What changed in this filing

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Item 1. Business

2022-02-11 compared with 2021-02-09 · 70 added, 51 removed, 107 unchanged (53% of the section changed)

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is a Virginia holding company incorporated in 1987.

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 of America.

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 leading a transformation in the tobacco industry to create a smoke-free future, based on a new category of reduced-risk products that, while not risk free, are a much better choice than continuing to smoke.

Our goal is to ultimately replace cigarettes with smoke-free products to the benefit of adults who would otherwise continue to smoke, society, the company and its shareholders.

Reduced-risk products ("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 are a leading international tobacco company working to deliver a smoke-free future and evolving our portfolio for the long-term to include products outside of the tobacco and nicotine sector.

Our current product portfolio primarily consists of cigarettes and reduced-risk products, including heat-not-burn, vapor and oral nicotine products, which are sold in markets outside the United States.

Since 2008, we have invested more than $9 billion to develop, scientifically substantiate and commercialize innovative smoke-free products for adults who would otherwise continue to smoke, with the goal of completely ending the sale of cigarettes.

This includes the building of world-class scientific assessment capabilities, notably in the areas of pre-clinical systems toxicology, clinical and behavioral research, as well as post-market studies.

Food and Drug Administration ("FDA") has authorized the marketing of a version of PMI’s IQOS Platform 1 device and 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 describe the MRTP order in more detail in the "Business Environment" section of Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations .

With a strong foundation and significant expertise in life-sciences, in February 2021, we announced our ambition to expand into wellness and healthcare areas and deliver innovative products and solutions that aim to address unmet patient and consumer needs.

In March 2008, we became a U.S.

public company listed on the New York Stock Exchange and subject to the rules of the Securities and Exchange Commission (the "SEC").

We have a range of RRPs in various stages of development, scientific assessment and commercialization.

Because our RRPs do not burn tobacco, they produce an aerosol that contains far lower quantities of harmful and potentially harmful constituents than found in cigarette smoke.

Through multidisciplinary capabilities in product development, state-of-the-art facilities and scientific substantiation, we aim to ensure that our RRPs meet adult consumer preferences and rigorous regulatory requirements.

Our RRPs are smoke-free products that contain and/or generate far lower quantities of harmful and potentially harmful constituents than found in cigarette smoke.

Our IQOS smoke-free product brand portfolio includes heated tobacco and nicotine-containing vapor products.

Our leading smoke-free platform ("Platform 1") is a precisely controlled device into which a specially designed heated tobacco unit is inserted and heated to generate an aerosol.

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

Our leading smoke-free platform ("Platform 1") is a precisely controlled heating device into which a specially designed and proprietary tobacco unit is inserted and heated to generate an aerosol.

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

Platform 1 was first introduced in Nagoya, Japan, in 2014.

As of December 31, 2020, Platform 1 is available for sale in 64 markets in key cities or nationwide.

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.

As of December 31, 2021, our smoke-free products are available for sale in 71 markets in key cities or nationwide.

Our cigarettes are sold in approximately 180 markets, and in many of these markets they hold the number one or number two market share position.

We have a wide range of premium, mid-price and low-price brands.

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These seven international cigarette brands contributed approximately 79% of our cigarette shipment volume in 2021.

We also own a number of important local cigarette brands, such as Dji Sam Soe , Sampoerna A and Sampoerna U in Indonesia, and Fortune and Jackpot in the Philippines.

We also own a number of important local cigarette brands, such as Dji Sam Soe and Sampoerna A in Indonesia, and Fortune and Jackpot in the Philippines.

During 2021, we laid the foundation for our long-term growth ambitions beyond nicotine in wellness and healthcare, including the milestone acquisitions of Vectura Group PLC and Fertin Pharma A/S, which provide essential capabilities for future product development.

Source of Funds — Dividends

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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.

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.

Description of Business

We manage our business in six operating segments as follows:

We currently manage our business in six geographical segments and an Other category:

• The European Union Region (“EU”) is headquartered in Lausanne, Switzerland, and covers all the European Union countries and also Switzerland, Norway, Iceland and the United Kingdom;

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• The East Asia & Australia Region (“EA&A”) is also headquartered in Hong Kong and includes Australia, Japan, South Korea, the People's Republic of China and other markets in this region, as well as Malaysia and Singapore;

• The Latin America & Canada Region (“LA&C”) is headquartered in New York and covers the South American continent, Central America, Mexico, the Caribbean and Canada.

LA&C also includes transactions under license with Altria Group, Inc., for the distribution of our Platform 1 product in the United States.

• The Americas Region (“AMCS”) is headquartered in New York and covers the South American continent, Central America, Mexico, the Caribbean and Canada.

AMCS also includes transactions under license with Altria Group, Inc., for the distribution of our Platform 1 product in the United States;

• Other, which includes our third quarter 2021 acquisitions of Fertin Pharma A/S, Vectura Group plc.

and OtiTopic, Inc.

For further details, see Item 8, Note 6.

Acquisitions and Item 8, Note 12.

Segment Reporting .

In the third quarter of 2021, our former Latin America & Canada segment was renamed as the Americas segment.

In the fourth quarter of 2021, we announced that we will be relocating our PMI corporate headquarters, including our AMCS headquarters, from New York, New York, to Stamford, Connecticut.

This move is expected to be completed by the third quarter of 2022.

As of March 22, 2019, we deconsolidated the financial results of our Canadian subsidiary, Rothmans, Benson & Hedges Inc.

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Deconsolidation of RBH .

Following the deconsolidation of our Canadian subsidiary, we will continue to report the volume of brands sold by RBH for which other PMI subsidiaries are the trademark owners.

Since the deconsolidation of our Canadian subsidiary, we have continued to report the volume of brands sold by RBH for which other PMI subsidiaries are the trademark owners.

These include HEETS , Next , Philip Morris and Rooftop .

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

In addition, to reflect the deconsolidation of RBH, effective March 22, 2019, PMI's total market share has been restated for previous periods.

2020 estimates for total industry volume and market share in certain geographies reflect limitations on the availability and accuracy of industry data during pandemic-related restrictions.

Our total shipments, including cigarettes and heated tobacco units, decreased by 8.1% in 2020 to 704.6 billion units.

We estimate that international industry volumes, including cigarettes and heated tobacco units, were approximately 4.9 trillion units in 2020, a 3.0% decrease from 2019.

Excluding the People’s Republic of China (“PRC”), we estimate that international cigarette and heated tobacco unit volume was 2.5 trillion units in 2020, a 5.8% decrease from 2019.

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.

Our total shipments, including cigarettes and heated tobacco units, increased by 2.2% in 2021 to 719.9 billion units.

We estimate that international industry volumes, including cigarettes and heated tobacco units, were approximately 5.0 trillion units in 2021, a 1.3% increase from 2020.

Excluding the People’s Republic of China (“PRC”), we estimate that international cigarette and heated tobacco unit volume was 2.6 trillion units in 2021, a 2.4% increase from 2020.

We estimate that our reported share of the international market (which is defined as worldwide cigarette and heated tobacco unit volume, excluding the United States of America) was approximately 14.3% in 2021, 14.3% in 2020 and 15.1% in 2019.

Excluding the PRC, we estimate that our reported share of the international market was approximately 27.3%, 27.7%, and 28.4% in 2021, 2020 and 2019, respectively.

Shipments of our principal cigarette brand, Marlboro , decreased by 11.3% in 2020 and represented approximately 9.5% of the international cigarette market, excluding the PRC, in 2020, 10.0% in 2019 and 9.7% in 2018.

Shipments of our principal cigarette brand, Marlboro , increased by 2.9% in 2021, and represented approximately 9.5% of the international cigarette market, excluding the PRC, in 2021, 9.5% in 2020, and 10.0% in 2019.

Total shipment volume of heated tobacco units reached 95.0 billion units in 2021, up from 76.1 billion units in 2020.

We have a market share of at least 15% in approximately 95 markets, including Algeria, Argentina, Australia, Austria, Belgium, Brazil, the Czech Republic, Egypt, France, Germany, Hong Kong, Hungary, Indonesia, Israel, Italy, Japan, Korea, Kuwait, Mexico, the Netherlands, Norway, the Philippines, Poland, Portugal, Russia, Saudi Arabia, Spain, Switzerland, Turkey and Ukraine.

We have a market share of at least 15% in approximately 100 markets, including Algeria, Argentina, Australia, Austria, Belgium, Brazil, the Czech Republic, Egypt, France, Germany, Hong Kong, Hungary, Indonesia, Israel, Italy, Japan, Kuwait, Mexico, the Netherlands, Norway, the Philippines, Poland, Portugal, Russia, Saudi Arabia, South Korea, Spain, Switzerland, Turkey and Ukraine.

Distribution & Sales

Our main types of distribution are tailored to the characteristics of each market and are often used simultaneously:

Our main types of distribution and sales are tailored to the characteristics of each market and are often used simultaneously:

• Direct sales and distribution, where we have set up our own distribution selling directly to the retailers;

• Distribution through independent distributors that often distribute other fast-moving consumer goods and are responsible for distribution in a particular market;

• Exclusive zonified distribution, where the distributors are dedicated to us in tobacco products distribution and assigned to exclusive territories within a market;

• Exclusive zonified distribution, where the distributors are dedicated to us in multicategory products distribution and assigned to exclusive territories within a market;

• Distribution through national or regional wholesalers that then supply the retail trade;

• Our own brand retail and e-commerce infrastructures for our RRP products and accessories.

• Our own e-commerce infrastructure for product sales to trade partners and to consumers;

• Our own brand retail infrastructure for our RRP products and accessories for sales to consumers.

We are subject to highly competitive conditions in all aspects of our business.

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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 and volume 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.

Competitors in our industry 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.

Certain new market entrants in the non-combustible product category 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, all of which could have a mutual adverse effect on our profitability and results of operations.

Procurement and Raw Materials

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Business Environment

Information called for by this Item is hereby incorporated by reference to the paragraphs in Item 7, Business Environment .

Information called for by this Item is hereby incorporated by reference to the paragraphs in Item 7, Business Environment to this Annual Report on Form 10-K.

Other Matters

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We believe that none of our business segments is dependent upon a single customer or a few customers, the loss of which would have a material adverse effect on our consolidated results of operations.

In some of our markets, particularly in the European Union and in the East Asia & Australia Regions, a loss of a distributor may result in a temporary market disruption.

In some of our markets, particularly in the European Union, Eastern Europe and in the East Asia & Australia Regions, a loss of a distributor may result in a temporary market disruption.

Our Workforce .

At December 31, 2020, we employed approximately 71,000 people worldwide, including full-time, temporary and part-time staff.

At December 31, 2021, we employed approximately 69,600 people worldwide of 133 different nationalities, including full-time, temporary and part-time staff.

Our businesses are subject to a number of laws and regulations relating to our relationship with our employees.

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To be successful in our transformation to a smoke-free future, we must continue transforming our culture and ways of working, align our talent with our business needs and innovate to become a truly consumer-centric business.

To achieve our strategic goals, we need to attract, retain and motivate the best global talent with the right degree of diversity, experience and skills.

To achieve our strategic goals, we need to attract, retain and motivate the best global talent with the right degree of diversity, experience, competencies and skills.

Therefore, we strive to ensure the development of our existing talent while increasingly recruiting those with the expertise in areas that are new to us such as digital and technical solutions.

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Oversight and Management .

Our Board of Directors provides oversight of various matters pertaining to our workforce, and the Compensation and Leadership Development Committee of the Board is responsible for executive compensation matters and oversight of the risks and programs related to talent management.

As part of our commitment to workplace diversity in 2020, our Board appointed a Chief Diversity Officer who reports directly to our CEO.

Our Code of Conduct highlights our commitment to diversity, inclusion, fairness, safety and equal opportunity in all aspects of employment.

Our Board of Directors (the "Board") provides oversight of various matters pertaining to our workforce, and the Compensation and Leadership Development Committee of the Board is responsible for executive compensation matters and oversight of the risks and programs related to talent management.

Our Code of Conduct, also known at PMI as the Guidebook for Success, highlights our commitment to ethical business conduct and honesty, respect, fairness in our ways of working.

Inclusion & Diversity .

At PMI, we believe that a diverse workforce and an inclusive culture are strategic priorities which help fuel innovation and business success.

As part of our commitment to workplace diversity in 2020, our Board appointed a Chief Diversity Officer.

Improving gender balance especially in management positions continues to be one of our priorities:

• We set a target of 40% female representation in management positions by the end of 2022;

• We launched a Women in Leadership program to support our female talents;

• We were the first multinational company to receive a global EQUAL-SALARY certification from the EQUAL-SALARY Foundation.

This achievement is an important building block on the road to creating a more inclusive gender-balanced workplace and continuing our reputation as a top employer.

In recognition of our efforts, we were added to the 2021 Bloomberg Gender-Equality Index for transparency in gender reporting and advancing women’s equity (among the 380 companies and 11 sectors who scored at or above the global threshold established by Bloomberg).

Creation of employee resource groups ("ERGs") was another important milestone to further inclusion at PMI.

We believe these groups are an important platform for building an enhanced sense of belonging, visibility, and greater understanding of different experiences and dimensions of diversity in our company.

Currently, we have established ERGs on race and ethnicity, LGBTQ+ inclusions, gender and disability.

Each ERG is sponsored by a member of the PMI Senior Leadership Team, to illustrate our strong commitment to Inclusion & Diversity comes from the top.

Our Initiatives in Response to COVID-19 .

We focused on business continuity, health and safety of our employees, and rapidly adapting our ways of working to a new environment.

We implemented additional safety measures for essential employees in our facilities and offices and continue to pay salaries to those employees who are unable to work due to government restrictions.

We enhanced remote work arrangements and digital collaboration and related risk management, and to date, a large majority of our employees continues to work remotely.

Since the outbreak of the global COVID-19 pandemic, we have focused on business continuity, health and safety of our employees, and have rapidly adapted our ways of working to a new environment.

We have implemented additional safety measures for essential employees in our facilities and offices, and continue to pay salaries to those employees who are unable to work due to government restrictions.

We have enhanced remote work arrangements and digital collaboration, and related risk management, and to date, a large majority of our employees continues to work remotely.

Government Regulation

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Furthermore, we have engaged an external certification body to validate the effectiveness of this management program at our manufacturing centers around the world, in accordance with internationally recognized standards for safety and environmental management.

Our subsidiaries expect to continue to

make investments in order to drive improved performance and maintain compliance with environmental laws and regulations.

Our subsidiaries expect to continue to make investments in order to drive improved performance and maintain compliance with environmental laws and regulations.

We assess and report to our management the compliance status of all our legal entities on a regular basis.

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Our trademarks are valuable assets, and their protection and reputation are essential to us.

We own the trademark rights to all of our principal brands, including Marlboro , HEETS and IQOS , or have the right to use them in all countries where we use them.

We own the trademark rights to all of our principal brands, including Marlboro , HEETS and IQOS , or have the right to use them in all countries in which these brands are advertised or sold.

In addition, we have a large number of granted patents and pending patent applications worldwide.

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However, no one patent, or group of related patents, is material to us.

We also have registered industrial designs, as well as unregistered proprietary trade secrets, technology, know-how, processes and other unregistered intellectual property rights.

We also have registered industrial

designs, as well as unregistered proprietary trade secrets, technology, know-how, processes and other unregistered intellectual property rights.

Effective January 1, 2008, PMI entered into an Intellectual Property Agreement with Philip Morris USA Inc., a wholly owned subsidiary of Altria Group, Inc.

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The SEC maintains an Internet website at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, from which investors can electronically access our SEC filings.

the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

We make available free of charge on, or through, our website at www.pmi.com our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

Investors can access our filings with the SEC by visiting www.pmi.com.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business