Philip Morris International Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; unaudited U.S. GAAP results. Comparisons are to the corresponding 2019 periods. PMI sells cigarettes and nicotine products primarily outside the United States and is investing in reduced-risk products (RRPs), including IQOS.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net revenues | $7.446B | $7.642B | $21.250B | $22.092B |
| Operating income | $3.243B | $2.788B | $8.763B | $8.025B |
| Net earnings attributable to PMI | $2.307B | $1.896B | $6.080B | $5.569B |
| Diluted EPS | $1.48 | $1.22 | $3.90 | $3.57 |
| Net cash from operating activities | Not separately provided for the quarter | $6.650B | $6.766B |
- Margins: Q3 gross margin was approximately 67.5% versus 65.9%; operating margin was 43.6% versus 36.5%. For the nine months, gross margin was 67.1% versus 65.0%; operating margin was 41.2% versus 36.3%.
- Q3 comparison: Net revenues declined 2.6% reported and 1.5% excluding unfavorable currency. Operating income rose 16.3% reported and 20.9% excluding currency; PMI-attributable earnings increased 21.7% and diluted EPS rose 21.3%.
- Nine-month comparison: Net revenues declined 3.8% reported and 1.7% excluding unfavorable currency. Operating income increased 9.2% reported and 14.5% excluding currency; PMI-attributable earnings and diluted EPS each rose 9.2%.
- Product mix and volumes: Nine-month RRP net revenues grew 20.6% to $4.890B, while combustible net revenues fell 9.3% to $16.360B. Q3 RRP net revenues rose 28.6% to $1.730B, while combustible revenue declined 9.2%. Cigarette shipments fell 10.9% for the nine months and 9.8% in Q3; heated tobacco unit shipments rose 27.9% and 18.7%, respectively. Total shipment volume declined 8.0% and 7.6%.
- Liquidity and debt at September 30: Cash and cash equivalents were $4.821B, down from $6.861B at year-end 2019. Total debt was approximately $29.5B versus $31.0B at year-end; long-term debt included $1.992B current and $27.346B noncurrent. PMI had $7.5B in committed revolving credit facilities, fully available, and no commercial paper outstanding. Its revolving-credit covenant ratio was 12.3x against a 3.5x minimum.
- Cash uses: Nine-month investing cash outflow was $568M, including $462M capital expenditures; financing cash outflow was $8.031B, including $5.485B in dividends paid and $3.999B of long-term debt repayments. Cash, cash equivalents and restricted cash ended at $4.827B.
Material changes and unusual items
- Reported operating-income growth benefited from comparison with substantial 2019 charges: a $374M Russia excise/VAT audit charge, a $239M RBH deconsolidation loss, a $194M Canadian tobacco-litigation charge and $65M of impairment/exit costs. Q3 2019 included the Russia charge and $22M of impairment/exit costs. Excluding comparable listed charges and currency, management reported operating-income growth of 4.1% for the nine months and 5.8% for Q3.
- 2020 included $71M of nine-month asset impairment and exit costs for organizational restructuring, and a $78M pre-tax fair-value loss on equity securities ($62M after tax). Currency reduced nine-month diluted EPS by $0.28 and Q3 EPS by $0.09.
- Regional performance was uneven. EU and East Asia and Australia operating income improved, while Middle East and Africa was pressured by steep declines in duty-free sales and pandemic-related disruption. South and Southeast Asia faced weaker volume, particularly in Indonesia and the Philippines.
Outlook, commentary and risks
- Management estimated a full-year 2020 effective tax rate of 22%–23%, excluding specified discrete tax items, and expected approximately $0.6B in 2020 capital expenditures. The filing does not provide a clear full-year revenue, earnings or EPS guidance figure.
- Management said most factories were operating, key inputs and inventories were adequate, and it did not anticipate product shortages in major markets. It cautioned that pandemic uncertainty remained significant; travel restrictions sharply reduced duty-free demand, and some cigarette facilities representing less than 5% of global cigarette capacity were temporarily affected.
- Management cited pricing, productivity and cost efficiencies as supports to underlying operating results, offset by lower cigarette volume and unfavorable product/geographic mix. In September, the quarterly dividend was raised 2.6% to $1.20 per share, or an annualized $4.80. No 2020 share-repurchase program was planned.
- Key risks include tobacco regulation and excise taxes, declining cigarette consumption and consumer down-trading, illicit trade, foreign-exchange volatility, COVID-19 impacts, and the uncertain adoption and regulatory treatment of RRPs. The FDA authorized exposure-modification marketing for a version of IQOS in the U.S.; PMI stated that this is not a risk-modification order and requires continued compliance and renewal after four years.
- Contingencies include extensive tobacco litigation. Canadian tobacco cases were stayed through March 31, 2021 under RBH’s CCAA proceedings; management said resolution could materially affect the fair value of PMI’s RBH investment. Other matters include Thailand customs cases, South Korean tax appeals, Saudi distributor customs assessments with an 80% guarantee commitment, and BAT patent proceedings targeting IQOS commercialization in several markets. A new guarantee related to investee Medicago’s Canadian COVID-19 vaccine project was described as not expected to have a material impact at inception.
Investor verification priorities
- Reconcile reported earnings growth with 2019 one-time charges, currency effects, and 2020 discrete tax benefits and fair-value losses.
- Assess whether RRP revenue and heated-tobacco shipment growth can offset continued cigarette-volume declines, including market-share trends and pandemic-related channel effects.
- Review cash generation, the impact of receivables factoring on operating cash flow, debt maturities, dividend commitments and available credit capacity.
- Track the duration and economic effects of COVID-19 restrictions, especially on duty-free sales, consumer demand and supply chains.
- Monitor Canadian CCAA and tobacco litigation developments, tax/customs disputes, and patent cases that could constrain IQOS sales or create material costs.