Saturday, 1 August 2015

The no-longer confidential financial statements

Although the tobacco companies convinced the Quebec Court of Appeal to relieve them of the obligation to make an advance payment on the money they owe some Quebec smokers, they did not convince the three judges that the financial statements they used when making their arguments should remain a secret.

To be more exact, the two companies that had requested confidentiality (Imperial Tobacco and Rothmans, Benson and Hedges) have now had their current financial statements made available to the public. Earlier this week I made a pleasant day-trip to Montreal and came back with some of these no-longer confidential records, including:

These documents deserve review by someone versed in accounting. Certainly there are a few surprises.

For one, it would appear that last year ITL joined JTI-Macdonald as a money-losing operation. In 2014 it posted a loss of $351 million dollars - JTI's ongoing annual loss of about $7 million is on record as a result of Justice Riordan's ruling.

Further up the balance sheet, both companies have positive and substantial profits on operations, as shown below. But a second surprise in is how much less profitable Imperial Tobacco is than it was historically.

Until about 2004, ITL was required to submit an annual report to the Toronto Security Exchange. At that time, its earnings per cigarette exceeded a dollar per package of 25 cigarettes

Today, their earnings per package, once inflation is taken into consideration, are about half as much. (Sales data below is taken from Euromonitor estimates of manufactured cigarette sales in Canada in 2013, which they say represent over 92% of all tobacco profits)

Profit from operations
Millions of packages of 25 cigarettes sold
Operating profit per package

Why is PMI/RBH so much more profitable than BAT/ITL?  If there has been such a dramatic fall in ITL profits, why has this not been identified in presentations made by BAT to investors? Your guess is as good as mine.* 

Those interested in other strategies used by ITL to reduce taxes will enjoy reading Note 6 on its Financial statement in which it reports on its victory against revenue departments after a prolonged dispute about "controlled foreign affiliate dividend deductions." 

* (My bet is that following the shift in production to Mexico, ITL adopted a transfer pricing strategy to split its profits on Canadian sales between two separate BAT subsidiaries.)