Q3 2024 Earnings Summary
- 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.
- 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.
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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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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.