PMI Revises Full-Year
2019 Reported Diluted EPS Forecast, Reflecting Deconsolidation of
RBH While under CCAA; Forecast Continues to Represent
Currency-Neutral, Like-for-Like Adjusted Diluted EPS Growth of at
Least 8%
Regulatory News:
Today, Philip Morris International Inc. (PMI) was informed by
its Canadian subsidiary, Rothmans, Benson & Hedges Inc. (RBH)
that RBH had obtained an initial order from the Ontario Superior
Court of Justice granting it protection under the Companies’
Creditors Arrangement Act (CCAA). RBH announced that obtaining
creditor protection became necessary following recent developments
in two Class Action proceedings in Québec against RBH, Imperial
Tobacco Canada Limited, and JTI-Macdonald Corp. (see “The Class
Actions & Other Pending Litigation” below for details).
Key Elements and Impact of RBH’s Decision to File for
Creditor Protection
- The initial order includes a
comprehensive stay of all tobacco-related litigation pending in
Canada against RBH and PMI, thus providing an efficient forum for
RBH to seek resolution of all such litigation.
- The CCAA process allows RBH to carry on
its business in the ordinary course with minimal disruption to its
customers, suppliers and employees.
- As a result of the filing, and under
U.S. GAAP, PMI will deconsolidate RBH from its financial
statements, resulting in an estimated one-time non-cash charge of
approximately $0.10 per share, as described below.
- While it remains under creditor
protection, RBH does not anticipate paying dividends. As RBH has
not paid dividends since the trial court’s judgment in May 2015,
the deconsolidation will not have an impact on PMI’s current
annualized dividend rate.
2019 PMI Full-Year Forecast & Assumptions and 2019-2021
Targets
As a result of the deconsolidation of RBH, PMI today revises its
full-year 2019 reported diluted earnings per share forecast to be
at least $4.90 at prevailing exchange rates. This full-year
guidance reflects:
- The current estimated one-time net
impact of the deconsolidation of RBH under U.S. GAAP of
approximately $0.10 per share, to be recorded in the first quarter
of 2019, which is a non-cash item, plus the tobacco
litigation-related charge of approximately $0.09 per share
announced on March 4, 2019; and
- The exclusion of RBH’s previously
anticipated earnings from PMI’s consolidated financial statements
from the date of deconsolidation to December 31, 2019, of
approximately $0.28 per share.
Excluding the above deconsolidation-related items and the
unfavorable impact of currency, at prevailing exchange rates, of
approximately $0.14 per share, this forecast represents a projected
increase of at least 8.0% versus a pro forma adjusted diluted
earnings per share of $4.84 in 2018. The 2018 pro forma adjusted
diluted EPS of $4.84 is calculated as reported diluted EPS of
$5.08, plus tax items of $0.02 per share primarily related to the
implementation of the Tax Cuts and Jobs Act, less approximately
$0.26 of estimated net earnings attributable to RBH from March 22
through December 31, 2018, in order to present a like-for-like
comparison.
Assumptions underlying this forecast, and PMI’s 2019-2021
targets, as communicated by PMI in its earnings release of February
7, 2019, and reiterated at the CAGNY Conference of February 20,
2019, remain unchanged on a like-for-like basis, except for 2019
operating cash flow, which, due to the impact of the
deconsolidation, is now estimated to be approximately $9.5 billion,
subject to year-end working capital requirements.
This forecast excludes the impact of: any future acquisitions;
unanticipated asset impairment and exit cost charges; future
changes in currency exchange rates; further developments related to
the Tax Cuts and Jobs Act; further developments pertaining to the
two Québec Class Action lawsuits and the CCAA protection granted to
RBH; and any unusual events. Factors described in the
Forward-Looking and Cautionary Statements section of this release
represent continuing risks to these projections.
Matters Relating to the CCAA Initial Order and PMI’s
Deconsolidation of RBH
- The Companies’ Creditors Arrangement
Act (CCAA) is a Canadian federal law that permits Canadian
businesses to restructure their affairs while maintaining business
as usual.
- The initial CCAA order authorizes RBH
to pay all expenses incurred in carrying on its business in the
ordinary course after the CCAA filing, including obligations to
employees, vendors, and suppliers.
- While it remains under creditor
protection, RBH does not anticipate paying dividends. As RBH has
not paid dividends since the trial court’s judgment in May 2015,
the deconsolidation will not have an impact on PMI’s current
annualized dividend rate; as always, future dividend increases
remain subject to the discretion of PMI’s Board of Directors.
- Beginning with the first quarter of
2019, PMI’s adjusted diluted EPS and other impacted results will
reflect the deconsolidation of RBH. PMI believes that the adjusted
measures will provide useful insight into underlying business
trends and results, and will provide a more meaningful performance
comparison for the period during which RBH remains under CCAA
protection.
The Class Actions & Other Pending Litigation
On March 1, 2019, the Court of Appeal of Québec in Montreal
issued its judgment in two class action lawsuits against RBH, as
well as Imperial Tobacco Canada Limited, and JTI-Macdonald Corp.
PMI is not a party to the cases.
In 2015, the trial court ruled in favor of plaintiffs and found
that the estimated class members’ damages totaled approximately CAD
15.6 billion including interest. In its decision, the Court of
Appeal largely affirmed the total amount of compensatory and
punitive damages, but reduced the total class member damages due to
an error in the interest calculation to approximately CAD 13.6
billion including interest. The trial court’s order, as upheld by
the Court of Appeal, required the defendants to deposit a portion
of the damages, approximately CAD 1.1 billion, into trust accounts
within 60 days. RBH’s share of the deposit is approximately CAD 257
million. RBH had already deposited CAD 226 million as security with
the Court of Appeal. See PMI’s Form 10-K for the year ended
December 31, 2018 for more information about these legal
proceedings.
On March 4, 2019, as a result of this decision against RBH, PMI
announced that it will incur in its consolidated results a pre-tax
charge of approximately $194 million, representing approximately
$142 million net of tax, in the first quarter of 2019, recorded as
tobacco litigation-related expenses. The charge reflects PMI’s
assessment of the portion of the judgment that it believes is
probable and estimable at this time and corresponds to the trust
account deposit required by the court. PMI will continue to monitor
developments in the CCAA proceedings as there is a significant lack
of clarity with respect to several factors, including the
likelihood of resolving in the CCAA process the underlying
litigation to which RBH is a party, the financial and other
parameters of any resolution of the underlying litigation, and the
length of the CCAA process.
While the trial court found that the ultimate damages
disposition would depend on an individual claims process, the three
defendants in the cases -- RBH, JTI-Macdonald Corp., and Imperial
Tobacco Canada Limited -- are jointly and severally liable for the
compensatory damages to be distributed to eligible class members.
JTI-Macdonald Corp. and Imperial Tobacco Canada Limited were
granted creditor protection under the CCAA in connection with the
class actions, on March 8 and 12, 2019, respectively. Without
creditor protection, RBH could have been required to pay, in
addition to its allocated portion, the portions of the class
actions judgment allocated to JTI-Macdonald Corp. and Imperial
Tobacco Canada Limited.
RBH is also a defendant in litigation brought by the Canadian
Provinces related to the recovery of health care costs. As part of
RBH’s filing for creditor protection, the Ontario Superior Court of
Justice made an initial order staying proceedings, including the
Québec Class Action proceedings and all other tobacco-related
litigation pending in Canada against RBH and PMI, including the
litigation with the Provinces, to provide RBH with the necessary
time to explore a court-supervised resolution of such matters.
The Ontario Superior Court of Justice has scheduled the next
hearing (known as the “comeback hearing”) on RBH’s filing for
creditor protection for April 4-5 at which time the Court will
consider any requests from interested parties, if any, to vary the
terms of the initial order for creditor protection.
Pursuant to the initial order, Ernst & Young Canada Inc. has
been appointed as Monitor in the CCAA proceedings. Information
regarding RBH’s CCAA proceedings, including copies of all court
orders made and the Monitor’s reports, will be available on the
Monitor’s website at: http://www.ey.com/ca/rbh. The information on
this website is not, and shall not be deemed to be, part of this
press release or incorporated into any filings we make with the
SEC.
2018 Key Market Facts: Canada
The total market in Canada, defined as cigarette and heated
tobacco unit volume, was 23.4 billion units, down by 5.1% from 24.6
billion units in 2017. PMI’s total shipments volume, defined as the
combined total of cigarette shipment volume and heated tobacco unit
shipment volume, was 8.9 billion units, down by 4.0% from 9.3
billion units in 2017. PMI’s total market share, based on in-market
sales, was 38.1%, up by 0.8 percentage points from 37.3% in 2017.
Brands sold by RBH include: in the premium segment, Belmont; in the
mid-price segment, Canadian Classics; and, in the low-price
segment, Next. RBH also sells the heated tobacco device, IQOS, and
its heated tobacco consumable HEETS.
Forward-Looking and Cautionary Statements
This press release contains projections of future results and
other forward-looking statements. Achievement of future results is
subject to risks, uncertainties and inaccurate assumptions. In the
event that risks or uncertainties materialize, or underlying
assumptions prove inaccurate, actual results could vary materially
from those contained in such forward-looking statements. Pursuant
to the “safe harbor” provisions of the Private Securities
Litigation Reform Act of 1995, PMI is identifying important factors
that, individually or in the aggregate, could cause actual results
and outcomes to differ materially from those contained in any
forward-looking statements made by PMI.
PMI's business risks include: excise tax increases and
discriminatory tax structures; increasing marketing and regulatory
restrictions that could reduce our competitiveness, eliminate our
ability to communicate with adult consumers, or ban certain of our
products; health concerns relating to the use of tobacco products
and exposure to environmental tobacco smoke; litigation related to
tobacco use; intense competition; the effects of global and
individual country economic, regulatory and political developments,
natural disasters and conflicts; changes in adult smoker behavior;
lost revenues as a result of counterfeiting, contraband and
cross-border purchases; governmental investigations; unfavorable
currency exchange rates and currency devaluations, and limitations
on the ability to repatriate funds; adverse changes in applicable
corporate tax laws; adverse changes in the cost and quality of
tobacco and other agricultural products and raw materials; and the
integrity of its information systems and effectiveness of its data
privacy policies. PMI's future profitability may also be adversely
affected should it be unsuccessful in its attempts to produce and
commercialize reduced-risk products or if regulation or taxation do
not differentiate between such products and cigarettes; if it is
unable to successfully introduce new products, promote brand
equity, enter new markets or improve its margins through increased
prices and productivity gains; if it is unable to expand its brand
portfolio internally or through acquisitions and the development of
strategic business relationships; or if it is unable to attract and
retain the best global talent. Future results are also subject to
the lower predictability of our reduced-risk product category's
performance.
PMI is further subject to other risks detailed from time to time
in its publicly filed documents, including those described under
Item 1A. “Risk Factors” in PMI’s annual report on Form 10-K for the
year ended December 31, 2018. PMI cautions that the foregoing list
of important factors is not a complete discussion of all potential
risks and uncertainties. PMI does not undertake to update any
forward-looking statement that it may make from time to time,
except in the normal course of its public disclosure
obligations.
###
Philip Morris International: Building a Smoke-Free
Future
Philip Morris International (PMI) is leading a transformation in
the tobacco industry to create a smoke-free future and ultimately
replace cigarettes with smoke-free products to the benefit of
adults who would otherwise continue to smoke, society, the company
and its shareholders. PMI is a leading international tobacco
company engaged in the manufacture and sale of cigarettes,
smoke-free products and associated electronic devices and
accessories, and other nicotine-containing products in markets
outside the U.S. PMI is building a future on a new category of
smoke-free products that, while not risk-free, are a much better
choice than continuing to smoke. Through multidisciplinary
capabilities in product development, state-of-the-art facilities
and scientific substantiation, PMI aims to ensure that its
smoke-free products meet adult consumer preferences and rigorous
regulatory requirements. PMI's smoke-free IQOS product portfolio
includes heated tobacco and nicotine-containing vapor products. As
of December 31, 2018, PMI estimates that approximately 6.6 million
adult smokers around the world have already stopped smoking and
switched to PMI’s heated tobacco product, which is currently
available for sale in 44 markets in key cities or nationwide under
the IQOS brand. For more information, please visit www.pmi.com and
www.pmiscience.com.
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