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    Altria Group Inc (MO)

    Business Description

    Altria Group, Inc. (MO) is a leading American corporation that operates through several wholly owned subsidiaries, including Philip Morris USA Inc., John Middleton Co., U.S. Smokeless Tobacco Company LLC, Helix Innovations LLC, and NJOY, LLC. The company is primarily involved in the manufacture and sale of tobacco products, offering a range of smokeable, oral tobacco, and e-vapor products . Altria's product lines include well-known brands such as Marlboro cigarettes, Copenhagen and Skoal moist smokeless tobacco, and NJOY e-vapor products .

    1. Smokeable Products - Includes combustible cigarettes and machine-made large cigars, with Marlboro as the principal brand. PM USA is the largest cigarette company in the United States, and Middleton produces cigars .

      • Cigarettes - PM USA's primary product, with a shipment volume of 76.3 billion units in 2023 .
      • Cigars - Produced by Middleton, with a shipment volume of approximately 1.8 billion units in 2023 .

    2. Oral Tobacco Products - Consists of moist smokeless tobacco (MST) and snus products, featuring premium brands like Copenhagen and Skoal, and the value brand Red Seal. Helix Innovations also produces on! oral nicotine pouches .

    3. E-Vapor Products - Sold by NJOY, LLC, including the NJOY ACE, the only pod-based e-vapor product with FDA market authorization. NJOY contracts with third-party importers for its products .

    4. All Other - Encompasses research and development for new product platforms and technologies, including NJOY, Horizon, and Helix International .

    Q3 2024 Summary

    Initial Price$45.90July 1, 2024
    Final Price$50.93October 1, 2024
    Price Change$5.03
    % Change+10.96%

    What went well

    • Marlboro continues to grow in the Premium segment, supported by Altria's implementation of Revenue Growth Management (RGM) strategies, allowing for more effective pricing and resource allocation in the marketplace.
    • Altria is making great progress in resolving the patent litigation with JUUL over NJOY products by filing PMTA exemptions for simple changes to the exterior of the product, and is confident in their contingency plans, indicating that JUUL is worried about the success that NJOY has had in the marketplace.
    • Altria's joint venture with Japan Tobacco on the Ploom device, a heat-not-burn product, with plans to file a combined PMTA MRTP in the first half of 2025, positions the company to capitalize on growth in emerging nicotine product categories, with e-vapor expected to be the largest category.

    What went wrong

    • Altria faces potential disruption in its smoke-free portfolio due to ongoing patent litigation with JUUL over its NJOY products, with a final determination date set for December 23rd; if the International Trade Commission rules against them, an exclusion order could stop imports of NJOY products.
    • The widening price gap between Marlboro and the lowest competitive cigarette brands, now at 47%, amid consumer economic pressures and increased downtrading to deep discount brands, may negatively impact Marlboro's market share.
    • Despite stronger-than-expected Q3 results, shipment timing benefits and inventory adjustments suggest potential earnings deceleration in Q4, raising concerns about over-shipments in Q3 that may unwind.

    Q&A Summary

    1. Guidance and Earnings Outlook
      Q: Despite strong Q3, why maintain broad guidance range?
      A: Management reaffirmed guidance, acknowledging economic strain on consumers and dynamic market conditions. They believe maintaining the current range is appropriate due to quarter-to-quarter fluctuations and the impact of illicit products affecting all categories.

    2. Patent Litigation with JUUL
      Q: How will JUUL's lawsuit affect NJOY products?
      A: The company expects a final determination in December regarding the patent infringement case. They have filed PMTA exemptions for three of the four patents, involving simple exterior changes to NJOY products. Teams are working on avoiding infringement of the fourth patent. Negotiations with JUUL continue, but no significant updates are available.

    3. Cost Management and Margins
      Q: What drove the impressive EBIT margin improvement in smokables?
      A: Controllable costs decreased in the quarter, contributing to a 350 basis point EBIT margin expansion. However, management attributed this to timing factors and cautioned against extrapolating this trend, suggesting costs may normalize over the longer term.

    4. Pricing Strategy and Consumer Trends
      Q: Any concerns about widening price gaps impacting Marlboro?
      A: While the national price gap is at 47%, management is leveraging Revenue Growth Management (RGM) to address price gaps at the store level. They focus on maximizing long-term profitability and are monitoring consumer economic strain and down-trading, but remain confident in Marlboro's performance in the premium segment.

    5. Competitor's Heated Tobacco Offering
      Q: How will a competitor's heated tobacco product affect you?
      A: Management acknowledges the new product and will monitor its impact. They believe e-vapor will remain the largest growth category, followed by nicotine pouches and then heated tobacco. The company is progressing with its joint venture with Japan Tobacco for the Ploom device, aiming to file a PMTA in the first half of 2025.

    6. NJOY Product Adjustments
      Q: Will changes to NJOY products affect FDA applications?
      A: Further changes to circumvent the remaining patent would require new SE applications. The company emphasizes that the adjustments involve minor exterior modifications that do not change the device's function.

    7. Joint Venture with Japan Tobacco (JT)
      Q: Does JT's U.S. acquisition affect your partnership?
      A: There is no impact on the joint venture for the Ploom device. The collaboration is progressing well, with teams working together on the PMTA application process.

    8. Regulatory Developments
      Q: Timeline for FDA's proposed import rule implementation?
      A: The company has urged the FDA to expedite enforcement without going through the proposed rule process, as they believe the FDA already has the jurisdiction. They await the FDA's response and have no specific timeline to share.

    9. Shipping Days and Inventory Impact
      Q: How did shipping days affect Q3 and Q4 expectations?
      A: An extra shipping day in Q3 benefited results, with another extra day expected in Q4. Management noted that inventory fluctuations tend to balance out over time, and there's nothing significant to highlight regarding shipments and inventories.

    10. Economic Strain on Consumers
      Q: Are economic pressures influencing consumer behavior?
      A: Yes, management observes that economic strain is leading some consumers to down-trade or shift due to the impact of illicit products across categories, including nicotine pouches and e-vapor. They continue to monitor these trends closely.

    Key Metrics

    View all financials →
    Revenue by Segment - in Millions of USDFY 2013Q1 2014Q2 2014Q3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    Smokeable Products5,0905,8205,5725,27421,7564,9065,4955,540
    - Cigarettes----20,665---
    - Cigars----1,091---
    Oral Tobacco Products6286806856742,667651711722
    Smokeless Products--------
    Wine--------
    All Other18242760193-3
    Total Revenue5,7196,5086,2815,97524,4835,5766,2096,259
    KPIs - MetricFY 2013Q1 2014Q2 2014Q3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    NJOY Consumables Shipment Volume--7.511-10.912.510.4
    NJOY Device Shipment Volume--0.90.9-11.81.1
    NJOY Share of the E-Vapor Category---3.7-4.35.56.2
    U.S. Nicotine Pouch Category Share26.229.132.335.9-40.141.643.9
    Traditional Smokeless Category Share-70.967.764.1-59.958.456.1
    Copenhagen Oral Tobacco Category Share25.424.323.121.7-20.119.518.7
    Shipments of Premium Cigarettes as a Percentage94.394.695.0--95.695.896.1

    Executive Team

    NamePositionStart DateShort Bio
    Jody L. BegleyExecutive Vice President and Chief Operating OfficerN/AJody L. Begley leads Altria's core tobacco and smoke-free businesses, as well as the Consumer Experience and Operations Logistics support functions .
    Daniel J. BryantVice President and TreasurerN/ADaniel J. Bryant has been employed by Altria or its subsidiaries in various capacities during the past five years .
    Steven D’AmbrosiaVice President and ControllerFebruary 27, 2023Steven D’Ambrosia has been serving as Vice President and Controller since at least February 27, 2023 .
    Murray R. GarnickExecutive Vice President and General Counsel (Retired)Retired April 1, 2024Murray R. Garnick managed complex litigation matters and played a key role in legal strategies for transactions and regulatory affairs. He retired effective April 1, 2024 .
    William F. Gifford, Jr.Chief Executive OfficerApril 2020William F. Gifford, Jr. has been CEO since April 2020. He joined Altria in 1994 and has held numerous senior leadership roles .
    Salvatore MancusoExecutive Vice President and Chief Financial OfficerN/ASalvatore Mancuso has been employed by Altria or its subsidiaries in various capacities over the past five years .
    Heather A. NewmanSenior Vice President, Chief Strategy & Growth OfficerN/AHeather A. Newman leads Altria's Enterprise Strategy, Planning & New Ventures, International & Corporate Development, and Digital Transformation & Technology functions .
    W. Hildebrandt Surgner, Jr.Vice President, Corporate Secretary and Associate General CounselN/AW. Hildebrandt Surgner, Jr. serves as Vice President, Corporate Secretary, and Associate General Counsel at Altria Group, Inc. .
    Charles N. WhitakerSenior Vice President, Chief Human Resources Officer and Chief Compliance OfficerN/ACharles N. Whitaker has been employed by Altria or its subsidiaries in various capacities over the past five years .
    Robert A. McCarter IIIExecutive Vice President and General Counsel (Effective April 1, 2024)April 1, 2024Robert A. McCarter III was elected to become Executive Vice President and General Counsel, effective April 1, 2024. He has been with ALCS in legal positions since 2015 .

    Questions to Ask Management

    1. Given the ongoing patent infringement lawsuit filed by JUUL against NJOY, which could potentially result in an exclusion order and halt imports of NJOY products by the end of December, can you provide more details on your contingency plans, specifically regarding the substantial equivalence applications and design changes to circumvent the patents, and how confident are you in receiving FDA approval in time?

    2. Regarding your "optimize and accelerate" initiative aiming to achieve at least $600 million in cumulative cost savings over the next five years through modernizing processes and leveraging artificial intelligence and automation, can you elaborate on the specific areas where these savings will come from, how these changes will impact your workforce, and what risks may affect your ability to achieve these savings?

    3. With the growth of illicit flavored disposable e-vapor products contributing to elevated cigarette industry volume declines and impacting your e-vapor category growth, what specific actions are you taking to address this issue, and how effective do you expect regulatory enforcement to be in curbing the proliferation of these products?

    4. In light of Japan Tobacco's recent acquisition in the U.S. cigarette market and considering your partnership with them on the Ploom device, how might this change in their market presence impact your joint venture and the competitive dynamics in the U.S., and are there plans to adjust your strategy accordingly?

    5. Given the elevated cigarette industry volume declines due to economic pressures on consumers, the growth of the discount segment by 1.5 share points, and Marlboro's retail share decline both year-over-year and sequentially, how do you plan to balance your pricing strategy with market share retention in the premium segment while addressing the shift toward discount products?

    Share Repurchase Program

    Program DetailsProgram 1
    Approval DateJanuary 2024
    End Date/DurationDecember 31, 2024
    Total Additional Amount$3.4 billion
    Remaining Authorization$310 million
    DetailsIncreased from $1.0 billion to $3.4 billion in March 2024

    Past Guidance

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Full Year Adjusted Diluted EPS: $5.07 to $5.15, representing a growth rate of 2.5% to 4% from a base of $4.95 in 2023 .
      2. Share Repurchase Program: $310 million remaining under the current share repurchase program, expected to complete by year-end .
      3. Cost Savings Initiative: Multi-phase initiative expected to deliver at least $600 million in cumulative cost savings over the next 5 years, with total pretax charges for the initial phases estimated at approximately $100 million to $125 million .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Adjusted Diluted EPS: Narrowed full-year 2024 guidance range to $5.07 to $5.15, representing a growth rate of 2.5% to 4% from a base of $4.95 in 2023 .
      2. Factors Influencing Second Half Growth:
        • Timing of the NJOY acquisition in June 2023.
        • Two additional shipping days in the second half of the year.
        • Benefit of an accelerated share repurchase program, which is back half weighted.
        • Expiration of the legal fund related to the Master Settlement Agreement (MSA) costs in the fourth quarter .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Adjusted Diluted EPS for 2024: Reaffirmed guidance to deliver full-year adjusted diluted EPS in the range of $5.05 to $5.17, representing a growth rate of 2% to 4.5% from a base of $4.95 in 2023 .
      2. Share Repurchase Program: Expanded share repurchase program to $3.4 billion. Implemented a $2.4 billion accelerated share repurchase program, with 46.5 million shares received in March, representing 85% of the ASR Program. Expected to receive shares representing the remaining 15% by the end of the second quarter. Anticipated having $1 billion remaining under the currently authorized share repurchase program, expected to complete by year-end .

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: FY 2024
    • Guidance:
      1. Adjusted Diluted EPS: Expected to deliver a full-year adjusted diluted EPS in the range of $5 to $5.15, representing an adjusted diluted EPS growth rate of 1% to 4% from a $4.95 base in 2023. Growth expected to be weighted towards the second half of the year .
      2. Additional Shipping Days: Guidance includes the impact of 2 additional shipping days in 2024 .
      3. Impact from Illicit E-Vapor Enforcement: Assumes limited impact from illicit e-vapor enforcement on combustible and e-vapor volumes .