Philip Morris International Inc. (PMI) Reports 2022 Second-Quarter and First-Half Results

Delivered 2022 Second-Quarter Reported Diluted EPS of $1.43 and Pro Forma (Excluding Russia and Ukraine) Adjusted Diluted EPS of $1.32, Representing Currency-Neutral Growth of 5.6%; Targets 2022 Full-Year Reported Diluted EPS of $5.73 to $5.88 (Including Russia and Ukraine) and Pro Forma Adjusted Diluted EPS of $5.23 to $5.34, Representing Currency-Neutral Growth of 10% to 12%

Regulatory News:

Philip Morris International Inc. (NYSE: PM) today announces its 2022 second-quarter and first-half 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 and provide a more comparable view of PMI's business performance. 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 SECOND-QUARTER & YEAR-TO-DATE HIGHLIGHTS

Second-Quarter

• Net revenues from smoke-free products accounted for 29.9% of total net revenues, or 29.1% on a pro forma basis
• Market share for heated tobacco units in IQOS markets up by 1.2 points to 7.5% on a pro forma basis
• Pro forma total IQOS users at quarter-end estimated at approximately 19.0 million (up by 3.2 million or 20.5% versus June 30, 2021), of which approximately 13.2 million had switched to IQOS and stopped smoking
• Announced recommended public offer for Swedish Match AB of SEK 106 in cash per share (see "Swedish Match AB Offer" section on page 6) and suspension of PMI's three-year share repurchase program (see "Share Repurchase Program" section on page 6)
• Declared regular quarterly dividend of $1.25 per common share, representing an annualized rate of $5.00

Six Months Year-to-Date

• Net revenues from smoke-free products accounted for 30.5% of total net revenues, or 29.7% on a pro forma basis
• Market share for heated tobacco units in IQOS markets up by 1.1 points to 7.5% on a pro forma basis

"First and foremost, the war in Ukraine continues to deeply affect the lives of our employees and families in the region," said Jacek Olczak, Chief Executive Officer. "My first priority is to give them the help they need and as a company we are focused on doing our utmost to support them throughout this conflict."

"Turning to our results, our strong underlying performance continued in the second quarter, with top- and bottom-line growth exceeding our initial expectations. This reflected excellent IQOS momentum, including accelerating growth in pro forma total IQOS users and heated tobacco unit in-market sales volume, as well as favorable cigarette category trends."

"We are raising our outlook for the full year and now expect to deliver pro forma adjusted growth in net revenues of 6% to 8%, on an organic basis, and diluted EPS of 10% to 12%, excluding currency, underpinned by pro forma heated tobacco unit shipment volume of 90 to 92 billion units."

"Building on our excellent financial results in 2021, this year's outlook puts us well on track to comfortably exceed our minimum compound annual net revenue and adjusted diluted EPS growth targets for 2021 to 2023 on a pro forma basis."

2022 SECOND-QUARTER SUMMARY

Pro forma adjusted net revenues increased by 6.2% on an organic basis, notably reflecting pro forma total shipment volume growth of 3.0%, driven by cigarettes (+2.4%) and heated tobacco units (+7.4%). As anticipated in April, heated tobacco unit shipment volume in the quarter was adversely impacted by the timing of shipments to Japan (approximately 2 billion units, which are expected in the second half) as the company manages the cancellation of planned heated tobacco unit manufacturing in Russia and disruptions in global supply chains generally. In-market sales for heated tobacco units increased by 19.9% in the quarter on a pro forma basis, a slight acceleration versus the first quarter.

Pro forma adjusted net revenue per unit increased by 3.0% on an organic basis, reflecting a further increase in the proportion of heated tobacco units in PMI’s sales mix (albeit at a lower rate than in prior quarters, due to the above-mentioned timing impact involving heated tobacco unit shipments to Japan) and higher pricing. Pro forma pricing for combustible products increased by 3.5%, or by almost 5% excluding Indonesia.

Pro forma adjusted operating income margin declined by 1.9 points on an organic basis, primarily reflecting: (i) investment to further expand and match the speed of growth of PMI's smoke-free portfolio, including the initial higher cost of ILUMA devices and heated tobacco units, as well as the transitory dilutive margin impact of higher device sales from the roll-out of ILUMA and the replenishment of distribution channels as device constraints ease (following component-related shortages) to support re-accelerating IQOS user growth; (ii) the impact of supply chain disruptions, notably due to the war in Ukraine; and (iii) cost inflation driven by the global pandemic recovery and exacerbated by the war in Ukraine, notably for certain direct materials, wages, energy and transportation costs. The decline also reflected a challenging prior year comparison, which included substantial productivity savings.

Despite the specific margin pressures in the quarter, the company’s strong net revenue growth, coupled with the positive effects from higher pricing and operating cost efficiencies, drove adjusted diluted EPS of $1.48 and pro forma adjusted diluted EPS of $1.32, reflecting currency-neutral growth of 3.8% and 5.6%, respectively, as shown in the table below.

2022 FULL-YEAR FORECAST

Reported diluted EPS is forecast to be in a range of $5.73 to $5.88, at prevailing exchange rates, versus reported diluted EPS of $5.83 in 2021. Excluding (i) 2022 adjustments of $0.17 per share, (ii) net earnings attributable to Russia and Ukraine of $0.67 to $0.71 per share assumed for full-year 2022, and (iii) an adverse pro forma currency impact, at prevailing exchange rates, of $0.86 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;
• Continuing uncertainty over the pace of the ongoing recovery from pandemic-related effects on the operating environment, notably in select geographies in PMI's South & Southeast Asia Region;
• A continued gradual improvement in PMI's duty-free business outside Asia;
• An improving IQOS device supply situation, with some remaining uncertainty on the timing of full IQOS availability;
• The impact on TEREA heated tobacco unit production capacity build-up 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 heated tobacco unit shipment volume growth for PMI of approximately 1.5% to 2.5%;
• Pro forma heated tobacco unit shipment volume of 90 to 92 billion units, compared to pro forma shipment volume of 73.5 billion units in 2021;
• Pro forma adjusted net revenue growth of approximately 6.0% to 8.0% on an organic basis (compared to 2021 pro forma adjusted net revenues of $29.2 billion), which includes the adverse full-year impact of moving to highly inflationary accounting in Turkey, effective April 1st, of approximately 0.7 points;
• A pro forma adjusted operating income margin change of flat to +50 basis points on an organic basis, primarily reflecting:
  • the continued favorable product mix shift from cigarettes to smoke-free products, coupled with the benefit of further operating leverage and accelerated operating efficiencies;
  • 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 IQOS ILUMA devices and initial weight and cost of TEREA consumables, which are expected to reduce 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 IQOS ILUMA and TEREA consumables in Japan, and (ii) the re-sourcing of select cigarette brands for Japan due to the war in Ukraine;
    • investments to grow production capacity across PMI's smoke-free platforms; and
    • increased 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;
• Wellness and Healthcare segment net revenues of around $300 million (including smoking cessation products), with an operating loss of around $150 million, primarily due to:
  • the amortization of intangibles related to acquisitions;
  • investments in research and development; and
  • expenses related to employee retention and recruitment programs;
• Full-year amortization of acquired intangibles of $0.08 per share;
• Operating cash flow of around $10.5 billion at prevailing exchange rates and 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%;
• The impact on diluted EPS of first-half 2022 share repurchases;
• Pro forma third-quarter adjusted diluted EPS of $1.23 to $1.28, including an unfavorable currency impact of around $0.24 per share, at prevailing exchange rates, reflecting:
  • heated tobacco unit shipment volume of around 22 billion;
  • mid-single-digit pro forma net revenue growth, on an organic basis, notably reflecting:
    • strong IQOS growth; partly offset by
    • a tougher year-over-year comparison for cigarette shipment volume versus the first half, as well as a modest negative impact due to cigarette shipment timing;
  • lower gross margin headwinds compared to the second quarter, broadly offset by a step-up in commercial investments as compared to a device-constrained third quarter of 2021;
• Fourth-quarter-weighted (i) growth in pro forma heated tobacco unit shipment volume and (ii) recovery in pro forma adjusted OI margin.

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

Swedish Match AB Offer

On May 11, 2022, Philip Morris Holland Holdings B.V. (PMHH), an affiliate of PMI, announced a recommended public offer to the shareholders of Swedish Match AB (Swedish Match) to tender all shares in Swedish Match (excluding treasury shares) to PMHH at a price of SEK 106 in cash per share.

On June 28, 2022, the offer document regarding PMHH's recommended offer was made public, following approval and registration by the Swedish Financial Supervisory Authority. The offer document and other public information regarding the offer are available on the offer website (www.smokefree-offer.com).

PMI expects the transaction to close in the fourth quarter of this year, subject to Swedish Match shareholder acceptance and all necessary regulatory and other approvals.

As of the date of the offer document, the waiting period for the transaction under the U.S. Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (HSR Act), had expired, meaning that PMHH has satisfied its requirements under the HSR Act to proceed with the transaction.

Share Repurchase Program

On May 11, 2022, PMI announced the suspension of its three-year share repurchase program as part of the company's announcement of its recommended public offer to the shareholders of Swedish Match. Prior to the suspension of the program, the company made no share repurchases during the second quarter of 2022.

From January 1, 2022 through March 31, 2022, PMI repurchased approximately 2.0 million shares of common stock for approximately $199 million, at an average price of $100.95 per share, representing total repurchases of approximately $983 million since the start of the three-year program in July 2021.

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. PMI has taken three critical steps in this regard: helping 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; providing critical aid to employees who cannot leave or who decide to remain in Ukraine; and providing those who have left the country with logistical, medical, financial, and other practical 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 already contributed approximately $10 million in funds and donated essential items across the country, directly to humanitarian organizations and through the company's own employee-led initiative, 'Projects With a Heart'.

On February 25th, PMI announced the temporary suspension of its operations in Ukraine, including at its factory, in Kharkiv. During the second quarter, the company 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. Production at the company's factory in Kharkiv remains suspended. PMI is applying increased security and safety measures for personnel.

In 2021, Ukraine accounted for around 2% of PMI’s total cigarette and heated tobacco unit shipment volume and under 2% of PMI’s total net revenues. As of June 30, 2022, PMI's Ukrainian operations have approximately $0.5 billion in total assets, excluding intercompany balances.

On March 24th, PMI announced the concrete steps it had taken to suspend planned investments and scale down its manufacturing operations in Russia. This included:

• the discontinuation of a number of cigarette products offered in the market (representing approximately one-quarter of the company's domestic cigarette SKUs, including Marlboro and Parliament SKUs) and the reduction of its manufacturing activities accordingly;
• the suspension of its marketing activities in the country;
• the cancellation of all product launches planned for 2022 in the market, including the launch of its flagship heated tobacco product IQOS ILUMA, originally planned for March 2022; and
• the cancellation of its plans to manufacture TEREA heated tobacco units for IQOS ILUMA in Russia (with an eventual annualized capacity of more than 20 billion units) and the related ongoing investment of $150 million.

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.

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 their safety and security as a priority.

In 2021, Russia made up almost 10% of total shipment volumes and around 6% of PMI net revenues. As of June 30, 2022, PMI's Russian operations have approximately $2.5 billion in total assets, excluding intercompany balances.

PMI recorded charges related to the war in Ukraine of approximately $80 million in the second quarter of 2022 and approximately $122 million in the first half of 2022. This includes charges in Russia related to the cancellation of the planned launch of IQOS ILUMA and the planned production of TEREA heated tobacco units.

Amortization and Impairment of Acquired Intangibles

Starting in the second quarter of 2022, and on a comparative basis, PMI will exclude amortization and impairment of acquired intangibles, if any, from its adjusted operating results (e.g., adjusted operating income and margin; adjusted diluted EPS). The company believes that operating results adjusted for these items better reflect the underlying performance of the business and provide a better comparison to past operating performance. Amortization of acquired intangibles is driven by the purchase price allocated to specific assets and is varied across acquisitions because of unique facts and circumstances, timing and terms of acquisition which result in amortization charges that could be inconsistent in size as compared to the revenues generated by those assets.

Conference Call

A conference call, hosted by Emmanuel Babeau, Chief Financial Officer, will be webcast at 9:00 a.m., Eastern Time, on July 21, 2022. Access the call at www.pmi.com/2022Q2earnings.

CONSOLIDATED SHIPMENT VOLUME & MARKET SHARE

Second-Quarter

PMI's total shipment volume increased by 1.1%, driven by:

• the EU, reflecting higher heated tobacco unit shipment volume across the Region (notably in Italy and Poland), partly offset by lower cigarette shipment volume (mainly in France and Spain, partially offset by Poland);
• Middle East & Africa, reflecting higher cigarette shipment volume (primarily in PMI Duty Free and Turkey, partly offset by Egypt) and higher heated tobacco unit shipment volume (mainly in Egypt, Lebanon and PMI Duty Free); and
• Americas, primarily reflecting higher cigarette shipment volume, mainly in Argentina and Brazil;

partly offset by

• Eastern Europe, reflecting lower cigarette and heated tobacco unit shipment volume (primarily in Russia and Ukraine);
• South & Southeast Asia, primarily reflecting lower cigarette shipment volume, mainly in the Philippines, partly offset by Indonesia; and
• East Asia & Australia, reflecting lower cigarette and heated tobacco unit shipment volume, primarily in Japan.

On a pro forma basis, PMI's total shipment volume increased by 3.0%, with a decrease of 3.4% in the Eastern Europe Region, as detailed in Appendix 3 and Appendix 4, respectively.

Impact of Inventory Movements

Excluding the net unfavorable impact of estimated distributor inventory movements of approximately 1.9 billion units, PMI’s total in-market sales increased by 2.2%.

The net unfavorable impact of approximately 1.9 billion units reflected:

• A net unfavorable impact of 2.3 billion heated tobacco units, essentially due to Japan (reflecting the delayed timing of shipments, as the company manages the cancellation of planned heated tobacco unit manufacturing in Russia and disruptions in global supply chains generally); partly offset by
• A net favorable impact of 0.4 billion cigarettes, mainly driven by PMI Duty Free (reflecting the replenishment of distributor inventories to account for increased passenger traffic in certain geographies), partially offset by Spain (mainly reflecting inventory movements in the second quarter of 2021).

On a pro forma basis, PMI's total in-market sales increased by 4.2%.

PMI's total heated tobacco unit in-market sales volume in the quarter was 25.7 billion units, or 21.1 billion units on a pro forma basis, representing growth of 12.1% and 19.9%, respectively.

Six Months Year-to-Date

PMI's total shipment volume increased by 2.2%, driven by:

• the EU, reflecting higher heated tobacco unit shipment volume across the Region (particularly in Italy and Poland), partly offset by lower cigarette shipment volume (notably in France and Germany, partially offset by Poland);
• Middle East & Africa, reflecting higher cigarette shipment volume (primarily in PMI Duty Free and Turkey), as well as higher heated tobacco unit shipment volume (mainly in Egypt, Lebanon and PMI Duty Free);
• South & Southeast Asia, primarily reflecting higher cigarette shipment volume, mainly in India and Indonesia, partly offset by Thailand; and
• Americas, mainly reflecting higher cigarette shipment volume, primarily in Brazil;

partly offset by

• Eastern Europe, reflecting lower cigarette and heated tobacco unit shipment volume (mainly in Russia and Ukraine); and
• East Asia & Australia, reflecting lower heated tobacco unit shipment volume (primarily in Japan), as well as lower cigarette shipment volume (notably in Japan).

On a pro forma basis, PMI's total shipment volume increased by 4.0%, with an increase of 0.2% in the Eastern Europe Region, as detailed in Appendix 3 and Appendix 4, respectively.

Impact of Inventory Movements

Excluding the net unfavorable impact of estimated distributor inventory movements of approximately 0.3 billion units, PMI’s total in-market sales increased by 2.4%.

The net unfavorable impact of approximately 0.3 billion units reflected:

• A net unfavorable impact of 2.8 billion heated tobacco units, primarily due to Japan (reflecting the same factors as in the quarter); partly offset by
• A net favorable impact of 2.5 billion cigarettes, mainly driven by PMI Duty Free (reflecting the same factor as in the quarter).

On a pro forma basis, PMI's total in-market sales increased by 4.0%, in line with the increase in total shipment volume.

PMI's total heated tobacco unit in-market sales volume in the six months year-to-date was 50.6 billion units, or 40.6 billion units on a pro forma basis, representing growth of 14.3% and 19.7%, respectively.

PMI Shipment Volume by Brand

Second-Quarter

The increase in PMI's heated tobacco unit shipment volume was mainly driven by the EU (notably Italy and Poland) and Middle East & Africa (primarily Egypt, Lebanon and PMI Duty Free), partly offset by Japan and Eastern Europe (mainly Russia and Ukraine). On a pro forma basis, PMI's heated tobacco unit shipment volume increased by 7.4%.

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

• Marlboro, mainly driven by PMI Duty Free, Russia and Turkey, partly offset by the Philippines;
• Chesterfield, primarily driven by Brazil, the Philippines and Russia;
• Parliament, mainly driven by Turkey and PMI Duty Free, partly offset by Ukraine;
• Sampoerna A in Indonesia, primarily driven by premium A Mild;
• Dji Sam Soe in Indonesia, mainly driven by Dji Sam Soe Magnum Mild; and
• Next, primarily driven by Russia.

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

• L&M, primarily due to Egypt, Spain, Thailand, Turkey and Ukraine, partly offset by PMI Duty Free;
• Philip Morris, mainly due to Russia and Ukraine, partly offset by Japan and Kazakhstan;
• Lark, primarily due to Japan and Turkey; and
• "Others," mainly due to: mid-price Sampoerna U (Indonesia); and low-price Bond Street (primarily due to Kazakhstan, Russia and Ukraine), Fortune (Philippines), More (Philippines) and Morven (Pakistan).

On a pro forma basis, PMI's cigarette shipment volume increased by 5.6% for Marlboro, 8.6% for Chesterfield, 15.3% for Parliament and 18.0% for Philip Morris, and decreased by 2.9% for L&M and 5.2% for Next.

International Share of Market

PMI's pro forma total international market share (excluding China and the U.S.), 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 0.4 points to 27.0%, reflecting:

• Market share for heated tobacco units of 3.5%, up by 0.5 points; and
• Market share for cigarettes of 23.5%, down by 0.1 point.

PMI's pro forma total international cigarette sales volume as a percentage of pro forma total industry cigarette sales volume increased by 0.1 point to 24.7%, mainly reflecting a higher cigarette market share and/or favorable geographic mix impact, notably in Brazil, Indonesia, PMI Duty Free, Poland and Turkey, partly offset by France and the Philippines.

Six Months Year-to-Date

The increase in PMI's heated tobacco unit shipment volume was mainly driven by the EU (notably Italy and Poland) and Middle East & Africa (primarily Egypt, Lebanon and PMI Duty Free), partly offset by Japan and Eastern Europe (mainly Russia and Ukraine). On a pro forma basis, PMI's heated tobacco unit shipment volume increased by 12.6%.

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

• Marlboro, mainly driven by PMI Duty Free, Russia and Turkey, partly offset by Japan;
• Chesterfield, primarily driven by Brazil, the Philippines, Poland and Russia;
• Parliament, mainly driven by PMI Duty Free and Turkey, partly offset by Russia, Saudi Arabia and Ukraine;
• Sampoerna A in Indonesia, primarily driven by premium A Mild;
• Dji Sam Soe in Indonesia, mainly driven by Dji Sam Soe Magnum Mild; and
• Next, primarily driven by Russia.

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

• L&M, mainly due to Germany, Thailand, Turkey and Ukraine, partly offset by PMI Duty Free;
• Philip Morris, primarily due to Russia and Ukraine, partly offset by Japan and Kazakhstan;
• Lark, mainly due to Japan and Turkey; and
• "Others," notably due to: mid-price Sampoerna U (Indonesia); and low-price Bond Street (primarily due to Kazakhstan, Russia and Ukraine), Fortune (Philippines) and More (Philippines).

On a pro forma basis, PMI's cigarette shipment volume increased by 5.4% for Marlboro, 9.6% for Chesterfield, 10.4% for Parliament, 15.6% for Philip Morris and 0.1% for Next, and decreased by 1.5% for L&M.

International Share of Market

PMI's pro forma total international market share (excluding China and the U.S.) increased by 0.6 points to 26.9%, reflecting:

• Market share for heated tobacco units of 3.5%, up by 0.5 points; and
• Market share for cigarettes of 23.4%, flat.

PMI's pro forma total international cigarette sales volume as a percentage of total industry cigarette sales volume increased by 0.3 points to 24.6%, mainly reflecting higher cigarette market share and/or a favorable geographic mix impact, notably in Indonesia, PMI Duty Free, Poland and Turkey, partly offset by Germany and Thailand.

CONSOLIDATED FINANCIAL SUMMARY

Second-Quarter

Net revenues increased by 8.7%, excluding currency and acquisitions, mainly reflecting: favorable volume/mix, primarily driven by higher heated tobacco unit volume, device volume and cigarette volume, partly offset by unfavorable device mix and cigarette mix; a favorable comparison related to the Saudi Arabia customs assessments of $246 million in 2021, shown in "Cost/Other"; and a favorable pricing variance, driven by higher combustible tobacco pricing, partly offset by lower device pricing. Adjusted net revenues increased by 5.3% on an organic basis.

During the quarter, Russia and Ukraine accounted for around 8% of PMI's total net revenues. Pro forma adjusted net revenues increased by 6.2% on an organic basis, as detailed in Schedule 11.

Operating income increased by 8.0%, excluding currency and acquisitions, notably reflecting: a favorable comparison versus the prior year period related to the Saudi Arabia customs assessments (as noted above for net revenues) and asset impairment and exit costs, partly offset by 2022 charges related to the war in Ukraine and 2022 costs associated with the Swedish Match AB offer.

Adjusted operating income increased by 1.6% on an organic basis, primarily reflecting: a favorable pricing variance, partly offset by higher manufacturing costs (mainly due to higher logistics costs and other inflationary impacts, partially offset by productivity). Volume/mix was slightly unfavorable, reflecting unfavorable cigarette mix, heated tobacco unit mix and device mix, as well as the unfavorable impact on profitability of higher device volume, partly offset by higher heated tobacco unit volume and cigarette volume. Adjusted operating income margin decreased by 1.5 points on an organic basis.

Pro forma adjusted operating income increased by 1.6% on an organic basis, while pro forma adjusted operating income margin decreased by 1.9 points, on the same basis, as detailed in Schedule 11. The margin decline primarily reflected the impact of significantly higher device sales; the growth of IQOS ILUMA (with its higher initial unit cost for devices and consumables); the temporary adverse timing impact related to heated tobacco unit shipments to Japan; and inflation in certain elements of the company's supply chain, which was also exacerbated by the impact of the war in Ukraine. The decline also reflected a challenging prior year comparison, which included substantial productivity savings.

Six Months Year-to-Date

Net revenues increased by 8.8%, excluding currency and acquisitions, mainly reflecting: favorable volume/mix, primarily driven by higher heated tobacco unit volume, device volume and cigarette volume, partly offset by unfavorable cigarette mix and device mix; a favorable pricing variance, driven by higher combustible tobacco pricing, partly offset by lower device 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 7.1% on an organic basis.

During the first half, Russia and Ukraine accounted for around 7% of PMI's total net revenues. Pro forma adjusted net revenues increased by 8.1% on an organic basis, as detailed in Schedule 11.

Operating income increased by 8.3%, excluding currency and acquisitions, notably reflecting: a favorable comparison versus the prior year period related to the Saudi Arabia customs assessments (as noted above for net revenues) and asset impairment and exit costs, partly offset by 2022 charges related to the war in Ukraine and 2022 costs associated with the Swedish Match AB offer.

Adjusted operating income increased by 5.0% on an organic basis, reflecting: a favorable pricing variance; and favorable volume/mix, primarily driven by higher heated tobacco unit volume and cigarette volume, partly offset by unfavorable cigarette mix, heated tobacco unit mix and device mix, as well as the unfavorable impact on profitability of higher device volume; partially offset by higher manufacturing costs (primarily due to higher logistics costs and other inflationary impacts, partly offset by productivity). Adjusted operating income margin decreased by 0.9 points on an organic basis.

Pro forma adjusted operating income increased by 5.4% 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. The margin decline primarily reflects the same factors as in the quarter.

EUROPEAN UNION REGION

Second-Quarter

Net revenues increased by 10.1% on an organic basis, reflecting: favorable volume/mix, mainly driven by higher heated tobacco unit volume and device volume, partly offset by lower cigarette volume; partially offset by an unfavorable pricing variance, primarily reflecting lower device pricing, partly offset by higher combustible pricing.

Operating income increased by 7.5%, excluding currency and acquisitions, primarily reflecting: favorable volume/mix, mainly driven by higher heated tobacco unit volume, partly offset by lower cigarette volume; partially offset by higher marketing, administration and research costs; an unfavorable pricing variance; and higher manufacturing costs (primarily due to inflationary impacts).

Adjusted operating income increased by 6.6% on an organic basis. Adjusted operating income margin decreased by 1.7 points on the same basis.

Six Months Year-to-Date

Net revenues increased by 10.3% on an organic basis, reflecting: favorable volume/mix, mainly driven by higher heated tobacco unit volume and device volume, partly offset by lower cigarette volume, unfavorable cigarette mix, and unfavorable heated tobacco unit mix; partially offset by an unfavorable pricing variance, mainly due to lower device pricing and heated tobacco unit pricing, partly offset by higher combustible pricing.

Operating income increased by 9.8%, excluding currency and acquisitions, primarily reflecting: favorable volume/mix, mainly driven by higher heated tobacco unit volume, partly offset by lower cigarette volume, unfavorable cigarette mix and unfavorable heated tobacco unit mix; partially offset by higher marketing, administration and research costs; higher manufacturing costs (primarily due to inflationary impacts); and an unfavorable pricing variance.

Adjusted operating income increased by 9.0% on an organic basis. Adjusted operating income margin decreased by 0.6 points on the same basis.

Total Market, PMI Shipment & Market Share Commentaries

Second-Quarter

The estimated total market in the EU increased by 3.4% to 126.4 billion units, primarily driven by:

• Italy, up by 5.5%, mainly reflecting the impact on adult smoker average daily consumption of the easing of pandemic-related measures;
• Poland, up by 18.5%, primarily reflecting a lower estimated prevalence of illicit trade, as well as higher border sales due to the easing of pandemic-related measures; and
• Spain, up by 9.2%, mainly reflecting the impact of increased in-bound tourism, coupled with higher border sales due to the easing of pandemic-related measures;

partly offset by

• the U.K., down by 17.6%, notably reflecting the impact of increased out-bound tourism compared to the pandemic-affected prior year period.

PMI's total shipment volume increased by 4.6% to 50.6 billion units, mainly driven by:

• Italy, up by 10.6%, primarily reflecting the higher total market and a higher market share driven by heated tobacco units; and
• Poland, up by 20.1%, mainly reflecting the higher total market and a higher market share driven by heated tobacco units.

Six Months Year-to-Date

The estimated total market in the EU increased by 3.2% to 235.9 billion units, primarily driven by:

• Italy, up by 5.4%, mainly reflecting the same factor as in the quarter;
• Poland, up by 18.6%, primarily reflecting the same factors as in the quarter; and
• Spain, up by 7.0%, mainly reflecting the same factors as in the quarter;

partly offset by

• Germany, down by 5.4%, 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 11.2%, primarily reflecting the same factor as in the quarter.

PMI's total shipment volume increased by 4.4% to 95.6 billion units, mainly driven by:

• Italy, up by 5.9%, primarily reflecting the same factors as in the quarter; and
• Poland, up by 20.4%, mainly reflecting the same factors as in the quarter.

EASTERN EUROPE REGION

Second-Quarter

Net revenues decreased by 1.7% on an organic basis, reflecting: unfavorable volume/mix, mainly due to lower cigarette volume and heated tobacco unit volume; partly offset by a favorable pricing variance, primarily driven by higher combustible pricing. During the quarter, Russia and Ukraine accounted for around 68% of PMI's total net revenues in the Region. Pro forma net revenues increased by 5.7% on an organic basis, as detailed in Schedule 11.

Operating income decreased by 25.2%, excluding currency and acquisitions, primarily reflecting 2022 charges related to the war in Ukraine.

Adjusted operating income decreased by 0.3% on an organic basis, mainly reflecting: unfavorable volume/mix, primarily due to the same factors as for net revenues; and higher manufacturing costs; partly offset by a favorable pricing variance. Adjusted operating income margin increased by 0.5 points on an organic basis.

On an organic basis, pro forma adjusted operating income and adjusted operating income margin increased by 6.3% and 0.2 points, respectively, as detailed in Schedule 11.

Six Months Year-to-Date