PM

Philip Morris International Inc. - Q1 2009 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended March 31, 2009. Philip Morris International Inc. (PMI) is a holding company engaged in the manufacture and sale of cigarettes and other tobacco products in markets outside the United States. The company operates in four geographic segments: European Union, Eastern Europe, Middle East and Africa (EEMA), Asia, and Latin America & Canada. The company spun off from Altria Group, Inc. in March 2008.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net revenues decreased 7.4% ($1.1 billion) primarily due to unfavorable currency impacts ($697 million excluding excise taxes) and lower volume/mix ($125 million), partially offset by net price increases ($358 million) and acquisitions ($140 million).
• Profitability: Operating income decreased 8.1% ($204 million). The decline was driven by unfavorable currency ($399 million), lower volume/mix ($109 million), and higher marketing costs. These were partially offset by price increases and lower asset impairment charges.
• Volume: Total cigarette shipment volume was essentially flat at 203.4 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 2.0 billion notes and CHF 500 million bonds in March 2009 to fund general corporate purposes and share repurchases.
• Share Repurchases: PMI repurchased 36.7 million shares for $1.3 billion during the quarter as part of a $13.0 billion two-year program.

Guidance, Outlook, and Risks

• 2009 Guidance: On April 23, 2009, PMI reaffirmed its full-year 2009 diluted EPS forecast of $2.85 to $3.00. Excluding currency, diluted EPS is projected to increase by 10%-14%.
• Management Commentary: Management noted that the unfavorable currency impact was due to the strengthening of the U.S. dollar against the Euro, Australian dollar, and various emerging market currencies (e.g., Indonesian rupiah, Mexican peso, Russian ruble). Operational improvements were seen in Asia and EEMA due to pricing and volume/mix, while the European Union faced volume declines.
• Acquisitions: PMI completed the acquisition of Rothmans Inc. in Canada (contributing $52 million to operating income in Q1) and purchased the Petterøes tobacco business in February 2009.
• Risks and Contingencies:
  • Litigation: Significant tobacco-related litigation remains pending in Brazil, Israel, Nigeria, and Canada, with damages claimed ranging into billions of dollars. Management believes it is not probable that a loss has been incurred in any pending case but notes the uncertainty.
  • Regulation: The company faces increasing regulatory pressure globally, including the WHO Framework Convention on Tobacco Control (FCTC), potential bans on descriptors (e.g., "lights"), plain packaging proposals, and increased excise taxes.
  • Governmental Investigations: An investigation in Thailand alleges underpayment of customs duties and excise taxes of approximately $2 billion.

Key Facts for Investor Verification

• Verify the impact of the strengthening U.S. dollar on future earnings, as currency headwinds significantly reduced Q1 results.
• Monitor the status of major litigation in Brazil (ADESF and Public Prosecutor cases) and Nigeria, where potential liabilities are substantial.
• Track the integration and performance of the Rothmans acquisition in Canada and the Petterøes business in Scandinavia.
• Assess the effectiveness of the $13.0 billion share repurchase program in offsetting earnings dilution and supporting the stock price.
• Review the company's ability to maintain pricing power in the face of rising excise taxes and potential regulatory restrictions on marketing and packaging.