Philip Morris International Inc.’s Canadian Subsidiary, Rothmans, Benson & Hedges Inc., Granted CCAA Protection; Represents Opportunity to Resolve All Outstanding Canadian Tobacco Litigation
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.