Philip Morris International Inc. Reports 2019 Third-Quarter Results

Revises, for a Tax Charge of $0.20 Per Share in Russia, 2019 Full-Year Reported Diluted EPS Forecast to at Least $4.73 vs. $5.08 in 2018, Reflecting Currency-Neutral Like-For-Like Adjusted Diluted EPS Growth of at Least 9.0%

NEW YORK–(BUSINESS WIRE)–Philip Morris International Inc. (NYSE: PM) today announces its 2019 third-quarter results and revises its 2019 full-year reported diluted earnings per share forecast. Comparisons presented in this press release on a “like-for-like” basis reflect pro forma 2018 results, which have been adjusted for the deconsolidation of PMI’s Canadian subsidiary, Rothmans, Benson & Hedges, Inc. (RBH), effective March 22, 2019 (the date of deconsolidation). In addition, reflecting the deconsolidation, PMI’s total market share has been restated for previous periods.

2019 THIRD-QUARTER & YEAR-TO-DATE HIGHLIGHTS

2019 Third-Quarter

• Reported diluted EPS of $1.22, down by 15.3%; also down by 15.3%, excluding currency
• Adjusted diluted EPS of $1.43, down by 0.7%; up by 5.9% on a like-for-like basis, excluding currency
• Cigarette and heated tobacco unit shipment volume down by 2.1%, reflecting cigarette shipment volume down by 5.9% and heated tobacco unit shipment volume up by 84.8%; on a like-for-like basis, cigarette and heated tobacco unit shipment volume down by 1.4%
• Market share of heated tobacco units in IQOS markets, excluding the U.S., up by 1.3 points to 5.1%
• A charge of approximately $0.20 per share related to an excise tax and Value Added Tax (VAT) audit in Russia
• Net revenues up by 1.8%; up by 7.0% on a like-for-like basis, excluding currency
• Operating income down by 11.7%; down by 11.3%, excluding currency
• Adjusted operating income up by 8.0% on a like-for-like basis, excluding currency
• Adjusted operating income margin up by 0.4 points to 41.2% on a like-for-like basis, excluding currency
• Increased the regular quarterly dividend by 2.6% to an annualized rate of $4.68 per common share
• IQOS introduced for sale in the U.S. following its marketing order authorization by the U.S. Food and Drug Administration
• New IQOS 3 DUO device introduced for sale in Japan as part of a planned introduction in most IQOS markets by year-end 2019

2019 Nine Months Year-to-Date

• Reported diluted EPS of $3.57, down by 7.3%; down by 3.9%, excluding currency
• Adjusted diluted EPS of $3.97, up by 3.1%; up by 11.7% on a like-for-like basis, excluding currency
• Cigarette and heated tobacco unit shipment volume down by 0.9%, reflecting cigarette shipment volume down by 3.4% and heated tobacco unit shipment volume up by 45.7%; on a like-for-like basis, cigarette and heated tobacco shipment volume down by 0.4%
• Market share of heated tobacco units in IQOS markets, excluding the U.S., up by 1.3 points to 4.9%
• Net revenues down by 0.2%; up by 6.5% on a like-for-like basis, excluding currency
• Operating income down by 7.5%; down by 3.8%, excluding currency
• Adjusted operating income up by 11.0% on a like-for-like basis, excluding currency
• Adjusted operating income margin up by 1.6 points to 40.0% on a like-for-like basis, excluding currency

“Our third quarter results continued to reflect strong underlying business performance and include the better-than-anticipated timing of pricing and costs compared to our previously communicated assumptions for the quarter,“ said André Calantzopoulos, Chief Executive Officer.

“The exciting global growth of our heated tobacco products drove our resilient total shipment performance, despite certain timing issues related to our combustible portfolio. The quality of our execution across the business drove growth against each of the key metrics of net revenues, operating income, margin, as well as earnings per share — both in the quarter and year-to-date — on a currency-neutral, adjusted like-for-like basis.”

“Importantly, IQOS was introduced in the U.S. this quarter, where it is currently the only FDA-authorized heat-not-burn product.”

“While we expect our net revenue and adjusted operating income growth in the fourth quarter to be in line with our year-to-date results, our currency-neutral adjusted EPS growth is anticipated to be lower than our year-to-date performance, primarily due to an unfavorable income tax rate comparison and a high relative adjusted operating income growth contribution from markets with sizable non-controlling interests. Nevertheless, we are fully on track to deliver our target of full-year currency-neutral, like-for-like adjusted diluted EPS growth of at least 9%.”

2019 FULL-YEAR FORECAST

PMI revises its full-year 2019 reported diluted EPS forecast to be at least $4.73 at prevailing exchange rates, compared to the previously communicated forecast of at least $4.94, versus $5.08 in 2018.

This revised full-year guidance reflects:

• A favorable tax item of $0.04 per share related to a reduction in estimated U.S. federal income tax on dividend repatriation for the years 2015-2018 recorded in the second quarter of 2019;
• Asset impairment and exit costs of approximately $0.04 per share resulting from plant closures as part of global manufacturing infrastructure optimization, reflecting: $0.01 per share related to Pakistan recorded in the first quarter of 2019; $0.02 per share related to Colombia ($0.01 per share recorded in the second quarter of 2019 and $0.01 per share in the third quarter of 2019); and $0.01 per share anticipated in the fourth quarter of 2019;
• A Canadian tobacco litigation-related expense of approximately $0.09 per share, announced on March 4, 2019, as well as the net impact of the loss on deconsolidation of PMI’s Canadian subsidiary Rothmans, Benson & Hedges Inc. (RBH) under U.S. GAAP of approximately $0.12 per share, recorded in the first quarter of 2019, which is a non-cash item;
• A charge of approximately $0.20 per share related to an excise and VAT tax audit in Russia (see below for a full description);
• An unfavorable currency impact, at prevailing exchange rates, of approximately $0.14;
• The exclusion, announced on March 22, 2019, of RBH’s previously anticipated net earnings from PMI’s consolidated financial statements, from March 22, 2019 (the date of deconsolidation) to December 31, 2019, of approximately $0.28 per share;
• A full-year effective tax rate of approximately 23%, excluding discrete tax items and Loss on Deconsolidation of RBH; and
• A projected increase of at least 9%, excluding currency, versus pro forma adjusted diluted earnings per share of $4.84 in 2018, as detailed in the attached Schedule 3 and as shown in the 2019 EPS Forecast table above.

Russia Excise & VAT Audit Charge

The Moscow Tax Inspectorate for Major Taxpayers (MTI) conducted an audit of AO Philip Morris Izhora (PM Izhora), our Russian affiliate, for the 2015-2017 financial years. On July 26, 2019, MTI issued its initial assessment, claiming that intercompany sales of cigarettes between PM Izhora and another Russian affiliate prior to excise tax increases and submission by PM Izhora of the maximum retail sales price notifications for cigarettes to the tax authorities were improper under Russian tax laws and resulted in underpayment of excise taxes and VAT. In August 2019, PM Izhora submitted its objections disagreeing with MTI’s allegations set forth in the initial assessment and MTI’s methodology for calculating the alleged underpayments. MTI accepted some of PM Izhora’s arguments and in September 2019, issued the final tax assessment claiming an underpayment of RUB 24.3 billion (approximately $374 million) including penalties and interest. In accordance with Russian tax laws, PM Izhora paid the entire amount of MTI’s final assessment. PMI recorded a pre-tax charge of $374 million, representing $315 million net of income tax and an earnings per share charge of approximately $0.20. Under the Russian law, PM Izhora has until mid-September 2020 to challenge the final tax assessment to the Federal Tax Service and is considering whether to pursue such a challenge.

2019 Full-Year Forecast Overview & Assumptions

This forecast assumes:

• An estimated total international industry volume decline, excluding China and the U.S., of approximately 2.5%;
• A total cigarette and heated tobacco unit shipment volume decline for PMI of approximately 1.0% to 1.5% on a like-for-like basis, compared to the previously communicated decline rate of approximately 1.0%, primarily reflecting the impact of earlier-than-initially-anticipated price increases in select markets;
• Heated tobacco unit shipment volume in line with PMI’s in-market heated tobacco unit sales volume, with 2019 inventory movements in individual markets expected to offset on an aggregate basis;
• Currency-neutral net revenue growth, on a like-for-like basis, of at least 6%;
• Currency-neutral net incremental investment behind RRPs of approximately $400 million for the full year 2019;
• An increase in full-year currency-neutral, like-for-like adjusted operating income margin of approximately 150 basis points versus 2018, compared to the previously communicated increase of at least 100 basis points;
• Operating cash flow of approximately $9.2 billion, compared to the previously communicated assumption of $9.5 billion, primarily reflecting the impact of the Russia excise and VAT audit charge described above, subject to year-end working capital requirements;
• Capital expenditures of approximately $1.0 billion, compared to the previously communicated assumption of $1.1 billion;
• An effective tax rate of approximately 23%; and
• No share repurchases.

This forecast excludes the impact of any future acquisitions, unanticipated asset impairment and exit cost charges, future changes in currency exchange rates, further developments related to the Tax Cuts and Jobs Act, further developments pertaining to the judgment in the two Québec Class Action lawsuits and the Companies’ Creditors Arrangement Act (CCAA) protection granted to RBH and any unusual events.

This forecast also excludes the contemplated proposal, previously communicated by PMI’s local affiliate, to end cigarette production in Berlin, Germany, by January 2020, as part of global manufacturing infrastructure optimization. Until the consultation process is concluded, the closure of the Berlin facility is not considered probable (under U.S. GAAP), and the total potential costs associated with this contemplated proposal, which are expected to be significant, cannot be determined. As a result, no related costs were recorded in the third quarter of 2019. If the consultation process is successfully concluded, PMI would expect, at that time, to record charges, which would include employee severance costs, asset costs, including accelerated depreciation, and impairment and other closure related costs. The amount and timing of the income statement recognition of these amounts and the related cash flows will depend on a number of factors including the timing of the completion of the consultation process as well as the negotiated elements of the associated social plan. The Berlin facility has a projected 2019 production capacity of approximately 40 billion units. Approximately 950 employees are anticipated to be impacted under this contemplated proposal.

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

Conference Call

A conference call, hosted by Martin King, Chief Financial Officer, will be webcast at 9:00 a.m., Eastern Time, on October 17, 2019. Access is at www.pmi.com/2019Q3earnings. The audio webcast may also be accessed on iOS or Android devices by downloading PMI’s free Investor Relations Mobile Application at www.pmi.com/irapp.

CONSOLIDATED SHIPMENT VOLUME & MARKET SHARE

Third-Quarter

PMI’s total shipment volume decreased by 2.1%, or by 1.4% on a like-for-like basis, principally due to:

• Middle East & Africa, reflecting lower heated tobacco unit shipment volume in PMI Duty Free and cigarette shipment volume, notably in Saudi Arabia and Turkey, partly offset by Egypt;
• South & Southeast Asia, reflecting lower cigarette shipment volume, primarily in Indonesia, Pakistan and the Philippines, partly offset by Thailand; and
• Latin America & Canada, due to lower cigarette shipment volume, primarily in Canada (reflecting the impact of the deconsolidation of RBH) and Mexico, partly offset by Brazil. On a like-for-like basis, PMI’s total shipment volume in the Region decreased by 6.9%;

partly offset by

• the EU, reflecting higher heated tobacco unit shipment volume across the Region, notably in Italy, partly offset by lower cigarette shipment volume, primarily in France and Italy;
• Eastern Europe, reflecting higher heated tobacco unit shipment volume across the Region, notably in Kazakhstan, Russia and Ukraine, partly offset by lower cigarette shipment volume, mainly in Russia and Ukraine; and
• East Asia & Australia, driven by higher heated tobacco unit shipment volume in Japan (mainly reflecting a favorable comparison with the third quarter of 2018 in which IQOS consumable inventories were reduced), partly offset by lower cigarette shipment volume across the Region, notably in Japan and Korea, as well as lower heated tobacco unit shipment volume in Korea.

Impact of Inventory Movements

On a like-for-like basis, excluding the net favorable impact of estimated distributor inventory movements of approximately 4.8 billion units, PMI’s total in-market sales declined by 3.6% due to a 5.7% decline of cigarette in-market sales, partially offset by a 28.3% increase in heated tobacco unit in-market sales.

The net favorable impact of estimated distributor inventory movements of approximately 4.8 billion units was driven by 3.8 billion heated tobacco units (mainly reflecting a favorable comparison with the third quarter of 2018 in which IQOS consumable inventories in Japan were reduced), and 1.0 billion cigarettes, driven partly by Japan.

Nine Months Year-to-Date

PMI’s total shipment volume decreased by 0.9%, or by 0.4% on a like-for-like basis, due to:

• South & Southeast Asia, reflecting lower cigarette shipment volume, primarily in Indonesia and Pakistan, partly offset by the Philippines and Thailand;
• East Asia & Australia, primarily reflecting lower cigarette shipment volume in Japan and lower cigarette and heated tobacco unit shipment volume in Korea, partly offset by higher heated tobacco unit shipment volume in Japan; and
• Latin America & Canada, reflecting lower cigarette shipment volume, principally in Argentina, Canada (primarily reflecting the impact of the deconsolidation of RBH), Mexico and Venezuela, partly offset by Brazil. On a like-for-like basis, PMI’s total shipment volume in the Region decreased by 5.2%;

partly offset by

• the EU, reflecting higher heated tobacco unit shipment volume across the Region, notably in Italy, and higher cigarette shipment volume in Poland, partly offset by lower cigarette shipment volume in France and Italy; and
• Middle East & Africa, primarily reflecting higher cigarette shipment volume, notably in Egypt and Saudi Arabia, partly offset by lower cigarette and heated tobacco unit shipment volume in PMI Duty Free.

PMI’s total shipment volume in Eastern Europe was flat, reflecting higher heated tobacco unit shipment volume across the Region, notably in Kazakhstan, Russia and Ukraine, offset by lower cigarette shipment volume, primarily in Russia and Ukraine.

Impact of Inventory Movements

On a like-for-like basis, excluding the net favorable impact of estimated distributor inventory movements of approximately 3.6 billion units, PMI’s total in-market sales declined by 1.0% due to a 2.9% decline of cigarette in-market sales, partly offset by a 31.8% increase in heated tobacco unit in-market sales.

The net favorable impact of estimated distributor inventory movements of approximately 3.6 billion units reflected 2.9 billion heated tobacco units, driven primarily by Japan, partly offset by PMI Duty Free and Russia, and 0.7 billion cigarettes, driven primarily by the EU Region and Saudi Arabia, partly offset by North Africa and Thailand.

PMI Shipment Volume by Brand

Third-Quarter

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

• Marlboro, mainly due to the GCC, Japan, partly reflecting the impact of out-switching to heated tobacco units, and Mexico, partly offset by the Philippines and Turkey;
• Chesterfield, mainly due to Argentina, Mexico, Russia and Saudi Arabia, partly offset by Brazil;
• Philip Morris, mainly due to Ukraine, partly offset by Indonesia;
• Parliament, mainly due to Japan, Korea, Russia and Turkey;
• Sampoerna A in Indonesia, mainly reflecting the impact of retail price increases resulting in widened price gaps with competitors’ products;
• Bond Street, mainly due to Russia and Ukraine;
• Lark, mainly due to Japan and Turkey;
• Fortune in the Philippines, mainly reflecting up-trading to Marlboro resulting from narrowed price gaps with the below premium price segment; and
• “Others,” notably due to: the impact of the deconsolidation of RBH in Canada; mid-price Sampoerna U in Indonesia, partly reflecting the impact of above-inflation retail price increases; and low-price brands, notably Morven in Pakistan, partly offset by Jackpot in the Philippines.

The increase in PMI’s heated tobacco unit shipment volume was mainly driven by the EU, notably Italy, Eastern Europe, notably Kazakhstan, Russia and Ukraine, as well as Japan, partly offset by Korea and PMI Duty Free.

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

• L&M, mainly driven by Egypt and Thailand, partly offset by Russia and Turkey; and
• Dji Sam Soe in Indonesia, driven by the strong performance of the DSS Magnum Mild 16 variant and the introduction of 20s and 50s variants.

International Share of Market

PMI’s total international market share (excluding China and the United States), defined as PMI’s cigarette and heated tobacco unit sales volume as a percentage of total industry cigarette and heated tobacco unit sales volume, decreased by 0.1 point to 28.8%, reflecting:

• Total international cigarette market share of 26.5%, down by 0.6 points; and
• Total international heated tobacco unit market share of 2.3%, up by 0.6 points.

PMI’s total international cigarette market share, defined as PMI’s cigarette sales volume as a percentage of total industry cigarette sales volume, was 27.3%, down by 0.4 points, mainly reflecting: out-switching to IQOS, notably in the EU Region, Japan and Russia; and lower cigarette market share, notably in Argentina, Indonesia, Korea, Mexico and Turkey.

Nine Months Year-to-Date

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

• Chesterfield, mainly due to Argentina, Italy, Russia and Venezuela, partly offset by Brazil, Mexico and Poland;
• Parliament, mainly due to Korea and Russia, partly offset by Turkey;
• Sampoerna A in Indonesia, reflecting the same factor as in the quarter;
• Bond Street, mainly due to Russia and Ukraine;
• Lark, mainly due to Japan and Turkey;
• Fortune in the Philippines, mainly reflecting the same factor as in the quarter; and
• “Others,” notably due to: the impact of the deconsolidation of RBH in Canada; mid-price Sampoerna U in Indonesia, partly reflecting the impact of above-inflation retail price increases; and low-price brands, notably in Mexico, mainly reflecting the morphing of Delicados into Chesterfield, and Russia, partly offset by Jackpot in the Philippines.

The increase in PMI’s heated tobacco unit shipment volume was mainly driven by: the EU, notably Italy, Eastern Europe, notably Kazakhstan, Russia and Ukraine, and Japan, partly offset by Korea and PMI Duty Free.

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

• Marlboro, mainly driven by Indonesia, reflecting the growth of the Filter Black 12s and 20s variants, the Philippines, reflecting up-trading resulting from narrowed price gaps with the below premium price segment, Saudi Arabia and Turkey, partially offset by Italy and Japan, par

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