Philip Morris International Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. Unaudited U.S. GAAP statements. PMI sells cigarettes and smoke-free nicotine products primarily outside the United States, with U.S. IQOS sales under license through Altria.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net revenues | $7.594B | $6.651B | $15.179B | $13.804B |
| Operating income | $3.129B | $2.731B | $6.573B | $5.520B |
| Net earnings attributable to PMI | $2.172B | $1.947B | $4.590B | $3.773B |
| Diluted EPS | $1.39 | $1.25 | $2.93 | $2.42 |
| Operating cash flow | Six-month figure: $4.065B | Prior six-month figure: $3.036B |
- Growth and margins: Q2 net revenues rose 14.2% (7.9% excluding favorable currency); operating income rose 14.6% (9.9% excluding currency); PMI-attributable earnings rose 11.6%; diluted EPS rose 11.2%. Six-month net revenues increased 10.0% (5.3% excluding currency), operating income 19.1% (13.4% excluding currency), and diluted EPS 21.1%. Calculated operating margin was 41.2% versus 41.1% in Q2 and 43.3% versus 40.0% for the six-month period.
- Product mix and volumes: RRP net revenues were $2.276B in Q2, up 41.7%, and $4.398B for six months, up 39.1%. Combustible net revenues increased 5.4% in Q2 and 1.3% for six months. Heated tobacco unit shipments rose about 30% in both periods; cigarette shipments rose 3.2% in Q2 but declined 2.2% for six months. Six-month total cigarette and heated-tobacco shipments increased 1.1%.
- Cash, debt and liquidity: Cash and cash equivalents were $4.915B at June 30, down from $7.280B at year-end 2020. Total debt was $29.2B, versus $31.5B at year-end; long-term debt was $27.414B and short-term borrowings $136M. PMI had $7.25B in committed revolving facilities, fully undrawn, and no commercial paper outstanding at quarter-end. Six-month capital expenditures were $307M; dividends paid were $3.752B.
- Margins and cash flow: Gross margin was approximately 69.0% in Q2 versus 67.2% a year earlier, and 69.5% for six months versus 66.8%. Operating cash flow improved by about $1.0B year over year, reflecting higher earnings and favorable currency, partly offset by working-capital needs and higher pension contributions. Cash used in financing was $6.123B for six months, principally reflecting dividends and debt repayments.
Material changes versus prior period
- Results benefited from continued IQOS/HTU growth, pricing, productivity and a recovery in combustible-product volumes from COVID-affected Q2 2020 comparisons. Management reported six-month net revenue growth excluding currency of 5.3%, or 7.1% excluding the Saudi Arabia assessment.
- Q2 included a $246M pre-tax charge, recorded as a reduction in revenue, following unfavorable Saudi Arabia customs-assessment appeal decisions. Management said the charge reduced six-month diluted EPS by $0.14; it had no net operating-cash-flow impact for the six months because the accrued liability offset the earnings effect.
- Reported international market share (excluding China and the U.S.) declined 0.8 percentage points in both the quarter and six-month period. Cigarette share fell, while heated-tobacco share increased.
- Asset impairment and exit costs were $79M in Q2 and $127M for six months, compared with $71M in each comparable 2020 period. Costs principally related to organizational restructuring; the six-month amount also included South Korea distribution-contract termination costs.
Outlook, commentary, risks and unusual items
- Management outlook: PMI estimated a full-year 2021 effective tax rate of around 22%, excluding discrete tax events, and expected capital expenditures of approximately $0.8B. It said liquidity, operating cash generation, debt markets and committed facilities were expected to meet liquidity requirements. COVID-19 restrictions had not materially disrupted product availability at the reporting date, but uncertainty and renewed restrictions remained.
- Investment and capital returns: The board authorized a share repurchase program of up to $7B, targeting $5B–$7B over three years starting in Q3 2021. PMI agreed to acquire Fertin Pharma for enterprise value of about $820M, subject to approvals, with a Q4 2021 closing expected. It also agreed to acquire Vectura for enterprise value of about $1.2B; closing was expected in H2 2021, subject to shareholder and regulatory approvals. PMI earmarked $1.5B of existing cash for Vectura. PMI expected each acquisition to have an immaterial effect on 2021 results.
- Key risks: Regulatory, tax and excise changes; declining cigarette consumption and illicit trade; COVID-related demand, supply and travel disruption; foreign-exchange volatility; RRP adoption, regulatory approval and scientific-claims risks; device supply constraints, including a manageable semiconductor shortage; and litigation and government investigations. PMI noted that RRPs are not risk-free and that their business performance is less predictable than cigarettes.
- Contingencies: The filing describes material tobacco litigation and ongoing Canadian restructuring proceedings involving deconsolidated subsidiary RBH, with a stay then extended through September 30, 2021. It also reports pending BAT patent cases involving IQOS/Platform 1 in multiple countries. In the U.S. ITC matter, an administrative law judge recommended an exclusion order after finding infringement of two asserted patents; the ITC’s final determination was expected in September 2021. PMI said it would defend the cases vigorously.
- Other unusual items: A $27M net-cash acquisition of Danish oral-tobacco business AG Snus closed in May, with up to $10M in contingent payments. PMI recorded $101M of six-month organizational-design charges, with approximately 950 positions affected cumulatively since the program began; future cash payments for exit costs incurred to date were expected to be substantially paid by end-2022.
Investor verification priorities
- Track RRP revenue growth, HTU shipment trends, device availability and whether gains translate into durable margins and market share.
- Assess the recurring versus one-off components of earnings growth, especially currency, the Saudi Arabia assessment, restructuring costs and COVID-related comparisons.
- Review cash conversion and working-capital movements, including the impact of receivables sales; $5.5B of receivables were sold during the six-month period.
- Monitor debt, dividends, the planned buyback and cash usage for Fertin and Vectura, including acquisition approvals, funding and integration risks.
- Follow developments in tobacco litigation, Saudi customs assessments, tax examinations and the IQOS patent proceedings, including potential effects on product commercialization.