PMPhilip Morris International

We note your risk factor indicating that inflation could affect your material costs, wages, energy and transportation costs. Please update this risk factor in future filings if recent inflationary pressures have materially impacted your operations. In this regard, identify the types of inflationary pressures you are facing and how your business has been affected.

We acknowledge the Staff’s comment and respectfully note that we have experienced and disclosed inflationary pressures in our Form 10-K, including: growing pressures on the cost of certain direct materials, wages, energy, transportation, and logistics as well as an increased cost of capital due to interest rate increases driven by the response to increased inflation.

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While the net result of the inflationary impacts and our efforts to mitigate these impacts were not material to the Company during the covered periods, in future filings the Company will update its risk factors to describe the material impact of inflationary pressures on the Company’s operations, if any, including by identifying the types of any such inflationary pressures and how the business may have been affected.

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We note your statement that following the deconsolidation of RBH, you continue to report the volume of brands sold by RBH in which other PMI subsidiaries own the trademark. Please revise to quantify the amounts of volume of RBH included in your tables.

As discussed in Item 8, Note 18. Contingencies - CCAA Proceedings and Stay of Tobacco-Related Cases Pending in Canada - of our 2022 Form 10-K, our subsidiary, Rothmans, Benson & Hedges Inc. (“RBH”), sought protection in the Ontario Superior Court of Justice under the Companies’ Creditors Arrangement Act (“CCAA”) on March 22, 2019. CCAA is a Canadian federal law that permits a Canadian business to restructure its affairs while carrying on its business in the ordinary course.

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As a result, RBH's financial results have been deconsolidated from our consolidated financial statements since March 22, 2019.

Following the deconsolidation of RBH, we have continued to report the volume and corresponding revenues (primarily royalty revenues) of brands sold by RBH for which other PMI subsidiaries are the trademark owners. These include HEETS, Next, Philip Morris and Rooftop.

The volume of these brands sold by RBH is not significant to the volume of the consolidated Company (i.e., cigarettes and heated tobacco units combined). Specifically, the volume of these brands sold by RBH represented approximately 0.4%, 0.5% and 0.5% of our total consolidated cigarettes and heated tobacco units volume for the years ended 2022, 2021 and 2020, respectively. For this reason, we respectfully believe that separate disclosure of the unit volume of these brands sold by RBH in our tabular disclosure or as a footnote to our tabular disclosure is not warranted. Going forward, we will continue to monitor the significance of this volume to the consolidated Company to determine whether additional disclosures should be provided.

In future filings, we will expand the disclosure referenced by the Staff to include the language underlined below:

Following the deconsolidation of our Canadian subsidiary, we continue to report the volume and corresponding royalty revenues of brands sold by RBH for which other PMI subsidiaries are the trademark owners. These include HEETS, Next, Philip Morris and Rooftop. The volume and corresponding royalty revenues for these brands sold by RBH were not material to the Company for all periods presented.

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Your disclosure indicates that you have faced significant inflationary forces and that such inflationary pressures are growing and could continue in upcoming quarters. In this regard, please disclose any known trends or uncertainties that have had or are reasonably likely to have a material impact on your cash flows, liquidity, capital resources, cash requirements, financial position, or results of operations

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arising from, related to, or caused by inflation. Trends or uncertainties may include the combined impact of inflation on cost of sales, gross profit, inventory and taxes.

We acknowledge the Staff’s comment and in future filings, the Company will include additional disclosures regarding the principal factors contributing to inflationary pressures and the resulting impact to the Company if there are any known trends or uncertainties that have had or are reasonably likely to have a material impact on our financial results which have not been previously disclosed.

As we have previously reported, our 2022 financial results were impacted by inflationary forces, despite specific actions taken to mitigate them.

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Such forces principally consisted of the inflationary pressures described in the Form 10-K and our response to Comment 1. While we expect certain inflationary elements to ease over the course of the year, we anticipate that our 2023 results will likely continue to be impacted by inflationary forces (particularly related to tobacco leaf given the impact of longer inventory durations and higher prices of direct materials, as discussed below in our response to Comment 4), which in the aggregate could be material to our business and financial results.

While the net result of the inflationary impacts and our mitigation efforts were not material to the Company's financial results during the covered periods, as noted above, additional disclosures will be included in future filings to the extent any of the above items or other known trends or uncertainties have had or are reasonably likely to have a material impact on our financial results.

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In a related matter, please expand your disclosure in future filings to identify the principal factors contributing to the inflationary pressures you have experienced and clarify the resulting impact to the company. In addition, update your disclosure in future filings to identify actions planned or taken, if any, to mitigate inflationary pressures.

We acknowledge the Staff’s comment and respectfully advise the Staff that, in future filings, the Company will include appropriate additional disclosures regarding the principal factors contributing to inflationary pressures and clarify the resulting impact to the Company including actions planned or taken to mitigate inflationary pressures.

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To illustrate, below is an example of how we are planning to disclose such impacts in our upcoming filings:

Inflationary impacts driven by higher wages have resulted from merit increases that reflect local inflation as we continuously evaluate our compensation and benefit offerings to be competitive with the current market. Increased transportation costs resulted from increased shipping rates for all modes of transportation (air, ocean and inland) due to ocean and air capacity constraints. Increases in cost of sales resulted from higher cost of direct materials due to the pass on of energy, transportation, labor and commodity price increases from suppliers as well as increases in utility costs, including gas and electricity prices, primarily in Europe resulting from the war in Ukraine. Raw materials such as tobacco leaf have longer inventory durations which resulted in insignificant inflationary impacts to our cost of sales in 2022; however tobacco leaf purchases in both 2022 and 2023 have been at higher prices due to inflationary impacts on fertilizer prices and labor costs, thus resulting in increases in the cost of inventory with corresponding impacts on our financial results expected in 2023. In addition, our cash flow from operations was impacted by the net working capital investment related to the procurement of tobacco leaf inventory and higher cost of direct materials, which is expected to continue in 2023.

Mitigation efforts have included (i) indexation clauses related to commodity costs and energy pricing within contracts, (ii) tactical inventory purchases, (iii) identification of new suppliers in different geographical locations for incremental sourcing, (iv) increasing tobacco leaf inventory durations to secure additional volumes at favorable prices, (v) optimizing the mix of tobacco leaf origins and suppliers, (vi) continuous evaluation of shipping routes and methods of shipment, (vii) supplier negotiations, (viii) variable contract durations for energy costs, (ix) hedging strategies, and (x) other pricing, productivity and procurement initiatives.

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We note your presentation of revenues, including excise taxes on the face of your statement of earnings. We also note that you have elected to present revenue on net basis of these excise taxes. Please tell us why you believe the gross presentation of revenues does not represent a non-GAAP measure.

We acknowledge the Staff’s comment and note that, as disclosed in Item 8, Note 2. Summary of Significant Accounting Policies of our Form 10-K, we have elected to present revenues on a net of excise tax basis by excluding excise taxes collected from customers from the measurement of the transaction price.

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Excise taxes and related revenues, including excise taxes on the face of the statement of earnings, are presented in accordance with our interpretation of the SEC rules stated in Item 10(e)(5) of Regulation S-K and Item 5-03 of Regulation S-X, pursuant to which we believe that the gross presentation of revenues does not represent a non-GAAP financial measure.

Regulation S-K Item 10(e)(5) states that “non-GAAP financial measures exclude financial measures required to be disclosed by GAAP, [SEC] rules, or a system of regulation of a government or governmental authority or self-regulatory organization that is applicable to the registrant.” Additionally, for the purpose of the presentation of revenues in PMI’s Consolidated Statements of Earnings, we have considered the guidance provided in Regulation S-X Item 5-03(1) “Net sales and gross revenues” which states: “If the total of sales and revenues reported under this caption includes excise taxes in an amount equal to 1 percent or more of such total, the amount of such excise taxes shall be shown on the face of the statement parenthetically or otherwise”.

We interpret Regulation S-X Item 5-03(1) to require the presentation of gross revenue, necessitating the presentation of excise taxes on the face of the statement of earnings. We also believe that including excise taxes within the statement promotes comparability with other filers from excise paying industries.

We respectfully note that revenues including excise taxes are not used by management as a non-GAAP measure to evaluate PMI’s financial performance or as a metric used in determining management compensation. Consequently, we believe that Regulation S-K Item 10(e)(1)(i)(C) does not apply, which states “[t]he registrant must include the following in the filing: [a] statement disclosing the reasons why the registrant's management believes that presentation of the non-GAAP financial measure provides useful information to investors regarding the registrant's financial condition and results of operations.”

In consideration of the above, we believe that revenues including excise taxes is not a non-GAAP measure. This measure is added to the face of the statement of earnings to comply with the SEC excise taxes disclosure regulations and to promote transparent disclosure and comparability with other filers from excise paying industries.

Notwithstanding the above, in accordance with the Staff's comment, in future filings we will remove revenues including excise taxes from the face of the statement of earnings and present excise taxes parenthetically or in a footnote to the statement of earnings.

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You disclose that inventories are stated at the lower of cost or market. Please clarify if you recognize inventory at the lower of cost or market, or the lower of cost or net realizable value, and revise your disclosures accordingly. See ASC 330-10-351B and ASC 905-330-30-1.

We acknowledge the Staff's comment and confirm that our inventories are stated at the lower of cost or net realizable value in accordance with ASC 330-10-35-1B. The Company will revise its disclosure in future periodic reports, beginning with our Form 10-K for the fiscal year ending December 31, 2023. Read in the reply ↗

We note your disclosure on pages 24 and 59 of how excluding the impact of certain inventory movements affected your shipment volumes and the cigarette market. Please clarify the nature of these "inventory movements." Your response and revised disclosure should fully explain what the inventory movements are and how excluding such movements affects your reported results.

The distribution of cigarettes and other nicotine-containing products, as well as IQOS heating devices and related accessories, to PMI’s customers is tailored to the characteristics of each market and includes PMI’s own direct sales to retailers, distribution through independent or dedicated distributors, distribution through national or regional wholesalers, and e-commerce.

The distribution of such products in any given market may require the creation and maintenance of certain levels of inventory tailored to particular market-specific factors, such as changes to the manufacturing supply

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chain, shipment methods, consumer demand, timing of excise tax increases or other influences that may affect the timing of sales to customers. In the case where distribution is through direct sales to retailers, PMI builds its own inventories to respond to these market-specific factors. In the case where distribution is indirect, such as through a third-party distributor (e.g., in Japan), it is the third party that builds inventories to respond to these market-specific factors.

Regardless of the distribution model, direct or indirect, PMI recognized revenue prior to January 1, 2018 when title and risk of loss passed to customers, typically either upon shipment or delivery of goods. Under ASC 606, which PMI adopted on January 1, 2018, PMI recognizes revenue once control is transferred to the customer, typically either upon shipment or delivery of goods. Consequently, increases and decreases in PMI's own inventories do not affect PMI's reported net revenues and shipment volumes. Conversely, increases and decreases of inventories by the distributor do affect PMI’s reported net revenues and shipment volumes.

In its Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), PMI discloses its own shipment volumes on a reported basis. PMI also discloses certain estimated total industry/market volumes on a reported basis (using latest available data from a number of internal and external sources). With respect to PMI’s own shipment volumes, in some circumstances, distributor inventory movements, in response to the market-specific factors described above, can significantly distort reported shipment trends and, as a result, fail to provide the most meaningful disclosure of PMI’s business performance to investors. Similarly, with respect to estimated total industry/market volumes, in some circumstances, estimated trade inventory movements in various trade channels in response to the market-specific factors described above can significantly distort reported estimated total industry/market volumes and, as a result, fail to provide the most meaningful disclosure of the estimated total industry/market performance to investors. Consequently, in such circumstances, management believes additional disclosure that excludes the impact of either favorable or unfavorable distributor inventory movements on PMI’s reported shipment volumes, and/or the impact of either favorable or unfavorable estimated trade inventory movements on the total industry/market, provides investors a better understanding of underlying volume performance and trends.

While changes to the inventory levels of PMI’s distributors result in changes to PMI’s shipment volumes and therefore PMI’s reported net revenues, the additional disclosure of the exclusion of the impact of their inventory movements on PMI’s shipment volume has no impact on revenue recognition described above.

To further explain the nature of these inventory movements and how their exclusion affects PMI’s reported results, PMI will add the following clarifying language to the MD&A in its future 10-Q and 10-K filings:

"From time to time, PMI’s shipment volumes are subject to the impact of distributor inventory movements, and estimated total industry/market volumes are subject to the impact of inventory movements in various trade channels that include estimated trade inventory movements of PMI’s competitors arising from market-specific factors that significantly distort reported volume disclosures. Such factors may include changes to the manufacturing supply chain, shipment methods, consumer demand, timing of excise tax increases or other influences that may affect the timing of sales to customers. In such instances, in addition to reviewing PMI shipment volumes and certain estimated total industry/market volumes on a reported basis, management reviews these measures on an adjusted basis that excludes the impact of distributor and/or estimated trade inventory movements. Management also believes that disclosing PMI shipment volumes and estimated total industry/market volumes in such circumstances on a basis that excludes the impact of distributor and/or estimated trade inventory movements improves the comparability of performance and trends for these measures over different reporting periods."

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We note from your disclosure in Note 7, that net revenues refers to your operating revenues from the sale of products, including shipping and handling charges billed to customers, net of sales and promotion incentives, and excise taxes.

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In light of the fact that the incentives appear to represent variable consideration, please tell us and revise to disclose the nature of all variable consideration and how you estimate the variable consideration, including whether this estimate is typically constrained. See ASC 606-1050-12(c) and 606-10-50-20. In this regard, we also note from your earnings calls that you may have loyalty programs associated with the IQOS products, which also may be sold with discounts. Please note that these programs should be considered in your variable consideration analysis.

When PMI recognizes revenue, the net amount reflects the transaction price billed to customers, less sales and promotion incentives, where applicable. Such sales and promotion incentives relate principally to volume-based customer discounts, rebates or prompt payment discounts. As it relates to IQOS products, PMI does, in certain markets, offer discounts to its customers, primarily related to IQOS devices.

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While PMI has begun to operate loyalty programs in certain markets, the related accounting impacts are currently inconsequential (less than $1 million annualized).

In situations where PMI sells directly to consumers and the discount is applied at the point of sale, the consideration is not variable as it does not change after the sale transaction. In markets where PMI sells through a third-party distributor or the level of pricing or consumer discounts is dependent on future events (for example the volume of sales to a customer in a particular period) this is variable consideration, as the amount to which PMI is entitled in exchange for transferring the goods is variable. In determining the transaction price, PMI estimates any relevant variable consideration based on the most likely amount PMI expects to be entitled to under the terms of the contract taking into consideration historical experience of discount or rebate redemption where relevant. Based on the evaluation of the factors set out in ASC 606-10-32-12, in the context of the PMI discount and incentive programs, PMI concluded that the potential reversal of any significant variable consideration is not probable and therefore such variable consideration is not constrained.

PMI will continue to monitor such sales and promotional incentives, as well as any loyalty programs, which may vary in significance with the continued growth in its reduced-risk product portfolio. In recognition of the expected increased significance, PMI will update, in future filings, the disclosures of revenue recognition as follows (by adding the underlined text):

"PMI recognizes revenue primarily through the manufacture and sale of cigarettes and other nicotine-containing products, including reduced-risk products. The majority of PMI revenues are generated by sales through direct and indirect distribution networks with short-term payment conditions and where control is typically transferred to the customer either upon shipment or delivery of goods. PMI evaluates the transfer of control through evidence of the customer’s receipt and acceptance, transfer of title, PMI’s right to payment for those products and the customer’s ability to direct the use of those products upon receipt. Typically, PMI’s performance obligations are satisfied and revenue is recognized either upon shipment or delivery of goods. In certain instances, PMI facilitates shipping and handling activities after control has transferred to the customer. PMI has elected to record all shipping and handling activities as costs to fulfill a contract. The shipping and handling costs that have not been incurred at the time revenue is recognized are accrued. The transaction price is typically based on the amount billed to the customer and includes estimated variable consideration where applicable. Such variable consideration is typically not constrained and is estimated based on the most likely amount that PMI expects to be entitled to under the terms of the contracts with customers, historical experience of discount or rebate redemption, where relevant, and the terms of any underlying discount or rebate programs, which may change from time to time as the business and product categories evolve."

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