Philip Morris International Inc.’s Canadian Subsidiary, Rothmans, Benson & Hedges Inc., Granted CCAA Protection; Represents Opportunity to Resolve All Outstanding Canadian Tobacco Litigation
The CCAA process allows RBH to carry on its business in the ordinary course with minimal disruption to its customers, suppliers and employees.
Regulatory News:
Today, Philip Morris International Inc. (PMI) was informed by its
Canadian subsidiary, Rothmans, Benson & Hedges Inc. (RBH) that RBH had
obtained an initial order from the Ontario Superior Court of Justice
granting it protection under the Companies’ Creditors Arrangement Act
(CCAA). RBH announced that obtaining creditor protection became
necessary following recent developments in two Class Action proceedings
in Québec against RBH, Imperial Tobacco Canada Limited, and
JTI-Macdonald Corp. (see “The Class Actions & Other Pending Litigation”
below for details).
Key Elements and Impact of RBH’s Decision to File for Creditor
Protection
-
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 CCAA process allows RBH to carry on its business in the ordinary
course with minimal disruption to its customers, suppliers and
employees. -
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 $0.10 per share, as described below. -
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.
2019 PMI Full-Year Forecast & Assumptions and 2019-2021 Targets
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 $0.10 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 $0.09 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 $0.28 per share.
Excluding the above deconsolidation-related items and the unfavorable
impact of currency, at prevailing exchange rates, of approximately $0.14
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. The 2018 pro forma adjusted diluted EPS of $4.84 is calculated as
reported diluted EPS of $5.08, plus tax items of $0.02 per share
primarily related to the implementation of the Tax Cuts and Jobs Act,
less approximately $0.26 of estimated net earnings attributable to RBH
from March 22 through December 31, 2018, in order to present a
like-for-like comparison.
Assumptions underlying this forecast, and PMI’s 2019-2021 targets, as
communicated by PMI in its earnings release of February 7, 2019, and
reiterated at the CAGNY Conference of February 20, 2019, 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 $9.5 billion, subject to year-end working capital
requirements.
This forecast excludes the impact of: any future acquisitions;
unanticipated asset impairment and exit cost charges; future changes in
currency exchange rates; further developments related to the Tax Cuts
and Jobs Act; further developments pertaining to the two Québec Class
Action lawsuits and the CCAA protection granted to RBH; and any unusual
events. Factors described in the Forward-Looking and Cautionary
Statements section of this release represent continuing risks to these
projections.
Matters Relating to the CCAA Initial Order and PMI’s Deconsolidation
of RBH
-
The Companies’ Creditors Arrangement Act (CCAA) is a Canadian
federal law that permits Canadian businesses to restructure their
affairs while maintaining business as usual. -
The initial CCAA order authorizes RBH to pay all expenses incurred in
carrying on its business in the ordinary course after the CCAA filing,
including obligations to employees, vendors, and suppliers. -
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 always, future
dividend increases remain subject to the discretion of PMI’s Board of
Directors. -
Beginning with the first quarter of 2019, PMI’s adjusted diluted EPS
and other impacted results will reflect the deconsolidation of RBH.
PMI believes that the adjusted measures will provide useful insight
into underlying business trends and results, and will provide a more
meaningful performance comparison for the period during which RBH
remains under CCAA protection.
The Class Actions & Other Pending Litigation
On March 1, 2019, the Court of Appeal of Québec in Montreal issued its
judgment in two class action lawsuits against RBH, as well as Imperial
Tobacco Canada Limited, and JTI-Macdonald Corp. PMI is not a party to
the cases.
In 2015, the trial court ruled in favor of plaintiffs and found that the
estimated class members’ damages totaled approximately CAD 15.6 billion
including interest. In its decision, the Court of Appeal largely
affirmed the total amount of compensatory and punitive damages, but
reduced the total class member damages due to an error in the interest
calculation to approximately CAD 13.6 billion including interest. The
trial court’s order, as upheld by the Court of Appeal, required the
defendants to deposit a portion of the damages, approximately CAD 1.1
billion, into trust accounts within 60 days. RBH’s share of the deposit
is approximately CAD 257 million. RBH had already deposited CAD 226
million as security with the Court of Appeal. See PMI’s Form 10-K for
the year ended December 31, 2018 for more information about these legal
proceedings.
On March 4, 2019, as a result of this decision against RBH, PMI
announced that it will incur in its consolidated results a pre-tax
charge of approximately $194 million, representing approximately $142
million net of tax, in the first quarter of 2019, recorded as tobacco
litigation-related expenses. The charge reflects PMI’s assessment of the
portion of the judgment that it believes is probable and estimable at
this time and corresponds to the trust account deposit required by the
court. PMI will continue to monitor developments in the CCAA proceedings
as there is a significant lack of clarity with respect to several
factors, including the likelihood of resolving in the CCAA process the
underlying litigation to which RBH is a party, the financial and other
parameters of any resolution of the underlying litigation, and the
length of the CCAA process.
While the trial court found that the ultimate damages disposition would
depend on an individual claims process, the three defendants in the
cases -- RBH, JTI-Macdonald Corp., and Imperial Tobacco Canada Limited
-- are jointly and severally liable for the compensatory damages to be
distributed to eligible class members. JTI-Macdonald Corp. and Imperial
Tobacco Canada Limited were granted creditor protection under the CCAA
in connection with the class actions, on March 8 and 12, 2019,
respectively. Without creditor protection, RBH could have been required
to pay, in addition to its allocated portion, the portions of the class
actions judgment allocated to JTI-Macdonald Corp. and Imperial Tobacco
Canada Limited.
RBH is also a defendant in litigation brought by the Canadian Provinces
related to the recovery of health care costs. As part of RBH’s filing
for creditor protection, the Ontario Superior Court of Justice made an
initial order staying proceedings, including the Québec Class Action
proceedings and all other tobacco-related litigation pending in Canada
against RBH and PMI, including the litigation with the Provinces, to
provide RBH with the necessary time to explore a court-supervised
resolution of such matters.
The Ontario Superior Court of Justice has scheduled the next hearing
(known as the “comeback hearing”) on RBH’s filing for creditor
protection for April 4-5 at which time the Court will consider any
requests from interested parties, if any, to vary the terms of the
initial order for creditor protection.
Pursuant to the initial order, Ernst & Young Canada Inc. has been
appointed as Monitor in the CCAA proceedings. Information regarding
RBH’s CCAA proceedings, including copies of all court orders made and
the Monitor’s reports, will be available on the Monitor’s website at: http://www.ey.com/ca/rbh.
The information on this website is not, and shall not be deemed to be,
part of this press release or incorporated into any filings we make with
the SEC.
2018 Key Market Facts: Canada
The total market in Canada, defined as cigarette and heated tobacco unit
volume, was 23.4 billion units, down by 5.1% from 24.6 billion units in
2017. PMI’s total shipments volume, defined as the combined total of
cigarette shipment volume and heated tobacco unit shipment volume, was
8.9 billion units, down by 4.0% from 9.3 billion units in 2017. PMI’s
total market share, based on in-market sales, was 38.1%, up by 0.8
percentage points from 37.3% in 2017. Brands sold by RBH include: in the
premium segment, Belmont; in the mid-price segment, Canadian
Classics; and, in the low-price segment, Next. RBH also sells
the heated tobacco device, IQOS, and its heated tobacco
consumable HEETS.
Forward-Looking and Cautionary Statements
This press release contains projections of future results and other
forward-looking statements. Achievement of future results is subject to
risks, uncertainties and inaccurate assumptions. In the event that risks
or uncertainties materialize, or underlying assumptions prove
inaccurate, actual results could vary materially from those contained in
such forward-looking statements. Pursuant to the “safe harbor”
provisions of the Private Securities Litigation Reform Act of 1995, PMI
is identifying important factors that, individually or in the aggregate,
could cause actual results and outcomes to differ materially from those
contained in any forward-looking statements made by PMI.
PMI's business risks include: excise tax increases and discriminatory
tax structures; increasing marketing and regulatory restrictions that
could reduce our competitiveness, eliminate our ability to communicate
with adult consumers, or ban certain of our products; health concerns
relating to the use of tobacco products and exposure to environmental
tobacco smoke; litigation related to tobacco use; intense competition;
the effects of global and individual country economic, regulatory and
political developments, natural disasters and conflicts; changes in
adult smoker behavior; lost revenues as a result of counterfeiting,
contraband and cross-border purchases; governmental investigations;
unfavorable currency exchange rates and currency devaluations, and
limitations on the ability to repatriate funds; adverse changes in
applicable corporate tax laws; adverse changes in the cost and quality
of tobacco and other agricultural products and raw materials; and the
integrity of its information systems and effectiveness of its data
privacy policies. PMI's future profitability may also be adversely
affected should it be unsuccessful in its attempts to produce and
commercialize reduced-risk products or if regulation or taxation do not
differentiate between such products and cigarettes; if it is unable to
successfully introduce new products, promote brand equity, enter new
markets or improve its margins through increased prices and productivity
gains; if it is unable to expand its brand portfolio internally or
through acquisitions and the development of strategic business
relationships; or if it is unable to attract and retain the best global
talent. Future results are also subject to the lower predictability of
our reduced-risk product category's performance.
PMI is further subject to other risks detailed from time to time in its
publicly filed documents, including those described under Item 1A. “Risk
Factors” in PMI’s annual report on Form 10-K for the year ended December
31, 2018. PMI cautions that the foregoing list of important factors is
not a complete discussion of all potential risks and uncertainties. PMI
does not undertake to update any forward-looking statement that it may
make from time to time, except in the normal course of its public
disclosure obligations.
###
Philip Morris International: Building a Smoke-Free Future
Philip Morris International (PMI) is leading a transformation in the
tobacco industry to create a smoke-free future and ultimately replace
cigarettes with smoke-free products to the benefit of adults who would
otherwise continue to smoke, society, the company and its shareholders.
PMI is a leading international tobacco company engaged in the
manufacture and sale of cigarettes, smoke-free products and associated
electronic devices and accessories, and other nicotine-containing
products in markets outside the U.S. PMI is building a future on a new
category of smoke-free products that, while not risk-free, are a much
better choice than continuing to smoke. Through multidisciplinary
capabilities in product development, state-of-the-art facilities and
scientific substantiation, PMI aims to ensure that its smoke-free
products meet adult consumer preferences and rigorous regulatory
requirements. PMI's smoke-free IQOS product portfolio includes
heated tobacco and nicotine-containing vapor products. As of December
31, 2018, PMI estimates that approximately 6.6 million adult smokers
around the world have already stopped smoking and switched to PMI’s
heated tobacco product, which is currently available for sale in 44
markets in key cities or nationwide under the IQOS brand. For
more information, please visit www.pmi.com
and www.pmiscience.com.
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