Wednesday, 23 March 2022

Mediation to settle lawsuits with big tobacco is extended to 42 months

This post is an update of a near-identical bulletin sent a year ago. Little has changed.

Today Justice McEwan of Ontario's Superior Court was asked for the eighth time to extend the insolvency protection orders under which Canada's 3 main tobacco companies are maintaining "business as usual" while trying to negotiate an end to the lawsuits filed against them. None of the lawyers representing the provinces and smokers who are suing the companies raised any objections, and after a 15-minute hearing the extensions were granted. 

In most respects, there appear to be no new developments in this story. For the past 36 months lawyers representing Quebec smokers (who have won a $14 billion award against the companies) and lawyers representing the ten Canadian provinces (whose claims for $500 billion have yet to be heard in court) have been told to stand down their legal actions. (Background on these lawsuits can be found here)

The companies' protection from creditors has bene extended to September 30, 2022 -- bringing the mediation to the 42 month mark. 

Secrets and non-secrets

As long as the companies are protected by these orders made under the authority of the Companies Creditors' Arrangement Act (CCAA), the resolution of the governments' lawsuits against tobacco companies will be developed in closed-door negotiations. Very little information has been made public about the discussions being mediated by former Justice Warren Winkler.

In contrast to this secretiveness, the CCAA process is providing transparency where usually there is none. One requirement of this system is that accounting firms are recruited to provide regular updates to the court on the financial situation of the insolvent companies. With the documents filed this week by Imperial Tobacco Canada (ITC), Rothmans, Benson and Hedges (RBH) and JTI-Macdonald (JTIM) we now have around 36 months of financial reports for each of the companies. In the decades since these companies became wholly-owned subsidiaries of global firms, such information has generally not been available.

Another unusual aspect to the insolvency protection is that while the companies are able to continue "business as usual", they are restricted in how they can use any of their operating profits. In this case, for example, they cannot send dividends or other payments to their multinational owners. The money is notionally set aside for distribution to their creditors -- the people who are suing them.

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. The information tabled in these reports reflects cash flows, and is not adjusted for deferred revenues or accounts payable, as year-end statements usually are.

The table below summarizes the data for the three-year period spanning mid-March 2019 to mid-March 2022.



The bottom lines

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 $1.9 billion dollars. This is about one-half of the $3.95 billion they collectively averaged through sales and other activities during this three-year period (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 $7.5 billion. This is only 1.25% of the amount that is being claimed against them. (The savings to health care budgets from reducing tobacco sales would be worth more for governments than the amount they are likely to recover from their lawsuits).

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.

Other information

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: 1% and 4% 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 $332 million on promotions, or 16% of its operating costs. 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.


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Monitor's reports with financial information:

Imperial Tobacco

Monitor's Eleventh Report, March 2022
Monitor's Tenth Report, September 2021
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



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Friday, 11 March 2022

42 months! Companies are seeking another CCAA extension.

Last month notice was given that Ontario courts would again be asked to extend the stay on all proceedings against tobacco companies. On the website of  Imperial Tobacco's monitor, the notice read: Please be advised that the motion to extend the stay of proceedings is currently scheduled to be held virtually on March 22, 2022. 

The protocol has now been posted. A YouTube link will be posted on each monitor's website 2 days before the hearing. 

The documents related to that hearing are now beginning to appear, and this page will be updated to provide links as they become available. From the first of these, we know that an extension is being sought that will extend to September 30, 2022. 

JTI-Macdonald:

Imperial Tobacco:

Rothmans, Benson and Hedges

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