2017 Annual Report

Philip Morris International 2017 Annual Report CHANG 2017 Philip Morris Annual Report_FEB 28, 2018 Designing a Smoke-Free Future The greatest contribution PMI can make to society is to replace cigarettes with less-harmful alternatives, which is why we are transforming from a cigarette maker to a smoke-free technology leader. Thanks to groundbreaking research, we have developed and are commercializing smoke-free products that are enjoyable for adult smokers and are a much better choice than cigarette smoking. The first of these is our flagship heat-not-burn product, IQOS. Korea The impressive performance of IQOS in 2017 was further driven by its launch in Korea in May. IQOS Highlights in 2017 Nearly IQOS Available in High Conversion Rates(a) Key Cities in n n n 5 Million Converted/Predominant Situational Abandoned Estimated Adult Consumers Around the 38 World Have Already Stopped Smoking Markets and Made the Change to IQOS(b) Greece Italy Korea Romania 89% 77% 80% 86% +36 Billion Heated Tobacco Units Shipped PMI National Heated Tobacco Unit Market Shares - Fourth Quarter 2017 vs. Fourth Quarter 2016 2.8% 1.2% 13.9% 5.5% 1.5% 1.9% 1.2% 0.7% 4.9% 0.3% 0.2% 0.2% 0.2% 0.0% 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 Greece Italy Japan Korea Portugal Romania Switzerland (a) Estimated number of legal age IQOS users that used our heated tobacco units for the following percentages of their daily tobacco consumption over the past seven days: Converted/Predominant: 70% or more. Situational: Between 5% and less than 70%. Abandoned: Less than 5%. (b) Status at the end of January 2018. For markets where IQOS is the only heated tobacco product, daily individual consumption of PMI heated tobacco units represents the totality of their daily tobacco consumption. For markets where IQOS is one among other heated tobacco products, daily individual consumption of heated tobacco units represents the totality of their daily tobacco consumption, of which at least 70% are PMI heated tobacco units. Note: Product visuals in this report are for illustrative purposes only. 2017 Philip Morris Annual Report_FEB 28, 2018 André Calantzopoulos Louis C. Camilleri Chief Executive Officer Chairman of the Board Dear Shareholder, Our robust performance in 2017, a landmark year in our transformation to performed well. Chesterfield and Philip Morris grew a smoke-free future, underscored the enormous promise of reduced-risk their cigarette share. While share of L&M, the third- products (RRPs), the strength of our combustible product portfolio and the largest international cigarette brand, declined slightly, commitment of our employees to lead the transformation of our industry. Parliament, our above-premium brand, recorded stable share – noteworthy given the challenging economic Our strong currency-neutral financial results were conditions and related consumer down-trading in some underpinned by the excellent performance of our of its key Eastern European markets. flagship smoke-free product, IQOS, which exceeded our Net revenues, excluding excise taxes, of $28.7 expectations and helped offset the adverse impact of billion increased by 7.7%, driven by strong RRP growth essentially no net pricing in Russia and a severe cigarette (principally heated tobacco units and IQOS devices) volume contraction in Saudi Arabia. coupled with favorable pricing for our cigarette portfolio. This reflected a favorable volume/mix variance of $1.1 2017 vs. 2016 Results billion, our best-ever full-year performance on this Our total cigarette and heated tobacco unit shipment measure. On a currency-neutral basis, net revenues, volume of 798.2 billion units declined by 2.7%, primarily excluding excise taxes, grew by 9.4%. reflecting lower cigarette industry volume in the Asia Adjusted OCI of $11.8 billion increased by 6.0%, and Eastern Europe, Middle East & Africa (EEMA) or by 7.4% excluding currency, driven by the strong Regions, partly offset by higher heated tobacco unit growth in net revenues, partly offset by investment volume, driven principally by Japan. behind the commercialization of IQOS, as well as the Our total international market share, excluding unfavorable profitability impact of higher IQOS device China and the U.S., declined by 0.1 percentage point sales, which yielded a negative margin due to introduc- to 28.0%, mainly due to mid- and low price segments tory discounts offered in the initial commercialization cigarette brands in the Asia and EEMA Regions. Market phase to accelerate adult smoker switching. Adjusted share of our premium brands increased, driven by the OCI margin declined by 0.7 points to 41.1%, or by 0.8 strong performance of our heated tobacco portfolio. We points, excluding currency. recorded growing or stable total market share in 16 of Our reported diluted EPS were unfavorably impacted our top 30 operating companies income (OCI)(1) markets. by tax items totaling $0.84 primarily related to the Marlboro’s international cigarette share increased enactment of the Tax Cuts and Jobs Act in the United slightly to 9.7%,(2) a notable achievement given the States, reflecting the requirement to pay a one-time impact of out-switching to our heated tobacco products transition tax on accumulated foreign earnings. in IQOS launch markets and the volume contraction in Excluding these tax items, our adjusted diluted EPS Saudi Arabia. The brand’s cigarette share increased in of $4.72 increased by 5.4%, despite a currency head- the Asia and EEMA Regions, reflecting robust growth in wind of $0.21 per share. Excluding currency and the Philippines and across markets in North Africa. the aforementioned tax items, adjusted diluted EPS Our other key international cigarette brands also increased by 10.0%. (1) 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. (2) Marlboro international cigarette share is defined as PMI total sales volume for Marlboro cigarettes as a percentage of the total industry estimated sales volume for cigarettes, excluding China and the U.S. Note: Reduced-risk products (RRPs) is the term we use to refer to products that present, are likely to present, or have the potential to present less risk of harm to smokers who switch to these products versus continued smoking. We have a range of RRPs in various stages of development, scientific assessment and commercialization. Because our RRPs do not burn tobacco, they produce an aerosol that contains far lower quantities of harmful and potentially harmful constituents than found in cigarette smoke. 1 2017 Philip Morris Annual Report_FEB 28, 2018 Operating cash flow(1) of $8.9 billion increased by tory frameworks that differentiate between cigarettes $0.8 billion or 10.3%. Excluding currency, operating and smoke-free products is a critical component in the cash flow increased by $0.4 billion, or 5.5%. Capital switching of smokers to better alternatives compared to expenditures of $1.5 billion increased by $0.4 billion, continued smoking. primarily reflecting investment behind heated tobacco The regulatory environment for RRPs continued to Robust EPS Growth production capacity expansion. evolve in 2017, though the underlying process remains In September, the Board of Directors approved an undeniably complex, as RRPs are uncharted territory +10.0% increase in our quarterly dividend to an annualized rate for the vast majority of regulators. This complexity in 2017 vs. 2016, of $4.28 per share. This was the tenth consecutive year is exacerbated by the divide in the public health Adjusted Diluted, Excluding Currency in which we increased our dividend, representing a total community on the topic of tobacco harm reduction. increase of 132.6%, or a compound annual growth rate We hope that the interests of the men and women (3) $4.93 of 9.8%, since we became a public company. who smoke will ultimately prevail over ideology in this We continued to access the capital markets at debate. favorable rates in 2017, raising $6.9 billion and reducing We were encouraged by a number of policy an- the weighted-average all-in financing cost of our total nouncements and findings related to RRPs by govern- debt by 20 basis points to 2.6%. The weighted-average mental agencies and advisory committees, such as the (2) $4.48 time to maturity of our total long-term debt stood at U.S. Food & Drug Administration (FDA), the U.K. Com- 9.4 years at the end of 2017 compared to 10.6 years at mittee on Toxicity, Public Health England and others. the end of 2016. We hope that they will soon act as a catalyst for other governments to adopt similar sensible policies. U.S. Tax Reform Despite continued progress on combatting illicit As a U.S. company that operates exclusively in markets trade, notably in the EU Region, it remains a sizable 2016 2017 outside of the U.S., the impact of the Tax Cuts and Jobs challenge, particularly in markets such as Brazil and Act on our business is unique. Based on our current Pakistan. To help confront tobacco smuggling and interpretation of the law, we expect an effective tax related crimes, we launched PMI IMPACT in 2016, rate of approximately 28% for 2018. The difference and last year the program’s council of independent between this rate and the 21% statutory tax rate experts, in the fields of law, anti-corruption and law Since its Spin-Off in under the new law reflects three main factors: foreign enforcement, allocated approximately $28 million in March 2008,(4) PMI has tax rate differences, the non-deductibility of interest grants across 32 projects as part of its first funding Increased its Regular expense, and the partial disallowance of foreign tax round.

Load more