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Philip Morris International Inc. Reports 2020 First-Quarter Reported Diluted EPS of $1.17 Versus $0.87 in 2019, Reflecting Currency-Neutral Like-for-Like Adjusted Diluted EPS Growth of 30.1%

Withdraws 2020 Full-Year Reported Diluted EPS Forecast Due Solely to Uncertainty Related to COVID-19 Pandemic and Replaces With Quarterly Forecast; Provides 2020 Second-Quarter Reported Diluted EPS Forecast of $1.00 to $1.10, Reflecting Unfavorable Currency Impact of Approximately $0.12

NEW YORK–(BUSINESS WIRE)–Regulatory News:

Philip Morris International Inc. (NYSE:PM) today announces its 2020 first-quarter results. Comparisons presented in this press release on a “like-for-like” basis reflect pro forma 2019 results, which have been adjusted for the deconsolidation of PMI’s Canadian subsidiary, Rothmans, Benson & Hedges, Inc. (RBH), effective March 22, 2019 (the date of deconsolidation). In addition, reflecting the deconsolidation, PMI’s total market share has been restated for previous periods.

2020 FIRST-QUARTER HIGHLIGHTS

  • Reported diluted EPS of $1.17, up by 34.5%; up by 49.4%, excluding currency
  • Adjusted diluted EPS of $1.21, up by 11.0%; up by 30.1% on a like-for-like basis, excluding currency
  • Cigarette and heated tobacco unit shipment volume down by 1.2% (reflecting cigarette shipment volume down by 4.4%, and heated tobacco unit shipment volume up by 45.5% to 16.7 billion units); down by 0.6% on a like-for-like basis
  • Market share of heated tobacco units in IQOS markets, excluding the U.S., up by 1.9 points to 6.6%
  • Net revenues up by 6.0%; up by 10.0% on a like-for-like basis, excluding currency
  • Operating income up by 36.0%; up by 45.6%, excluding currency
  • Adjusted operating income up by 25.5% on a like-for-like basis, excluding currency
  • Adjusted operating income margin up by 5.1 points to 41.3% on a like-for-like basis, excluding currency
  • Total IQOS users at quarter-end estimated at approximately 14.6 million, of which approximately 10.6 million have stopped smoking and switched to IQOS
  • During the quarter, PMI declared a regular quarterly dividend of $1.17 per common share, representing an annualized rate of $4.68
  • On March 30, 2020, PMI submitted a supplemental premarket tobacco product application (PMTA) for the IQOS 3 tobacco heating device with the U.S. Food and Drug Administration

“During these unprecedented times, our main focus is on the health and well-being of our employees and their families, our commercial partners and the broader communities in which we operate,” said André Calantzopoulos, Chief Executive Officer. “To that end, we recently announced a new set of guiding principles to reassure our employees of the company’s commitment to job security. Thanks to our employees’ efforts, our business continuity measures are operating effectively.”

“We started the year with a very strong first quarter, reflecting continued structural growth momentum driven by our smoke-free portfolio and favorable combustible tobacco pricing. We experienced a limited impact on our performance from the early stages of the COVID-19 pandemic, as the onset of government restrictions related to social distancing and travel were generally only implemented in our key markets over the course of March.”

“We expect that the pandemic will have adverse impacts on our full-year 2020 business results. Those already observable relate to a severe reduction of our duty-free sales, slower IQOS user acquisition and delayed minimum price enforcement in Indonesia. We also have to assume that, in certain markets, unemployment and related reductions in disposable income will have a temporary impact on market dynamics or the ability of certain small retailers to operate.”

“The duration of the pandemic, the magnitude of its economic impact during the government restrictions, and the subsequent speed of recovery are today unknown. As we are currently unable to forecast with reasonable accuracy the impact of these factors for the remainder of the year, we are withdrawing our 2020 reported diluted EPS guidance of at least $5.50, originally provided on February 6, 2020, and are instead providing a forecast for the second quarter, for which we have relatively better visibility.”

“Despite near-term uncertainty, our company is resilient with a robust financial position. I remain as confident as ever in the underlying fundamentals of our business over time and expect PMI to emerge from the current challenges even better positioned to deliver on our smoke-free ambition and reward our shareholders.”

COVID-19: Q1 2020 Volume and Financial Impacts on Like-for-Like Change vs. Q1 2019

The estimated impacts of the COVID-19 pandemic on select PMI volume and currency-neutral financial metrics in the first quarter of 2020 are provided in the table below and primarily reflect favorable estimated distributor and trade inventory movements.

 

 

Like-for-Like

Change

Fav./(Unfav.) (1)

 

Est. Impact

Attributable

to COVID-19

PMI Total Shipment Volume

 

(0.6)%

 

+1.7 p.p.

Net Revenues

 

10.0%

 

+2.0 p.p.

Adjusted Operating Income

 

25.5%

 

+5.6 p.p.

Adjusted Diluted EPS

 

30.1%

 

+6.8 p.p.

 

 

 

 

 

(1) Changes for Net Revenues, Adjusted Operating Income and Adjusted Diluted EPS exclude currency.

Explanations and reconciliations to the most directly comparable U.S. GAAP measures are provided in Appendix 2 and Schedule 8.

COVID-19: Business Continuity Update

Since the onset of COVID-19, PMI has undertaken a number of business continuity measures to mitigate potential disruption to its operations and route-to-market in order to preserve the availability of products to its customers and adult consumers.

Currently, PMI has sufficient access to the inputs for its products and is not facing any significant business continuity issues with respect to key suppliers.

The large majority of PMI’s manufacturing facilities globally are currently operational, including all heated tobacco unit factories. Certain cigarette production facilities are temporarily impacted by government-mandated shutdowns or production limitations. Such facilities account for approximately 20% of PMI’s total cigarette production capacity worldwide.

Based on current sales trends, there are adequate inventories of PMI finished goods, on average across all markets, of over two months for heated tobacco units, over three months for tobacco heating devices, and over one and a half months for cigarettes. While government-related restrictions have led to complexities in the company’s route-to-market in select geographies, PMI does not currently anticipate out-of-stock situations in any major operating income markets and generally expects consumers to have adequate access to its products. In certain emerging markets, potential difficulties for some smaller general trade outlets could lead to temporary localized out-of-stock situations given less developed route-to-market infrastructures.

Currently, PMI has ample liquidity resources through cash on hand, the ongoing cash generation of its business, and continued access to commercial paper. As of March 31, 2020, the company had approximately $3.7 billion of cash and cash equivalents, $1.1 billion of commercial paper, with an average term of approximately 30 days, and $7.5 billion in stand-by revolving credit facilities. PMI repaid approximately $3.6 billion in bond maturities during the first quarter and paid approximately $3.6 billion in dividends to shareholders year-to-date April (reflecting dividends declared in the fourth quarter of 2019 and the first quarter of 2020). The company has a well laddered bond portfolio and $0.3 billion of bonds maturing through the end of 2020.

COVID-19: Primary Business Impacts

While the trajectory and duration of the COVID-19 pandemic — and related government restrictions — remain uncertain, PMI anticipates three primary areas of impact from temporary changes to its operating environment:

  • Reduced Duty-Free Sales: Government travel restrictions and related reductions in passenger travel are having a significant impact on the company’s duty-free business, which contributed approximately 4% of total net revenues in 2019 and has relatively high unit margins reflecting its skew to premium brands. As a result of this premium skew, only a portion of the COVID-linked duty-free volume decline is expected to be recovered by the company’s own brand portfolio in local markets, and generally at lower margins.
  • Delayed IQOS User Acquisition: Lock-down measures and other restrictions limit PMI’s ability to engage with adult smokers through the company’s field sales forces, as well as company-owned and third-party retail touch-points, and are only partly mitigated by PMI’s increasing use of digital tools that enable virtual guided trials and other e-commerce activities. Based on trends since lock-down measures were introduced in various markets, the rate of new user acquisition is expected to be, on average, around 50% lower than anticipated for as long as government restrictions are in place, with variation depending on the level of restrictions by market.
  • Indonesia – Minimum Retail Price Delay: The Indonesian government has announced that the enforcement of the new minimum price, originally scheduled for April 1, 2020, is delayed until June due to COVID-19 restrictions. This is expected to impact retail prices at the low end of the market and related price gaps with PMI’s cigarette brands, with a corresponding negative impact on PMI’s cigarette market share and timing of pricing.

PMI also anticipates uncertainty as to the general economic impact of the global pandemic and ultimate shape of the recovery, particularly with respect to unemployment, disposable income, consumption and the extent of any down-trading, as well as retail operations in certain developing markets.

2020 FULL-YEAR FORECAST WITHDRAWAL

Given the inherent uncertainty surrounding the COVID-19 pandemic and the related impact on PMI’s business globally, the company is currently unable to forecast its full-year financial results with reasonable accuracy. PMI is therefore withdrawing its 2020 reported diluted EPS forecast of at least $5.50, originally provided on February 6, 2020.

The limited impact of COVID-19 on the company’s first-quarter 2020 financial results primarily reflected the relatively late-quarter onset of the pandemic in many of PMI’s key markets. However, as an increasing number of governments globally have now enforced self-isolation and lock-down measures — the duration and severity of which remain uncertain — the company anticipates an adverse impact on its full-year results that cannot be accurately quantified at this time.

Based on data from markets to date, particularly those that were impacted by COVID-19-related government restrictions earlier in the year, PMI believes that the adverse impacts on its business from the pandemic are temporary in nature, mainly subject to the duration of government lock-downs and the subsequent timing of recovery.

2020 SECOND-QUARTER FORECAST

Although the company is unable to assess with reasonable accuracy the impact of COVID-19 on its business over the full year, it has relatively better visibility on the second quarter of 2020.

As initially communicated on February 6th, PMI anticipated a soft second quarter in 2020, notably due to an unfavorable prior year comparison, existing dynamics in Indonesia and the phasing of certain costs. The company now anticipates a further adverse impact related to the COVID-19 pandemic, with the largest quarterly impact this year expected in the second quarter.

PMI forecasts second-quarter reported diluted EPS to be in a range of $1.00 to $1.10, including an unfavorable currency impact, at prevailing exchange rates, of approximately $0.12 per share.

This forecast assumes the following estimated unfavorable EPS impacts in the quarter related to COVID-19:

  • 10 cents for distributor and trade inventory movements, mainly related to reversals from the first quarter;
  • 9 cents for lost Duty-Free sales, net of domestic sales recapture, assuming no recovery in global travel in the period;
  • 5 to 15 cents for the impact of the delay in minimum price enforcement in Indonesia and other COVID-19-related factors, including temporary reductions in daily consumption and down-trading in certain developing markets.

The forecast also assumes:

  • a currency-neutral net revenue decline of approximately 8% to 12%, wholly attributable to COVID-19-related factors, including lower IQOS device sales; and
  • no additional disruption in the company’s ability to supply its customers, based on its current operations and inventory levels.

Until PMI is able to estimate the full-year 2020 impact of COVID-19 on its business with greater certainty, the company plans to continue providing quarterly forecasts on a one quarter forward basis, with the exception of the following items forecasted for the full year:

  • capital expenditures of approximately $0.8 billion, compared to approximately $1.0 billion disclosed previously, with the reduction unrelated to reduced-risk product investments; and
  • an effective tax rate of approximately 23%, subject to changes in full-year earnings mix.

The forecasts in this press release exclude the impact of any future acquisitions, unanticipated asset impairment and exit cost charges, future changes in currency exchange rates, further developments related to the U.S. Tax Cuts and Jobs Act, further developments pertaining to the judgment in the two Québec Class Action lawsuits and the Companies’ Creditors Arrangement Act (CCAA) protection granted to RBH, any unusual events, and any COVID-19-related developments different from the assumptions set forth in the company’s forecasts.

Factors described in the Forward-Looking and Cautionary Statements section of this release represent continuing risks to these projections.

Conference Call

A conference call, hosted by André Calantzopoulos, Chief Executive Officer, and Martin King, Chief Financial Officer, will be webcast at 9:00 a.m., Eastern Time, on April 21, 2020. Access is at www.pmi.com/2020Q1earnings. The audio webcast may also be accessed on iOS or Android devices by downloading PMI’s free Investor Relations Mobile Application at www.pmi.com/irapp.

CONSOLIDATED SHIPMENT VOLUME & MARKET SHARE

PMI Shipment Volume by Region

 

First-Quarter

(million units)

 

2020

2019

Change

Cigarettes

 

 

 

 

European Union

 

40,646

39,488

2.9%

Eastern Europe

 

21,419

20,320

5.4%

Middle East & Africa

 

29,996

33,304

(9.9)%

South & Southeast Asia

 

37,595

41,492

(9.4)%

East Asia & Australia

 

12,299

12,113

1.5%

Latin America & Canada

 

15,063

17,580

(14.3)%

Total PMI

 

157,018

164,297

(4.4)%

 

 

 

 

 

Heated Tobacco Units

 

 

 

 

European Union

 

4,661

2,293

+100%

Eastern Europe

 

4,366

1,548

+100%

Middle East & Africa

 

470

754

(37.7)%

South & Southeast Asia

 

—%

East Asia & Australia

 

7,122

6,849

4.0%

Latin America & Canada (1)

 

108

54

+100%

Total PMI

 

16,727

11,498

45.5%

 

 

 

 

 

Cigarettes and Heated Tobacco Units

 

 

 

 

European Union

 

45,307

41,781

8.4%

Eastern Europe

 

25,785

21,868

17.9%

Middle East & Africa

 

30,466

34,058

(10.5)%

South & Southeast Asia

 

37,595

41,492

(9.4)%

East Asia & Australia

 

19,421

18,962

2.4%

Latin America & Canada

 

15,171

17,634

(14.0)%

Total PMI

 

173,745

175,795

(1.2)%

(1) Includes shipments to Altria Group, Inc., commencing in the third quarter of 2019, for sale in the United States under license.

During the quarter, PMI’s total shipment volume decreased by 1.2%, or by 0.6% on a like-for-like basis, principally due to:

  • Middle East & Africa, reflecting lower cigarette shipment volume, notably in Saudi Arabia and Turkey, partly offset by North Africa;
  • South & Southeast Asia, reflecting lower cigarette shipment volume, primarily in Indonesia, Pakistan and the Philippines; and
  • Latin America & Canada, reflecting lower cigarette shipment volume, primarily in Argentina, Canada (mainly due to the impact of the deconsolidation of RBH), and Mexico. On a like-for-like basis, PMI’s total shipment volume in the Region decreased by 8.8%;

partly offset by

  • the EU, reflecting higher heated tobacco unit shipment volume across the Region, particularly in Italy, as well as higher cigarette shipment volume, notably in Germany and Italy;
  • Eastern Europe, reflecting higher heated tobacco unit shipment volume across the Region, notably in Russia and Ukraine, as well as higher cigarette shipment volume, mainly in Russia, partly offset by Ukraine; and
  • East Asia & Australia, mainly reflecting higher cigarette and heated tobacco unit shipment volume in Japan.

First-Quarter Impact of Inventory Movements

On a like-for-like basis, excluding the net favorable impact of estimated distributor inventory movements of approximately 5.4 billion units, PMI’s total in-market sales declined by 3.7%, due to a 6.7% decline in cigarettes, partly offset by a 35.6% increase in heated tobacco units.

The net favorable impact of estimated distributor inventory movements of approximately 5.4 billion units reflected:

  • A net favorable impact of 4.7 billion cigarettes, mainly driven by the EU Region, Japan, North Africa, PMI Duty Free and Russia, partly offset by Saudi Arabia; and
  • A net favorable impact of 0.7 billion heated tobacco units, mainly driven by the EU Region and Russia.

PMI Shipment Volume by Brand

PMI Shipment Volume by Brand

 

First-Quarter

(million units)

 

2020

2019

Change

Cigarettes

 

 

 

 

Marlboro

 

59,245

59,963

(1.2)%

L&M

 

22,641

21,816

3.8%

Chesterfield

 

12,903

14,298

(9.8)%

Philip Morris

 

11,463

10,723

6.9%

Sampoerna A

 

8,548

7,901

8.2%

Parliament

 

7,573

8,830

(14.2)%

Dji Sam Soe

 

6,175

6,651

(7.2)%

Bond Street

 

5,612

5,671

(1.0)%

Lark

 

4,025

5,270

(23.6)%

Fortune

 

2,482

3,045

(18.5)%

Others

 

16,351

20,129

(18.8)%

Total Cigarettes

 

157,018

164,297

(4.4)%

Heated Tobacco Units (1)

 

16,727

11,498

45.5%

Total PMI

 

173,745

175,795

(1.2)%

(1) Includes shipments to Altria Group, Inc., commencing in the third quarter of 2019, for sale in the United States under license.

Note: Sampoerna A includes Sampoerna; Philip Morris includes Philip Morris/Dubliss; and Lark includes Lark Harmony.

PMI’s cigarette shipment volume of the following brands decreased:

  • Marlboro, mainly due to the GCC, Indonesia, Mexico and Turkey, partially offset by Germany, Italy, Japan, North Africa and Russia;
  • Chesterfield, mainly due to Argentina, Russia, Saudi Arabia and Turkey, partly offset by Brazil;
  • Parliament, mainly due to Russia and Turkey;
  • Dji Sam Soe in Indonesia, mainly due to Dji Sam Soe Magnum Mild, reflecting adult smoker down-trading to super-low-price brands due to widened price gaps;
  • Bond Street, mainly due to Ukraine, partly offset by Russia;
  • Lark, mainly due to Japan and Turkey;
  • Fortune in the Philippines, mainly reflecting the impact of the August 2019 price increase, which widened price gaps with competitive brands; and
  • “Others,” notably due to: the impact of the deconsolidation of RBH in Canada; mid-price Sampoerna U in Indonesia and Muratti in Turkey; and low-price Morven in Pakistan.

The increase in PMI’s heated tobacco unit shipment volume was mainly driven by the EU (notably Italy), Eastern Europe (notably Russia and Ukraine) and Japan, partly offset by PMI Duty Free.

PMI’s cigarette shipment volume of the following brands increased:

  • L&M, mainly driven by Mexico and North Africa (primarily Egypt), partly offset by Saudi Arabia;
  • Philip Morris, primarily driven by Japan and Russia, partly offset by Argentina; and
  • Sampoerna A in Indonesia, mainly driven by premium A Mild, notably reflecting reduced price gaps with directly competitive mid and low-price brands.

First-Quarter International Share of Market

PMI’s total international market share (excluding China and the U.S.), defined as PMI’s cigarette and heated tobacco unit sales volume as a percentage of total industry cigarette and heated tobacco unit sales volume, decreased by 0.2 points to 27.9%, reflecting:

  • Total international market share for cigarettes of 25.0%, down by 1.1 points; and
  • Total international market share for heated tobacco units of 2.9%, up by 0.9 points.

PMI’s total international cigarette sales volume as a percentage of total industry cigarette sales volume was down by 0.8 points to 25.9%, mainly reflecting: out-switching to heated tobacco units, as well as lower cigarette market share, notably in Argentina, Indonesia, Mexico, Pakistan, Saudi Arabia and Turkey.

CONSOLIDATED FINANCIAL SUMMARY

Financial Summary –

Quarters Ended March 31,

 

 

 

 

 

Change

Fav./(Unfav.)

 

Variance

Fav./(Unfav.)

 

2020

2019

 

Total

Excl.

Curr.

 

Total

Cur-

rency

Price

Vol/

Mix

Cost/

Other(1)

(in millions)

 

 

 

Net Revenues

 

$

7,153

 

$

6,751

 

 

6.0

%

7.1

%

 

402

(74

)

323

381

(228

)

Cost of Sales

 

 

(2,402

)

 

(2,465

)

 

2.6

%

0.6

%

 

63

 

49

 

 

29

 

(15

)

Marketing, Administration and Research Costs (2)

 

 

(1,944

)

 

(2,217

)

 

12.3

%

20.0

%

 

273

 

(171

)

 

 

444

 

Amortization of Intangibles

 

 

(18

)

 

(19

)

 

5.3

%

5.3

%

 

1

 

 

 

 

1

 

Operating Income

 

$

2,789

 

$

2,050

 

 

36.0

%

45.6

%

 

739

 

(196

)

323

 

410

 

202

 

Asset Impairment & Exit Costs (3)

 

 

 

(20

)

 

+100

%

+100

%

 

20

 

 

 

 

20

 

Canadian Tobacco Litigation-Related Expense (3)

 

 

 

(194

)

 

+100

%

+100

%

 

194

 

 

 

 

194

 

Loss on Deconsolidation of RBH (3)

 

 

 

(239

)

 

+100

%

+100

%

 

239

 

 

 

 

239

 

Adjusted Operating Income

 

$

2,789

 

$

2,503

 

 

11.4

%

19.3

%

 

286

 

(196

)

323

 

410

 

(251

)

Adjusted Operating Income Margin

 

 

39.0

%

 

37.1

%

 

1.9

pp

4.2

pp

 

 

 

 

 

 

 

 

 

(1) Cost/Other variance includes the impact of the RBH deconsolidation.

(2) Unfavorable Cost/Other variance of $9 million, excluding 2019 asset impairment and exit costs, the 2019 Canadian tobacco litigation-related expense and the 2019 Loss on deconsolidation of RBH.

(3) Included in Marketing, Administration and Research Costs above.

Note: Net Revenues include revenues from shipments of Platform 1 devices, heated tobacco units and accessories to Altria Group, Inc., commencing in the third quarter of 2019, for sale under license in the United States.

During the quarter, net revenues, excluding unfavorable currency, increased by 7.1%, mainly reflecting: a favorable pricing variance, notably driven by Australia, the GCC, Germany, Mexico, the Philippines and Turkey, partly offset by Italy; and a favorable volume/mix, primarily driven by heated tobacco unit volume (notably in the EU and Eastern Europe, partly offset by PMI Duty Free), partially offset by lower IQOS device volume (notably in Japan) and lower cigarette volume (mainly due to Mexico, the Philippines, Saudi Arabia and Turkey, largely offset by Germany, Italy, Japan, North Africa and Russia). The currency-neutral growth in net revenues of 7.1% came despite the unfavorable impact of $228 million, shown in “Cost/Other,” mainly resulting from the deconsolidation of RBH. On a like-for-like basis, net revenues, excluding unfavorable currency, increased by 10.0%, as detailed in Schedule 8.

Operating income, excluding unfavorable currency, increased by 45.6%, notably reflecting a favorable comparison to charges recorded in the first quarter of 2019 of $453 million, shown in “Cost/Other,” related to the loss on deconsolidation of RBH, the Canadian tobacco litigation-related expense, and asset impairment and exit costs related to a plant closure in Pakistan.

Excluding the impact of these 2019 charges, adjusted operating income, excluding unfavorable currency, increased by 19.3%, primarily reflecting: a favorable pricing variance; and favorable volume/mix, primarily driven by heated tobacco unit volume (notably in the EU and Eastern Europe, partly offset by PMI Duty Free); partially offset by higher manufacturing costs; higher marketing, administration and research costs (notably reflecting increased investment behind reduced-risk products, mainly in the EU and Eastern Europe); and the net unfavorable impact resulting from the deconsolidation of RBH, included in “Cost/Other.

Contacts

Investor Relations:

New York: +1 (917) 663 2233

Lausanne: +41 (0)58 242 4666

InvestorRelations@pmi.com

Media:

Lausanne: +41 (0)58 242 4500

Iro.Antoniadou@pmi.com

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