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PM Is Increasing Prices in Russia due to the Weakening Ruble

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Eastern Europe, the Middle East, and Africa in 4Q15

Philip Morris International’s (PM) 4Q15 revenue for Eastern Europe, the Middle East, and Africa (or EEMA) fell 21.8% to $1.7 billion compared to $2.2 billion in 4Q14.

The fall was primarily due to an unfavorable currency impact of $0.4 billion. However, excluding the negative impact of currencies, net revenue for the EEMA region rose 0.4% in 4Q15.

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Reasons for the rise

The region’s increase in revenue on a constant-currency basis was primarily due to favorable pricing of $0.1 billion, driven by Russia, Turkey, and the Ukraine. The shipment volume of L&M cigarettes rose 3.3 points to 13.0% in North Africa in 4Q15.

Operating income

The region’s reported operating income fell by 22% to $0.7 billion in 4Q15. Excluding foreign currency of $0.1 billion, its operating income fell by 7.5%. The fall was due to unfavorable volume and mix, higher costs, and increased investments related to reduced-risk product iQOS in Russia. Cigarette industry volume fell by 8.4% in Russia in 4Q15.

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Performance of peers in Russia

Due to the weakening of the Russian ruble, British American Tobacco (BTI) saw lower profits in Russia. However, Imperial Tobacco Group’s (ITYBY) Davidoff brand maintained its cigarette share in West Russia despite challenging economic conditions.

Japan Tobacco’s (JAPAF) (JAPAY) Global Flagship Brand market share grew 23.8%, led by Winston’s 15.2% share and LD’s 6.1% share in Russia in 2Q15.[1. Quarter ended June 30, 2015]

Increasing prices

In January 2016, the Russian government implemented an excise tax increase, resulting in an average tax pass-on of ~10 Russian rubles per pack or 14% on an industry-weighted-average basis. In anticipation, PM increased its retail (XRT) selling price across a majority of its portfolio by five rubles per pack in November 2015 and a further five rubles per pack in January 2016.

PM has exposure to the iShares Core High Dividend ETF (HDV), with a total weight of 4.7% in its portfolio.[2. Updated as of February 5, 2016]

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