PMI_2014AR_CompleteAnnualReport

2014 Annual Report

Billion Cigarettes Shipped, down by 2.8%?

856.0

Billion

Net Revenues,* up by 2.0%??

$29.8

Billion Adjusted OCI,

flat ??

$12.6

Adjusted

Diluted EPS, up by 7.8%???

$5.02

2014: A Successful Investment Year

1We aimed to address specific challenges in

key markets, such as Italy, Japan and the

Philippines, while also investing in a number

of strategic initiatives, including the pilot

launches of our Reduced-Risk Product (1)

iQOS and the roll-out of the new Marlboro

2.0 Architecture (both featured later in this

Annual Report) as well as the optimization

of our global manufacturing footprint. In

addition, we faced an operating environment

of continued macro-economic weakness and

an unprecedented currency headwind.

Within this context, we delivered a

solid currency-neutral performance in 2014,

achieving adjusted diluted earnings per

share (EPS) growth of 7.8%. This result

exceeded the 6.5% to 7.5% currency-neutral

guidance that we provided last November,

due mainly to better-than-expected per-

formances in the European Union (EU)

and Eastern Europe, Middle East & Africa

(EEMA) Regions. In addition, we made

very substantial progress in addressing our

market-specific challenges and successfully

executed our strategic initiatives.

2014 Results

Cigarette volume of 856.0 billion units

in 2014 was down by 2.8%, excluding

acquisitions, versus the prior year. The

decline primarily reflects the impact of lower

cigarette industry volume in all Regions

and unfavorable inventory movements,

particularly in Asia, partially offset by market

share growth in the EU, EEMA and Latin

America & Canada (LA&C) Regions.

Reported net revenues, excluding

excise taxes, of $29.8 billion declined by

4.6% versus 2013. Excluding currency

and acquisitions, net revenues grew by

2.0%. Adverse volume/mix, due mainly to

total industry volume declines, eroded a

significant portion of our favorable pricing

variance, which at $1.9 billion was in line

with our historical average.

Adjusted Operating Companies Income

(OCI) of $12.6 billion declined by 10.5%

versus 2013. Excluding currency and

acquisitions, adjusted OCI was flat.

We exceeded our productivity target of $300 million last year. Both manufacturing and procurement-related productivity savings helped to partially offset the impact of higher leaf and clove prices on our manufacturing costs. In 2015, we anticipate that our productivity and cost-savings programs, combined with savings associated with the manufacturing footprint restructuring implemented last year, should result in a total company cost-base increase, excluding RRPs and currency, of approximately 1%. Adjusted diluted EPS of $5.02 declined by 7.0% versus 2013, with currency repre-senting a considerable headwind of $0.80 per share. Excluding currency, adjusted diluted EPS increased by 7.8%. Free cash flow of $6.6 billion declined by 26.3% versus 2013. Excluding currency, free cash flow was down by 7.9%, notably due to an increase in working capital require-ments (largely due to the timing of excise payments) and higher cash payments related to restructuring costs. Our market share performance in 2014 was strong despite significant price competition in several countries, notably Australia and the Philippines. We registered a growing or stable share in 19 of our top-30 OCI markets. Importantly, we stabilized our share in Japan, which augurs well for 2015. Total PMI share, excluding China and the U.S., grew by 0.3 percentage points to 28.6%, with the highest-ever share progression in the EU Region, up by 1.0 percentage point, as well as increases in the LA&C and EEMA Regions, up by 0.4 and 0.3 percentage points, respectively. Overall, we continued to effectively manage the delicate balance between share and OCI growth within the context of a difficult operating environment. The strong market share results were driven by our robust brand portfolio, led by Marlboro . In 2014, the brand gained 0.3 share points in both the EU and EEMA Regions, while it held share in the Asia and LA&C Regions. This impressive overall performance was driven by the highly successful initial roll-out of the 2.0 Architecture, a continued stream of product innovation and the further expansion of the Be Marlboro global marketing campaign.“Although we anticipated that 2014 would be a particularly difficult and complex year for PMI, our performance in

several critical areas of the business was extremely positive.”Louis C. Camilleri Chairman of the Board

André Calantzopoulos Chief Executive Officer Dear Shareholder,

(1)Reduced-Risk Products (RRPs) is the term the

company uses to refer to products with the poten-

tial to reduce inpidual risk and population harm in

comparison to smoking combustible cigarettes.

Our stable of other key international brands also contributed to market share strength in 2014. Of particular note was the continued strong performance of above-premium Parliament, whose volume grew

by 5.6% versus 2013. Chesterfield also performed exceptionally well, with volume growth of 22.6% over the same period. This growth was driven by the EU Region, where Chesterfield now ranks as the third-largest cigarette industry brand by volume, behind Marlboro and L&M.

In U.S. dollar terms, our total share-holder return (TSR) for 2014 of -2.1% trailed that of our Tobacco Peers (15.2%), the S&P 500 (13.7%) and our Compensation Survey Group (4.5%). In U.S. dollar terms, our TSR since the spin-off in 2008 through December 31, 2014, of 116.1% was above that of our Compensation Survey Group (82.2%) and the S&P 500 (81.5%), though marginally below that of our Tobacco Peers (117.9%). Regretfully, the significant currency headwind that we faced last year, which persists into 2015, clearly had a major adverse impact on our TSRs for both periods.

We nevertheless continued to prioritize the generous return of cash to our share-holders in 2014, while preserving our single-A credit rating. This was evidenced by our 6.4% pidend increase last September, to an annualized rate of $4.00 per share, and our share repurchases of $3.8 billion. We remain the clear leader among our Tobacco Peers with regard

to the absolute level of cash returned to shareholders since 2008.

We successfully completed a number

of capital market transactions in 2014 while maintaining our superior credit ratings. We issued an aggregate of $5.7 billion in bonds at favorable interest rates, thereby reducing the weighted-average all-in financing cost of our total debt to 3.2%, down by 0.3 percent-age points versus 2013. The average time to maturity of our long-term debt portfolio was 10.8 years at the end of 2014, in line with the level for the prior year.The Fiscal, Regulatory and

Illicit Trade Environment

Our continued strong pricing was supported

by an excise tax environment that remained

broadly rational. Recent examples of

markets that have improved excise tax

structures and/or implemented multi-year

tax plans include France, Indonesia, Italy,

Russia, Spain and Turkey. One notable

exception, however, is South Korea, where

the government implemented a substantial

excise tax increase at the start of 2015.

While an increase was long overdue, the

most recent one having occurred in 2004,

the magnitude – at 120% – will be disruptive

given its impact on the average retail selling

price. Additionally, there remain a number

of key markets where we see opportunities

for further improvements in fiscal structures,

including the reduction of the tax-yield gap

between manufactured cigarettes and fine-

cut products.

Following its adoption last year, we

sought – and were granted – the right to

challenge the European Union Tobacco

Products Directive (TPD) before the Court

of Justice of the European Union (CJEU).

The challenge covers whether the TPD

complies with EU treaties in three specific

areas – Legal Competence, Fundamental

Rights and Delegated Acts – and we

expect the CJEU to issue a judgment within

two years. In parallel, we are working to

ensure that EU Member States transpose

the TPD into national legislation without

additional unreasonable restrictions and with

appropriate regulatory frameworks for RRPs.

Plain packaging continued to loom as a

longer-term regulatory challenge in certain

markets in 2014. The U.K. and Ireland,

for example, separately notified the EU of

their intent to introduce plain packaging

legislation. After a mandatory “standstill”

period following the submission of detailed

opinions by other EU Member States, the

U.K. Government announced in January this

year its plan to move forward. In Ireland, a

Plain Packaging Bill has progressed through

Parliament, but has not yet come into effect.

While we maintain an ongoing dialogue

with regulators and hope that reason will

ultimately prevail, we will consider all

available options, including litigation, to

ensure the protection of our intellectual

property.

With respect to our Bilateral Investment

Treaty claim concerning plain packaging

in Australia, the arbitration continues to

proceed in accordance with the Tribunal’s

timeline. Last month the Tribunal held a

hearing on purely jurisdictional matters and

should issue its ruling in the fall. Separately,

the World Trade Organization (WTO) has

stated that a decision on the consolidated

challenge filed against Australia by various

members will be announced in the second

part of 2016 at the earliest. A potential

appellate process would continue into 2017

before final WTO resolution.

Illicit trade continued to be a challenge for

both the industry and governments in 2014,

though we saw signs of overall stabilization

driven by recent progress in a number of

markets. We remain committed to combatting

illicit trade through our dedicated organiza-

tion, our renewed agreement with Interpol

and increased collaboration with authorities

around the world. Our efforts address both

adult smokers and the entire supply chain of

illicit manufacturers. Australia, the Philippines

and Turkey remain priority markets.

Last year we saw initial progress on the

RRP regulatory and fiscal fronts, notably in the

U.S., the EU Region and Japan, and engaged

in ongoing dialogue on RRPs with a wide

range of regulators and other stakeholders.

In particular, we advocated for an appropriate

fiscal landscape for iQOS and witnessed

positive developments in Japan and Italy,

where Marlboro HeatSticks are subject to

lower effective excise tax rates compared

to cigarettes. While regulatory and fiscal

discussions advanced at a pace slower than

we would have liked, we believe that these

topics will become increasingly important to –

and thus progressively receive attention from

– governments around the world.

Business Development and

Manufacturing Footprint Optimization

We successfully completed a number of

value-enhancing business development

initiatives in 2014, most notably the change

to our new business structure in Egypt and

the acquisition of Nicocigs Limited, a leading

U.K.-based e-vapor company. In addition,

our 2013 business development initiatives in

both Algeria and Russia met or exceeded our

strategic and financial objectives for 2014.

Last year we undertook a major

optimization of our global manufacturing

footprint, notably in Australia and the

Netherlands. While the decision to close

facilities was not easy – particularly given the

impact on our employees – we believe that

these changes put PMI on a more efficient

operational footing. All closures proceeded

seamlessly, and we were able to reallocate

volumes in a very efficient manner with

virtually no operational disruptions.

2

3

Research & Development

We opened a groundbreaking new chapter in the history of our company in 2014 with the commercialization of iQOS in Nagoya, Japan, and Milan, Italy. We believe that this innovation and, more broadly, our entire RRP portfolio represent our greatest growth opportunity and a potential public health breakthrough. Although it is still too early for a com-prehensive quantitative assessment, we are pleased that both adult smoker and trade responses have been very positive and that the performance of iQOS has met or exceed-ed key indicators that we established. These include promising preliminary awareness and market penetration rates in both pilot cities. Furthermore, the iQOS flagship store concept, as currently tested in Nagoya, is a success, our logistics chain is working well, and both product defect and return rates are much lower than we had anticipated. Given the positive initial performance of iQOS and Marlboro HeatSticks , we are confirming our plans to commence national expansion in Japan and Italy, as well as pilot or national launches in additional markets, later this year. These launches will be supported by new HeatStick variants and a new release of iQOS that incorporates feedback from the pilot markets and features a variety of colors and textures to broaden the product’s appeal amongst adult smokers. In 2014, we inaugurated our pilot RRP production facility in Bologna, Italy, and broke ground on our first manufacturing facility for larger scale production of RRPs, which is expected to be fully operational by the end of 2016. We also advanced, as planned, with our iQOS clinical trials and made progress on our other RRP platforms. Platform 2, our second heat-not-burn product, remains on schedule for pilot launches in 2016, while we continue progressing with the development and preclinical testing of Platform 3, a nicotine-containing aerosol product based on acquired technology. Additionally, we will launch Solaris , a Platform 4 e-vapor product, this month in Spain. Thanks to the strategic framework agreement we established with Altria Group, Inc. in December of 2013, this product features Nu Mark’s FourDraw T echnology used in its line-up of MarkTen e-vapor

products in the U.S. Finally, we continue the development of the next generation of Platform 4 e-vapor product offerings.

Environment, Health & Safety

We made further progress on the Environ- ment, Health & Safety front in 2014. As

discussed in more detail later in this Report, we were again recognized by CDP (formerly the Carbon Disclosure Project) for our success in reducing the environmental footprint of our supply chain. We were also recognized for our Agricultural Labor Practices program that, alongside our

partnership with the non-profit organization Verité, was featured by the United States Department of Labor as an example of “leadership and good practice” in the fight against child labor. Further, in October 2014 we received the International Fleet Safety Award from Fleet Europe, which recognized the continued progress that we have made in the important area of vehicle safety through a focus on safety leadership, training and local programs.

The Organization

In October of last year, we updated our

existing Code of Conduct which we now call our Guidebook for Success. The guidebook highlights the fundamental beliefs and

attributes that unite and guide us in pursuing the company’s goals in a manner consistent with laws and regulations. We believe it is clearer, more accessible to employees and better suits our organization and the unique challenges that we face as part of the tobacco industry. Enhancing organizational effectiveness remained a top priority in 2014. During last year’s management meeting, we outlined the key areas that will be instrumental for our continued success and shared PMI’s seven new key behaviors – learning, collaboration, entrepreneurship, agility, communication, impact and leading – which will be at the center of everything we do. We also continued to invest in the very important area of persity within the organization, which is critical to improving the long-term effectiveness of our company, and introduced an updated employee performance appraisal tool that greatly

streamlines the existing process. Finally, we believe that the relationship between management and the Board con-tinues to be governed by total transparency and a very positive atmosphere. We wel-comed three new Board members – Werner Geissler, Jun Makihara and Frederik Paulsen – and believe that their perse backgrounds and considerable experience will further bolster an already formidable Board.The Year Ahead

We continue to rise as an organization to overcome the significant challenges that we face and are doing our utmost to mitigate their impact while maintaining an uncompromising commitment to invest for the long term. The key strategic initiatives that we undertook last year will enable us to grow our business in the years to come and therefore continue to generously reward our shareholders. We remain steadfast in our aim to return around 100% of our free cash flow to our shareholders. Given the recent extreme currency volatility, we are focused on managing our cash flow prudently and on maintaining our financial flexibility for business development opportunities. As we look to the future, we are very excited by the potential for our RRP portfolio to spark a transformation in the tobacco industry as we know it and for our great company to lead the way forward. None of our achievements would have been possible without the unfailing commitment, determination and creativity of our wonderful employees. We thank them wholeheartedly on your and our behalf.

André Calantzopoulos, Chief Executive Officer

Louis C. Camilleri, Chairman of the Board March 6, 2015

“We believe that this innovation and, more

broadly, our entire RRP portfolio represent our greatest growth opportunity and a potential public health breakthrough.”

See Page 6 for Full Story.

Germany

Germany

a variety of refreshing taste propositions.

Poland

France

Portugal

Saudi Arabia

In addition to the roll-out of this next evolution of its architecture, bring to market relevant product innovations with attributes that address a variety of adult smoker preferences. Here are a few examples:

n With Marlboro in select European markets, adult smokers can create their own taste sensation thanks to Iceball? and Mintball? capsules in the cigarette filter that provide a variety of menthol-based flavors.

n “Smart Seal” technology, which maintains product freshness with a novel, state-of-the-art re-seal mechanism, has been a key driver of Marlboro the Arab Gulf.

Innovative.

and capsule variants has been a significant contributor to the brand’s growth.

Philippines

Slovakia

Lithuania

Chesterfield performed tremendously well

last year, growing in all four of our Regions,

notably in the EU Region where it jumped

from being the sixth-most-popular cigarette

brand in 2013 to the third-most-popular

in 2014.

Launched in five new markets in

2014 – namely, Costa Rica, El Salvador,

Guatemala, Macedonia and the Philippines

– Chesterfield was present in more than 60 Italy

Heritage. Prestige.

In November 2014, PMI officially launched

, the first of its heat-not-burn

disciplines, including material sciences, consumer electronics, clinical science and Milan: Tobacconist Store A New Era in Tobacco

7Empowering Women in Italy PMI partnered with Nocetum Social Cooperative in Milan to provide the training and skills that help empower immigrant women in vulnerable situations to become self-sufficient. Whether it be by assisting to set up a catering business or teaching sustainable farming techniques, Nocetum helps to significantly improve the lives of these women and their families. Increasing Economic Opportunity in Malawi

PMI’s long-standing partner, Total Land Care , worked with tobacco-growing communities to develop solutions that address poverty, such as providing access to clean water and building schools. “Before the school was built, children were sitting under trees or in classrooms with no desks or chairs. During the rains, many children would not come to school. The new school facilities have attracted

teachers for the increased number of pupils.”

– Peter Kalusa, Head Teacher, Primary School, Malawi.

World-Class Performance 2014 was a year of impressive environmental recognition for PMI. In June, we ranked in the top ten percent of the largest global com p anies assessed in the Newsweek Green Rankings and placed 29th among the 500 largest U.S. companies assessed. In October, CDP (formerly the Carbon Disclosure Project) confirmed us as a Climate Performance Leader in a measure considered one of the most credible and respected in the area of Environmental Sustainability benchmarking. This recognition represents our highest accolade to date and makes us one of only three S&P 500 Consumer Staples companies, and the only tobacco company, to qualify for CDP’s “A list.” This tremendous achievement highlights the passion and dedication of our employees. For the first time, this year’s CDP report also correlates a corporation’s environmental rating with its economic performance. PMI scored at the top of the premier quartile of

S&P 500 companies in this ranking.

We disclose our carbon emissions through CDP , but a summary can be found at dd90333cf90f76c660371a11/carbon. We will continue to manage our environmental performance responsibly and reduce the impact that we have on the environment. We are developing long-term carbon emission reduction initiatives that are scientifically consistent with limiting global warming to ensure that we play our part in

addressing this key societal challenge.PMI is committed to addressing critical societal issues around the world. Our programs primarily focus on access to education, providing economic opportunity, empowering women and disaster relief. We have an almost 60-year history of supporting communities where we do business, and our commitment has never been stronger than it is today. In 2014, we gave a total of approximately

$31 million to more than 210 non-profit organizations around the world.

Contributions

Environmental Sustainability

Italy Malawi

*Against our 2010 baseline, per million units of product equivalent. Energy reduction is focused

on fossil fuels.

8

A. Calantzopoulos D. Azinovic

B. Bonvin P . Brunel F. de Wilde M. Firestone M. King A. Kurali

P . Luongo A. Marques J. Mortensen J. Olczak M. Pellegrini J. Pollès J. Whitson M. Zielinski

Committees

Presiding Director, Lucio A. Noto 1

Member of Audit Committee, Lucio A. Noto , Chair 2

Member of Compensation and

Leadership Development Committee, Stephen M. Wolf , Chair 3

Member of Finance Committee, Jennifer Li , Chair 4

Member of Nominating and

Corporate Governance Committee, Kalpana Morparia , Chair 5

Member of Product Innovation and Regulatory Affairs Committee, Harold Brown , Chair

Harold Brown 2,3,5

Counselor, Center for Strategic and International Studies Director since 2008André Calantzopoulos Chief Executive Officer Director since 2013Louis C. Camilleri Chairman of the Board Director since 2008 Werner Geissler 2,3,5 Operating Partner, Advent International Director since 2015 Jennifer Li 1,3,4

Chief Financial Officer, Baidu Inc.

Director since 2010

Jun Makihara 1,3,5

Chairman, Neoteny Co., Ltd. Director since 2014

Sergio Marchionne 1,2,3,4Chief Executive Officer,

Fiat Chrysler Automobiles N.V.Chairman, CNH Industrial N.V. Director since 2008

Kalpana Morparia 3,4,5Chief Executive Officer,

J.P . Morgan India Private Ltd. Director since 2011

Lucio A. Noto 1,3,4Managing Partner,

Midstream Partners, LLC Director since 2008 Frederik Paulsen 3,5 Chairman, Ferring Group Director since 2014

Robert B. Polet 2,3,4,5

Chairman, Safilo Group S.p.A. Director since 2011

Carlos Slim Helú 3,5

Chairman, Carso Infraestructura y Construcción, S.A.B. de C.V. Director since 2008

Stephen M. Wolf 1,2,3,4,5

Managing Partner, Alpilles, LLC Director since 2008

André Calantzopoulos Chief Executive Officer Drago Azinovic President,

European Union Region Bertrand Bonvin

Senior Vice President,Research & Development Patrick Brunel

Senior Vice President and Chief Information Officer

Frederic de Wilde Senior Vice President, Marketing & Sales Marc S. Firestone Senior Vice President and General Counsel Martin King

President, Latin America & Canada Region Andreas Kurali Vice President and Controller

Peter Luongo Vice President,

Treasury & Planning Antonio Marques Senior Vice President, Operations

James R. Mortensen Senior Vice President, Human Resources Jacek Olczak

Chief Financial Officer

Matteo Pellegrini President, Asia Region

Jeanne Pollès

Senior Vice President, Corporate Affairs Jerry Whitson

Deputy General Counsel and Corporate Secretary Miroslaw Zielinski

President, Eastern Europe, Middle East & Africa Region and PMI Duty Free

J. Li

J. Makihara

S. Marchionne

K. Morparia

H. Brown A. Calantzopoulos L.C. Camilleri W. Geissler

L.A. Noto F. Paulsen R.B. Polet C. Slim Helú

S.M. Wolf

Board of Directors

Company Management

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-33708

PHILIP MORRIS INTERNATIONAL INC.

(Exact name of registrant as specified in its charter)

Virginia13-3435103

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

120 Park Avenue, New York, New York10017 (Address of principal executive offices)(Zip Code)

917-663-2000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

5.875% Notes due 2015 New York Stock Exchange

2.500% Notes due 2016 New York Stock Exchange

1.625% Notes due 2017 New York Stock Exchange

1.125% Notes due 2017 New York Stock Exchange

1.250% Notes due 2017 New York Stock Exchange

5.650% Notes due 2018 New York Stock Exchange

1.875% Notes due 2019 New York Stock Exchange

2.125% Notes due 2019 New York Stock Exchange

1.750% Notes due 2020 New York Stock Exchange

4.500% Notes due 2020 New York Stock Exchange

1.875% Notes due 2021 New York Stock Exchange

4.125% Notes due 2021 New York Stock Exchange

2.900% Notes due 2021 New York Stock Exchange

2.500% Notes due 2022 New York Stock Exchange

2.625% Notes due 2023 New York Stock Exchange

3.600% Notes due 2023 New York Stock Exchange

2.875% Notes due 2024 New York Stock Exchange

3.250% Notes due 2024 New York Stock Exchange

2.750% Notes due 2025 New York Stock Exchange

2.875% Notes due 2026 New York Stock Exchange

6.375% Notes due 2038 New York Stock Exchange 4.375% Notes due 2041 New York Stock Exchange 4.500% Notes due 2042 New York Stock Exchange 3.875% Notes due 2042 New York Stock Exchange 4.125% Notes due 2043 New York Stock Exchange 4.875% Notes due 2043 New York Stock Exchange 4.250% Notes due 2044

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes

No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes

No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes

No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter

period that the registrant was required to submit and post such files). Yes No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this

Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange dd90333cf90f76c660371a11rge accelerated filer

Accelerated filer

Non-accelerated filer Smaller reporting company

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes

No

As o f J une 30, 2014, t he a ggregate m arket v alue o f t he r egistrant’s c ommon s tock h eld b y n on-affiliates o f t he r egistrant w as a pproximately $132 billion based on the closing sale price of the common stock as reported on the New York Stock Exchange.

Class Outstanding at January 30, 2015Common Stock, no par value

1,546,930,958 shares

DOCUMENTS INCORPORATED BY REFERENCE

Document

Parts Into Which Incorporated

Portions of the registrant’s definitive proxy statement for use in connection with its annual

meeting of shareholders to be held on May 6, 2015, to be filed with the Securities and Exchange Commission (“SEC”) on or about March 26, 2015.

Part III

TABLE OF CONTENTS

Page

Item 1. Item 1A. Item 1B.Item 2. Item 3. Item 4.

Item 5.Item 6. Item 7.Item 7A.Item 8. Item 9.Item 9A. Item 9B.

Item 10. Item 11. Item 12.Item 13. Item 14.Item 15.

In this report, “PMI,” “we,” “us” and “our” refers to Philip Morris International Inc. and its subsidiaries.

PART I Business 1Risk Factors

7Unresolved Staff Comments 11Properties 11Legal Proceedings 12Mine Safety Disclosures

20

PART II Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 20Selected Financial Data

23Management’s Discussion and Analysis of Financial Condition and Results of Operations

24Quantitative and Qualitative Disclosures About Market Risk 58Financial Statements and Supplementary Data

59Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

113Controls and Procedures 113Other Information

113

PART III Directors, Executive Officers and Corporate Governance 113Executive Compensation

114Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

114Certain Relationships and Related Transactions, and Director Independence 114Principal Accounting Fees and Services

115

PART IV Exhibits and Financial Statement Schedules

115Signatures

120

PART I

Item 1. Business.

(a) General Development of Business

General

Philip Morris International Inc. is a Virginia holding company incorporated in 1987. Our subsidiaries and affiliates and their licensees are engaged in the manufacture and sale of cigarettes, other tobacco products and other nicotine-containing products in markets outside of the United States of America. Our products are sold in more than 180 markets and, in many of these markets, they hold the number one or number two market share position. We have a wide range of premium, mid-price and low-price brands. Our portfolio comprises both international and local brands.

Our portfolio of international and local brands is led by Marlboro, the world’s best-selling international cigarette, which accounted for approximately 33% of our total 2014 shipment volume. Marlboro is complemented in the premium-price category by Merit, Parliament and Virginia Slims. Our leading mid-price brands are L&M and Chesterfield. Other leading international brands include Bond Street, Lark, Muratti, Next, Philip Morris and Red & White.

We also own a number of important local cigarette brands, such as Sampoerna, Dji Sam Soe and U Mild in Indonesia, Fortune, Champion and Hope in the Philippines, Diana in Italy, Optima and Apollo-Soyuz in Russia, Morven Gold in Pakistan, Boston in Colombia, Belmont, Canadian Classics and Number 7 in Canada, Best and Classic in Serbia, f6 in Germany, Delicados in Mexico, Assos in Greece and Petra in the Czech Republic and Slovakia. While there are a number of markets where local brands remain important, international brands are expanding their share in numerous markets. With international brands contributing approximately 72% of our shipment volume in 2014, we are well positioned to continue to benefit from this trend.

Separation from Altria Group, Inc.

We were a wholly owned subsidiary of Altria Group, Inc. ("Altria") until the distribution of all of our shares owned by Altria (the “Spin-off”) was made on March 28, 2008 (the "Distribution Date").

Acquisitions and Other Business Arrangements

We enhanced our business with the following transactions:

In June 2014, we acquired 100% of Nicocigs Limited, a leading U.K.-based e-vapor company, for the final purchase price of $103 million, net of cash acquired, with additional contingent payments of up to $77 million, primarily relating to performance targets over a three-year period. As of December 31, 2014, the additional contingent payments were projected to be up to $62 million over the remaining two-year period. For additional information, see Note 16. Fair Value Measurements to our consolidated financial statements in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K ("Item 8").

In the fourth quarter of 2013, as part of our initiative to enhance profitability and growth in North African and Middle Eastern markets, we decided to restructure our business in Egypt. The new business model entails a new contract manufacturing agreement with our long-standing, s trategic b usiness p artner, E astern C ompany S.A.E., t he c reation o f a n ew P MI a ffiliate i n E gypt a nd a n ew d istribution a greement with Trans Business for Trading and Distribution LLC. To accomplish this restructuring and to ensure a smooth transition to the new model, we recorded, in the fourth quarter of 2013, a charge to our 2013 full-year reported diluted EPS of approximately $0.10 to reflect the discontinuation of existing contractual arrangements.

On December 20, 2013, we established a strategic framework with Altria under which Altria will make available its e-cigarette products exclusively to us for commercialization outside the United States, and we will make available two of our candidate reduced-risk tobacco products exclusively to Altria for commercialization in the United States. The agreements also provide for cooperation on the scientific assessment of these products and for the sharing of improvements to the existing generation of reduced-risk products.

On December 12, 2013, we acquired from Megapolis Investment BV a 20% equity interest in Megapolis Distribution BV, the holding company of CJSC TK Megapolis ("Megapolis"), PMI's distributor in Russia. The purchase price of $760 million excludes an additional payment of up to $100 million, which is contingent on Megapolis's operational performance over the four fiscal years following the closing of the transaction.

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On September 30, 2013, we acquired a 49% equity interest in United Arab Emirates-based Arab Investors-TA (FZC) ("AITA") for approximately $625 million. As a result of this transaction, we hold an approximate 25% economic interest in Société des Tabacs Algéro-Emiratie ("STAEM"), an Algerian joint venture which is owned 51% by AITA and 49% by the Algerian state-owned enterprise Société Nationale des Tabacs et Allumettes SpA. STAEM manufactures and distributes under license some of PMI's brands.

In September 2013, Grupo Carso, S.A.B. de C.V. ("Grupo Carso") sold to us its remaining 20% interest in our Mexican tobacco business for $703 million. As a result, we own 100% of our Mexican tobacco business. A director of PMI has an affiliation with Grupo Carso. The final purchase price is subject to a potential adjustment based on the actual performance of the Mexican tobacco business over the three-year period ending two fiscal years after the closing of the purchase.

During 2012, we did not engage in any businesses development transactions.

Source of Funds — Dividends

We are a legal entity separate and distinct from our direct and indirect subsidiaries. Accordingly, our right, and thus the right of our creditors and stockholders, to participate in any distribution of the assets or earnings of any subsidiary is subject to the prior rights of creditors of such subsidiary, except to the extent that claims of our company itself as a creditor may be recognized. As a holding company, our principal sources of funds, including funds to make payment on our debt securities, are from the receipt of pidends and repayment of debt from our subsidiaries. Our principal wholly owned and majority-owned subsidiaries currently are not limited by long-term debt or other agreements in their ability to pay cash pidends or to make other distributions with respect to their common stock.

(b) Financial Information About Segments

We pide our markets into four geographic regions, which constitute our segments for financial reporting purposes: ? The European Union (“EU”) Region is headquartered in Lausanne, Switzerland, and covers all the EU countries except for Slovenia, Bulgaria, Croatia and Romania, and also comprises Switzerland, Norway and Iceland, which are linked to the EU through trade agreements;

? The Eastern Europe, Middle East & Africa (“EEMA”) Region is also headquartered in Lausanne and includes Eastern Europe, the Balkans (including Slovenia, Bulgaria, Croatia and Romania), Turkey, the Middle East and Africa and our international duty free business;

? The Asia Region is headquartered in Hong Kong and covers all other Asian markets as well as Australia, New Zealand and the Pacific Islands; and

? The Latin America & Canada Region is headquartered in New York and covers the South American continent, Central America, Mexico, the Caribbean and Canada.

Net revenues and operating companies income* (together with a reconciliation to operating income) attributable to each segment for each of the last three years are set forth in Note 12. Segment Reporting to the consolidated financial statements in Item 8. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K ("Item 7") for a discussion of our operating results by business segment.

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The relative percentages of operating companies income attributable to each reportable segment were as follows:

Asia26.433.6 36.7

*Our management evaluates segment performance and allocates resources based on operating companies income, which we define as operating income, excluding general corporate expenses and amortization of intangibles, plus equity (income)/loss in unconsolidated subsidiaries, net. The accounting policies of the segments are the same as those described in Note 2. Summary of Significant Accounting Policies to the consolidated financial statements in Item 8.

We use the term net revenues to refer to our operating revenues from the sale of our products, net of sales and promotion incentives. Our net revenues and operating income are affected by various factors, including the volume of products we sell, the price of our products, changes in currency exchange rates and the mix of products we sell. Mix is a term used to refer to the proportionate value of premium-price brands to mid-price or low-price brands in any given market (product mix). Mix can also refer to the proportion of shipment volume in more profitable markets versus shipment volume in less profitable markets (geographic mix). We often collect excise taxes from our customers and then remit them to local governments, and, in those circumstances, we include excise taxes in our net revenues and excise taxes on products. Our cost of sales consists principally of tobacco leaf, non-tobacco raw materials, labor and manufacturing costs.

Our marketing, administration and research costs include the costs of marketing and selling our products, other costs generally not related to t he m anufacture o f o ur p roducts (including g eneral c orporate e xpenses), a nd c osts i ncurred t o d evelop n ew p roducts. T he m ost s ignificant components o f o ur m arketing, a dministration a nd r esearch c osts a re m arketing a nd s ales e xpenses a nd g eneral a nd a dministrative e xpenses.

(c) Narrative Description of Business

Our subsidiaries and affiliates and their licensees are engaged in the manufacture, market and sale of cigarettes, other tobacco products and other nicotine-containing products in markets outside the United States of America.

Our total cigarette shipments decreased by 2.8% in 2014 to 856.0 billion units. We estimate that international cigarette market shipments were approximately 5.5 trillion units in 2014, a 0.9% decrease over 2013. We estimate that our reported share of the international cigarette market (which is defined as worldwide cigarette volume, excluding the United States of America) was approximately 15.6% in 2014, 15.7% in 2013 and 16.4% in 2012. Excluding the People’s Republic of China (“PRC”), we estimate that our reported share of the international cigarette market was approximately 28.6%, 28.3%, and 29.0% in 2014, 2013 and 2012, respectively.

Shipments of our principal cigarette brand, Marlboro, decreased by 2.8% in 2014 and represented approximately 9.4% of the international cigarette market, excluding the PRC, in 2014, 9.3% in 2013 and 9.4% in 2012.

We have a cigarette market share of at least 15% and, in a number of instances, substantially more than 15%, in 103 markets, including Algeria, A rgentina, A ustralia, A ustria, B elgium, B razil, C anada, C olombia, t he C zech R epublic, E gypt, F inland, F rance, G ermany, G reece, Hungary, Indonesia, Italy, Japan, Kazakhstan, Korea, Mexico, the Netherlands, the Philippines, Poland, Portugal, Romania, Russia, Saudi Arabia, Serbia, Singapore, Spain, Sweden, Switzerland, Thailand, Turkey and Ukraine.

References to total international cigarette market, total cigarette market, total market and market shares in this Form 10-K reflect our best estimates based on a number of internal and external sources.

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Consumer Focused Marketing & Sales

In 2014, w e c ontinued t o d eploy o ur n ew s trategic f ramework t hat c ombines o ur m arketing a nd s ales e xpertise w ith o ur i n-depth k nowledge of various sales territories. This framework allows us not only to engage more effectively with our adult smokers but also to enhance the success of our direct and indirect trade partners. The main benefits are:

? Improved effectiveness of direct adult smoker engagement activities;

? More effective communication with our retailers about our brands;

? Increased speed, efficiency and widespread availability of our products; and

? Distribution and sales strategies tailored to the inpidual characteristics of each market (namely, the needs and capabilities of r etailers, t he w holesale i nfrastructure, d istributors' n etworks, o ur c ompetitive p osition, o perating c osts a nd t he r egulatory

framework).

The four main types of distribution that we use globally, often simultaneously in a given market, are:

? Direct Sales and Distribution, where we have set up our own distribution directly to retailers;

? Distribution through single independent distributors who are responsible for distribution in a single market;

? Exclusive Zonified Distribution, where distributors are assigned an exclusive territory within a market to enable them to obtain a suitable return on their investment; and

? Distribution through national or regional wholesalers that then supply the retail trade.

In many markets we also directly supply key accounts, including gas stations, retail chains and supermarkets.

Our distribution and sales systems are supported by sales forces that total approximately 20,700 employees worldwide. Our sales forces are well trained and recognized by trade surveys for their professionalism.

Our products are marketed and promoted through various media and channels, including, where permitted by law, point of sale communications, brand events, access-restricted Web sites, print and direct communication to verified adult smokers. Our direct communication w ith v erified a dult s mokers u tilizes m ail, e-mail a nd o ther e lectronic c ommunication t ools. P romotional a ctivities i nclude, where permitted by law, competitions, invitations to events, interactive programs, consumer premiums and price promotions. To support advertising and promotional activities in the markets, we have a dedicated consumer engagement group that develops innovative engagement tools for adult smokers based on the latest technologies and adult smoker trends.

Competition

We are subject to highly competitive conditions in all aspects of our business. We compete primarily on the basis of product quality, brand recognition, brand loyalty, taste, innovation, packaging, service, marketing, advertising and retail price. Our competitors include three l arge i nternational t obacco c ompanies a nd s everal r egional a nd l ocal t obacco c ompanies a nd, i n s ome i nstances, s tate-owned t obacco enterprises, principally in Algeria, Egypt, the PRC, Taiwan, Thailand and Vietnam. Industry consolidation and privatizations of state-owned enterprises have led to an overall increase in competitive pressures. Some competitors have different profit and volume objectives, and some international competitors are susceptible to changes in different currency exchange rates. We compete predominantly with American blend cigarette brands, such as Marlboro, L&M, Parliament and Chesterfield, which are the most popular across many of our markets. We seek to compete in all profitable retail price categories, although our brand portfolio is weighted towards the premium-price category.

Procurement and Raw Materials

We purchase tobacco leaf of various types, grades and styles throughout the world, the majority through independent tobacco suppliers. We also contract directly with farmers in several countries, including Argentina, Brazil, Colombia, the Dominican Republic, Ecuador, Italy, Kazakhstan, Mexico, Pakistan, the Philippines and Poland. Direct sourcing from farmers represents approximately 35% of PMI’s global leaf requirements. The largest supplies of tobacco leaf are sourced from Brazil, the United States, Indonesia (mostly for domestic use in kretek products), India, China, Turkey, Greece, Argentina, Mozambique, Tanzania and Malawi.

We believe that there is an adequate supply of tobacco leaf in the world markets to satisfy our current and anticipated production requirements.

In a ddition t o t obacco l eaf, w e p urchase a w ide v ariety o f d irect m aterials f rom a t otal o f a pproximately 450 s uppliers. O ur t op t en s uppliers of direct materials combined represent approximately 57% of our total direct materials purchases. The three most significant direct materials that we purchase are printed paper board used in packaging, acetate tow used in filter making and fine paper used in cigarette manufacturing. In addition, the adequate supply and procurement of cloves are of particular importance to our Indonesian business.

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Business Environment

Information called for by this Item is hereby incorporated by reference to the paragraphs in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Operating Results by Business Segment—Business Environment.

Other Matters

Customers

None of our business segments is dependent upon a single customer or a few customers, the loss of which would have a material adverse effect on our consolidated results of operations.

Employees

At December 31, 2014, we employed approximately 82,500 people worldwide, including employees under temporary contracts and hourly paid part-time staff. Our businesses are subject to a number of laws and regulations relating to our relationship with our employees. Generally, these laws and regulations are specific to the location of each business. In addition, in accordance with European Union requirements, we have established a European Works Council composed of management and elected members of our workforce. We believe that our relations with our employees and their representative organizations are excellent.

Executive Officers of the Registrant

The disclosure regarding executive officers is set forth under the heading “Executive Officers as of February 20, 2015” in Item 10. Directors, Executive Officers and Corporate Governance of this Annual Report on Form 10-K ("Item 10").

Research and Development

Reduced-Risk Products. One of our strategic priorities is to develop, assess and commercialize a portfolio of innovative products with the potential to reduce inpidual risk and population harm in comparison to smoking combustible cigarettes. We refer to these as reduced-risk products, or RRPs. The use of this term applies to tobacco-containing products and other nicotine-containing products that have the potential to reduce inpidual risk and population harm in comparison to smoking combustible cigarettes. Except for iQOS, which was launched for pilots in Nagoya (Japan) and Milan (Italy), our RRPs are in various stages of development. We are conducting extensive and r igorous s cientific s tudies t o d etermine w hether w e c an s upport c laims f or s uch p roducts o f r educed e xposure t o h armful a nd p otentially harmful constituents in smoke, and ultimately claims of reduced disease risk, when compared to smoking combustible cigarettes. Before making any such claims, we will need to rigorously evaluate the full set of data from the relevant scientific studies to determine whether they substantiate reduced risk. Any such claims may also be subject to government review and approval, as is the case in the U.S. today. We draw upon a team of world-class scientists from a broad spectrum of scientific disciplines, whose efforts are guided by the following three key objectives:

? to develop RRPs that provide adult smokers the taste, sensory experience, nicotine delivery profile and ritual characteristics that are similar to those currently provided by combustible cigarettes;

? to substantiate the reduction of risk for the inpidual adult smoker and the reduction of harm to the population as a whole, based on robust scientific evidence derived from well-established assessment processes; and

? to advocate for the development of science-based regulatory frameworks for the approval and commercialization of RRPs, including the communication of substantiated health benefits to adult smokers.

In addition to iQOS, we are developing three RRP platforms that are in various stages of commercialization readiness. We are commercializing an e-vapor product under the Nicocigs brand name in the U.K., are also developing other potential platforms and are working on developing the next generation of e-vapor technology.

Further information about our RRPs is set forth in Item 7, Business Environment - Taxes, Legislation, Regulation and Other Matters Regarding the Manufacture, Marketing, Sale and Use of Tobacco Products - Reduced-Risk Products.

Cigarette Products. We conduct research to support and reinforce our combustible cigarette product business. We seek to be at the forefront of innovation for product enhancements and launches of innovative new products. We have also increased support for the

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combustible cigarette business because compliance with applicable laws and regulations is requiring additional capacity for analysis and testing.

Finally, working through biotechnology partners, we conduct research and development on technology platforms that can potentially lead to the development of alternative uses of tobacco, such as for the production of therapeutic molecules.

The research and development expense for the years ended December 31, 2014, 2013 and 2012, is set forth in Item 8, Note 14. Additional Information to the consolidated financial statements.

Intellectual Property

Our trademarks are valuable assets, and their protection and reputation are essential to us. We own the trademark rights to all of our principal brands, including Marlboro, or have the right to use them in all countries where we use them.

In a ddition, w e h ave m ore t han 5,200 g ranted p atents w orldwide a nd a pproximately 4,400 p ending p atent a pplications. O ur p atent p ortfolio, as a whole, is material to our business. However, no one patent, or group of related patents, is material to us. We also have registered industrial designs and proprietary secrets, technology, know-how, processes and other intellectual property rights that are not registered. Effective J anuary 1, 2008, P MI e ntered i nto a n I ntellectual P roperty A greement w ith P hilip M orris U SA I nc. (“PM U SA”). T he I ntellectual Property A greement g overns t he o wnership o f i ntellectual p roperty b etween P MI a nd P M U SA. O wnership o f t he j ointly f unded i ntellectual property has been allocated as follows:

? PMI owns all rights to the jointly funded intellectual property outside the United States, its territories and possessions; and ? PM USA owns all rights to the jointly funded intellectual property in the United States, its territories and possessions. Ownership of intellectual property related to patent applications and resulting patents based solely on the jointly funded intellectual property, regardless of when filed or issued, will be exclusive to PM USA in the United States, its territories and possessions and exclusive to PMI everywhere else.

The Intellectual Property Agreement contains provisions concerning intellectual property that is independently developed by us or PM USA following the Distribution Date. For ten years following the Distribution Date, independently developed intellectual property may be subject to rights under certain circumstances that would allow either us or PM USA a priority position to obtain the rights to the new intellectual property from the other party, with the price and other commercial terms to be negotiated.

In the event of a dispute between us and PM USA under the Intellectual Property Agreement, we have agreed with PM USA to submit the dispute first to negotiation between our and PM USA’s senior executives and then to binding arbitration.

Seasonality

Our business segments are not significantly affected by seasonality, although in certain markets cigarette consumption trends rise during the summer months due to longer daylight time and tourism.

Environmental Regulation

We are subject to applicable international, national and local environmental laws and regulations in the countries in which we do business. We have specific programs across our business units designed to meet applicable environmental compliance requirements and reduce our carbon footprint and wastage as well as water and energy consumption. We report externally about our climate change mitigation strategy, together with associated targets and results in reducing our carbon footprint, through CDP (formerly, the Carbon Disclosure Project), the leading international non-governmental organization assessing the work of thousands of companies worldwide in the area of climate change. We have developed and implemented a consistent environmental and occupational health, safety and security management system ("EHSS"), which involves policies, standard practices and procedures at all our manufacturing centers. We also conduct regular safety assessments at our offices, warehouses and car fleet organizations. Furthermore, we have engaged an external certification body to validate the effectiveness of our EHSS management system at our manufacturing centers around the world, in accordance with internationally recognized standards for safety and environmental management. The environmental performance data we report externally is also verified by a qualified third party. Our subsidiaries expect to continue to make investments in order to drive improved performance and maintain compliance with environmental laws and regulations. We assess and report the compliance status of all our legal entities on a regular basis. Based on the management and controls we have in place and our review of climate change

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risks (both physical and regulatory), environmental expenditures have not had, and are not expected to have, a material adverse effect on our consolidated results of operations, capital expenditures, financial position, earnings or competitive position.

(d) Financial Information About Geographic Areas

The amounts of net revenues and long-lived assets attributable to each of our geographic segments for each of the last three fiscal years are set forth in Item 8, Note 12. Segment Reporting to the consolidated financial statements.

(e) Available Information

We are required to file with the SEC annual, quarterly and current reports, proxy statements and other information required by the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Investors may read and copy any document that we file, including this Annual Report on Form 10-K, at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Investors may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet Web site at dd90333cf90f76c660371a11 that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, from which investors can electronically access our SEC filings.

We make available free of charge on, or through, our Web site at dd90333cf90f76c660371a11 our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Investors can access our filings with the SEC by visiting dd90333cf90f76c660371a11.

The information on our Web site is not, and shall not be deemed to be, a part of this report or incorporated into any other filings we make with the SEC.

Item 1A.Risk Factors.

The following risk factors should be read carefully in connection with evaluating our business and the forward-looking statements contained in this Annual Report on Form 10-K. Any of the following risks could materially adversely affect our business, our operating results, our financial condition and the actual outcome of matters as to which forward-looking statements are made in this Annual Report on Form 10-K.

Forward-Looking and Cautionary Statements

We may from time to time make written or oral forward-looking statements, including statements contained in this Annual Report on Form 10-K and other filings with the SEC, in reports to stockholders and in press releases and investor webcasts. You can identify these forward-looking statements by use of words such as "strategy," "expects," "continues," "plans," "anticipates," "believes," "will," "estimates," "intends," "projects," "goals," "targets" and other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts.

We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and inaccurate assumptions. Should known or unknown risks or u ncertainties m aterialize, o r s hould u nderlying a ssumptions p rove i naccurate, a ctual r esults c ould v ary m aterially f rom t hose a nticipated, estimated or projected. Investors should bear this in mind as they consider forward-looking statements and whether to invest in or remain invested in our securities. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we are identifying important factors that, inpidually or in the aggregate, could cause actual results and outcomes to differ materially from those contained in any forward-looking statements made by us; any such statement is qualified by reference to the following cautionary statements. We elaborate on these and other risks we face throughout this document, particularly in Item 7, Business Environment. You should understand that it is not possible to predict or identify all risk factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties. We do not undertake to update any forward-looking statement that we may make from time to time, except in the normal course of our public disclosure obligations.

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Risks Related to Our Business and Industry

Cigarettes are subject to substantial taxes. Significant increases in cigarette-related taxes have been proposed or enacted and are likely to continue to be proposed or enacted in numerous jurisdictions. These tax increases may disproportionately affect our profitability and make us less competitive versus certain of our competitors.

Tax regimes, including excise taxes, sales taxes and import duties, can disproportionately affect the retail price of manufactured cigarettes versus other tobacco products, or disproportionately affect the relative retail price of our manufactured cigarette brands versus cigarette brands manufactured by certain of our competitors. Because our portfolio is weighted toward the premium-price manufactured cigarette category, tax regimes based on sales price can place us at a competitive disadvantage in certain markets. As a result, our volume and profitability may be adversely affected in these markets.

Increases i n c igarette t axes a re e xpected t o c ontinue t o h ave a n a dverse i mpact o n o ur s ales o f c igarettes, d ue t o r esulting l ower c onsumption levels, a shift in sales from manufactured cigarettes to other tobacco products and from the premium-price to the mid-price or low-price cigarette categories, where we may be under-represented, from local sales to legal cross-border purchases of lower price products, or to

illicit products such as contraband, counterfeit and "illicit whites."

Our business faces significant governmental action aimed at increasing regulatory requirements with the goal of reducing or preventing the use of tobacco products.

Governmental actions, combined with the diminishing social acceptance of smoking and private actions to restrict smoking, have resulted in reduced industry volume in many of our markets, and we expect that such factors will continue to reduce consumption levels and will increase down-trading and the risk of counterfeiting, contraband, "illicit whites" and legal cross-border purchases. Significant regulatory developments will take place over the next few years in most of our markets, driven principally by the World Health Organization's Framework C onvention o n T obacco C ontrol (“FCTC”). T he F CTC i s t he f irst i nternational p ublic h ealth t reaty o n t obacco, a nd i ts o bjective is to establish a global agenda for tobacco regulation. The FCTC has led to increased efforts by tobacco control advocates and public health organizations to reduce the palatability and attractiveness of tobacco products to adult smokers. Regulatory initiatives that have been proposed, introduced or enacted include:

?

restrictions on or licensing of outlets permitted to sell cigarettes;?

the levying of substantial and increasing tax and duty charges;?

restrictions or bans on advertising, marketing and sponsorship;?

the display of larger health warnings, graphic health warnings and other labeling requirements;?

restrictions on packaging design, including the use of colors, and plain packaging;? restrictions on packaging and cigarette formats and dimensions;

? restrictions or bans on the display of tobacco product packaging at the point of sale and restrictions or bans on cigarette vending

machines;

? requirements regarding testing, disclosure and performance standards for tar, nicotine, carbon monoxide and other smoke

constituents;

?

disclosure, restrictions, or bans of tobacco product ingredients;?

increased restrictions on smoking in public and work places and, in some instances, in private places and outdoors;?

elimination of duty free sales and duty free allowances for travelers; and ? encouraging litigation against tobacco companies.

Our operating income could be significantly affected by regulatory initiatives resulting in a significant decrease in demand for our brands, in particular requirements that lead to a commoditization of tobacco products, as well as any significant increase in the cost of complying

with new regulatory requirements.

Litigation related to tobacco use and exposure to environmental tobacco smoke could substantially reduce our profitability and could severely impair our liquidity.

There is litigation related to tobacco products pending in certain jurisdictions. Damages claimed in some tobacco-related litigation are significant and, in certain cases in Brazil, Canada and Nigeria, range into the billions of U.S. dollars. We anticipate that new cases will continue to be filed. The FCTC encourages litigation against tobacco product manufacturers. It is possible that our consolidated results

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