ALTRIA GROUP, INC. quarterly report, Q2 FY2023

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Altria Group, Inc. — Q2 2023 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2023. Unless otherwise noted, amounts are in U.S. dollars. NJOY results are consolidated from June 1, 2023.

Business context and key financial metrics

  • Altria’s principal businesses are U.S. smokeable products and oral tobacco products. It acquired NJOY, an e-vapor business, on June 1 for total consideration of approximately $2.9 billion, including contingent consideration.
  • Q2 revenue: $6.508 billion, down 0.5% year over year. Gross profit was $3.757 billion, up 2.5%; operating income was $2.905 billion, down 6.4%.
  • Q2 earnings: Net earnings were $2.117 billion versus $891 million; diluted EPS was $1.19 versus $0.49. Adjusted net earnings were $2.346 billion versus $2.282 billion, and adjusted diluted EPS was $1.31 versus $1.26. Reported comparisons were strongly affected by JUUL fair-value losses in 2022 and litigation charges in 2023.
  • First-half revenue and earnings: Revenue was $12.227 billion, down 1.7%; operating income was $5.662 billion, down 5.5%. Net earnings were $3.904 billion versus $2.850 billion; diluted EPS was $2.18 versus $1.57. Adjusted net earnings were $4.464 billion versus $4.329 billion, and adjusted diluted EPS was $2.50 versus $2.38.
  • Segment performance, Q2: Smokeable revenue was $5.820 billion, down 0.9%; adjusted operating companies income (OCI) was $2.886 billion, up 3.1%, with a 60.4% adjusted OCI margin. Oral tobacco revenue was $680 million, up 2.3%; OCI was $443 million, up 3.0%, with a 68.0% margin.
  • Cash flow and liquidity: First-half operating cash flow was $3.108 billion versus $2.561 billion; investing cash outflow was $2.858 billion, including $2.750 billion for NJOY; financing cash outflow was $3.418 billion. Cash and equivalents were $874 million at June 30, down from $4.030 billion at year-end. The company reported a working capital deficit and said available cash flow, credit capacity and market access should meet foreseeable needs.
  • Debt: Total debt was $27.195 billion at June 30, including a $2.0 billion term loan used to fund NJOY. Long-term debt was $25.2 billion, compared with $26.7 billion at year-end. Debt-to-Consolidated EBITDA was 2.2x. Altria repaid the term loan in full in July after receiving the remaining approximately $1.8 billion PMI payment; this subsequent event is not reflected in June 30 cash or debt balances.
  • Capital returns: First-half dividends paid were $3.365 billion. The annualized dividend rate was $3.76 per share. Altria repurchased $472 million of stock in the first half and had $528 million remaining under its $1.0 billion repurchase authorization at June 30.

Material changes versus the prior comparable period

  • Cigarette shipment volumes remained under pressure: first-half total cigarette shipments fell 10.0%; Q2 fell 8.7%. Management attributed weakness to industry declines and share losses, alongside consumer affordability pressures. Q2 estimated U.S. cigarette industry volume declined 7.5%.
  • Smokeable results benefited from pricing, which partly offset lower volume and higher costs. Marlboro’s Q2 retail share was 42.1%, down 0.6 percentage points year over year. Oral tobacco shipments fell 1.7% in Q2, while on! shipments grew 47.8%; on! share rose 2.1 points to 7.0%.
  • Operating expenses rose materially: marketing, administration and research costs increased 51.9% in Q2, primarily from litigation-related charges and NJOY acquisition costs. First-half costs rose 35.6%.
  • Adjusted EPS growth was more modest than reported EPS growth: Q2 adjusted diluted EPS increased 4.0%, and first-half adjusted diluted EPS increased 5.0%. Reported earnings were also influenced by investment accounting, including the 2022 JUUL fair-value losses and 2023 loss on disposition of JUUL shares.

Outlook, management commentary, risks and unusual items

  • 2023 guidance: Adjusted diluted EPS of $4.89–$5.03, representing 1%–4% growth from 2022 adjusted EPS of $4.84; adjusted effective tax rate of 24.5%–25.5%. Guidance includes planned smoke-free investments and approximately $50 million of NJOY-related amortization.
  • Long-term goals: Mid-single-digit adjusted diluted EPS and dividend growth through 2028; debt-to-Consolidated EBITDA near 2.0x; adjusted OCI margin of at least 60% annually for five years; and U.S. smoke-free revenue of $5 billion by 2028. These are targets, not guarantees.
  • Management cited inflation and consumer budget pressure, supply-chain and geopolitical uncertainty, discount-brand competition, declining cigarette consumption, and evolving tobacco preferences. Potential FDA action includes proposed menthol-cigarette and flavored-cigar restrictions and a proposed maximum nicotine level for combustible products.
  • The NJOY purchase price includes up to $500 million in contingent payments tied to FDA authorizations; the recorded fair value of that contingency was $130 million. Purchase accounting remains preliminary. NJOY ACE also faces patent litigation, including proceedings seeking to restrict imports or sales.
  • Altria agreed to a $235 million settlement covering most JUUL-related multidistrict and coordinated California cases, subject to final court-approved agreements; specified cases are excluded. The company also recorded first-half litigation charges, including $240 million for certain JUUL-related settlements and approximately $100 million for a shareholder derivative settlement, which includes a commitment to fund youth prevention and cessation programs over five years.
  • Other material uncertainties include tobacco and health litigation, including a $1 billion punitive award in the Fontaine case that Altria is challenging; MSA payment obligations; regulatory approvals for smoke-free products; and tax treatment of the former JUUL investment. Management stated that, apart from matters discussed in the filing, it could not conclude that losses in pending cases were probable and reasonably estimable.
  • The approximately $2.7 billion deferred gain from the PMI IQOS rights transaction is expected to be recognized when Altria relinquishes the rights effective April 30, 2024. The July 2023 PMI payment and term-loan repayment are subsequent to the reported quarter.

Most important facts for investors to verify

  • Progress toward the $4.89–$5.03 adjusted EPS guidance, and the assumptions underlying volume, pricing and smoke-free investment plans.
  • NJOY integration, FDA authorizations and the outcome of patent proceedings that could affect NJOY ACE distribution or sales.
  • Updated litigation settlement terms, appeals and any changes in accrued liabilities or cash payments.
  • Post-quarter cash and debt balances following the PMI receipt and term-loan repayment, alongside dividend and repurchase commitments.
  • Regulatory developments and consumer trade-down trends that could affect cigarette volumes, margins, MSA costs and asset values.