Altria Group, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Altria is a U.S.-focused tobacco company with cigarette, cigar, smokeless tobacco, oral nicotine pouch and, since June 1, 2023, NJOY e-vapor operations. It also holds investments in Anheuser-Busch InBev (ABI) and Cronos.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net revenue | $6.281B | $6.550B | $18.508B | $18.985B |
| Operating income | $3.089B | $3.112B | $8.751B | $9.101B |
| Net earnings | $2.166B | $224M | $6.070B | $3.074B |
| Diluted EPS | $1.22 | $0.12 | $3.40 | $1.69 |
| Adjusted diluted EPS | $1.28 | $1.28 | $3.78 | $3.66 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $6.060B | $5.637B |
- Q3 net revenue declined 4.1%; nine-month revenue declined 2.5%. Lower smokeable product volumes were the main factor.
- Q3 adjusted net earnings fell 1.1%, while adjusted diluted EPS was unchanged. Nine-month adjusted net earnings rose 1.7% and adjusted diluted EPS rose 3.3%.
- Reported earnings comparisons are substantially affected by investment-related items, notably the 2022 ABI impairment and changes in the former JUUL investment. Reported EPS growth therefore does not represent underlying operating growth.
- Gross profit was $3.699B in Q3 and $10.785B for the nine months. Adjusted operating companies income margin for the nine months was 61.0% overall, including 60.1% for smokeable products and 68.9% for oral tobacco products.
- Nine-month operating cash flow increased to $6.060B. Investing activities used $1.217B, including the NJOY acquisition, partly offset by IQOS-related proceeds; financing activities used $7.353B, mainly reflecting dividends and debt repayment.
Debt, liquidity and capital returns
- At September 30, cash and cash equivalents were $1.537B; total debt was $25.098B, comprising $1.121B current and $23.977B long-term. The company reported a 2.1x debt-to-Consolidated EBITDA ratio.
- Altria said cash, operating cash flow, access to credit markets and its $3.0B revolving credit facility provide sufficient liquidity for the next 12 months and foreseeable future. A new five-year $3.0B revolving facility was entered into on October 24, 2023, after the quarter-end.
- The company paid $5.040B in dividends during the first nine months. In August it raised the quarterly dividend to $0.98 per share, or $3.92 annualized. It repurchased $732M of shares and had $268M remaining under its $1.0B repurchase authorization at September 30.
Material changes and unusual items
- Altria acquired NJOY on June 1 for approximately $2.9B, including contingent consideration. The preliminary allocation included $1.614B of goodwill. Up to $500M of additional cash payments may be due if specified FDA authorizations are received.
- Altria received approximately $1.8B, including interest, from PMI in July under the IQOS commercialization-rights agreement. A $2.7B deferred gain remained on the balance sheet and is expected to be recognized when Altria relinquishes its rights, effective April 30, 2024.
- Altria transferred its JUUL equity securities to JUUL in March in exchange for a non-exclusive license to certain heated-tobacco intellectual property, recording a $250M loss. It expects to claim an approximately $6.5B ordinary loss for cash tax purposes relating to JUUL tax basis, while recording an approximately $1.6B unrecognized tax benefit pending IRS review.
- Nine-month marketing, administration and research costs rose 24.4%, primarily due to litigation-related charges, NJOY acquisition costs and increased intangible amortization. Litigation charges and provisions included shareholder derivative and JUUL-related settlements.
Outlook, management commentary and risks
- Altria narrowed full-year 2023 adjusted diluted EPS guidance to $4.91–$4.98, representing 1.5%–3.0% growth from the 2022 adjusted base of $4.84. Adjusted effective tax rate guidance remained 24.5%–25.5%.
- Management’s 2028 goals include mid-single-digit adjusted EPS and dividend growth, debt-to-Consolidated EBITDA of approximately 2.0x, and growth in U.S. smoke-free products. The company aims to approximately double U.S. smoke-free net revenue to $5B by 2028 from its 2022 base.
- Management estimated U.S. cigarette industry volume declined 8% in Q3, with illegal flavored disposable e-vapor products contributing an estimated 1.5–2.5 percentage points to declines over the prior 12 months. Cigarette shipment volume fell 11.6% in Q3; Marlboro retail share was 42.3%, down 0.3 percentage points year over year.
- Oral nicotine pouches represented 32.3% of the U.S. oral tobacco category in Q3, up 9.8 percentage points year over year. Altria’s oral segment gained revenue and operating income, but traditional smokeless brands lost share. NJOY ACE shipped approximately 7.5 million pods in Q3 and reached about 42,000 stores; management continued to target 70,000 stores by year-end.
- Key risks include inflation and pressure on consumer spending, category shifts and illicit e-vapor competition, tobacco volume declines, evolving FDA rules and authorization decisions, potential menthol/flavor and nicotine product standards, and significant litigation. The company reported 5,177 U.S. e-vapor cases as of October 23, 2023 and recorded a $235M provision for a settlement covering most of the JUUL multidistrict litigation, subject to participation and court approval.
- Altria recorded $373M of accrued tobacco and other litigation liabilities at September 30. Management said it could not estimate possible losses in many pending cases; adverse outcomes could materially affect results, cash flows or financial position. The filing also highlights potential impairment risk to the Skoal trademark if volume or valuation assumptions weaken.
Important facts for investors to verify
- Whether cigarette volume declines, discount mix and market-share trends stabilize, and whether pricing continues to offset lower volumes.
- Whether oral nicotine pouch growth and NJOY distribution translate into sustainable sales and earnings, including NJOY’s regulatory authorizations and contingent acquisition payments.
- Progress on litigation settlements and appeals, particularly the JUUL-related cases, and the potential financial exposure from unresolved tobacco litigation.
- Developments in the JUUL-related tax position, including IRS review, recognition of the tax benefit and any Corporate Alternative Minimum Tax effects.
- Whether the planned recognition of the $2.7B IQOS deferred gain in 2024 and the stated EPS guidance are realized, and how debt and cash generation progress toward the company’s leverage goal.