Q2 2024 Earnings Summary
- Altria narrowed its full-year 2024 EPS guidance and expects adjusted diluted EPS growth to accelerate in the second half of the year, driven by factors such as the benefit from the acquisition of NJOY, two extra shipping days, and the expiration of legal fund payments, highlighting confidence in its financial outlook.
- NJOY is showing strong momentum with device retail share increasing to 25.4%, more than doubling sequentially, indicating potential for future growth in the smoke-free product category.
- Altria is seeing positive signs ("green shoots") in the market as inflation lessens and consumers adapt, suggesting potential stabilization in cigarette industry volumes, which could support future earnings growth.
- Declining cigarette volumes continue to pressure Altria's profits, with domestic cigarette volumes declining by over 11% in the second quarter, primarily due to macroeconomic factors and the growth of illicit e-vapor products. The company estimates that cross-category movement from cigarettes to illicit e-vapor contributed an estimated 2% to 3% of the cigarette industry decline over the last 12 months.
- Despite high margins, Altria's Smokeable Products segment adjusted operating income declined by 2% in the second quarter, as volume declines and increased costs weigh on profitability. The company is supporting consumers through investments in Marlboro Black, but controllable costs were up high single digits.
- Illicit e-vapor products and inconsistent regulatory enforcement pose significant challenges. Altria acknowledges that the e-vapor category continues to be overrun by illicit disposable products, which now represent more than 60% of the category, and enforcement efforts have been inadequate.
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EPS Guidance
Q: What are the drivers of second-half EPS growth?
A: The company expects a step-up in EPS growth in the second half due to factors such as lapping the acquisition of NJOY (which occurred in June of last year), two extra shipping days, the back-half weighting of their accelerated share repurchase program, and the expiration of the legal fund related to MSA costs in the fourth quarter. -
Illicit Vape Impact
Q: How are illicit vapes affecting cigarette declines and enforcement efforts?
A: The increasing prevalence of illicit vapor products is contributing to higher cigarette industry decline rates. While awareness of the issue is growing, enforcement actions need to significantly step up. In places like Louisiana, enforcement led to authorized vape products increasing and illicit ones dropping to nearly zero, but overall enforcement across the U.S. remains insufficient, allowing bad actors to entrench supply chains. -
Smokeable Segment Profits
Q: Are smokable profits expected to grow this year amidst volume declines?
A: Despite strong net price realization and margin performance, smokable volumes are down, increasing controllable costs per pack. Tailwinds expected in the second half include two extra shipping days and the expiration of the legal fund in Q4. The company is managing the business to maximize profitability while balancing investments in Marlboro and smoke-free products. -
MSA Legal Fund Impact
Q: What is the benefit from the expiration of the MSA legal fund?
A: The total legal fund of about $500 million will expire in the fourth quarter. The company pays its fair share based on shipments and will see a benefit of one-quarter this year, with the remaining three quarters impacting 2025. -
Industry Volume Trends
Q: Are there signs of stabilization in industry volume declines?
A: The company notes some "green shoots" with a more steady decline in cigarette volumes, partly due to lessening inflation. However, increased consumer movement to illicit vape products counteracts this trend, highlighting the need for sustained enforcement actions. -
NJOY Device Share
Q: Can you discuss NJOY's device share and conversion rates?
A: NJOY's device share has seen a significant sequential increase, reaching 25%. While it's early to provide conversion data from device to consumable sales, the company is optimistic about NJOY's positioning and plans to share more insights as data becomes available. -
ABI Stake and Credit Rating
Q: How does the ABI stake relate to the credit rating and future sales?
A: Maintaining an investment-grade credit rating is important for accessing the commercial paper market. The company manages a strong balance sheet with over $1 billion in excess cash after dividends. There is no change in how they view the ABI stake; it's considered a financial asset aimed at long-term shareholder value, with no immediate plans for further sales. -
Leaf Cost Inflation
Q: What is the outlook on leaf cost inflation?
A: The company is seeing some inflation in leaf costs due to higher labor and fuel expenses. However, since they blend multiple years of leaf and their cost of goods is relatively low, with high margins in the cigarette category, primary cost drivers remain MSA, federal excise taxes, and fees. They work closely with growers to manage costs effectively. -
Wholesale Shipment Trends
Q: Will shipment trends continue to lag consumption trends due to inventory dynamics?
A: While there was a sizable inventory headwind in the first half, overall inventories tend to balance over time. As volumes decline, inventories are expected to decrease commensurately. Retailers allocating shelf space to illicit vape products may also impact inventory levels in traditional categories. -
International RRP Expansion
Q: Are there plans to expand RRPs internationally, including NJOY and Swick?
A: Currently, the focus for NJOY is on the U.S. market, given the challenges with illicit vapes internationally. As for on! in Sweden and the U.K., market share figures are not yet disclosed due to early stages. Updates on Swick will be shared as they approach year-end.