Altria Group, Inc. (NYSE:MO) Q4 2023 Earnings Call Transcript

Altria Group, Inc. (NYSE:MO) Q4 2023 Earnings Call Transcript February 1, 2024

Altria Group, Inc. beats earnings expectations. Reported EPS is $1.18, expectations were $1.17. Altria Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day everyone, and welcome to the Altria Group 2023 Fourth Quarter and Full Year 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, sir.

Mac Livingston: Thanks, Jamie. Good morning, and thank you for joining us. This morning, Billy Gifford, Altria’s CEO; and Sal Mancuso, our CFO, will discuss Altria’s fourth quarter and full year 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 Altria’s Board. Altria reports its 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 reconciliations are included in today’s earnings release and on our website 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. It was a pivotal year for Altria, as we made significant progress in pursuit of our vision, by enhancing our smoke-free product portfolio, while our businesses performed well in a challenging environment. We grew adjusted diluted earnings per share by 2.3% and continued our long history of rewarding shareholders by delivering nearly $7.8 billion in dividends and share repurchases. Throughout 2023, we took several transformative steps that we believe position us for sustained success in the U.S. nicotine space, including completing our acquisition of NJOY and fully integrating it into our family of companies, Making exciting progress on our promising smoke-free pipeline including launching on! PLUS internationally in Sweden, one of the world’s largest modern old tobacco markets.

Continuing preparations to bring heated tobacco products to market. This includes heated tobacco stick products through Horizon, our joint venture with JT, and our heated tobacco capsule product SWIC and advocating for a responsible and well regulated e-vapor market including stepped up enforcement against the listed disposable products. Our vision continues to guide our actions and we believe that our growing portfolio of smoke-free products positions us well to lead in the evolving nicotine space. My remarks this morning will focus on our view of the U.S. nicotine space and our progress in each of the smoke-free categories. I’ll then hand it over to Sal, who will provide an update on consumer and industry dynamics and further detail on our business and financial results.

Let’s begin with the operating environment. We estimate that total industry equivalized nicotine volumes increased approximately 3% for the year, and approximately 1% over the past five years on a compounded annual basis, driven by the growth of illicit flavored disposable e-vapor products. This new estimate mark stayed changed from our previously provided estimates of low-single-digit decline in total nicotine over the past several years. Our new estimate reflects a deeper ongoing analysis of the impact of a list of products on the e-vapor category. We have previously acknowledged the challenges associated with reading illicit market activity that takes place in less traditional channels. And we believe, we have deepened our understanding of market dynamics through improved data sources, information gaps still remain.

As a result, we’re making some informed assumptions to better reflect the dynamics at play. For example, we account for differences in liquid volume across products, device attributes and usage patterns by equivalizing e-vapor volume across different form factors. We then equivalized e-vapor volume back to cigarettes, our base unit of equivalized volume. Because of the volatility that exists in reading the illicit market, our estimates may change over time and we plan to provide you with our latest and best thinking as it evolves. Of note, our estimate focuses only on usage among age 21 plus consumers. Looking now by category, industry cigarette volumes declined by an estimated 8% last year primarily due to the historical secular rate of decline, the growth of illicit vapor products and continued macroeconomic pressures on smokers.

And while we’re deeply concerned about growth in illicit product use, we are encouraged that adult smokers continue to transition to smoke-free alternatives, which now represent approximately 40% of total nicotine space. E-vapor continues to be the largest smoke-free category and we have observed an increase and the number of adult vapers driven primarily by those choosing illicit products. Based on our new estimate, we see e-vapor category grew approximately 35% in 2023. We believe the category growth was largely driven by illicit flavored disposable products, which we estimate represents over 50% of the category. We estimate that pod-based products declined approximately 50%, and represent between 15% to 20% of the category. We continue to believe the e-vapor category is in the beginning of a reset and the steps that we have taken since closing the NJOY transaction will allow us to responsibly participate in the category’s growth.

Let’s briefly recap our 2023 actions with NJOY, following the completion of our acquisition on June 1st. First, we strengthened NJOY’s supply chain to enable our expansion plans. Our teams work diligently to solidify the entire supply chain from sourcing direct materials through shipment to retail. We now expect to have capacity to support our expansion plans for NJOY moving forward. Next, we prioritize closing inventory gaps at retail and expanding distribution of ACE. For example, prior to closing, a number of stores had ACE pods in distributions, but no devices. While other stores were missing various pod varieties. Our teams have closed inventory gaps in stores that already had distribution, which has significantly improved in stock conditions at retail.

During the fourth quarter, we expanded distribution of ACE to over 75,000 stores, surpassing our previously announced goal of 70,000 stores. These stores represent approximately 75% of e-vapor for volume, and 55% of cigarette volume sold in the U.S. multi-outlet and convenience channel. We also introduced NJOY’s first retail trade program, which we will — we believe will help NJOY achieve optimal visibility and product fixture space at retail. Retailers can sign up for the program at various levels with merchandising options designed to position, NJOY’s strategically and responsibly to tobacco consumers while creating further awareness of the brand. We’re encouraged by our trade partners response to the program with approximately 70% of stores having chosen options that secure premium positioning and the e-vapor fixture for NJOY.

Fixture resets are well underway and we expect the majority will be completed in the first half of this year. We believe that achieving manufacturing capacity, supply chain security, and optimal product distribution and placement at retail were necessary precursors to engaging consumers with impactful marketing and promotional offers. Turning to NJOY’s business results, NJOY consumer — consumables shipment volume was approximately 11 million units for the quarter, and 23 million units since closing. NJOY’s retail share and the multi-outlet and convenience channel was 3.7% in the fourth quarter. In November, we began testing trial generating bundle offers in a limited number of retail accounts, and the results were very encouraging. Despite the limited reach of these offers, NJOY retail share increased 0.3 of a percentage point nationally in November and another 0.3 in December.

While still early, we are excited by NJOY’s momentum and remain optimistic about its potential in the U.S. market. We expect to further expand, NJOY promotions and marketing activations in the first quarter, and we anticipate submitting a PMTA for NJOY’s age restricted Bluetooth device with non-tobacco flavors in the first half of this year. We look forward to sharing more detail about our plans for the year at CAGNY. Looking more broadly at the e-vapor category, we continue to believe that the current state of the market is intolerable for both legitimate manufacturers and consumers. As I previously stated, the total nicotine space grew in 2023, largely because of illegal flavored disposable e-vapor products. These products are being distributed by companies violating virtually every rule and guidance the FDA has issued since 2016.

We are actively engaging with regulators, state and federal lawmakers, air trade partners, and other stakeholders to build awareness of this serious issue and drive marketplace enforcement. While we believe there is still significant work ahead to eliminate these illicit products from the market, we have seen some encouraging actions. In December, the FDA in collaboration with U.S. Customs and Border Production announced the seizure of approximately 1.4 million unauthorized e-vapor products, including Elf Bar and other brands that are popular with underage users. We believe that adopting comprehensive border protection programs is an important step towards clearing the market of illicit products. Additionally, we have worked with legislatures in a number of states that have passed or are considering legislation requiring manufacturers to certify that they have either submitted a PMTA, which is pending or received a marketing order in compliance with FDA regulations.

We also initiated litigation in the United States District Court in California relating to the sale of unlawful products. And although this litigation is facing some initial procedural challenges, we remain committed to explore and pursue all litigation opportunities against manufacturers, distributors and online retailers related to sale of unlawful products. A strong course correction is needed to protect the tobacco harm reduction for the millions of adult smokers in the U.S. We’ve learned from past experiences that complex issues like this require the work of many stakeholders. For our part, we’re working with regulators, legislatures, law enforcement and others to address the illicit market. And while the FDA and other authorities are stepping up enforcement, more action is needed.

Turning to oral tobacco, the nicotine pouch category experienced sizable growth once again resulting in an estimated 7.5% increased in total U.S. oral tobacco volumes over the past six months. In the fourth quarter, oral nicotine pouches grew 11.8 share points year-over-year and now represent more than 35% of the total U.S. oral tobacco category. On! continued to participate in the category growth as reported shipment volumes increased nearly 33% in the fourth quarter and 39% for the full year. In the fourth quarter, Helix continued its focus on volume growth while improving profitability. Helix applied its analytics and revenue growth management capabilities to be more flexible and efficient with its promotional investments in the marketplace.

As a result, orange retail price increased over 47% versus the year ago period, while growing its retail share by 1.1 percentage points. Encouragingly, we continue to see increasing levels of both trial and adoption of the brand with repeat purchases up more than 30% year-over-year, despite the substantial increase in retail price. We remain excited about on! PLUS and its potential in the U.S. market. We believe its long lasting flavor system and proprietary softened material are differentiators in the category. We continue to see encouraging results from the on! PLUS test launch in Sweden. Consumer research from the fourth quarter indicates that on! PLUS is competitive with the market leading old nicotine pouch products in Sweden, and is seen as a unique offering with a strong repeat purchase rate of over 30% in the e-commerce channel.

Given the success of on! PLUS net and smooth net in December, we introduced on! PLUS berry and citrus and 6 and 9 milligram strength variants in the e-commerce channel. We also plan to expand on! PLUS to additional retail accounts and suite. Our teams are on-track to submit the PMTA for on! PLUS in the first half of this year and upon FDA authorization, we expect it will contribute meaningfully to Helix’s growth. In heated tobacco, we believe our compelling portfolio of products will appeal to the millions of adult smokers seeking innovative and scalable alternatives to e-vapor products. We are continuing regulatory preparations to bring heated tobacco stick products to the U.S. market through Horizon, our joint venture with JT. We remain on-track to follow-up PMTA for Ploom in the first half of 2025.

And we are making continued progress on our heated tobacco capsule product SWIC. While we believe heated tobacco products can play an important role in achieving harm reduction, the category remains nonexistent in the United States. We’re encouraged by the progress we made in 2023 and we are committed to achieving long-term leadership in each of the smoke-free categories while delivering strong shareholder returns. Last March, we introduced our 2028 enterprise goals. We provided updates on our progress in this morning’s press release and we expect to provide progress updates annually moving forward. We look forward to discussing our exploration of non-nicotine and international mid-teen markets at CAGNY later this month. Turning to our 2024 financial outlook.

Our plans include a continuation of our strategy to balance earnings growth and shareholder returns with strategic investments toward our vision. For 2024, our planned investment areas include marketplace activities in support of our smoke-free products and continued smoke-free product research, development and regulatory preparations. We believe the external environment will remain dynamic in 2024, and we will continue to monitor the economy, including the cumulative impact of inflation, tobacco consumer dynamics including purchasing patterns and adoption of smoke-free products, solicity vapor enforcement and regulatory litigation and legislative developments. Considering these factors, we expect to deliver 2024 full year adjusted diluted EPS in a range of $5 to $5.15.

This range represents an adjusted diluted EPS growth rate of 1% to 4% from a $4.95 base in 2023. We expect 2024 adjusted diluted EPS growth to be weighted to the second half of the year. Our guidance includes the impact of two additional shipping days in 2024 and assumes limited impact from illicit e-vapor enforcement on combustible and e-vapor volumes. Before I turn it over to Sal, I’d like to take a moment to recognize Murray Garnick, who recently announced his decision to retire from Altria. During his remarkable career, Murray represented Altria and its subsidiaries for nearly 40 years, both as outside and in-house counsel including his last seven as General Counsel, leading the law and regulatory affairs departments. Under his guidance, we have successfully managed significant litigation challenges and established Altria as a leading advocate for tobacco harm-reduction policies in the U.S. We will continue to benefit from Murray’s guidance through the first quarter.

At which time, Bob McCarter will assume the role of General Counsel. Bob currently leads the management of tobacco health and other litigation. Bob has been with Altria since 2015, and spent 18 years before that representing the company as outside catching. Please join me in thanking, and congratulating Murray on an incredible career. And we look forward to introducing Bob to many of you at CAGNY, and in years to come. And 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 a review of the macroeconomic backdrop and its impact on U.S. tobacco consumers. We believe that discretionary income levels remained under pressure through the fourth quarter. While slightly lower gas prices in the fourth quarter were a modest tailwind, we believe the cumulative effects of inflation and higher consumer debt levels led to lower discretionary income for tobacco consumers. Late last year, we conducted research to understand how tobacco consumers we’re adjusting their purchasing behaviors to the current macroeconomic environment. Our research indicates smokers continue to feel economic pressure throughout 2023, and we’re more likely to search for deals when purchasing tobacco products in the fourth quarter.

We will continue to monitor tobacco consumer behaviors and changes in marketplace conditions in 2024. Moving to our results. Our tobacco businesses generated solid financial performance again this year and a challenging external environment. In the smokeable products segment, adjusted operating companies income declined by 1.3% in the fourth quarter and was essentially flat for the full year. Adjusted OCI results in the fourth quarter and full year were primarily driven by elevated industry volume declines and higher promotional investments. Adjusted OCI margins expanded by 0.6 and 0.9 in the fourth quarter and full year, respectively. Net pricing remained robust and net price realization for the segment was 5.5% for the fourth quarter and 8.8% for the full year.

Marlboro displayed resiliency during a period of continued uncertainty for consumers. In the fourth quarter, Marlboro’s retail share was 42.2%, unchanged versus the year ago period and down just 0.1 sequentially. Marlboro also grew its share within the highly profitable premium segment to 59.2%, an increase of 0.8 versus a year ago, and 0.3 sequentially. In 2023, PM USA uses a sophisticated suite of RGM tools, to make investments in Marlboro Black to support its share performance. The investments in Marlboro Black gave consumers under economic strain, a place to stay within the Marlboro portfolio while positioning PM USA to maximize profitability over the long-term. Historically, we have seen similar investments improve brand loyalty during times of economic uncertainty, which has contributed to Marlboro’s long-standing leadership in the category.

We continue to believe that Marlboro remains the aspirational brand in the cigarette category, and we are encouraged by its performance in 2023. Total discount segment share was 28.6% in the fourth quarter, up 0.4 sequentially and 0.9 versus a year ago. We believe that results were driven in part by seasonal trends in the discount segment and the macroeconomic factors that I just discussed. Turning to volumes. Smokeable products segment reported domestic cigarette volumes declined by 7.6% in the fourth quarter and 9.9% for the full year. When adjusted for trade inventory movements, domestic cigarette volumes for the fourth quarter and full year declined by an estimated 9% and 10%, respectively. At the industry level, when adjusted for trade inventory movements and other factors, we estimate that domestic cigarette volumes declined by 8% in the fourth quarter and for the full year.

In cigars, reported shipment volume decreased 1.4% for the fourth quarter and increased 2.8% for the full year while Black & Mild continued to maintain its leadership in the profitable machine-made to cigar segment. The oral tobacco products segment reported strong fourth quarter results. Adjusted OCI and OCI margins increased and on! continued to grow its retail share of the oral tobacco category year-over-year. For the fourth quarter, adjusted OCI grew 10.3% and the segment expanded adjusted OCI margins to 63.1%, an increase of nearly 2 percentage points versus the prior year. This performance was supported by robust net price realization due in part to lower promotional investment behind on. For the full year, the segment grew adjusted OCI by 5.5% with adjusted OCI margins of 67.4%, up more than 1 percentage point.

Total segment reported shipment volume decreased by 2% and 2.2% for the fourth quarter and full year, respectively. The segment’s volume decline was primarily driven by declines in MST volume, partially offset by the growth of on!. When adjusted for trade inventory movements and calendar differences, segment volumes declined by an estimated 2.5% for the fourth quarter and full year. Oral tobacco products segment retail share declined by 5.8 percentage points in the fourth quarter as declines in our MST brands were partially offset by the year-over-year growth of on!. Turning to our investment in ABI. We recorded $628 million of adjusted equity earnings for the full year, up 10% versus 2022. We continue to view our stake in ABI as a financial investment, and our goal remains to maximize the long-term value of the investment for our shareholders.

In our all other operating category, we recorded $74 million in adjusted losses for the year, and we continue to return significant cash to shareholders while maintaining a strong balance sheet. Last year, we paid approximately $6.8 billion in dividends and raised our dividend by 4.3% in August in line with our new progressive dividend growth goal. This marked our 58th increase in the last 54 years and repurchased 22.7 million shares, which completed our previously authorized $1 billion program. Our balance sheet remains strong. As of the end of the fourth quarter, our debt-to-EBITDA ratio was 2.2x in line with our new capital structure goal of approximately 2x. In the fourth quarter, we issued $1 billion in debt that we plan to use to retire approximately $1.1 billion in maturing debt in the first quarter.

Earlier this week, our Board authorized a new $1 billion share repurchase program, which we expect to complete by the end of 2024. 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: [Operator Instructions] Our first question will come from Matt Smith with Stifel.

See also 24 Countries Where You Can Retire on Just Social Security in 2024 and 25 Largest Banks in the US by Total Deposits.

Q&A Session

Matt Smith: Wanted to ask a question if we could start with the EPS guidance for the year. When we consider the 1% to 4% growth, you note that it will be weighted towards the second half. Can you talk about the factors supporting that higher growth in the second half? How much of that is the difference between incrementally higher investment in the first half before you anniversary some higher investment levels in 2023 versus your outlook for the cigarette volumes, including the additional shipping days in the second half?

Billy Gifford: I think when you think about it being weighted to the second half of the year, I think there’s two major components you should think. I’m the biggest being NJOY. You remember, we closed that on June 1. So we had amortization of that acquisition. And so you’ll have the investments that we highlighted in our remarks of course, in the first half of the year where you didn’t have that in the first half of last year. I think the other thing to note is, remember, the two extra shipping days, one of those will occur in the third quarter and one in the fourth quarter. So they’re both back half of the year weighted. I think those are the two major things. And of course, there are always puts and takes, but those are the two major things I would highlight.

Matt Smith: If I could ask a second question here. When we look at the price realization on a per pack basis in the smokeable business, that year-over-year contribution decelerated through 2023, especially in the second half with realized pricing well below the rate of list price increases. Can you talk about the offsets to the price announcements that you have made, how much of that difference is between list and realized prices is due to trade down mix within Marlboro, with Marlboro Black Gold and other extensions versus increased promotional spending.

Billy Gifford: Yes, it’s a little bit of both. I think when you think about it, Matt, we tried to highlight that our consumer is under pressure. And we felt like we could use the normal Black franchise as well as rounding out that portfolio for — with the normal gold pack. I think if you look back in history, you see we use these tools. It allows us to take a small segment of Marlboro and provide a place for consumers under pressure because Marlboro still the aspirational brand in the marketplace. Those that are facing economic pressures have a place to continue to interact with Marlboro and purchase Marlboro. You’ll see historically, when economic pressures ease a bit for our consumers, we’re able to lessen those promotional.

But in essence, we kept them in the mobile franchise, the brand itself. And it’s much more effective and efficient to do it that way, then try to win them back if they trade it down. I would encourage you to think about price realization over the long-term. When you look at it on a quarter basis, you have timing of pricing things of that nature. But even if I can encourage you to look at it over the long-term, at least look at it and look at costs year-over-year. And I think if you look last year, you’ll see the fourth quarter was a high mark compared to the other quarters from a price realization. So comps will affect it to a certain degree as well.

Operator: We’ll turn now to Pamela Kaufman with Morgan Stanley.

Pamela Kaufman: Congrats to Murray, and thanks to him for all of the help over the years.

Billy Gifford: Thanks for that, Pamela.

Pamela Kaufman: So question on the guidance for low-single-digit earnings growth in 2024. This follows a year of low-single-digit growth in ’23, but your growth algorithm calls for mid-single-digit earnings growth. So do you think that your longer-term targets are still achievable? And what do you anticipate changing over the next few years that can put you on that path?

Billy Gifford: Thanks for your question, Pamela. I think there are a number of factors you should think about. When we put that enterprise goal out there, we talked about it on a compounded annual basis. And we highlighted for you that there would be variability throughout that process because there are going to be years where you have investment and you heard the answer to the previous question, we closed NJOY in the second half of the year. And so now you have a full year of investment. On the other hand, you have puts and takes across it because you saw the increase in profitability with on!. So as you’re investing, the various categories is going to be at different levels of investment and as we’re able to ease those investments that’s what we anticipate through time. You know the aspiration is to be the leader — a leader in each of the categories, and you know that we are pretty successful in increasing margins through time.

Pamela Kaufman: And then in the smokeable segment, this was the second consecutive quarter of negative sales and OCI growth. Given several years of elevated cigarette volume declines and a heightened competitive backdrop, how do you get comfort that your financial model is sustainable and more near term, do you anticipate that smokeable segment operating profit can grow in 2024? .

Billy Gifford: Yes. I would point you back to the decomposition of overall industry volume and the factors affecting it. The ones I would highlight is really the macroeconomic and other. And there remember, there are two components there. One, we’ve been highlighting for you that the consumer is under economic pressure. And when they’re under economic pressure they make different decisions in the moment. The other is the explosion of illicit base. It’s having an impact both in the combustible segment as well as the e-vapor segment, the legitimate e-vapor segment, if you will, and so it’s having an impact on both. So I think as you think about the economy through time as well as what is necessary, which is significant more enforcement of illegitimate and illegal product in the marketplace those consumers will be at play.

We want to keep them in the e-vapor market, and that’s why you see the distribution and the movements we’ve made with NJOY, but keeping them in the e-vapor market responsibly. And so that’s the way we think about it through time.

Pamela Kaufman: And just one last one. Can you talk about the current competitive backdrop and what you’re observing from the premium and deep discount cigarette segments as well as from e-vapor and your strategy to compete against each of these segments?

Billy Gifford: Yes. I think when you think about the combustible segment, it has always been a competitive marketplace. So I think we’re seeing these other bigger challenges with the consumer being under pressure and the illicit base. From an illicit base standpoint, the consumers are moving. What’s encouraging is it’s a proof of harm-reduction. If we had harm-reduced products in the marketplace, consumers removed. But they have to be reviewed and authorized by the FDA for the consumer to be able to count on that. So I think when you think about through time, the competitive, I would point to Marlboro continues to grow its share in the premium segment. And its overall share has been really steady if you go pre-pandemic to post-pandemic, but it continues to be a competitive marketplace.