Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Altria Group Inc (MO, Financial) reported strong performance in its innovative smoke-free products, with NJOY showing significant volume and share growth.
- NJOY received the first and only marketing granted orders from the FDA for menthol e-vapor products, marking a significant regulatory milestone.
- The company returned significant value to shareholders, delivering more than $5.8 billion through share repurchases and dividends in the first half of the year.
- Altria Group Inc (MO) saw strong results from its oral tobacco product, on!, which grew its retail share and shipment volume significantly.
- The company maintained a strong balance sheet with a debt-to-EBITDA ratio of 2.1 times, aligning with its capital structure goal of approximately 2 times.
Negative Points
- Adjusted diluted earnings per share declined by 1.6% for the first half of the year.
- Cigarette industry shipment volumes remained pressured due to macroeconomic factors and the growth of illegal disposable e-vapor products.
- The company identified more than 350 illicit nicotine pouch SKUs, indicating a growing challenge in the illicit market.
- Altria Group Inc (MO) recorded a noncash pre-tax impairment of $354 million for the Skoal trademark due to evolving consumer preferences and the growth of oral nicotine pouches.
- The smokable products segment saw a decline in domestic cigarette volumes by 13% in the second quarter and 11.5% for the first half.
Q & A Highlights
Q: You narrowed your EPS guidance that implies the midpoint stays the same. What are the drivers of growth in the back half, and how much visibility do you have on this given the challenging environment?
A: We narrowed guidance as our EPS for the first half was in line with expectations. For the second half, factors include lapping the NJOY acquisition, two extra shipping days, benefits from our accelerated share repurchase program, and the expiration of the legal fund related to the MSA in the fourth quarter.
Q: Despite expanding operating margins in the smokable segment, dollar profits didn't increase. Could you talk about the drivers behind these costs and the outlook for smokable profits?
A: We are managing the smokable business to maximize profitability and balance investments. We are pleased with strong net price realization and margin performance. Tailwinds in the second half include two extra shipping days and the expiration of the legal fund. We are also lapping investments in Marlboro Black, which helps engage price-sensitive consumers.
Q: How are adult consumers reacting to enforcement efforts against illicit vapor products, and what impact does this have on cross-category movement?
A: Enforcement needs to step up significantly. Early trends in Louisiana showed authorized products increased and illicit products went to zero, with a slight improvement in cigarette volume declines. However, the lack of enforcement across the US allows illicit products to remain prevalent.
Q: What proportion of US cigarette volumes do the seven states that have passed but not yet enforced measures against illicit vapor products represent?
A: We don't have that number off the top of our heads, but we will follow up. The delay in enforcement is due to states trying to implement a comprehensive approach. We believe state registry bills can be effective when properly enforced.
Q: Are there legislative measures that could help with the illicit vapor product problem, and could we see acceleration after the US election?
A: Regardless of the election outcome, we will work with the new administration. The focus should be on harm reduction, with both authorizations for legitimate smoke-free products and enforcement against illicit products. The FDA has the necessary tools and should take action.
Q: Can you provide recent data on the conversion rates for NJOY Ace and the proportion of people trialing the product who continue using it?
A: It's early yet, but we are seeing increased visibility and consumer engagement with NJOY. We will share more data on conversion rates as we gather sufficient information.
Q: How important is maintaining an investment-grade credit rating, and could this mean a further stake sale in ABI is unlikely?
A: Maintaining a strong balance sheet and investment-grade credit rating is important. We have a balanced approach to capital allocation, including share repurchase and debt management. There is no change in how we view the ABI asset; it remains a financial asset for long-term shareholder value.
Q: What options do authorities have to evolve regulation to control new alternative nicotine products, and is resetting the deeming regulation date feasible?
A: The FDA can take several actions, such as litigation or civil penalties against illicit manufacturers and distributors, and preventing illicit products from entering the borders. Enforcement is key to holding actors accountable to regulations.
Q: Are you seeing any green shoots in industry volume trends, and is there an improvement in cigarette industry volume trends?
A: We are seeing some green shoots, such as lessening inflation, but the cumulative impact of prolonged inflation still affects consumers. We also see increased movement to illicit vape products due to their prevalence.
Q: Can you help us understand the benefit of the expiration of the MSA legal fund in Q4 and 2025?
A: The total legal fund is about $500 million, and we pay our fair share based on shipments. We will see a benefit in Q4 this year and the remaining three quarters in 2025.
Q: Are you seeing lower leaf cost inflation in the second half, and will this benefit you in the next 13 months?
A: We are seeing some inflation in leaf costs due to higher labor and fuel costs. However, our cost of goods is relatively low, and we have high margins in the cigarette category. Our team does a great job of securing high-quality leaf at competitive prices.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
