Philip Morris International Inc. — Q2 2020 Form 10-Q
Reporting period ended June 30, 2020. Unaudited consolidated results are presented under U.S. GAAP. PMI sells cigarettes and nicotine products primarily outside the United States and is transitioning toward reduced-risk products (RRPs), including IQOS.
Financial performance
Amounts in USD millions except per-share data. Comparisons are with the corresponding 2019 period.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net revenues | 6,651 | 7,699 | 13,804 | 14,450 |
| Gross profit | 4,472 | 5,034 | 9,223 | 9,320 |
| Operating income | 2,731 | 3,187 | 5,520 | 5,237 |
| Net earnings attributable to PMI | 1,947 | 2,319 | 3,773 | 3,673 |
| Diluted EPS | $1.25 | $1.49 | $2.42 | $2.36 |
| Net cash from operating activities | Not separately provided | Not separately provided | 3,036 | 4,683 |
- Q2 net revenues fell 13.6%; operating income fell 14.3%; PMI-attributable earnings fell 16.0%. Six-month net revenues fell 4.5%, while operating income rose 5.4% and PMI-attributable earnings rose 2.7%.
- Calculated gross margin was approximately 67.2% in Q2 (65.4% in 2019) and 66.8% for the six-month period (64.5% in 2019). Operating margin was approximately 41.1% in Q2 (41.4% in 2019) and 40.0% for six months (36.2% in 2019).
- RRP net revenues were $1,606 million in Q2, up 9.5%, and $3,161 million for six months, up 16.7%. Combustible-product net revenues declined 19.1% and 9.4%, respectively.
- Worldwide cigarette shipments decreased 17.6% in Q2 and 11.4% for six months; heated tobacco unit shipments increased 24.3% and 33.4%, respectively. PMI attributed much of the quarter’s deterioration to COVID-19, including reduced travel and duty-free sales, lockdowns, and lower consumption in several markets.
- Six-month operating cash flow was $3,036 million, down from $4,683 million. Management cited pandemic-related inventory build-up and timing of excise-tax payments as key working-capital drivers. Investing cash outflow was $134 million; financing cash outflow was $5,503 million. Capital expenditures were $310 million.
- At June 30, cash and cash equivalents were $4,200 million; total debt was approximately $29.6 billion. Current assets were $17,776 million versus current liabilities of $15,792 million. Stockholders’ deficit was $10,120 million.
Material changes and unusual items
- Q2 revenue excluding unfavorable currency declined 9.5%; six-month revenue excluding currency declined 1.8%. Currency reduced six-month diluted EPS by $0.19 and Q2 diluted EPS by $0.06.
- Six-month operating income excluding currency increased 11.1%, but this comparison benefited from $476 million of 2019 charges related to RBH deconsolidation, Canadian tobacco litigation, and plant closures, compared with $71 million of 2020 restructuring and impairment costs. Excluding these charges and unfavorable currency, management reported operating-income growth of 3.1%.
- PMI recorded $71 million of first-half 2020 restructuring and impairment costs for organizational changes in Switzerland and New York. Approximately 240 positions are expected to be eliminated, relocated, or outsourced; further restructuring costs and pension effects remain uncertain.
- Cash declined from $6,861 million at December 31, 2019 to $4,200 million at June 30, 2020. Six-month dividends paid were $3,658 million; the annualized dividend rate was $4.68 per share. PMI said it did not intend to repurchase shares in 2020.
Outlook, management commentary, and risks
- Management said most manufacturing facilities remained operational, with temporarily affected cigarette facilities representing less than 5% of global cigarette capacity. It reported adequate inventories and liquidity, citing cash, operating cash generation, and access to debt and commercial-paper markets.
- PMI expected 2020 capital expenditures of approximately $0.7 billion, revised from approximately $0.8 billion previously disclosed. It estimated a full-year effective tax rate of 22%–23%, excluding specified discrete tax events. The filing text does not provide clear full-year revenue or EPS guidance.
- At June 30, committed revolving credit facilities totaled $7.5 billion and were fully available. Total debt was approximately $29.6 billion; the company issued $2.25 billion of U.S.-dollar notes in May. The credit-facility leverage covenant was 11.8 to 1.0 versus a 3.5 to 1.0 minimum.
- Material risks include pandemic-driven volume and duty-free declines, currency volatility, supply-chain disruption, reduced ability to convert smokers to RRPs, regulatory restrictions and excise taxes, and intense competition. PMI also identified dependency on limited-source electronic-device components and manufacturers.
- Pending tobacco litigation includes Canadian cases stayed under RBH creditor-protection proceedings, with the stay then extended through September 30, 2020. Management said possible unfavorable outcomes could materially affect results, cash flows, or financial position; it could not estimate losses for many cases. Other exposures include Thai customs cases, Korean tax appeals, a Russian tax assessment, and patent litigation with BAT affiliates concerning Platform 1.
- On July 7, 2020, after quarter-end, the FDA authorized a version of IQOS to be marketed with specified exposure-modification information. The FDA did not grant a risk-modification order; the authorization is subject to requirements and may not be renewed.
Most important facts for investors to verify
- Whether the COVID-related declines in cigarette volumes, duty-free sales, and operating cash flow persisted or reversed in subsequent quarters.
- Whether growth in heated tobacco units and RRPs can offset combustible-product declines and sustain profitability, including in markets with regulatory or commercialization limits.
- Cash conversion and working-capital trends, debt maturities and refinancing needs, and the sustainability of the dividend relative to operating cash flow.
- Developments in Canadian tobacco litigation and RBH’s CCAA process, and any changes to recorded provisions or the value of PMI’s RBH investment.
- Outcomes of significant tax disputes and BAT patent proceedings, and any material effects on cash, operations, or product access.