Q1 2024 Earnings Summary
- Altria increased its full-year guidance, reflecting confidence in its core businesses and the positive impact of the ABI transaction.
- The smokable products segment is expected to benefit from lower SG&A costs throughout the year, contributing to margin growth and strong profitability. ,
- Marlboro demonstrated strong pricing power with an 8.5% price per pack increase, maintaining stable share in the premium segment despite economic pressures and down-trading. ,
- Growth of illicit disposable e-vapor products is negatively impacting Altria's legal e-vapor sales, particularly NJOY, whose retail sales have declined double digits over the past few months despite share gains. This suggests that illicit products are eroding market share and revenues in the e-vapor category.
- Consumer economic pressure due to cumulative inflation, increased debt levels, and high interest rates is impacting lower-income consumers' discretionary spending, putting pressure on Altria's core cigarette business. The company acknowledges that their consumers are under strain, which could lead to accelerated volume declines in the smokable segment.
- Higher costs in the smokable products segment, including increased MSA cost per pack and inventory accounting adjustments, led to a mid-teens increase in controllable cost per pack in Q1. These increased costs could continue to pressure profitability if not fully offset by price increases, which may be challenging given the economic strain on consumers.
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Guidance Raise and Underlying Performance
Q: Why was the guidance raise modest despite ABI share sale and buybacks?
A: Altria was pleased to revise their guidance, increasing the bottom end by a full percentage point and the top end by about 0.5 percentage point, reflecting confidence in their core businesses and providing flexibility to invest in innovative tobacco products. The guidance reflects the accretion from the ABI transaction. -
Sustainability of Pricing Strategy
Q: Is the strategy of raising prices despite volume declines sustainable?
A: Altria believes maximizing long-term profitability while investing in Marlboro and growth segments is the right strategy. They acknowledge consumers are under economic strain due to inflation and high interest rates but feel confident in their price realization of 8.5% this quarter, with consumers experiencing just under 6% at retail. They plan to continue making appropriate investments and supporting consumers under pressure. -
Smokable Segment Costs and EPS Guidance
Q: Can you meet EPS guidance despite higher smokable costs?
A: Altria is confident in growing margins in the smokable segment. The higher controllable cost per pack in Q1 was due to one-time accounting adjustments related to MSA costs and LIFO inventory valuation, impacting Q1 more than the rest of the year. They also benefit from lower SG&A costs, which will continue throughout the year. -
Pricing Strategy and Price Gaps
Q: Are you concerned about wider price gaps and down-trading?
A: While they cannot discuss future pricing decisions, Altria feels good about Marlboro's steady share and growth in the premium segment, despite some down-trading due to economic pressure. They manage price gaps at the store level using data analytics and believe their tools are effective. They also highlight the need for regulatory enforcement against illicit e-vapor products impacting volumes. -
ABI Stake and JUUL Losses
Q: Will you progressively exit the ABI stake over next 4 years?
A: Tax considerations are one of many factors in their capital allocation decisions regarding the ABI investment. The recent sale included both restricted and unrestricted shares, with a tax liability of less than $100 million, expected to be offset by JUUL losses. They await feedback from the IRS on JUUL losses and will consider future ABI transactions accordingly. -
R&D Spending Shift and Profitability
Q: Does shifting R&D affect smokable profitability growth?
A: There is a shift in R&D spending toward innovative products, contributing to lower SG&A costs in the smokable segment. This reduction benefits smokable profitability, which will continue throughout the year, alongside overall company EPS growth. -
NJOY Performance and Illicit Vapes
Q: Why is NJOY's sales declining despite share gains?
A: NJOY gained 60 basis points in share, but retail sales are down due to the growth of illicit disposable e-vapor products, which are impacting legal products. The pod segment, where NJOY competes, continues to shrink as illicit disposables grow. -
Oral Tobacco Strategy vs. Zyn
Q: What's your strategy with Zyn gaining share in oral tobacco?
A: Altria aims to maximize profitability while investing in Copenhagen and on!. They acknowledge moist smokeless consumers are moving to nicotine pouches to avoid social friction. They feel good about on!'s performance and plan to improve retail positioning and expand the product pipeline with on! PLUS pending FDA authorization. -
Consumer Pressure and Promotions
Q: How are you supporting consumers under economic pressure?
A: Altria is adjusting retail promotions using data analytics to address consumer economic pressures. They tailor promotions at the store level, providing options like Marlboro Black to keep consumers engaged with the brand even when under financial strain. -
on! Promotions and Market Share
Q: Have you increased promotions on on! due to share loss?
A: Altria hasn't specifically stepped up promotions to address share loss. They utilize advanced analytics to manage promotions, aiming to keep consumers engaged and induce trial. Despite short-term variability in retail pricing, they focus on long-term volume growth with significant year-over-year retail price increases.