Philip Morris International Inc. Reports 2021 Second-Quarter Reported Diluted EPS of $1.39—Including Charges for Saudi Arabia Customs Assessments and Exit Costs—and Adjusted Diluted EPS of $1.57, Reflecting Organic Growth of 17.8%

  • Oops!
    Something went wrong.
    Please try again later.
·21 min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.

Revises 2021 Full-Year Reported Diluted EPS Forecast to a Range of $5.76 to $5.86 and Raises Organic Growth to Around 12% to 14%

NEW YORK, July 20, 2021--(BUSINESS WIRE)--Regulatory News:

Philip Morris International Inc. (NYSE:PM) today announces its 2021 second-quarter results. Growth rates presented in this press release on an organic basis reflect currency-neutral underlying results. Adjusted net revenues exclude the impact related to the Saudi Arabia customs assessments. Adjustments, other calculations and reconciliations to the most directly comparable U.S. GAAP measures are included in the schedules to this press release.

2021 SECOND-QUARTER & YEAR-TO-DATE HIGHLIGHTS

2021 Second-Quarter

  • Reported diluted EPS of $1.39, up by 11.2%; up by 7.2%, excluding currency

  • Adjusted diluted EPS of $1.57, up by 21.7%; up by 17.8% on an organic basis

  • Cigarette and heated tobacco unit shipment volume up by 6.1% (reflecting cigarette shipment volume up by 3.2%, and heated tobacco unit shipment volume up by 30.2% to 24.4 billion units)

  • Market share for heated tobacco units in IQOS markets, excluding the U.S., up by 1.4 points to 7.3%

  • Net revenues up by 14.2%; up by 7.9%, excluding currency

  • Adjusted net revenues up by 11.6% on an organic basis

  • Net revenues from smoke-free products accounted for 29.0% of total adjusted net revenues

  • Operating income up by 14.6%; up by 9.9%, excluding currency

  • Adjusted operating income up by 18.7% on an organic basis

  • Adjusted operating income margin of 44.1% up by 2.0 points; up by 2.7 points on an organic basis

  • Total IQOS users at quarter-end estimated at approximately 20.1 million, of which approximately 14.7 million have switched to IQOS and stopped smoking

  • New share repurchase program of up to $7 billion authorized, with target spending of $5 to $7 billion over a three-year period that will commence in the third quarter of 2021

  • Regular quarterly dividend of $1.20 per common share declared, representing an annualized rate of $4.80

2021 Six Months Year-to-Date

  • Reported diluted EPS of $2.93, up by 21.1%; up by 14.9%, excluding currency

  • Adjusted diluted EPS of $3.14, up by 25.6%; up by 19.6% on an organic basis

  • Cigarette and heated tobacco unit shipment volume up by 1.1% (reflecting cigarette shipment volume down by 2.2%, and heated tobacco unit shipment volume up by 30.1% to 46.1 billion units)

  • Market share for heated tobacco units in IQOS markets, excluding the U.S., up by 1.5 points to 7.4%

  • Net revenues up by 10.0%; up by 5.3% excluding currency

  • Adjusted net revenues up by 7.1% on an organic basis

  • Net revenues from smoke-free products accounted for 28.5% of total adjusted net revenues

  • Operating income up by 19.1%; up by 13.4%, excluding currency

  • Adjusted operating income up by 18.6% on an organic basis

  • Adjusted operating income margin of 45.0% up by 4.5 points; up by 4.4 points on an organic basis

"We delivered strong financial performance in the quarter, with adjusted diluted EPS of $1.57 up by 17.8% on an organic basis," said Jacek Olczak, Chief Executive Officer.

"IQOS continued its impressive growth, surpassing an estimated 20 million total users by quarter-end and driving sequential quarterly heated tobacco unit in-market sales volume growth of 8%. We expect this momentum to be bolstered by the launch of IQOS ILUMA, starting next month in Japan."

"We are increasing our full-year adjusted outlook, with organic net revenue growth of 6% to 7% and adjusted diluted EPS growth of 12% to 14% on the same basis, mainly reflecting improved total industry volume. This outlook further supports our recently announced three-year share repurchase program of up to $7 billion."

"In addition, the proposed acquisitions of Fertin Pharma and Vectura Group will reinforce our long-term growth potential in the beyond nicotine space."

2021 FULL-YEAR FORECAST

Full-Year

2021
Forecast

2020

Organic
Growth

Reported Diluted EPS

$5.76

-

$5.86

$ 5.16

Saudi Arabia customs assessments

0.14

Asset impairment and exit costs

0.07

0.08

Fair value adjustment for equity security investments

0.04

Tax items

(0.06

)

Brazil indirect tax credit

(0.05

)

Adjusted Diluted EPS

$5.97

-

$6.07

$ 5.17

Currency

(0.18)

Adjusted Diluted EPS, excluding currency

$5.79

-

$5.89

$ 5.17

12

%

-

14

%

PMI revises its full-year reported diluted EPS forecast to a range of $5.76 to $5.86, at prevailing exchange rates, from a range of $5.93 to $6.03 previously, reflecting:

  • An adverse impact of $0.14 per share, related to a reduction in net revenues for the Saudi Arabia customs assessments communicated previously;

  • Asset impairment and exit costs of $0.07 per share, compared to $0.02 per share previously, mainly due to organizational design optimization;

  • A favorable currency impact of $0.18 at prevailing exchange rates, compared to $0.20 per share, previously; and

  • Better anticipated underlying business performance, primarily driven by an improved estimated industry volume progression (due to cigarettes) and the corresponding impact on PMI shipment volume.

On an organic basis, this forecast represents a projected increase of around 12% to 14% versus adjusted diluted EPS of $5.17 in 2020, as outlined in the table above.

2021 Full-Year Forecast Assumptions

This forecast assumes:

  • A gradual improvement in the general operating environment, with potential volatility around the duration and effects of pandemic-related mobility restrictions across PMI's key markets;

  • Lack of near-term recovery in PMI's duty-free business given the uncertain outlook for global travel, with current dynamics persisting through year end;

  • A limited impact from the current global shortage of semiconductors on the supply of our electronic devices to consumers;

  • An estimated total international industry volume progression, excluding China and the U.S., of approximately -1% to +1%, compared to approximately -3% to flat, previously;

  • A total cigarette and heated tobacco unit shipment volume progression for PMI of approximately flat to +2%, compared to approximately -2% to +1%, previously;

  • Heated tobacco unit shipment volume of 95 to 100 billion units;

  • Adjusted net revenue growth of approximately 6% to 7% on an organic basis, compared to approximately 5% to 7%, previously;

  • An increase in adjusted operating income margin of around 200 basis points on an organic basis;

  • Operating cash flow of around $11 billion at prevailing exchange rates and subject to year-end working capital requirements;

  • Capital expenditures of approximately $0.8 billion;

  • An effective tax rate, excluding discrete tax events, of around 22%;

  • No material impact of any share repurchases;

  • No material impact related to the announced agreements to acquire Fertin Pharma A/S or Vectura Group plc;

  • A second half of 2021 reflecting:

    • The assumption that many of PMI's key markets will have largely emerged from pandemic-related restrictions;

    • Continued robust organic net revenue growth; and

    • Incremental commercial investments, compared to the first half of 2021, of approximately $300 to $400 million.

  • Third-quarter reported diluted EPS in a range of $1.50 to $1.55, including a favorable currency impact, at prevailing exchange rates, of around $0.04 per share.

The foregoing is underpinned by the assumption that, even in the event of prolonged pandemic-related restrictions, there will not be a return to the depressed consumption levels of the second quarter of 2020. This assumption is consistent with the less severe impact on consumption levels observed in the second half of 2020 as COVID-19 spread in a number of markets.

This forecast excludes the impact of any future acquisitions, unanticipated or unquantifiable asset impairment and exit cost charges, future changes in currency exchange rates, further developments pertaining to the judgment in the two Québec Class Action lawsuits and the Companies’ Creditors Arrangement Act (CCAA) protection granted to PMI's Canadian subsidiary, Rothmans, Benson & Hedges, Inc. (RBH), any unusual events, any intensification of the global shortage of semiconductors and the related impact on the supply of our electronic devices, and any COVID-19-related developments different from the assumptions set forth in the company's forecast.

Factors described in the Forward-Looking and Cautionary Statements section of this release represent continuing risks to these projections.

Saudi Arabia Customs Assessments

As previously communicated, in June 2021, the Customs Appeal Committee in Riyadh notified our distributors in Saudi Arabia of its decisions to largely reject their challenges of the Saudi Arabia Customs General Authority assessments described in our Form 10-Q that was filed with the U.S. Securities and Exchange Commission for the quarter ended March 31, 2021.

On the basis of these decisions and in line with arrangements with the distributors, PMI recorded a pre-tax charge of $246 million in the second quarter of 2021, resulting in a $0.14 per share adverse impact on reported diluted EPS. In accordance with U.S. GAAP, the charge was recorded as a reduction of net revenues on the consolidated statement of earnings. These amounts are excluded from PMI's adjusted results.

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 ample liquidity through cash on hand, the ongoing cash generation of its business, and its access to the commercial paper and debt markets.

Beyond Nicotine

In February 2021, PMI announced its ambition to generate at least $1 billion in annual net revenues from "Beyond Nicotine" products by 2025, leveraging its expertise—in life sciences, inhalation technology, natural ingredients, commercial deployment and ability to change consumer behavior—to explore, develop and grow new adjacent areas to deliver additional growth. The key focus areas identified by PMI include botanical well-being and respiratory drug delivery.

On July 1, 2021, PMI announced an agreement to acquire Fertin Pharma A/S, a leading developer and manufacturer of innovative pharmaceutical and well-being products based on oral and intra-oral delivery systems, for an enterprise value of DKK 5.1 billion (approximately $820 million based on then-prevailing exchange rates). PMI will fund the transaction with existing cash and expects it to close in the fourth quarter of 2021, subject to approval by the appropriate regulatory authorities.

On July 9, 2021, PMI announced it had agreed with the board of Vectura Group plc (Vectura) (LSE:VEC) on the terms of an all-cash, recommended offer to acquire Vectura for an enterprise value of GBP 852 million (calculated as per Appendix II of the Rule 2.7 offer announcement; approximately $1.2 billion based on then-prevailing exchange rates). Vectura is a provider of innovative inhaled drug delivery solutions that enable partners to bring their medicines to patients. The company has thirteen key inhaled products marketed by major global pharmaceutical partners, as well as a diverse portfolio of partnerships for drugs in clinical development. PMI will fund the transaction with existing cash and expects it to close in the second half of 2021, subject to a Vectura shareholder vote and approval by the appropriate regulatory authorities.

Conference Call

A conference call, hosted by Emmanuel Babeau, Chief Financial Officer, will be webcast at 9:00 a.m., Eastern Time, on July 20, 2021. Access is at www.pmi.com/2021Q2earnings.

CONSOLIDATED SHIPMENT VOLUME & MARKET SHARE

PMI Shipment Volume by Region

Second-Quarter

Six Months Year-to-Date

(million units)

2021

2020

Change

2021

2020

Change

Cigarettes

European Union

41,504

40,317

2.9%

78,273

80,963

(3.3)%

Eastern Europe

22,785

23,657

(3.7)%

42,751

45,076

(5.2)%

Middle East & Africa

30,347

27,188

11.6%

57,989

57,184

1.4%

South & Southeast Asia

35,321

33,346

5.9%

70,209

70,941

(1.0)%

East Asia & Australia

10,968

12,071

(9.1)%

22,330

24,370

(8.4)%

Latin America & Canada

15,213

14,780

2.9%

30,098

29,843

0.9%

Total PMI

156,138

151,359

3.2%

301,650

308,377

(2.2)%

Heated Tobacco Units

European Union

6,921

4,227

63.7%

13,347

8,888

50.2%

Eastern Europe

6,840

5,126

33.4%

12,475

9,492

31.4%

Middle East & Africa

512

185

+100%

908

655

38.6%

South & Southeast Asia

39

—%

72

—%

East Asia & Australia

9,904

9,076

9.1%

19,043

16,198

17.6%

Latin America & Canada

140

94

48.9%

245

202

21.3%

Total PMI

24,356

18,708

30.2%

46,090

35,435

30.1%

Cigarettes and Heated Tobacco Units

European Union

48,425

44,544

8.7%

91,620

89,851

2.0%

Eastern Europe

29,625

28,783

2.9%

55,226

54,568

1.2%

Middle East & Africa

30,859

27,373

12.7%

58,897

57,839

1.8%

South & Southeast Asia

35,360

33,346

6.0%

70,281

70,941

(0.9)%

East Asia & Australia

20,872

21,147

(1.3)%

41,373

40,568

2.0%

Latin America & Canada

15,353

14,874

3.2%

30,343

30,045

1.0%

Total PMI

180,494

170,067

6.1%

347,740

343,812

1.1%

Second-Quarter

PMI's total shipment volume increased by 6.1%, driven by:

  • the EU, reflecting higher heated tobacco unit shipment volume across the Region, notably in Italy, and higher cigarette shipment volume, notably in Italy and Spain, partly offset by Germany;

  • Eastern Europe, reflecting higher heated tobacco unit shipment volume across the Region, primarily in Russia and Ukraine, partly offset by lower cigarette shipment volume, notably in Russia;

  • Middle East & Africa, mainly reflecting higher cigarette shipment volume, primarily in North Africa (particularly Egypt), PMI Duty Free and Turkey, partly offset by the GCC (predominantly Saudi Arabia);

  • South & Southeast Asia, primarily reflecting higher cigarette shipment volume, mainly in Indonesia and Thailand, partly offset by the Philippines; and

  • Latin America & Canada, mainly reflecting higher cigarette shipment volume, notably in Mexico, partly offset by Argentina;

partly offset by

  • East Asia & Australia, reflecting lower cigarette shipment volume, mainly in Japan, partly offset by higher heated tobacco unit shipment volume, primarily in Japan.

PMI's cigarette shipment volume increase in the quarter includes a favorable comparison versus the second quarter of 2020, when pandemic-related disruption across many key markets was at its peak.

Impact of Inventory Movements

Excluding the net favorable impact of estimated distributor inventory movements of approximately 3.2 billion units, PMI’s total in-market sales increased by 4.2%, driven by a 27.6% increase in heated tobacco units and a 1.5% increase in cigarettes.

The net favorable impact of approximately 3.2 billion units reflected:

  • A net favorable impact of 2.5 billion cigarettes, mainly driven by inventory movements in the second quarter of 2020 related to lower shipments to distributors due to the pandemic; and

  • A net favorable impact of 0.7 billion heated tobacco units, primarily reflecting the need to maintain inventory durations for the growing category.

PMI's total heated tobacco unit in-market sales volume in the quarter was 23.0 billion units, reflecting sequential growth of 8.0% compared to the first quarter of 2021. The company believes that the current level of heated tobacco unit inventory is appropriate based on anticipated sales.

Six Months Year-to-Date

PMI's total shipment volume increased by 1.1%, driven by:

  • the EU, reflecting higher heated tobacco unit shipment volume across the Region, particularly in Italy and Poland, partly offset by lower cigarette shipment volume, notably in the Czech Republic, France and Germany, partly offset by Italy and Spain;

  • Eastern Europe, reflecting higher heated tobacco unit shipment volume, notably in Russia and Ukraine, partly offset by lower cigarette shipment volume, mainly in Russia and Ukraine;

  • Middle East & Africa, reflecting higher cigarette shipment volume (primarily in Turkey, partly offset by the GCC, North Africa and PMI Duty Free), as well as higher heated tobacco unit shipment volume (driven notably by the GCC and Lebanon, partly offset by PMI Duty Free);

  • East Asia & Australia, reflecting higher heated tobacco unit shipment volume driven by Japan, partly offset by lower cigarette shipment volume, predominantly in Japan and South Korea; and

  • Latin America & Canada, reflecting higher cigarette shipment volume, primarily in Brazil and Mexico, partially offset by Argentina;

partly offset by

  • South & Southeast Asia, reflecting lower cigarette shipment volume, primarily in the Philippines, partially offset by Indonesia, Pakistan and Thailand.

Impact of Inventory Movements

The net impact of estimated distributor inventory movements for the first half of the year was immaterial to PMI's total shipment volume performance. PMI’s total in-market sales volume increased by 0.5%.

PMI Shipment Volume by Brand

PMI Shipment Volume by Brand

Second-Quarter

Six Months Year-to-Date

(million units)

2021

2020

Change

2021

2020

Change

Cigarettes

Marlboro

58,466

54,812

6.7

%

112,148

114,057

(1.7

)%

L&M

22,096

22,385

(1.3

)%

42,464

45,025

(5.7

)%

Chesterfield

14,269

12,604

13.2

%

27,027

25,507

6.0

%

Philip Morris

10,590

11,106

(4.6

)%

20,774

22,569

(7.9

)%

Parliament

10,023

8,462

18.4

%

18,980

16,035

18.4

%

Sampoerna A

9,186

7,254

26.6

%

17,884

15,802

13.2

%

Dji Sam Soe

5,422

5,797

(6.5

)%

11,126

11,972

(7.1

)%

Bond Street

4,630

6,428

(28.0

)%

9,158

12,041

(23.9

)%

Lark

3,882

4,189

(7.3

)%

7,781

8,213

(5.3

)%

Sampoerna Hijau

2,029

1,566

29.5

%

4,228

3,043

38.9

%

Others

15,545

16,756

(7.2

)%

30,080

34,113

(11.8

)%

Total Cigarettes

156,138

151,359

3.2

%

301,650

308,377

(2.2

)%

Heated Tobacco Units

24,356

18,708

30.2

%

46,090

35,435

30.1

%

Total PMI

180,494

170,067

6.1

%

347,740

343,812

1.1

%

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

Second-Quarter

PMI's cigarette shipment volume of the following brands increased:

  • Marlboro, mainly driven by Italy, PMI Duty Free, Spain and Turkey, partly offset by the GCC and Japan;

  • Chesterfield, primarily driven by Russia, partly offset by Saudi Arabia;

  • Parliament, mainly driven by Saudi Arabia and Turkey;

  • Sampoerna A in Indonesia, primarily driven by premium A Mild; and

  • Sampoerna Hijau in Indonesia.

PMI's cigarette shipment volume of the following brands decreased:

  • L&M, notably due to Germany, Saudi Arabia and Turkey, partly offset by North Africa, Spain and Thailand;

  • Philip Morris, primarily due to Russia;

  • Dji Sam Soe in Indonesia, mainly due to Dji Sam Soe Magnum Mild;

  • Bond Street, primarily due to Russia;

  • Lark, mainly due to Japan; and

  • "Others," primarily due to: mid-price Fortune (Philippines) and Sampoerna U (Indonesia).

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

International Share of Market

PMI's total international market share (excluding China and the U.S.), defined as PMI's cigarette and heated tobacco unit sales volume as a percentage of total industry cigarette and heated tobacco unit sales volume, decreased by 0.8 points to 27.3%, reflecting:

  • Total international market share for cigarettes of 23.8%, down by 1.3 points; and

  • Total international market share for heated tobacco units of 3.5%, up by 0.5 points.

PMI's total international cigarette sales volume as a percentage of total industry cigarette sales volume was down by 1.1 points to 24.9%, mainly reflecting lower cigarette market share and/or an unfavorable geographic mix impact, notably in France, Germany, Japan, the Philippines and Russia, partly offset by Indonesia, PMI Duty Free and Turkey.

Six Months Year-to-Date

PMI's cigarette shipment volume of the following brands increased:

  • Chesterfield, mainly due to Brazil, the Philippines and Russia, partly offset by Saudi Arabia;

  • Parliament, primarily due to Russia, Saudi Arabia and Turkey, partly offset by Japan;

  • Sampoerna A in Indonesia, mainly due to premium A Mild; and

  • Sampoerna Hijau in Indonesia.

PMI's cigarette shipment volume of the following brands decreased:

  • Marlboro, mainly due to France, Japan, Kuwait, the Philippines and PMI Duty Free, partly offset by Mexico and Turkey;

  • L&M, notably due to Egypt, Germany, Poland and Turkey, partly offset by Spain and Thailand;

  • Philip Morris, primarily due to Indonesia, Italy and Russia, partly offset by Japan;

  • Dji Sam Soe in Indonesia, mainly due to Dji Sam Soe Magnum Mild;

  • Bond Street, mainly due to Russia and Ukraine;

  • Lark, primarily due to Japan; and

  • "Others," notably due to: mid-price Fortune (Philippines), Hope (Philippines) and Sampoerna U (Indonesia); and low-price Jackpot (Philippines); partly offset by low-price Diana (Italy) and Morven (Pakistan).

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

International Share of Market

PMI's total international market share (excluding China and the U.S.) decreased by 0.8 points to 27.0%, reflecting:

  • Total international market share for cigarettes of 23.5%, down by 1.4 points; and

  • Total international market share for heated tobacco units of 3.5%, up by 0.6 points.

PMI's total international cigarette sales volume as a percentage of total industry cigarette sales volume was down by 1.2 points to 24.6%, mainly reflecting lower cigarette market share and/or an unfavorable geographic mix impact, notably in Japan, the Philippines and Russia, partly offset by Turkey.

CONSOLIDATED FINANCIAL SUMMARY

Second-Quarter

Financial Summary -

Quarters Ended June 30,

Change

Fav./(Unfav.)

Variance

Fav./(Unfav.)

(in millions)

2021

2020

Total

Excl.

Curr.

Total

Cur-

rency

Price

Vol/

Mix

Cost/

Other

Net Revenues

$

7,594

$

6,651

14.2

%

7.9

%

943

420

226

575

(278

)

Saudi Arabia Customs Assessments

(246

)

%

%

(246

)

(246

)

Adjusted Net Revenues

$

7,840

$

6,651

17.9

%

11.6

%

1,189

420

226

575

(32

)

Net Revenues (1)

$

7,594

$

6,651

14.2

%

7.9

%

943

420

226

575

(278

)

Cost of Sales

(2,353

)

(2,179

)

(8.0

)%

(1.9

)%

(174

)

(133

)

(147

)

106

Marketing, Administration and Research Costs

(2,093

)

(1,722

)

(21.5

)%

(12.3

)%

(371

)

(159

)

(212

)

Amortization of Intangibles

(19

)

(19

)

%

5.3

%

(1

)

1

Operating Income

$

3,129

$

2,731

14.6

%

9.9

%

398

127

226

428

(383

)

Asset Impairment & Exit Costs (2)

(79

)

(71

)

(11.3

)%

(11.3

)%

(8

)

(8

)

Saudi Arabia Customs Assessments (3)

(246

)

%

%

(246

)

(246

)

Adjusted Operating Income

$

3,454

$

2,802

23.3

%

18.7

%

652

127

226

428

(129

)

Adjusted Operating Income Margin

44.1

%

42.1

%

2.0

pp

2.7

pp

(1) Cost/Other variance includes a reduction in net revenues of $246 million in 2021 related to the Saudi Arabia customs assessments.

(2) Included in Marketing, Administration and Research Costs above.

(3) Included in Net Revenues above.

Net revenues increased by 7.9%, excluding currency, mainly reflecting: favorable volume/mix, primarily driven by higher heated tobacco unit volume (notably in the EU, particularly Italy and Poland, as well as Japan, Russia and Ukraine) and higher cigarette volume (mainly in Indonesia, Italy, PMI Duty Free and Spain, partly offset by the GCC, Germany, Japan and the Philippines); and a favorable pricing variance (notably driven by Germany, Japan, the Philippines, Russia and Turkey, partly offset by Indonesia); partly offset by the unfavorable impact of the Saudi Arabia customs assessments of $246 million, shown in "Cost/Other". Adjusted net revenues increased by 11.6% on an organic basis, as detailed above and in Schedule 5.

Operating income increased by 9.9%, excluding currency, primarily reflecting: favorable volume/mix, primarily driven by higher heated tobacco unit volume (reflecting the same geographies as for net revenues noted above); a favorable pricing variance; and lower manufacturing costs (driven by productivity gains related to reduced-risk and combustible products); partly offset by the unfavorable impact of the Saudi Arabia customs assessments (as noted above for net revenues); and higher marketing, administration and research costs.

Adjusted operating income increased by 18.7% on an organic basis. Adjusted operating income margin increased by 2.7 points on the same basis, as detailed in Schedule 8.

Six Months Year-to-Date

Financial Summary -

Six Months Ended June 30,

Change

Fav./(Unfav.)

Variance

Fav./(Unfav.)

2021

2020

Total

Excl.

Curr.

Total

Cur-

rency

Price

Vol/

Mix

Cost/

Other

(in millions)

Net Revenues

$

15,179

$

13,804

10.0

%

5.3

%

1,375

645

432

544

(246

)

Saudi Arabia Customs Assessments

(246

)

%

%

(246

)

(246

)

Adjusted Net Revenues

$

15,425

$

13,804

11.7

%

7.1

%

1,621

645

432

544

Net Revenues (1)

$

15,179

$

13,804

10.0

%

5.3

%

1,375

...

645

432

544

(246

)

Cost of Sales

(4,627

)

(4,581

)

(1.0

)%

3.8

%

(46

)

(220

)

(118

)

292

Marketing, Administration and Research Costs

(3,942

...

)

(3,666

)

(7.5

)%

(4.5

)%

(276

)

(110

)

(166

)

Amortization of Intangibles

(37

)

(37

)

%

2.7

%

(1

)

1

Operating Income

$

6,573

$

5,520

19.1

%

13.4

%

1,053

314

432

426

(119

)

Asset Impairment & Exit Costs (2)

(127

)

(71

)

(78.9

)%

(78.9

)%

(56

)

(56

)

Saudi Arabia Customs Assessments (3)

(246

)

%

%

(246

)

(246

)

Adjusted Operating Income

$

6,946

$

5,591

24.2

%

18.6

%

1,355

314

432

426

183

Adjusted Operating Income Margin

45.0

%

40.5

%

4.5

pp

4.4

pp

(1) Cost/Other variance includes a reduction in net revenues of $246 million in 2021 related to the Saudi Arabia customs assessments.

(2) Included in Marketing, Administration and Research Costs above.

(3) Included in Net Revenues above.

Net revenues increased by 5.3%, excluding currency, mainly reflecting: favorable volume/mix, primarily driven by higher heated tobacco unit volume (notably in the EU, particularly Germany, Italy and Poland, as well as Japan, Russia and Ukraine), partly offset by lower cigarette volume (mainly in the EU Region, notably Germany, as well as Japan, Kuwait, North Africa, the Philippines and PMI Duty Free, partially offset by Indonesia and Turkey); and a favorable pricing variance (notably driven by Germany, Japan, North Africa, the Philippines, Russia and Turkey, partly offset by Indonesia and Poland); partially offset by the unfavorable impact of the Saudi Arabia customs assessments of $246 million, shown in "Cost/Other". Adjusted net revenues increased by 7.1% on an organic basis, as detailed above and in Schedule 5.

Operating income increased by 13.4%, excluding currency, primarily reflecting: a favorable pricing variance; favorable volume/mix, mainly driven by the same factors as for net revenues noted above; and lower manufacturing costs (driven by productivity gains related to reduced-risk and combustible products); partly offset by the unfavorable impact of the Saudi Arabia customs assessments (as noted above for net revenues); and higher marketing, administration and research costs, including higher asset impairment and exit costs (mainly related to organizational design optimization, as well as product distribution restructuring in South Korea).

Adjusted operating income increased by 18.6% on an organic basis. Adjusted operating income margin increased by 4.4 points on the same basis, as detailed in Schedule 8.

EUROPEAN UNION REGION

Second-Quarter

Financial Summary -

Quarters Ended June 30,

Change

Fav./(Unfav.)

Variance

Fav./(Unfav.)

2021

2020

Total

Excl.

Curr.

Total

Cur-

rency

Price

Vol/

Mix

Cost/

Other

(in millions)

Net Revenues

$

3,149

$

2,475

27.2

%

15.6

%

674

288

35

351

Operating Income

$

1,641

$

1,178

39.3

%

24.2

%

463

178

35

304

(54

)

Asset Impairment & Exit Costs (1)

(35

)

(27

)

(29.6

)%

(29.6

)%

(8

)

(8

)

Adjusted Operating Income

$

1,676

$

1,205

39.1

%

24.3

%

471

178

35

304

(46

)

Adjusted Operating Income Margin

53.2

%

48.7

%

4.5

pp

3.7

pp

(1) Included in marketing, administration and research costs at the consolidated operating income level.

Net revenues increased by 15.6% on an organic basis, reflecting: favorable volume/mix, mainly driven by higher heated tobacco unit volume (notably in Italy and Poland), partly offset by unfavorable cigarette volume/mix (notably unfavorable volume/mix in Germany, partly offset by higher volume in Italy and Spain); and a favorable pricing variance (driven by higher combustible pricing, particularly in Germany).

Operating income increased by 24.2%, excluding currency, primarily reflecting: favorable volume/mix, driven by the same factors as for net revenues noted above; lower manufacturing costs (driven mainly by combustible products); and a favorable pricing variance; partly offset by higher marketing, administration and research costs.

Adjusted operating income increased by 24.3% on an organic basis. Adjusted operating income margin increased by 3.7 points on the same basis, as detailed in Schedule 8.

Six Months Year-to-Date

Financial Summary -

Six Months Ended June 30,

Change

Fav./(Unfav.)

Variance

Fav./(Unfav.)

2021

2020

Total

Excl.

Curr.

Total

Cur-

rency

Price

Vol/

Mix

Cost/

Other

(in millions)

Net Revenues

$

6,058

$

5,010

20.9

%

10.5

%

1,048

523

72

453

Operating Income

$

3,131

$

2,336

34.0

%

19.7

%

795

334

72

405

(16

)

Asset Impairment & Exit Costs (1)

(44

)

(27

)

(63.0

)%

(63.0

)%

(17

)

(17

)

Adjusted Operating Income

$

3,175

$

2,363

34.4

%

20.2

%

812

334

72

405

1

Adjusted Operating Income Margin

52.4

%

47.2

%

5.2

pp

4.1

pp

(1) Included in marketing, administration and research costs at the consolidated operating income level.

Net revenues increased by 10.5% on an organic basis, reflecting: favorable volume/mix, mainly driven by higher heated tobacco unit volume (notably in Germany, Italy and Poland), partly offset by lower cigarette volume (notably in the Czech Republic, France and Germany) and unfavorable cigarette mix (particularly in Germany); and a favorable pricing variance (driven by higher combustible pricing, primarily in Germany, partly offset by Poland).

Operating income increased by 19.7%, excluding currency, primarily reflecting: favorable volume/mix, driven by the same factors as for net revenues noted above; lower manufacturing costs (driven by combustible and reduced-risk products); and a favorable pricing variance; partly offset by higher marketing, administration and research costs.

Adjusted operating income increased by 20.2% on an organic basis. Adjusted operating income margin increased by 4.1 points on the same basis, as detailed in Schedule 8.

Total Market, PMI Shipment & Market Share Commentaries

European Union Key Data

Second-Quarter

Six Months Year-to-Date

Change

Change

2021

2020

% / pp

2021

2020

% / pp

Total Market (billion units)

121.6

116.1

4.8

%

228.1

225.5

1.1

%

PMI Shipment Volume (million units)

Cigarettes

41,504

40,317

2.9

%

78,273

80,963

(3.3

)%

Heated Tobacco Units

6,921

4,227

63.7

%

13,347

8,888

50.2

%

Total EU

48,425

44,544

8.7

%

91,620

89,851

2.0

%

PMI Market Share

Marlboro

16.7

%

17.7

%

(1.0

)

16.8

%

17.7

%

(0.9

)

L&M

5.7

%

6.5

%

(0.8

)

5.7

%

6.5

%

(0.8

)

Chesterfield

5.4

%

5.5

%

(0.1

)

5.4

%

5.6

%

(0.2

)

Philip Morris

2.2

%

2.6

%

(0.4

)

2.2

%

2.6

%

(0.4

)

HEETS

5.5

%

3.9

%

1.6

5.6

%

3.9

%

1.7

Others

3.1

%

3.0

%

0.1

3.2

%

3.0

%

0.2

Total EU

38.6

%

39.2

%

(0.6

)

38.9

%

39.3

%

(0.4

)

Note: HEETS includes HEETS Dimensions.

Second-Quarter

The estimated total market in the EU increased by 4.8% to 121.6 billion units, mainly driven by:

  • Denmark, up by +100%. Excluding the net favorable impact of estimated trade inventory movements, the total estimated market was down by 16.9%, primarily reflecting the impact of excise tax-driven price increases;

  • Italy, up by 9.3%, mainly reflecting the impact on adult smoker average daily consumption of the easing of pandemic-related measures;

  • Poland, up by 17.6%, primarily reflecting the impact on adult smoker average daily consumption and border sales of the easing of pandemic-related measures, as well as a lower prevalence of illicit trade; and

  • Spain, up by 8.9%, or by 5.2% excluding the net favorable impact of estimated trade inventory movements, mainly reflecting the impact on in-bound tourism and border sales of the easing of pandemic-related measures;

partly offset by

  • Germany, down by 7.2%, or by 1.9% excluding the net unfavorable impact of estimated trade inventory movements, primarily due to the impact of price increases.

PMI's total shipment volume increased by 8.7% to 48.4 billion units, primarily driven by:

  • Italy, up by 25.8%, or by 11.4% excluding the net favorable impact of estimated distributor inventory movements, mainly reflecting the higher total market and a higher market share driven by heated tobacco units; and

  • Spain, up by 51.5%, or by 8.3% excluding the net favorable impact of estimated distributor inventory movements, mainly reflecting the higher total market;

partly offset by

  • Germany, down by 7.4%, mainly reflecting the lower total market.

Excluding the net favorable impact of estimated distributor inventory movements, PMI's total in-market sales volume increased by 3.2%.

Six Months Year-to-Date

The estimated total market in the EU increased by 1.1% to 228.1 billion units, primarily driven by:

  • Italy, up by 5.4%, mainly reflecting the same factor as in the quarter; and

  • Poland, up by 8.3%, primarily reflecting the same factors as in the quarter;

partly offset by

  • Czech Republic, down by 10.8%, mainly reflecting the impact, in the first quarter of 2021, of lower border sales due to pandemic-related lockdown measures; and

  • France, down by 5.1%, primarily reflecting the impact of excise tax-driven price increases and higher cross-border (non-domestic) purchases due to the easing of pandemic-related measures.

PMI's total shipment volume increased by 2.0% to 91.6 billion units, primarily driven by:

  • Italy, up by 14.4%, or by 7.3% excluding the net favorable impact of estimated distributor inventory movements, mainly reflecting the same factors as in the quarter; and

  • Spain, up by 7.0%, or by 0.5% excluding the net favorable impact of estimated distributor inventory movements, primarily reflecting the same factor as in the quarter;

partly offset by

  • Czech Republic, down by 13.8%, mainly reflecting the lower total market and a lower market share (due to cigarettes, partly offset by heated tobacco units); and

  • France, down by 7.1%, mainly reflecting the lower total market and a lower market share of cigarettes.

Excluding the net favorable impact of estimated distributor inventory movements, PMI's total in-market sales volume increased by 0.2%.

EASTERN EUROPE REGION

Second-Quarter

Financial Summary -

Quarters Ended June 30,

Change

Fav./(Unfav.)

Variance

Fav./(Unfav.)

(in millions)

2021

2020

Total

Excl.

Curr.

Total

Cur-

rency

Price

Vol/

Mix

Cost/

Other

Net Revenues

$

895

$

783

14.3

%

12.5

%

112

14

22

76

Operating Income

$

314

$

266

18.0

%

32.7

%

48

(39

)

22

56

9

Asset Impairment & Exit Costs (1)

(7

)

(7

)

%

%

Adjusted Operating Income

$

321

$

273

17.6

%

31.9

%

48

(39

)

22

56

9

Adjusted Operating Income Margin

35.9

%

34.9

%

1.0

pp

6.0

pp

(1) Included in marketing, administration and research costs at the consolidated operating income level.

Net revenues increased by 12.5% on an organic basis, reflecting: favorable volume/mix, driven by higher heated tobacco unit volume (primarily in Russia and Ukraine), partly offset by unfavorable cigarette volume/mix (primarily in Russia); and a favorable pricing variance, mainly driven by higher combustible pricing (primarily in Kazakhstan, Russia and Ukraine).

Operating income increased by 32.7%, excluding currency, primarily reflecting: favorable volume/mix, driven by the same factors as for net revenues noted above; a favorable pricing variance; and lower manufacturing costs (primarily related to reduced-risk products, mainly in Russia).

Adjusted operating income increased by 31.9% on an organic basis. Adjusted operating income margin increased by 6.0 points on the same basis, as detailed in Schedule 8.

Six Months Year-to-Date

Financial Summary -

Six Months Ended June 30,

Change

Fav./(Unfav.)

Variance

Fav./(Unfav.)

2021

2020

Total

Excl.

Curr.

Total

Cur-

rency

Price

Vol/

Mix

Cost/

Other

(in millions)

Net Revenues

$

1,691

$

1,571

7.6

%

11.5

%

120

(61

)

46

135

Operating Income

$

575

$

365

57.5

%

66.3

%

210

(32

)

46

113

83

Asset Impairment & Exit Costs (1)

(9

)

(7

)

(28.6

)%

(28.6

)%

(2

)

(2

)

Adjusted Operating Income

$

584

$

372

57.0

%

65.6

%

212

(32

)

46

113

85

Adjusted Operating Income Margin

34.5

%

23.7

%

10.8

pp

11.5

pp

(1) Included in marketing, administration and research costs at the consolidated operating income level.

Net revenues increased by 11.5% on an organic basis, reflecting: favorable volume/mix, driven by higher heated tobacco unit volume (mainly in Russia and Ukraine), partly offset by unfavorable cigarette volume (primarily in Russia and Ukraine); and a favorable pricing variance, mainly driven by higher combustible pricing (primarily in Kazakhstan, Russia and Ukraine).

Operating income increased by 66.3%, excluding currency, primarily reflecting: favorable volume/mix, driven by the same factors as for net revenues noted above; lower manufacturing costs (mainly related to reduced-risk products, primarily in Russia); a favorable pricing variance; and lower marketing, administration and research costs.

Adjusted operating income increased by 65.6% on an organic basis. Adjusted operating income margin increased by 11.5 points on the same basis, as detailed in Schedule 8.

Total Market, PMI Shipment & Market Share Commentaries

PMI Shipment Volume

Second-Quarter

Six Months Year-to-Date

(million units)

2021

2020

Change

2021

2020

Change

Cigarettes

22,785

23,657

(3.7)%

42,751

45,076

(5.2)%

Heated Tobacco Units

6,840

5,126

33.4%

12,475

9,492

31.4%

Total Eastern Europe

29,625

28,783

2.9%

55,226

54,568

1.2%

Second-Quarter

The estimated total market in Eastern Europe decreased, mainly due to:

  • Russia, down by 2.7%, primarily reflecting the impact of excise tax-driven price increases, partly offset by the impact on adult smoker average daily consumption of the easing of pandemic-related measures; and

  • Ukraine, down by 3.7%, mainly reflecting the impact of excise tax-driven price increases and a higher prevalence of illicit trade, partly offset by the impact on adult smoker average daily consumption of the easing of pandemic-related measures.

PMI's total shipment volume increased by 2.9% to 29.6 billion units, notably driven by:

  • Ukraine, up by 8.8%, or by 5.0% excluding the net favorable impact of estimated distributor inventory movements, mainly reflecting a higher market share driven by heated tobacco units, partially offset by the lower total market;

partly offset by

  • Russia, down by 1.7%. Excluding the net favorable impact of estimated distributor inventory movements (primarily due to cigarettes), PMI's in-market sales decreased by 6.0%, mainly reflecting a lower market share due to cigarettes and the lower total market.

Excluding the net favorable impact of estimated distributor inventory movements, PMI's total in-market sales volume decreased by 0.8%.

Six Months Year-to-Date

The estimated total market in Eastern Europe decreased, notably due to:

  • Ukraine, down by 9.5%, mainly reflecting the same factors as in the quarter;

partly offset by

  • Russia, up by 0.6%. Excluding the net favorable impact of estimated trade inventory movements, the total estimated market was down by 1.0%, primarily reflecting: the impact of excise tax-driven price increases, partly offset by the impact on adult smoker average daily consumption of the easing of pandemic-related measures, as well as a lower estimated prevalence of illicit trade.

PMI's total shipment volume increased by 1.2% to 55.2 billion units, mainly driven by:

  • Russia, up by 1.0%. Excluding the net favorable impact of estimated distributor inventory movements, PMI’s total in-market sales volume was down by 3.1%, primarily reflecting a lower market share due to cigarettes.

Excluding the net favorable impact of estimated distributor inventory movements, PMI's total in-market sales volume decreased by 1.2%.

MIDDLE EAST & AFRICA REGION

Second-Quarter

Financial Summary -

Quarters Ended June 30,

Change

Fav./(Unfav.)

Variance

Fav./(Unfav.)

2021

2020

Total

Excl.

Curr.

Total

Cur-

rency

Price

Vol/

Mix

Cost/

Other

(in millions)

Net Revenues

$

560

$

704

(20.5

)%

(18.2

)%

(144

)

(16

)

50

100

(278

)

Saudi Arabia Customs Assessments

(246

)

%

%

(246

)

(246

)

Adjusted Net Revenues

$

806

$

704

14.5

%

16.8

%

102

(16

)

50

100

(32

)

Net Revenues (1)

$

560

$

704

(20.5

)%

(18.2

)%

(144

)

(16

)

50

100

(278

)

Operating Income

$

16

$

237

(93.2

)%

(79.7

)%

(221

)

(32

)

50

65

(304

)

Asset Impairment & Exit Costs (2)

(8

)

(9

)

11.1

%

11.1

%

1

1

Saudi Arabia Customs Assessments (3)

(246

)

%

%

(246

)

(246

)

Adjusted Operating Income

$

270

$

246

9.8

%

22.8

%

24

(32

)

50

65

(59

)

Adjusted Operating Income Margin

33.5

%

34.9

%

(1.4

)pp

1.8

pp

(1) Cost/Other variance includes a reduction in net revenues of $246 million in 2021 related to the Saudi Arabia customs assessments.

(2) Included in Marketing, Administration and Research Costs above.

(3) Included in Net Revenues above.

Net revenues decreased by 18.2%, excluding currency, predominantly due to the unfavorable impact of the Saudi Arabia customs assessments of $246 million, shown in "Cost/Other."

Adjusted net revenues increased by 16.8% on an organic basis, as detailed above and in Schedule 5, primarily reflecting: favorable volume/mix, mainly driven by higher cigarette volume (primarily in PMI Duty Free, South Africa and Turkey, partly offset by the GCC), as well as higher heated tobacco unit volume (mainly in PMI Duty Free); and a favorable pricing variance (driven by combustible pricing, mainly in Turkey); partly offset by lower fees for certain distribution rights billed to customers in certain markets, shown in "Cost/Other."

Operating income decreased by 79.7%, excluding currency, predominantly due to the unfavorable impact of the Saudi Arabia customs assessments, as noted above for net revenues.

Adjusted operating income increased by 22.8% on an organic basis, mainly reflecting: favorable volume/mix, due to the same factors as for net revenues noted above; and a favorable pricing variance; partly offset by higher marketing, administration and research costs; and lower fees for certain distribution rights, as noted above for net revenues.

Adjusted operating income margin increased by 1.8 points on an organic basis, as detailed in Schedule 8.

Six Months Year-to-Date

Financial Summary -

Six Months Ended June 30,

Change

Fav./(Unfav.)

Variance

Fav./(Unfav.)

2021

2020

Total

Excl.

Curr.

Total

Cur-

rency

Price

Vol/

Mix

Cost/

Other

(in millions)

Net Revenues

$

1,361

$

1,580

(13.9

)%

(11.4

)%

(219

)

(39

)

127

(59

)

(248

)

Saudi Arabia Customs Assessments

(246

)

%

%

(246

)

(246

)

Adjusted Net Revenues

$

1,607

$

1,580

1.7

%

4.2

%

(27

)

(39

)

127

(59

)

(2

)

Net Revenues (1)

$

1,361

$

1,580

(13.9

)%

(11.4

)%

(219

)

(39

)

127

(59

)

(248

)

Operating Income

$

351

$

558

(37.1

)%

(29.0

)%

(207

)

(45

)

127

(65

)

(224

)

Asset Impairment & Exit Costs (2)

(10

)

(9

)

(11.1

)%

(11.1

)%

(1

)

(1

)

Saudi Arabia Customs Assessments (3)

(246

)

%

%

(246

)

(246

)

Adjusted Operating Income

$

607

$

567

7.1

%

15.0

%

40

(45

)

127

(65

)

23

Adjusted Operating Income Margin

37.8

%

35.9

%

1.9

pp

3.7

pp

(1) Cost/Other variance includes a reduction in net revenues of $246 million in 2021 related to the Saudi Arabia customs assessments.

(2) Included in Marketing, Administration and Research Costs above.

(3) Included in Net Revenues above.

Net revenues decreased by 11.4%, excluding currency, predominantly due to the unfavorable impact of the Saudi Arabia customs assessments of $246 million, shown in "Cost/Other."

Adjusted net revenues increased by 4.2% on an organic basis, as detailed above and in Schedule 5, primarily reflecting: a favorable pricing variance, driven by combustible pricing (mainly in Egypt and Turkey); partly offset by unfavorable volume/mix, mainly due to lower cigarette volume (primarily in Kuwait, North Africa and PMI Duty Free, partially offset by South Africa and Turkey), partly offset by favorable cigarette mix (primarily in PMI Duty Free, Saudi Arabia and Turkey).

Operating income decreased by 29.0%, excluding currency, predominantly due to the unfavorable impact of the Saudi Arabia customs assessments, as noted above for net revenues.

Adjusted operating income increased by 15.0% on an organic basis, mainly reflecting: a favorable pricing variance; and lower manufacturing costs; partly offset by unfavorable volume/mix, due to the same factors as for net revenues noted above.

Adjusted operating income margin increased by 3.7 points on an organic basis, as detailed in Schedule 8.

Total Market, PMI Shipment & Market Share Commentaries

PMI Shipment Volume

Second-Quarter

Six Months Year-to-Date

(million units)

2021

2020

Change

2021

2020

Change

Cigarettes

30,347

27,188

11.6%

57,989

57,184

1.4%

Heated Tobacco Units

512

185

+100%

908

655

38.6%

Total Middle East & Africa

30,859

27,373

12.7%

58,897

57,839

1.8%

Second-Quarter

The estimated total market in the Middle East & Africa increased, mainly driven by:

  • Egypt, up by 43.9%, or by 35.6% excluding the net favorable impact of estimated trade inventory movements, primarily reflecting: a favorable comparison due to pandemic-related supply-chain shortages involving competitors' products in the second quarter of 2020 and in-switching to cigarettes from other combustible tobacco products;

  • International Duty Free, up by 54.1%, reflecting the impact of reduced government travel restrictions and increased passenger traffic in certain geographies;

  • South Africa, reflecting a favorable comparison versus the second quarter of 2020, in which the total market was fully impacted by the pandemic-related ban on all tobacco sales from March 27, 2020, through August 17, 2020; and

  • Turkey, up by 7.7%, mainly reflecting the impact on adult smoker average daily consumption of the easing of pandemic-related measures.

PMI's total shipment volume increased by 12.7% to 30.9 billion units, notably driven by:

  • Egypt, up by 13.3%, primarily reflecting the higher total market, partly offset by a lower market share (due to an unfavorable comparison following pandemic-related supply-chain shortages involving competitors' products during the second quarter of 2020);

  • PMI Duty Free, up by +100%, or by 89.3% excluding the net favorable impact of estimated distributor inventory movements, mainly reflecting the higher total market and a higher market share; and

  • Turkey, up by 16.1%, primarily reflecting a higher market share, driven by the growth of Marlboro and Parliament, as well as the higher total market;

partly offset by

  • Saudi Arabia, down by 27.1%, or by 5.7% excluding the net unfavorable impact of estimated distributor inventory movements, mainly reflecting a lower total market, partly offset by a higher market share of cigarettes (driven by Parliament) and heated tobacco units.

Six Months Year-to-Date

The estimated total market in the Middle East & Africa increased, mainly driven by:

  • Egypt, up by 22.9%, or by 17.8% excluding the net favorable impact of estimated trade inventory movements, primarily reflecting the same factors as in the quarter;

  • South Africa, up by 45.6%, primarily reflecting a favorable comparison versus the second quarter of 2020, in which the total market was fully impacted by the pandemic-related ban on all tobacco sales from March 27, 2020, through August 17, 2020, partly offset by a higher estimated prevalence of illicit trade stemming from the aforementioned ban; and

  • Turkey, up by 2.8%, mainly reflecting the impact on adult smoker average daily consumption of the easing of pandemic-related measures, as well as a lower estimated prevalence of illicit trade related to cut tobacco (particularly in the first quarter of 2021);

partly offset by

  • International Duty Free, down by 31.7%, primarily reflecting the impact of government travel restrictions and reduced passenger traffic since the start of the pandemic in March 2020.

PMI's total shipment volume increased by 1.8% to 58.9 billion units, notably driven by:

  • Turkey, up by 12.2%, mainly reflecting a higher market share (driven by Marlboro and Parliament) and the higher total market;

partly offset by

  • PMI Duty Free, down by 30.3%, or by 23.9% excluding the net unfavorable impact of estimated distributor inventory movements (principally due to cigarettes), mainly reflecting the lower total market, partly offset by a higher market share.

SOUTH & SOUTHEAST ASIA REGION

Second-Quarter

Financial Summary -

Quarters Ended June 30,

Change

Fav./(Unfav.)

Variance

Fav./(Unfav.)

2021

2020

Total

Excl.

Curr.

Total

Cur-

rency

Price

Vol/

Mix

Cost/

Other

(in millions)

Net Revenues

$

1,046

$

889

17.7

%

10.0

%

157

68

20

69

Operating Income

$

331

$

289

14.5

%

8.0

%

42

19

20

33

(30

)

Asset Impairment & Exit Costs (1)

(10

)

(11

)

9.1

%

9.1

%

1

1

Adjusted Operating Income

$

341

$

300

13.7

%

7.3

%

4

19

20

33

(31

)

Adjusted Operating Income Margin

32.6

%

33.7

%

(1.1

)pp

(0.8

)pp

(1) Included in marketing, administration and research costs at the consolidated operating income level.

Net revenues increased by 10.0% on an organic basis, reflecting: favorable volume/mix, due to higher cigarette volume (primarily in Indonesia, partly offset by the Philippines); and a favorable pricing variance (driven by combustible pricing mainly in the Philippines, partly offset by Indonesia).

Operating income increased by 8.0%, excluding currency, primarily reflecting: favorable volume/mix, due to the same factors as for net revenues noted above; and a favorable pricing variance; partly offset by higher marketing, administration and research costs (mainly related to combustible products in Indonesia and the Philippines).

Adjusted operating income increased by 7.3% on an organic basis. Adjusted operating income margin decreased by 0.8 points on the same basis, as detailed in Schedule 8.

Six Months Year-to-Date

Financial Summary -

Six Months Ended June 30,

Change

Fav./(Unfav.)

Variance

Fav./(Unfav.)

2021

2020

Total

Excl.

Curr.

Total

Cur-

rency

Price

Vol/

Mix

Cost/

Other

(in millions)

Net Revenues

$

2,219

$

2,140

3.7

%

(0.8

)%

79

96

(18

)

1

Operating Income

$

860

$

888

(3.2

)%

(6.8

)%

(28

)

32

(18

)

(39

)

(3

)

Asset Impairment & Exit Costs (1)

(13

)

(11

)

(18.2

)%

(18.2

)%

(2

)

(2

)

Adjusted Operating Income

$

873

$

899

(2.9

)%

(6.5

)%

(26

)

32

(18

)

(39

)

(1

)

Adjusted Operating Income Margin

39.3

%

42.0

%

(2.7

)pp

(2.4

)pp

(1) Included in marketing, administration and research costs at the consolidated operating income level.

Net revenues decreased by 0.8% on an organic basis, reflecting: an unfavorable pricing variance, due to Indonesia, partially offset by the Philippines. Volume/mix was essentially stable, notably reflecting favorable cigarette mix (primarily in Indonesia and the Philippines), partly offset by lower cigarette volume (mainly in the Philippines, partially offset by Indonesia).

Operating income decreased by 6.8%, excluding currency, primarily reflecting: unfavorable volume/mix, due mainly to lower cigarette volume (primarily in the Philippines, partially offset by Indonesia), partly offset by favorable cigarette mix (mainly in Indonesia and the Philippines); and an unfavorable pricing variance.

Adjusted operating income decreased by 6.5% on an organic basis. Adjusted operating income margin decreased by 2.4 points on the same basis, as detailed in Schedule 8.

Total Market, PMI Shipment & Market Share Commentaries

PMI Shipment Volume

Second-Quarter

Six Months Year-to-Date

(million units)

2021

2020

Change

2021

2020

Change

Cigarettes

35,321

33,346

5.9%

70,209

70,941

(1.0)%

Heated Tobacco Units

39

—%

72

—%

Total South & Southeast Asia

35,360

33,346

6.0 %

70,281

70,941

(0.9)%

Second-Quarter

The estimated total market in South & Southeast Asia increased, notably driven by:

  • Bangladesh, up by 30.9%, primarily reflecting a favorable comparison versus the second quarter of 2020, during which pandemic-related restrictions impacted tobacco product availability;

  • India, up by 35.7%, mainly reflecting a favorable comparison versus the second quarter of 2020, during which pandemic-related restrictions impacted the movement of certain products, including tobacco; and

  • Indonesia, up by 12.4%, mainly reflecting the growth of the tax-advantaged 'below tier one' segment and the impact on adult smoker average daily consumption of the easing of pandemic-related measures.

PMI's total shipment volume increased by 6.0% to 35.4 billion units, notably driven by:

  • Indonesia, up by 11.5%, primarily reflecting the higher total market, partly offset by a lower market share (mainly due to adult smoker down-trading to the 'below tier one' segment as a result of significantly lower retail prices, partly offset by share growth for PMI's premium and hand-rolled kretek portfolio); and

  • Thailand, up by 28.0%, or by 12.6% excluding the net favorable impact of estimated distributor inventory movements, primarily due to a higher total market and a higher market share (driven by L&M 7.1);

partly offset by

  • the Philippines, down by 12.0%, mainly reflecting a lower market share (primarily due to mid-price Fortune, reflecting the impact of price increases in the fourth quarter of 2020, partly offset by Marlboro), as well as a lower total market.

Six Months Year-to-Date

The estimated total market in South & Southeast Asia increased, mainly driven by:

  • Bangladesh, up by 13.2%, primarily reflecting the same factor as in the quarter;

  • India, up by 16.7%, mainly reflecting the same factor as in the quarter;

  • Indonesia, up by 8.7%, primarily reflecting the same factors as in the quarter;

  • Pakistan, up by 14.6%, or by 9.3% excluding the net favorable impact of estimated trade inventory movements, notably reflecting a lower prevalence of illicit trade (partly due to pandemic-related supply disruptions for illicit products); and

  • Vietnam, up by 7.4%, mainly reflecting a lower prevalence of illicit trade due to pandemic-related supply disruptions for illicit products;

partly offset by:

  • the Philippines, down by 9.0%, primarily reflecting the impact of industry-wide price increases in the fourth quarter of 2020.

PMI's total shipment volume decreased by 0.9% to 70.3 billion units, notably due to:

  • the Philippines, down by 18.3%, mainly reflecting the same factors as in the quarter;

partly offset by:

  • Indonesia, up by 3.9%, primarily reflecting the same factors as in the quarter;

  • Pakistan, up by 12.8%, mainly reflecting the higher total market; and

  • Thailand, up by 9.1%, primarily reflecting the same factors as in the quarter.

EAST ASIA & AUSTRALIA REGION

Second-Quarter

Financial Summary -

Quarters Ended June 30,

Change

Fav./(Unfav.)

Variance

Fav./(Unfav.)

2021

2020

Total

Excl.

Curr.

Total

Cur-

rency

Price

Vol/

Mix

Cost/

Other

(in millions)

Net Revenues

$

1,514

$

1,432

5.7

%

3.1

%

82

37

88

(43

)

Operating Income

$

715

$

669

6.9

%

7.0

%

46

(1

)

88

(40

)

(1

)

Asset Impairment & Exit Costs (1)

(15

)

(13

)

(15.4

)%

(15.4

)%

(2

)

(2

)

Adjusted Operating Income

$

730

$

682

7.0

%

7.2

%

48

(1

)

88

(40

)

1

Adjusted Operating Income Margin

48.2

%

47.6

%

0.6

pp

1.9

pp

(1) Included in marketing, administration and research costs at the consolidated operating income level.

Net revenues increased by 3.1% on an organic basis, reflecting: a favorable pricing variance, primarily driven by higher heated tobacco and combustible pricing in Japan; and unfavorable volume/mix, mainly due to lower cigarette volume (primarily in Japan), partly offset by higher heated tobacco unit volume (predominantly in Japan).

Operating income increased by 7.0%, excluding currency, mainly reflecting: a favorable pricing variance; and lower manufacturing costs (primarily related to reduced-risk products in Japan); partly offset by higher marketing, administration and research costs; and unfavorable volume/mix, due to the same factors as for net revenues noted above.

Adjusted operating income increased by 7.2% on an organic basis. Adjusted operating income margin increased by 1.9 points on the same basis, as detailed in Schedule 8.

Six Months Year-to-Date

Financial Summary -

Six Months Ended June 30,

Change

Fav./(Unfav.)

Variance

Fav./(Unfav.)

2021

2020

Total

Excl.

Curr.

Total

Cur-

rency

Price

Vol/

Mix

Cost/

Other

(in millions)

Net Revenues

$

2,986

$

2,687

11.1

%

7.1

%

299

108

193

(2

)

Operating Income

$

1,410

$

1,155

22.1

%

20.6

%

255

17

193

18

27

Asset Impairment & Exit Costs (1)

(46

)

(13

)

-(100

)%

-(100

)%

(33

)

(33

)

Adjusted Operating Income

$

1,456

$

1,168

24.7

%

23.2

%

288

17

193

18

60

Adjusted Operating Income Margin

48.8

%

43.5

%

5.3

pp

6.5

pp

(1) Included in marketing, administration and research costs at the consolidated operating income level.

Net revenues increased by 7.1% on an organic basis, mainly reflecting: a favorable pricing variance, primarily driven by higher heated tobacco and combustible pricing in Japan. Volume/mix was essentially stable, mainly reflecting: lower cigarette volume (primarily in Japan and South Korea), unfavorable cigarette mix (mainly in Australia and Japan), lower device volume (primarily in Japan) and unfavorable heated tobacco unit mix in Japan, partly offset by higher heated tobacco unit volume in Japan.

Operating income increased by 20.6%, excluding currency, mainly reflecting: a favorable pricing variance; lower manufacturing costs (primarily related to reduced-risk products in Japan); and favorable volume/mix, driven by higher heated tobacco unit volume in Japan, partly offset by lower cigarette volume (mainly in Japan and South Korea), unfavorable cigarette mix (primarily in Australia and Japan) and unfavorable heated tobacco unit mix in Japan; partially offset by higher marketing, administration and research costs (mainly due to higher asset impairment and exit costs, primarily associated with product distribution restructuring in South Korea).

Adjusted operating income increased by 23.2%, on an organic basis. Adjusted operating income margin increased by 6.5 points on the same basis, as detailed in Schedule 8.

Total Market, PMI Shipment & Market Share Commentaries

PMI Shipment Volume

Second-Quarter

Six Months Year-to-Date

(million units)

2021

2020

Change

2021

2020

Change

Cigarettes

10,968

12,071

(9.1)%

22,330

24,370

(8.4)%

Heated Tobacco Units

9,904

9,076

9.1%

19,043

16,198

17.6%

Total East Asia & Australia

20,872

21,147

(1.3)%

41,373

40,568

2.0%

Second-Quarter

The estimated total market in East Asia & Australia, excluding China, decreased, primarily due to:

  • Australia, down by 7.8%, or by 12.5% excluding the net favorable impact of estimated trade inventory movements, mainly reflecting the impact of the ending of the pandemic-related wage subsidy by the government; and

  • South Korea, down by 1.6%, mainly reflecting the structural market trend.

PMI's total shipment volume decreased by 1.3% to 20.9 billion units, primarily due to:

  • South Korea, down by 5.9%, mainly reflecting a lower market share (primarily due to the unfavorable impact of the growth of the cigarette new taste dimension segment, in which PMI has a relatively low share) and the lower total market.

Excluding the net unfavorable impact of estimated distributor inventory movements, PMI's total in-market sales volume was essentially stable.

Six Months Year-to-Date

The estimated total market in East Asia & Australia, excluding China, decreased, mainly due to:

  • Japan, down by 4.2%, primarily reflecting the impact of excise tax-driven price increases.

PMI's total shipment volume increased by 2.0% to 41.4 billion units, notably driven by:

  • Japan, up by 3.9%, mainly reflecting a higher market share driven by heated tobacco units, partially offset by the lower total market;

partly offset by

  • South Korea, down by 5.0%, primarily reflecting a lower market share (due to the same factor as in the quarter).

Excluding the net unfavorable impact of estimated distributor inventory movements, PMI's total in-market sales volume was stable.

LATIN AMERICA & CANADA REGION

Second-Quarter

Financial Summary -

Quarters Ended June 30,

Change

Fav./(Unfav.)

Variance

Fav./(Unfav.)

2021

2020

Total

Excl.

Curr.

Total

Cur-

rency

Price

Vol/

Mix

Cost/

Other

(in millions)

Net Revenues

$

430

$

368

16.8

%