Philip Morris International Inc. (PMI) Reports 2022 Third-Quarter and September Year-to-Date Results

Delivered 2022 Third-Quarter Reported Diluted EPS of $1.34, Adjusted Diluted EPS of $1.53 and Pro Forma (Excluding Russia and Ukraine) Adjusted Diluted EPS of $1.33, Representing Currency-Neutral Growth of 8.3%; Targets 2022 Full-Year Reported Diluted EPS of $5.47 to $5.62, Adjusted Diluted EPS of $5.81 to $5.96 and Pro Forma Adjusted Diluted EPS of $5.22 to $5.33, Representing Currency-Neutral Growth of 10% to 12%

Regulatory News:

Philip Morris International Inc. (NYSE: PM) today announces its 2022 third-quarter and September year-to-date results. Growth rates presented in this press release on an organic basis reflect adjusted results, excluding currency, acquisitions and disposals. Given the uncertainty and volatility regarding the company’s operations in Russia and Ukraine, PMI is also providing figures and comparisons on a pro forma basis, which exclude the company’s operations in these two markets for all periods. A glossary of key terms, definitions and explanatory notes is included at the end of this press release. Adjustments, other calculations and reconciliations to the most directly comparable U.S. GAAP measures are included in the schedules to this press release.

2022 THIRD-QUARTER & YEAR-TO-DATE HIGHLIGHTS

Third-Quarter

• Net revenues from smoke-free products accounted for 30.1% of total net revenues, or 29.2% on a pro forma basis
• Market share for heated tobacco units (HTUs) in IQOS markets up by 1.3 points to 7.7% on a pro forma basis
• Pro forma total IQOS users at quarter-end estimated at approximately 19.5 million (up by 3.6 million or 22% versus September 30, 2021), of which approximately 13.5 million had switched to IQOS and stopped smoking
• Increased regular quarterly dividend by 1.6% to $1.27 per share, or an annualized rate of $5.08 per share

Nine Months Year-to-Date

• Net revenues from smoke-free products accounted for 30.4% of total net revenues, or 29.6% on a pro forma basis
• Market share for HTUs in IQOS markets up by 1.2 points to 7.6% on a pro forma basis

"We delivered very strong performance in the third quarter, driving quarterly adjusted diluted EPS of $1.53 per share despite pressures related to currency, the supply chain and inflation," said Jacek Olczak, Chief Executive Officer.

"IQOS's excellent momentum continued in the quarter, with heated tobacco unit volume and share growth across all key geographies, driven in part by ILUMA's strong performance in initial launch markets. This was complemented by the robust performance of our combustible tobacco portfolio, reflecting essentially stable shipment volume, encouraging international market share growth and accelerated pricing."

"As a result of our strong year-to-date performance, we are raising the low end of our full-year pro forma growth outlook for adjusted net revenues, resulting in a range of 6.5% to 8% on an organic basis, and continue to expect full-year pro forma adjusted diluted EPS growth of 10% to 12%, excluding currency."

"Importantly, our smoke-free transformation continues at a rapid pace, reinforcing our aim to become a majority smoke-free company by net revenues in 2025. Today's exciting announcement regarding IQOS in the U.S. furthers this ambition, giving PMI full rights to commercialize IQOS in the largest smoke-free market globally as of April 30, 2024."

"Furthermore, we believe the best and final price in our revised offer for Swedish Match, announced earlier today, provides very compelling value for both sets of shareholders. Should the offer fail, we are well prepared to proceed autonomously to develop IQOS and the rest of our smoke-free portfolio in the U.S."

2022 THIRD-QUARTER SUMMARY

On a pro forma basis, adjusted net revenues increased by 6.9% in organic terms, primarily driven by total shipment volume growth of 2.3%, the continued favorable mix shift from cigarettes to smoke-free products, and a favorable total pricing variance.

Smoke-free product pro forma net revenues increased by 14.2 on an organic basis, mainly driven by HTU shipment volume growth of 21.9% (to reach 22.4 billion units), partly offset by lower device revenues and the impact of HTU pricing comparisons.

Combustible product pro forma adjusted net revenues increased by 4.1% on an organic basis, driven by a favorable pricing variance of 4.9%. Pro forma cigarette shipment volume declined slightly (-0.2%), while international cigarette share increased by 0.2 points to 25.3% on the same basis, including a 0.1 point increase for Marlboro.

Pro forma adjusted operating income margin declined by 1.0 point on an organic basis, primarily reflecting: (i) investment to further expand ILUMA and match underlying demand, (ii) the higher initial cost of ILUMA devices and related HTUs; (iii) the impact of supply chain disruptions, notably due to the war in Ukraine; and (iv) global cost inflation.

Despite these margin pressures, the company’s strong adjusted net revenue growth, coupled with the positive effects from higher pricing and operating cost efficiencies, drove pro forma adjusted diluted EPS of $1.33, reflecting currency-neutral growth of 8.3%. Adjusted diluted EPS of $1.53 increased by 8.2%, excluding currency, as shown in the table below.

2022 FULL-YEAR FORECAST

Reported diluted EPS is forecast to be in a range of $5.47 to $5.62, at prevailing exchange rates, versus reported diluted EPS of $5.83 in 2021. Excluding (i) 2022 adjustments of $0.34 per share, (ii) net earnings attributable to Russia and Ukraine of $0.59 to $0.63 per share assumed for full-year 2022, and (iii) an adverse pro forma currency impact, at prevailing exchange rates, of $0.87 per share, this forecast represents a projected increase of 10% to 12% versus pro forma adjusted diluted EPS of $5.53 in 2021, as outlined in the above table.

2022 Full-Year Forecast Assumptions

This forecast assumes:

• The full contribution of the company's operations in Russia and Ukraine for the entire year;
• No asset impairment costs or further other charges related to the company's operations in Russia or Ukraine;
• No contribution from the operations of Swedish Match in 2022 following the assumed transaction close in the fourth quarter and no further costs associated with the Swedish Match offer;
• No impact on net earnings or operating cash flow related to PMI's agreement to obtain the full rights to IQOS in the U.S., as PMI is currently evaluating the impact of the agreement on the company's consolidated financial statements;
• A continued gradual improvement in PMI's duty-free business outside Asia;
• The impact of delayed production capacity build-up for ILUMA HTUs due to the decision to cancel manufacturing plans in Russia;
• A pro forma estimated total international industry volume change, excluding China and the U.S., of approximately flat to +1%;
• Pro forma total cigarette and HTU shipment volume growth for PMI of approximately 2% to 3%, compared to approximately 1.5% to 2.5% previously;
• Pro forma HTU shipment volume of 89 to 91 billion units compared to 90 to 92 billion units previously (despite continued strong expected in-market sales volume growth), reflecting the impact of global supply chain disruptions, as well as production constraints for ILUMA HTU consumables in the face of better-than-anticipated performance for ILUMA;
• Pro forma adjusted net revenue growth of approximately 6.5% to 8.0% on an organic basis (compared to 6.0% to 8.0% previously), which includes the adverse full-year impact of moving to highly inflationary accounting in Turkey, effective April 1st, of approximately 0.6 points;
• A pro forma adjusted operating income margin change of -50 basis points to flat on an organic basis (compared to flat to +50 basis points previously), primarily reflecting:
  • the expectation of a lower gross margin primarily due to:
    • the significant growth in IQOS device volumes (notably in the first-half) as device supply constraints ease, reflecting the replenishment of channel inventories for user acquisition and supply for the accelerated device replacement cycle driven by ILUMA;
    • the higher initial cost of ILUMA devices and initial weight and cost of TEREA consumables, which are expected to decline over time, as with previous innovations;
    • higher logistics costs, including costs related to the use of air freight to support: (i) the strong up-take of ILUMA and related HTU consumables in Japan, and (ii) the re-sourcing of select cigarette brands for Japan due to the war in Ukraine;
    • investments behind the roll-out of ILUMA and to grow production capacity across PMI's smoke-free platforms; and
    • increasing inflation in raw material and energy prices, and additional supply chain costs due to war-related disruptions;
  • continued commercial reinvestment to support the company's growing portfolio of smoke-free alternatives;
  • largely offset by the continued favorable product mix shift from cigarettes to smoke-free products, coupled with the benefit of further operating leverage and accelerated operating efficiencies;
• Wellness and Healthcare segment net revenues of around $275 million (including smoking cessation products), with an adjusted operating loss of around $100 million, primarily due to:
  • investments in research and development; and
  • expenses related to employee retention and recruitment programs;
• Full-year amortization and impairment of acquired intangibles of $0.14 per share;
• Operating cash flow of around $10.5 billion at prevailing exchange rates, subject to year-end working capital requirements;
• Capital expenditures of approximately $1.0 billion;
• An effective tax rate, excluding discrete tax events, of 21% to 22%; and
• The impact on diluted EPS of year-to-date 2022 share repurchases.

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

IQOS in the U.S.

As announced in a separate press release today, PMI has reached an agreement with Altria Group, Inc. to end the companies’ commercial relationship covering IQOS in the U.S. as of April 30, 2024. Thereafter, PMI will have the full rights to commercialize IQOS in the U.S. As part of the agreement, PMI will pay a total cash consideration of $2.7 billion, of which $1.0 billion was paid at the inception of the agreement using available cash. The remaining $1.7 billion, plus interest, will be paid by July 2023 at the latest.

PMI is currently evaluating the impact of this agreement on its consolidated financial statements.

For more information, please refer to the aforementioned press release, available at www.pmi.com.

Swedish Match AB: Revised Offer with Best and Final Price

Earlier today, Philip Morris Holland Holdings B.V. (PMHH), an affiliate of PMI, announced an increase in the price in its recommended public offer to the shareholders of Swedish Match AB (Swedish Match) to SEK 116 in cash per share (compared to SEK 106 in cash per share previously).

The price in the revised offer represents a premium of 52.5% compared to the undisturbed Swedish Match closing share price of SEK 76.06 on May 9, 2022, and the offer price will not be further increased by PMHH. By this statement, PMHH cannot, in accordance with the Takeover Rules for Nasdaq Stockholm, increase the price in the revised offer any further. The revised offer remains subject to the 90% acceptance condition, which is critical to capture the full potential of the combination.

The price in the revised offer primarily reflects the higher net value to PMI related to the portion of Swedish Match’s cash flows generated in U.S. dollars, given currency movements since the initial offer was announced in May. PMI believes that the deterioration in the global economic outlook, equity markets and the interest rate environment since the time of the initial offer strengthens yet further the attractiveness of the revised offer to Swedish Match shareholders.

PMI expects the transaction to close in the fourth quarter of this year, subject to the terms and conditions of the offer being fulfilled or waived as further set out in the offer document. Public information regarding the offer is available on the offer website (www.smokefree-offer.com).

Should the offer fail, PMI will continue with its strategic alternatives to the Swedish Match combination, including its well-advanced plans for the U.S. commercialization of IQOS -- upon regaining full control after April 30, 2024 -- as well as its broader smoke-free portfolio.

War in Ukraine

Since the onset of the war in Ukraine, PMI's main priority has been the safety and security of its more than 1,300 employees and their families in the country. The company has helped to evacuate more than 1,000 people from Ukraine and relocate over 2,700 others from conflict zones to locations in the country away from the heaviest fighting; provided critical aid to employees who cannot leave or who decide to remain in Ukraine; and provided those who have left the country with a range of support in neighboring countries. The company is continuing to pay salaries to all its Ukrainian employees and is also providing substantial in-kind support to them and their families. In addition, PMI has contributed approximately $10 million in funds and donated essential items across the country.

On February 25th, PMI announced the temporary suspension of its operations in Ukraine, including at its factory, in Kharkiv. The company subsequently resumed some retail activities where safety allowed, in order to provide product availability and service to adult consumers, and began to supply the market from production centers outside Ukraine, as well as through contract manufacturing by a third party. PMI is applying increased security and safety measures for personnel. Production at the company's factory in Kharkiv remains suspended.

As of September 30, 2022, PMI's Ukrainian operations have approximately $0.5 billion in total assets, excluding intercompany balances.

PMI employs more than 3,200 people in Russia and will continue to support its employees there, including paying their salaries, while continuing to fulfil its legal obligations. The company will continue to make decisions with employee safety and security as a priority.

On March 24th, PMI announced the concrete steps it had taken to suspend planned investments and scale down its manufacturing operations in Russia, including: the discontinuation of a number of cigarette products; the suspension of its marketing activities; the cancellation of all product launches planned for 2022, including ILUMA; and the cancellation of its plans to manufacture HTUs for ILUMA in Russia.

As previously announced, PMI intends to exit the Russian market in an orderly manner, as the complexities of continuing to operate in Russia increase, such as supply chain challenges and financial and banking sector restrictions. The company's Board of Directors and senior executives continue to actively work on options for doing so, in the context of an increasingly complex and rapidly changing regulatory and operating environment, including the requirement to obtain certain governmental approvals for any transaction.

As of September 30, 2022, PMI's Russian operations have approximately $2.6 billion in total assets, excluding intercompany balances.

PMI recorded pre-tax charges related to the war in Ukraine of approximately $6 million in the third quarter of 2022 and approximately $128 million in the September year-to-date period. This includes charges in Russia related to the cancellation of the planned launch of ILUMA and the planned production of related HTUs.

Impairment of Acquired Intangibles

PMI recorded a pre-tax impairment charge of $112 million as of September 30, 2022, reflecting the impact of general economic and market conditions resulting in a reduction in future estimated cash flows on certain products within the Wellness and Healthcare segment. The charge was recorded within cost of sales in the condensed consolidated statements of earnings and is excluded from adjusted results.

Conference Call

A conference call, hosted by Jacek Olczak, Chief Executive Officer, and Emmanuel Babeau, Chief Financial Officer, will be webcast at 9:00 a.m., Eastern Time, on October 20, 2022. Access the call at www.pmi.com/2022Q3earnings.

CONSOLIDATED SHIPMENT VOLUME & MARKET SHARE

Third-Quarter

PMI's total shipment volume increased by 0.6%, driven by a 17.1% increase in HTU shipments, partly offset by a 1.7% decline in cigarette shipments.

On a pro forma basis, PMI's total shipment volume increased by 2.3%, as detailed in Appendix 3, reflecting a 21.9% increase for HTUs, partly offset by a 0.2% decrease for cigarettes. PMI's total shipment volume in the Eastern Europe Region increased by 6.8%, on the same basis, as shown in Appendix 4.

For additional detail on PMI's shipment volume performance by Region, please refer to the "Total Market, PMI Shipment & Market Share Commentaries" sections for PMI's regional operating segments.

Impact of Inventory Movements

The net unfavorable impact of estimated distributor inventory movements was immaterial in the quarter, with PMI’s total in-market sales increasing by 0.8%, or by 2.5% on a pro forma basis -- both essentially in-line with the respective shipment volumes.

PMI's total HTU in-market sales volume in the quarter was 27.9 billion units, or 22.7 billion units on a pro forma basis, representing growth of 13.5% and 18.2%, respectively.

Nine Months Year-to-Date

PMI's total shipment volume increased by 1.7%, driven by increases of 10.9% and 0.3% for HTUs and cigarettes, respectively.

On a pro forma basis, PMI's total shipment volume increased by 3.4%, as detailed in Appendix 3, reflecting increases of 15.8% and 1.8% for HTUs and cigarettes, respectively. PMI's total shipment volume in the Eastern Europe Region increased by 2.5%, on the same basis, as shown in Appendix 4.

For additional detail on PMI's shipment volume performance by Region, please refer to the "Total Market, PMI Shipment & Market Share Commentaries" sections for PMI's regional operating segments.

Impact of Inventory Movements

The net unfavorable impact of estimated distributor inventory movements was immaterial in the period, with PMI’s total in-market sales increasing by 1.8%, or by 3.4% on a pro forma basis -- both essentially in-line with the respective shipment volumes.

PMI's total HTU in-market sales volume in the nine months year-to-date was 78.5 billion units, or 63.3 billion units on a pro forma basis, representing growth of 14.0% and 19.2%, respectively.

PMI Shipment Volume by Brand

Third-Quarter

Shipment volume for PMI's HTU brands increased, primarily driven by the EU, Eastern Europe and Middle East & Africa Regions.

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

• Chesterfield, mainly driven by the Eastern Europe and South & Southeast Asia Regions, partly offset by the Middle East & Africa Region; and
• Parliament, primarily driven by the Middle East & Africa Region.

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

• Marlboro, mainly due to the EU and Eastern Europe Regions, partly offset by the Americas Region;
• L&M, primarily due to the Eastern Europe Region; and
• Philip Morris, mainly due to the Eastern Europe Region, partly offset by the East Asia & Australia Region.

The cigarette shipment volume decline for "Others" was mainly due to: Bond Street (primarily Eastern Europe) and Lark (mainly Japan and Turkey), partly offset by Dji Sam Soe (Indonesia).

On a pro forma basis, PMI's cigarette shipment volume increased by 1.5% for Chesterfield, 7.9% for Parliament and 6.1% for Philip Morris, and decreased by 0.4% for Marlboro and 0.5% for L&M.

Nine Months Year-to-Date

Shipment volume for PMI's HTU brands increased, primarily driven by the EU and Middle East & Africa Regions, partly offset by the East Asia & Australia Region.

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

• Marlboro, mainly driven by the Eastern Europe, Middle East & Africa and Americas Regions, partly offset by the EU Region;
• Chesterfield, primarily driven by the Eastern Europe and South & Southeast Asia Regions; and
• Parliament, mainly driven by the Middle East & Africa Region.

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

• L&M, primarily due to the EU, Eastern Europe and South & Southeast Asia Regions, partly offset by the Americas Region; and
• Philip Morris, mainly due to the Eastern Europe Region, partly offset by the East Asia & Australia Region.

The cigarette shipment volume decline for "Others" was mainly due to: Bond Street (primarily Eastern Europe) and Lark (mainly Japan and Turkey), partly offset by Dji Sam Soe (Indonesia) and Sampoerna A (Indonesia).

On a pro forma basis, PMI's cigarette shipment volume increased by 3.3% for Marlboro, 6.8% for Chesterfield, 9.4% for Parliament and 12.3% for Philip Morris, and decreased by 1.1% for L&M.

Pro Forma International Share of Market

CONSOLIDATED FINANCIAL SUMMARY

Third-Quarter

Net revenues increased by 6.7% on an organic basis, mainly reflecting: favorable volume/mix, primarily driven by higher HTU volume, partly offset by lower cigarette volume and unfavorable device mix; and a favorable pricing variance, driven by higher combustible tobacco pricing, partly offset by lower device pricing and lower HTU (net) pricing.

During the quarter, Russia and Ukraine accounted for nearly 10% of PMI's total net revenues. Pro forma adjusted net revenues increased by 6.9% on an organic basis, as detailed in Schedule 11.

Operating income decreased by 2.5%, excluding currency and acquisitions, primarily reflecting: the impact of 2022 costs associated with the Swedish Match AB offer, as well as higher amortization and impairment of intangibles, partly offset by favorable comparisons versus the prior year period related to asset acquisition cost and asset impairment and exit costs.

Adjusted operating income increased by 4.4% on an organic basis, mainly reflecting: a favorable pricing variance; and favorable volume/mix, primarily driven by higher HTU volume, partly offset by lower cigarette volume, unfavorable HTU mix and unfavorable cigarette mix; partly offset by higher manufacturing costs (mainly due to higher logistics costs and other inflationary impacts, partially offset by productivity); and higher marketing, administration and research costs. Adjusted operating income margin decreased by 0.9 points on an organic basis.

Pro forma adjusted operating income increased by 4.4% on an organic basis, while pro forma adjusted operating income margin decreased by 1.0 point, on the same basis, as detailed in Schedule 11.

Nine Months Year-to-Date

Net revenues increased by 8.1%, excluding currency and acquisitions, mainly reflecting: favorable volume/mix, primarily driven by higher HTU volume and device volume, partly offset by unfavorable device mix, cigarette mix and HTU mix; a favorable pricing variance, driven by higher combustible tobacco pricing, partly offset by lower device pricing and lower HTU (net) pricing; and a favorable comparison related to the Saudi Arabia customs assessments of $246 million in 2021, shown in "Cost/Other". Adjusted net revenues increased by 7.0% on an organic basis.

During the September year-to-date period, Russia and Ukraine accounted for around 8% of PMI's total net revenues. Pro forma adjusted net revenues increased by 7.7% on an organic basis, as detailed in Schedule 11.

Operating income increased by 4.6%, excluding currency and acquisitions, which included: favorable comparisons versus the prior year period related to the Saudi Arabia customs assessments (as noted above for net revenues), asset impairment and exit costs, and asset acquisition cost, partly offset by the impact of 2022 costs associated with the Swedish Match AB offer, higher amortization and impairment of intangibles, and 2022 charges related to the war in Ukraine.

Adjusted operating income increased by 4.8% on an organic basis, mainly reflecting: a favorable pricing variance; and favorable volume/mix, primarily driven by higher HTU volume, partly offset by unfavorable cigarette mix, HTU mix and device mix, the unfavorable impact on profitability of higher device volume, as well as lower cigarette volume; partially offset by higher manufacturing costs (primarily due to higher logistics costs and other inflationary impacts, partly offset by productivity); and higher marketing, administration and research costs. Adjusted operating income margin decreased by 0.9 points on an organic basis.

Pro forma adjusted operating income increased by 5.0% on an organic basis, while pro forma adjusted operating income margin decreased by 1.1 points, on the same basis, as detailed in Schedule 11.

EUROPEAN UNION REGION

Third-Quarter

Net revenues increased by 10.8% on an organic basis, reflecting: favorable volume/mix, mainly driven by higher HTU volume and device volume, partly offset by lower cigarette volume, unfavorable HTU mix and unfavorable cigarette mix. Pricing variance was slightly unfavorable, primarily reflecting lower device pricing and lower HTU (net) pricing, partly offset by higher combustible pricing.

Operating income increased by 2.0%, excluding currency and acquisitions, which included the impact of 2022 costs associated with the Swedish Match AB offer.

Adjusted operating income increased by 6.9% on an organic basis, primarily reflecting: favorable volume/mix, mainly driven by higher HTU volume, partly offset by lower cigarette volume, unfavorable HTU mix, unfavorable cigarette mix and the unfavorable impact on profitability of higher device volume; partially offset by higher marketing, administration and research costs; and higher manufacturing costs.

Adjusted operating income margin decreased by 1.9 points on the same basis.

Nine Months Year-to-Date

Net revenues increased by 10.5% on an organic basis, reflecting: favorable volume/mix, mainly driven by higher HTU volume and device volume, partly offset by lower cigarette volume, unfavorable cigarette mix, and unfavorable HTU mix; partially offset by an unfavorable pricing variance, mainly due to lower device pricing and lower HTU (net) pricing, partly offset by higher combustible pricing.

Operating income increased by 7.1%, excluding currency and acquisitions, which included: the impact of 2022 costs associated with the Swedish Match AB offer, partly offset by a favorable comparison versus the prior year period related to asset impairment and exit costs.

Adjusted operating income increased by 8.3% on an organic basis, primarily reflecting: favorable volume/mix, mainly driven by higher HTU volume, partly offset by lower cigarette volume, unfavorable cigarette mix, unfavorable HTU mix and the unfavorable impact on profitability of higher device volume; partially offset by higher marketing, administration and research costs; higher manufacturing costs; and an unfavorable pricing variance.

Adjusted operating income margin decreased by 1.1 points on the same basis.

Total Market, PMI Shipment & Market Share Commentaries

Third-Quarter

The estimated total market in the EU increased by 0.6% to 133.0 billion units, primarily driven by:

• Poland, up by 10.0%, primarily reflecting a lower estimated prevalence of illicit trade, as well as higher border sales (largely due to the easing of pandemic-related measures); and
• Romania, up by 8.4%, mainly reflecting a lower estimated prevalence of illicit trade, as well as higher border sales (largely due to the easing of pandemic-related measures);

partly offset by

• the U.K., down by 15.0%, notably reflecting the impact of increased out-bound tourism compared to the pandemic-affected prior year period.

PMI's total shipment volume increased by 3.9% to 51.0 billion units, mainly driven by:

• Italy, up by 6.7%, mainly reflecting a higher market share driven by HTUs, as well as a higher total market;
• Poland, up by 17.1%, primarily reflecting the higher total market and a higher market share driven by HTUs; and
• Romania, up by 51.4%. Excluding the net favorable impact of estimated distributor inventory movements, total in-market sales volume increased by 26.8%, mainly reflecting a higher market share driven by HTUs, as well as the higher total market.

Nine Months Year-to-Date

The estimated total market in the EU increased by 2.2% to 369.0 billion units, primarily driven by:

• Italy, up by 3.9%, mainly reflecting the impact on adult smoker average daily consumption of the easing of pandemic-related measures (particularly in the first half of the year);
• Poland, up by 15.3%, primarily reflecting the same factors as in the quarter; and
• Romania, up by 9.7%, mainly reflecting the same factors as in the quarter;

partly offset by

• Germany, down by 4.0%, primarily reflecting the impact of excise tax-driven price increases and higher cross-border (non-domestic) purchases due to the easing of pandemic-related measures; and
• the U.K., down by 12.5%, primarily reflecting the same factor as in the quarter.

PMI's total shipment volume increased by 4.2% to 146.6 billion units, mainly driven by:

• Italy, up by 6.1%, primarily reflecting the same factors as in the quarter;
• Poland, up by 19.1%, mainly reflecting the same factors as in the quarter; and
• Romania, up by 42.6%. Excluding the net favorable impact of estimated distributor inventory movements, total in-market sales volume increased by 31.6%, mainly reflecting the same factors as in the quarter.

EASTERN EUROPE REGION

Third-Quarter

Net revenues increased by 9.5% on an organic basis, reflecting: a favorable pricing variance, primarily driven by higher combustible pricing; partly offset by unfavorable volume/mix, mainly due to lower cigarette volume, partially offset by higher HTU volume.

During the quarter, Russia and Ukraine accounted for around 71% of PMI's total net revenues in the Region. Pro forma net revenues increased by 20.5% on an organic basis, as detailed in Schedule 11.

Operating income increased by 3.8%, excluding currency and acquisitions, which included the impact of 2022 costs associated with the Swedish Match AB offer.

Adjusted operating income increased by 11.8% on an organic basis, mainly reflecting: a favorable pricing variance; and lower marketing, administration and research costs; partly offset by unfavorable volume/mix, primarily due to the same factors as for net revenues; and higher manufacturing costs. Adjusted operating income margin increased by 0.8 points on an organic basis.

On an organic basis, pro forma adjusted operating income and pro forma adjusted operating income margin increased by 33.6% and 4.2 points, respectively, as detailed in Schedule 11.

Nine Months Year-to-Date

Net revenues increased by 2.9% on an organic basis, reflecting: a favorable pricing variance, primarily driven by higher combustible pricing; partly offset by unfavorable volume/mix, mainly due to lower cigarette volume and unfavorable cigarette mix.

During the September year-to-date period, Russia and Ukraine accounted for around 69% of PMI's total net revenues in the Region. Pro forma net revenues increased by 12.5% on an organic basis, as detailed in Schedule 11.

Operating income decreased by 13.5%, excluding currency and acquisitions, which included the impact of 2022 charges related to the war in Ukraine and costs associated with the Swedish Match AB offer.

Adjusted operating income increased by 2.5% on an organic basis, primarily reflecting: a favorable pricing variance; partly offset by unfavorable volume/mix, mainly due to the same factors as for net revenues; and higher manufacturing costs. Adjusted operating income margin decreased by 0.1 point on an organic basis.

On an organic basis, pro forma adjusted operating income and pro forma adjusted operating income margin increased by 15.7% and 1.1 points, respectively, as detailed in Schedule 11.

Total Market, PMI Shipment & Market Share Commentaries

Given the company's intention to exit the Russian market and the impact of the war in Ukraine on business operations in the country, PMI's references to the total market estimate for the Eastern Europe Region exclude Russia and Ukraine.

The company's reported shipment volume, presented in the table below, includes Russia and Ukraine.

Third-Quarter

The pro forma estimated total market in Eastern Europe increased, mainly driven by:

• Kazakhstan, up by 5.5%. Excluding the net unfavorable impact of estimated trade inventory movements, total in-market sales volume decreased by 0.9%; and
• Southeast Europe, up by 2.8%, mainly reflecting increased in-bound travel, the impact on adult smoker average daily consumption of the easing of pandemic-related measures and a lower estimated prevalence of illicit trade.

PMI's total shipment volume decreased by 6.8% to 29.0 billion units, primarily due to:

• Russia, down by 5.6%, due to cigarettes; and
• Ukraine, down by 37.0%, due to cigarettes and HTUs;

partly offset by

• Kazakhstan, up by 19.7%, or by 11.0% excluding the net favorable impact of estimated distributor inventory movements, primarily driven by a higher market share for cigarettes and HTUs, as well as the higher total market.

During the quarter, Russia and Ukraine accounted for around 70% of PMI's total shipment volume in the Region. Pro forma total shipment volume, excluding Russia and Ukraine, increased by 6.8%, as detailed in Appendix 4.

Nine Months Year-to-Date

The pro forma estimated total market in Eastern Europe increased, mainly driven by:

• Southeast Europe, up by 7.5%, mainly reflecting the same factors as in the quarter;

partly offset by

• Central Asia, down by 11.0%, primarily reflecting a higher estimated prevalence of illicit trade following excise tax-driven price increases in July 2021.

PMI's total shipment volume decreased by 7.4% to 80.0 billion units, primarily due to:

• Russia, down by 6.5%, due to cigarettes and HTUs; and
• Ukraine, down by 29.6%, due to cigarettes and HTUs.

During the first nine months of 2022, Russia and Ukraine accounted for around 71% of PMI's total shipment volume in the Region. Pro forma total shipment volume, excluding Russia and Ukraine, increased by 2.5%, as detailed in Appendix 4.

MIDDLE EAST & AFRICA REGION

Third-Quarter