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Dynamic quotes 
OFFON

PHILIP MORRIS INTERNATIONAL, INC.

(PM)
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Philip Morris International : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

04/27/2021 | 01:27pm EDT

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 outside the United States. In addition, we ship versions of our Platform
1 device and consumables to Altria Group, Inc. for sale under license in the
United States, where these products have received marketing authorizations from
the U.S. Food and Drug Administration ("FDA") under the premarket tobacco
product application ("PMTA") pathway; the FDA has also authorized the marketing
of a version of our Platform 1 device and its consumables as a Modified Risk
Tobacco Product ("MRTP"), finding that an exposure modification order for these
products is appropriate to promote the public health. We are building a future
on a new category of smoke-free products that, while not risk-free, are a much
better choice than continuing to smoke. We describe the PMTA and MRTP orders in
more detail in the "Business Environment" section of this Item 2. Through
multidisciplinary capabilities in product development, state-of-the-art
facilities and scientific substantiation, we aim to ensure that our smoke-free
products meet adult consumer preferences and rigorous regulatory requirements.
Our smoke-free product portfolio includes heat-not-burn and nicotine-containing
vapor products.

We manage our business in six operating segments:


•European Union ("EU");
•Eastern Europe ("EE");
•Middle East & Africa ("ME&A"), which includes our international duty free
business;
•South & Southeast Asia ("S&SA");
•East Asia & Australia ("EA&A"); and
•Latin America & Canada ("LA&C"), which includes transactions under license with
Altria Group, Inc. for the distribution of our Platform 1 product in the United
States.

Our cigarettes are sold in more than 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
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subsidiary is subject to the prior rights of creditors of such subsidiary,
except to the extent that claims of our company itself as a creditor may be
recognized. As a holding company, our principal sources of funds, including
funds to make payment on our debt securities, are from the receipt of dividends
and repayment of debt from our subsidiaries. Our principal wholly owned and
majority-owned subsidiaries currently are not limited by long-term debt or other
agreements in their ability to pay cash dividends or to make other distributions
that are otherwise compliant with law.

Executive Summary
The following executive summary provides the business update and significant
highlights from the "Discussion and Analysis" that follows.

Consolidated Operating Results for the Three Months Ended March 31, 2021


•Net Revenues - Net revenues of $7.6 billion for the three months ended March
31, 2021 increased by $0.4 billion, or 6.0%, from the comparable 2020 amount.
The change in our net revenues from the comparable 2020 amount was driven by the
following (variances not to scale with quarterly results):
                     [[Image Removed: pm-20210331_g1.jpg]]
During the quarter, net revenues, excluding favorable currency, increased by
2.9%, mainly reflecting: a favorable pricing variance (notably driven by
Germany, Japan, the Philippines and Turkey, partly offset by Indonesia); and
higher fees for certain distribution rights billed to customers in certain
markets, shown in "Other;" partly offset by unfavorable volume/mix, primarily
due to lower cigarette volume (mainly in Indonesia, Japan, North Africa, the
Philippines, PMI Duty Free and Spain), partially offset by higher heated tobacco
unit volume (notably in the EU, Japan and Russia, partly offset by PMI Duty
Free).

Net revenues by product category for the three months ended March 31, 2021 and 2020, are shown below:

[[Image Removed: pm-20210331_g2.jpg]] [[Image Removed: pm-20210331_g3.jpg]]

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•Diluted Earnings Per Share - The changes in our reported diluted EPS ("diluted EPS") for the three months ended March 31, 2021, from the comparable 2020 amounts, were as follows:

                                                                      Diluted EPS        % Growth
For the three months ended March 31, 2020                           $       

1.17

2020 Asset impairment and exit costs                                        

-

2020 Fair value adjustment for equity security investments                  0.04

2020 Tax items                                                                 -
    Subtotal of 2020 items                                                  0.04
2021 Asset impairment and exit costs                                       (0.02)

2021 Tax items                                                                 -
    Subtotal of 2021 items                                                 (0.02)
Currency                                                                    0.10
Interest                                                                   (0.02)
Change in tax rate                                                          0.04

Operations                                                                  0.24
For the three months ended March 31, 2021                           $       1.55                32.5  %



Fair Value adjustment for equity security investments - In the first quarter of
2020, we recorded an unfavorable fair value adjustment for our equity security
investments of $62 million after tax (or $0.04 per share decrease in diluted
EPS). The fair value adjustment for our equity security investments was included
in equity investments and securities (income)/loss, net ($78 million loss) and
provision for income taxes ($16 million benefit) on the condensed consolidated
statements of earnings for the three months ended March 31, 2020.

Asset impairment and exit costs - In the first quarter of 2021, we recorded
pre-tax asset impairment and exit costs of $48 million, representing $38 million
net of income tax and a diluted EPS charge of $0.02 per share, related to
product distribution restructuring in South Korea and the organizational design
optimization plan, primarily in Switzerland. The total pre-tax charge was
included in marketing, administration and research costs on the condensed
consolidated statements of earnings. For further details, see Note 16. Asset
Impairment and Exit Costs.

Currency - The favorable impact of $0.10 per share in the first quarter includes
$0.07 per share of transactional impact incurred in March 2020, primarily from
the revaluation of Euro or Dollar denominated payables in certain markets, such
as Russia, where the local currency had seen a significant devaluation. The
favorable currency impact also includes the fluctuations of the U.S. dollar to
other currencies, especially against the Euro. This favorable currency movement
has impacted our profitability across our primary revenue markets and local
currency cost bases.

Interest - The unfavorable impact of interest was due primarily to lower interest income related to derivative financial instruments.


Income Taxes - The change in the tax rate that increased our diluted EPS by
$0.04 per share in the table above was primarily due to corporate income tax
rate reductions in Indonesia and the Philippines, as well as changes in earnings
mix by taxing jurisdiction. For further details, see Note 9. Income Taxes.

Operations - The increase in diluted EPS of $0.24 from our operations in the table above was due primarily to the following segments:


•East Asia & Australia: Favorable pricing, favorable volume/mix, and lower
manufacturing costs;
•European Union: Favorable volume/mix, lower manufacturing costs and favorable
pricing, partially offset by higher marketing, administration and research
costs;
•Eastern Europe: Favorable volume/mix, lower manufacturing costs, favorable
pricing and lower marketing, administration
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and research costs;
•Middle East & Africa: Favorable pricing, lower marketing, administration and
research costs, higher fees for certain distribution rights, and lower
manufacturing costs, partially offset by unfavorable volume/mix; and
•Latin America & Canada: Lower marketing, administration and research costs,
partially offset by unfavorable volume/mix;
partially offset by
•South & Southeast Asia: Unfavorable volume/mix and unfavorable pricing,
partially offset by 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 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
Consolidated Operating Results
See pages 74-81 for a discussion of our "Cautionary Factors That May Affect
Future Results." Our net revenues and operating income by segment are shown in
the table below:
(in millions)                   For the Three Months Ended March 31,
                                                       2021      2020     Change
Net revenues:
European Union                                       $ 2,909   $ 2,535     14.8  %
Eastern Europe                                           796       788      1.0  %
Middle East & Africa                                     801       876     (8.6) %
South & Southeast Asia                                 1,173     1,251     (6.2) %
East Asia & Australia                                  1,472     1,255     17.3  %
Latin America & Canada                                   434       448     (3.1) %
Net revenues                                         $ 7,585   $ 7,153      6.0  %
Operating income:
European Union                                       $ 1,490   $ 1,158     28.7  %
Eastern Europe                                           261        99       +100%
Middle East & Africa                                     335       321      4.4  %
South & Southeast Asia                                   529       599    (11.7) %
East Asia & Australia                                    695       486     43.0  %
Latin America & Canada                                   134       126      6.3  %
Operating income                                     $ 3,444   $ 2,789     23.5  %


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


•Asset impairment and exit costs - See Note 16. Asset Impairment and Exit Costs
for details of the $48 million pre-tax charge and a breakdown of these costs by
segment for the three months ended March 31, 2021.

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Our net revenues by product category are shown in the table below:

                                   PMI Net Revenues by Product Category
(in millions)                                                               

For the Three Months Ended March 31,

                                                                                                              2021        2020          Change
Combustible Products
European Union                                                                                             $  1,950    $  1,911              2.1  %
Eastern Europe                                                                                                  492         523             (6.0) %
Middle East & Africa                                                                                            780         832             (6.3) %
South & Southeast Asia                                                                                        1,171       1,251             (6.4) %
East Asia & Australia                                                                                           648         642              1.0  %
Latin America & Canada                                                                                          422         440             (4.1) %
Total Combustible Products                                                                                 $  5,463    $  5,598             (2.4) %
Reduced-Risk Products
European Union                                                                                             $    959    $    624             53.5  %
Eastern Europe                                                                                                  304         265             14.7  %
Middle East & Africa                                                                                             21          44            (51.5) %
South & Southeast Asia                                                                                            2           -                -  %
East Asia & Australia                                                                                           824         613             34.4  %
Latin America & Canada                                                                                           12           8             49.3  %
Total Reduced-Risk Products                                                                                $  2,122    $  1,555             36.5  %

Total PMI Net Revenues                                                                                     $  7,585    $  7,153              6.0  %

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


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

Net revenues related to reduced-risk products refer to the operating revenues
generated from the sale of these products, including shipping and handling
charges billed to customers, net of sales and promotion incentives, and excise
taxes. These net revenue amounts consist of the sale of our heated tobacco
units, heat-not-burn devices and related accessories, and other
nicotine-containing products, which primarily include our e-vapor 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 in the United States, are included in Net Revenues of the
Latin America & Canada segment.

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

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Our shipment volume by segment for cigarettes and heated tobacco units is shown in the table below:

                        PMI Shipment Volume (Million Units)
                                                                   For the Three Months Ended March
                                                                                 31,
                                                                                          2021           2020           Change
Cigarettes
European Union                                                                            36,769         40,646             (9.5) %
Eastern Europe                                                                            19,966         21,419             (6.8) %
Middle East & Africa                                                                      27,642         29,996             (7.8) %
South & Southeast Asia                                                                    34,888         37,595             (7.2) %
East Asia & Australia                                                                     11,362         12,299             (7.6) %
Latin America & Canada                                                                    14,885         15,063             (1.2) %
Total Cigarettes                                                                         145,512        157,018             (7.3) %
Heated Tobacco Units
European Union                                                                             6,426          4,661             37.9  %
Eastern Europe                                                                             5,635          4,366             29.1  %
Middle East & Africa                                                                         396            470            (15.7) %
South & Southeast Asia                                                                        33              -                -  %
East Asia & Australia                                                                      9,139          7,122             28.3  %
Latin America & Canada                                                                       105            108             (2.8) %
Total Heated Tobacco Units                                                                21,734         16,727             29.9  %
Cigarettes and Heated Tobacco Units
European Union                                                                            43,195         45,307             (4.7) %
Eastern Europe                                                                            25,601         25,785             (0.7) %
Middle East & Africa                                                                      28,038         30,466             (8.0) %
South & Southeast Asia                                                                    34,921         37,595             (7.1) %
East Asia & Australia                                                                     20,501         19,421              5.6  %
Latin America & Canada                                                                    14,990         15,171             (1.2) %
Total Cigarettes and Heated Tobacco Units                                                167,246        173,745             (3.7) %



Heated tobacco units ("HTU") is the term we use to refer to heated tobacco consumables, which include our HEETS, HEETS Creations, HEETS Dimensions, HEETS Marlboro and HEETS FROM MARLBORO (defined collectively as HEETS), Marlboro Dimensions, Marlboro HeatSticks and Parliament HeatSticks, as well as the KT&G-licensed brands, Fiit and Miix (outside of South Korea).

Market share for HTUs is defined as the total sales volume for HTUs as a percentage of the total estimated sales volume for cigarettes and HTUs.

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


References to total international market, defined as worldwide cigarette and
heated tobacco unit volume excluding the United States, total industry, total
market and market shares throughout this "Discussion and Analysis" are our
estimates for tax-paid products based on the latest available data from a number
of internal and external sources and may, in defined instances, exclude the
People's Republic of China and/or our duty free business.

2020 and 2021 estimates for total industry volume and market share in certain
geographies reflect limitations on the availability and accuracy of industry
data during pandemic-related restrictions.
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In-market sales ("IMS") is defined as sales to the retail channel, depending on the market and distribution model.

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

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

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


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

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Key market data regarding total market size, our shipments and market share are
shown in the tables below:


                                                                                                       For the Three Months Ended March 31,
                                                                                     PMI Shipments (billion units)                                                     PMI Market Share (%)(1)
                                    Total Market
       Market                      (billion units)                 Total                    Cigarette               Heated Tobacco Unit                   Total                         Heated Tobacco Unit
                                   2021       2020             2021      2020            2021      2020               2021         2020              2021       2020                      2021              2020
Total                              611.2      615.6           167.2      173.7           145.5     157.0              21.7         16.7              26.8       27.5                       3.5              2.8

European Union
France                              8.2        8.3             3.8        4.0             3.7       4.0               0.1            -               43.6       44.5                       0.6              0.4

Germany                            17.4       16.0             7.1        6.7             6.5       6.4               0.6           0.4              40.9       42.2                       3.6              2.4

Italy                              15.9       15.7             9.6        9.2             7.5       7.8               2.2           1.4              52.8       51.9                      11.3              7.4

Poland                             10.8       10.8             4.0        4.3             3.4       3.9               0.6           0.5              36.7       40.0                       5.4              4.3

Spain                               9.6       10.4             2.7        3.7             2.6       3.5               0.1           0.1              31.2       30.9                       1.2              0.9

Eastern Europe
Russia                             48.6       46.9             15.7      15.0            12.1      12.4               3.6           2.6              31.3       32.3                       7.7              6.5

Middle East & Africa
Saudi Arabia                        5.5        4.3             2.2        1.1             2.2       1.0                -             -               42.1       40.6                       0.8               -

Turkey                             25.2       25.9             11.0      10.2            11.0      10.2                -             -               43.4       38.9                        -                -

South & Southeast Asia
Indonesia                          70.8       67.4             19.9      20.4            19.9      20.4                -             -               28.1       30.3                        -                -

Philippines                        13.1       15.3             8.2       10.7             8.1      10.7                -             -               62.4       70.1                       0.2               -

East Asia & Australia
Australia                           2.4        2.5             0.8        0.7             0.8       0.7                -             -               32.7       28.0                        -                -

Japan                              32.6       35.5             13.8      12.8             5.9       6.8               7.9           6.0              39.2       36.3                      23.4              19.1

South Korea                        16.8       16.2             3.4        3.5             2.2       2.4               1.1           1.1              20.1       21.8                       6.8              6.6

Latin America & Canada
Argentina                           9.1        8.0             5.3        5.3             5.3       5.3                -             -               57.6       65.9                        -                -

Mexico                              6.8        6.7             4.0        4.1             4.0       4.1                -             -               59.6       61.0                       0.3              0.2

(1) Market share estimates are calculated using IMS data Note: % change for Total Market and PMI shipments is computed based on millions of units. "-" indicates volume below 50 million units and market share below 0.1%

Consolidated Operating Results for the Three Months Ended March 31, 2021 The following discussion compares our consolidated operating results for the three months ended March 31, 2021, with the three months ended March 31, 2020.

Our total shipment volume decreased by 3.7%, due to:


•the EU, reflecting lower cigarette shipment volume, notably in the Czech
Republic, Poland and Spain, partly offset by higher heated tobacco unit shipment
volume across the Region, notably in Italy;
•Eastern Europe, reflecting lower cigarette shipment volume, notably in Ukraine,
partly offset by higher heated tobacco unit shipment volume across the Region,
primarily in Russia;
•Middle East & Africa, mainly reflecting lower cigarette shipment volume, mainly
in North Africa (primarily Egypt) and PMI Duty Free, partly offset by Turkey;
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•South & Southeast Asia, primarily reflecting lower cigarette shipment volume,
primarily in Indonesia and the Philippines, partly offset by Pakistan; and
•Latin America & Canada, reflecting lower cigarette shipment volume, notably in
Colombia, partly offset by Brazil;
partly offset by
•East Asia & Australia, reflecting higher heated tobacco unit shipment volume,
primarily in Japan, partly offset by lower cigarette shipment volume, mainly in
Japan.

First-Quarter Impact of Inventory Movements


Excluding the net unfavorable impact of estimated distributor inventory
movements of approximately 0.9 billion units, our total in-market sales declined
by 3.3%, due to a 6.2% decline in cigarettes, partly offset by a 22.7% increase
in heated tobacco units.

The net unfavorable impact of approximately 0.9 billion units reflected:
•A net unfavorable impact of 2.0 billion cigarettes, mainly due to inventory
movements in the first quarter of 2020 related to higher shipments to
distributors at the onset of the pandemic;
partly offset by
•A net favorable impact of 1.1 billion heated tobacco units, mainly driven by
inventory movements in the first quarter of 2020 due to the temporary shutdown
of the company's Bologna manufacturing facility due to pandemic-related lockdown
restrictions.

PMI's total heated tobacco unit in-market sales volume in the quarter was 21.3
billion units, broadly consistent with heated tobacco unit shipment volume. The
company believes that the current level of heated tobacco unit inventory is
appropriate based on anticipated sales.


Our cigarette shipment volume by brand and heated tobacco units shipment volume are shown in the table below:

                       PMI Shipment Volume by Brand (Million Units)
                                                              First-Quarter
                                                        2021         2020     Change
     Cigarettes
     Marlboro                                            53,682     59,245     (9.4) %
     L&M                                                 20,367     22,641    (10.0) %
     Chesterfield                                        12,758     12,903     (1.1) %
     Philip Morris                                       10,184     11,463    (11.2) %
     Parliament                                           8,957      7,573     18.3  %
     Sampoerna A                                          8,698      8,548      1.8  %
     Dji Sam Soe                                          5,704      6,175     (7.6) %
     Bond Street                                          4,527      5,612    (19.3) %
     Lark                                                 3,899      4,025     (3.1) %
     Sampoerna Hijau                                      2,199      1,477     48.9  %
     Others                                              14,537     17,356    (16.2) %
     Total Cigarettes                                   145,512    157,018     (7.3) %
     Heated Tobacco Units                                21,734     16,727     29.9  %
     Total Cigarettes and Heated Tobacco Units          167,246    173,745     (3.7) %

Note: Sampoerna A includes Sampoerna; Philip Morris includes Philip Morris/Dubliss; and Lark includes Lark Harmony

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Our cigarette shipment volume of the following brands decreased:
•Marlboro, mainly due to Japan, North Africa, the Philippines, PMI Duty Free and
Spain, partly offset by Turkey;
•L&M, notably due to Egypt and Poland;
•Chesterfield, mainly due to the GCC and Spain, partly offset by Brazil and
Russia;
•Philip Morris, primarily due to Italy and Russia;
•Dji Sam Soe in Indonesia, mainly due to Dji Sam Soe Magnum Mild;
•Bond Street, notably due to Russia and Ukraine;
•Lark, primarily due to Japan and PMI Duty Free; and
•"Others," notably due to: mid-price Fortune in the Philippines and Sampoerna U
in Indonesia; partly offset by low-price Morven in Pakistan.
Our cigarette shipment volume of the following brands increased:
•Parliament, mainly driven by Russia, Saudi Arabia and Turkey;
•Sampoerna A in Indonesia, primarily driven by premium A Mild; and
•Sampoerna Hijau in Indonesia.

The increase in our heated tobacco unit shipment volume was mainly driven by the EU (notably Italy), Eastern Europe (notably Russia) and Japan.

First-Quarter International Share of Market (excluding China and the United States)


Our total international market share (excluding China and the United States),
defined as our cigarette and heated tobacco unit sales volume as a percentage of
total industry cigarette and heated tobacco unit sales volume, decreased by 0.7
points to 26.8%, reflecting:
•Total international market share for cigarettes of 23.3%, down by 1.4 points;
and
•Total international market share for heated tobacco units of 3.5%, up by 0.7
points.
Our total international cigarette sales volume as a percentage of total industry
cigarette sales volume was down by 1.2 points to 24.3%, mainly reflecting:
out-switching to heated tobacco units, as well as lower cigarette market share
and/or an unfavorable geographic mix impact, notably in Japan, the Philippines,
PMI Duty Free and Ukraine, partly offset by Turkey.
                                                                   Financial Summary
Financial Summary -                                                              Change                                      Variance
Quarters Ended March 31,                                                      Fav./(Unfav.)                               Fav./(Unfav.)
                                          2021        2020                 Total           Excl.            Total     Cur-    Price     Vol/    Cost/
(in millions)                                                                              Curr.                     rency              Mix     Other
Net Revenues                           $  7,585    $  7,153                      6.0  %       2.9  %       $ 432    $ 225    $ 206    $ (31)   $  32
Cost of Sales                            (2,274)     (2,402)                     5.3  %       9.0  %         128      (87)       -       29      186
Marketing, Administration and
Research Costs (1)                       (1,849)     (1,944)                     4.9  %       2.4  %          95       49        -        -       46
Amortization of Intangibles                 (18)        (18)                       -  %         -  %           -        -        -        -        -
Operating Income                       $  3,444    $  2,789                     23.5  %      16.8  %       $ 655    $ 187    $ 206    $  (2)   $ 264

(1) Cost/Other variance includes a charge in 2021 for asset impairment and exit costs of $48 million.

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During the quarter, net revenues, excluding favorable currency, increased by
2.9%, mainly reflecting: a favorable pricing variance (notably driven by
Germany, Japan, the Philippines and Turkey, partly offset by Indonesia); and
higher fees for certain distribution rights billed to customers in certain
markets, shown in "Cost/Other"; partly offset by unfavorable volume/mix,
primarily due to lower cigarette volume (mainly in Indonesia, Japan, North
Africa, the Philippines, PMI Duty Free and Spain), partially offset by higher
heated tobacco unit volume (notably in the EU, Japan and Russia, partly offset
by PMI Duty Free).

The favorable currency in net revenues was due primarily to the Euro and Japanese yen, partially offset by the Russian ruble and Turkish lira.


Net revenues include $2.1 billion in 2021 and $1.6 billion in 2020 related to
the sale of RRPs. IQOS devices accounted for approximately 6% of RRP net
revenues in the first quarter of 2021, reflecting longer replacement times for
existing users due to improving battery lives and reliability; and lower device
prices in certain markets.

Operating income, excluding favorable currency, increased by 16.8%, primarily
reflecting: a favorable pricing variance; lower manufacturing costs (driven by
productivity gains related to reduced-risk and combustible products); lower
marketing, administration and research costs (largely driven by cost
efficiencies, partially offset by the impact of 2021 asset impairment and exit
costs of $48 million related to product distribution restructuring in South
Korea and organizational design optimization); and higher fees for certain
distribution rights, as noted above for net revenues.

Interest expense, net, of $167 million increased by $38 million (29.5%) due primarily to lower interest income related to derivative financial instruments.

Our effective tax rate decreased by 1.1 percentage points to 21.5%. The effective tax rate for the three months ended March 31, 2021 was favorably impacted by corporate income tax rate reductions in Indonesia and the Philippines, as well as changes in earnings mix by taxing jurisdiction. For further details, see Note 9. 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 $2.4 billion increased by $592 million or
32.4%. This increase was due primarily to higher operating income as discussed
above. Diluted and basic EPS of $1.55 increased by 32.5%. Excluding a favorable
currency impact of $0.10, diluted EPS increased by 23.9%.


Operating Results by Business Segment


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

•regulatory restrictions on our products, including restrictions on the
packaging, marketing, and sale of tobacco or other nicotine-containing products
that could reduce our competitiveness, eliminate our ability to communicate with
adult consumers, or even ban certain of our products;
•fiscal challenges, such as excessive excise tax increases and discriminatory
tax structures;
•illicit trade in cigarettes and other tobacco and nicotine-containing products,
including counterfeit, contraband and so-called "illicit whites";
•intense competition, including from non-tax paid volume by certain local
manufacturers;
•pending and threatened litigation as discussed in Note 8. Contingencies; and
•governmental investigations.

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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 the World Health Organization's (the "WHO") Framework Convention on
Tobacco Control (the "FCTC"), which entered into force in 2005. The FCTC has as
its main objective to establish a global agenda for tobacco regulation, with the
purpose of reducing tobacco use. To date, 182 countries and the European Union
are Parties to the FCTC. The treaty requires Parties to have in place various
tobacco control measures and recommends others. The FCTC governing body, the
Conference of the Parties ("CoP"), has also adopted non-binding guidelines and
policy recommendations related to certain articles of the FCTC that go beyond
the text of the treaty. In October 2018, the CoP recognized the need for more
scientific assessment and improved reporting to define policy on heated tobacco
products. Similar to its previous policy recommendations on e-cigarettes, the
CoP invited countries to regulate, restrict or prohibit heated tobacco products,
as appropriate under their national laws.

In July 2019, the WHO issued the Report on the Global Tobacco Epidemic 2019.
While citing insufficient independent studies regarding the benefits and the
unknown long-term health impacts of electronic nicotine delivery systems and
heated tobacco products, the WHO has taken the position that such products are
not risk-free and should be regulated in the same manner as cigarettes and in
line with the FCTC provisions. In December 2020, the WHO issued a report
recommending substantial restrictions on the commercialization of heated tobacco
products and e-cigarettes and the prohibition of e-cigarettes with open tank
systems. It is not possible to predict whether or to what extent measures
recommended by the WHO or 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 people 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, the World Customs Organization
(the "WCO") amended the harmonized system nomenclature to introduce dedicated
custom codes for novel tobacco and nicotine products, including heated tobacco
products, e-cigarettes and other nicotine-containing products. The amendments
will be effective as of January 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: In April 2014, the EU adopted a significantly
revised EU Tobacco Products Directive (the "TPD"), which entered into force in
May 2016. All member states have adopted laws transposing the TPD.  The TPD sets
forth a comprehensive set of regulatory requirements for tobacco products,
including:

•health warnings covering 65% of the front and back panels of cigarette packs, with an option for member states to further standardize tobacco packaging, including the introduction of plain packaging;

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•a ban on characterizing flavors in some tobacco products, with a transition
period for menthol that expired in May 2020;
•security features and tracking and tracing measures that became effective in
May 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 by May 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.

Plain Packaging and Other Packaging Restrictions: Plain packaging legislation
bans the use of branding, logos and colors on packaging other than the brand
name and variant that may be printed only in specified locations and in a
uniform font. To date, plain packaging laws have been adopted in certain markets
in all of our operating segments, including the key markets of Australia,
France, Saudi Arabia and Turkey. Some countries, such as Canada, New Zealand,
Israel and Denmark, 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. The European
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 of May 2020. Broader ingredient bans have been adopted by
Canada and Brazil.

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


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

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

Restrictions on Public Smoking 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,
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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 on
August 17, 2020, resulted in a significant increase of illicit trade of tobacco
products.

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


The EU Single-Use Plastics Directive, which will require tobacco manufacturers
and importers to cover the costs of public collection systems for tobacco
product filters, entered into force on July 2, 2019, after which member states
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, increases corruption and reduces government tax
revenue. We generally estimate that, excluding China and the U.S., illicit trade
may account for as much as 12% of global cigarette consumption; this includes
counterfeit, contraband and the persistent problem of "illicit whites," which
are cigarettes legally produced in one jurisdiction for the sole purpose of
being exported and illegally sold in another jurisdiction where they have no
legitimate market. Currently, we estimate that illicit trade in the European
Union accounted for approximately 10% of total cigarette consumption in 2020.

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

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

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

In 2009, our Colombian subsidiaries entered into an Investment and Cooperation
Agreement with the national and regional governments of Colombia to promote
investment in, and cooperation on, anti-contraband and anti-counterfeit efforts.
The agreement provides $200 million in funding over a 20-year period to address
issues such as combating illegal cigarette trade and increasing the quality and
quantity of locally-grown tobacco.

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

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Reduced-Risk Products (RRPs)


Our Approach to RRPs: We recognize that smoking cigarettes causes serious
diseases and that the best way to avoid the harms of smoking is never to start
or to quit. Nevertheless, it is predicted that by 2025 the number of smokers
will remain largely unchanged from the current estimate of 1.1 billion, despite
the considerable efforts to discourage smoking.

Cigarettes burn tobacco, which produces smoke. As a result of the combustion
process, the smoker inhales various toxic substances. In contrast, RRPs do not
burn tobacco and 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.
For as long as a significant number of adult smokers continues to smoke,
responsible leadership of the category is critical. We aim to maintain our
competitive position in the cigarette market through selective investment. As a
leading international cigarette manufacturer, we will continue to accelerate
this transformation by using our regulatory and commercial expertise and
extensive commercial and distribution infrastructure as an effective platform
for the commercialization of our RRPs and communication with adult smokers and
trade partners about the benefits of switching to our RRPs.

While seeking to remain competitive in the cigarette market, we are judiciously reallocating resources from cigarettes to RRPs and are streamlining our cigarette portfolio.


We have a range of RRPs in various stages of development, scientific assessment
and commercialization. We conduct rigorous scientific assessments of our RRP
platforms to substantiate that they reduce exposure to HPHCs and, ultimately,
that these products present, are likely to present, or have the potential to
present less risk of harm to adult 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
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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 one-month product use
and adaptation study in adult smokers for the product variant without
electronics. The results of the study indicated that while during the study
period, the adult smokers did not fully switch from smoking cigarettes to this
Platform 3 product, on average, they used this product on a daily basis and
significantly reduced their daily consumption of cigarettes. We are working on
product modifications to enable switching by those adult smokers who are looking
for better alternatives to cigarettes.

  Platform 4 covers e-vapor products, which are battery-powered devices that
produce an aerosol by vaporizing a nicotine-containing liquid solution. In 2020,
our e-vapor products comprised devices with the "coil and wick" technology as
well as our e-vapor mesh technology designed to ensure the consistency and
quality of the generated aerosol compared to the products with the "coil and
wick" technology. Recently, we discontinued the commercialization of devices
with the "coil and wick" technology. We conducted a nicotine pharmacokinetic
study with respect to products with our e-vapor mesh technology in 2017. The
results of this study indicate that these products are an effective means of
nicotine delivery while being a satisfying alternative for e-cigarette users. In
March 2019, a six-month pre-clinical study in mice evaluating the impact of
e-cigarette vapor on the risks of pulmonary and cardiovascular disease compared
to cigarette smoke was completed; this study did not pertain to a specific
product. The study demonstrated that e-cigarette vapors induce significantly
lower biological responses associated with cardiovascular and pulmonary diseases
compared with cigarette smoke.

We aim to expand our brand portfolio and market positions with additional RRPs.
In addition, we are continuing to use our expertise, technology and capabilities
to explore new growth opportunities beyond our current business, including
products that do not contain nicotine or tobacco.

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

Commercialization of RRPs: We are building a new product category and tailor our
commercialization strategy to the characteristics of each specific market. We
focus our commercialization efforts on consumer retail experience, guided
consumer trials and customer care, and increasingly, digital communication
programs and e-commerce.  In order to accelerate switching to our Platform 1
products, our initial market introductions typically entail one-to-one consumer
engagement (in person or by digital means) and device discounts.  These initial
commercialization efforts require substantial investment, which we believe will
moderate over time and further benefit from the increased use of digital
engagement capabilities. During the COVID-19 pandemic, we accelerated our
investments in, and pivot to, digital consumer engagement.

In 2014, we introduced our Platform 1 product in pilot city launches in Nagoya,
Japan, and in Milan, Italy. Since then, we have continuously expanded our
commercialization activities. As of March 31, 2021, PMI's smoke-free products
are available for sale in 66 markets in key cities or nationwide. While our
Platform 1 products are currently available for sale in Mexico, 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.
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An adequate supply chain for our RRP portfolio, including the supply of
electronic devices, is important to our business. We work with three electronics
manufacturing service providers for the supply of our Platform 1 and Platform 4
devices and a small number of other providers for other products in our RRP
portfolio and related accessories. Due to the COVID-19 pandemic, the operations
of our two electronic manufacturing service providers were temporarily suspended
at different times. Even though these suspensions did not materially affect our
operations, if one or more of these service providers were significantly
constrained at the same time, the supply of the devices could be disrupted.
Although we work closely with these service providers on monitoring their
production capability and financial health, we cannot guarantee that they will
remain capable of meeting their commitments, particularly during the COVID-19
pandemic; if they will not, the commercialization of our RRPs could be adversely
affected. The production of our RRP portfolio requires various metals, and we
believe that there is an adequate supply of such metals in the world markets to
satisfy our current and anticipated production requirements. However, some
components and materials necessary for the production of our RRPs, including
those for the electronic devices, are obtained from single or limited sources,
and can be subject to industry-wide shortages and price fluctuations. While we
were successful in maintaining adequate supply of such components and materials
so far, we may not be able to secure such supply going forward, particularly
during the COVID-19 pandemic; this could negatively impact the commercialization
of our RRPs. For example, currently, we are exposed to a world-wide shortage of
semiconductors. While the impact of this development has not been significant,
if this shortage intensifies, the supply of our electronic devices may be
disrupted, which may affect our consumer acquisition and retention rates. For
details on the impact of COVID-19 on our production and supply chain, see the
"Executive Summary" section of this MD&A.

We discuss product warranties in more detail in Note 14. Product Warranty. The
significance of warranty claims is dependent on a number of factors, including
device version mix, product failure rates, logistics and service delivery costs,
and warranty policies, and may increase with the number of devices sold.

Product quality may affect consumer acceptance of our RRPs.

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


•We started commercializing an improved version of our IQOS MESH product in New
Zealand, Italy, Finland and the Czech Republic under the IQOS VEEV or VEEV brand
names. We currently plan to launch this product in additional markets.

•With respect to TEEPS, our Platform 2 product, we 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 in
Australia, the commercialization of e-cigarettes is prohibited in Argentina, the
 importation of e-cigarettes and heat-not-burn products is prohibited in Turkey,
and the importation of e-cigarettes and devices that heat tobacco is prohibited
in Mexico.

These regulations might foreclose or unreasonably restrict adult consumer access
even to products that might be shown to be a better consumer choice than
continuing to smoke. During the COVID-19 pandemic, some governments have been
and may continue to be temporarily unable to focus on the development of
science-based regulatory frameworks for the development and commercialization of
RRPs or on the enforcement or implementation of regulations that are significant
to our business.

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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.

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

On April 30, 2019, the FDA determined that a version of our Platform 1 product,
namely, IQOS 2.4 and three related consumables, is appropriate for the
protection of public health and authorized it for sale in the United States. The
FDA's decision followed its comprehensive assessment of our PMTA. On December 7,
2020, the FDA reached the same determination for the IQOS 3 device and
authorized that version of our Platform 1 product for sale in the United States.

On July 7, 2020, the FDA determined that the available scientific evidence demonstrates that the issuance of an exposure modification order would be appropriate for the promotion of public health and authorized the marketing of a version of our Platform 1 product, namely, IQOS 2.4 and three related consumables, as a "modified risk tobacco product." The FDA authorized the marketing of this product in the U.S. with the following information:

"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 from the date of the orders.


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.

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.


The FDA'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 U.S. have introduced severe restrictions for the sale of certain e-cigarettes and tobacco products, including those authorized by the FDA. We believe that such restrictions on FDA-authorized products will not advance public health and will unreasonably limit adult consumer access to products that are shown to be a better alternative to continued smoking.

In March 2020, we requested a clarification from the FDA regarding the applicability of its new health warning requirements to our heated tobacco units sold in the United States.


In the U.S., tobacco and nicotine-containing products that were not commercially
marketed as of February 15, 2007 are subject to review and authorization by the
FDA. Manufacturers of all non-authorized products currently on the market were
required to file a PMTA with the FDA by September 9, 2020. The FDA announced on
September 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.

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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 in Egypt, Jordan, Saudi Arabia,
Tunisia and the UAE, and voluntary in the U.K., Russia, Ukraine, Kazakhstan,
Kyrgyzstan, Tajikistan, Vietnam, and Indonesia. In Japan, a voluntary standard
sets minimum safety requirements for tobacco heating devices. We expect other
governments to consider similar product standards and encourage making them
mandatory.

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

In addition, in Italy, in April 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. In January 2019, our
application was not granted primarily on the grounds of insufficient data and
questions of methodology.  Due to the constraints of the review process, we had
been unable to supplement the application with all the data we subsequently
filed with the FDA and to address methodological questions during the review. We
plan to submit a new application where we will clarify the concerns raised by
the decision and further strengthen our application by submitting additional
evidence that became available since we submitted our first application,
consistent with our FDA filings. We are confident that our evidence supports our
application.

On October 31, 2019, our Australian subsidiary, Philip Morris Limited ("PML"),
submitted an application to the Scheduling Committee of the Therapeutic Goods
Administration of Australia ("TGA") seeking to exempt heated tobacco products
from being prohibited in Australia. In August 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:


In December 2017, at the request of the U.K. Department of Health and Public
Health England, the U.K. Committee on Toxicity published its assessment of the
risk of heat-not-burn products relative to cigarette smoking. This assessment
included analysis of scientific data for two heat-not-burn products, one of
which was our Platform 1 product. The assessment concluded that, while still
harmful to health, compared with the known risks from cigarettes, heat-not-burn
products are probably less harmful. Subsequently, in February 2018, Public
Health England published a report stating that the available evidence suggests
that heat-not-burn products may be considerably less harmful than cigarettes and
more harmful than e-cigarettes.

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

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

In June 2018, the Korean Food and Drug Administration ("KFDA") issued a
statement on products that heat rather than burn tobacco. The KFDA tested three
heat-not-burn products, one of which was our Platform 1 product. The KFDA
confirmed that the levels of the nine HPHCs tested in the aerosol of these
products were on average approximately 90% lower compared to those measured in
the cigarette smoke of the top five cigarette brands in South Korea. However,
the KFDA stated that it could not establish that the tested heat-not-burn
products are less harmful than cigarettes. In October 2018, our Korean
subsidiary filed a request with a local court seeking information underlying
KFDA's analysis, conclusions and public statements. In May 2020, the court
ordered KFDA to produce certain records.

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

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


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

In 2020, the Superior Health Council of Belgium ("SHC") published results of its
inquiry into heat-not-burn products. The SHC concluded that heat-not-burn
products, while not safe, have a more favorable toxicity profile than
cigarettes. However, in light of the uncertainty of such products' short and
long-term impacts, the toxic effects of the dual use with cigarettes, and the
existence of approved smoking cessation tools, the SHC recommended that current
regulations for cigarettes should apply to heat-not-burn products.

The foregoing scientific findings of government agencies may not be indicative of the measures that the relevant government authorities could take in regulating our products.


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

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

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


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

Our RRP Business Development Initiatives: 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.
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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 in Thailand, Russia and South Korea in Note 8.
Contingencies.

In November 2010, a WTO panel issued its decision in a dispute relating to facts
that arose from August 2006 between the Philippines and Thailand concerning a
series of Thai customs and tax measures affecting cigarettes imported by PM
Thailand into Thailand (see Note 8. Contingencies for additional information).
The WTO panel decision, which was upheld by the WTO Appellate Body, concluded
that Thailand had no basis to find that PM Thailand's declared customs values
and taxes paid were too low, as alleged by the Department of Special
Investigations of the government of Thailand ("DSI") in 2009. The decision also
created obligations for Thailand to revise its laws, regulations, or practices
affecting the customs valuation and tax treatment of future cigarette imports.
Thailand agreed in September 2011 to fully comply with the decision by October
2012. The Philippines asserts that to date Thailand has not fully complied with
the WTO panel decision and commenced challenges at the WTO Appellate Body. The
WTO Appellate Body is not operational, and the appeals by Thailand are suspended
indefinitely. In December 2020, the Philippines and Thailand 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 of Rome, 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 in July 2020 and March
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. In September 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 Note 16. Asset Impairment and Exit Costs to our condensed consolidated financial statements.

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Acquisitions and Other Business Arrangements


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

Products sold under the agreement 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 in the United States.

In the third quarter of 2020, we launched commercial initiatives for licensed KT&G products in select markets.

Equity Investments

We discuss our equity investments in Note 12. Related Parties - Equity Investments and Other to our condensed consolidated financial statements.

Trade Policy


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

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


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

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

We sell cigarettes in Cuba under a distribution agreement. These sales are permitted by U.S. law under a License Exception for Agricultural Commodities, issued by the United States Department of Commerce (Bureau of Industry and Security), granted to our distributor.


Certain states within the U.S. have enacted legislation permitting or requiring
state pension funds to divest or abstain from future investment in stocks of
companies that do business with certain countries that are sanctioned by the
U.S. 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.



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Operating Results - Three Months Ended March 31, 2021


The following discussion compares operating results within each of our operating
segments for the three months ended March 31, 2021, with the three months ended
March 31, 2020.

Unless otherwise stated, references to total industry, total market, our
shipment volume and our market share performance reflect cigarettes and heated
tobacco units. Estimates for total industry volume and market share in certain
geographies reflect limitations on the availability and accuracy of industry
data.

European Union:
                                                                                      Change                                     Variance
Financial Summary -                                                               Fav./(Unfav.)                                Fav./(Unfav.)
Quarters Ended March 31,                                                                       Excl.                      Cur-              Vol/     Cost/
(in millions)                                  2021        2020                 Total          Curr.            Total    rency    Price     Mix      Other
Net Revenues                                $  2,909    $  2,535                    14.8  %       5.5  %       $ 374    $ 235    $  37    $ 102    $    -
Operating Income                            $  1,490    $  1,158                    28.7  %      15.2  %       $ 332    $ 156    $  37    $ 101    $   38



During the quarter, net revenues, excluding favorable currency, increased by
5.5%, reflecting: favorable volume/mix, mainly driven by higher heated tobacco
unit volume (notably in Germany and Italy), partly offset by lower cigarette
volume (notably in Spain); and a favorable pricing variance (driven by higher
combustible pricing, particularly in Germany).

Operating income, excluding favorable currency, increased by 15.2%, primarily
reflecting: favorable volume/mix, driven by the same factors as for net revenues
noted above; lower manufacturing costs (driven mainly by reduced-risk products);
and a favorable pricing variance; partly offset by higher marketing,
administration and research costs (including the impact of 2021 asset impairment
and exit costs related to organizational design optimization).

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

Total market and market share performance are shown in the table below: European Union Key Data

                    First-Quarter
                                                           Change
                                           2021     2020   % / pp
Total Market (billion units)              105.8    109.4  (3.3) %

PMI Market Share
Marlboro                                17.1  %  17.6  %  (0.5)
L&M                                      5.8  %   6.5  %  (0.7)
Chesterfield                             5.5  %   5.6  %  (0.1)
Philip Morris                            2.2  %   2.6  %  (0.4)
HEETS                                    5.7  %   3.9  %   1.8
Others                                   3.2  %   3.2  %     -
Total European Union                    39.5  %  39.4  %   0.1

Note: HEETS includes HEETS Dimensions.


In the quarter, the estimated total market in the EU decreased by 3.3% to 105.8
billion units, notably driven by:
•Czech Republic, down by 24.9%, mainly reflecting lower border sales due to
pandemic-related lockdown measures;
•Denmark, down by 58.9%, or by 15.1% excluding the net unfavorable impact of
estimated trade inventory movements, primarily reflecting the impact of excise
tax-driven price increases;
•Romania, down by 12.8%, mainly reflecting the impact of pandemic-related
lockdown measures; and
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•Spain, down by 7.7%, notably reflecting lower in-bound tourism due to the
pandemic;
partly offset by
•Germany, up by 8.5%, primarily reflecting the pandemic-related impact of lower
cross-border (non-domestic) purchases and reduced out-bound tourism.


                     [[Image Removed: pm-20210331_g4.jpg]]
Our total shipment volume decreased by 4.7% to 43.2 billion units, or by 3.0%
excluding the net unfavorable impact of estimated distributor inventory
movements (notably in Spain), reflecting:
•lower cigarette shipment volume, mainly due to the lower total market, as well
as lower market share (notably in Germany, Italy and Poland, partly reflecting
out-switching to heated tobacco units);
partly offset by
•higher heated tobacco unit shipment volume across the Region, driven by higher
market share (notably in Germany, Hungary, Italy and Poland).

Eastern Europe:
 Financial Summary -                                        Change                            Variance
 Quarters Ended March 31,                                Fav./(Unfav.)                     Fav./(Unfav.)
                                                                    Excl.               Cur-            Vol/   Cost/
 (in millions)                   2021     2020          Total       Curr.       Total   rency   Price   Mix    Other
 Net Revenues                  $  796   $  788              1.0  %  10.5  %    $   8   $ (75)  $  24   $ 59   $   -
 Operating Income              $  261   $   99               +100%    +100%    $ 162   $   7   $  24   $ 57   $  74



During the quarter, net revenues, excluding unfavorable currency, increased by
10.5%, reflecting: favorable volume/mix, driven by higher heated tobacco unit
volume (primarily in Russia and Ukraine), partly offset by unfavorable cigarette
volume (mainly in Ukraine); and a favorable pricing variance, driven by higher
combustible pricing (notably in Ukraine).

Operating income increased by over 100%, excluding favorable currency (note:
currency variance includes a favorable comparison due to an adverse transaction
currency impact in the first quarter of 2020 related to the revaluation of
foreign
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currency payables in Russia), primarily reflecting: favorable volume/mix, driven
by the same factors as for net revenues noted above; lower manufacturing costs
(primarily related to reduced-risk products, mainly in Russia); a favorable
pricing variance; and lower marketing, administration and research costs.


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


In the quarter, the estimated total market in Eastern Europe decreased, mainly
due to:
•Ukraine, down by 15.7%, or by 9.9% excluding the net unfavorable impact of
estimated trade inventory movements, mainly reflecting the impact of excise
tax-driven price increases and a higher prevalence of illicit trade;
partly offset by
•Russia, up by 3.6%, primarily reflecting the net favorable impact of estimated
trade inventory movements, partly related to the ban on discounts on cigarettes
effective April 1, 2021. Excluding these movements, the total estimated market
decreased by 2.4%, mainly due to the impact of excise tax-driven price
increases, partly offset by a lower prevalence of illicit trade.


                     [[Image Removed: pm-20210331_g5.jpg]]
Our total shipment volume decreased by 0.7% to 25.6 billion units, notably due
to:
•Ukraine, down by 10.9%, or by 7.7% excluding the net unfavorable impact of
estimated distributor inventory movements, mainly reflecting the lower total
market, partly offset by a higher market share driven by heated tobacco units;
partly offset by
•Russia, up by 4.2%. Excluding the net favorable impact of estimated distributor
inventory movements of 0.4 billion cigarettes and 0.2 billion heated tobacco
units, PMI's in-market sales increased by 0.3%, mainly reflecting the higher
total market, partly offset by a lower market share due to cigarettes.



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Middle East & Africa:
Financial Summary -                                                              Change                                       Variance
Quarters Ended March 31,                                                      Fav./(Unfav.)                                 Fav./(Unfav.)
                                                                                           Excl.                      Cur-               Vol/      Cost/
(in millions)                                2021      2020                Total           Curr.            Total    rency     Price      Mix      Other
Net Revenues                               $  801    $  876                     (8.6) %      (5.9) %       $ (75)   $ (23)   $   77    $ (159)   $   30
Operating Income                           $  335    $  321                      4.4  %       8.4  %       $  14    $ (13)   $   77    $ (130)   $   80



During the quarter, net revenues, excluding unfavorable currency, decreased by
5.9%, primarily reflecting: unfavorable volume/mix, mainly due to lower
cigarette and heated tobacco unit volume in PMI Duty Free, as well as lower
cigarette volume in North Africa (particularly Egypt); partly offset by a
favorable pricing variance (driven by combustible pricing, mainly in Turkey);
and higher fees for certain distribution rights billed to customers in certain
markets, shown in "Cost/Other."

Operating income, excluding unfavorable currency, increased by 8.4%, mainly
reflecting: a favorable pricing variance; lower marketing, administration and
research costs; higher fees for certain distribution rights, as noted above for
net revenues; and lower manufacturing costs; partly offset by unfavorable
volume/mix, due to the same factors as for net revenues noted above.

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


In the quarter, the estimated total market in the Middle East & Africa
decreased, mainly due to:
•International Duty Free, down by 58.4%, reflecting the impact of government
travel restrictions and reduced passenger traffic due to the pandemic; and
•South Africa, down by 29.2%, primarily reflecting a higher estimated prevalence
of illicit trade resulting from the pandemic-related ban on all tobacco sales
from March 27, 2020, through August 17, 2020;
partly offset by
•Egypt, up by 7.6%, or by 4.6% excluding the net favorable impact of estimated
trade inventory movements, notably reflecting a lower estimated prevalence of
illicit trade and in-switching to cigarettes from other combustible tobacco
products.


                     [[Image Removed: pm-20210331_g6.jpg]]
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Our total shipment volume decreased by 8.0% to 28.0 billion units, notably due
to:
•Egypt, down by 16.6%, or by 9.1% excluding the net unfavorable impact of
estimated distributor inventory movements, mainly reflecting a lower market
share (notably for L&M); and
•PMI Duty Free, down by 67.4%, or by 54.5% excluding the net unfavorable impact
of estimated distributor inventory movements (due to cigarettes), mainly
reflecting the lower total market for both cigarettes and heated tobacco units;
partly offset by
•Turkey, up by 7.9%, primarily reflecting a higher market share, driven by the
growth of Marlboro and Parliament, partly offset by a lower total market.


South & Southeast Asia:

Financial Summary -                                                                    Change                                       Variance
Quarters Ended March 31,                                                           Fav./(Unfav.)                                 Fav./(Unfav.)
                                                                                                 Excl.                      Cur-               Vol/     Cost/
(in millions)                                  2021        2020                 Total            Curr.            Total     rency    Price     Mix      Other
Net Revenues                                $  1,173    $  1,251                     (6.2) %       (8.5) %       $ (78)   $   28    $ (38)   $ (68)   $    -
Operating Income                            $    529    $    599                    (11.7) %      (13.9) %       $ (70)   $   13    $ (38)   $ (72)   $   27


During the quarter, net revenues, excluding favorable currency, decreased by 8.5%, reflecting: unfavorable volume/mix, due to lower cigarette volume in Indonesia and the Philippines, partly offset by favorable cigarette mix in Indonesia and the Philippines; and an unfavorable pricing variance, due to Indonesia, partially offset by the Philippines.


Operating income, excluding favorable currency, decreased by 13.9%, primarily
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.

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


In the quarter, the estimated total market in South & Southeast Asia increased,
notably due to:
•Indonesia, up by 4.9%, mainly reflecting the growth of the tax-advantaged
'below tier one' segment; and
•Pakistan, up by 26.7%, or by 5.0% excluding the net favorable impact of
estimated trade inventory movements, primarily reflecting a lower prevalence of
illicit trade;
partly offset by
•the Philippines, down by 14.4%, primarily reflecting the impact of
industry-wide price increases in the fourth quarter of 2020.







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                     [[Image Removed: pm-20210331_g7.jpg]]
Our total shipment volume decreased by 7.1% to 34.9 billion units, notably due
to:
•Indonesia, down by 2.7%, primarily reflecting a lower market share, mainly due
to adult smoker down-trading to the 'below tier one' segment as a result of
significantly lower retail prices; and
•the Philippines, down by 23.9%, mainly reflecting the lower total market, and a
lower market share (due primarily to mid-price Fortune, reflecting the impact of
price increases in the fourth quarter of 2020, partly offset by Marlboro);
partly offset by
•Pakistan, up by 19.8%, primarily reflecting the higher total market.


East Asia & Australia:
Financial Summary -                                                                   Change                                      Variance
Quarters Ended March 31,                                                           Fav./(Unfav.)                                Fav./(Unfav.)
                                                                                                Excl.                      Cur-              Vol/     Cost/
(in millions)                                  2021        2020                 Total           Curr.            Total    rency    Price     Mix      Other
Net Revenues                                    $ 1,472     $ 1,255                  17.3  %      11.6  %       $ 217    $  71    $ 105    $  41    $    -
Operating Income                                  $ 695       $ 486                  43.0  %      39.3  %       $ 209    $  18    $ 105    $  58    $   28


During the quarter, net revenues, excluding favorable currency, increased by 11.6%, reflecting: a favorable pricing variance, primarily driven by higher heated tobacco and combustible pricing in Japan; and favorable volume/mix, mainly due to higher heated tobacco unit volume in Japan, partly offset by: lower cigarette volume (mainly in Japan, partially offset by Australia), unfavorable cigarette mix (mainly in Australia and Japan), and unfavorable heated tobacco unit mix in Japan.


Operating income, excluding favorable currency, increased by 39.3%, mainly
reflecting: a favorable pricing variance; favorable volume/mix, due to the same
factors as for net revenues noted above; and lower manufacturing costs
(primarily related to reduced-risk products in Japan). Marketing, administration
and research costs were essentially stable, despite the unfavorable impact of
2021 asset impairment and exit costs (primarily related to product distribution
restructuring in South Korea).



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


In the quarter, the estimated total market in East Asia & Australia, excluding
China, decreased, primarily due to:
•Japan, down by 8.0%, primarily due to the impact of excise tax-driven price
increases in October 2020;
partly offset by
•South Korea, up by 3.7%, 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 12.7%, mainly reflecting the same factor as for South Korea.


                     [[Image Removed: pm-20210331_g8.jpg]]
Our total shipment volume increased by 5.6% to 20.5 billion units, or decreased
by 0.2% excluding the net favorable impact of estimated distributor inventory
movements, notably reflecting:
•Japan, up by 7.8%. Excluding the net favorable impact of estimated distributor
inventory movements of 1.1 billion heated tobacco units (primarily driven by
inventory movements in the first quarter of 2020), PMI's in-market sales
decreased by 0.8%, mainly due to the lower total market, partly offset by a
higher market share driven by heated tobacco units.


Latin America & Canada:
Financial Summary -                                                              Change                                       Variance
Quarters Ended March 31,                                                      Fav./(Unfav.)                                 Fav./(Unfav.)
                                                                                           Excl.                      Cur-               Vol/     Cost/
(in millions)                                2021      2020                Total           Curr.            Total    rency     Price     Mix      Other
Net Revenues                               $  434    $  448                     (3.1) %      (0.7) %       $ (14)   $ (11)   $    1    $  (6)   $     2
Operating Income                           $  134    $  126                      6.3  %       1.6  %       $   8    $   6    $    1    $ (16)   $    17





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During the quarter, net revenues, excluding unfavorable currency, decreased by
0.7%, mainly reflecting: unfavorable volume/mix, notably due to lower cigarette
volume in Colombia, partly offset by Brazil.

Operating income, excluding favorable currency, increased by 1.6%, primarily
reflecting: lower marketing, administration and research costs (mainly related
to combustible products); partly offset by unfavorable volume/mix, due to the
same factors as for net revenues noted above.

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


In the quarter, the estimated total market in Latin America & Canada increased,
mainly due to:
•Argentina, up by 14.2%, or by 9.4% excluding the net favorable impact of
estimated trade inventory movements, primarily reflecting a lower estimated
prevalence of illicit trade; and
•Brazil, up by 8.3%, 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.


                     [[Image Removed: pm-20210331_g9.jpg]]
Our total shipment volume decreased by 1.2% to 15.0 billion units, notably due
to:
•Colombia, down by 15.3%, primarily reflecting a lower total market, primarily
due to the impact of price increases in January 2021 and increased
pandemic-related restrictions;
partly offset by
•Brazil, up by 9.7%, mainly reflecting the higher total market.

Excluding the net unfavorable impact of estimated distributor inventory movements, PMI's heated tobacco unit in-market sales volume in the Region increased by 10.1%.

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Financial Review

Cash Flow Highlights [[Image Removed: pm-20210331_g10.jpg]][[Image Removed: pm-20210331_g11.jpg]][[Image Removed: pm-20210331_g12.jpg]]

                                                         For the Three Months Ended March 31,
(in millions)                                                   2021        

2020

Net cash provided by operating activities               $             435    $         1,111
Net cash provided by investing activities                              55                514
Net cash used in financing activities                              (3,649)  

(4,549)

Net Cash Provided by Operating Activities


During the first quarter of 2021, net cash provided by operating activities
decreased by $0.7 billion compared with the first quarter of 2020. Excluding
favorable currency movements of $0.2 billion, net cash provided by operating
activities decreased by $0.9 billion, due primarily to higher working capital
requirements of $1.3 billion, partially offset by higher net earnings.

The higher working capital requirements in the first quarter of 2021 as compared
with the first quarter of 2020 were primarily due to the timing of excise
tax-paid inventory movements and excise tax payments, including the settlement
of excise tax liabilities driven by the COVID-19 pandemic-related build-up of
inventory. The higher working capital requirements were also due to lower usage
of our factoring arrangements to sell trade receivables in the first quarter of
2021 compared with the first quarter of 2020. For further details on our
factoring arrangements to sell trade receivables, see Note 13. Sale of Accounts
Receivable.

Net Cash Provided by Investing Activities


During the first quarter of 2021, net cash provided by investing activities
decreased by $0.5 billion compared with the first quarter of 2020. This change
was primarily due to the movements in cash collateral exchanged with financial
institutions to secure derivatives designated as net investment hedges of Euro
assets principally related to changes in exchange rates between the Euro and the
U.S. dollar. For further details on our derivatives designated as net investment
hedges, see Note 5. Financial Instruments.

The 2021 capital expenditures were primarily related to our ongoing investments
in RRPs. We expect total capital expenditures in 2021 to be approximately $0.8
billion.

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Net Cash Used in Financing Activities


During the first quarter of 2021, net cash used in financing activities
decreased by $0.9 billion compared with the first quarter of 2020. The change
was due primarily to lower long-term debt repayments ($1.6 billion in 2021
compared with $3.6 billion in 2020), partially offset by lower proceeds from
short-term borrowings (primarily commercial paper).

Debt and Liquidity


We define cash and cash equivalents as short-term, highly liquid investments,
readily convertible to known amounts of cash that mature within a maximum of
three months and have an insignificant risk of change in value due to interest
rate or credit risk changes. As a policy, we do not hold any investments in
structured or equity-linked products. Our cash and cash equivalents are
predominantly held with institutions that have investment-grade long-term credit
rating. As part of our cash management strategy and in order to manage
counterparty exposure, we also enter into reverse repurchase agreements. Such
agreements are collateralized with government or corporate securities held by a
custodial bank and, at maturity, cash is paid back to PMI, and the collateral is
returned to the bank. For the three months ended March 31, 2021 and the
full-year 2020, the activities for such reverse repurchase agreements were not
material.

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

Credit Ratings - The cost and terms of our financing arrangements as well as our
access to commercial paper markets may be affected by applicable credit ratings.
At March 31, 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



Credit Facilities - On January 29, 2021, we entered into an agreement to amend
and extend the term of our 364-day revolving credit facility from February 2,
2021, to February 1, 2022 in the amount of $1.75 billion.

At March 31, 2021, our committed credit facilities were as follows:
(in billions)
                                                                   Committed
                                                                    Credit
Type                                                              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 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 March 31, 2021, there were no borrowings under the committed credit facilities, and the entire committed amounts were available for borrowing.


All banks participating in our committed credit facilities have an
investment-grade long-term credit rating from the credit rating agencies. We
continuously monitor the credit quality of our banking group, and at this time
we are not aware of any potential non-performing credit provider.
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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. At
March 31, 2021, our ratio calculated in accordance with the agreement was 13.5
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 agreement previously filed with the
U.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 $2.5 billion at March 31, 2021 and $2.7 billion at December 31,
2020, are for the sole use of our subsidiaries. Borrowings under these
arrangements and other bank loans amounted to $192 million at March 31, 2021,
and $244 million at December 31, 2020.

Commercial Paper Program - We continue to have access to liquidity in the
commercial paper market through programs in place in the U.S. and in Europe
having an aggregate issuance capacity of $8.0 billion. At March 31, 2021 and
December 31, 2020, we had no commercial paper outstanding. The average
commercial paper balance outstanding during the first quarter of 2021 was $0.9
billion. The average commercial paper balance outstanding during 2020 was $1.2
billion.

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

Our operating cash flows were positively impacted by the amount of the trade
receivables sold and derecognized from the condensed consolidated balance
sheets, which remained outstanding with the unaffiliated financial institutions.
The trade receivables sold that remained outstanding under these arrangements as
of March 31, 2021, and March 31, 2020 were $0.6 billion and $1.0 billion,
respectively. The net proceeds received are included in cash provided by
operating activities in the condensed consolidated statements of cash flows.

For further details, see Note 13. Sale of Accounts Receivable to our condensed consolidated financial statements.

Debt - Our total debt was $29.4 billion at March 31, 2021 and $31.5 billion at December 31, 2020.


On February 11, 2020, we filed a shelf registration statement with the U.S.
Securities and Exchange Commission, under which we may from time to time sell
debt securities and/or warrants to purchase debt securities over a three-year
period.


Guarantees - At March 31, 2021, 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. In October 2020, we guaranteed an obligation for an equity method
investee. For further details, see Note 8. Contingencies to our condensed
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 condensed consolidated financial
statements associated with these guarantees. These guarantees have not had, and
are not expected to have, a significant impact on PMI's liquidity.

Equity and Dividends

We discuss our stock awards as of March 31, 2021 in Note 2. Stock Plans to our condensed consolidated financial statements.


During 2020 and the first quarter of 2021, we did not repurchase any shares
under a share repurchase program.
Dividends paid in the first quarter of 2021 were $1.9 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.

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Market Risk
Counterparty Risk - We predominantly work with financial institutions with
strong short- and long-term credit ratings as assigned by Standard & Poor's and
Moody's. These banks are also part of a defined group of relationship banks.
Non-investment grade institutions are only used in certain emerging markets to
the extent required by local business needs. We have a conservative approach
when it comes to choosing financial counterparties and financial instruments. As
such, we do not invest or hold investments in any structured or equity-linked
products. The majority of our cash and cash equivalents is currently invested
with maturities of less than 30 days.
We continuously monitor and assess the credit worthiness of all our
counterparties.
Derivative Financial Instruments - We operate in markets outside 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 Note 5. Financial Instruments to our condensed consolidated financial
statements for further details on our derivative financial instruments and the
related collateral arrangements.

Contingencies

See Note 8. Contingencies to our condensed consolidated financial statements for a discussion of contingencies.

Cautionary Factors That May Affect Future Results


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

Overall Business Risks
Consumption of tax-paid cigarettes continues to decline in many of our markets.
This decline is due to multiple factors, including increased taxes and pricing,
governmental actions, the diminishing social acceptance of smoking and health
concerns, continuing economic and geopolitical uncertainty, and the continuing
prevalence of illicit products. These factors and their potential consequences
are discussed more fully below and in the "Business Environment" section.
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Cigarettes are subject to substantial taxes. Significant increases in
cigarette-related taxes have been proposed or enacted and are likely to continue
to be proposed or enacted in numerous jurisdictions. These tax increases may
disproportionately affect our profitability and make us less competitive versus
certain of our competitors.
Tax regimes, including excise taxes, sales taxes and import duties, can
disproportionately affect the retail price of cigarettes versus other
combustible tobacco products, or disproportionately affect the relative retail
price of our cigarette brands versus cigarette brands manufactured by certain of
our competitors. Because our portfolio is weighted toward the premium-price
cigarette category, tax regimes based on sales price can place us at a
competitive disadvantage in certain markets. As a result, our volume and
profitability may be adversely affected in these markets.
Increases in cigarette taxes are expected to continue to have an adverse impact
on our sales of cigarettes, due to resulting lower consumption levels, a shift
in sales from manufactured cigarettes to other combustible tobacco products and
from the premium-price to the mid-price or low-price cigarette categories, where
we may be under-represented, from local sales to legal cross-border purchases of
lower price products, or to illicit products such as contraband, counterfeit and
"illicit whites."
Our business faces significant governmental action aimed at increasing
regulatory requirements with the goal of reducing or preventing the use of
tobacco products.
Governmental actions, combined with the diminishing social acceptance of smoking
and private actions to restrict smoking, have resulted in reduced industry
volumes in many of our markets, and we expect that such factors will continue to
reduce consumption levels and will increase down-trading and the risk of
counterfeiting, contraband, "illicit whites" and legal cross-border purchases.
Significant regulatory developments will continue to take place over the next
few years in most of our markets, driven principally by the World Health
Organization's Framework Convention on Tobacco Control (the "FCTC"). Since it
came into force in 2005, the FCTC has led to increased efforts by tobacco
control advocates and public health organizations to promote increasingly
restrictive regulatory measures on the marketing and sale of tobacco products to
adult smokers. Regulatory initiatives that have been proposed, introduced or
enacted include:

•   restrictions on or licensing of outlets permitted to sell cigarettes;


•   the levying of substantial and increasing tax and duty charges;


•   restrictions or bans on advertising, marketing and sponsorship;

• the display of larger health warnings, graphic health warnings and other labeling

requirements;

• restrictions on packaging design, including the use of colors, and mandating plain

packaging;

• restrictions on packaging and cigarette formats and dimensions; • restrictions or bans on the display of tobacco product packaging at the point of sale

and restrictions or bans on vending machines; • requirements regarding testing, disclosure and performance standards for tar, nicotine,

carbon monoxide and other smoke constituents; • disclosure, restrictions, or bans of tobacco product ingredients; • increased restrictions on smoking and use of tobacco and nicotine-containing products

          in public and work places and, in some instances, in private places and outdoors;
•         restrictions or prohibitions of novel tobacco or nicotine-containing products;
•         elimination of duty free sales and duty free allowances for travelers;


•   encouraging litigation against tobacco companies; and

• excluding tobacco companies from transparent public dialogue regarding public

health and other policy matters.



Our financial results could be significantly affected by regulatory initiatives
resulting in a significant decrease in demand for our brands. More specifically,
requirements that lead to a commoditization of tobacco products or impede adult
consumers' ability to convert to our RRPs, as well as any significant increase
in the cost of complying with new regulatory requirements could have a material
adverse effect on our financial results.
Changes in the earnings mix and changes in tax laws may result in significant
variability in our effective tax rates. Our ability to receive payments from
foreign subsidiaries or to repatriate royalties and dividends could be
restricted by local country currency exchange controls and other regulations.

We are subject to income tax laws in the United States and numerous foreign jurisdictions. The results of the 2020 U.S. presidential and congressional elections could lead to changes in the U.S. tax system, including significant increases in the U.S. corporate income tax rate and the minimum tax rate on certain earnings of foreign subsidiaries. If ultimately enacted into law,

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such changes could have a material adverse impact on our effective tax rate
thereby reducing our net earnings. Further changes in the tax laws of foreign
jurisdictions could arise as a result of the base erosion and profit shifting
project undertaken by the Organisation for Economic Co-operation and
Development, which recommended changes to numerous long-standing tax principles.
If implemented, such changes, as well as changes in taxing jurisdictions'
administrative interpretations, decisions, policies, or positions, could also
have a material adverse impact on our effective tax rate thereby reducing our
net earnings. In future periods, our ability to recover deferred tax assets
could be subject to additional uncertainty as a result of such developments.
Furthermore, changes in the earnings mix or applicable foreign tax laws may
result in significant variability in our effective tax rates.

Because we are a U.S. holding company, our most significant source of funds is
distributions from our non-U.S. subsidiaries. Certain countries in which we
operate have adopted or could institute currency exchange controls and other
regulations that limit or prohibit our local subsidiaries' ability to convert
local currency into U.S. dollars or to make payments outside the country. This
could subject us to the risks of local currency devaluation and business
disruption.

Risks Related to our International Operations
Because we have operations in numerous countries, our results may be adversely
impacted by economic, regulatory and political developments, natural disasters,
pandemics or conflicts.
Some of the countries in which we operate face the threat of civil unrest and
can be subject to regime changes. In others, nationalization, terrorism,
conflict and the threat of war may have a significant impact on the business
environment. Natural disasters, pandemics, economic, political, regulatory or
other developments could disrupt our supply chain, manufacturing capabilities or
distribution capabilities. In addition, such developments could increase costs
of our materials and operations and lead to loss of property or equipment that
are critical to our business in certain markets and difficulty in staffing and
managing our operations, all of which could reduce our volumes, revenues and net
earnings. We discuss risks associated with the COVID-19 pandemic below.
In certain markets, we are dependent on governmental approvals of various
actions such as price changes, and failure to obtain such approvals could impair
growth of our profitability.
In addition, despite our high ethical standards and rigorous control and
compliance procedures aimed at preventing and detecting unlawful conduct, given
the breadth and scope of our international operations, we may not be able to
detect all potential improper or unlawful conduct by our employees and partners.
Such improper or unlawful conduct (actual or alleged) could lead to litigation
and regulatory action, cause damage to our reputation and that of our brands and
result in substantial costs.
Our reported results could be adversely affected by unfavorable currency
exchange rates, and currency devaluations could impair our competitiveness.
We conduct our business primarily in local currency and, for purposes of
financial reporting, the local currency results are translated into U.S. dollars
based on average exchange rates prevailing during a reporting period. During
times of a strengthening U.S. dollar, our reported net revenues, operating
income and EPS will be reduced because the local currency translates into fewer
U.S. dollars. During periods of economic crises, such as during the ongoing
COVID-19 pandemic, foreign currencies may be devalued significantly against the
U.S. dollar, reducing our margins. Actions to recover margins may result in
lower volume and a weaker competitive position.
Risks Related to Legal Challenges and Investigations
Litigation related to tobacco use and exposure to environmental tobacco smoke
could substantially reduce our profitability and could severely impair our
liquidity.
There is litigation related to tobacco products pending in certain jurisdictions
in which we operate. Damages claimed in some tobacco-related litigation are
significant and, in certain cases in Brazil, Canada, and Nigeria, range into the
billions of U.S. dollars. We anticipate that new cases will continue to be
filed. The FCTC encourages litigation against tobacco product manufacturers. It
is possible that our consolidated results of operations, cash flows or financial
position could be materially affected in a particular fiscal quarter or fiscal
year by an unfavorable outcome or settlement of certain pending litigation. See
Note 8. Contingencies to our condensed consolidated financial statements for a
discussion of pending litigation and "Business Environment-Reduced-Risk Products
(RRPs)-Legal Challenges to RRPs."
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From time to time, we are subject to governmental investigations on a range of
matters.
Investigations include allegations of contraband shipments of cigarettes,
allegations of unlawful pricing activities within certain markets, allegations
of underpayment of income taxes, customs duties and/or excise taxes, allegations
of false and misleading usage of descriptors, allegations of unlawful
advertising, and allegations of unlawful labor practices. We cannot predict the
outcome of those investigations or whether additional investigations may be
commenced, and it is possible that our business could be materially affected by
an unfavorable outcome of pending or future investigations. See Note 8.
Contingencies-Other Litigation and "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Operating Results by Business
Segment-Business Environment-Governmental Investigations" for a description of
certain governmental investigations to which we are subject.
We may be unable to adequately protect our intellectual property rights, and
disputes relating to intellectual property rights could harm our business.
Our intellectual property rights are valuable assets, and their protection is
important to our business.  If the steps we take to protect our intellectual
property rights globally, including through a combination of trademark, design,
patent and other intellectual property rights, are inadequate, or if others
infringe or misappropriate our intellectual property rights, notwithstanding
legal protection, our business could be adversely impacted. Intellectual
property rights of third parties may limit our ability to commercialize our
products or improve product quality in one or more markets. Competitors or other
third parties may claim that we infringe their intellectual property rights. Any
such claims, regardless of merit, could divert management's attention, be
costly, disruptive, time-consuming and unpredictable and expose us to litigation
costs and damages, and impede our ability to manufacture, commercialize and
improve our products. If, as a result, we are unable to manufacture or sell our
RRPs or improve their quality in one or more markets, our ability to convert
adult smokers to our RRPs in such markets would be adversely affected. See Note
8. Contingencies- Other Litigation to our condensed consolidated financial
statements for a description of certain intellectual property proceedings.
Risks Related to our Competitive Environment

We face intense competition, and our failure to compete effectively could have a
material adverse effect on our profitability and results of operations.
We are subject to highly competitive conditions in all aspects of our business.
We compete primarily on the basis of product quality, brand recognition, brand
loyalty, taste, R&D, innovation, packaging, customer service, marketing,
advertising and retail price and, increasingly, adult smoker willingness to
convert to our RRPs. The competitive environment and our competitive position
can be significantly influenced by weak economic conditions, erosion of consumer
confidence, competitors' introduction of lower-price products or innovative
products, higher tobacco product taxes, higher absolute prices and larger gaps
between retail price categories, and product regulation that diminishes the
ability to differentiate tobacco products and restricts adult consumer access to
truthful and non-misleading information about our RRPs. Competitors include
three large international tobacco companies, new market entrants, particularly
with respect to innovative products, several regional and local tobacco
companies and, in some instances, state-owned tobacco enterprises, principally
in Algeria, Egypt, the PRC, Taiwan, Thailand and Vietnam. Industry consolidation
and privatizations of state-owned enterprises have led to an overall increase in
competitive pressures. Some competitors have different profit, volume and
regulatory objectives, and some international competitors are susceptible to
changes in different currency exchange rates. Certain new market entrants may
alienate consumers from innovative products through inappropriate marketing
campaigns, messaging and inferior product satisfaction, while not relying on
scientific substantiation based on appropriate R&D protocols and standards. The
growing use of digital media could increase the speed and extent of the
dissemination of inaccurate and misleading information about our RRPs.
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We may be unable to anticipate changes in adult consumer preferences.
Our business is subject to changes in adult consumer preferences, which may be
influenced by local economic conditions.
To be successful, we must:
•        promote brand equity successfully;
•        anticipate and respond to new adult consumer trends;
•        develop new products and markets and broaden brand portfolios;
•        improve productivity;
•        convince adult smokers to convert to our RRPs;
•        ensure effective adult consumer engagement, including communication about product
         characteristics and usage of RRPs;
•        provide excellent customer care;
•        ensure adequate production capacity to meet demand for our products; and
•        be able to protect or enhance margins through price increases.


In periods of economic uncertainty, adult consumers may tend to purchase lower-price brands, and the volume of our premium-price and mid-price brands and our profitability could be materially adversely impacted as a result. Such down-trading trends may be reinforced by regulation that limits branding, communication and product differentiation.


Our ability to grow profitability may be limited by our inability to introduce
new products, enter new markets or improve our margins through higher pricing
and improvements in our brand and geographic mix.
Our profit growth may be adversely impacted if we are unable to introduce new
products or enter new markets successfully, to raise prices or to improve the
proportion of our sales of higher margin products and in higher margin
geographies.

We may be unable to expand our brand portfolio through successful acquisitions
or the development of strategic business relationships, and the intended
benefits from our investments may not materialize.
One element of our growth strategy is to expand our brand portfolio and market
positions through selective acquisitions and the development of strategic
business relationships. Acquisition and strategic business development
opportunities are limited and present risks of failing to achieve efficient and
effective integration, strategic objectives and/or anticipated revenue
improvements and cost savings. There is no assurance that we will be able to
acquire attractive businesses or enter into strategic business relationships on
favorable terms ahead of our competitors, or that such acquisitions or strategic
business development relationships will be accretive to earnings or improve our
competitive position. In addition, we may not have a controlling position in
certain strategic investments or relationships, which could impact the extent to
which the intended financial growth and other benefits from these investments or
relationships may ultimately materialize.
Our ability to achieve our strategic goals may be impaired if we fail to
attract, motivate and retain the best global talent and effectively align our
organizational design with the goals of our transformation.
To be successful, we must continue transforming our culture and ways of working,
align our talent and organizational design with our increasingly complex
business needs, and innovate and transform to a consumer-centric business. We
compete for talent, including in areas that are new to us, such as digital and
technical solutions, with companies in the consumer products, technology and
other sectors that enjoy greater societal acceptance. As a result, we may be
unable to attract, motivate and retain the best global talent with the right
degree of diversity, experience and skills to achieve our strategic goals.
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Risks Related to the Impact of COVID-19 on our Business
Our business, results of operations, cash flows and financial position will be
adversely impacted during the continuation of the COVID-19 pandemic.
The COVID-19 pandemic has created significant societal and economic disruption,
and resulted in closures of stores, factories and offices, and restrictions on
manufacturing, distribution and travel, all of which have and will continue to
adversely impact our business, results of operations, cash flows and financial
position while the pandemic continues. Our business continuity plans and other
safeguards may not be effective to mitigate the impact of the pandemic.
Currently, significant risks include our diminished ability to convert adult
smokers to our RRPs, significant volume declines in our duty-free business and
certain other key markets, disruptions or delays in our manufacturing and supply
chain, increased currency volatility, and delays in certain cost saving,
transformation and restructuring initiatives. Our business could also be
adversely impacted if key personnel or a significant number of employees or
business partners become unavailable due to the COVID-19 outbreak. The
significant adverse impact of COVID-19 on the economic or political conditions
in markets in which we operate could result in changes to the preferences of our
adult consumers and lower demand for our products, particularly for our
mid-price or premium-price brands. Continuation of the pandemic could disrupt
our access to the credit markets or increase our borrowing costs. Governments
may temporarily be unable to focus on the development of science-based
regulatory frameworks for the development and commercialization of RRPs or on
the enforcement or implementation of regulations that are significant to our
business. In addition, messaging about the potential negative impacts of the use
of our products on COVID-19 risks may lead to increasingly restrictive
regulatory measures on the sale and use of our products, negatively impact
demand for our products and the willingness of adult consumers to switch to our
RRPs, and adversely impact our efforts to advocate for the development of
science-based regulatory frameworks for the development and commercialization of
RRPs.
The impact of these risks also depends on factors beyond our knowledge or
control, including the duration and severity of the COVID-19 pandemic in general
and specifically in the jurisdictions in which we operate, its recurrence in our
key markets, actions taken to contain its spread and to mitigate its public
health effects, and the ultimate economic consequences thereof.
Risks Related to Sourcing of Materials, Products and Services
Use of third-party resources may negatively impact quality of our products and
services, and we may be required to replace third-party contract manufacturers
or service providers with our own resources.

We increasingly rely on third-party resources to manufacture some of our
products and product parts (particularly, the electronic devices and
accessories) and to provide services, including to support our finance and
information technology processes. While many of these arrangements improve
efficiencies and decrease our operating costs, they also diminish our direct
control. Such diminished control may have an adverse effect on the quality of
products or services, our supply chain, and the speed and flexibility in our
response to changing market conditions and adult consumer preferences, all of
which may place us at a competitive disadvantage. In addition, we may be unable
to renew these agreements on satisfactory terms for numerous reasons, including
government regulations, and our costs may increase significantly if we must
replace such third parties with our own resources.
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Government mandated prices, production control programs, shifts in crops driven
by economic conditions and the impact of climate change may increase the cost or
reduce the quality of the tobacco and other agricultural products used to
manufacture our products.
As with other agricultural commodities, the price of tobacco leaf and cloves can
be influenced by imbalances in supply and demand and the impacts of natural
disasters and pandemics such as COVID-19. Furthermore, crop quality may be
influenced by variations in weather patterns, including those caused by climate
change. Tobacco production in certain countries is subject to a variety of
controls, including government mandated prices and production control programs.
Changes in the patterns of demand for agricultural products could cause farmers
to produce less tobacco or cloves. Any significant change in tobacco leaf and
clove prices, quality and quantity could affect our profitability and our
business.
Risks Related to the Success of our Reduced-Risk Products
The financial and business performance of our reduced-risk products is less
predictable than our cigarette business.
Our RRPs are novel products in a new category, and the pace at which adult
smokers adopt them may vary, depending on the competitive, regulatory, fiscal
and cultural environment, and other factors in a specific market. There may be
periods of accelerated growth and periods of slower growth for these products,
the timing and drivers of which may be more difficult for us to predict versus
our mature cigarette business. The impact of this lower predictability on our
projected results for a specific period may be significant, particularly during
the early stages of this new product category and during the COVID-19 pandemic.
We may be unsuccessful in our attempts to introduce reduced-risk products, and
regulators may not permit the commercialization of these products or the
communication of scientifically substantiated information and claims.

Our key strategic priorities are: to develop and commercialize products that
present less risk of harm to adult 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 RRPs. For our efforts to be successful, we
must:
•        develop RRPs that such adult smokers find acceptable alternatives to smoking;
•        conduct rigorous scientific studies to substantiate that they reduce exposure to

harmful and potentially harmful constituents in smoke and, ultimately, that these

products present, are likely to present, or have the potential to present less risk of

harm to adult smokers who switch to them versus continued smoking; and • effectively advocate for the development of science-based regulatory frameworks for

the development and commercialization of RRPs, including communication of

scientifically substantiated information to enable adult smokers to make better

consumer choices.



We might not succeed in our efforts. If we do not succeed, but others do, or if
heat-not-burn products are inequitably regulated compared to other RRP
categories without regard to the totality of the scientific evidence available
for such products, we may be at a competitive disadvantage. In addition, actions
of some market entrants, such as the inappropriate marketing of e-vapor products
to youth, as well as alleged health consequences associated with the use of
certain e-vapor products, may unfavorably impact public opinion and/or
mischaracterize all e-vapor products or other RRPs to consumers, regulators and
policy makers without regard to the totality of scientific evidence for specific
products. This may impede our efforts to advocate for the development of
science-based regulatory frameworks for the development and commercialization of
RRPs. We cannot predict whether regulators will permit the sale and/or marketing
of RRPs with scientifically substantiated information and claims. Such
restrictions could limit the success of our RRPs.

Our RRPs and commercial activities for these products are designed for, and
directed toward, current adult smokers and users of nicotine-containing
products, and not for non-smokers or youth. If nonetheless there is a
significant usage of our products or competitive products among youth or
non-smokers, even in situations over which we have no control, our credibility
may suffer, and our efforts to advocate for the development of science-based
regulatory frameworks for the commercialization of RRPs may be significantly
impacted.

Moreover, the FDA's premarket tobacco product and modified risk tobacco product
authorizations of a version of our Platform 1 product are subject to strict
marketing, reporting and other requirements. Although we have received these
product authorizations from the FDA, there is no guarantee that the product will
remain authorized, particularly if there is a significant uptake in youth or
non-smoker initiation.
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We may be unsuccessful in our efforts to differentiate reduced-risk products and cigarettes with respect to taxation.


To date, we have been largely successful in demonstrating to regulators that our
RRPs are not cigarettes due to the absence of combustion, and as such they are
generally taxed either as a separate category or as other tobacco products,
which typically yields more favorable tax rates than cigarettes. If we cease to
be successful in these efforts, RRP unit margins may be adversely affected.
Risks Related to Illicit Trade
We lose revenues as a result of counterfeiting, contraband, cross-border
purchases, "illicit whites," non-tax-paid volume produced by local
manufacturers, and counterfeiting of our Platform 1 device and heated tobacco
units.
Large quantities of counterfeit cigarettes are sold in the international market.
We believe that Marlboro is the most heavily counterfeited international
cigarette brand, although we cannot quantify the revenues we lose as a result of
this activity. In addition, our revenues are reduced by contraband, legal
cross-border purchases, "illicit whites" and non-tax-paid volume produced by
local manufacturers. Our revenues and consumer satisfaction with our Platform 1
device and heated tobacco units may be adversely affected by counterfeit
products that do not meet our product quality standards and scientific
validation procedures.

Risks Related to Cybersecurity and Data Governance
The failure of our information systems to function as intended or their
penetration with the intent to corrupt them or our failure to adhere to strict
data governance and cybersecurity protocols and to comply with privacy laws and
regulations could result in business disruption, loss of reputation, litigation
and regulatory action, and loss of revenue, assets or personal or other
confidential data.
We use information systems to help manage business processes, collect and
interpret data and communicate internally and externally with employees,
suppliers, consumers, customers and others. Some of these information systems
are managed by third-party service providers. We have backup systems and
business continuity plans in place, and we work with our internal specialists
and these third-party service providers to protect these systems and data from
unauthorized access. Nevertheless, failure of these systems to function as
intended, or penetration of these systems by parties intent on extracting or
corrupting information or otherwise disrupting business processes, could place
us at a competitive disadvantage, result in a loss of revenue, assets or
personal or other sensitive data, litigation and regulatory action, cause damage
to our reputation and that of our brands and result in significant remediation
and other costs. Failure to protect personal data, respect the rights of data
subjects, and adhere to strict data governance and cybersecurity protocols could
subject us to substantial fines and other legal challenges under regulations
such as the EU General Data Protection Regulation. As we are increasingly
relying on digital platforms in our business, and as privacy laws in the
jurisdictions in which we do business become more stringent, the magnitude of
these risks is likely to increase.

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