What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-02-11 compared with 2021-02-09 · 566 added, 524 removed, 827 unchanged (57% of the section changed)

3 unchanged sentences

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.

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:

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 this Item 7.

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

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

• European Union ("EU");

3 unchanged sentences

• East Asia & Australia ("EA&A");

• 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.

• Americas ("AMCS");

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

(also known as Vectura Group Ltd.) and OtiTopic, Inc.

For further details, see Item 8, Note 6.

Acquisitions, and Item 8, Note 12.

Segment Reporting.

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.

2 unchanged sentences

RRPs is the term we use to refer to products that present, are likely to present, or have the potential to present less risk of harm to smokers who switch to these products versus continuing smoking.

IQOS is the leading brand in our smoke-free product portfolio.

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

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.

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.

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).

15 unchanged sentences

Consolidated Operating Results

• Net Revenues – Net revenues of $28.7 billion for the year ended December 31, 2020, decreased by $1.1 billion, or 3.7%, from the comparable 2019 amount, and were impacted by the effects of the COVID-19 pandemic, particularly in the second quarter of 2020 and continuing throughout the second half of the year.

• Net Revenues – Net revenues of $31.4 billion for the year ended December 31, 2021, increased by $2.7 billion, or 9.4%, from the comparable 2020 amount, and were impacted by the effects of the COVID-19 pandemic, particular in 2020.

The change in our net revenues from the comparable 2020 amount was driven by the following (variances not to scale):

Net revenues, excluding unfavorable currency, decreased by 2.2%, reflecting:

unfavorable volume/mix, primarily due to lower cigarette volume (mainly in Argentina, Indonesia, Italy, Japan, Mexico, the Philippines, PMI Duty Free, Poland, Russia and Ukraine, partly offset by Germany), partially offset by higher heated tobacco unit volume (notably in the EU, Japan, Russia and Ukraine, partly offset by PMI Duty Free);

and the unfavorable impact of $253 million, shown in "Cost/Other," mainly resulting from the deconsolidation of our Canadian subsidiary, Rothman, Benson & Hedges, Inc.

("RBH"), effective March 22, 2019, and lower fees for certain distribution rights billed to customers in certain markets;

partly offset by a favorable pricing variance (notably driven by the Gulf Cooperation Council, Germany, Japan, Mexico, North Africa, the Philippines, PMI Duty Free, Russia and Ukraine, partially offset by Indonesia, Poland and Turkey).

For further details on the deconsolidation of RBH, see Item 8, Note 17.

Contingencies and Note 20.

Deconsolidation of RBH.

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

Net revenues, excluding currency and acquisitions, increased by 6.7%, mainly reflecting:

favorable volume/mix, primarily driven by higher heated tobacco unit volume (notably in the EU, particularly Germany, Hungary, Italy and Poland, as well as Japan, Russia and Ukraine), and higher device volume (notably in the EU, primarily Italy, and Japan, partly offset by South Korea), partially offset by lower cigarette volume (mainly in the EU Region, notably the Czech Republic, France and Germany, as well as the GCC, North Africa, the Philippines, Russia and Ukraine, partly offset by India, Indonesia, PMI Duty Free and Turkey) and unfavorable cigarette mix (primarily in Germany, Japan and Russia, partially offset by Indonesia and PMI Duty Free);

and a favorable pricing variance (notably driven by the Czech Republic, Germany, Japan, Kazakhstan, the Philippines, Russia and Turkey, partly offset by Australia, Indonesia, Poland and Ukraine);

partially offset by the unfavorable impact of the Saudi Arabia customs assessments of $246 million, included in "Other" and further described in the following " Diluted Earnings Per Share " discussion.

This net revenue growth reflects the continued strength of IQOS , and the recovery of the combustible business in many markets from the low base in 2020 due to the impact of COVID-19.

Net revenues by product category for the years ended December 31, 2021 and 2020, are shown below:

Net revenues in the Other category primarily consist of operating revenues generated from the sale of inhaled therapeutics, and oral and intra-oral delivery systems resulting from the third quarter 2021 acquisitions of Fertin Pharma A/S, Vectura Group plc.

and OtiTopic, Inc.

• Diluted Earnings Per Share – The changes in our reported diluted earnings per share (“diluted EPS”) for the year ended December 31, 2021, from the comparable 2020 amounts, were as follows:

2 unchanged sentences

2020 Asset impairment and exit costs 0.08

2019 Canadian tobacco litigation-related expense 0.09

2019 Loss on deconsolidation of RBH 0.12

2019 Russia excise and VAT audit charge 0.20

2020 Brazil indirect tax credit (0.05)

2020 Fair value adjustment for equity security investments 0.04

2 unchanged sentences

2021 Asset impairment and exit costs (0.12)

2020 Brazil indirect tax credit 0.05

2020 Fair value adjustment for equity security investments (0.04)

2021 Saudi Arabia customs assessments (0.14)

2021 Asset acquisition cost (0.03)

2021 Equity investee ownership dilution 0.04

2021 Tax items —

1 unchanged sentence

Currency 0.12

Interest (0.02)

Change in tax rate 0.08

1 unchanged sentence

For the year ended December 31, 2021 $ 5.83 13.0 %

Asset impairment and exit costs – During 2019, as part of the optimization of our global manufacturing infrastructure, we recorded pre-tax asset impairment and exit costs of $422 million, representing $362 million net of income tax and a diluted EPS charge of $0.23 per share.

This 2019 charge primarily related to a cigarette plant closure in Berlin, Germany (approximately $0.19 per share), as well as the closure of cigarette plants in Argentina, Colombia and Pakistan.

During 2020, we recorded pre-tax asset impairment and exit costs of $149 million, representing $124 million net of income tax and a diluted EPS charge of

$0.08 per share, related to the organizational design optimization plan, primarily in Switzerland.

Asset impairment and exit costs – During 2020, we recorded pre-tax asset impairment and exit costs of $149 million, representing $124 million net of income tax and a diluted EPS charge of $0.08 per share, related to the organizational design optimization plan,

primarily in Switzerland.

During 2021, we recorded pre-tax asset impairment and exit costs of $216 million, representing $181 million net of income tax and a diluted EPS charge of $0.12 per share, related to the organizational design optimization plan, primarily in Switzerland, and the product distribution restructuring in South Korea.

The total pre-tax charges in 2020 and 2021 were included in marketing, administration and research costs on the consolidated statements of earnings.

1 unchanged sentence

Asset Impairment and Exit Costs .

Canadian tobacco litigation-related expense – In the first quarter of 2019, we recorded a pre-tax charge of $194 million, representing $142 million net of tax, relating to the judgment against RBH in two Québec smoking and health class actions.

The charge of $0.09 per share reflects our assessment of the portion of the judgment that represents a probable and estimable loss prior to the deconsolidation of RBH and corresponds to the trust account deposit required by the judgment.

The total pre-tax charge was included in marketing, administration and research costs on the consolidated statements of earnings and was included in the operating income of the Latin America & Canada segment.

For further details, see Item 8, Note 17.

Contingencies and Item 8, Note 20.

Deconsolidation of RBH .

Loss on deconsolidation of RBH – Following the judgment in the two Québec smoking and health class actions, RBH obtained an initial order from the Ontario Superior Court of Justice granting it protection under the Companies’ Creditors Arrangement Act (“CCAA”), which is a Canadian federal law that permits a Canadian business to restructure its affairs while carrying on its business in the ordinary course with minimal disruption to its customers, suppliers and employees.

The administration of the CCAA process, principally relating to the powers provided to the court and the court appointed monitor, removes certain elements of control of the business from both PMI and RBH.

As a result, we have determined that we no longer have a controlling financial interest over RBH and that we do not exert "significant influence" over RBH under U.S.

Therefore, we deconsolidated RBH as of the date of the CCAA filing on March 22, 2019, and have accounted for our continuing investment in RBH as an equity security, without readily determinable fair value.

A loss on the deconsolidation of RBH of $239 million was included in marketing, administration and research costs on the consolidated statements of earnings for the year ended December 31, 2019, and was included in the operating income of the Latin America & Canada segment.

The $0.12 per share impact also included a tax benefit of $49 million within the provision for income taxes, as discussed below, related to the reversal of a deferred tax liability on the unremitted earnings of RBH.

For further details, see Item 8, Note 17.

Contingencies and Item 8, Note 20.

Deconsolidation of RBH .

Russia excise and VAT audit charge – As a result of the final tax assessment for the 2015-2017 financial years received by our Russian affiliate, in the third quarter of 2019, PMI recorded a pre-tax charge of $374 million in marketing, administration and research costs in the consolidated statements of earnings, representing $315 million net of income tax and a diluted EPS charge of $0.20.

The pre-tax charge of $374 million was included in the operating income of the Eastern Europe segment.

For further details, see Item 8, Note 17.

Contingencies.

Brazil indirect tax credit - Following a final and enforceable decision by the highest court in Brazil in October 2020, PMI recorded a gain of $119 million for tax credits ($79 million net of income tax and $0.05 per share increase in diluted EPS) representing overpayments of indirect taxes for the period from March 2012 through December 2019;

these tax credits will be applied to future tax liabilities in Brazil.

This amount was included as a reduction in marketing, administration and research costs in the consolidated statements of earnings for the year ended December 31, 2020 and was included in the operating income of the Latin America & Canada segment.

A decision regarding an additional amount of overpaid indirect taxes of approximately $90 million is still pending before this court.

Fair Value adjustment for equity security investments – In the fourth quarter of 2019, PMI recorded a favorable fair value adjustment for its equity security investments of $35 million after tax (or $0.02 per share increase in diluted EPS).

The fair value adjustment for its equity security investments was included in equity investments and securities (income)/loss, net ($44 million income) and provision for income taxes ($9 million expense) on the consolidated statements of earnings in 2019.

During 2020, we recorded an unfavorable fair value adjustment for our equity security investments of $60 million after tax (or $0.04 per share decrease in diluted EPS).

The fair value adjustment for our equity security investments was included in equity investments and securities (income)/loss, net ($76 million loss) and provision for income taxes ($16 million benefit) on the consolidated statements of earnings.

Brazil indirect tax credit - Following a final and enforceable decision by the highest court in Brazil in October 2020, we recorded a gain of $119 million for tax credits in 2020 ($79 million net of income tax and $0.05 per share increase in diluted EPS) representing overpayments of indirect taxes for the period from March 2012 through December 2019;

these tax credits were applied to tax liabilities in Brazil during 2021.

This amount was included as a reduction in marketing, administration and research costs in the consolidated statements of earnings for the year ended December 31, 2020, and was included in the operating income of the Americas segment.

An additional amount of overpaid indirect taxes of approximately $90 million is dependent on a potential tax authority challenge.

Fair Value adjustment for equity security investments – During 2020, we recorded an unfavorable fair value adjustment for our equity security investments of $60 million after tax (or $0.04 per share decrease in diluted EPS).

For further details, see Item 8, Note 4.

Related Parties - Equity Investments and Other.

Income taxes – The 2019 Tax items that increased our 2019 diluted EPS by $0.04 per share in the table above were primarily due to a reduction in estimated U.S.

federal income tax on dividend repatriation for the years 2015 - 2018 ($67 million).

The 2020 Tax items that increased our 2020 diluted EPS by $0.06 per share in the table above were due to final U.S.

Income taxes – The 2020 Tax items that increased our 2020 diluted EPS by $0.06 per share in the table above were due to final U.S.

tax regulations under the Global Intangible Low-Taxed Income ("GILTI") provisions of the Internal Revenue Code for years 2018 and 2019 ($93 million).

The change in the tax rate that increased our diluted EPS by $0.08 per share in the table above was primarily due to the corporate income tax rate reduction in the Philippines (enacted in the first quarter of 2021), as well as changes in earnings mix by taxing jurisdiction.

For further details, see Item 8, Note 11.

Income Taxes .

The change in the tax rate that increased our diluted EPS by $0.05 per share in the table above was primarily due to changes in earnings mix by taxing jurisdiction, a reduction of U.S.

state tax expense and the corporate income tax rate reduction in Indonesia,

partially offset by a decrease in deductions related to foreign-derived intangible income for the years 2018 and 2019 and repatriation cost differences.

Saudi Arabia customs assessment s – 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 as described in Item 8, Note 17.

Contingencies .

On the basis of these decisions and in line with arrangements with the distributors, we recorded a pre-tax charge of $246 million in the second quarter of 2021 (representing $215 million net of income tax and a diluted EPS charge of $0.14 per share) .

The pre-tax charge was recorded as a reduction of net revenues on the consolidated statement of earnings for the year ended December 31, 2021, and was included in the Middle East & Africa segment results.

Asset acquisition cost – In August 2021, we acquired 100% of OtiTopic, Inc., a U.S.

respiratory drug development company with a late-stage dry powder inhalation aspirin treatment for acute myocardial infarction.

We accounted for this transaction as an asset acquisition since the acquired in-process research and development ("IPR&D") of the dry powder inhalation aspirin treatment represented substantially all of the fair value of the gross assets acquired.

At the date of acquisition, we determined that the acquired IPR&D had no alternative future use.

As a result, we recorded a pre-tax charge of $51 million (representing a $0.03 per share charge to diluted EPS) to research and development costs within marketing, administration and research costs in the consolidated statements of earnings for the year ended December 31, 2021.

For further details, see Item 8, Note 6.

Income Taxes .

Currency – The unfavorable currency impact during 2020 results from the fluctuations of the U.S.

dollar, especially against the Argentine peso, Brazilian real, Indonesian rupiah, Mexican peso, Russian ruble, Swiss franc and Turkish lira, partially offset by the Egyptian pound, Japanese yen and Philippine peso.

This unfavorable 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 earned on cash balances.

Operations – The increase in diluted EPS of $0.27 from our operations in the table above was due primarily to the following segments:

Acquisitions .

Equity investee ownership dilution – In 2021, our equity method investee, Medicago Inc, initiated additional rounds of equity funding in which we did not participate.

As a result, our share of holdings in Medicago Inc.

was reduced from approximately 32% to approximately 23% as of December 31, 2021.

The ownership dilution resulted in a $0.04 per share favorable impact to diluted EPS and income of $55 million to Equity investments and securities (income)/loss, net in the consolidated statements of earnings for the year ended December 31, 2021.

For further details, see Item 8, Note 17.

Contingencies - Third Party Guarantees .

Currency – The favorable impact of $0.12 per share during the reporting period primarily results from the fluctuations of the U.S.

dollar, especially against the Euro.

This favorable currency movement has impacted our profitability across our primary revenue markets and local currency cost bases.

Operations – The increase in diluted EPS of $0.71 per share from our operations in the table above was due primarily to the following segments:

• European Union:

Favorable volume/mix, favorable pricing and lower manufacturing costs, partially offset by higher marketing, administration and research costs;

• East Asia & Australia:

Lower marketing, administration and research costs, lower manufacturing costs and favorable pricing, partially offset by unfavorable volume/mix;

Favorable volume/mix, lower manufacturing costs and favorable pricing, partially offset by higher marketing, administration and research costs;

• Middle East & Africa:

Favorable pricing, favorable volume/mix and lower manufacturing costs, partially offset by lower

fees for certain distribution rights and higher marketing, administration and research costs;

• Eastern Europe:

Favorable pricing, favorable volume/mix and lower manufacturing costs, partially offset by higher marketing, administration and research costs ;

Favorable volume/mix, lower manufacturing costs, favorable pricing and lower marketing, administration and research costs;

• East Asia & Australia:

Favorable pricing and lower manufacturing costs, partially offset by higher marketing, administration and research costs;

Favorable pricing and lower marketing, administration and research costs, partially offset by higher manufacturing costs;

partially offset by

• Middle East & Africa:

Unfavorable volume/mix and lower fees for certain distribution rights billed to customers in certain markets, partially offset by favorable pricing, and lower marketing, administration and research costs;

• South & Southeast Asia:

Unfavorable volume/mix and unfavorable pricing, partially offset by lower marketing, administration and research costs;

• Latin America & Canada:

Unfavorable volume/mix, as well as the unfavorable impact resulting from the deconsolidation of RBH, partially offset by favorable pricing and lower marketing, administration and research costs.

Unfavorable pricing, unfavorable volume/mix and higher 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

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.

• PMI has sufficient access to the inputs for its products and is not facing any significant business continuity issues with respect to key suppliers;

• All of of PMI's cigarette and heated tobacco unit manufacturing facilities globally are operational;

• COVID-related restrictions do not have a significant impact on the availability of PMI's products to its customers and adult consumers;

• 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.

IQOS Device Supply

The current global semiconductor shortage has resulted in a tightness in IQOS device supply in the second half of 2021.

In the fourth quarter of 2021, the IQOS device supply situation eased, resulting in an improved IQOS user growth versus the third quarter.

We expect an improving IQOS device supply situation, with a gradual return to an unconstrained IQOS user quarterly growth progression.

However, we still do not have full visibility over the full year 2022.

IQOS in the United States

On November 29, 2021, an importation ban and cease-and-desist orders imposed by the U.S.

International Trade Commission ("ITC") relating to IQOS Platform 1 products (including consumables and infringing components) went into effect.

As a result, IQOS is not currently available for sale in the U.S.

We have appealed the patent and statutory issues related to the ITC's Final Determination, and also have contingency plans underway, including domestic production.

We hope to be able to resume U.S.

supply in the first half of 2023.

For more details on the ITC case and related legal matters, please refer to Item 8, Note 17 .

Contingencies .

The ITC decision has no bearing outside the U.S.;

competitor lawsuits based on the same patent families have repeatedly and universally failed in European courts and the European Patent Office.

During 2021, PMI acquired the following companies:

• Vectura Group plc, an inhaled therapeutics company based in the United Kingdom;

• Fertin Pharma A/S, a Danish company that is a leading developer and manufacturer of innovative pharmaceutical and well-being products based on oral and intra-oral delivery systems;

• OtiTopic, Inc., a U.S.

respiratory drug development company with a late-stage dry powder inhalation aspirin treatment for acute myocardial infarction;

• AG Snus Aktieselskab, a Danish company, and its Swedish subsidiary, Tobacco House of Sweden AB, fully owned by AG Snus, which operates in the oral tobacco and modern oral product categories.

For further details on these acquisitions, see Item 8, Note 6.

Acquisitions .

Discussion and Analysis

9 unchanged sentences

Revenue Recognition - We recognize revenue as performance obligations are satisfied.

Our primary performance obligation is the distribution and sales of cigarettes and other nicotine-containing products, including reduced-risk products.

Our primary performance obligation is the distribution and sales of cigarettes and reduced-risk products, including heat-not-burn, vapor and oral nicotine products.

Our performance obligations are typically satisfied upon shipment or delivery to our customers.

12 unchanged sentences

To determine the fair value of goodwill, we primarily use the market approach using earnings multiples of comparable global companies within the tobacco industry, supported by a discounted cash flow model.

At December 31, 2020, the carrying value of our goodwill was $6.0 billion, which is related to ten reporting units, each of which consists of a group of markets with similar operating and economic characteristics.

The estimated fair value of each of our ten reporting units exceeded the carrying value as of December 31, 2020.

At December 31, 2021, the carrying value of our goodwill was $6.7 billion, which is related to ten geographical reporting units, each of which consists of a group of markets with similar operating and economic characteristics and our 2021 acquisitions.

The Fertin Pharma A/S, Vectura Group plc.

and OtiTopic, Inc.

acquisitions in 2021 are considered separate operating segments and are accounted for within the Other category.

For additional information see Item 8, Note 6.

Acquisitions .

The estimated fair value of each of our ten reporting units and additional businesses acquired in 2021 exceeded the carrying value as of December 31, 2021.

To determine the fair value of non-amortizable intangible assets, we primarily use a discounted cash flow model applying the relief-from-royalty method.

5 unchanged sentences

The costs of our advertising and marketing programs are expensed in accordance with U.S.

Recognition of the cost related to our consumer engagement and trade promotion programs contain uncertainties due to the

judgment required in estimating the potential performance and compliance for each program.

Recognition of the cost related to our consumer engagement and trade promotion programs contain uncertainties due to the judgment required in estimating the potential performance and compliance for each program.

For volume-based incentives provided to customers, management continually assesses and estimates, by customer, the likelihood of the customer's achieving the specified targets, and records the reduction of revenue as the sales are made.

12 unchanged sentences

Postretirement plans 3.08% 2.84%

We anticipate that assumption changes will increase 2021 pre-tax pension and postretirement expense to approximately $300 million as compared with approximately $264 million in 2020, excluding amounts related to employee severance and early retirement programs.

The anticipated increase is primarily due to higher amortization of unrecognized actuarial gains/losses of $50 million, coupled with higher service cost of $24 million, partially offset by lower interest cost of $18 million and higher expected return on plan assets of $17 million and other movements of $3 million.

We anticipate that assumption changes will decrease 2022 pre-tax pension and postretirement expense to approximately $152 million as compared with approximately $300 million in 2021, excluding amounts related to employee severance and early retirement programs.

The anticipated decrease is primarily due to lower amortization of unrecognized actuarial gains/losses of $123 million, coupled with lower service cost of $45 million and other movements of $9 million, partially offset by higher interest cost of $29 million.

Weighted-average expected rate of return and discount rate assumptions have a significant effect on the amount of expense reported for the employee benefit plans.

11 unchanged sentences

If we determine, using all available evidence, that we do not reach the more likely than not threshold for recovery, a valuation allowance is recorded.

Significant judgment is required in determining the need for and amount of valuation allowances for deferred tax assets including estimates of future taxable income in the applicable jurisdictions and the feasibility of on-going tax planning strategies, as applicable.

Significant judgment is required in determining the need for and amount of valuation allowances for deferred tax assets including estimates of future taxable income in the applicable jurisdictions an d the feasibility of on-going tax planning strategies , as applicable.

The effective tax rates used for interim reporting are based on our full-year geographic earnings mix projections.

4 unchanged sentences

Hedging - As discussed below in “Market Risk,” we use derivative financial instruments principally to reduce exposures to market risks resulting from fluctuations in foreign currency exchange and interest rates by creating offsetting exposures.

For derivatives to which we have elected to apply hedge accounting, gains and losses on these derivatives are initially deferred in accumulated other comprehensive losses on the consolidated balance sheet and recognized in the consolidated statement of earnings into the same line item as the impact of the underlying transaction and in the periods when the related hedged transactions are also recognized in operating results.

For derivative contracts that are designated and qualify as fair value hedges the gain or loss on the derivative, as well as the offsetting gain or loss on the hedged items attributable to the hedged risk, is recognized in the consolidated statement of earnings.

For our other derivatives to which we have elected to apply hedge accounting, gains and losses on these derivatives are initially deferred in accumulated other comprehensive losses on the consolidated balance sheet and recognized in the consolidated statement of earnings into the same line item as the impact of the underlying transaction and in the periods when the related hedged transactions are also recognized in operating results.

If we had elected not to use the hedge accounting provisions, gains (losses) deferred in stockholders’ (deficit) equity would have been recorded in our net earnings for these derivatives.

20 unchanged sentences

East Asia & Australia 5,953 5,429 5,364

Latin America & Canada (1)

1,843 1,701 2,206

Other 101 — —

Net revenues $ 31,405 $ 28,694 $ 29,805

Operating Income

Operating Income (Loss)

European Union $ 6,119 $ 5,098 $ 3,970

3 unchanged sentences

East Asia & Australia 2,556 2,400 1,932

Latin America & Canada (1)

564 235 1,145

Other (52) — —

Operating income $ 12,975 $ 11,668 $ 10,531

5 unchanged sentences

• Asset impairment and exit costs - See Item 8, Note 19.

Asset Impairment and Exit Costs for details of the $149 million and $422 million pre-tax charges for the years ended December 31, 2020 and 2019, respectively, as well as a breakdown of these costs by segment.

Asset Impairment and Exit Costs for details of the $216 million, $149 million and $422 million pre-tax charges for the years ended December 31, 2021, 2020 and 2019, respectively, as well as a breakdown of these costs by segment.

• Saudi Arabia customs assessments – See Item 8, Note 17.

Contingencies for the details of the $246 million reduction in net revenues of combustible products included in the Middle East & Africa segment for the year ended December 31, 2021.

• Asset acquisition cost - See Item 8, Note 6.

Acquisitions for the details of the $51 million pre-tax charge associated with the asset acquisition of OtiTopic, Inc.

included in Other within the operating income table above for the year ended December 31, 2021.

• Russia excise and VAT audit charge - See Item 8, Note 17.

2 unchanged sentences

Contingencies and Note 20.

Deconsolidation of RBH for details of the $194 million pre-tax charge included in the Latin America & Canada segment for the year ended December 31, 2019.

Deconsolidation of RBH for details of the $194 million pre-tax charge included in the Americas segment for the year ended December 31, 2019.

• Loss on deconsolidation of RBH - See Item 8, Note 20.

Deconsolidation of RBH for details of the $239 million loss included in the Latin America & Canada segment for the year ended December 31, 2019.

Deconsolidation of RBH for details of the $239 million loss included in the Americas segment for the year ended December 31, 2019.

• Brazil indirect tax credit - Following a final and enforceable decision by the highest court in Brazil in October 2020, PMI recorded a gain of $119 million for tax credits representing overpayments of indirect taxes for the period from March 2012 through December 2019;

these tax credits will be applied to future tax liabilities in Brazil.

A decision regarding an additional amount of overpaid indirect taxes of approximately $90 million is still pending before this court.

these tax credits were applied to tax liabilities in Brazil during 2021.

An additional amount of overpaid indirect taxes of approximately $90 million is dependent on a potential tax authority challenge.

Our net revenues by product category were as follows:

7 unchanged sentences

East Asia & Australia 2,414 2,468 2,693

Latin America & Canada 1,670 2,179 3,037

Americas 1,790 1,670 2,179

Total Combustible Products $ 22,190 $ 21,867 $ 24,218

5 unchanged sentences

East Asia & Australia 3,539 2,961 2,671

Latin America & Canada 31 27 19

Americas 53 31 27

Total Reduced-Risk Products $ 9,115 $ 6,827 $ 5,587

Other $ 101 $ — $ —

Total PMI Net Revenues $ 31,405 $ 28,694 $ 29,805

4 unchanged sentences

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.

These net revenue amounts consist of the sale of our heated tobacco units, heat-not-burn devices and related accessories, and other nicotine-containing products, which primarily include our e-vapor and oral nicotine products.

and OtiTopic, Inc.

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:

References to "Cost/Other" in the Consolidated Financial Summary table of total PMI and the six geographical segments throughout this "Discussion and Analysis" reflects the currency-neutral variances of:

cost of sales (excluding the volume/mix cost component);

marketing, administration and research costs (including asset impairment and exit costs, the Canadian tobacco litigation-related expense, the charge related to the deconsolidation of RBH in Canada, and the Russia excise and VAT audit charge);

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, as well as the impact of the deconsolidation in RBH.

“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, and the Saudi Arabia customs assessment net revenue adjustment.

Our shipment volume by segment for cigarettes and heated tobacco units was as follows:

6 unchanged sentences

East Asia & Australia 43,913 45,100 49,951

Latin America & Canada 63,749 72,293 80,738

Americas 64,587 63,749 72,293

Total Cigarettes 624,875 628,518 706,709

5 unchanged sentences

East Asia & Australia 38,162 33,862 30,677

Latin America & Canada (1)

Americas 576 451 299

Total Heated Tobacco Units 94,976 76,111 59,652

5 unchanged sentences

East Asia & Australia 82,075 78,962 80,628

Latin America & Canada 64,200 72,592 80,885

Americas 65,163 64,200 72,592

Total Cigarettes and Heated Tobacco Units 719,851 704,629 766,361

(1) Includes shipments to Altria Group, Inc., commencing in the third quarter of 2019, for sale in the United States under license.

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.

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

These include HEETS , Next , Philip Morris and Rooftop.

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).

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

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

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.

Shipment volume of heated tobacco units to the United States is included in the heated tobacco unit shipment volume of the Americas 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.

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.

2020 and 2021 estimates for total industry volume and market share in certain geographies reflect limitations on the availability and accuracy of industry data during pandemic-related restrictions.

In-market sales ("IMS") is defined as sales to the retail channel, depending on the market and distribution model.

1 unchanged sentence

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.

Southeast Europe is defined as Albania, Bosnia & Herzegovina, Kosovo, Montenegro, North Macedonia and Serbia.

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

From time to time, PMI’s shipment volumes are subject to the impact of distributor inventory movements, and estimated total industry/market volumes are subject to the impact of inventory movements in various trade channels that include estimated trade inventory movements of PMI’s competitors arising from market-specific factors that significantly distort reported volume disclosures.

4 unchanged sentences

The following discussion compares our consolidated operating results for the year ended December 31, 2021, with the year ended December 31, 2020.

Estimated international industry cigarette and heated tobacco unit volume, excluding China and the United States, of 2.5 trillion, decreased by 5.8%, due to all PMI Regions, as described in the Regional sections below.

Our total shipment volume decreased by 8.1%, due to:

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

• Middle East & Africa, reflecting lower cigarette shipment volume, primarily in PMI Duty Free and Turkey, as well as lower heated tobacco unit shipment volume due to PMI Duty Free;

• South & Southeast Asia, reflecting lower cigarette shipment volume, primarily in Indonesia, Pakistan and the Philippines;

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

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

Excluding the volume impact from the RBH deconsolidation, our total shipment volume in the Region decreased by 10.3%;

Estimated international industry cigarette and heated tobacco unit volume, excluding China and the U.S., of 2.6 trillion, increased by 2.4%, driven by the EU, Middle East & Africa, South & Southeast Asia and Americas Regions, partly offset by the Eastern Europe and East Asia & Australia Regions, as described in the Regional sections.

Our total shipment volume increased by 2.2%, driven by:

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

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

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

• Americas, mainly reflecting higher cigarette shipment volume, primarily in Brazil and Mexico, partially offset by Argentina;

partly offset by

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

Excluding the volume impact from the RBH deconsolidation of approximately 1.0 billion units (reflecting first quarter 2019 volume of RBH-owned brands and including Duty-Free sales of these brands in Canada), PMI's total shipment volume decreased by 7.9%.

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

Total shipment volume in Eastern Europe was essentially flat, reflecting lower cigarette shipment volume, mainly in Russia and Ukraine, almost fully offset by higher heated tobacco unit shipment volume, primarily in Russia and Ukraine.

Impact of Inventory Movements

The net impact of estimated distributor inventory movements for the full year was immaterial.

Excluding the volume impact from the deconsolidation of RBH, our total in-market sales declined by 7.8%.

Excluding the net favorable impact of estimated distributor inventory movements of approximately 8.4 billion units, our total in-market sales increased by 1.0%, driven by a 21.1% increase in heated tobacco units, partly offset by a 1.5% decrease in cigarettes.

The net favorable impact of approximately 8.4 billion units reflected:

• A net favorable impact of 5.6 billion cigarettes, mainly driven by 2020 movements in Japan, PMI Duty Free and Russia;

• A net favorable impact of 2.7 billion heated tobacco units, primarily reflecting the growing category and driven by Japan, Italy, PMI Duty Free and Russia.

Our total heated tobacco unit in-market sales volume in the year was 92.5 billion units.

Our cigarette shipment volume by brand and heated tobacco unit shipment volume was as follows:

8 unchanged sentences

Dji Sam Soe 22,627 24,754 (8.6) %

Bond Street 24,113 28,025 (14.0) %

Lark 15,487 15,489 — %

Bond Street 14,175 24,113 (41.2) %

Next 8,849 8,980 (1.5) %

2 unchanged sentences

Heated Tobacco Units 94,976 76,111 24.8 %

76,111 59,652 27.6 %

Total Cigarettes and Heated Tobacco Units 719,851 704,629 2.2 %

(1) Includes shipments to Altria Group, Inc., commencing in the third quarter of 2019, for sale in the United States under license.

Sampoerna A includes Sampoerna ;

Philip Morris includes Philip Morris/Dubliss ;

Lark includes Lark Harmony ;

and Next includes Next/Dubliss

Next includes Next Dubliss ;

Philip Morris includes Philip Morris/Dubliss ;

and Sampoerna A includes Sampoerna .

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

Our cigarette shipment volume of the following brands increased:

• Marlboro, mainly driven by Mexico, PMI Duty Free, Russia and Turkey, partly offset by France, Japan and the Philippines;

• Chesterfield , primarily driven by Brazil, the Philippines and Russia, partly offset by Saudi Arabia;

• Parliament , mainly driven by Russia, Saudi Arabia and Turkey, partly offset by South Korea;

• Sampoerna A in Indonesia, primarily driven by premium A Mild .

Our cigarette shipment volume of the following brands decreased:

• Marlboro, mainly due to Indonesia, Italy, Japan, Mexico, the Philippines, PMI Duty Free, Saudi Arabia and Turkey, partly offset by Russia;

• L&M , notably due to PMI Duty Free and Poland, partly offset by Mexico and Turkey;

• Chesterfield , mainly due to Poland, Russia and Turkey, partly offset by Brazil and Saudi Arabia;

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

• Parliament , mainly due to PMI Duty Free, Russia and Turkey;

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

• L&M , mainly due to Egypt, Germany, Poland, Russia and Turkey;

• 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 , largely due to Russia and Ukraine;

• Lark , primarily due to Japan and Turkey;

• Bond Street , primarily due to Kazakhstan, Russia and Ukraine;

• Next , primarily due to Canada and Ukraine, partly offset by Russia;

• "Others," notably due to:

the impact of the deconsolidation of RBH in Canada;

mid-price Fortune and Hope in the Philippines, Muratti in Turkey and Sampoerna U in Indonesia;

and low-price Baronet (morphed to L&M ) in Mexico, Jackpot in the Philippines and Morven in Pakistan;

partly offset by mid-price Sampoerna Hijau in Indonesia.

Our cigarette shipment volume of the following brand increased:

• Next , notably driven by Israel and Russia.

The increase in our heated tobacco unit shipment volume was mainly driven by the EU (notably Italy and Poland), Eastern Europe (notably Russia and Ukraine) and Japan, partly offset by PMI Duty Free.

mid-price Fortune (Philippines) and Sampoerna U (Indonesia);

and low-price Jackpot (Philippines) and More (Philippines);

partly offset by mid-price Sampoerna Hijau (Indonesia) and low-price Morven (Pakistan).

PMI's cigarette shipment volume for Lark was flat.

2021 International Share of Market (excluding China and the United States)

Our total international market share (excluding China and the U.S.), defined as our cigarette and heated tobacco unit sales volume as a percentage of total industry cigarette and heated tobacco unit sales volume, decreased by 0.7 points to 27.7%, reflecting:

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 0.4 points to 27.3%, reflecting:

• Total international market share for cigarettes of 23.8%, down by 0.9 points;

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

Our total international cigarette sales volume as a percentage of total industry cigarette sales volume was down by 1.2 points to 25.7%, mainly reflecting:

out-switching to heated tobacco units, as well as lower cigarette market share and/or an unfavorable geographic mix impact, notably in Indonesia, Mexico, the Philippines and PMI Duty Free, partly offset by Brazil and Germany.

Our total international cigarette sales volume as a percentage of total industry cigarette sales volume was down by 0.8 points to 24.9%, mainly reflecting lower cigarette market share and/or an unfavorable geographic mix impact, notably in Japan, the Philippines and Russia, partly offset by Indonesia and Turkey.

In 2021, we owned five of the world's top 15 international cigarette brands, with international cigarette market shares as follows:

27 unchanged sentences

Japan 139.5 142.9 55.2 51.1 22.1 22.2 33.1 28.9 38.5 37.1 22.9 20.4

Korea 71.6 68.6 14.8 15.5 10.2 10.8 4.6 4.6 20.7 22.6 6.5 6.8

Latin America & Canada

South Korea 71.7 71.6 14.1 14.8 9.4 10.2 4.7 4.6 19.7 20.7 6.5 6.5

Argentina 36.1 33.6 19.9 20.5 19.9 20.5 — — 55.1 61.0 — —

2 unchanged sentences

% change for Total Market and PMI shipments is computed based on millions of units.

PMI Market Share estimates for previous periods are restated to reflect RBH deconsolidation and exclude RBH-owned brands.

"-" indicates volume below 50 million units and market share below 0.1%

Financial Summary

Financial Summary -

December 31, Change

Years Ended December 31, Change

Fav./(Unfav.) Variance

1 unchanged sentence

2021 2020 Total Excl.

rency Price Vol/

rency Acqui-sitions Price Vol/

Mix Cost/Other

1 unchanged sentence

Net Revenues (1)

$ 31,405 $ 28,694 9.4 % 6.7 % $ 2,711 $ 678 $ 109 $ 667 $ 1,538 $ (281)

Cost of Sales (10,030) (9,569) (4.8) % (1.2) % (461) (266) (82) — (530) 417

3 unchanged sentences

Operating Income $ 12,975 $ 11,668 11.2 % 8.9 % $ 1,307 $ 268 $ 1 $ 667 $ 1,008 $ (637)

(1) Cost/Other variance includes the impact of the RBH deconsolidation.

(2) Favorable Cost/Other variance includes the 2019 Russia excise and VAT audit charge of $374 million, the 2019 Canadian tobacco litigation-related expense of $194 million, the 2019 loss on deconsolidation of RBH of $239 million, the 2019 asset impairment and exit costs of $422 million, the 2020 asset impairment and exit costs of ($149 million) and the 2020 Brazil indirect tax credit of $119 million, as well as the impact of the RBH deconsolidation.

Net Revenues include revenues from shipments of Platform 1 devices, heated tobacco units and accessories to Altria Group, Inc., commencing in the third quarter of 2019, for sale under license in the United States.

Net revenues, excluding unfavorable currency, decreased by 2.2%, reflecting:

and the unfavorable impact of $253 million, shown in "Cost/Other," mainly resulting from the deconsolidation of RBH and lower fees for certain distribution rights billed to customers in certain markets;

partly offset by a favorable pricing variance (notably driven by the GCC, Germany, Japan, Mexico, North Africa, the Philippines, PMI Duty Free, Russia and Ukraine, partially offset by Indonesia, Poland and Turkey).

The unfavorable currency in net revenues was due primarily to the Brazilian real, Indonesian rupiah, Mexican pesos, Russian ruble and Turkish lira, partially offset by the Euro, Japanese yen and Philippine peso.

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

For more details, see Item 8, Note 17.

Contingencies .

(2) Cost/Other variance includes charges in 2021 and 2020 of $216 million and $149 million, respectively, for asset impairment and exit costs.

Cost/Other variance also includes in 2021 the pre-tax charge of $51 million associated with the asset acquisition cost of OtiTopic, Inc., and in 2020 the Brazil indirect tax credit of $119 million.

For more details, see Item 8, Note 6.

Acquisitions, Item 8, Note 12.

Segment Reporting and Item 8, Note 19.

Asset Impairment and Exit Costs .

Net revenues, excluding currency and acquisitions, increased by 6.7%, mainly reflecting:

favorable volume/mix, primarily driven by higher heated tobacco unit volume (notably in the EU, particularly Germany, Hungary, Italy and Poland, as well as Japan, Russia and Ukraine) and higher device volume (notably in the EU, primarily Italy, and Japan, partly offset by South Korea), partially offset by lower cigarette volume (mainly in the EU Region, notably the Czech Republic, France and Germany, as well as the GCC, North Africa, the Philippines, Russia and Ukraine, partly offset by India, Indonesia, PMI Duty Free and Turkey) and unfavorable cigarette mix (primarily in Germany, Japan and Russia, partially offset by Indonesia and PMI Duty Free);

and a favorable pricing variance (notably driven by the Czech Republic, Germany, Japan, Kazakhstan, the Philippines, Russia and Turkey, partly offset by Australia, Indonesia, Poland and Ukraine);

partially offset by the unfavorable impact of the Saudi Arabia customs assessments of $246 million, shown in "Cost/Other".

Excluding the unfavorable impact of the Saudi Arabia customs assessments of $246 million, net revenues increased by 10.3%, or 7.6% excluding favorable currency of $678 million and acquisitions of $109 million.

The favorable currency in net revenues was due primarily to the Australian dollar, Czech krona, Euro, Indonesian rupiah, Mexican peso and Philippine peso, partially offset by the Russian ruble and Turkish lira.

Net revenues include $9.1 billion in 2021 and $6.8 billion in 2020 related to the sale of RRPs.

IQOS devices accounted for approximately 7% of RRP net revenues for the year ended December 31, 2020, mainly due to a naturally lower ratio of new users to existing users, longer replacement cycles and geographic mix.

Operating income, excluding unfavorable currency, increased by 15.3%, notably reflecting a favorable comparison, shown in "Cost/Other," of a net charge of $30 million recorded in 2020 related to asset impairment and exit costs of $149 million (associated with organizational design optimization) and the Brazil indirect tax credit of $119 million, to charges recorded in 2019 of $1.2 billion, related to:

asset impairment and exit costs ($422 million), associated with plant closures in Argentina, Colombia, Germany and Pakistan), the loss on the deconsolidation of RBH ($239 million), the Canadian tobacco litigation-related expense ($194 million), and the Russia excise and VAT audit charge ($374 million).

Excluding these 2020 and 2019 items noted above, and unfavorable currency of $475 million, operating income increased by 3.5%, primarily reflecting:

For the year ended December 31, 2021, IQOS devices accounted for over 6% of RRP net revenues, with a step-up in the second half of 2021 reflecting the IQOS ILUMA launch;

outweighing the effect of supply constraints on other IQOS versions.

Operating income, excluding currency and acquisitions, increased by 8.9%, primarily reflecting:

favorable volume/mix, mainly driven by higher heated tobacco unit volume, partly offset by lower cigarette volume and unfavorable cigarette mix (each mainly reflecting the same geographies as for net revenues noted above);

a favorable pricing variance;

lower manufacturing costs (driven by productivity gains related to reduced-risk and combustible products) and lower marketing, administration and research costs (partly driven by cost efficiencies);

partially offset by unfavorable volume/mix, mainly due to lower cigarette volume (primarily in Indonesia, Italy, Japan, Mexico, the Philippines, PMI Duty Free, Poland and Russia), partly offset by higher heated tobacco unit volume (notably in the EU, Japan, Russia and Ukraine, partially offset by PMI Duty Free);

and the unfavorable impact of the deconsolidation of RBH, included in "Cost/Other."

Interest expense, net, of $618 million increased by $48 million (8.4%) due primarily to lower interest earned on cash balances.

Our effective tax rate decreased by 1.5 percentage points to 21.7%.

The effective tax rate for the year ended December 31, 2020 was favorably impacted by changes in earnings mix by taxing jurisdiction, a reduction of U.S.

state tax expense, a reduction of estimated U.S.

federal income tax liabilities for years 2018 and 2019 due to final regulations under the GILTI provisions of the Internal Revenue Code ($93 million) and the corporate income tax rate reduction in Indonesia, partially offset by a decrease in deductions related to

foreign-derived intangible income for the years 2018 and 2019 and repatriation cost differences.

and lower manufacturing costs (driven by significant productivity gains related to reduced-risk and combustible products);

partly offset by higher marketing, administration and research costs, including an unfavorable comparison related to the Brazil indirect tax credit in 2020, higher asset impairment and exit costs (mainly related to organizational design optimization, as well as product distribution restructuring in South Korea) and asset acquisition costs related to OtiTopic;

and the unfavorable impact of the Saudi Arabia customs assessments (as noted above for net revenues).

Interest expense, net, of $628 million increased by $10 million (1.6%).

Our effective tax rate increased by 0.1 percentage point to 21.8%.

We estimate that our 2022 effective tax rate will be around 22%, excluding discrete tax events.

Changes in currency exchange rates, earnings mix by taxing jurisdiction or future regulatory developments may have an impact on the effective tax rates, which we monitor each quarter.

Significant judgment is required in determining income tax provisions and in evaluating tax positions.

For further details, see Item 8, Note 11.

Income Taxes .

We are regularly examined by tax authorities around the world, and we are currently under examination in a number of jurisdictions.

It is reasonably possible that within the next 12 months certain tax examinations will close, which could result in a change in unrecognized tax benefits along with related interest and penalties.

An estimate of any possible change cannot be made at this time.

Net earnings attributable to PMI of $8.1 billion increased by $871 million or 12.1%.

This increase was due primarily to higher operating income as discussed above and a lower effective tax rate.

Diluted and basic EPS of $5.16 increased by 11.9%.

Excluding an unfavorable currency impact of $0.32, diluted EPS increased by 18.9%.

Net earnings attributable to PMI of $9.1 billion increased by $1.1 billion or 13.1%.

This increase was due primarily to higher operating income as discussed above, partially offset by a higher effective tax rate.

Basic and diluted EPS of $5.83 increased by 13.0%.

Excluding a favorable currency impact of $0.12, diluted EPS increased by 10.7%.

2020 compared with 2019

17 unchanged sentences

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 (“WHO”) Framework Convention on Tobacco Control (“FCTC”), which entered into force in 2005.

Much of the regulation that shapes the business environment in which we operate is driven by the Framework Convention on Tobacco Control (the “FCTC”) of the World Health Organization (the "WHO"), 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.

4 unchanged sentences

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.

It is not possible to predict whether or to what extent measures recommended by the WHO, including the FCTC guidelines, will be implemented.

We believe that when better alternatives to cigarettes exist, the discussion should not be whether these alternatives should be made available to the more than one billion men and women who smoke today, but how fast, and within what regulatory framework to maximize their adoption while minimizing unintended use.

Prior to CoP 9 that took place in November 2021, the WHO and the WHO FCTC Secretariat published two reports on novel and emerging tobacco products.

The reports were noted by CoP 9 and related substantive discussions and decisions were deferred to CoP 10, currently scheduled for 2023.

It is not possible to predict whether or to what extent measures recommended by the WHO's reports will be implemented as the reports are not binding to the WHO Member States.

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.

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.

9 unchanged sentences

World Customs Organization Developments :

In 2020, the World Customs Organization (“WCO”) amended the harmonized system nomenclature to introduce dedicated custom codes for novel tobacco and nicotine products, including heated tobacco products, e-cigarettes and other nicotine-containing products.

The amendments will be effective as of January 1, 2022.

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 became 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.

1 unchanged sentence

EU Tobacco Products Directive:

In April 2014, the EU adopted a significantly revised EU Tobacco Products Directive (TPD), which entered into force in May 2016.

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.

2 unchanged sentences

• 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 on May 20, 2019;

• security features and tracking and tracing measures that became effective in May 2019;

• 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.

In May 2021, the European Commission published its first report on the application of the TPD.

The report identifies significant progress made due to the implementation of the TPD and where there is still room for improvement.

Most notably, it finds that the EU legislation has enhanced tobacco control, contributed to protecting the health of EU citizens by providing Member States with strong rules to address the use of tobacco products in the EU.

The TPD reportedly achieved the 2% reduction target of the impact assessment with decreased smoking prevalence among youth.

The report also concludes that there is scope for improvement in certain areas, such as enforcement at national level, assessment of ingredients, and a better consideration for novel and emerging products.

In November 2021, the European Commission published the implementation roadmap to Europe's Beating Cancer Plan (the "Plan").

According to the Plan, a revision of the TPD is planned for 2024.

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.

The proposal is expected to be finalized and adopted by the EU Council in 2023.

The adoption of the final proposal by the EU Council will require unanimous agreement by all EU member states.

Plain Packaging and Other Packaging Restrictions:

1 unchanged sentence

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.

Some countries, such as Canada, Denmark, Israel and New Zealand adopted plain packaging regulations that apply to all tobacco products, including RRPs.

Other countries are also considering plain packaging legislation.

10 unchanged sentences

Turkey banned menthol as of May 2020.

Broader ingredient bans have been adopted by Canada and Brazil.

Broader ingredient bans have been adopted by Brazil and Canada.

Bans on Display of Tobacco Products at Retail:

17 unchanged sentences

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 will have two years to transpose it into national law.

The EU Single-Use Plastics Directive, which will require tobacco manufacturers and importers to cover the costs of public collection systems for tobacco product filters, under Extended Producer Responsibility ("EPR") schemes, entered into force on July 2, 2019.

To date, some member states transposed the Directive into national legislation.

We expect remaining member states to transpose the EU Single-Use Plastics Directive into national legislation including EPR schemes by January 2023.

While we cannot predict the impact of this initiative on our business at this time, we are monitoring developments in this area.

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.

Without accounting for any potential COVID-19-related impact, we generally estimate that, excluding China and the U.S., illicit trade may account for as much as 10 to 12% of global cigarette consumption;

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.

5 unchanged sentences

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.

In November 2021, the second Meeting of the Parties to the Protocol decided, among others, to focus on the implementation of a framework for global information sharing to combat illicit tobacco trade and enable the parties to exchange products' tracking and tracing information in a secure manner.

We welcome this decision and expect that other Parties will ratify the Protocol.

13 unchanged sentences

We recognize that smoking cigarettes causes serious diseases and that the best way to avoid the harms of smoking is never to start or to quit.

Nevertheless, it is predicted that over the next decade the number of smokers will remain largely unchanged from the current estimate of 1.1 billion, despite the considerable efforts to discourage smoking.

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.

In contrast, RRPs do not burn tobacco and therefore contain significantly lower levels of harmful and potentially harmful constituents ("HPHCs") than found in cigarette smoke.

For adult smokers who would otherwise continue to smoke, we believe that RRPs, while not risk-free, offer a much better consumer choice.

Accordingly, our key strategic priorities are:

to develop and commercialize products that present less risk of harm to adult smokers who switch to those products versus continued smoking;

and to convince current adult smokers who would otherwise continue to smoke to switch to those products.

Accordingly, our key strategic priorities are to:

(i) to develop and commercialize products that present less risk of harm to adult smokers who switch to those products versus continued smoking;

and (ii) educate and convince convince current adult smokers who would otherwise continue to smoke to switch to those products.

We recognize that this transformation from cigarettes to RRPs will take time and that the speed of transformation will depend in part upon factors beyond our control, such as the willingness of governments, regulators and other policy groups to embrace RRPs as a desired alternative to continued cigarette smoking.

We also recognize that our part in this transformation must be funded from our existing cigarette business.

For as long as a significant number of adult smokers continues to smoke, it is critical that the industry be led by responsible and ethical manufacturers.

Therefore, during the transformation, we intend to remain a leading international cigarette manufacturer.

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 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.

5 unchanged sentences

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.

Our product development is based on the elimination of combustion via tobacco heating and other innovative systems, which we believe are the most promising path to providing a better consumer choice for 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:

Five PMI-developed or improved 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.

5 unchanged sentences

We shared the results with the FDA in August 2018.

In addition to the original version of Platform 1 which relies on a heating technology using a blade, a new version of Platform 1 is now available using induction.

All studies referenced above were conducted with the blade version of Platform 1.

We believe that there is full comparability between the versions, therefore the data from these studies remain valid.

Platform 2 uses a pressed carbon heat source which, when ignited, generates a nicotine-containing aerosol by heating tobacco.

2 unchanged sentences

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.

We conducted a consumer test of our Platform 2 design in the last quarter of 2021.

As a result of the feedback from this consumer test, the design of our current Platform 2 technology has been discontinued.

We are assessing alternative designs for this consumer segment.

Platform 3 provides an aerosol of nicotine salt.

1 unchanged sentence

The results of our pharmacokinetic study related to the version without electronics indicate this product's potential as an acceptable alternative to continued cigarette smoking in terms of product satisfaction.

In February 2020, we completed a product use and adaptation study in adult smokers for the product variant without electronics.

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.

2 unchanged sentences

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.

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;

1 unchanged sentence

The study demonstrated that e-cigarette vapors induce significantly lower biological responses associated with cardiovascular and pulmonary diseases compared with cigarette smoke.

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

The research and development expense for our RRP portfolio accounted for 99%, 98% and 92% of our total research and development expense for the years ended December 31, 2020, 2019 and 2018, respectively.

Recently, we designed a new consumable for our e-vapor mesh technology to deliver real tobacco taste satisfaction in an E-Vapor product liquid-using patented technology, where flavors and nicotine are extracted directly from the tobacco leaves and captured in a liquid solution, without having to add flavoring ingredients.

This consumable has been commercialized in one market in December 2021.

Platform 5 covers Modern Oral Nicotine Pouches, which consist of white pre-portioned pouches containing nicotine derived from tobacco.

Users place a pouch between the upper lip and gum and leave it there while the nicotine and taste are being released.

At the end of the use, the user can dispose of the pouch.

Nicotine pouches are inherently smoke-free as they are consumed orally, and no combustion process occurs during use.

Our nicotine pouches do not contain tobacco.

Instead, they contain primarily nicotine, flavors, and a cellulose substrate.

The nicotine used in the pouches is of pharmaceutical-grade like the nicotine used in medicinal products, such as gums and inhalers, while the flavors are approved for use in food in accordance with the product quality standards for nicotine pouches developed by the Swedish Institute for Standards.

In 2021, PMI acquired AG Snus as well as Fertin Pharma, two companies manufacturing and/or marketing nicotine pouches.

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.

The research and development expense for our smoke-free portfolio accounted for 99%, 99% and 98% of our total research and development expense for the years ended December 31, 2021, 2020 and 2019, respectively.

The research and development expense for the years ended December 31, 2021, 2020 and 2019, is set forth in Item 8, Note 14.

6 unchanged sentences

During the COVID-19 pandemic, we accelerated our investments in, and pivot to, digital consumer engagement.

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

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, and as of December 31, 2020 the product has been commercialized in 64 markets in key cities or nationwide.

While our Platform 1 products are currently available for sale in Mexico, that country banned the importation of e-cigarettes and devices that heat tobacco.

Since then, we have continuously expanded our commercialization activities.

We believe that only a very small percentage of adult smokers who convert to our Platform 1 product switch back to cigarettes.

1 unchanged sentence

An adequate supply chain for our RRP portfolio, including the supply of electronic devices, is important to our business.

We work with two electronics manufacturing service providers for the supply of our Platform 1 and IQOS VEEV devices and a small number of other providers for other products in our RRP portfolio and related accessories.

Due to the COVID-19 pandemic, the operations of our two electronic manufacturing service providers were temporarily suspended at different times.

Even though these suspensions did not materially affect our operations, if both of these service providers were significantly constrained at the same time, the supply of the devices could be disrupted.

We work with four electronics manufacturing service providers for the supply of our Platform 1 and Platform 4 devices, and a small number of other providers for other products in our RRP portfolio and related accessories.

Due to the COVID-19 pandemic, the operations of our two main electronic manufacturing service providers were temporarily suspended at different times.

Even though these suspensions did not materially affect our operations, if one or more of these service providers were significantly constrained at the same time, the supply of the devices could be disrupted.

Although we work closely with these service providers on monitoring their production capability and financial health, we cannot guarantee that they will remain capable of meeting their commitments, particularly during the COVID-19 pandemic;

if they will not, the commercialization of our RRPs could be adversely affected.

The production of our RRP portfolio requires various metals, and we believe that there is an adequate supply of such metals in the world markets to satisfy our current and anticipated production requirements.

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.

1 unchanged sentence

this could negatively impact the commercialization of our RRPs.

For details on the impact of COVID-19 on our production and supply chain, see the " Executive Summary " section within this Item 7 of this Form 10-K.

Our Platform 1 and IQOS VEEV devices are subject to standard product warranties generally for a period of 12 months from the date of purchase or such other periods as required by law.

In addition, we are also exposed to a world-wide shortage of semiconductors, which continues to put constraints on our device supplies for RRPs.

We believe, however, that the overall impact of this shortage remains manageable, and we have adjusted our device assortments to limit the effect on consumer availability of our RRPs.

We discuss product warranties in more detail in Item 8, Note 5.

2 unchanged sentences

Product quality may affect consumer acceptance of our RRPs.

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

• In 2020, we started commercializing an improved version of our IQOS MESH product in New Zealand and the Czech Republic under the IQOS VEEV brand name.

We currently plan to launch this product in additional markets under the IQOS VEEV or VEEV brand names.

• 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.

Our near-term planned commercialization efforts for the other PMI-developed RRP platforms are as follows:

• We started commercializing an improved version of our IQOS MESH product in Canada, Corsica, Croatia, the Czech Republic, Finland, Italy, Ukraine and New Zealand under the IQOS VEEV or VEEV brand names.

We currently plan to launch this product in additional markets.

• With respect to TEEPS , our Platform 2 product, we finalized our improvements to this product and conducted a consumer test in the last quarter of 2021.

As a result of the feedback from this consumer test, the design of our current Platform 2 technology has been discontinued.

We are assessing alternative designs for this consumer segment.

• 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.

• We launched a Platform 5 product in Sweden in January 2022, that is a reformulated version of the already commercialized nicotine pouches bearing the Shiro brand by our newly acquired affiliate AG Snus.

Due to the COVID-19 pandemic, certain of these commercialization efforts could be delayed.

RRP Regulation and Taxation:

3 unchanged sentences

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, 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.

During the COVID-19 pandemic, some governments have been and may continue to be temporarily unable to focus on the development of science-based regulatory frameworks for the development and commercialization of RRPs or on the enforcement or implementation of regulations that are significant to our business.

We oppose blanket bans and unreasonable restrictions of products that have the potential to present less risk of harm compared to continued smoking.

11 unchanged sentences

• 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.

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.

On March 18, 2021, we submitted to the FDA a supplemental MRTPA ("sMRTPA") for IQOS 3 requesting authorization to market this version of the device as a Modified Risk Tobacco Product with reduced exposure information like IQOS 2.4.

In June 2021, the FDA formally accepted and filed our sMRTPA for substantive scientific review and, already in May 2021, the FDA opened the period for the public to provide comments on our application.

The public comment period, which was initially scheduled to be closed on August 2, 2021, was extended on July 20, 2021 to provide time for the public to review application materials that were not previously posted by FDA.

The FDA closed the comment period for IQOS 3 's sMRTPA on December 10, 2021.

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.

We had requested both types of orders for IQOS 2.4 and an initial selection of 3 consumables' variants.

After review, the FDA determined that the evidence did not support issuing a "risk modification" order at this time but that it did support issuing an "exposure modification" order for the product.

8 unchanged sentences

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 June 2021, the FDA responded to our letter and requested additional information regarding the applicability of the cigarette health warnings rule to the IQOS System and HeatSticks .

Philip Morris Products S.A.

is committed to providing adult consumers of tobacco products with complete, accurate and non-misleading information regarding the health risks associated with the use of the IQOS System and HeatSticks .

We shared our views with the FDA on the applicability of new health warnings to our products in our submission on December 2, 2021.

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.

1 unchanged sentence

The FDA announced on September 9, 2020 that it will prioritize enforcement against any tobacco and nicotine-containing product sold without a PMTA.

On October 5, 2021, FDA published its final PMTA rule in the Federal Register, which is effective November 4, 2021.

All future applications will have to comply with the requirements in the PMTA rule, which is substantially similar to the version of the final PMTA rule which was posted on Advanced Federal Register on January 19, 2021.

FDA actions may influence the regulatory approach of other governments.

On September 29, 2021, the International Trade Commission ("ITC") issued its Final Determination ("FD"), Limited Exclusion Order ("LEO") and Cease and Desist Order ("CDO").

The ITC upheld the finding of infringement in the ID and found a subsequent violation.

The ITC issued a LEO prohibiting the importation of infringing tobacco heating articles and components thereof and cease and desist orders against Philip Morris USA, Inc.

and Altria Client Services, LLC, which went into effect at the end of the 60-day Presidential review period on November 28, 2021.

We have appealed the patent issues.

Furthermore, lawsuits based on the same patent families have been repeatedly and universally rejected in European courts and the European Patent Office.

The decision has no bearing outside the United States.

Until recently, there were no countries with specific product standards for heat-not-burn products.

Currently, national standards setting minimum quality and safety requirements for such products have been adopted in several countries with technical heat-not-burn specifications and/or methods for demonstrating the absence of combustion.

They are mandatory in Egypt, Jordan, Saudi Arabia, Tunisia and the UAE, and voluntary in the U.K., Russia, Ukraine, Kazakhstan, Kyrgyzstan, Vietnam, and Indonesia.

They are mandatory in Egypt, Jordan, Saudi Arabia, Tunisia, the UAE, Uzbekistan and Bahrain, and voluntary in Armenia, Costa Rica, Indonesia, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, Vietnam, the U.K.

In Japan, a voluntary standard sets minimum safety requirements for tobacco heating devices.

1 unchanged sentence

All EU member states have transposed the EU Tobacco Products Directive, including the provisions on novel tobacco products, such as heated tobacco units, and e-cigarettes.

Most of the EU member states require a notification submitted six months before the intended placing on the market of a novel tobacco product, while some require pre-market authorizations for the introduction of such products.

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.

35 unchanged sentences

The CNTQST found that the former contained fewer, and lower levels of, harmful constituents than the latter and concluded that the lower temperature of heating tobacco in our Platform 1 product contributed to the difference.

The CNTQST stated that the reduction in emissions of harmful constituents cannot be interpreted as equivalent to a proportionate harm/risk reduction for smokers.

The CNTQST stated that the reduction in emissions of harmful constituents cannot be interpreted as a harm/risk reduction for smokers in the same proportion.

In 2020, 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.

11 unchanged sentences

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.

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:

4 unchanged sentences

(“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.

Under the agreement, PM USA must achieve certain milestones to maintain its exclusive distribution right and additional milestones to extend the agreement after the initial 5-year term.

PMI and Altria are currently discussing these milestones, the contractual obligations, and the impact of the United States International Trade Commission (“ITC”) Orders (For more details please refer to Item 8, Note 17 .

Contingencies ).

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.

3 unchanged sentences

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.

We contributed $45 million in 2020, $40 million in 2021, and expect to contribute $35 million annually from 2022 through 2029, as specified in the amended pledge agreement.

To date, we contributed a total of $249.5 million.

3 unchanged sentences

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 Item 8, Note 17.

We describe certain matters pending in Russia, South Korea and Thailand in Item 8, Note 17.

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 Item 8, Note 17.

In November 2010, a World Trade Organization ("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 Item 8, Note 17.

Contingencies for additional information).

9 unchanged sentences

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.

At the first trial hearing held on September 22, 2021, BAT filed a civil claim against PM Italia claiming vicarious liability for any wrongdoing of its former or current employees.

BAT claims EUR 50 million in damages.

The court admitted the claim as a matter of course and issued summons for PM Italia to appear as civil party in the case.

The next trial hearing is scheduled for April 8, 2022.

PM Italia believes the charges brought against it by the Public Prosecutor are without merit and will defend them vigorously.

5 unchanged sentences

Acquisitions to our consolidated financial statements.

On January 5, 2022, we acquired the remaining 25% stake of our holding in Philsa Philip Morris Sabancı Sigara ve Tütüncülük Sanayi ve Ticaret A.Ş.

("PHILSA") and 24.75% stake in Philip Morris SA, Philip Morris Sabancı Pazarlama ve Satış A.Ş.

("PMSA") from our Turkish partners, Sabanci Holding for an acquisition price of $205 million (TRY 2,747 million).

This amount was paid on January 5th 2022, but the final acquisition price remains subject to certain predetermined adjustments based on the audited financial results of PHILSA and PMSA for fiscal years 2021 and 2022.

As a result of this acquisition, PMI now owns 100% of these Turkish subsidiaries.

Global Collaboration Agreement with KT&G

8 unchanged sentences

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.

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

Equity Investments

1 unchanged sentence

Related Parties - Equity Investments and Other to our consolidated financial statements.

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.

We are subject to various trade restrictions imposed by the U.S.

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.

4 unchanged sentences

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.

A subsidiary sells products to distributors that, in turn, sell those products to duty free customers that supply U.N.

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.

6 unchanged sentences

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.

law under a License Exception for Agricultural Commodities, issued by the United States Department of Commerce (Bureau of Industry and Security), granted to our

Certain states within the U.S.

2 unchanged sentences

We do not believe such legislation has had a material effect on the price of our shares.

PMI is also subject to various Trade Sanctions imposed by the EU and other jurisdictions ("Trade Sanctions").

We comply fully with these Trade Sanctions.

The EU imposed new sanctions regarding the Republic of Belarus ("Belarus") on June 21, 2021, including the designation of additional EU sanctions targets (individuals and legal entities) in Belarus.

On June 24, 2021, the EU council introduced additional sectoral economic sanctions aimed at specific sectors of the Belarus economy, including restrictions on the trade of goods used for the production or manufacture of tobacco products.

Subsequently, six non-EU countries (Norway, Iceland, Liechtenstein, North Macedonia, Montenegro, and Albania) announced that they “aligned themselves” with the EU sanctions of June 21.

On July 6, 2021, Switzerland imposed sanctions on Belarusian individuals and legal entities effective July 7, 2021.

The Swiss sanctions are similar in scope to the EU sanctions of June 21, 2021.

Further, on August 9, 2021, the U.K.

introduced sectoral economic sanctions similar in scope to the EU sectoral sanctions of June 24, 2021.

Also on August 9, 2021, the U.S.

imposed blocking sanctions on certain individuals and entities pursuant to an Executive Order adding them to the list of Specially Designated Nationals and Blocked Persons (the "SDN List") issued by the U.S.

Department of Treasury's Office of Foreign Asset Control ("OFAC").

The Executive Order expanded the bases for the imposition of sanctions, including, among others, by authorizing the imposition by OFAC of blocking sanctions on persons operating in the tobacco sector of the Belarus economy, as well as for providing material support or assistance to any SDN.

In December 2021, the U.S., the EU, the U.K.

and Canada amended their respective sanctions lists by including additional Belarusian individuals, entities, and aircraft.

PMI complies with all applicable laws and regulations, including sanctions, in the markets where it operates.

We have taken appropriate actions in response to the latest sanctions to ensure full compliance with the relevant restrictions.

2021 compared with 2020

The following discussion compares operating results within each of our operating segments for 2020 with 2019.

The following discussion compares operating results within each of our geographical segments and Other category for 2021 with 2020.

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

2 unchanged sentences

Financial Summary -

December 31, Change

Years Ended December 31, Change

Fav./(Unfav.) Variance

1 unchanged sentence

2021 2020 Total Excl.

rency Price Vol/

rency Acqui-sitions Price Vol/

(in millions)

1 unchanged sentence

Operating Income $ 6,119 $ 5,098 20.0 % 12.5 % $ 1,021 $ 384 $ 2 $ 69 $ 728 $ (162)

Net revenues, excluding favorable currency, increased by 8.8%, reflecting:

favorable volume/mix, mainly driven by higher heated tobacco unit volume across the Region (notably in the Czech Republic, Germany, Hungary, Italy and Poland), partly offset by lower cigarette volume (notably in the Czech Republic, Italy, Poland and Spain, partly offset by Germany) and lower cigarette mix (mainly in Germany);

and a favorable pricing variance (driven by higher combustible pricing, notably in Germany, partly offset by lower heated tobacco unit and IQOS device pricing).

Operating income, excluding unfavorable currency, increased by 29.0%, notably reflecting a favorable comparison, shown in "Cost/Other," of asset impairment and exit costs recorded in 2020 associated with organizational design optimization ($57 million), to those recorded in 2019 associated with a plant closure in Germany ($342 million).

Excluding these asset impairment and exit costs, as well as unfavorable currency of $24 million, operating income increased by 20.1%, primarily reflecting:

favorable volume/mix, mainly driven by the same factors as for net revenues noted above;

a favorable pricing variance;

and lower manufacturing costs (notably in Germany);

partly offset by higher marketing, administration and research costs (mainly related to increased investments behind reduced-risk products, notably in Germany and Poland).

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

Total market, PMI shipment volume and market share performance are shown in the table below:

Net revenues, excluding currency and acquisitions, increased by 8.8%, reflecting:

favorable volume/mix, mainly driven by higher heated tobacco unit volume (notably in Germany, Hungary, Italy and Poland), as well as higher device volume and favorable device mix (notably in Italy), partly offset by lower cigarette volume (notably in the Czech Republic, France and Germany) and unfavorable cigarette mix (primarily in Germany);

and a favorable pricing variance, driven by higher combustible pricing (mainly in Germany and Portugal, partly offset by France and Poland) and higher heated tobacco unit pricing (notably in the Czech Republic and Germany, partially offset by Poland), partly offset by lower device pricing (notably in Germany and Italy).

Operating income, excluding currency and acquisitions, increased by 12.5%, primarily reflecting:

favorable volume/mix, mainly driven by higher heated tobacco unit volume and favorable device mix, partly offset by lower cigarette volume and unfavorable cigarette mix (each primarily reflecting the same geographies 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 (due to combustible and reduced-risk products).

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 Full-Year

1 unchanged sentence

Total Market (billion units) 478.2 473.4 1.0 %

PMI Shipment Volume (million units)

Cigarettes 163,420 174,319 (6.3) %

Heated Tobacco Units 19,842 12,569 57.9 %

Total European Union 183,262 186,888 (1.9) %

PMI Market Share

3 unchanged sentences

Philip Morris 2.2 % 2.4 % (0.2)

HEETS 4.2 % 2.5 % 1.7

Heated Tobacco Units 5.7 % 4.2 % 1.5

Others 3.1 % 3.0 % 0.1

Total European Union 38.6 % 38.8 % (0.2)

HEETS includes HEETS Dimensions.

The estimated total market in the EU decreased by 2.1% to 472.7 billion units, notably due to:

• Czech Republic, down by 10.9%, primarily reflecting lower border sales due to lockdown measures;

• France, down by 3.6%, mainly reflecting the impact of significant excise tax-driven price increases, partly offset by the pandemic-related impact of lower cross-border (non-domestic) purchases and a lower estimated prevalence of illicit trade due to border restrictions;

• Spain, down by 7.8%, primarily reflecting lower in-bound tourism and border sales due to the pandemic;

The estimated total market in the EU increased by 1.0% to 478.2 billion units, primarily driven by:

• Italy, up by 4.4%, mainly reflecting the impact on adult smoker average daily consumption of the easing of pandemic-related measures;

• Poland, up by 8.1%, primarily reflecting the impact on adult smoker average daily consumption and border sales of the easing of pandemic-related measures, as well as a lower prevalence of illicit trade;

partly offset by

• Germany, up by 1.9%, notably reflecting the pandemic-related impact of lower cross-border (non-domestic) purchases and reduced out-bound tourism, partly offset by the impact of retail price increases in the first quarter of 2020 and adult smoker out-switching to other combustible tobacco products.

Our total shipment volume decreased by 1.9% to 183.3 billion units, reflecting:

• lower cigarette shipment volume, mainly due to the lower total market and lower cigarette market share (notably in Italy and Poland, partly reflecting out-switching to heated tobacco units);

• Czech Republic, down by 7.3%, mainly reflecting the impact of excise tax-driven price increases;

• France, down by 6.2%, 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.

Our Regional market share decreased by 0.2 points to 38.6%, with declines in the Czech Republic, France and Germany, partly offset by gains in Greece and Italy.

Our total shipment volume increased by 1.5% to 186.1 billion units, primarily driven by:

• Italy, up by 11.5%, or by 6.1% 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;

• Poland, up by 3.7%, primarily reflecting the higher total market, partially offset by a lower market share due to cigarettes;

partly offset by

• higher heated tobacco unit shipment volume across the Region (notably in Germany, Italy and Poland), driven by higher market share.

Our Regional market share increased by 0.1 point to 38.9%, with gains in Germany and Italy, partly offset by a decline in Poland.

• Czech Republic, down by 9.7%, mainly reflecting the lower total market and a lower market share due to cigarettes;

• France, down by 6.6%, primarily reflecting the lower total market and a lower market share due to cigarettes.

Eastern Europe:

Financial Summary -

December 31, Change

Years Ended December 31, Change

Fav./(Unfav.) Variance

1 unchanged sentence

2021 2020 Total Excl.

rency Price Vol/

rency Acqui-sitions Price Vol/

(in millions)

1 unchanged sentence

Operating Income $ 1,213 $ 871 39.3 % 38.5 % $ 342 $ 7 $ — $ 68 $ 139 $ 128

Net revenues, excluding unfavorable currency, increased by 10.9%, reflecting:

favorable volume/mix, predominantly driven by higher heated tobacco unit volume across the Region (notably in Russia and Ukraine) and higher heated tobacco unit mix (mainly in Russia), partly offset by unfavorable cigarette volume (primarily in Russia and Ukraine, partially offset by Israel) and unfavorable cigarette mix (mainly in Russia);

and a favorable pricing variance, driven by higher combustible pricing (primarily in Russia and Ukraine), partly offset by lower IQOS device pricing (mainly in Russia).

Operating income, excluding unfavorable currency, increased by over 100%, primarily reflecting a favorable comparison, shown in "Cost/Other," mainly due to a charge recorded in 2019 of $374 million, related to the Russia excise and VAT audit.

Excluding the 2019 Russia excise and VAT audit charge of $374 million, the 2020 charge for asset impairment and exit costs of $15 million and unfavorable currency of $299 million, operating income increased by 28.7%, reflecting:

Net revenues, excluding currency and acquisitions, increased by 5.9%, reflecting:

favorable volume/mix, driven by higher heated tobacco unit volume (mainly in Russia and Ukraine), partly offset by lower cigarette volume (primarily in Russia and Ukraine), as well as unfavorable cigarette mix (mainly in Russia);

and a favorable pricing variance, primarily driven by higher combustible pricing (mainly in Kazakhstan, Russia and Ukraine), partially offset by lower device pricing (primarily in Russia and Ukraine) and lower heated tobacco unit pricing (mainly in Ukraine, partly offset by Russia).

Operating income, excluding currency and acquisitions, increased by 38.5%, primarily reflecting:

favorable volume/mix, mainly driven by higher heated tobacco unit volume, partly offset by lower cigarette volume and unfavorable cigarette mix (all primarily reflecting the same geographies as for net revenues noted above);

lower manufacturing costs (mainly related to reduced-risk products, primarily in Russia);

a favorable pricing variance;

favorable volume/mix, driven by the same factors as for net revenues noted above;

and lower manufacturing costs;

partly offset by higher marketing, administration and research costs (partly related to increased investments behind reduced-risk products, notably in Russia and Ukraine).

and lower marketing, administration and research costs.

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

The estimated total market in Eastern Europe decreased by 4.6% to 379.4 billion units, notably due to:

• Russia, down by 3.3%, primarily reflecting the impact of price increases, partly offset by a lower estimated prevalence of illicit trade due to pandemic-related border restrictions;

• Ukraine, down by 10.2%, mainly reflecting the impact of excise tax-driven price increases.

Our Regional market share increased by 1.8 points to 30.5%.

PMI Shipment Volume (million units) Full-Year

2020 2019 Change

Cigarettes 93,462 100,644 (7.1) %

Heated Tobacco Units 20,898 13,453 55.3 %

Total Eastern Europe 114,360 114,097 0.2 %

Our total shipment volume increased by 0.2% to 114.4 billion units, mainly due to:

• Russia, up by 1.8%, or by 3.9% excluding the net unfavorable impact of estimated distributor inventory movements, primarily reflecting a higher market share, driven by heated tobacco units, partly offset by the lower total market;

The estimated total market in Eastern Europe decreased by 1.8% to 373.3 billion units, mainly due to:

• Russia, down by 1.0%, or by 2.7% excluding the net favorable impact of estimated trade inventory movements, primarily reflecting the impact of excise tax-driven price increases and a higher prevalence of illicit trade, partly offset by the impact on adult smoker average daily consumption of the easing of pandemic-related measures;

• Ukraine, down by 9.8%, mainly reflecting the impact of excise tax-driven price increases and a higher prevalence of illicit trade.

Our Regional market share increased by 0.1 point to 30.6%.

Our total shipment volume was flat at 114.3 billion units, notably reflecting:

• Southeast Europe, up by 6.9%, primarily reflecting a higher total market and a higher market share (driven by heated tobacco units);

partly offset by

• Ukraine, down by 4.3%, mainly due to the lower total market, partly offset by a higher market share driven by heated tobacco units.

• Belarus, down by 43.9%, mainly reflecting the halt of shipments as of the third quarter due to international sanctions;

• Russia, down by 0.5%, or by 3.0% excluding the net favorable impact of estimated distributor inventory movements, mainly reflecting a lower market share (due to cigarettes, partly offset by heated tobacco units) and the lower total market;

• Ukraine, down by 3.3%, mainly reflecting the lower total market, partly offset by a higher market share driven by heated tobacco units.

Excluding the net favorable impact of estimated distributor inventory movements, our total in-market sales volume decreased by 1.3%.

Middle East & Africa:

Financial Summary -

December 31, Change

Years Ended December 31, Change

Fav./(Unfav.) Variance

1 unchanged sentence

2021 2020 Total Excl.

rency Price Vol/

rency Acqui-sitions Price Vol/

(in millions)

1 unchanged sentence

Operating Income $ 1,146 $ 1,026 11.7 % 23.8 % $ 120 $ (124) $ — $ 287 $ 237 $ (280)

Net revenues, excluding unfavorable currency, decreased by 21.7%, reflecting:

unfavorable volume/mix, mainly due to lower cigarette volume, heated tobacco unit volume and IQOS device volume in PMI Duty Free, as well as lower cigarette volume in South Africa and Turkey;

and lower fees for certain distribution rights billed to customers in certain markets, shown in "Cost/Other";

partially offset by a favorable pricing variance, driven by combustible pricing (mainly in the GCC, particularly Saudi Arabia, as well as North Africa and PMI Duty Free, partly offset by Turkey).

Operating income, excluding unfavorable currency, decreased by 35.2%, mainly reflecting:

unfavorable volume/mix, predominantly due to lower cigarette and heated tobacco unit volume in PMI Duty Free;

Net revenues, excluding currency and acquisitions, increased by 10.4%, despite the unfavorable impact of the Saudi Arabia customs assessments of $246 million, shown in "Cost/Other".

Excluding the unfavorable impact of the Saudi Arabia customs assessments, unfavorable currency and acquisitions, net revenues increased by 18.3%, reflecting:

favorable volume/mix, primarily driven by higher cigarette volume (predominantly in PMI Duty Free and Turkey, partly offset by the GCC and North Africa), higher heated tobacco unit volume (mainly in Egypt, Jordan and PMI Duty Free) and favorable cigarette mix (mainly in the GCC, PMI Duty Free and Turkey);

and a favorable pricing variance, mainly driven by combustible pricing (primarily in Egypt and Turkey);

partially offset by lower fees for certain distribution rights billed to customers in certain markets, shown in "Cost/Other".

Operating income, excluding currency and acquisitions, increased by 23.8%, mainly reflecting:

a favorable pricing variance;

favorable volume/mix, driven by the same factors and geographies as for net revenues noted above;

and lower manufacturing costs (primarily related to combustible products);

partly offset by the unfavorable impact of the Saudi Arabia customs assessments, as noted above for net revenues;

higher marketing, administration and research costs;

and lower fees for certain distribution rights, as noted above for net revenues.

partially offset by a favorable pricing variance;

and lower marketing, administration and research costs.

Excluding asset impairment and exit costs of $19 million in 2020 and unfavorable currency of $65 million, operating income decreased by 34.1%.

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

The estimated total market in the Middle East & Africa decreased by 8.0% to 546.4 billion units, mainly due to:

• International Duty Free, down by 62.0%, reflecting the impact of government travel restrictions and reduced passenger traffic due to the pandemic;

• South Africa, down by 35.5%, primarily reflecting the impact of the pandemic-related ban on all tobacco sales from March 27, 2020, through August 17, 2020;

• Turkey, down by 4.2%, mainly reflecting the impact of lockdown measures on adult smoker average daily consumption, as well as a higher prevalence of illicit trade related to cut tobacco, particularly during the first-half of 2020, following significant industry-wide cigarette price increases in 2019;

• The UAE, down by 38.1%, primarily reflecting the adverse impact on low-price brands from the implementation of a minimum excise tax and digital tax stamps in the second half of 2019.

Our Regional market share decreased by 1.4 points to 22.0%.

PMI Shipment Volume (million units) Full-Year

2020 2019 Change

Cigarettes 117,999 134,568 (12.3) %

Heated Tobacco Units 1,022 2,654 (61.5) %

Total Middle East & Africa 119,021 137,222 (13.3) %

Our total shipment volume decreased by 13.3% to 119.0 billion units, notably due to:

• PMI Duty Free, down by 70.8%, or by 58.8% excluding the net unfavorable impact of estimated distributor inventory movements (principally due to cigarettes), mainly reflecting the lower total market;

• Turkey, down by 8.5%, mainly reflecting the lower total market and a lower market share, notably due to adult smoker down-trading following the 2019 price increases.

The estimated total market in the Middle East & Africa increased by 2.9% to 560.5 billion units, mainly driven by:

• Algeria, up by 6.2%, primarily reflecting the impact on adult smoker average daily consumption of the easing of pandemic-related measures, partly offset by the impact of price increases;

• Egypt, up by 8.8%, mainly reflecting a favorable comparison due to pandemic-related supply chain shortages for competitors' products in 2020, as well as the favorable impact of adult smoker in-switching to cigarettes (mainly in the low-tax tier) from other combustible tobacco products;

• South Africa, up by 13.2%, primarily reflecting a favorable comparison versus the second and third quarters of 2020, in which the total market was impacted by the pandemic-related ban on all tobacco sales from March 27th through August 17th, partly offset by a higher estimated prevalence of illicit trade stemming from the ban;

• Turkey, up by 8.2%, mainly reflecting the impact on adult smoker average daily consumption of the easing of pandemic-related measures, coupled with increased in-bound tourism (particularly by Turkish expatriates), partially offset by a higher estimated prevalence of illicit trade;

partly offset by

• International Duty Free, down by 10.6%, primarily reflecting the impact of government travel restrictions and reduced passenger traffic since the start of the pandemic in March 2020;

• Tunisia, down by 15.6%, mainly reflecting higher estimated prevalence of illicit trade (primarily due to market disruptions impacting product availability and the impact of price increases in July 2021).

Our Regional market share increased by 1.1 points to 23.1%.

Our total shipment volume increased by 9.3% to 130.1 billion units, notably driven by:

• PMI Duty Free, up by 56.9%.

Excluding the net favorable impact of estimated distributor inventory movements (principally due to cigarettes), PMI in-market sales volume was up by 4.1%, primarily reflecting a higher market share driven by Marlboro , partly offset by the lower total market;

• Turkey, up by 17.2%, mainly reflecting a higher market share driven by adult smoker up-trading (mainly benefiting Marlboro and Parliament ) and the higher total market;

partly offset by

• Egypt, down by 5.2%, mainly reflecting a lower market share (due primarily to adult smoker down-trading to products in the low-tax tier), partly offset by the higher total market;

• Kuwait, down by 23.4%, or by 12.3% excluding the net unfavorable impact of estimated distributor inventory movements, primarily reflecting a lower total market.

South & Southeast Asia:

Financial Summary -

December 31, Change

Years Ended December 31, Change

Fav./(Unfav.) Variance

1 unchanged sentence

2021 2020 Total Excl.

rency Price Vol/

rency Acqui-sitions Price Vol/

(in millions)

1 unchanged sentence

Operating Income $ 1,506 $ 1,709 (11.9) % (14.0) % $ (203) $ 36 $ — $ (93) $ (90) $ (56)

Net revenues, excluding unfavorable currency, decreased by 13.3%, reflecting:

unfavorable volume/mix, primarily due to lower cigarette volume in Indonesia and the Philippines, partly offset by favorable cigarette mix in Indonesia;

and an unfavorable pricing variance, due to combustible pricing in Indonesia, partly offset by the Philippines.

Operating income, excluding favorable currency, decreased by 21.1%, mainly reflecting:

unfavorable volume/mix, due to the same factors as for net revenues noted above;

and an unfavorable pricing variance;

partly offset by lower marketing, administration and research costs (primarily in Indonesia).

Excluding asset impairment and exit costs of $23 million in 2020 and $20 million in 2019, as well as favorable currency of $2 million, operating income decreased by 20.8%.

Net revenues, excluding currency and acquisitions, decreased by 2.3%, primarily reflecting:

an unfavorable pricing variance, mainly due to lower pricing for combustible products (primarily in Indonesia, partly offset by the Philippines).

Volume/mix was slightly unfavorable, mainly due to lower cigarette volume (primarily in the Philippines, partly offset by India and Indonesia), largely offset by favorable cigarette mix (mainly in Indonesia and the Philippines).

Operating income, excluding currency and acquisitions, decreased by 14.0%, primarily reflecting:

an unfavorable pricing variance;

unfavorable volume/mix, mainly due to lower cigarette volume (primarily in the Philippines, partly offset by India and Indonesia), partially offset by favorable cigarette mix (mainly in Indonesia and the Philippines);

and higher marketing, administration and research costs (mainly in Indonesia and the Philippines).

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

The estimated total market in South & Southeast Asia decreased by 8.7% to 672.3 billion units, notably due to:

• India, down by 17.9%, mainly reflecting the impact of lockdown restrictions on the movement of certain products, including tobacco;

• Indonesia, down by 9.6%, mainly reflecting the impact of excise tax-driven price increases and pandemic-related measures on adult smoker average daily consumption;

• Pakistan, down by 10.3%, mainly reflecting the impact of excise tax-driven price increases in June 2019 and price increases on PMI value brands in February 2020;

• the Philippines, down by 12.0%, mainly reflecting the impact of pandemic-related quarantines, as well as industry-wide price increases in the third quarter of 2019 and the fourth quarter of 2020.

The estimated total market in South & Southeast Asia increased by 7.2% to 722.6 billion units, notably driven by:

• Bangladesh, up by 12.9%, primarily reflecting a favorable comparison versus the prior year, during which pandemic-related restrictions impacted tobacco product availability;

• India, up by 13.6%, mainly reflecting a favorable comparison versus the prior year, during which pandemic-related restrictions impacted the movement of certain products, including tobacco;

• Indonesia, up by 7.2%, primarily reflecting the growth of the tax-advantaged 'below tier one' segment and the impact on adult smoker consumption of the easing of pandemic-related measures;

• Pakistan, up by 17.3%, notably reflecting a lower prevalence of illicit trade (partly due to pandemic-related supply disruptions for illicit products);

• Vietnam, up by 10.0%, mainly reflecting a lower prevalence of illicit trade due to pandemic-related supply disruptions for illicit products;

partly offset by:

• the Philippines, down by 10.7%, primarily reflecting the impact of industry-wide price increases in the fourth quarter of 2020.

Our Regional market share decreased by 1.7 points to 19.7%.

PMI Shipment Volume (million units) Full-Year

2020 2019 Change

Cigarettes 144,788 174,934 (17.2) %

Heated Tobacco Units 36 — — %

Total South & Southeast Asia 144,824 174,934 (17.2) %

Our total shipment volume decreased by 17.2% to 144.8 billion units, notably due to:

• Indonesia, down by 19.3%, reflecting the lower total market, as well as a lower market share, mainly due to:

adult smoker down-trading to the tax-advantaged 'below tier one' segment, the impact of elevated price gaps in the tier one segment (partly due to the

delay in minimum price enforcement), and the disproportionate impact of stricter public mobility restrictions in urban areas, where PMI’s share is higher;

• Pakistan, down by 20.0%, mainly reflecting the lower total market and a lower market share, mainly due to low-price Morven ;

• the Philippines, down by 16.1%, mainly reflecting the lower total market and a lower market share, primarily for mid-price Fortune due to the impact of price increases in the third quarter of 2019 and the fourth quarter of 2020.

Our total shipment volume decreased by 1.8% to 142.2 billion units, primarily due to:

• the Philippines, down by 17.6%, mainly reflecting the lower total market and a lower market share (predominantly due to mid-price Fortune , reflecting the impact of price increases in the fourth quarter of 2020, partly offset by Marlboro );

• Thailand, down by 4.7%, primarily reflecting a lower total market, partly offset by a higher market share driven by L&M 7.1 ;

partly offset by

• India, up by 43.2%, mainly reflecting a higher market share (driven by Marlboro ) and the higher total market;

• Indonesia, up by 4.3%, primarily reflecting the higher total market, partly offset by a lower market share (mainly due to adult smoker down-trading to the 'below tier one' segment as a result of significantly lower retail prices, partly offset by share growth for PMI's premium and hand-rolled portfolio);

• Pakistan, up by 10.1%, mainly reflecting the higher total market, partly offset by a lower market share.

East Asia & Australia:

Financial Summary -

December 31, Change

Years Ended December 31, Change

Fav./(Unfav.) Variance

1 unchanged sentence

2021 2020 Total Excl.

rency Price Vol/

rency Acqui-sitions Price Vol/

(in millions)

1 unchanged sentence

Operating Income $ 2,556 $ 2,400 6.5 % 8.7 % $ 156 $ (53) $ — $ 291 $ (2) $ (80)

Net revenues, excluding favorable currency, increased by 0.6%, reflecting:

a favorable pricing variance, mainly driven by higher heated tobacco and combustible pricing in Japan, partly offset by lower IQOS device pricing in Japan;

and unfavorable volume/mix, mainly due to lower cigarette volume (primarily in Japan), unfavorable cigarette mix in Australia, lower device volume/mix in Japan and lower heated tobacco unit mix in Japan, partly offset by higher heated tobacco unit volume in Japan.

Operating income, excluding favorable currency, increased by 23.1%, mainly reflecting:

lower marketing, administration and research costs (notably in Japan);

lower manufacturing costs (mainly related to Japan and Korea);

and a favorable pricing variance;

partly offset by unfavorable volume/mix, mainly due to lower cigarette volume (primarily in Japan), unfavorable cigarette mix in Australia and lower heated tobacco unit mix in Japan, partly offset by higher heated tobacco unit volume in Japan.

Excluding asset impairment and exit costs of $26 million in 2020 and favorable currency of $21 million, operating income increased by 24.5%.

Net revenues, excluding currency and acquisitions, increased by 8.5%, reflecting:

a favorable pricing variance, primarily driven by higher heated tobacco, combustible and device net pricing in Japan, partly offset by lower combustible pricing in Australia;

and favorable volume/mix, mainly driven by higher heated tobacco unit volume and favorable device volume/mix in Japan (driven by the launch of IQOS ILUMA ), partly offset by unfavorable cigarette mix (mainly in Australia and Japan), lower cigarette volume (primarily in Australia, Japan and South Korea) and unfavorable heated tobacco unit mix in Japan

Operating income, excluding currency acquisitions, increased by 8.7%, mainly reflecting:

a favorable pricing variance;

and lower manufacturing costs (primarily related to reduced-risk products in Japan and South Korea);

partly offset by higher marketing, administration and research costs (notably due to the launch of IQOS ILUMA in Japan and higher asset impairment and exit costs, mainly related to product distribution restructuring in South Korea).

Volume/mix was slightly unfavorable, primarily reflecting unfavorable cigarette mix (mainly in Australia and Japan), lower cigarette volume (primarily in Australia, Japan and South Korea), as well as unfavorable heated tobacco unit mix and device mix in Japan, largely offset by higher heated tobacco unit volume in Japan.

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

The estimated total market in East Asia & Australia, excluding China, decreased by 3.6% to 288.6 billion units, notably due to:

• Australia, down by 8.8%, primarily reflecting the impact of excise tax-driven price increases;

• Japan, down by 9.4%, mainly reflecting the impact of excise tax-driven price increases, reduced adult smoker consumption occasions due to pandemic-related measures, as well as adult smoker out-switching from cigarettes to the cigarillo category;

partly offset by

• Korea, up by 4.4%, mainly reflecting the shift of adult smokers from duty-free to domestic purchases due to the pandemic-related decline in international travel;

• Taiwan, up by 5.4%, primarily driven by the same factor as for Korea.

The estimated total market in East Asia & Australia, excluding China, decreased by 1.4% to 284.7 billion units, mainly due to:

• Australia, down by 11.3%, primarily reflecting the impact of the ending of the pandemic-related wage subsidy by the government, coupled with the impact of pandemic-related restrictions;

• Japan, down by 2.4%, mainly reflecting the impact of the October 2020 and 2021 excise tax-driven price increases.

Our Regional market share, excluding China, increased by 0.3 points to 27.5%.

PMI Shipment Volume (million units) Full-Year

2020 2019 Change

Cigarettes 45,100 49,951 (9.7) %

Heated Tobacco Units 33,862 30,677 10.4 %

Total East Asia & Australia 78,962 80,628 (2.1) %

Our total shipment volume decreased by 2.1% to 79.0 billion units, notably in:

• Japan, down by 2.4%, mainly due to the lower total market, partly offset by a higher market share driven by heated tobacco units;

• Korea, down by 4.3%, primarily due to a lower market share, mainly reflecting the unfavorable impact of the growth of the cigarette new taste dimension segment, in which PMI has a relatively low share, partly offset by the higher total market.

Latin America & Canada:

Our total shipment volume increased by 3.9% to 82.1 billion units, mainly driven by:

• Japan, up by 8.0%, or by 1.3% excluding the net favorable impact of estimated distributor inventory movements, primarily reflecting a higher market share (driven by heated tobacco units), partly offset by the lower total market;

partly offset by

• South Korea, down by 4.7%, mainly reflecting a lower market share due mainly to Parliament .

Excluding the net favorable impact of estimated distributor inventory movements, our total in-market sales volume declined by 0.4%.

Financial Summary -

December 31, Change

Years Ended December 31, Change

Fav./(Unfav.) Variance

1 unchanged sentence

2021 2020 Total Excl.

rency Price Vol/

Mix Cost/Other (1)

rency Acqui-sitions Price Vol/

(in millions)

1 unchanged sentence

Operating Income $ 487 $ 564 (13.7) % (16.8) % $ (77) $ 18 $ — $ 45 $ (4) $ (136)

(1) Cost/Other variance includes the impact of the RBH deconsolidation.

Net revenues, excluding unfavorable currency, decreased by 15.5%, reflecting:

unfavorable volume/mix, due to lower cigarette volume, mainly in Argentina and Mexico, partly offset by Brazil;

and the unfavorable impact of the deconsolidation of RBH shown in "Cost/Other";

partially offset by a favorable pricing variance, driven by higher combustible pricing across the Region (notably in Brazil and Mexico).

Operating income, excluding unfavorable currency, increased by over 100%, notably reflecting a favorable comparison, shown in "Cost/Other," of net favorable items recorded in 2020 of $110 million related to the Brazil indirect tax credit of $119 million and asset impairment and exit costs of $9 million (associated with organizational design optimization), and charges recorded in 2019 of $493 million related to:

asset impairment and exit costs ($60 million) associated with plant closures in Argentina and Colombia, the loss on the deconsolidation of RBH ($239 million), and the Canadian tobacco litigation-related expense ($194 million).

Excluding these 2020 and 2019 items noted above, and unfavorable currency of $110 million, operating income decreased by 22.5%, mainly reflecting:

unfavorable volume/mix, due to the same factors as for net revenues noted above;

and the unfavorable impact of the deconsolidation of RBH, included in "Cost/Other";

partly offset by a favorable pricing variance;

and lower marketing, administration and research costs (notably in Argentina).

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

The estimated total market in Latin America & Canada decreased by 2.8% to 189.0 billion units, notably due to:

• Colombia, down by 14.2%, primarily reflecting reduced product availability (mainly in the second quarter of 2020) and lower adult smoker average daily consumption due to the impact of pandemic-related mobility restrictions;

• Mexico, down by 13.6%, mainly due to the impact of excise tax-driven price increases in January 2020 and pandemic-related measures on adult smoker average daily consumption;

Net revenues, excluding currency and acquisitions, increased by 5.6%, mainly reflecting:

a favorable pricing variance, driven by higher combustible pricing (mainly in Argentina and Colombia);

and favorable volume/mix, primarily driven by higher cigarette volume (mainly in Brazil and Mexico, partly offset by Argentina) and higher device volume, partially offset by unfavorable cigarette mix (primarily in Brazil).

Operating income, excluding currency and acquisitions, decreased by 16.8%, mainly reflecting an unfavorable comparison related to the Brazil indirect tax credit of $119 million in 2020 and higher manufacturing costs (due to reduced-risk and combustible products), partly offset by a favorable pricing variance and lower marketing, administration and research costs.

Volume/mix was slightly unfavorable, mainly reflecting unfavorable cigarette mix (notably in Brazil), largely offset by higher cigarette volume (primarily in Brazil and Mexico, partly offset by Argentina).

Americas - Total Market, PMI Shipment Volume and Market Share Commentaries

The estimated total market in Americas, excluding the U.S., increased by 2.2% to 193.9 billion units, mainly driven by:

• Argentina, up by 7.4%, primarily reflecting a lower estimated prevalence of illicit trade and a favorable comparison related to retail out-of-stock in the second quarter of 2020 (due to temporary factory shutdowns related to the pandemic), partly offset by the impact of price increases;

• Brazil, up by 3.1%, mainly reflecting a lower estimated prevalence of illicit trade due to reduced price gaps with legal products and the impact of social incentives provided by the government to mitigate the effects of the pandemic;

• Mexico, up by 4.2%, primarily reflecting the impact on adult smoker average daily consumption of the easing of pandemic-related measures coupled with the impact of increased in-bound tourism;

partly offset by

• Brazil, up by 13.4%, mainly reflecting a lower estimated prevalence of illicit trade due to:

reduced price gaps with legal products and the impact of border restrictions imposed as a result of the pandemic.

Our Regional market share decreased by 3.0 points to 33.9%.

PMI Shipment Volume (million units) Full-Year

2020 2019 Change

Cigarettes 63,749 72,293 (11.8) %

Heated Tobacco Units 451 299 50.8 %

Total Latin America & Canada 64,200 72,592 (11.6) %

Our total shipment volume decreased by 11.6% to 64.2 billion units, or by 10.3% excluding the impact of the RBH deconsolidation, notably due to

• Argentina, down by 12.2%, primarily reflecting a lower market share, mainly due to adult smoker down-trading to ultra-low-price brands produced by local manufacturers, as well as the impact of retail out-of-stock of PMI brands during the second quarter;

• Canada, down by 18.6%, due to the unfavorable impact of the deconsolidation of RBH;

• Colombia, down by 14.2%, primarily reflecting the lower total market;

• Mexico, down by 18.0%, mainly due to the lower total market and a lower market share, primarily reflecting:

adult smoker down-trading following the January 2020 price increases and the impact of the pandemic on adult smoker consumption patterns;

• Canada, down by 9.3%, notably reflecting the impact of price increases and out-switching from cigarettes to e-vapor products.

Our Regional market share, excluding the U.S., decreased by 0.4 points to 33.4%.

Our total shipment volume increased by 1.5% to 65.2 billion units, primarily driven by:

• Brazil, up by 5.2%, mainly reflecting the higher total market and a higher market share driven by Chesterfield ;

• Mexico, up by 4.7%, primarily reflecting the higher total market, as well as a higher market share driven by Marlboro ;

partly offset by

• Brazil, up by 13.2%, mainly reflecting the higher total market.

• Argentina, down by 2.9%, mainly reflecting a lower market share (primarily due to adult smoker down-trading to ultra-low-price brands produced by local manufacturers).

Following the acquisitions of Fertin Pharma A/S, Vectura Group plc.

and OtiTopic, Inc., we added the "Other" category in the third quarter of 2021.

Business operations for the Other category are managed and evaluated separately from the geographical segments.

Financial Summary -

Years Ended December 31, Change

Fav./(Unfav.) Variance

Fav./(Unfav.)

2021 2020 Total Excl.

rency Acqui-sitions Price Vol/

(in millions)

Net Revenues $ 101 $ — — % — % $ 101 $ — $ 101 $ — $ — $ —

Operating Income / (Loss) $ (52) $ — — % — % $ (52) $ — $ (1) $ — $ — $ (51)

We recorded net revenues of $101 million in the Other category, with approximately 39% of the total coming from Fertin Pharma's nicotine replacement therapy and nicotine-containing oral products businesses.

The operating loss of $52 million primarily reflected a pre-tax charge of $51 million in the third quarter of 2021 related to the OtiTopic, Inc.

The charge was recorded to research and development costs (within marketing, administration and research costs) and reflected PMI's accounting for the OtiTopic transaction as an asset acquisition, since the in-process research and development of the dry powder inhalation aspirin treatment represented substantially all of the fair value of the gross assets acquired and had no alternative future use.

For further details, see Item 8, Note 6.

Acquisitions and Item 8, Note 12.

Segment Reporting .

2020 compared with 2019

For a discussion comparing our consolidated operating results within each of our operating segments for the year ended December 31, 2019, with the year ended December 31, 2018, refer to Part II, Item 7.

For a discussion comparing our consolidated operating results within each of our geographical segments for the year ended December 31, 2020, with the year ended December 31, 2019, refer to Part II, Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operation - Operating Results by Business Segment in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the U.S.

8 unchanged sentences

• Net Cash Provided by Operating Activities

Net cash provided by operating activities for the year ended December 31, 2020 decreased by $0.3 billion compared with 2019.

Excluding unfavorable currency movements of $0.5 billion, net cash provided by operating activities increased by $0.2 billion, due primarily to higher net earnings (excluding 2019 non-cash charges related to the Canadian tobacco litigation-related expense and the loss on deconsolidation of RBH), partially offset by higher working capital requirements of $0.5 billion and higher cash payments in 2020 for asset impairment and exit costs.

For further details, see Item 8, Note 19.

Asset Impairment and Exit Costs for additional information.

Higher net earnings in 2020, excluding the impact of the above 2019 non-cash charges, were partly attributable to the Russia excise and VAT audit charge of $374 million which was paid in the third quarter of 2019.

For further details, Item 8, Note 17.

Contingencies for additional information.

The higher working capital requirements were primarily due to net cash used in inventories and accrued liabilities and other current assets reflecting COVID-19 pandemic related build-up of inventory in our supply chain, and the timing of excise tax-paid inventory movements and excise tax payments.

This change was partially offset by cash provided by accounts receivable due to the varying levels of usage of our factoring arrangements to sell trade receivables and timing of sales and cash collections.

Net cash provided by operating activities for the year ended December 31, 2021 increased by $2.2 billion compared with 2020.

Excluding favorable currency movements of $0.8 billion, net cash provided by operating activities increased by $1.4 billion, due primarily to higher net earnings and lower working capital requirements of $0.5 billion, partially offset by higher pension plan contributions.

The lower working capital requirements in 2021 as compared with 2020 were primarily due to more cash provided by the net impact of both inventories and accrued liabilities and other current assets mainly reflecting COVID-19 pandemic related build-up of inventory levels in our supply chain in 2020, and the timing of excise tax-paid inventory movements and excise tax payments, as well as higher cash provided by accounts payable primarily reflecting higher IQOS device purchases in 2021.

More cash used in accounts receivable was mainly due to the lower usage of our factoring arrangements to sell trade receivable, partially offset by the Brazil indirect tax credit recovered in 2021.

For further details on our factoring arrangements to sell trade receivables and our Brazil indirect tax credit recovered in 2021, see Item 8, Note 18.

Sale of Accounts Receivable and Item 8, Note 12.

Segment Reporting, respectively.

• Net Cash Used in Investing Activities

Net cash used in investing activities of $1.2 billion for the year ended December 31, 2020, decreased by $0.7 billion from the comparable 2019 period.

This decrease in net cash used in investing activities was primarily due to the reduction of cash in 2019 resulting from the deconsolidation of RBH and lower capital expenditures, partially offset by higher cash collateral posted to secure derivatives designated as net investment hedges of Euro assets principally related to changes in exchange rates between the Euro and the U.S.

For further details on deconsolidation of RBH, see Item 8.

Deconsolidation of RBH .

For further details on

our derivatives designated as net investment hedges, see Item 8.

Net cash used in investing activities of $2.4 billion for the year ended December 31, 2021, increased by $1.2 billion from the comparable 2020 period.

This increase was primarily due to $2.1 billion of cash used in 2021 for our acquisitions, net of acquired cash, partially offset by favorable movements of $1.0 billion in cash collateral exchanged with financial institutions to secure derivatives designated as net investment hedges of Euro assets principally related to changes in exchange rates between the Euro and

For further detail on our 2021 acquisitions and derivatives designated as net investment hedges, see Item 8, Note 6.

Acquisitions and Item 8, Note 15.

Financial Instruments.

4 unchanged sentences

Net cash used in financing activities of $12.0 billion for the year ended December 31, 2021, increased by $3.5 billion from the comparable 2020 period.

The change was due primarily to higher payments to noncontrolling interests and higher dividends paid, partially offset by debt activity.

The change was primarily due to the proceeds we received in 2020 from long-term U.S.

dollar debt issuances ($3.7 billion), share purchases in 2021 under the new share repurchase program and higher dividend payments, partially offset by lower repayments of long-term debt and lower payments to noncontrolling interests.

Dividends paid in 2021 and 2020 were $7.6 billion and $7.4 billion, respectively.

6 unchanged sentences

As a policy, we do not hold any investments in structured or equity-linked products.

Our cash and cash equivalents are predominantly held in demand deposits with institutions that have investment-grade long-term credit rating.

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.

1 unchanged sentence

For 2021 and 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.

In August 2021, we published a business transformation-linked financing framework (“Framework”), which integrates the company’s smoke-free transformation into its financing strategy.

The Framework outlines the guidelines that we will follow in issuing business transformation-linked financing instruments in the debt capital and loan markets, which may include public notes offerings, private placements, loans, and other relevant financing instruments.

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

4 unchanged sentences

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.

Credit Facilities – On January 28, 2022, we entered into an agreement to amend and extend the term of our $1.8 billion 364-day revolving credit facility from February 1, 2022, to January 31, 2023.

At February 10, 2022, our committed credit facilities were as follows:

(in billions)

364-day revolving credit, expiring February 1, 2022

Multi-year revolving credit, expiring October 1, 2022 3.50

Multi-year revolving credit, expiring February 10, 2025 (a)

364-day revolving credit, expiring January 31, 2023 $ 1.8

Multi-year revolving credit, expiring February 10, 2026 (1)

Multi-year revolving credit, expiring September 29, 2026 (2)

Total facilities

(a) On January 29, 2021, we entered into an agreement, effective February 10, 2021, to amend and extend the term of our $2.0 billion multi-year revolving credit facility, for an additional year covering the period February 11, 2025 to February 10, 2026, in the amount of $1.86 billion.

(1) On January 28, 2022, we entered into an agreement, effective February 10, 2022, to amend and extend the term of our $2.0 billion multi-year revolving credit facility, for an additional year covering the period February 11, 2026 to February 10, 2027, in the amount of $1.9 billion.

(2) Includes business transformation-linked pricing adjustments that may result in the reduction or increase in both the interest rate and commitment fee under the credit agreement if PMI achieves, or fails to achieve, certain specified targets based on its business transformation goals.

At February 10, 2022, there were no borrowings under the committed credit facilities, and the entire committed amounts were available for borrowing.

Subject to market conditions, PMI currently expects to request a further extension of the terms of its $2.5 billion multi-year revolving credit facility for an additional one-year period, in accordance with and subject to the terms and conditions of the relevant revolving credit facility agreement.

All banks participating in our committed credit facilities have an investment-grade long-term credit rating from the credit rating agencies.

1 unchanged sentence

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 December 31, 2020, our ratio calculated in accordance with the agreement was 12.6 to 1.0.

We expect to continue to meet our covenants.

The terms “consolidated EBITDA” and “consolidated interest expense,” both of which include certain adjustments, are defined in the facility agreements previously filed with 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 $2.7 billion at December 31, 2020 and December 31, 2019, respectively, are for the sole use of our subsidiaries.

These credit arrangements, which amounted to approximately $2.3 billion at December 31, 2021 and approximately $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 $225 million at December 31, 2021, and $244 million at December 31, 2020.

14 unchanged sentences

Our total debt is primarily fixed rate in nature.

The weighted-average all-in financing cost of our total debt was 2.4% in 2020 and 2.5% in 2019.

details, including the fair value of our debt, see Item 8, Note 7.

The weighted-average all-in financing cost of our total debt was 2.4% in 2021 and 2020.

For further details,

including the fair value of our debt, see Item 8, Note 7.

Indebtedness .

2 unchanged sentences

Securities and Exchange Commission, under which we may from time to time sell debt securities and/or warrants to purchase debt securities over a three-year period.

Our debt issuances in 2020 were as follows:

(in millions)

Type Face Value Interest Rate Issuance Maturity

dollar notes (a) $750 1.125% May 2020 May 2023

dollar notes (a) $750 1.500% May 2020 May 2025

dollar notes (a) $750 2.100% May 2020 May 2030

dollar notes (b) $750 0.875% November 2020 May 2026

dollar notes (b) $750 1.750% November 2020 November 2030

(a) Interest on these notes is payable semi-annually in arrears beginning in November 2020.

(b) Interest on these notes is payable semi-annually in arrears beginning in May 2021.

The net proceeds from the sale of the securities listed in the table above have been and will be used for general corporate purposes, including repayment of outstanding commercial paper and redemption on January 25, 2021, of our outstanding $750 million 1.875% U.S.

dollar notes due February 25, 2021.

The weighted-average time to maturity of our long-term debt was 9.7 years at the end of 2020 and 10.2 years at the end of 2019.

• Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

We have no off-balance sheet arrangements, including special purpose entities, other than guarantees and contractual obligations discussed below.

Guarantees – At December 31, 2020, we were contingently liable for guarantees of our own performance, of which $0.3 billion were related to our obligations under indemnity agreements to enable appeals of customs assessments against our distributors.

In October 2020, we guaranteed an obligation for an equity method investee.

During 2021, we had no public debt issuances.

The weighted-average time to maturity of our long-term debt was approximately 10 years at the end of 2021 and 2020.

Cash Requirements – At December 31, 2021, our material short-term and long-term cash requirements for various contractual obligations and commitments primarily consisted of the following:

• principal payments related to long-term debt and the associated interest payments.

For further details, see Item 8, Note 7.

Contingencies to our consolidated financial statements.

Additionally, we have other guarantees of our own performance, which are primarily related to excise taxes on the shipment of our products.

Indebtedness to our consolidated financial statements;

• accounts payable and accrued liabilities on our consolidated balance sheet (primarily short-term in nature);

• purchase obligations for inventory and production costs to be utilized in the normal course of business such as raw materials, electronic devices, indirect materials and supplies, packaging, co-manufacturing arrangements, storage and distribution, as well as capital expenditures.

These purchase obligations are expected to be approximately $2.7 billion in 2022 and approximately $1.6 billion for years beyond;

• operating lease liabilities, on an undiscounted basis, which were included in our consolidated balance sheets.

For further details, see Item 8, Note 21.

Leases to our consolidated financial statements;

• other long-term liabilities mainly related to transition tax.

For further details, see Item 8, Note 11.

Income Taxes to our consolidated financial statements.

Our ability to access the capital and credit markets as well as overall dynamics of these markets may impact borrowing costs.

• Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements, including special purpose entities, other than guarantees, and cash requirements discussed above.

Guarantees – At December 31, 2021, we have guarantees of our own performance, which are primarily related to excise taxes on the shipment of our products.

There is no liability in the 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.

Aggregate Contractual Obligations – The following table summarizes our contractual obligations at December 31, 2020:

(in millions)

2021 2022-2023 2024-2025 2026 and Thereafter

Long-term debt (1)

$31,552 $3,124 $5,122 $5,866 $17,440

Interest on borrowings (2)

9,781 874 1,531 1,275 6,101

Operating leases (3)

896 215 271 119 291

Purchase obligations (4) :

Inventory and production costs

2,902 2,048 584 267 3

1,719 1,038 363 157 161

4,621 3,086 947 424 164

Other long-term liabilities (5)

1,699 267 361 845 226

$48,549 $7,566 $8,232 $8,529 $24,222

(1) Amounts represent the expected cash payments at the face value of our long-term debt and finance lease obligations.

In October 2020, we guaranteed an obligation for an equity method investee.

For further details, see Item 8, Note 17.

Indebtedness to our consolidated financial statements.

(2) Amounts represent the expected cash payments of our interest expense on our long-term debt, including the current portion of long-term debt.

Interest on our fixed-rate debt is presented using the stated interest rate.

Interest on our variable debt is estimated using the rate in effect at December 31, 2020.

Amounts exclude the amortization of debt discounts, the amortization of loan fees and fees for lines of credit that would be included in interest expense in the consolidated statements of earnings.

(3) Amounts represent the maturity of PMI's operating lease liabilities, on an undiscounted basis.

(4) Purchase obligations for inventory and production costs (such as raw materials, electonic devices, indirect materials and supplies, packaging, co-manufacturing arrangements, storage and distribution) are commitments for projected needs to be utilized in the normal course of business.

Other purchase obligations include commitments for marketing, advertising, capital expenditures, information technology and professional services.

Other purchase obligations also include the expected future contributions to the Foundation for a Smoke-Free World.

For further details see Business Environment — Other Developments .

Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure and approximate timing of the transaction.

Amounts represent the minimum commitments under non-cancelable contracts.

Any amounts reflected on the consolidated balance sheet as accounts payable and accrued liabilities are excluded from the table above.

(5) Other long-term liabilities consist primarily of transition tax (as discussed in Item 8, Note 11.

Income Taxes to our consolidated financial statements), postretirement health care costs, accruals established for employment costs and accruals established for Exit activities (for further details, see Note 19.

Asset impairment and Exit Costs ).

The following long-term liabilities included on the consolidated balance sheet are excluded from the table above:

accrued pension and postemployment costs, tax contingencies, insurance accruals and other accruals.

We are unable to estimate the timing of payments (or contributions in the case of accrued pension costs) for these items.

Currently, we anticipate making pension contributions of approximately $262 million in 2021, based on current tax and benefit laws (as discussed in Item 8, Note 13.

Benefit Plans to our consolidated financial statements).

Contingencies to our consolidated financial statements.

Equity and Dividends

1 unchanged sentence

Stock Plans to our consolidated financial statements.

During 2020, 2019 and 2018, we did not repurchase any shares under a share repurchase program.

During 2020 and the first six months of 2021, we did not repurchase any shares under a share repurchase program.

On June 11, 2021, our Board of Directors authorized a new share repurchase program of up to $7 billion, with target spending of $5 billion to $7 billion over a three-year period.

On July 22, 2021, we began repurchasing shares under this new share repurchase program.

From July 22, 2021 through December 31, 2021, we repurchased 8.5 million shares of our common stock at a cost of $785 million.

Dividends paid in 2021 were $7.6 billion.

35 unchanged sentences

$180 $445 $1,146 $180

The significant year-over-year increase in "average" and "high" impact on the value at risk computation above was primarily due to an increase in interest rate and foreign currency volatility during the first quarter of 2020 resulting from the impact of the COVID-19 pandemic.

The significant year-over-year decrease in "average" and "high" impact on the value at risk computation above was primarily due to an increase in interest rate and foreign currency volatility during the first quarter of 2020 resulting from the impact of the COVID-19 pandemic.

The value at risk computation is a risk analysis tool designed to statistically estimate the maximum probable daily loss from adverse movements in interest and foreign currency rates under normal market conditions.

The computation does not purport to represent actual losses in fair value or earnings to be incurred by us, nor does it consider the effect of favorable changes in market rates.

We cannot predict actual future movements in such market rates and do not present these results to be indicative of future movements in market rates or to be representative of any actual impact that future changes in market rates may have on our future results of operations or financial position.

cannot predict actual future movements in such market rates and do not present these results to be indicative of future movements in market rates or to be representative of any actual impact that future changes in market rates may have on our future results of operations or financial position.

Contingencies

4 unchanged sentences

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," "estimates," "intends," "projects," "aims," "goals," "targets" and other words of similar meaning.

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.

14 unchanged sentences

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 7. Management’s Discussion and Analysis