Altria Group, Inc. (NYSE:MO) Q3 2023 Earnings Call Transcript

Altria Group, Inc. (NYSE:MO) Q3 2023 Earnings Call Transcript October 26, 2023

Altria Group, Inc. misses on earnings expectations. Reported EPS is $1.28 EPS, expectations were $1.29.

Operator: Good day everyone, and welcome to the Altria Group 2023 Third Quarter and Nine Months Earnings Conference Call. Today’s call is scheduled to last about one hour, including remarks by Altria’s management and a question-and-answer session. [Operator Instructions] Representatives of the investment community and media on the call will be able to ask questions following the conclusion of the prepared remarks. I would now like to turn the call over to Mac Livingston, Vice President of Investor Relations for Altria Client Services. Please go ahead.

Mac Livingston: Thanks Ashley. Good morning and thank you for joining us. This morning, Billy Gifford, Altria’s CEO; and Sal Mancuso, our CFO, will discuss Altria’s third quarter and first nine months business results. Earlier today, we issued a press release providing our results. The release, presentation, quarterly metrics and our latest corporate responsibility reports are all available at altria.com. During our call today, unless otherwise stated, we’re comparing results to the same period in 2022. Our remarks contain forward-looking and cautionary statements and projections of future results. Please review the forward-looking and cautionary statements section at the end of today’s earnings release for various factors that could cause actual results to differ materially from projections.

Future dividend payments and share repurchases remain subject to the discretion of our Board. We report our financial results in accordance with U.S. generally accepted accounting principles. Today’s call will contain various operating results on both, a reported and adjusted basis. Adjusted results exclude special items that affect comparisons with reported results. Descriptions of these non-GAAP financial measures and the reconciliations are included in today’s earnings release and on our website at altria.com. Finally, all references in today’s remarks to tobacco consumers or consumers within a specific tobacco category or segment refer to existing adult tobacco consumers 21 years of age or older. With that, I’ll turn the call over to Billy.

Billy Gifford: Thanks Mac. Good morning and thank you for joining us. Our highly profitable produced traditional tobacco businesses were resilient in a dynamic operating environment during the third quarter and first nine months, providing fuel for our business transformation and significant cash returns to our shareholders. We grew adjusted diluted earnings per share by 3.3% for the first nine months and returned more than $5.7 billion to shareholders through dividends and share repurchases. We continue to balance maximizing profitability from our smokeable and moist smokeless tobacco businesses with investments to realize their vision of responsibly leading the transition of adult smokers to a smoke-free future. This morning I will focus on our progress with NJOY, the state of the e-vapor category, and the encouraging third quarter results from on.

I’ll then turn it over to Sal, who will providing update on consumer and industry dynamics, further detail on our financial results and outlook for the remainder of the year. Let’s begin in the e-vapor category. In our first full quarter of ownership, our teams executed NJOY’s business plans with speed and focus to lay the foundation for NJOY’s long-term success. Today, NJOY ACE remains the only pod based e-vapor product with a marketing authorization from the FDA. We’re actively working to bring this compelling smoke-free alternative for more smokers in vapors across the United States. We believe that the long-term success in e-vapor will be influenced by our actions in the near term, and we’re executing in the marketplace to grow the business responsibly and sustainably.

First, while already strong strengthening NJOY supply chain was a necessary step to begin the initial phase of our expansion with ACE. Our teams work diligently to solidify the entire supply chain from sourcing direct materials through the shipment to retail. As a result, we do not anticipate capacity constraints as we execute our initial expansion plan. Next, during the third quarter, our teams prioritize closing inventory gaps at retail and expanding distribution of ACE. Prior to the acquisition, NJOY had a small scale salesforce, which resulted in inventory volatility and significant distribution gaps at retail. Upon completion of the NJOY transaction, we immediately unleashed our salesforce to focus on closing the inventory gaps in stores that already had distribution.

We improved inventory conditions in stores and are actively working to close remaining gaps at retail. For expansion based distribution grew to approximately 42,000 stores during the third quarter and is now distributed in all of the top 25 convenience store chains by e-vapor volume. In addition, we began to amplify visibility with new point of sale and fixture signage at retail. During the fourth quarter, we continue to expect ACE expansion to reach a total of 70,000 stores by year-end, representing approximately 70% of e-vapor volume and 55% of cigarette volume sold in the US multi outlet and convenience channel. As we continue to expand distribution and close inventory gaps, we expect to further enhance visibility and product fixture space at retail.

Last month, NJOY unveil its first retail trade program. Retail partners can sign up for the program at various levels with merchandising options designed to position NJOY strategically and responsibly to tobacco consumers, while creating further awareness of the brand. And as we move to our next phase of e-vapor consumer engagement, we’re beginning to test a variety of promotional plans and anticipate more disruptive execution at retail in the fourth quarter. Moving into 2024. We will continue to refine our promotional plans, implement, NJOY’s retail trade program, further expand distribution and evolve our consumer engagement strategy. Our strategies will focus on informing adult vapors and smokers of the attributes of ACE, such as battery capacity and pods size relative to other leading brands, generating trial and growing brand loyalty.

In addition, plans for a new brand equity campaign are well underway. We expect to equity campaign to further amplify the brand’s presence at retail and drive consumer engagement with the brand. We’re excited to share more on this campaign and the next phases of our growth plans in the near future. Looking more broadly at the e-vapor category, the current state of the market is intolerable for both legitimate manufacturers and consumers. As we have noted repeatedly four months, the regulated market is being overrun by illegal flavored disposable e-vapor products made and distributed by companies violating virtually every rule and guidance FDA has issued since 2016. Regulation not enforced is indistinguishable from no regulation at all. Illegal e-vapor products circumvent the actions of regulators, responsible manufacturers and retailers by evading scientific review, quality of manufacturing controls, marketing oversight, and legal aids or purchase restrictions.

Despite recent actions by the FDA, enforcement has been inadequate and ineffective. We believe the FDA has the tools necessary to bring order to the market. For our part, we’re actively engaged with regulators, state and federal lawmakers and trade partners and other stakeholders to build awareness of these serious issues and drive marketplace enforcement. We have also taken more targeted, but necessary action and initiated litigation in the United States District Court in California against 34 organizations, including manufacturers, distributors and online retailers related to the sale of unlawful products. A strong course correction is needed to protect the tobacco farm reduction opportunity for the 30 million adult smokers in the US. Turning to oral tobacco.

The nicotine pouch category experienced sizable growth once again, resulting in an estimated 5% increase in total US oral tobacco volumes over the past six months. Full nicotine pouches grew nearly 10 share points year-over-year and now represent more than 32% and the US oral tobacco category. on! participated in the category growth as third quarter reported shipment volumes increased nearly 37% versus the year ago period. During the quarter, Helix focused on continued volume growth, while improving profitability. Helix applied its evolving analytical resources to be more flexible with its promotions in the marketplace. As a result, on!’s retail price increased 33% per can sequentially and 52% versus the prior year, closing the gap [indiscernible] in by over $1 year-over-year.

Encouragingly, we continue to see increasing level of both trial and adoption of the brand with repeat purchases up more than 35% year-over-year despite the substantial increase in retail price. In addition, on’s! retail share of the oral tobacco category was 6.9%, up 1.7 share points versus the prior year and stable sequentially. Internationally, on! PLUS began its test launch in Sweden, one of the largest modern oral tobacco markets in the world. And consumers are engaging with the brand through both e-commerce and select retail locations. While still early days, we are encouraged by the feedback we’ve received from consumers. Initial consumer data showed that on! PLUS performed well in the areas of comfort, flavor and overall satisfaction.

We believe that on! PLUS’ long-lasting flavor system and proprietary software material are differentiators in the category. We are at an exciting period in our history. We have an unprecedented opportunity to responsibly lead the transition of adult smokers to our smoke-free future. Our smoke-free portfolio is compelling, and I am encouraged by our initial progress with NJOY and on’s! strong performance. I believe we have the appropriate strategy. on! people in place to execute our growth plans. I continue to believe that we can achieve our vision and create long-term value for our shareholders. I’ll now turn it over to Sal to provide more detail on the business environment and our results.

Sal Mancuso: Thanks Billy. Let’s begin with an update on consumer and industry dynamics. During the third quarter, cigarette industry volume declines continued to be elevated from their historical levels, due in part to macroeconomic factors, and the growth of illegal favored disposable e-vapor products. By design, illicit products are largely distributed through non-traditional untracked channels requiring us to refine our ability to estimate their impacts on the industry. With the information we have today, we believe that there is more cross-category movement than previously assumed. And we now estimate that growth of illegal flavor disposable e-vapor products contributed to industry, cigarette industry declines in the range of 1.5% to 2.5% and over the last 12 months.

These updated estimates have been reflected in our decomposition of cigarette industry decline rates. We will continue to monitor this dynamic trend and are actively pursuing better data sources to enhance our estimates in this space. Turning to results for the quarter. The Smokeable Products segment continued to deliver on its strategy of maximizing profitability in combustibles over the long-term, while appropriately balancing investments in Marlboro with funding the growth of smoke-free products. In fact, during the third quarter, the Smokable Products segment expanded adjusted OCI margins while Marlboro grew its retail share sequentially in the cigarette category and within the Premium segment. Adjusted operating companies income declined by 2.5% in the third quarter, but grew by 0.2% for the first nine months.

The adjusted OCI declined during the third quarter was primarily driven by elevated industry volume declines due to the factors I mentioned and higher promotional investments. As a reminder, there was also one fewer shipping day in the third quarter of 2023 compared to the third quarter of 2022. Adjusted OCI margins expanded by 0.7% and 0.9% in the third quarter and the first nine months, respectively. Net pricing remained robust, and net price realization for the segment was 8.6% in the third quarter and 9.8% for the first nine months. Marlboro was resilient during the quarter and its retail share of the cigarette category grew 0.3% sequentially to 42.3%, while declining 0.3% versus the year ago period. Promotional investments across the Marlboro portfolio, such as investments in Marlboro Black supported the strong share performance for the quarter.

Additionally, Marlboro grew its share within the stable Premium segment to 58.9%, an increase of 0.3% sequentially and 0.4% year-over-year, while other brands ceded share in the Premium segment sequentially and year-over-year. Total discount segment share grew 1.1 percentage points year-over-year to 28.2%, but has been flat since the first quarter of 2023. We believe the recent stability in discount is an encouraging sign, considering the adverse macroeconomic conditions impacting smokers in the premium position of our portfolio. Smokeable Products segment reported domestic cigarette volumes declined by 11.6% in the third quarter and 10.5% for the first nine months. When adjusted for calendar differences and trade inventory movements, third quarter domestic cigarette volumes declined by an estimated 10%.

For the first nine months, adjusted domestic cigarette volumes declined by an estimated 10.5%. At the industry level, we estimate that adjusted domestic cigarette volumes declined by 8% in the third quarter and for the first nine months. In Cigars, John Middleton reported exceptional performance through the first nine months and cigar shipment volume increased 4.2%. The Oral Tobacco Products Segment reported strong results during the quarter. As adjusted OCI and OCI margins increased while on! continued to grow its retail share of the oral tobacco category year-over-year. For the third quarter, adjusted OCI grew 7.1% and the segment expanded adjusted OCI margins to 69.3%, an increase of nearly 3 percentage points versus the prior year. This performance was supported by robust net price realization due in part to the more efficient on! promotional investments, Billy described earlier.

For the first nine months, the segment grew adjusted OCI by 4.1%, with adjusted OCI margins of 68.9%, up nearly 1 percentage point. Total segment reported shipment volume decreased by 3.3% and 2.3% for the third quarter and for the first nine months, respectively. The segment’s volume decline was driven by declines in MSP volumes, partially offset by the growth of on!. When adjusted for calendar differences and trade inventory movements, segment volumes declined by an estimated 2% and 2.5% for the third quarter and first nine months, respectively. Oral Tobacco Products Segment retail share declined 4.2 percentage points in the third quarter as declines in our MSP brands were partially offset by the year-over-year growth of on!. Turning to capital allocation.

We continue to return significant cash to shareholders. In the third quarter, we paid approximately $1.6 billion in dividends and raised our dividend by 4.3% in August, in line with our new progressive dividend goal. This increase marked our 58th increase in the last 54 years, and repurchased 5.9 million shares for $260 million. As of the end of the quarter, we had $268 million remaining under our current share repurchase program, which we expect to complete by the end of the year. In addition, our balance sheet remained strong through the quarter. As of the end of the third quarter, our debt to EBITDA ratio was 2.1 times. Let’s turn to our financial outlook for the remainder of the year. We are narrowing our full year 2023 guidance range and now expect to deliver diluted — adjusted diluted earnings per share in a range of $4.91 to $4.98.

This range represents a growth rate of 1.5% to 3% from a base of $4.84 in 2022. Finally, at our Investor Day, we announced the creation of our connect and transform open innovation system, which is focused on partnering externally to leverage subject matter expertise, new technologies and disruptive innovations to augment our internal capabilities and support our innovation strategies. As part of this system, today we are publishing 11 innovation briefs. More information is available on altria.com. With that, we’ll wrap up and Billy and I will be happy to take your questions. While the calls are being compiled, I’ll remind you that today’s earnings release and our non-GAAP reconciliations are available on altria.com. We’ve also posted our usual quarterly metrics, which include pricing, inventory and other items.

Let’s open the question-and-answer period. Operator, do we have any questions?

Operator: Thank you. [Operator Instructions] Our first question comes from Pamela Kaufman with Morgan Stanley. Please go ahead.

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Q&A Session

Pamela Kaufman: Hi. Good morning.

Billy Gifford: Good morning, Pamela.

Pamela Kaufman: Can you talk about the puts and takes influencing the outlook for the cigarette category as you look over the next few quarters? How are you thinking about the category? And do you view high single digit industry volume declines as the new normal?

Sal Mancuso: Pamela, first, good morning, and I’ll start the answer. So this is very typical of us to narrow guidance as the year plays out, and we’re through three quarters, and we were happy to provide more transparency in narrowing our guidance to 1.5% to 3% growth off of last year’s adjusted EPS. We feel really good about the guidance we’ve been able to provide. Of course, across the plan, there’s always puts and takes. We feel that we have enough levers to deal with any changes in the marketplace, but we feel good about the narrowing of the guidance. And I think that’s, as I said, pretty typical of how we manage guidance as the year progresses.

Pamela Kaufman: Okay. I was also curious about how you’re thinking about the outlook for the cigarette category. And if you expect high single digit industry volume decline to continue going forward.

Billy Gifford: Yeah. Pamela, as you know, we don’t provide look forward guidance. But I think when you think about volume, and it’s important to look at the e-comp [ph], we tried to highlight for you that, look, our consumer is still under macroeconomic pressure both the cumulative impact of inflation, but even gas prices moving around. But more importantly, what we’re seeing is an influence of the illicit vapor and the impact it’s having on the cigarette industry. And you see that we’re estimating that to be about 1.5 to 2.5. The reason that’s such a broad range is the nature of the illicit product. It’s going through distribution channels that we feel like we have some information gaps and we’re going to be looking to fill those information gaps.

But we wanted to highlight that to that as we discovered it. What we did is we used the data sources we had, and we’re able to triangulate it. I would point you to our quarterly metrics that we shared, and you see the significant jump up in adult vapors just over the nine months thus far in 2023. So we think that’s having an impact consider out buying too. We talked about some of the enforcement activities, some of the things the FDA could do, some of the things we’re doing. And we would look to get that enforcement active in the marketplace.

Pamela Kaufman: Thanks. And also one area that I was kind of surprised about in the quarter was just the limited amount of NJOY investment spend that appeared to flow through the P&L. So could you elaborate on how you’re thinking about NJOY investment over the coming quarters? And do you think that the NJOY brand can be successful and grow in an environment where illicit e-ciggs are unregulated?

Billy Gifford: We believe, we can grow NJOY brand. Remember, it competes and our focus is in the pod base. The FDA still needs to get through its authorizations and we believe that is going to cause transition in the marketplace as well. I tried to step you through the plan with NJOY as we progress through what we did in the third quarter as we progress through the fourth quarter, but I’ll just highlight it. We really wanted to make sure we had the foundation built. And so the focus was on making sure that the supply chain would support the increased line, and we feel good about that. We wanted to fill the inventory gaps and improve visibility in the stores that NJOY was already present, and we’ve made significant progress on that.