platform 1 devices, heated tobacco units and accessories to Altria Group, Inc., commencing in the third quarter of 2019, for sale under license inthe United States . Net revenues, excluding unfavorable currency, decreased by 15.5%, reflecting: unfavorable volume/mix, due to lower cigarette volume, mainly inArgentina andMexico , partly offset byBrazil ; and the unfavorable impact of the deconsolidation of RBH shown in "Cost/Other"; partially offset by a favorable pricing variance, driven by higher combustible pricing across the Region (notably inBrazil andMexico ). Operating income, excluding unfavorable currency, increased by over 100%, notably reflecting a favorable comparison, shown in "Cost/Other," of net favorable items recorded in 2020 of$110 million related to theBrazil indirect tax credit of$119 million and asset impairment and exit costs of$9 million (associated with organizational design optimization), and charges recorded in 2019 of$493 million related to: asset impairment and exit costs ($60 million ) associated with plant closures inArgentina andColombia , the loss on the deconsolidation of RBH ($239 million ), and the Canadian tobacco litigation-related expense ($194 million ). Excluding these 2020 and 2019 items noted above, and unfavorable currency of$110 million , operating income decreased by 22.5%, mainly reflecting: unfavorable volume/mix, due to the same factors as for net revenues noted above; and the unfavorable impact of the deconsolidation of RBH, included in "Cost/Other"; partly offset by a favorable pricing variance; and lower marketing, administration and research costs (notably inArgentina ).
The estimated total market inLatin America &Canada decreased by 2.8% to 189.0 billion units, notably due to: •Colombia, down by 14.2%, primarily reflecting reduced product availability (mainly in the second quarter of 2020) and lower adult smoker average daily consumption due to the impact of pandemic-related mobility restrictions; and •Mexico, down by 13.6%, mainly due to the impact of excise tax-driven price increases inJanuary 2020 and pandemic-related measures on adult smoker average daily consumption; 50 -------------------------------------------------------------------------------- partly offset by •Brazil, up by 13.4%, 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.
Our Regional market share decreased by 3.0 points to 33.9%.
PMI Shipment Volume (million units) Full-Year
2020 2019 Change
Cigarettes 63,749 72,293 (11.8) %
Heated Tobacco Units 451 299 50.8 %
Total Latin America & Canada 64,200 72,592 (11.6) %
Our total shipment volume decreased by 11.6% to 64.2 billion units, or by 10.3% excluding the impact of the RBH deconsolidation, notably due to •Argentina, down by 12.2%, primarily reflecting a lower market share, mainly due to adult smoker down-trading to ultra-low-price brands produced by local manufacturers, as well as the impact of retail out-of-stock of PMI brands during the second quarter; •Canada, down by 18.6%, due to the unfavorable impact of the deconsolidation of RBH; •Colombia, down by 14.2%, primarily reflecting the lower total market; and •Mexico, down by 18.0%, mainly due to the lower total market and a lower market share, primarily reflecting: adult smoker down-trading following theJanuary 2020 price increases and the impact of the pandemic on adult smoker consumption patterns; partly offset by •Brazil, up by 13.2%, mainly reflecting the higher total market.
2019 compared with 2018
For a discussion comparing our consolidated operating results within each of our operating segments for the year endedDecember 31, 2019 , with the year endedDecember 31, 2018 , refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation - Operating Results by Business Segment in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , which was filed with theU.S. Securities and Exchange Commission onFebruary 7, 2020 . 51 --------------------------------------------------------------------------------
Financial Review
[[Image Removed: pm-20201231_g5.jpg]][[Image Removed: pm-20201231_g6.jpg]][[Image Removed: pm-20201231_g7.jpg]]
For the Years Ended (in millions) 2020
2019 2018
Net cash provided by operating activities$ 9,812 $
10,090
Net cash used in investing activities (1,154)
(1,811) (998)
Net cash used in financing activities (8,496) (8,061) (9,651) 2020 compared with 2019
•Net Cash Provided by Operating Activities
Net cash provided by operating activities for the year endedDecember 31, 2020 decreased by$0.3 billion compared with 2019. Excluding unfavorable currency movements of$0.5 billion , net cash provided by operating activities increased by$0.2 billion , due primarily to higher net earnings (excluding 2019 non-cash charges related to the Canadian tobacco litigation-related expense and the loss on deconsolidation of RBH), partially offset by higher working capital requirements of$0.5 billion and higher cash payments in 2020 for asset impairment and exit costs. For further details, see Item 8, Note 19. Asset Impairment and Exit Costs for additional information. Higher net earnings in 2020, excluding the impact of the above 2019 non-cash charges, were partly attributable to theRussia excise and VAT audit charge of$374 million which was paid in the third quarter of 2019. For further details, Item 8, Note 17. Contingencies for additional information. The higher working capital requirements were primarily due to net cash used in inventories and accrued liabilities and other current assets reflecting COVID-19 pandemic related build-up of inventory in our supply chain, and the timing of excise tax-paid inventory movements and excise tax payments. This change was partially offset by cash provided by accounts receivable due to the varying levels of usage of our factoring arrangements to sell trade receivables and timing of sales and cash collections.
•Net Cash Used in Investing Activities
Net cash used in investing activities of$1.2 billion for the year endedDecember 31, 2020 , decreased by$0.7 billion from the comparable 2019 period. This decrease in net cash used in investing activities was primarily due to the reduction of cash in 2019 resulting from the deconsolidation of RBH and lower capital expenditures, partially offset by higher cash collateral posted 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 details on deconsolidation of RBH, see Item 8. Note 20. Deconsolidation of RBH. For further details on 52 --------------------------------------------------------------------------------
our derivatives designated as net investment hedges, see Item 8. Note 15. Financial Instruments.
Our capital expenditures were$0.6 billion in 2020 and$0.9 billion in 2019. The 2020 expenditures were primarily related to our ongoing investments in RRPs. We expect total capital expenditures in 2021 of approximately$0.8 billion (including capital expenditures related to our ongoing investment in RRPs), to be funded by operating cash flows.
•Net Cash Used in Financing Activities
Net cash used in financing activities of$8.5 billion for the year endedDecember 31, 2020 , increased by$0.4 billion from the comparable 2019 period. The change was due primarily to higher payments to noncontrolling interests and higher dividends paid, partially offset by debt activity.
Dividends paid in 2020 and 2019 were
2019 compared with 2018
For a discussion comparing our net cash activities (operating, investing and financing) for the year endedDecember 31, 2019 , with the year endedDecember 31, 2018 , refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation - Financial Review in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , which was filed with theU.S. Securities and Exchange Commission onFebruary 7, 2020 .
Debt and Liquidity
We define cash and cash equivalents as short-term, highly liquid investments, readily convertible to known amounts of cash that mature within a maximum of three months and have an insignificant risk of change in value due to interest rate or credit risk changes. As a policy, we do not hold any investments in structured or equity-linked products. Our cash and cash equivalents are predominantly held in demand deposits with institutions that have investment-grade long-term credit rating. As part of our cash management strategy and in order to 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 2020 and 2019, 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. 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. AtFebruary 8, 2021 , our credit ratings and outlook by major credit rating agencies were as follows: Short-term Long-term Outlook Moody's P-1 A2 Stable Standard & Poor's A-1 A Stable Fitch F1 A Stable 53
-------------------------------------------------------------------------------- Credit Facilities - OnJanuary 29, 2021 , we entered into an agreement to amend and extend the term of our 364-day revolving credit facility fromFebruary 2, 2021 , toFebruary 1, 2022 in the amount of$1.75 billion .
At
(in billions)
Type Committed
Credit
Facilities
364-day revolving credit, expiring February 1, 2022 $ 1.75
Multi-year revolving credit, expiring October 1, 2022 3.50
Multi-year revolving credit, expiring February 10, 2025 (a)
2.00
Total facilities $ 7.25
(a) On January 29, 2021 , we entered into an agreement, effective February 10,
2021 , to amend and extend the term of our $2.0 billion multi-year revolving
credit facility, for an additional year covering the period February 11, 2025 to
February 10, 2026 , in the amount of $1.86 billion .
At
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. The$3.5 billion multi-year revolving credit facility in the table above requires us to maintain a ratio of consolidated earnings before interest, taxes, depreciation and amortization ("consolidated EBITDA") to consolidated interest expense of not less than 3.5 to 1.0 on a rolling four-quarter basis. AtDecember 31, 2020 , our ratio calculated in accordance with the agreement was 12.6 to 1.0. We expect to continue to meet our covenants. The terms "consolidated EBITDA" and "consolidated interest expense," both of which include certain adjustments, are defined in the facility agreements previously filed with theU.S. Securities and Exchange Commission . In addition to the committed credit facilities discussed above, certain of our subsidiaries maintain short-term credit arrangements to meet their respective working capital needs. These credit arrangements, which amounted to approximately$2.7 billion atDecember 31, 2020 andDecember 31, 2019 , respectively, are for the sole use of our subsidiaries. Borrowings under these arrangements and other bank loans amounted to$244 million atDecember 31, 2020 , and$338 million atDecember 31, 2019 . Commercial Paper Program - We continue to have access to liquidity in the commercial paper market through programs in place in theU.S. and inEurope having an aggregate issuance capacity of$8.0 billion . AtDecember 31, 2020 , andDecember 31, 2019 , we had no commercial paper outstanding. The average commercial paper balance outstanding during 2020 and 2019 was$1.2 billion and$2.3 billion , respectively. Sale of Accounts Receivable - To mitigate credit risk and enhance cash and liquidity management, we sell trade receivables to unaffiliated financial institutions. These arrangements allow us to sell, on an ongoing basis, certain trade receivables without recourse. The trade receivables sold are generally short-term in nature and are removed from the consolidated balance sheets. We sell trade receivables under two types of arrangements, servicing and nonservicing. Our operating cash flows were positively impacted by the amount of the trade receivables sold and derecognized from the consolidated balance sheets, which remained outstanding with the unaffiliated financial institutions. The trade receivables sold that remained outstanding under these arrangements as ofDecember 31, 2020 , 2019 and 2018, were$1.2 billion ,$0.9 billion and$1.0 billion , respectively. The net proceeds received are included in cash provided by operating activities in the consolidated statements of cash flows.
For further details, see Item 8, Note 18. Sale of Accounts Receivable to our consolidated financial statements.
Debt - Our total debt was$31.5 billion atDecember 31, 2020 , and$31.0 billion atDecember 31, 2019 . Our total debt is primarily fixed rate in nature. The weighted-average all-in financing cost of our total debt was 2.4% in 2020 and 2.5% in 2019. For further 54 --------------------------------------------------------------------------------
details, including the fair value of our debt, see Item 8, Note 7. Indebtedness. The amount of debt that we can issue is subject to approval by our Board of Directors.
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.
Our debt issuances in 2020 were as follows:
(in millions)
Type Face Value Interest Rate Issuance Maturity
U.S. dollar notes (a) $750 1.125% May 2020 May 2023
U.S. dollar notes (a) $750 1.500% May 2020 May 2025
U.S. dollar notes (a) $750 2.100% May 2020 May 2030
U.S. dollar notes (b) $750 0.875% November 2020 May 2026
U.S. dollar notes (b) $750 1.750% (a) Interest on these notes is payable semi-annually in arrears beginning inNovember 2020 . (b) Interest on these notes is payable semi-annually in arrears beginning inMay 2021 . The net proceeds from the sale of the securities listed in the table above have been and will be used for general corporate purposes, including repayment of outstanding commercial paper and redemption onJanuary 25, 2021 , of our outstanding$750 million 1.875%U.S. dollar notes dueFebruary 25, 2021 .
The weighted-average time to maturity of our long-term debt was 9.7 years at the end of 2020 and 10.2 years at the end of 2019.
•Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
We have no off-balance sheet arrangements, including special purpose entities, other than guarantees and contractual obligations discussed below.
Guarantees - AtDecember 31, 2020 , we were contingently liable for guarantees of our own performance, of which$0.3 billion were related to our obligations under indemnity agreements to enable appeals of customs assessments against our distributors. InOctober 2020 , we guaranteed an obligation for an equity method investee. For further details, see Item 8, Note 17. Contingencies to our consolidated financial statements. Additionally, we have other guarantees of our own performance, which are primarily related to excise taxes on the shipment of our products. There is no liability in the 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. 55 --------------------------------------------------------------------------------
Aggregate Contractual Obligations - The following table summarizes our
contractual obligations at
Payments Due
(in millions) Total 2021 2022-2023 2024-2025 2026 and Thereafter Long-term debt (1)
$31,552 $3,124 $5,122 $5,866 $17,440 Interest on borrowings (2) 9,781 874 1,531 1,275 6,101 Operating leases (3) 896 215 271 119 291 Purchase obligations (4): Inventory and production costs 2,902 2,048 584 267 3 Other 1,719 1,038 363 157 161 4,621 3,086 947 424 164 Other long-term liabilities (5) 1,699 267 361 845 226$48,549 $7,566 $8,232 $8,529 $24,222 (1) Amounts represent the expected cash payments at the face value of our long-term debt and finance lease obligations. For further details, see Item 8, Note 7. Indebtedness to our consolidated financial statements. (2) Amounts represent the expected cash payments of our interest expense on our long-term debt, including the current portion of long-term debt. Interest on our fixed-rate debt is presented using the stated interest rate. Interest on our variable debt is estimated using the rate in effect atDecember 31, 2020 . Amounts exclude the amortization of debt discounts, the amortization of loan fees and fees for lines of credit that would be included in interest expense in the consolidated statements of earnings. (3) Amounts represent the maturity of PMI's operating lease liabilities, on an undiscounted basis. (4) Purchase obligations for inventory and production costs (such as raw materials, electonic devices, indirect materials and supplies, packaging, co-manufacturing arrangements, storage and distribution) are commitments for projected needs to be utilized in the normal course of business. Other purchase obligations include commitments for marketing, advertising, capital expenditures, information technology and professional services. Other purchase obligations also include the expected future contributions to theFoundation for a Smoke-Free World . For further details see Business Environment-Other Developments. Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure and approximate timing of the transaction. Amounts represent the minimum commitments under non-cancelable contracts. Any amounts reflected on the consolidated balance sheet as accounts payable and accrued liabilities are excluded from the table above. (5) Other long-term liabilities consist primarily of transition tax (as discussed in Item 8, Note 11. Income Taxes to our consolidated financial statements), postretirement health care costs, accruals established for employment costs and accruals established for Exit activities (for further details, see Note 19. Asset impairment and Exit Costs). The following long-term liabilities included on the consolidated balance sheet are excluded from the table above: accrued pension and postemployment costs, tax contingencies, insurance accruals and other accruals. We are unable to estimate the timing of payments (or contributions in the case of accrued pension costs) for these items. Currently, we anticipate making pension contributions of approximately$262 million in 2021, based on current tax and benefit laws (as discussed in Item 8, Note 13. Benefit Plans to our consolidated financial statements).
Equity and Dividends
We discuss our stock awards as of
During 2020, 2019 and 2018, we did not repurchase any shares under a share repurchase program.
Dividends paid in 2020 were$7.4 billion . During the third quarter of 2020, our Board of Directors approved a 2.6% increase in the quarterly dividend to$1.20 per common share. As a result, the present annualized dividend rate is$4.80 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.
56
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Derivative Financial Instruments - We operate in markets outside of the 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 Item 8, Note 15. Financial Instruments to our consolidated financial statements for further details on our derivative financial instruments and the related collateral arrangements.
Value at Risk - We use a value at risk computation to estimate the potential one-day loss in the fair value of our interest-rate-sensitive and foreign currency price-sensitive derivative financial instruments. This computation includes our debt and foreign currency forwards, swaps and options. Anticipated transactions, foreign currency trade payables and receivables, and net investments in foreign subsidiaries, which the foregoing instruments are intended to hedge, were excluded from the computation. The computation estimates were made assuming normal market conditions, using a 95% confidence interval and a one-day holding period using a "parametric delta-gamma" approximation technique to determine the observed interrelationships between movements in interest rates and various currencies and in calculating the risk of the underlying positions in the portfolio. These interrelationships were determined by observing interest rate and forward currency rate movements primarily over the preceding quarter for determining value at risk atDecember 31, 2020 and 2019, and primarily over each of the four preceding quarters for the calculation of average, high and low value at risk amounts during each year. Fair Value Impact At (in millions) December 31, 2020 Average High Low
Instruments sensitive to:
Foreign currency rates$59 $78 $136 $54 Interest rates$180 $445 $1,146 $180 Fair Value Impact At (in millions) December 31, 2019 Average High Low
Instruments sensitive to:
Foreign currency rates$18 $20 $24 $18 Interest rates$301 $247 $346 $169 The significant year-over-year increase in "average" and "high" impact on the value at risk computation above was primarily due to an increase in interest rate and foreign currency volatility during the first quarter of 2020 resulting from the impact of the COVID-19 pandemic. The value at risk computation is a risk analysis tool designed to statistically estimate the maximum probable daily loss from adverse movements in interest and foreign currency rates under normal market conditions. The computation does not purport to represent actual losses in fair value or earnings to be incurred by us, nor does it consider the effect of favorable changes in market rates. We cannot predict actual future movements in such market rates and do not present these results to be indicative of future movements in market rates or to be representative of any actual impact that future changes in market rates may have on our future results of operations or financial position.
Contingencies
See Item 3 and Item 8, Note 17. Contingencies to our consolidated financial statements for a discussion of contingencies.
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--------------------------------------------------------------------------------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," "estimates," "intends," "projects," "aims," "goals," "targets" and other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts. We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Our RRPs constitute a new product category in its early stages that is less predictable than our mature cigarette business. Achievement of future results is subject to risks, uncertainties and inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from those anticipated, estimated or projected. Investors should bear this in mind as they consider forward-looking statements and whether to invest in or remain invested in our securities. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, we are identifying important factors that, individually or in the aggregate, could cause actual results and outcomes to differ materially from those contained in any forward-looking statements made by us; any such statement is qualified by reference to the following cautionary statements. We elaborate on these and other risks we face throughout this document, particularly in Item 1A. Risk Factors and Business Environment of this section. You should understand that it is not possible to predict or identify all risk factors. Consequently, you should not consider this discussion of potential risks or uncertainties to be complete. We do not undertake to update any forward-looking statement that we may make from time to time, except in the normal course of our public disclosure obligations.
Item 7A.Quantitative and Qualitative Disclosures About Market Risk.
The information called for by this Item is included in Item 7, Market Risk.
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