Philip Morris International Inc. (PMI) Reports 2017 Second-Quarter Results; Revises 2017 Full-Year Reported Diluted EPS Forecast for Currency Only, Reflecting Currency-Neutral Growth of Approximately 9% to 12% Vs. 2016 Adjusted Diluted EPS of $4.48

Regulatory News:

2017 Second-Quarter

• Reported diluted earnings per share of $1.14, down by $0.01 or 0.9% versus $1.15 in 2016
  • Excluding unfavorable currency of $0.11, reported diluted earnings per share up by $0.10 or 8.7% versus $1.15 in 2016 as detailed in the attached Schedule 13
• Adjusted diluted earnings per share of $1.14, down by $0.01 or 0.9% versus $1.15 in 2016
  • Excluding unfavorable currency of $0.11, adjusted diluted earnings per share up by $0.10 or 8.7% versus $1.15 in 2016 as detailed in the attached Schedule 13
• Total cigarette and heated tobacco unit shipment volume of 199.9 billion, down by 5.0%
• Cigarette shipment volume of 193.5 billion units, down by 7.5%
• Heated tobacco unit shipment volume of 6.4 billion units, up from 1.2 billion units in 2016
• Reported net revenues of $19.3 billion, up by 1.5%
• Net revenues, excluding excise taxes, of $6.9 billion, up by 4.0%
  • Excluding unfavorable currency of $195 million, net revenues, excluding excise taxes, up by 7.0% as detailed in the attached Schedule 10
• Reported operating income of $2.7 billion, down by 1.2%
• Operating companies income of $2.8 billion, down by 1.1%
  • Excluding unfavorable currency of $199 million, operating companies income up by 5.9% as detailed in the attached Schedule 10
• Adjusted operating companies income, reflecting the items detailed in the attached Schedule 12, of $2.8 billion, down by 1.1%
  • Excluding unfavorable currency of $199 million, adjusted operating companies income up by 5.9% as detailed in the attached Schedule 12

2017 Six Months Year-to-Date

• Reported diluted earnings per share of $2.17, up by $0.04 or 1.9% versus $2.13 in 2016
  • Excluding unfavorable currency of $0.11, reported diluted earnings per share up by $0.15 or 7.0% versus $2.13 in 2016 as detailed in the attached Schedule 17
• Adjusted diluted earnings per share of $2.13 were flat versus 2016
  • Excluding unfavorable currency of $0.11, adjusted diluted earnings per share up by $0.11 or 5.2% versus $2.13 in 2016 as detailed in the attached Schedule 17
• Total cigarette and heated tobacco unit shipment volume of 377.9 billion, down by 7.1%
• Cigarette shipment volume of 367.1 billion units, down by 9.4%
• Heated tobacco unit shipment volume of 10.8 billion units, up from 1.6 billion units in 2016
• Reported net revenues of $35.9 billion, up by 0.1%
• Net revenues, excluding excise taxes, of $13.0 billion, up by 2.0%
  • Excluding unfavorable currency of $315 million, net revenues, excluding excise taxes, up by 4.4% as detailed in the attached Schedule 14
• Reported operating income of $5.1 billion, down by 2.1%
• Operating companies income of $5.3 billion, down by 1.6%
  • Excluding unfavorable currency of $211 million, operating companies income up by 2.3% as detailed in the attached Schedule 14
• Adjusted operating companies income, reflecting the items detailed in the attached Schedule 16, of $5.3 billion, down by 1.6%
  • Excluding unfavorable currency of $211 million, adjusted operating companies income up by 2.3% as detailed in the attached Schedule 16

2017 Full-Year Forecast

• PMI revises, for currency only, its 2017 full-year reported diluted earnings per share to a range of $4.78 to $4.93, at prevailing exchange rates, versus $4.48 in 2016. Excluding an unfavorable currency impact, at prevailing exchange rates, of approximately $0.14 for the full-year 2017, as well as the favorable tax item of $0.04 recorded in the first quarter of 2017, the forecast range represents a projected increase of approximately 9% to 12% versus adjusted diluted earnings per share of $4.48 in 2016 as detailed in the attached Schedule 20
• This forecast anticipates net revenue growth, excluding excise taxes, of over 7%, excluding currency and acquisitions
• This forecast does not include any share repurchases in 2017
• This forecast excludes the impact of any future acquisitions, unanticipated asset impairment and exit cost charges, future changes in currency exchange rates, and any unusual events. Factors described in the Forward-Looking and Cautionary Statements section of this release represent continuing risks to these projections

Philip Morris International Inc. (NYSE / Euronext Paris: PM) today announced its 2017 second-quarter results.

"Our quarterly results were robust with, as expected, sequential improvement in our volume performance, as well as strong currency-neutral net revenue growth of 7% versus last year," said André Calantzopoulos, Chief Executive Officer.

"IQOS, our flagship smoke-free alternative, continues to perform exceptionally well, supported by further recent successful market launches, notably in Korea. In the quarter, shipments of Marlboro HeatSticks represented over 40% of our total shipments in Japan, where we recorded a national share of 10%. To date, more than 2.9 million adult consumers have already stopped smoking and switched to IQOS."

Conference Call

A conference call, hosted by Jacek Olczak, Chief Financial Officer, with members of the investor community and news media, will be webcast at 9:00 a.m., Eastern Time, on July 20, 2017. Access is at www.pmi.com/2017Q2earnings. 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.

Dividends

During the quarter, PMI declared a regular quarterly dividend of $1.04, representing an annualized rate of $4.16 per common share.

2017 SECOND-QUARTER CONSOLIDATED RESULTS

Key Terms, Definitions and Explanatory Notes

General

• “PMI” refers to Philip Morris International Inc. and its subsidiaries. Trademarks and service marks that are the registered property of, or licensed by, the subsidiaries of PMI, are italicized.
• Comparisons are made to the same prior-year period unless otherwise stated.
• Unless otherwise stated, references to total industry, total market, PMI volume and PMI market share performance reflect cigarettes and PMI’s heated tobacco units for those markets that have commercial sales of IQOS.
• References to total international market, defined as worldwide cigarette and PMI heated tobacco unit volume excluding the United States, total industry, total market and market shares are PMI tax-paid estimates 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 PMI's duty free business.
• "Combustible products" is the term PMI uses to refer to cigarettes and OTP, combined.
• "OTP" is defined as other tobacco products, primarily roll-your-own and make-your-own cigarettes, pipe tobacco, cigars and cigarillos, and does not include reduced-risk products.
• "Total shipment volume" is defined as the combined total of cigarette shipment volume and heated tobacco unit shipment volume.
• "EEMA" is defined as Eastern Europe, Middle East and Africa and includes PMI's international duty free business.
• "North Africa" is defined as Algeria, Egypt, Libya, Morocco and Tunisia.

Financial

• Net revenues, excluding excise taxes, related to combustible products refer to the operating revenues generated from the sale of these products, net of sales and promotion incentives.
• "Operating Companies Income," or "OCI," is defined as operating income, excluding general corporate expenses and the amortization of intangibles, plus equity (income)/loss in unconsolidated subsidiaries, net. Management evaluates business segment performance and allocates resources based on OCI.
• “Adjusted EBITDA” is defined as earnings before interest, taxes, depreciation and amortization, excluding asset impairment and exit costs, and unusual items.
• "Net debt" is defined as total debt, less cash and cash equivalents.
• Management reviews OCI, OCI margins, operating cash flow and earnings per share, or “EPS,” on an adjusted basis, which may exclude the impact of currency and other items such as acquisitions, asset impairment and exit costs, tax items and other special items.
• Management reviews these measures because they exclude changes in currency exchange rates and other factors that may distort underlying business trends, thereby improving the comparability of PMI’s business performance between reporting periods. Furthermore, PMI uses several of these measures in its management compensation program to promote internal fairness and a disciplined assessment of performance against company targets. PMI discloses these measures to enable investors to view the business through the eyes of management.
• Non-GAAP measures used in this release should neither be considered in isolation nor as a substitute for the financial measures prepared in accordance with U.S. GAAP. For a reconciliation of non-GAAP measures to the most directly comparable GAAP measures, see the relevant schedules provided with this press release.

Reduced-Risk Products

• "Reduced-risk products," or "RRPs," is the term PMI uses 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 continued smoking. PMI has a range of RRPs in various stages of development, scientific assessment and commercialization. Because PMI's RRPs do not burn tobacco, they produce far lower quantities of harmful and potentially harmful compounds than found in cigarette smoke.
• "Heated tobacco units" is the term PMI uses to refer to heated tobacco consumables, which include HEETS, HEETS Marlboro and HEETS FROM MARLBORO, defined collectively as HEETS, as well as MarlboroHeatSticks and Parliament HeatSticks.
• Net revenues, excluding excise taxes, related to RRPs represent the sale of heated tobacco units, IQOS devices and related accessories, and other nicotine-containing products, primarily e-vapor products, net of sales and promotion incentives.

SHIPMENT VOLUME

In the quarter, PMI's total shipment volume of cigarettes and heated tobacco units decreased by 5.0%, principally due to: Asia, notably Indonesia, as well Pakistan and the Philippines, reflecting ongoing declines of primarily low-margin cigarette volumes; and EEMA. The net impact of inventory movements in the quarter was immaterial.

PMI's cigarette volume decreased by 7.5% due to: the EU, principally Germany and Spain, partly offset by France; EEMA, mainly Russia, Saudi Arabia, mainly reflecting the implementation of a new excise tax, Turkey and Ukraine, partly offset by North Africa; and Asia, principally Indonesia, Japan, Pakistan and the Philippines. The decline was partly offset by growth in Latin America & Canada, principally Mexico.

The decline in PMI's cigarette shipment volume was partly offset by higher heated tobacco unit shipment volume of 6.4 billion units, up from 1.2 billion units in the second quarter of 2016, driven by Japan.

Year-to-date, PMI's total shipment volume of cigarettes and heated tobacco units decreased by 7.1%, or by 6.3% excluding net estimated inventory movements, principally due to: Asia, notably Indonesia, as well as Pakistan and the Philippines, reflecting ongoing declines of primarily low-margin cigarette volumes; and EEMA.

PMI's cigarette volume decreased by 9.4% due to: the EU, principally Italy and Spain, partly offset by Poland; EEMA, reflecting declines across the Region, notably Russia and Ukraine; Asia, principally Indonesia, Japan, Pakistan and the Philippines; and Latin America & Canada, principally Argentina, Brazil and Canada.

The decline in PMI's cigarette shipment volume was partly offset by higher heated tobacco unit shipment volume of 10.8 billion units, up from 1.6 billion units in the first six months of 2016, driven by Japan.

PMI shipment volume by brand is shown in the table below.

In the quarter, cigarette shipment volume of Marlboro decreased in: the EU, mainly due to Germany and Spain, partly offset by Italy; EEMA, mainly due to Saudi Arabia, partly offset by North Africa; Asia, mainly due to Japan, principally reflecting out-switching to Marlboro HeatSticks, partly offset by the Philippines. The decline was partly offset by growth in Latin America & Canada, driven by Mexico.

Cigarette shipment volume of L&M decreased, mainly due to North Africa, Russia, Saudi Arabia and Turkey, partly offset by Kazakhstan and Taiwan. Cigarette shipment volume of Chesterfield increased, mainly driven by Argentina and Turkey, partly offset by Russia. Cigarette shipment volume of Parliament decreased, mainly due to Japan, Russia, Saudi Arabia and Turkey, partly offset by Kazakhstan and Korea. Cigarette shipment volume of Bond Street decreased, mainly due to Kazakhstan and Ukraine. Cigarette shipment volume of Philip Morris increased, driven by Russia and Ukraine, partly offset by Argentina. Cigarette shipment volume of Lark decreased, principally due to Japan and Turkey. Cigarette shipment volume of "Others" decreased, mainly due to: Indonesia; local, low-margin brands in Pakistan and the Philippines; and the successful morphing of local, low-margin brands into international brands in Russia and Ukraine.

Year-to-date, cigarette shipment volume of Marlboro decreased in: the EU, mainly due to Italy and Spain; EEMA, mainly due to Saudi Arabia, partly offset by North Africa; Asia, mainly due to Japan, principally reflecting out-switching to Marlboro HeatSticks, partly offset by the Philippines; and Latin America & Canada, mainly due to Argentina and Brazil, partly offset by Mexico.

Cigarette shipment volume of L&M decreased, mainly due to North Africa, Russia, Turkey and Ukraine, partly offset by Argentina, Kazakhstan and Taiwan. Cigarette shipment volume of Chesterfield increased, mainly driven by Argentina and Turkey, partly offset by Italy and Russia. Cigarette shipment volume of Parliament decreased, mainly due to Russia and Turkey. Cigarette shipment volume of Bond Street decreased, mainly due to Kazakhstan, Russia and Ukraine. Cigarette shipment volume of Philip Morris increased, driven by Russia and Ukraine, partly offset by Argentina and Italy. Cigarette shipment volume of Lark decreased, mainly due to Japan and Turkey, partly offset by Korea. Cigarette shipment volume of "Others" decreased, mainly due to: Indonesia; local, low-margin brands in Pakistan and the Philippines; and the successful morphing of local, low-margin brands into international brands in Russia and Ukraine.

NET REVENUES (Excluding Excise Taxes)

In the quarter, net revenues, excluding excise taxes, of $6.9 billion increased by 4.0%, as detailed above and in the attached Schedule 10. Excluding unfavorable currency of $195 million, net revenues, excluding excise taxes, increased by 7.0%, driven by a favorable pricing variance of $367 million from across all Regions and favorable volume/mix of $96 million.

OPERATING COMPANIES INCOME

In the quarter, operating companies income of $2.8 billion decreased by 1.1%. Excluding unfavorable currency of $199 million, operating companies income increased by 5.9%, mainly driven by a favorable pricing variance across all Regions, notably EEMA and Asia, partly offset by unfavorable volume/mix of $89 million, as well as an unfavorable cost comparison, largely reflecting increased support behind reduced-risk products, notably in the EU.

Adjusted operating companies income and margin are shown in the table below and detailed in Schedule 12. Adjusted operating companies income, excluding unfavorable currency, increased by 5.9%. Adjusted operating companies income margin, excluding unfavorable currency, decreased by 0.4 points to 42.3%, reflecting the factors mentioned above, as detailed on Schedule 12.

EUROPEAN UNION REGION (EU)

2017 Second-Quarter

Net revenues, excluding excise taxes, of $2.1 billion, decreased by 2.1%. Excluding unfavorable currency of $92 million, net revenues, excluding excise taxes, increased by 2.2%, principally reflecting a favorable pricing variance of $38 million, driven mainly by Germany and the United Kingdom, partly offset by France and Italy, as well as a favorable volume/mix of $9 million, mainly driven by Italy, notably reflecting the performance of reduced-risk products, partly offset by Germany, primarily reflecting the lower total market, lower market share and impact of price increases.

Operating companies income of $969 million decreased by 9.4%. Excluding unfavorable currency of $61 million, operating companies income decreased by 3.7%, mainly due to: unfavorable volume/mix of $23 million, mainly in Germany and Spain, partly offset by Italy; and increased investment behind reduced-risk products across the Region, notably in Germany; partly offset by favorable pricing.

Adjusted operating companies income and margin are shown in the table below and detailed on Schedule 12. Adjusted operating companies income, excluding unfavorable currency, decreased by 3.7%. Adjusted operating companies income margin, excluding unfavorable currency, decreased by 2.9 points to 46.8%, reflecting the factors mentioned above, as detailed on Schedule 12.

EU Total Market, PMI Shipment & Market Share Commentaries

In the quarter, the estimated total market in the EU decreased by 1.0% to 127.9 billion units, partly reflecting a lower prevalence of illicit trade, notably in Poland. The net impact of inventory movements on the estimated total market was immaterial.

Year-to-date, the estimated total market in the EU decreased by 1.8% to 240.1 billion units, partly reflecting the same dynamic as described for the quarter. The net impact of inventory movements on the estimated total market was immaterial.

2017 Second-Quarter and Six Months Year-to-Date

In the quarter, PMI's total shipment volume decreased by 0.6% to 50.2 billion units, mainly due to Germany, Greece and Spain, partly offset by Italy, France and Poland. Excluding estimated inventory movements, principally associated with distributor cigarette inventory movements in Italy, PMI's total shipment volume decreased by 1.6%. The decrease in cigarette shipment volume of Marlboro was mainly due to Germany and Spain, partly offset by Italy. The increase in cigarette shipment volume of L&M was mainly driven by France and Poland, partly offset by Germany. The decrease in cigarette shipment volume of Chesterfield was mainly due to Portugal and Spain, partly offset by Italy and Poland. The decrease in cigarette shipment volume of Philip Morris was mainly due to Italy, partly offset by France. The decrease in cigarette shipment volume of "Others" was mainly due to Muratti in Italy and RGD in Poland.

In the quarter, PMI's total market share decreased by 0.2 points to 38.2%, with declines, mainly in Germany, Italy and Spain, partly offset by gains, notably in France and Poland.

Year-to-date, PMI's total shipment volume decreased by 3.7% to 92.9 billion units, mainly due to cigarette volume declines in Italy and Spain, partly offset by Poland. Excluding estimated inventory movements, principally associated with distributor cigarette inventory movements, mainly in Italy and Spain, PMI's total shipment volume decreased by 2.2%. The decrease in cigarette shipment volume of Marlboro was mainly due to Italy and Spain. The decrease in cigarette shipment volume of L&M was mainly due to Germany and Spain, partly offset by Poland. The decrease in cigarette shipment volume of Chesterfield was mainly due to Italy and Spain, partly offset by Poland and the United Kingdom. The decrease in cigarette shipment volume of Philip Morris was mainly due to Italy. The decrease in cigarette shipment volume of "Others" was mainly due to Merit and Muratti in Italy.

Year-to-date, PMI's total market share decreased by 0.2 points to 38.3%, with declines, mainly in Germany, Italy and Spain, partly offset by gains, notably in France and Poland.

EU Key Market Commentaries

In France, estimated industry size, PMI shipment volume and market share performance, shown in the table below, include cigarettes and PMI's heated tobacco units.

In the quarter, the estimated total market increased by 0.5%. Excluding the net impact of estimated trade inventory movements, primarily associated with the implementation of the Tobacco Products Directive (TPD) in 2016, the estimated total market declined by 1.2%. The increase in PMI's shipment volume was mainly driven by higher market share, principally Marlboro, partly reflecting in-switching.

Year-to-date, the estimated total market increased by 1.0%. The increase in PMI's shipment volume was mainly driven by higher market share, principally Marlboro, reflecting the same dynamic as in the quarter.

In Germany, estimated industry size, PMI shipment volume and market share performance, shown in the table below, include cigarettes and PMI's heated tobacco units.

In the quarter, the estimated total market decreased by 1.7%, partly reflecting the lapsed contribution of favorable factors in 2016, including a lower prevalence of illicit trade, which contributed to a growth of the total market in the second quarter of 2016 of 1.3%, as well as the impact of price increases in March 2017. The decrease in PMI's shipment volume was mainly due to the lower total market and market share, mainly Marlboro, reflecting the impact of its price increase from the round €6.00 per pack price point to €6.30, combined with the later timing of competitors' price increases.

Year-to-date, the estimated total market decreased by 1.9%, partly reflecting the lapsed contribution of favorable factors in 2016, as well as the impact of price increases in March 2017. The decrease in PMI's shipment volume was mainly due to the lower total market.

In Italy, estimated industry size, PMI shipment volume and market share performance, shown in the table below, include cigarettes and PMI's heated tobacco units.

In the quarter, the estimated total market decreased by 2.7%, partly reflecting the implementation of elements of the TPD, notably the ban on pack sizes of ten cigarettes, which fueled growth in cheaper alternatives, including fine cut and cigarillos. The decline of PMI's shipments, down by 3.4% excluding the net impact of distributor inventory movements, mainly reflected the lower total market. PMI's lower market share was mainly due to: Marlboro, as a result of its price increase in the second quarter of 2016, the ban on pack sizes of ten cigarettes, and out-switching to HEETS; and low-price Philip Morris, impacted by the growth of the super-low price segment.

Year-to-date, the estimated total market decreased by 3.9%, mainly reflecting the same dynamics as in the quarter. The decline of the total market also reflected a challenging comparison with the first six months of 2016, which grew by 1.3%. The decline of PMI's shipments, down by 5.6% excluding the net impact of distributor inventory movements, mainly reflected the lower total market, as well as lower cigarette market share, principally due to the same factors as in the quarter.

In Poland, estimated industry size, PMI shipment volume and market share performance, shown in the table below, include cigarettes and PMI's heated tobacco units.

In the quarter, the estimated total market increased by 1.3%, mainly driven by a lower prevalence of illicit trade. The increase in PMI's shipment volume primarily reflected the higher total market. The slight increase in PMI's market share reflected higher share of Chesterfield, driven by brand support, partly offset by Marlboro.

Year-to-date, the estimated total market increased by 1.4%, reflecting the same dynamics as in the quarter. The increase in PMI's shipment volume was primarily driven by the higher total market, as well as higher market share, mainly reflecting higher share of Chesterfield, driven by brand support, partly offset by Marlboro.

In Spain, estimated industry size, PMI shipment volume and market share performance, shown in the table below, include cigarettes and PMI's heated tobacco units.

In the quarter, the estimated total market decreased by 0.8%, or by 3.2% excluding the net impact of estimated trade inventory movements associated with the second quarter of 2016. The decline of PMI's shipments was mainly due to lower market share, principally due to Marlboro, reflecting the impact of price increases, particularly above the round €5.00 per pack price point in the vending channel, as well as a challenging comparison with the second quarter of 2016 in which the market share of Marlboro grew by 1.1 points.

Year-to-date, the estimated total market decreased by 2.6%. The decline of PMI's shipments, down by 7.1% excluding the net impact of distributor inventory movements associated with the first six months of 2016, was mainly due to the lower total market and lower market share, principally due to Marlboro, reflecting the same dynamics as in the quarter, as well as a challenging comparison with the first six months of 2016 in which the market share of Marlboro grew by 1.4 points.

EASTERN EUROPE, MIDDLE EAST & AFRICA REGION (EEMA)

2017 Second-Quarter

Net revenues, excluding excise taxes, of $1.7 billion increased by 0.7%. Excluding unfavorable currency of $62 million, net revenues, excluding excise taxes, increased by 4.4%, principally reflecting a favorable pricing variance of $127 million, driven mainly by North Africa, notably Egypt, Turkey and Ukraine. The favorable pricing variance was partly offset by unfavorable volume/mix of $54 million, mainly due to lower total markets in Russia, Saudi Arabia, mainly resulting from the implementation of a new excise tax, and Turkey, partly offset by North Africa.

Operating companies income of $733 million decreased by 7.7%. Excluding unfavorable currency of $87 million, operating companies income increased by 3.3%, principally reflecting a favorable pricing variance, partly offset by unfavorable volume/mix of $43 million, mainly in Russia, Saudi Arabia and Turkey, partly offset by North Africa, and higher costs, primarily reflecting a challenging cost comparison to the second quarter of 2016 in which costs were favorable.

Adjusted operating companies income and margin are shown in the table below and detailed on Schedule 12. Adjusted operating companies income, excluding unfavorable currency, increased by 3.3%. Adjusted operating companies income margin, excluding unfavorable currency, decreased by 0.5 points to 47.2%, reflecting the factors mentioned above, as detailed on Schedule 12.

*Margins are calculated as adjusted OCI, divided by net revenues, excluding excise taxes.

EEMA PMI Shipment Commentaries

2017 Second-Quarter and Six Months Year-to-Date

In the quarter, PMI's total shipment volume decreased by 5.4% to 64.6 billion units, mainly due to cigarette volume declines in: Russia; Saudi Arabia, notably reflecting the implementation of a new excise tax in June 2017 resulting in a doubling of retail prices, from SAR 12 to SAR 24 per pack in the case of Marlboro; Turkey and Ukraine, partly offset by North Africa. The decrease in cigarette shipment volume of Marlboro was mainly due to Saudi Arabia, partly offset by North Africa. The decrease in cigarette shipment volume of L&M was mainly due to North Africa, Russia, Saudi Arabia and Turkey, partly offset by Kazakhstan. The decrease in cigarette shipment volume of Bond Street was mainly due to Kazakhstan and Ukraine. The decrease in cigarette shipment volume of Parliament was mainly due to Russia, Saudi Arabia and Turkey, partly offset by Kazakhstan. The decrease in cigarette shipment volume of "Others" was mainly due to low-price Next/Dubliss in Russia, due to the competitive environment, while largely local, lower-margin brands in Russia and Ukraine were successfully morphed into Philip Morris.

Year-to-date, PMI's total shipment volume decreased by 7.7% to 121.3 billion units, mainly reflecting cigarette volume declines in Russia, Saudi Arabia, Turkey and Ukraine. The decrease in cigarette shipment volume of Marlboro was mainly due to Saudi Arabia, partly offset by North Africa. The decrease in cigarette shipment volume of L&M was mainly due to North Africa, Russia, Turkey and Ukraine, partly offset by Kazakhstan. The decrease in cigarette shipment volume of Bond Street was mainly due to Kazakhstan, Russia and Ukraine. The decrease in cigarette shipment volume of Parliament was mainly due to Russia, Saudi Arabia and Turkey. The decrease in cigarette shipment volume of "Others" was mainly due to the same dynamics as in the quarter.

EEMA Key Market Commentaries

In North Africa, estimated cigarette industry size, PMI cigarette shipment volume and cigarette market share performance are shown in the table below.

In the quarter, the estimated total cigarette market was essentially flat. The increase in PMI's cigarette shipment volume, up by 3.3% excluding estimated distributor inventory movements, mainly reflected higher cigarette market share, notably driven by the recovery of Marlboro in Algeria following product changes to address the lower-than-anticipated acceptance of Architecture 2.0 in 2016, partly offset by L&M in Egypt as a result of widening price gaps with competitors' brands.

Year-to-date, the estimated total cigarette market decreased by 1.0%, mainly due to Algeria. The decrease in PMI's cigarette shipment volume, down by 3.1% excluding estimated distributor inventory movements, was mainly due to the lower total cigarette market, as well as lower cigarette market share, notably of L&M in Egypt as a result of widening price gaps with competitors' brands, partly offset by the recovery of Marlboro in Algeria, reflecting the same dynamic as in the quarter.

In Russia, estimated industry size and PMI shipment volume, shown in the table below, include cigarettes and PMI's heated tobacco units. May quarter-to-date and year-to-date market share performance, as measured by Nielsen and shown in the table below, reflects that of cigarettes.

In the quarter, the estimated total market decreased by 6.2%, reflecting the impact of excise tax-driven price increases. The decline of PMI's shipment volume was mainly due to the lower total market. The slight increase in PMI's market share was driven by Bond Street and the growth of recently-launched Philip Morris in "Others," reflecting the successful morphing of super-low price Optima and Apollo Soyuz, partly offset by Parliament, reflecting the impact of price increases.

Year-to-date, the estimated total market decreased by 6.1%, reflecting the same dynamic as in the quarter. Excluding the net impact of estimated distributor inventory movements, mainly associated with 2016, PMI's shipment volume decreased by 5.9%, in line with the lower total market. The decrease of PMI's cigarette market share was mainly due to: Parliament, reflecting the impact of price increases; Chesterfield, L&M and Next in "Others," primarily reflecting slower-than-anticipated retail price penetration of competitors' brands, partly offset by Bond Street; and the growth of recently-launched Philip Morris in "Others," reflecting the successful morphing of super-low price Optima and Apollo Soyuz.

In Turkey, estimated cigarette industry size, PMI cigarette shipment volume and May quarter-to-date and year-to-date cigarette market share performance, as measured by Nielsen, are shown in the table below.

In the quarter, the estimated total cigarette market decreased by 6.5%, mainly reflecting a higher prevalence of illicit trade. The decrease in PMI's shipments was mainly due to the lower total cigarette market and lower cigarette market share, mainly driven by low-price Lark reflecting competitive pressure from super-low price alternatives.

Year-to-date, the estimated total cigarette market decreased by 4.4%. Excluding the net impact of estimated trade inventory movements associated with the timing of anticipated price increases, the estimated total cigarette market declined by 6.8%, mainly reflecting a higher prevalence of illicit trade resulting from the impact of price increases. The decrease in PMI's shipments was mainly due to the lower total cigarette market and lower cigarette market share, mainly reflecting the same dynamics as in the quarter.

In Ukraine, estimated industry size and PMI cigarette shipment volume, shown in the table below, include cigarettes and PMI's heated tobacco units. May quarter-to-date and year-to-date market share performance, as measured by Nielsen and shown in the table below, reflects that of cigarettes.

In the quarter, the estimated total market decreased by 9.3%, mainly due to the impact of price increases and a challenging comparison with the second quarter of 2016, which grew by 2.7%. The decrease in PMI's shipment volume was primarily due to the lower total market, as well as lower cigarette market share, primarily of low-price Bond Street, and in "Others," Chesterfield, largely reflecting the impact of price increases and President, following its morphing into Philip Morris.

Year-to-date, the estimated total market decreased by 11.6%, mainly due to the impact of price increases and a challenging comparison with the first six months of 2016, which grew by 9.1%. The decrease in PMI's shipment volume was primarily due to the lower total market, as well as lower cigarette market share, primarily of low-price Bond Street, and in "Others," Chesterfield, largely reflecting the impact of price increases and President, following its morphing into Philip Morris, partly offset by L&M.

ASIA REGION

2017 Second-Quarter

Net revenues, excluding excise taxes, of $2.4 billion increased by 11.8%. Excluding unfavorable currency of $21 million, net revenues, excluding excise taxes, increased by 12.8%, reflecting a favorable pricing variance of $128 million, driven principally by Australia, Indonesia and the Philippines. The favorable pricing variance was supported by favorable volume/mix of $144 million, predominantly driven by heated tobacco unit volume in Japan, partly offset by unfavorable volume due mainly to lower total markets in Australia, Indonesia, Pakistan and the Philippines.

Operating companies income of $836 million increased by 11.6%. Excluding unfavorable currency of $25 million, operating companies income increased by 15.0%, mainly driven by a favorable pricing variance, partly offset by unfavorable volume/mix of $19 million, mainly due to unfavorable volume/mix in Indonesia and unfavorable volume in Australia, Pakistan and the Philippines, partly offset by favorable volume in Japan, driven by heated tobacco units.

Adjusted operating companies income and margin are shown in the table below and detailed on Schedule 12. Adjusted operating companies income, excluding unfavorable currency, increased by 15.0%. Adjusted operating companies income margin, excluding unfavorable currency, increased by 0.7 points to 35.8%, reflecting the factors mentioned above, as detailed on Schedule 12.

*Margins are calculated as adjusted OCI, divided by net revenues, excluding excise taxes.

Asia PMI Shipment Commentaries

2017 Second-Quarter and Six Months Year-to-Date

In the quarter, PMI's total shipment volume decreased by 9.8% to 63.5 billion units, mainly due to cigarette volume declines in: Indonesia; Japan; Pakistan, reflecting the impact of excise tax-driven price increases and an increase in the prevalence of illicit trade; and the Philippines; partly offset by higher heated tobacco unit volume in Japan. The decrease in cigarette shipment volume of Marlboro was mainly due to Japan, primarily reflecting out-switching to Marlboro HeatSticks, partly offset by the Philippines. The decrease in cigarette shipment volume of Lark was driven by Japan. The decrease in cigarette shipment volume of Parliament was mainly due to Japan, partly offset by Korea. The decrease in cigarette shipment volume of "Others" was mainly due to Indonesia and to local, low-margin brands in Pakistan and the Philippines.

Year-to-date, PMI's total shipment volume decreased by 9.7% to 122.8 billion units, mainly due to the same dynamics as in the quarter. The decrease in cigarette shipment volume of Marlboro was mainly due to Japan, primarily reflecting out-switching to Marlboro HeatSticks, partly offset by the Philippines. The decrease in cigarette shipment volume of Lark was driven by Japan. The decrease in cigarette shipment volume of Parliament was mainly due to Japan, partly offset by Korea. The decrease in cigarette shipment volume of "Others" was mainly due to Indonesia and to local, low-margin brands in Pakistan and the Philippines.

Asia Key Market Commentaries

In Indonesia, estimated cigarette industry size, PMI cigarette shipment volume, cigarette market share and segmentation performance are shown in the tables below.

In the quarter, the estimated total cigarette market decreased by 11.6%, unfavorably impacted by net estimated trade inventory movements mainly associated with the timing of Ramadan. The decline primarily reflected the impact of above-inflation tax-driven price increases and the impact of higher utility prices on consumer spending. The decrease in PMI's cigarette shipments was mainly due to the lower estimated total cigarette market. The decline of PMI's cigarette market share mainly reflected the decline of PMI's share of the SPM segment and the soft performance of PMI's SKT portfolio.

Year-to-date, the estimated total cigarette market decreased by 8.8%, unfavorably impacted by net estimated trade inventory movements mainly associated with the timing of Ramadan, primarily reflecting the same dynamics as in the quarter. The decrease in PMI's cigarette shipments and share primarily reflected the same dynamics as in the quarter.

In Japan, estimated industry size, PMI shipment volume and market share performance, shown in the table below, include cigarettes and PMI's heated tobacco units.