Altria Group, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited consolidated results; comparisons are with Q1 2019. Altria’s businesses include smokeable products, oral tobacco products, wine and investments including ABI, JUUL and Cronos. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net revenues | $6.359 billion | $5.628 billion |
| Gross profit | $2.873 billion | $2.811 billion |
| Operating income | $2.336 billion | $2.238 billion |
| Net earnings attributable to Altria | $1.552 billion | $1.120 billion |
| GAAP diluted EPS | $0.83 | $0.60 |
| Adjusted net earnings / diluted EPS | $2.034 billion / $1.09 | $1.734 billion / $0.92 |
| Operating cash flow | $3.129 billion | $2.289 billion |
| Capital expenditures | $52 million | $38 million |
Revenue grew 13.0%; GAAP net earnings rose 38.6%, and adjusted net earnings rose 17.3%. Adjusted diluted EPS increased 18.5%. Revenue includes excise taxes. Calculated consolidated gross margin was approximately 45.2% versus 49.9%, and operating margin was approximately 36.7% versus 39.8%; the wine inventory and grape-commitment charges materially affected comparability.
Cash and cash equivalents were $5.616 billion at quarter-end. Total debt was approximately $30.0 billion: $3.0 billion of short-term borrowings and $27.0 billion of long-term debt. Current assets of $7.935 billion were below current liabilities of $11.154 billion, including $4.419 billion of accrued settlement charges and $1.565 billion of dividends payable. Management described liquidity as adequate. Altria drew the full $3.0 billion revolving credit facility as a precaution amid COVID-19 market uncertainty; its credit-agreement EBITDA-to-interest covenant ratio was 9.0x versus a 4.0x minimum, and it was in compliance.
Cash dividends paid were $1.563 billion. The annualized dividend rate was $3.36 per share; the stated payout objective remained approximately 80% of adjusted diluted EPS, subject to Board discretion. Operating cash flow less capital expenditures was approximately $3.077 billion, calculated from reported figures.
Segments and material changes
- Smokeable products: Revenue was $5.606 billion, up 13.6%; operating companies income (OCI) was $2.370 billion, up 22.7%. Adjusted OCI was $2.392 billion and adjusted OCI margin 55.3%. Reported cigarette shipments rose 6.1%, influenced by pantry loading, calendar differences and trade inventory movements; adjusted for these factors, management estimated volume declined about 5%. Cigarette retail share fell 0.7 percentage points to 49.2%; Marlboro share declined 0.5 points.
- Oral tobacco products: Revenue was $601 million, up 11.3%; OCI was $414 million, up 15.6%. Adjusted OCI was $416 million and adjusted margin 73.0%. Shipments rose 2.8%, but retail share declined 2.8 points to 50.4%, primarily amid rapid growth in oral nicotine pouches and declines in traditional products.
- Wine: Revenue was $146 million, down 3.3%; reported OCI was a loss of $379 million. Ste. Michelle recorded $392 million of charges: a $292 million inventory write-off and $100 million for future non-cancelable grape commitments. Adjusted OCI was $13 million versus $15 million. It expects up to approximately $25 million of additional charges in 2020 and described a strategic reset to reduce products, costs, capital spending and working capital.
Interest and other debt expense fell to $275 million from $384 million, largely reflecting prior-year debt issuance costs. Cronos-related financial-instrument losses declined to $137 million from $425 million, primarily due to changes in fair values of Cronos warrants and preemptive rights. These items, along with the large wine charge and other special items, make reported earnings comparisons less representative of underlying operations.
Outlook, commentary and risks
- Altria withdrew its 2020 adjusted diluted EPS growth forecast of 4%–7% over its recast 2019 adjusted EPS base of $4.21, citing COVID-19 uncertainty, economic recovery scenarios and uncertain ABI contributions. It also withdrew its three-year adjusted EPS growth objective and said it would restore guidance when appropriate.
- Management expected U.S. adjusted cigarette industry volume to decline 4%–6% in 2020 and stopped providing a multi-year volume-decline forecast, citing volatility across tobacco categories.
- COVID-19 had not materially disrupted core tobacco operations or supply and distribution chains by the filing date, according to management. Several manufacturing facilities were temporarily suspended in March and resumed operations under enhanced safety protocols in April. On! capacity expansion could be delayed; the IQOS launch in Charlotte was postponed.
- Altria deferred certain federal and state income-tax and federal excise-tax payments under COVID-19 relief measures to preserve liquidity. It made no share repurchases in Q1 and rescinded the remaining $500 million of its repurchase authorization in April.
- ABI reduced its upcoming dividend by 50% and withdrew 2020 earnings guidance. Altria expected about $100 million less in ABI cash dividends in Q2 and reduced its 2020 expectations for ABI earnings and dividends. Altria’s ABI investment had a $18.5 billion carrying value versus $8.8 billion fair value at March 31; management deemed the decline temporary and recorded no impairment, but a future impairment could be material.
- Altria’s $4.2 billion JUUL investment was not impaired in Q1. In April, the FTC challenged the investment, seeking remedies that could include divestiture or rescission; the administrative trial was scheduled for March 2021. Numerous JUUL-related lawsuits and government investigations are also pending.
- Other material exposures include tobacco and health litigation, state settlement and FDA user-fee payments, and extensive tobacco regulation. Management stated it generally could not estimate possible losses for pending litigation where no provision was recorded. State settlement and FDA user-fee charges were approximately $1.1 billion in Q1; estimated charges were approximately $4.5 billion for 2020, subject to adjustments.
Most important facts for investors to verify
- Whether COVID-19-related pantry loading, consumer trading down, facility interruptions or economic weakness alter tobacco volumes and margins after Q1.
- Whether Altria restores earnings guidance, and the effects of lower ABI dividends and operating results on equity earnings and cash generation.
- Developments in the ABI fair-value shortfall and whether management continues to conclude it is temporary rather than an impairment.
- Outcomes and potential remedies in the FTC JUUL challenge, JUUL regulatory reviews, and related litigation or investigations.
- Ste. Michelle’s demand recovery, execution of its strategic reset, grape-commitment cash payments over the next five years, and additional charges.
- Debt, liquidity and covenant headroom as settlement payments, dividends and deferred tax payments come due; and developments in tobacco litigation and state settlement disputes.