PM

Philip Morris International Inc. - Q2 2009 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended June 30, 2009. Philip Morris International Inc. (PMI) operates as a holding company for subsidiaries engaged in the manufacture and sale of cigarettes and other tobacco products in approximately 160 countries outside the United States. The company is organized into four reportable segments: European Union; Eastern Europe, Middle East and Africa (EEMA); Asia; and Latin America & Canada.

Key Financial Metrics (Six Months Ended June 30, 2009)

Note: Total debt includes short-term borrowings ($399M) and long-term debt ($13,480M) as of June 30, 2009.

Material Changes vs. Prior Period

• Revenue Decline: Net revenues decreased 8.2% year-over-year. Excluding excise taxes, revenues fell 7.1% due to unfavorable currency impacts ($1.9 billion) and lower volume/mix ($266 million), partially offset by net price increases ($907 million) and acquisitions ($323 million).
• Earnings Decline: Net earnings attributable to PMI decreased 10.2%. The decline was driven by lower operating income (impacted by currency and volume) and higher interest expense ($351M vs. $136M in 2008).
• Currency Impact: The strengthening U.S. dollar against the Euro, Indonesian rupiah, Mexican peso, Russian ruble, and Turkish lira resulted in an unfavorable currency impact of $730 million on net earnings for the six-month period.
• Volume Trends: Total cigarette shipment volume was essentially unchanged at 426.5 billion units. Gains in Asia and Latin America & Canada were offset by declines in the European Union and EEMA.
• Debt Levels: Total debt increased significantly due to the issuance of Euro notes ($2.6 billion) and Swiss Franc bonds ($431 million) in March 2009 to repay commercial paper and for general corporate purposes.

Guidance, Outlook, and Unusual Items

• 2009 Guidance Update: On July 23, 2009, PMI raised its full-year 2009 diluted EPS forecast to a range of $3.10 to $3.20, up from the previous $2.85 to $3.00. This guidance includes an unfavorable currency impact of $0.55 per share and excludes the impact of future acquisitions or unusual events.
• Colombian Agreement Charge: In Q2 2009, PMI recorded a pre-tax charge of $135 million ($93 million after-tax) related to an Investment and Cooperation Agreement with the Republic of Colombia to combat illicit trade. This was recorded in the Latin America & Canada segment.
• Acquisitions: PMI announced agreements in July 2009 to acquire Protabaco (Colombia) for $452 million and Swedish Match South Africa for approximately $222 million. Both are expected to be marginally accretive to EPS immediately.
• Share Repurchases: PMI continued its $13.0 billion share repurchase program, buying back 71.4 million shares for $2.7 billion during the first six months of 2009.
• Legal Contingencies: Significant tobacco-related litigation remains pending in Brazil, Canada, Nigeria, and Israel. Management believes it is not probable that a loss has been incurred in any pending tobacco-related case, though outcomes are uncertain.

Investor Verification Checklist

• Currency Sensitivity: Verify the impact of the strengthening U.S. dollar on future earnings, as currency headwinds were a primary driver of the reported decline.
• Colombian Agreement Terms: Review the long-term financial obligations associated with the $200 million, 20-year Colombian Investment and Cooperation Agreement.
• Debt Servicing Capacity: Assess the impact of increased interest expense ($351M for six months) on future cash flows given the higher debt load.
• Regulatory Risks: Monitor developments in the European Union regarding minimum retail selling price laws and the Framework Convention on Tobacco Control (FCTC) guidelines.
• Acquisition Integration: Track the integration and accretion of the Rothmans (Canada) acquisition and the pending Protabaco and Swedish Match South Africa deals.