01—Abstract
Summary
Summary of the 10-Q filed April 25, 2019. Cited figures are marked; the original filing is the authoritative source.
Philip Morris International Inc. (PM) reported a decrease in net revenues for the first quarter of 2019, down 2.1% year-over-year to $6.8 billiona.
This decline was primarily attributed to unfavorable currency movements and challenging year-over-year comparisons, though currency-neutral net revenues saw a modest increase of 3.2% driven by favorable pricing. Diluted earnings per share (EPS) also declined by 13.0% to $0.87b, impacted by significant charges including a $194 million expense related to Canadian tobacco litigation and a $239 million loss from the deconsolidation of its Canadian subsidiary, Rothmans, Benson & Hedges Inc. (RBH). Despite these headwinds, the company's reduced-risk products (RRPs) showed strong growth, with net revenues increasing by 10.3% to $1.2 billion, indicating a strategic shift towards smoke-free alternatives.
The company's operational performance was mixed across segments, with notable growth in the EU and South & Southeast Asia, while East Asia & Australia and Latin America & Canada experienced declines. The deconsolidation of RBH resulted in a significant reduction in goodwill and a shift in accounting for the investment to an equity security. Management is focused on navigating these challenges, investing in RRPs, and managing its capital structure effectively.
02—Key points
Key Highlights
- Net revenues decreased by 2.1% to $6.8 billion, impacted by currency headwinds and tough comparisons to the prior year.
- Diluted EPS fell 13.0% to $0.87, significantly affected by Canadian tobacco litigation expenses and the deconsolidation of RBH.
- Reduced-Risk Products (RRPs) revenue grew by 10.3% to $1.2 billion, highlighting the company's strategic focus on smoke-free alternatives.
- The deconsolidation of Rothmans, Benson & Hedges Inc. (RBH) resulted in a $239 million loss and a significant adjustment to goodwill.
- Operating income decreased by 15.5%, with notable challenges in East Asia & Australia and Latin America & Canada segments.
- The European Union segment showed resilience with net revenue growth of 8.6% and operating income growth of 21.1%, driven by RRPs and pricing.
- The company repaid approximately $2.1 billion of long-term debt in Q1 2019 as part of its capital structure optimization efforts.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in Q1 FY2019, Philip Morris International Inc. kept $0.20.
- Revenue$6.75B100.0%
- Cost of revenue−$2.46B36.5%
- Gross profit$4.29B63.5%
- Operating costs−$2.24B33.1%
- Operating income$2.05B30.4%
- Interest, other & tax−$696.0M10.3%
- Net income$1.35B20.1%
04—Financials
Financial Highlights
Figures from 10-QQ1 FY2019filed April 25, 2019Financial Statements
Q1 FY2019 against Q1 FY2018
| Line item | Q1 FY2019Q1 FY2018 | Change |
|---|---|---|
| Revenue | $6.75B$6.90B | −2.1% |
| Cost of Revenue | $2.46B$2.62B | −5.7% |
| Gross Profit | $4.29B$4.28B | +0.1% |
| Operating Income | $2.05B$2.43B | −15.5% |
| Net Income | $1.35B$1.56B | −13.0% |
| EPS (Basic) | $0.87$1.00 | −13.0% |
| EPS (Diluted) | $0.87$1.00 | −13.0% |
| Shares Outstanding (Basic) | 1.55B1.55B | +0.1% |
| Shares Outstanding (Diluted) | 1.56B1.55B | +0.1% |
05—Questions
Frequently Asked Questions
What were the main drivers of the decrease in net revenues?
The decrease in net revenues was primarily driven by unfavorable currency movements and challenging year-over-year comparisons. While currency-neutral net revenues increased by 3.2%, this growth was partially offset by the full impact of highly inflationary accounting in Argentina and a strong IQOS device shipment performance in Japan in the prior year's first quarter.
What is the significance of the Rothmans, Benson & Hedges Inc. (RBH) deconsolidation?
Following a Canadian court judgment, RBH sought protection under the Companies' Creditors Arrangement Act (CCAA). This led PMI to determine it no longer had controlling financial interest, resulting in the deconsolidation of RBH. This event resulted in a $239 million loss on deconsolidation and a removal of RBH's assets and liabilities from PMI's consolidated balance sheet. PMI now accounts for its continuing investment in RBH as an equity security.
How is the company's investment in Reduced-Risk Products (RRPs) performing?
RRPs are a key strategic focus, and their performance remains strong. Net revenues from RRPs increased by 10.3% to $1.2 billion in the first quarter of 2019. The European Union segment, in particular, saw significant growth in RRP revenue, indicating positive consumer adoption and market traction for these smoke-free alternatives.
What is the impact of the Canadian tobacco litigation on the company's financials?
The company recorded a pre-tax charge of $194 million related to a Canadian court judgment. This expense, along with the loss on deconsolidation of RBH, significantly impacted diluted EPS, contributing $0.21 per share negatively in the first quarter.
06—Continue