Philip Morris revises FY19 EPS view for deconsolidation of Canadian subsidiary

Philip Morris International (PM) announced on Friday night that it was informed by its Canadian subsidiary, Rothmans, Benson & Hedges Inc., or “RBH,” that RBH had obtained an initial order from the Ontario Superior Court of Justice granting it protection under the Companies’ Creditors Arrangement Act, or CCAA. RBH announced that obtaining creditor protection became necessary following recent developments in two Class Action proceedings in Quebec against RBH, Imperial Tobacco Canada Limited (IMBBY) and JTI-Macdonald Corp. The initial order includes a comprehensive stay of all tobacco-related litigation pending in Canada against RBH and PMI, “thus providing an efficient forum for RBH to seek resolution of all such litigation,” the company said. As a result of the filing, and under U.S. GAAP, PMI will deconsolidate RBH from its financial statements, resulting in an estimated one-time non-cash charge of approximately 10c per share. While it remains under creditor protection, RBH does not anticipate paying dividends. As RBH has not paid dividends since the trial court’s judgment in May 2015, the deconsolidation will not have an impact on PMI’s current annualized dividend rate. As a result of the deconsolidation of RBH, PMI today revises its full-year 2019 reported diluted earnings per share forecast to be at least $4.90 at prevailing exchange rates. This full-year guidance reflects: the current estimated one-time net impact of the deconsolidation of RBH under U.S. GAAP of approximately 10c per share, to be recorded in the first quarter of 2019, which is a non-cash item, plus the tobacco litigation-related charge of approximately 9c per share announced on March 4, 2019; and the exclusion of RBH’s previously anticipated earnings from PMI’s consolidated financial statements from the date of deconsolidation to December 31, 2019, of approximately 28c per share. Excluding the above deconsolidation-related items and the unfavorable impact of currency, at prevailing exchange rates, of approximately 14c per share, this forecast represents a projected increase of at least 8.0% versus a pro forma adjusted diluted earnings per share of $4.84 in 2018. Assumptions underlying this forecast, and PMI’s 2019-2021 targets, as communicated by PMI in its earnings release of February 7 and reiterated at the CAGNY Conference of February 20 remain unchanged on a like-for-like basis, except for 2019 operating cash flow, which, due to the impact of the deconsolidation, is now estimated to be approximately $9.5B, subject to year-end working capital requirements. FY19 EPS consensus is $5.40.

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