01—Abstract
Summary
Summary of the 10-Q filed October 24, 2019. Cited figures are marked; the original filing is the authoritative source.
Philip Morris International (PM) reported a slight decrease in net revenues for the first nine months of 2019, down 0.2% to $22.1 billiona, while net revenues for the third quarter increased by 1.8% to $7.6 billion.
This performance was impacted by unfavorable currency movements, significant charges related to a Russia excise and VAT audit, asset impairments, and the deconsolidation of its Canadian subsidiary, RBH, which collectively led to a notable decline in diluted earnings per share (EPS) for both periods. Despite these headwinds, the company saw strong growth in Reduced-Risk Products (RRPs), with net revenues up 36.5%b year-to-date, driven by strong performance in heated tobacco units, particularly in the European Union and East Asia & Australia. Operationally, excluding these significant charges and currency impacts, the company demonstrated underlying growth, driven by favorable pricing and RRP volume/mix across key segments.
The company continues to invest in its RRP portfolio, aiming to transition smokers to less harmful alternatives, with IQOS authorization from the FDA in the U.S. being a key development. Management expects continued investment in RRPs to moderate over time, with an expectation that these products will drive future growth.
02—Key points
Key Highlights
- Net revenues slightly decreased by 0.2% year-to-date but increased by 1.8% for the third quarter, reflecting mixed performance across regions and currency impacts.
- Reduced-Risk Products (RRPs) revenue surged by 36.5% year-to-date, indicating strong consumer adoption and a successful transition strategy.
- Diluted EPS saw a significant decline of 7.3% year-to-date and 15.3% for the third quarter, primarily due to substantial charges including a Russia excise and VAT audit charge ($374 million pre-tax), asset impairments, Canadian tobacco litigation expenses, and the deconsolidation of RBH.
- The company achieved FDA authorization for a version of its Platform 1 (IQOS) product in the United States, a critical step in expanding its reduced-risk product offerings.
- Shipment volumes for heated tobacco units experienced significant growth of 45.7% year-to-date, driven by strong performance in the EU, Eastern Europe, and East Asia & Australia.
- Total combustible product net revenues declined by 5.8% year-to-date, reflecting a continued shift away from traditional cigarettes.
- The company repaid a significant amount of long-term debt, reducing interest expenses and optimizing its capital structure, while maintaining strong liquidity with no outstanding borrowings under its committed credit facilities at the end of the period.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in Q3 FY2019, Philip Morris International Inc. kept $0.25.
- Revenue$7.64B100.0%
- Cost of revenue−$2.60B34.1%
- Gross profit$5.04B65.9%
- Operating costs−$2.25B29.4%
- Operating income$2.79B36.5%
- Interest, other & tax−$892.0M11.7%
- Net income$1.90B24.8%
04—Financials
Financial Highlights
Figures from 10-QQ3 FY2019filed October 24, 2019Financial Statements
Q3 FY2019 against Q3 FY2018
| Line item | Q3 FY2019Q3 FY2018 | Change |
|---|---|---|
| Revenue | $7.64B$7.50B | +1.8% |
| Cost of Revenue | $2.60B$2.62B | −0.5% |
| Gross Profit | $5.04B$4.89B | +3.1% |
| Operating Income | $2.79B$3.16B | −11.7% |
| Net Income | $1.90B$2.25B | −15.6% |
| EPS (Basic) | $1.22$1.44 | −15.3% |
| EPS (Diluted) | $1.22$1.44 | −15.3% |
| Shares Outstanding (Basic) | 1.56B1.55B | +0.1% |
| Shares Outstanding (Diluted) | 1.56B1.55B | +0.1% |
05—Questions
Frequently Asked Questions
What were the primary drivers for the decline in diluted EPS?
The decline in diluted EPS was primarily driven by several significant charges and events. These included a $374 million pre-tax charge related to a Russia excise and VAT audit, $65 million in asset impairment and exit costs, $194 million for Canadian tobacco litigation, and a $239 million loss on the deconsolidation of RBH. Unfavorable currency movements also contributed to the EPS decline.
How is the company performing in its Reduced-Risk Products (RRPs) segment?
The RRP segment showed very strong growth, with net revenues increasing by 36.5% year-to-date and 63.4% for the third quarter. Heated tobacco unit shipment volumes also grew significantly, up 45.7% year-to-date. Key markets like the European Union and East Asia & Australia are leading this growth, indicating successful consumer adoption of these products.
What is the significance of the FDA authorization for the Platform 1 product in the U.S.?
The FDA authorization for a version of the Platform 1 product (IQOS) is a crucial development as it marks the first heat-not-burn product to receive such authorization in the U.S. This opens up a significant new market for PMI's reduced-risk products and is a key step in their strategy to transition smokers to less harmful alternatives.
How are the substantial charges impacting the company's financial health?
While these charges significantly impacted reported earnings, the company's operating cash flow generation remained robust, decreasing only slightly year-to-date. PMI also has strong liquidity, with no outstanding borrowings under its committed credit facilities and significant access to capital markets, indicating financial resilience despite the one-time charges.
06—Continue