Next Wednesday (March 31), the Ontario court order which has suspended all legal actions against tobacco companies will expire. On the day before, the dozens of lawyers representing those suing and those being sued will meet (virtually) to argue whether or not the "stay" should be extended for an additional 6 months. The stays have now been in place for 2 years.
The outcome of the scheduled hearing before Justice McEwen seems to be an inevitable "Yes" to the companies, request. It is now well after the required notice period and only one objection to the extention has been filed, by a relatively small creditor. The big players in the talks (the governments and Quebec class actions) have not signalled any opposition, or any requests to alter the current mediation process. (A backgrounder on these actions is available here)
Follow the action
The COVID-19 pandemic has prevented in-person court hearings, but it has created the opportunity for events to be monitored through phone calls. Those wishing to listen in on proceedings can do so through Youtube at by following this link:
The hold-out
The objection was filed by the Ontario Flue-Cured Tobacco Growers’ Marketing Board. The farmers are seeking redress for having been underpaid during the 1990s when Canadian tobacco companies arranged for untaxed cigarettes to be re-routed through Indigenous territories and back into Canada. Because these contraband cigarettes were manufactured as "exports", farmers received a lower payment for them than they would have for domestic sales. The farmers filed their suits in 2009, shortly after federal and provincial governments struck a deal with the companies over lost taxes during that period.
In their opposition to the extension, the farmers say their case against the companies is distinct from the others', that it has made no progress during mediation ("has not received any proposal from the Tobacco Manufacturers"), is being left out of discussions ("has no role whatsoever to play in whatever efforts are being made through the Court-Appointed Mediation process"), and feels it is unfair for farmers who were poorly treated in 80s and 90s should have to wait more than 30 years to have their issues addressed.
The financial updates
This is the 6th request for a stay on litigation, and each request has been accompanied by a monitor's report which provides a financial snapshot of the cash-flows of the companies. These are not fulloy reliable financial statements, as they are not adjusted for deferred income and postponed bills, but they do provide more transparency on the tobacco industry market than usual. It has been about 20 years since all of the companies were transferred into fully private ownership and since Canada-specific financial reports and management discussions were available for public view.
The financial pictures provided in the monitors reports (links provided below) are presented somewhat differently than the financial statements typically seen in annual reports, and each company has chosen to provide different levels of details. JTI-Macdonald was the only one to identify its promotional expenditures, for example, only two of the companies revealed how much they paid for the main ingredient in their products (tobacco), and one company combined excise and income taxes in its report.
What the numbers show:
The only money transfers are from smokers. The CCAA process has prevented smokers from receiving compensation from tobacco companies, but it has not stopped tobacco companies or the governments suing them from receiving money from smokers.
Even in insolvency, tobacco companies are enormously profitable. During this period the annual combined net (after tax) cash retained by the companies is about $1.7 billion dollars. This is about one-half of the $3.3 billion they collectively received through sales and other activities (after excise, sales and income taxes are discounted). If these are final numbers, this will give them net profit margin of about 50%.
These high earnings are still not enough to satisfy claims. At the beginning of the CCAA process, the companies declared that they had $2.5 billion between them as cash available to pay their creditors. Two years later, that amount has grown to $5.8 billion. This is only 1% of the amount that is being claimed against them.
Governments don't need lawsuits to get money from smokers. During this period, Canadian smokers contributed more than $6 billion per year in tax revenues to governments through the companies. (This will include taxes received by the federal government, which is not involved in the lawsuits). Smokers remain the only source of revenue for any compensation paid by the companies in settling these lawsuits.
The cheapest component of cigarettes appears to be tobacco. Two of the companies, RBH and JTIM, provided information on how much they spent on the main ingredient in their products, tobacco: 4% and 2% of their operating costs respectively.
Even in a dark market, promotions are a major cost. Only one of the companies, JTIM, provided expenditures on advertising and promotion. In the two-year period it spent $225 million on promotions, or 35% of its operating costs (8% of its total costs, once its unusually high payments for trademark rights are included). JTI is the only company which does not have a direct contracting system with retailers, so the incentive payments it makes to retailers are not integrated with its billings, as they are for other companies.
Tobacco companies pay well. RBH spent $104 million per year on salaries for its 850 employees and contractors -- an average pay and benefit package worth $120,000. The average for JTI's 500 employees was even higher - $146,500.
Canada's 4.7 million smokers each contributed about $2,000 per year to the tobacco market. About $340 of that was used to manufacture and distribute the cigarettes; governments received about $1,300 in taxes and tobacco companies cleared the remaining $360.
More is being spent to keep tobacco companies alive than is being spent to protect their consumers. During these two years, the companies spent more on "restructuring" costs to keep their companies alive than Health Canada spent on activities aimed at preventing deaths from tobacco. ($74 million vs. $68 million)
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Monitor's reports with financial information:
Imperial Tobacco
Monitor's Ninth Report March 19, 2021
Monitor's Eighth Report September 22, 2020
Monitor's Seventh Report February 13, 2020
Monitor's Fifth Report September 25, 2019
Monitor's Fourth Report June 24, 2019
Monitor's Second Report April 24, 2019
Monitor's First Report April 3, 2019
Rothmans, Benson & Hedges
Seventh Report of the Monitor - 19 Mar 2021
Sixth Report of the Monitor - 21 Sep 2020
Fifth Report of the Monitor - 13 Feb 2020
Third Report of the RBH Monitor - 25 Sep 2019
Second Report of the Monitor - 24 Jun 2019
JTI-Macdonald
