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Philip Morris International Inc. Reports 2019 Third-Quarter Results

NEW YORK--(BUSINESS WIRE)--

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%

Philip Morris International Inc. (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

 

Full-Year

2019 EPS Forecast

2019
Forecast

 

2018

Adjusted
Growth

 

 

 

 

 

 

 

 

Reported Diluted EPS

$4.73

(a)

$5.08

 

 

 

2018 Tax items

 

 

0.02

 

 

 

2019 Tax items

 

(0.04)

 

 

 

 

2019 Asset impairment and exit costs

 

0.04

 

 

 

 

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

 

 

 

 

Adjusted Diluted EPS

 

$5.14

 

$5.10

 

 

 

Net earnings attributable to RBH

 

 

 

(0.26)

(b)

 

 

Adjusted Diluted EPS

 

$5.14

 

$4.84

(c)

 

 

Currency

 

(0.14)

 

 

 

 

 

Adjusted Diluted EPS, excluding currency

$5.28

 

$4.84

(c)

9%

(a) Reflects the exclusion of previously anticipated net EPS of approximately $0.28 attributable to RBH from March 22, 2019 through December 31, 2019. The impact relating to the eight-day stub period was not material.
(b) Net reported diluted EPS attributable to RBH from March 22, 2018 through December 31, 2018.
(c) Pro forma.

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

PMI Shipment Volume by Region

Third-Quarter

Nine Months Year-to-Date

(million units)

2019

2018

Change

2019

2018

Change

Cigarettes

 

 

 

 

 

 

European Union

47,238

48,223

(2.0)%

133,093

135,878

(2.0)%

Eastern Europe

27,379

29,801

(8.1)%

74,779

80,294

(6.9)%

Middle East & Africa

36,994

37,406

(1.1)%

101,957

100,831

1.1%

South & Southeast Asia

42,362

45,840

(7.6)%

130,230

130,846

(0.5)%

East Asia & Australia

12,692

14,186

(10.5)%

38,650

43,391

(10.9)%

Latin America & Canada

16,854

19,612

(14.1)%

52,906

58,829

(10.1)%

Total PMI

183,519

195,068

(5.9)%

531,615

550,069

(3.4)%

 

 

 

 

 

 

 

Heated Tobacco Units

 

 

 

 

 

 

European Union

3,474

1,730

+100%

8,810

3,853

+100%

Eastern Europe

3,858

1,152

+100%

8,213

2,667

+100%

Middle East & Africa

588

1,152

(49.0)%

2,061

2,832

(27.2)%

South & Southeast Asia

—%

—%

East Asia & Australia

7,976

4,575

74.3%

23,253

19,755

17.7%

Latin America & Canada (1)

89

43

+100%

202

98

+100%

Total PMI

15,985

8,652

84.8%

42,539

29,205

45.7%

 

 

 

 

 

 

 

Cigarettes and Heated Tobacco Units

 

 

 

 

 

 

European Union

50,712

49,953

1.5%

141,903

139,731

1.6%

Eastern Europe

31,237

30,953

0.9%

82,992

82,961

—%

Middle East & Africa

37,582

38,558

(2.5)%

104,018

103,663

0.3%

South & Southeast Asia

42,362

45,840

(7.6)%

130,230

130,846

(0.5)%

East Asia & Australia

20,668

18,761

10.2%

61,903

63,146

(2.0)%

Latin America & Canada

16,943

19,655

(13.8)%

53,108

58,927

(9.9)%

Total PMI

199,504

203,720

(2.1)%

574,154

579,274

(0.9)%

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

 

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

PMI Shipment Volume by Brand

Third-Quarter

Nine Months Year-to-Date

(million units)

2019

2018

Change

2019

2018

Change

Cigarettes

 

 

 

 

 

 

Marlboro

68,859

69,121

(0.4)%

196,883

195,987

0.5%

L&M

24,428

24,329

0.4%

69,765

66,751

4.5%

Chesterfield

15,001

15,821

(5.2)%

43,502

44,622

(2.5)%

Philip Morris

13,275

13,505

(1.7)%

36,949

36,687

0.7%

Parliament

10,407

11,588

(10.2)%

29,085

31,041

(6.3)%

Sampoerna A

8,756

10,333

(15.3)%

26,012

29,131

(10.7)%

Dji Sam Soe

8,599

7,578

13.5%

23,089

21,151

9.2%

Bond Street

7,687

8,595

(10.6)%

21,099

23,960

(11.9)%

Lark

4,955

6,058

(18.2)%

15,575

17,604

(11.5)%

Fortune

3,215

4,052

(20.7)%

9,702

11,791

(17.7)%

Others

18,337

24,088

(23.9)%

59,954

71,344

(16.0)%

Total Cigarettes

183,519

195,068

(5.9)%

531,615

550,069

(3.4)%

Heated Tobacco Units (1)

15,985

8,652

84.8%

42,539

29,205

45.7%

Total PMI

199,504

203,720

(2.1)%

574,154

579,274

(0.9)%

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

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

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, partly reflecting the impact of out-switching to heated tobacco units, as well as France and PMI Duty Free;
  • L&M, mainly driven by Egypt, Saudi Arabia and Thailand, partly offset by Russia and Turkey;
  • Philip Morris, mainly driven by Indonesia and Russia, partly offset by Argentina; and
  • Dji Sam Soe in Indonesia, driven by the same factors as in the quarter.

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, increased by 0.2 points to 28.3%, reflecting:

  • Total international cigarette market share of 26.2%, down by 0.3 points; and
  • Total international heated tobacco unit market share of 2.1%, up by 0.5 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 26.9%, down by 0.2 points.

CONSOLIDATED FINANCIAL SUMMARY

Third-Quarter

Financial Summary -
Quarters Ended September 30,

 

 

 

 

Change
Fav./(Unfav.)

 

Variance
Fav./(Unfav.)

 

2019

2018

 

Total

Excl.
Curr.

 

Total

Cur-
rency

Price

Vol/
Mix

Cost/
Other(1)

(in millions)

 

 

 

Net Revenues

 

$ 7,642

$ 7,504

 

1.8%

3.4%

 

138

(115)

266

263

(276)

Cost of Sales

 

(2,605)

(2,618)

 

0.5%

(0.6)%

 

13

30

(181)

164

Marketing, Administration and Research Costs (2)

 

(2,234)

(1,710)

 

(30.6)%

(34.8)%

 

(524)

71

(595)

Amortization of Intangibles

 

(15)

(20)

 

25.0%

15.0%

 

5

2

3

Operating Income

 

$ 2,788

$ 3,156

 

(11.7)%

(11.3)%

 

(368)

(12)

266

82

(704)

Asset Impairment & Exit Costs (3)

 

(22)

 

—%

—%

 

(22)

(22)

Russia Excise and VAT Audit Charge (3)

 

(374)

 

—%

—%

 

(374)

(374)

Adjusted Operating Income

 

$ 3,184

$ 3,156

 

0.9%

1.3%

 

28

(12)

266

82

(308)

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Operating Income Margin

 

41.7%

42.1%

 

(0.4)pp

(0.9)pp

 

 

 

 

 

 

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

(2) Unfavorable Cost/Other variance includes 2019 asset impairment and exit costs and the Russia excise and VAT audit charge.

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

Note: Net Revenues include revenues from shipments of the IQOS heated tobacco device, 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, increased by 3.4%, mainly reflecting: a favorable pricing variance, driven notably by Germany, Indonesia, Mexico, the Philippines and Turkey, partly offset by Japan (reflecting the price repositioning of IQOS devices and associated inventory revaluation); as well as a favorable volume/mix, mainly driven by heated tobacco units, notably across the EU, Japan and Russia, partly offset by unfavorable volume/mix of cigarettes, notably in Australia, Indonesia, Japan, Mexico, Russia and Turkey, as well as unfavorable volume of heated tobacco units in Korea and PMI Duty Free. The currency-neutral growth in net revenues of 3.4% came despite the unfavorable impact of $276 million, shown in "Cost/Other," predominantly resulting from the deconsolidation of RBH. On a like-for-like basis, net revenues, excluding unfavorable currency, increased by 7.0%, as detailed in the attached Schedule 9.

Operating income, excluding unfavorable currency, decreased by 11.3%. Excluding asset impairment and exit charges related to a plant closure in Colombia as part of global manufacturing infrastructure optimization, as well as the Russia excise and VAT audit charge, adjusted operating income, excluding unfavorable currency, increased by 1.3%, primarily reflecting: a favorable pricing variance; favorable volume/mix, reflecting the same drivers as for net revenues noted above; and lower manufacturing costs across the Regions; partly offset by higher marketing, administration and research costs, reflecting increased investment behind reduced-risk products mainly in the EU, Eastern Europe and East Asia & Australia, and the net unfavorable impact resulting from the deconsolidation of RBH shown in "Cost/Other." On a like-for-like basis, adjusted operating income, excluding unfavorable currency, increased by 8.0%, as detailed in the attached Schedule 9.

Adjusted operating income margin, excluding currency, decreased by 0.9 points to 41.2%, reflecting the factors mentioned above, as detailed in the attached Schedule 8, or increased by 0.4 points to 41.2% on a like-for-like basis, as detailed in the attached Schedule 9.

Nine Months Year-to-Date

Financial Summary -
Nine Months Ended 
September 30,

 

 

 

 

Change
Fav./(Unfav.)

 

Variance
Fav./(Unfav.)

 

2019

2018

 

Total

Excl.
Curr.

 

Total

Cur-
rency

Price

Vol/
Mix

Cost/
Other(1)

(in millions)

 

 

 

Net Revenues

 

$

22,092

$

22,126

 

(0.2)%

4.1%

 

(34)

(931)

953

457

(513)

Cost of Sales

 

(7,735)

(7,977)

 

3.0%

(0.4)%

 

242

274

(255)

223

Marketing, Administration and Research Costs (2)

 

(6,282)

(5,411)

 

(16.1)%

(22.3)%

 

(871)

333

(1,204)

Amortization of Intangibles

 

(50)

(63)

 

20.6%

15.9%

 

13

3

10

Operating Income

 

$

8,025

$

8,675

 

(7.5)%

(3.8)%

 

(650)

(321)

953

202

(1,484)

Asset Impairment & Exit Costs (3)

 

(65)

 

—%

—%

 

(65)

(65)

Canadian Tobacco Litigation-Related Expense (3)

 

(194)

 

—%

—%

 

(194)

(194)

Loss on Deconsolidation of RBH (3)

 

(239)

 

—%

—%

 

(239)

(239)

Russia Excise and VAT Audit Charge (3)

 

(374)

 

—%

—%

 

(374)

(374)

Adjusted Operating Income

 

$

8,897

$

8,675

 

2.6%

6.3%

 

222

(321)

953

202

(612)

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Operating Income Margin

 

40.3%

39.2%

 

1.1pp

0.8pp

 

 

 

 

 

 

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

(2) Unfavorable Cost/Other variance includes the 2019 Canadian tobacco litigation-related expense, the loss on deconsolidation of RBH, asset impairment and exit costs, the impact of the RBH deconsolidation and the Russia excise and VAT audit charge.

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

Note: Net Revenues include revenues from shipments of the IQOS heated tobacco device, 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, increased by 4.1%, mainly reflecting: a favorable pricing variance, notably in Germany, Indonesia, Japan, the Philippines and Turkey, partly offset by Argentina; and favorable volume/mix, mainly driven by heated tobacco units in the EU, Japan and Russia, partly offset by unfavorable volume/mix of cigarettes, notably in the EU, Indonesia, Japan and Russia, as well as unfavorable volume of heated tobacco units in Korea and PMI Duty Free. The currency-neutral growth in net revenues of 4.1% came despite the unfavorable impact of $513 million, shown in "Cost/Other," predominantly resulting from the deconsolidation of RBH. On a like-for-like basis, net revenues, excluding unfavorable currency, increased by 6.5%, as detailed in the attached Schedule 9.

Operating income, excluding unfavorable currency, decreased by 3.8%. Excluding the loss on deconsolidation of RBH, the Canadian tobacco litigation-related expense, and asset impairment and exit charges related to plant closures in Colombia and Pakistan as part of global manufacturing infrastructure optimization, as well as the Russia excise and VAT audit charge, adjusted operating income, excluding unfavorable currency, increased by 6.3%, primarily reflecting: a favorable pricing variance; favorable volume/mix, mainly across the EU, Eastern Europe and the Philippines, partly offset by Argentina, Australia, Indonesia, Japan, Korea and PMI Duty Free; and lower manufacturing costs; partly offset by higher marketing, administration and research costs, reflecting increased investment behind reduced-risk products mainly in the EU and Eastern Europe, and the net unfavorable impact resulting from the deconsolidation of RBH, shown in "Cost/Other." On a like-for-like basis, adjusted operating income, excluding unfavorable currency, increased by 11.0%, as detailed in the attached Schedule 9.

Adjusted operating income margin, excluding currency, increased by 0.8 points to 40.0%, reflecting the factors mentioned above, as detailed in the attached Schedule 8, or by 1.6 points to 40.0% on a like-for-like basis, as detailed in the attached Schedule 9.

EUROPEAN UNION REGION

Third-Quarter

Financial Summary -
Quarters Ended September 30,

 

 

 

 

Change
Fav./(Unfav.)

 

Variance
Fav./(Unfav.)

 

2019

2018

 

Total

Excl.
Curr.

 

Total

Cur-
rency

Price

Vol/
Mix

Cost/
Other

(in millions)

 

 

 

Net Revenues

 

$

2,645

$

2,467

 

7.2%

11.2%

 

178

(98)

54

222

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

$

1,255

$

1,179

 

6.4%

12.0%

 

76

(66)

54

153

(65)

Asset Impairment & Exit Costs

 

 

—%

—%

 

Adjusted Operating Income

 

$

1,255

$

1,179

 

6.4%

12.0%

 

76

(66)

54

153

(65)

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Operating Income Margin

 

47.4%

47.8%

 

(0.4)pp

0.4pp

 

 

 

 

 

 

Net revenues, excluding unfavorable currency, increased by 11.2%, reflecting a favorable pricing variance, driven principally by France, Germany and the United Kingdom, and favorable volume/mix, driven by favorable heated tobacco unit volume, notably in the Czech Republic, Germany, Italy and Poland, partly offset by unfavorable cigarette volume/mix, notably in Germany, Italy and the United Kingdom.

Operating income, excluding unfavorable currency, increased by 12.0%, mainly reflecting: a favorable pricing variance; favorable volume/mix, driven by heated tobacco unit volume, notably in the Czech Republic, Germany, Italy and Poland, partly offset by lower cigarette volume/mix, notably in Germany, Italy, Switzerland and the United Kingdom; and lower manufacturing costs; partly offset by higher marketing, administration and research costs, largely related to increased investments behind reduced-risk products.

Adjusted operating income margin, excluding currency, increased by 0.4 points to 48.2%, reflecting the factors mentioned above, as detailed on Schedule 8.

Nine Months Year-to-Date

Financial Summary -
Nine Months Ended September 30,

 

 

 

 

Change
Fav./(Unfav.)

 

Variance
Fav./(Unfav.)

 

2019

2018

 

Total

Excl.
Curr.

 

Total

Cur-
rency

Price

Vol/
Mix

Cost/
Other

(in millions)

 

 

 

Net Revenues

 

$

7,381

$

6,958

 

6.1%

12.6%

 

423

(457)

206

674

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

$

3,346

$

3,096

 

8.1%

16.5%

 

250

(261)

206

518

(213)

Asset Impairment & Exit Costs

 

 

—%

—%

 

Adjusted Operating Income

 

$

3,346

$

3,096

 

8.1%

16.5%

 

250

(261)

206

518

(213)

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Operating Income Margin

 

45.3%

44.5%

 

0.8pp

1.5pp

 

 

 

 

 

 

Net revenues, excluding unfavorable currency, increased by 12.6%, reflecting a favorable pricing variance, driven principally by France, Germany and the United Kingdom, partly offset by Poland; and favorable volume/mix, primarily reflecting favorable heated tobacco unit volume/mix, notably in the Czech Republic, Germany, Italy and Poland, partly offset by lower cigarette volume, notably in France and Italy, and lower cigarette volume/mix in Germany.

Operating income, excluding unfavorable currency, increased by 16.5%, mainly reflecting: a favorable pricing variance; favorable volume/mix, notably in the Czech Republic, Germany, Italy and Poland, driven by heated tobacco unit volume, partially offset by lower cigarette volume/mix, reflecting the same drivers as for net revenues noted above; partially offset by higher manufacturing costs and higher marketing, administration and research costs notably related to increased investment behind reduced-risk products.

Adjusted operating income margin, excluding currency, increased by 1.5 points to 46.0%, reflecting the factors mentioned above, as detailed on Schedule 8.

Total Market, PMI Shipment & Market Share Commentaries

European Union Key Data

 

Third-Quarter

 

Nine Months Year-to-Date

 

 

 

 

Change

 

 

 

Change

 

 

2019

2018

% / pp

 

2019

2018

% / pp

Total Market (billion units)

 

132.1

131.4

0.5%

 

363.8

365.2

(0.4)%

 

 

 

 

 

 

 

 

 

PMI Shipment Volume (million units)

 

 

 

 

 

 

 

 

Cigarettes

 

47,238

48,223

(2.0)%

 

133,093

135,878

(2.0)%

Heated Tobacco Units

 

3,474

1,730

+100.0%

 

8,810

3,853

+100.0%

Total EU

 

50,712

49,953

1.5%

 

141,903

139,731

1.6%

 

 

 

 

 

 

 

 

 

PMI Market Share

 

 

 

 

 

 

 

 

Marlboro

 

18.0%

18.5%

(0.5)

 

18.1%

18.4%

(0.3)

L&M

 

6.7%

7.0%

(0.3)

 

6.7%

6.9%

(0.2)

Chesterfield

 

5.8%

5.9%

(0.1)

 

5.8%

5.9%

(0.1)

Philip Morris

 

2.7%

2.9%

(0.2)

 

2.7%

3.0%

(0.3)

HEETS

 

2.5%

1.2%

1.3

 

2.3%

1.0%

1.3

Others

 

3.0%

3.0%

 

3.2%

3.2%

Total EU

 

38.7%

38.5%

0.2

 

38.8%

38.4%

0.4

Third-Quarter

The estimated total market in the EU increased by 0.5% to 132.1 billion units, mainly driven by:

  • Germany, up by 1.3%, primarily reflecting the impact of estimated trade inventory movements of competitors' products, partly offset by the impact of price increases in March 2019; and
  • Poland, up by 4.3%, primarily reflecting a lower prevalence of illicit trade;

partly offset by

  • France, down by 4.8%, mainly due to the impact of significant excise-tax driven price increases, and an increase in the prevalence of illicit trade.

PMI's total shipment volume increased by 1.5% to 50.7 billion units, reflecting:

  • higher heated tobacco unit shipment volume across the Region, notably Italy, driven by higher market share;

partly offset by:

  • lower cigarette shipment volume, mainly in France, due to the lower total market and lower cigarette market share, and Italy, partly reflecting out-switching to heated tobacco units.

Nine Months Year-to-Date

The estimated total market in the EU decreased by 0.4% to 363.8 billion units, notably due to:

  • France, down by 6.4%, primarily reflecting the impact of price increases in 2018 and the first quarter of 2019;
  • Germany, down by 1.9%, primarily reflecting the impact of price increases in 2018 and March 2019; and
  • Italy, down by 1.8%, primarily reflecting the impact of price increases in 2018 and the first quarter of 2019;

partly offset by

  • Poland, up by 6.7%, reflecting the same factor as in the quarter; and
  • Spain, up by 0.9%, partly reflecting a lower prevalence of illicit trade.

PMI's total shipment volume increased by 1.6% to 141.9 billion units, reflecting:

  • higher heated tobacco unit shipment volume across the Region, notably Italy, driven by higher market share;

partly offset by

  • lower cigarette shipment volume, mainly in France and Italy, reflecting the same factors as in the quarter, partly offset by Poland, mainly driven by the higher total market.

     

EASTERN EUROPE REGION

Third-Quarter

Financial Summary -
Quarters Ended September 30,

 

 

 

 

Change
Fav./(Unfav.)

 

Variance
Fav./(Unfav.)

 

2019

2018

 

Total

Excl.
Curr.

 

Total

Cur-
rency

Price

Vol/
Mix

Cost/
Other

(in millions)

 

 

 

Net Revenues

 

$ 899

$ 778

 

15.6%

16.5%

 

121

(7)

(3)

131

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income (Loss)

 

$ (101)

$ 270

 

-(100)%

-(100)%

 

(371)

25

(3)

32

(425)

Asset Impairment & Exit Costs

 

 

—%

—%

 

Russia Excise and VAT Audit Charge (1)

 

(374)

 

—%

—%

 

(374)

(374)

Adjusted Operating Income

 

$ 273

$ 270

 

1.1%

(8.1)%

 

3

25

(3)

32

(51)

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Operating Income Margin

 

30.4%

34.7%

 

(4.3)pp

(7.3)pp

 

 

 

 

 

 

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

Net revenues, excluding unfavorable currency, increased by 16.5%, reflecting favorable volume/mix, predominantly driven by heated tobacco unit volume in Kazakhstan and Ukraine, and heated tobacco unit and IQOS device volume in Russia, partly offset by lower cigarette volume/mix, mainly due to Russia and Ukraine.

Operating income, excluding favorable currency, decreased by over 100% due primarily to the unfavorable impact, shown in "Cost/Other," of the Russia excise and VAT audit charge. Excluding this charge, adjusted operating income, excluding favorable currency, decreased by 8.1%, mainly due to higher marketing, administration and research costs, notably reflecting increased investments behind reduced-risk products, primarily in Russia in support of geographic expansion, partly offset by favorable volume/mix, predominantly driven by heated tobacco unit volume in Russia, partly offset by lower cigarette volume/mix in Russia.

Adjusted operating income margin, excluding currency, decreased by 7.3 points to 27.4%, reflecting the factors mentioned above, as detailed on Schedule 8.

Nine Months Year-to-Date

Financial Summary -
Nine Months Ended September 30,

 

 

 

 

Change
Fav./(Unfav.)

 

Variance
Fav./(Unfav.)

 

2019

2018

 

Total

Excl.
Curr.

 

Total

Cur-
rency

Price

Vol/
Mix

Cost/
Other

(in millions)

 

 

 

Net Revenues

 

$ 2,300

$ 2,105

 

9.3%

15.8%

 

195

(137)

50

282

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

$ 284

$ 682

 

(58.4)%

(56.9)%

 

(398)

(10)

50

73

(511)

Asset Impairment & Exit Costs

 

 

—%

—%

 

Russia Excise and VAT Audit Charge (1)

 

(374)

 

—%

—%

 

(374)

(374)

Adjusted Operating Income

 

$ 658

$ 682

 

(3.5)%

(2.1)%

 

(24)

(10)

50

73

(137)

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Operating Income Margin

 

28.6%

32.4%

 

(3.8)pp

(5.0)pp

 

 

 

 

 

 

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

Net revenues, excluding unfavorable currency, increased by 15.8%, reflecting a favorable pricing variance, driven notably by Ukraine, and favorable volume/mix, predominantly driven by heated tobacco unit and IQOS device volume in Russia and Ukraine, partly offset by lower cigarette volume/mix in Russia.

Operating income, excluding unfavorable currency, decreased by 56.9% due primarily to the unfavorable impact, shown in "Cost/Other," of the Russia excise and VAT audit charge. Excluding this charge, adjusted operating income, excluding unfavorable currency, decreased by 2.1%, due to: higher manufacturing costs and higher marketing, administration and research costs, notably reflecting increased investments behind reduced-risk products, primarily in Russia in support of geographic expansion; partly offset by a favorable pricing variance and favorable volume/mix, predominantly driven by heated tobacco unit volume in Russia and Ukraine, partly offset by lower cigarette volume/mix in Russia.

Adjusted operating income margin, excluding currency, decreased by 5.0 points to 27.4%, reflecting the factors mentioned above, as detailed on Schedule 8.

Total Market, PMI Shipment & Market Share Commentaries

PMI Shipment Volume

Third-Quarter

 

Nine Months Year-to-Date

(million units)

2019

2018

Change

 

2019

2018

Change

Cigarettes

27,379

29,801

(8.1)%

 

74,779

80,294

(6.9)%

Heated Tobacco Units

3,858

1,152

+100.0%

 

8,213

2,667

+100.0%

Total Eastern Europe

31,237

30,953

0.9%

 

82,992

82,961

—%

Third-Quarter

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

  • Russia, down by 5.9%, primarily reflecting the impact of price increases, as well as an increase in the prevalence of illicit trade; and
  • Ukraine, down by 14.5%, primarily reflecting the impact of excise tax-driven price increases, as well as an increase in the prevalence of illicit trade;

partly offset by

  • Kazakhstan, up by 4.6%, partly reflecting a lower prevalence of illicit trade.

PMI's total shipment volume increased by 0.9% to 31.2 billion units, driven by:

  • Kazakhstan, up by 7.9%, mainly reflecting a higher total market and a higher market share of heated tobacco units; and
  • Russia, up by 2.8%, mainly reflecting a higher market share of heated tobacco units, partially offset by the lower total market;

partly offset by

  • Ukraine, down by 6.3%, reflecting a lower total market, partly offset by higher market share of heated tobacco units.

Nine Months Year-to-Date

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

  • Russia, down by 5.3%, reflecting the same factors as in the quarter; and
  • Ukraine, down by 13.4%, reflecting the same factors as in the quarter;

partly offset by

  • Kazakhstan, up by 5.2%, reflecting the same factor as in the quarter.

PMI's total shipment volume was flat at 83.0 billion units, notably reflecting:

  • Kazakhstan, up by 10.5%, reflecting a higher total market and a higher market share of heated tobacco units; and
  • Russia, up by 0.1%, mainly reflecting a higher market share of heated tobacco units, partially offset by the lower total market;

offset by

  • Ukraine, down by 3.2%, reflecting a lower total market, partly offset by a higher market share, notably of heated tobacco units.

 MIDDLE EAST & AFRICA REGION

Third-Quarter

Financial Summary -
Quarters Ended September 30,

 

 

 

 

Change
Fav./(Unfav.)

 

Variance
Fav./(Unfav.)

 

2019

2018

 

Total

Excl.
Curr.

 

Total

Cur-
rency

Price

Vol/
Mix

Cost/
Other

(in millions)

 

 

 

Net Revenues

 

$ 1,127

$ 1,143

 

(1.4)%

—%

 

(16)

(16)

89

(70)

(19)

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

$ 519

$ 491

 

5.7%

4.9%

 

28

4

89

(69)

4

Asset Impairment & Exit Costs

 

 

—%

—%

 

Adjusted Operating Income

 

$ 519

$ 491

 

5.7%

4.9%

 

28

4

89

(69)

4

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Operating Income Margin

 

46.1%

43.0%

 

3.1pp

2.1pp

 

 

 

 

 

 

Net revenues, excluding unfavorable currency, were flat, reflecting a favorable pricing variance, driven predominantly by Turkey, offset by: unfavorable volume/mix, notably due to unfavorable heated tobacco unit volume in PMI Duty Free, and unfavorable cigarette volume in the GCC, primarily Saudi Arabia, and Turkey, partly offset by favorable cigarette volume in Egypt; and an unfavorable cost/other variance mainly driven by the timing of other revenues.

Operating income, excluding favorable currency, increased by 4.9%, mainly reflecting a favorable pricing variance and lower manufacturing costs, partly offset by unfavorable volume/mix, reflecting the same drivers as for net revenues noted above, and the timing of other revenues.

Adjusted operating income margin, excluding currency, increased by 2.1 points to 45.1%, reflecting the factors mentioned above, as detailed on Schedule 8.

Nine Months Year-to-Date

Financial Summary -
Nine Months Ended September 30,

 

 

 

 

Change
Fav./(Unfav.)

 

Variance
Fav./(Unfav.)

 

2019

2018

 

Total

Excl.
Curr.

 

Total

Cur-
rency

Price

Vol/
Mix

Cost/
Other

(in millions)

 

 

 

Net Revenues

 

$ 3,058

$ 3,126

 

(2.2)%

3.4%

 

(68)

(174)

154

(45)

(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

$ 1,304

$ 1,268

 

2.8%

8.2%

 

36

(68)

154

(81)

31

Asset Impairment & Exit Costs

 

 

—%

—%

 

Adjusted Operating Income

 

$ 1,304

$ 1,268

 

2.8%

8.2%

 

36

(68)

154

(81)

31

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Operating Income Margin

 

42.6%

40.6%

 

2.0pp

1.9pp

 

 

 

 

 

 

Net revenues, excluding unfavorable currency, increased by 3.4%, mainly reflecting: a favorable pricing variance, primarily driven by Egypt, Kuwait, PMI Duty Free and Turkey, partly offset by Saudi Arabia; partly offset by unfavorable volume/mix, predominantly due to unfavorable cigarette and heated tobacco unit volume in PMI Duty Free, partly offset by Egypt and Saudi Arabia.

Operating income, excluding unfavorable currency, increased by 8.2%, mainly reflecting a favorable pricing variance and lower manufacturing costs, partly offset by unfavorable volume/mix, notably due to unfavorable cigarette and heated tobacco unit volume in PMI Duty Free, partly offset by cigarette mix in Saudi Arabia.

Adjusted operating income margin, excluding currency, increased by 1.9 points to 42.5%, reflecting the factors mentioned above, as detailed on Schedule 8.

Total Market, PMI Shipment & Market Share Commentaries

PMI Shipment Volume

Third-Quarter

 

Nine Months Year-to-Date

(million units)

2019

2018

Change

 

2019

2018

Change

Cigarettes

36,994

37,406

(1.1)%

 

101,957

100,831

1.1%

Heated Tobacco Units

588

1,152

(49.0)%

 

2,061

2,832

(27.2)%

Total Middle East & Africa

37,582

38,558

(2.5)%

 

104,018

103,663

0.3%

Third-Quarter

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

  • Algeria, up by 7.5%, partly reflecting the impact of estimated trade inventory movements;
  • Egypt, up by 10.1%, mainly due to the timing of estimated trade inventory movements in the third quarter of 2019 related to anticipated price increases compared to estimated unfavorable trade inventory movements in the third quarter of 2018 following the July 2018 health tax increase; and
  • Saudi Arabia, up by 4.1%, primarily reflecting a recovery of the total market following the introduction of the new excise tax in June 2017 and VAT in January 2018, respectively;

partly offset by

  • Duty Free, down by 5.6%, mainly reflecting increased enforcement of traveler allowances, notably by China.

PMI's total shipment volume decreased by 2.5% to 37.6 billion units, notably due to:

  • PMI Duty Free, down by 11.1%. Excluding the net unfavorable impact of estimated distributor inventory movements, primarily of heated tobacco units, PMI's in market sales declined by 8.0%, primarily reflecting the lower total market;
  • Saudi Arabia, down by 21.1%. Net unfavorable estimated distributor inventory movements totaled 0.6 billion cigarettes, mainly attributable to the pay-back of adjustments in the first half of 2019 resulting from the delayed importation deadline before the implementation of plain packaging scheduled for January 1, 2020. Excluding the impact of these inventory movements, PMI's in-market sales grew by 1.9%; and
  • Turkey, down by 10.7%, mainly reflecting lower market share, primarily driven by the timing of above-inflation retail price increases in April 2019 compared to competition, as well as the impact of price increases in August 2019;

partly offset by

  • Egypt, up by 22.6%, primarily reflecting higher market share, driven by L&M, as well as a higher total market.

Nine Months Year-to-Date

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

  • Algeria, up by 5.9%, partly reflecting the timing of estimated trade inventory movements in 2019 compared to 2018;
  • Egypt, up by 1.8%, mainly reflecting the same factor as in the quarter;
  • Saudi Arabia, up by 6.3%, primarily reflecting a favorable comparison with the first nine months of 2018, which was down by 24.5%, mainly due to the impact of retail price increases in 2017, the first quarter of 2018 following the introduction of the new excise tax in June 2017 and VAT in January 2018; and
  • Turkey, up by 8.2%, notably reflecting a lower prevalence of illicit trade;

partly offset by

  • Duty Free, down by 5.4%, mainly reflecting the lower total market.

PMI's total shipment volume increased by 0.3% to 104.0 billion units, notably in:

  • Egypt, up by 14.6%, mainly reflecting the same factors as in the quarter; and
  • Saudi Arabia, up by 26.1%. Net favorable estimated distributor inventory movements totaled 1.1 billion cigarettes, mainly attributable to the timing of shipments compared to 2018. Excluding the impact of these inventory movements, PMI's in-market sales grew by 4.6%, partly reflecting a higher total market;

partly offset by

  • PMI Duty Free, down by 10.6%. Excluding the net unfavorable impact of estimated distributor inventory movements of 0.8 billion units, PMI's in-market sales decline was 5.6%, mainly reflecting the same factor as in the quarter.

 SOUTH & SOUTHEAST ASIA REGION

Third-Quarter

Financial Summary -
Quarters Ended September 30,

 

 

 

 

Change
Fav./(Unfav.)

 

Variance
Fav./(Unfav.)

 

2019

2018

 

Total

Excl.
Curr.

 

Total

Cur-
rency

Price

Vol/
Mix

Cost/
Other

(in millions)

 

 

 

Net Revenues

 

$ 1,246

$ 1,197

 

4.1%

2.8%

 

49

15

123

(89)

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

$ 539

$ 455

 

18.5%

14.3%

 

84

19

123

(64)

6

Asset Impairment & Exit Costs

 

 

—%

—%

 

Adjusted Operating Income

 

$ 539

$ 455

 

18.5%

14.3%

 

84

19

123

(64 )

6

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Operating Income Margin

 

43.3%

38.0%

 

5.3pp

4.2pp

 

 

 

 

 

 

Net revenues, excluding favorable currency, increased by 2.8%, predominantly reflecting a favorable pricing variance driven by Indonesia and the Philippines, partly offset by unfavorable volume/mix, mainly due to Indonesia and Pakistan, partly offset by the favorable mix in the Philippines.

Operating income, excluding favorable currency, increased by 14.3%, predominantly reflecting: a favorable pricing variance; lower manufacturing costs, mainly in the Philippines; partly offset by unfavorable volume/mix, mainly due to Indonesia and Pakistan, partly offset by favorable mix in the Philippines; and higher marketing, administration and research costs.

Adjusted operating income margin, excluding currency, increased by 4.2 points to 42.2%, reflecting the factors mentioned above, as detailed on Schedule 8.

Nine Months Year-to-Date

Financial Summary -
Nine Months Ended September 30,

 

 

 

 

Change
Fav./(Unfav.)

 

Variance
Fav./(Unfav.)

 

2019

2018

 

Total

Excl.
Curr.

 

Total

Cur-
rency

Price

Vol/
Mix

Cost/
Other

(in millions)

 

 

 

Net Revenues

 

$ 3,607

$ 3,434

 

5.0%

7.3%

 

173

(78)

313

(62)

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

$ 1,471

$ 1,324

 

11.1%

13.0%

 

147

(25)

313

(41)

(100)

Asset Impairment & Exit Costs (1)

 

(20)

 

—%

—%

 

(20)

(20)

Adjusted Operating Income

 

$ 1,491

$ 1,324

 

12.6%

14.5%

 

167

(25)

313

(41)

(80)

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Operating Income Margin

 

41.3%

38.6%

 

2.7pp

2.5pp

 

 

 

 

 

 

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

Net revenues, excluding unfavorable currency, increased by 7.3%, reflecting: a favorable pricing variance, driven principally by Indonesia and the Philippines, partly offset by unfavorable volume/mix, largely due to Indonesia, partly offset by the Philippines.

Operating income, excluding unfavorable currency, increased by 13.0%. Excluding asset impairment and exit costs related to a plant closure in Pakistan in the first quarter of 2019 as part of global manufacturing infrastructure optimization, adjusted operating income, excluding unfavorable currency, increased by 14.5%, mainly reflecting: a favorable pricing variance; partly offset by unfavorable volume/mix, mainly due to Indonesia, partly offset by the Philippines; and higher marketing, administration and research costs, partly due to the Philippines.

Adjusted operating income margin, excluding currency, increased by 2.5 points to 41.1%, reflecting the factors mentioned above, as detailed on Schedule 8.

Total Market, PMI Shipment & Market Share Commentaries

PMI Shipment Volume

Third-Quarter

 

Nine Months Year-to-Date

(million units)

2019

2018

Change

 

2019

2018

Change

Cigarettes

42,362

45,840

(7.6)%

 

130,230

130,846

(0.5)%

Heated Tobacco Units

—%

 

—%

Total South & Southeast Asia

42,362

45,840

(7.6 )%

 

130,230

130,846

(0.5)%

Third-Quarter

The estimated total market in South & Southeast Asia decreased, notably due to:

  • Indonesia, down by 1.6%, mainly due to estimated trade inventory movements;
  • Pakistan, down by 49.8%, mainly due to estimated trade inventory movements following those of the second quarter 2019 related to anticipated excise tax-driven price increases compared to the prior year. Excluding the impact of these inventory movements, the total market is estimated to have declined by 14.7%; and
  • the Philippines, down by 5.8%, mainly due to the impact of price increases in the below premium segment in the fourth quarter of 2018, as well as price increases in the third-quarter of 2019;

partly offset by

  • Thailand, up by 3.3%, primarily reflecting on-going recovery from the September 2017 excise tax reform.

PMI's total shipment volume decreased by 7.6% to 42.4 billion units, notably due to:

  • Indonesia, down by 5.7%, mainly reflecting a lower market share, primarily due to widening price gaps between Sampoerna A and competitive brands following its price increase in October 2018, as well as a lower total market;
  • Pakistan, down by 54.1%, mainly reflecting a lower total market; and
  • the Philippines, down by 2.8%, mainly reflecting a lower total market, partly offset by higher market share, notably of Marlboro;

partly offset by

  • Thailand, up by 8.0%, mainly reflecting a higher market share driven by the continued strong performance of L&M 7.1 and the favorable impact of distribution expansion in 2018, as well as a higher total market.

Nine Months Year-to-Date

The estimated total market in South & Southeast Asia decreased, notably due to:

  • Pakistan, down by 9.8%, mainly reflecting the impact of excise tax-driven price increases; and
  • Vietnam, down by 4.4%, mainly reflecting the impact of excise tax-driven price increases;

partly offset by

  • Indonesia, up by 0.7%, reflecting the absence of an excise tax increase in 2019; and
  • Thailand, up by 12.9%, reflecting the same factor as in the quarter.

PMI's total shipment volume decreased by 0.5% to 130.2 billion units, notably due to:

  • Indonesia, down by 3.2%, mainly reflecting a lower market share primarily due to the widened retail price gap of Sampoerna A to competitive brands following its price increase in October 2018, partly offset by a higher total market; and
  • Pakistan, down by 2.4%, mainly reflecting a lower total market, partly offset by a higher market share resulting from the timing of estimated trade inventory movements of competitors' brands;

partly offset by

  • the Philippines, up by 1.5%, mainly reflecting a higher market share, notably of Marlboro; and
  • Thailand, up by 20.2%, reflecting the same factors as in the quarter.

EAST ASIA & AUSTRALIA REGION

Third-Quarter

...

Financial Summary -
Quarters Ended September 30,

 

 

 

 

Change
Fav./(Unfav.)

 

Variance
Fav./(Unfav.)

 

2019

2018

 

Total

Excl.
Curr.

 

Total

Cur-
rency

Price

Vol/
Mix

Cost/
Other

(in millions)

 

 

 

Net Revenues

 

$ 1,252

$ 1,166

 

7.4%

7.5%

 

86

(1)

(21)

108

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

$ 451

$ 426

 

5.9%

3.1%

 

25

12

(21)

64

(30)

Asset Impairment & Exit Costs

 

 

—%

—%

 

Adjusted Operating Income