PM

Philip Morris International Inc. - 10-Q Summary (Q3 2008)

Business Context and Reporting Period

This report covers the quarterly period ended September 30, 2008. 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 markets outside the United States. The company operates in four segments: European Union, Eastern Europe, Middle East and Africa (EEMA), Asia, and Latin America & Canada. This filing follows the company's separation from Altria Group, Inc., which was completed on March 28, 2008.

Key Financial Metrics

Note: Debt increased significantly due to new issuances to fund acquisitions and share repurchases. Net revenues include excise taxes of $29,675 million.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 19.8% year-over-year, driven by favorable currency movements ($4.9 billion impact), net price increases, and acquisitions (Rothmans, Mexico, Pakistan). Excluding excise taxes, revenue grew 15.6%.
• Profitability: Operating income rose 21.5% to $8.3 billion. Net earnings increased 21.2% to $5.6 billion. Diluted EPS grew 21.7%.
• Volume: Total cigarette volume increased 2.4% to 667.0 billion units. Excluding acquisitions, volume grew 0.9%.
• Debt Structure: Total debt rose from $6.3 billion to $11.1 billion. PMI issued $6.0 billion in senior unsecured notes in May 2008 and Euro 1.75 billion in August 2008 to fund operations, the Rothmans acquisition, and share repurchases.
• Share Repurchases: Under a $13.0 billion two-year program initiated in May 2008, PMI repurchased 86.2 million shares for $4.5 billion during the first nine months of 2008.

Guidance, Outlook, and Risks

• Guidance: On October 22, 2008, PMI reaffirmed its forecast for adjusted 2008 full-year diluted EPS in the range of $3.32 to $3.38, representing 19% to 21% growth over a revised pro-forma 2007 base of $2.79.
• Acquisitions: PMI completed the acquisition of Rothmans Inc. (Canada) for approximately $1.8 billion. This acquisition did not significantly impact Q3 results but is expected to contribute to future growth.
• Unusual Items:
  • RBH Legal Settlement: A $124 million after-tax charge was recorded in Q2 2008 related to a settlement with the Government of Canada regarding Rothmans, Benson & Hedges Inc. (RBH).
  • Canada Distribution Charge: A $61 million pre-tax charge was recorded in Q3 2008 related to a previous distribution agreement in Canada.
  • Asset Impairment/Exit Costs: $84 million pre-tax charges were recorded for the nine months ended Sep 30, 2008, primarily for separation programs and facility closures.
• Risks: Key risks include increasing excise taxes, regulatory restrictions (e.g., FCTC, advertising bans, plain packaging), litigation (including health care cost recovery and "lights" descriptor cases), and currency exchange rate fluctuations. The company faces significant litigation in Brazil, Israel, Nigeria, and Canada.

Investor Verification Checklist

• Debt Servicing: Verify the impact of the increased debt load ($11.1 billion) on future interest expenses and liquidity, given the current credit market environment.
• Acquisition Integration: Monitor the integration and financial contribution of the Rothmans acquisition in Canada.
• Regulatory Environment: Track developments in the European Union regarding minimum retail selling price laws and the potential impact of the WHO Framework Convention on Tobacco Control (FCTC) on marketing and packaging.
• Legal Contingencies: Review the status of major pending litigation, particularly the health care cost recovery cases in Canada and Nigeria, and the "lights" descriptor cases in Israel and Italy.
• Currency Exposure: Assess the sensitivity of future earnings to fluctuations in the Euro, Japanese Yen, and Russian Ruble, which significantly impacted Q3 results.