U.S. Markets closed

Altria Group's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Altria Group Inc. (MO) Q3 2013 Earnings Call October 24, 2013 9:00 AM ET

Executives

Martin Barrington – Chairman and CEO

Howard Willard – EVP and CFO

Sarah Knakmus – Vice President, Investor Relations

Analysts

David Adelman – Morgan Stanley

Thilo Wrede – Jefferies & Company

Christopher Growe – Stifel Nicolaus

Vivien Azer – Citigroup

Bonnie Herzog – Wells Fargo Securities, LLC

Judy Hong – Goldman Sachs

Filippe Goossens – Mitsubishi Securities

Michael Lavery – Credit Agricole Securities (USA) Inc

Chris Evert – Bloomberg News

Thomas Russo – Gardner Russo & Gardner

Operator

Good day and welcome to the Altria Group Q3 2013 earnings conference call. (Operator instructions) I would now like to turn the call over to Ms. Sarah Knakmus, Vice President, Investor Relations for Altria Client Services. Please go ahead ma’am.

Sarah Knakmus

Thank you. Good morning and welcome to Altria’s Q3 earnings conference call. We are here this morning with Marty Barrington, Altria’s Chairman and CEO and Howard Willard, Altria’s Chief Financial Officer. This morning we will only be discussing Altria’s business results for Q3 and first nine months of 2013 and we will not be discussing the status of tobacco litigation. Our remarks contain forward-looking cautionary statements and projections of future results.

May I direct your attention to the forward-looking and cautionary statement section at the end of our earnings release for review of the various factors that could cause actual results to differ materially from projections. Time periods referencing these remarks are to the relevant 2013 period unless another year is identified. Similarly, comparisons are to the comparable year or period unless otherwise stated. For a detailed review of Altria’s business results please review the earnings release that is available on our web site Altria.com. Altria reports its financial results in accordance with U.S. generally accepted accounting principles. Today’s call will contain various operating results on both a reported and adjusted basis which excludes items that affect the comparability of reported results. Descriptions of these measures and reconciliations are included in today’s earnings press release and are available on our web site.

Now I will turn the call over to Marty.

Martin Barrington

Thanks Sarah. Good morning everyone. In the first nine months of the year Altria continued to execute against our long term objectives of delivering consistent adjusted diluted EPS growth in the range of 7% to 9% and maintaining a strong and growing dividend.

Strong Q3 results driven by contributions across our businesses helped produce adjusted diluted EPS growth of 9% for the first three quarters. Also during Q3 we increased our dividend by 9.1% marking the 47 th dividend increase in the 44 years. Overall our businesses are on track against their full year objectives and Altria remains focused on creating long term value for shareholders.

During both the quarter and the first nine months our strategies and diverse business model continued to produce strong results. Our tobacco operating companies grew adjusted operating companies income behind their leading premium tobacco brands and are alcohol assets also delivered income growth.

Additionally we used our capital structure to reward shareholders through share repurchases and we expanded our buyback program.

In the smokable product segment, PM USA balanced income growth with shared gains in a competitive environment. Higher pricing helped drive income growth in both the quarter and for the first nine months. PM USA grew its total retail share in both periods and held Marlboro’s retail share flat versus its strong performance in both periods a year ago. The Marlboro Black family continues to contribute to the brand success and later this month PM USA will expand distribution of Marlboro Edge nationally. Marlboro Edge offers adult smokers bold smooth flavor.

In third quarter, Q3 PM USA benefited from stronger shipment volume as volume declines moderated versus the previous quarters of 2013. PM USA’s reported cigarette shipments grew 1.2% for Q3. After adjusting for calendar differences and changes in trade inventories, PM USA estimates that its Q3 domestic cigarette shipment volume was down approximately 3%, less than the estimated 3.5% decline rate for the total cigarette category.

Also, after adjusting for trade inventory changes PM USA estimates that both its cigarette volume and total category volume declined approximately 4% for the [technical difficulty] with a 3% to 4% category decline rate we've seen for the last couple of years.

Altria's smokeless product segment continue to perform well as higher pricing and higher volume drove strong adjusted operating Company's income growth for both the quarter and first nine months. USSTC grew, Copenhagen and Skoal’s combined volume and retail share for both reporting periods.

In addition to producing strong results in our core businesses we are developing innovative tobacco products for adult tobacco consumers. In August, Nu Mark introduced MarkTen e-vapor products into a lead market in Indiana and we're pleased with the results so far. Further Nu Mark plan [technical difficulty] and our expectation for the rest of the year, we are reaffirming Altria's guidance for 2013 full-year adjusted diluted EPS to be in the range of $2.36 to $2.41. This represents a growth rate between 7% and 9% from an adjusted diluted EPS base of $2.21 in 2012.

I'll now turn things over to Howard, who will discuss our business results in more detail.

Howard Willard

Thank you, Marty. Good morning, everyone. In the smokeable product segment third quarter reported operating Company's income grew by 11.5%, primarily due to higher pricing from previously disclosed NPM arbitration panel decision and higher reported shipment volume. These factors were partially offset by higher promotional investments, higher resolution expense and higher selling, general and administrative cost due to the timing of spending.

For the first nine months of 2013, the smokeable product segment's reported operating Company's income grew by 16%, primarily due to PM USA's NPM adjustment settlement, the NPM arbitration panel decision and higher pricing. These factors were partially offset by lower reported shipment volume and higher resolution spends.

Excluding the special items identified in our earnings press release, adjusted operating Company's income for the smokeable product segment grew by 3.1% to approximately $1.7 billion for the third quarter, and increased by 2% to approximately $4.8 billion for the first nine months.

PM USA grew its total retail share by two-tenths of a share point to 50.7% for the third quarter and by three-tenths of a share point to 50.6% for the first nine months.

Marlboro's retail share was unchanged versus both prior year periods at 43.7% for the quarter and 43.6% for the first nine months. PM USA's discount share was 3.9% for both periods, up three-tenths of a share point for the third quarter and up five-tenths of a share point for the first nine months. L&M contributed to PM USA's discount share gains in both periods.

Cigar shipment volume increased 6% for the third quarter and decreased 6.6% for the first nine months. Black & Mild's retail share decreased 1.1 share points for the third quarter and 1.6 share points for the first nine months.

Turning to the smokeless product segment, reported operating Company's income, for the third quarter, increased 12.6%, primarily due to higher volume, higher pricing and 2012 restructuring charges related to the current cost reduction program. These factors were partially offset by higher promotional investments and higher selling, general and administrative expenses.

For the first nine months of 2013, the segment's reported operating Company's income increased 13.4% primarily due to the same factors that drove growth for the quarter, partially offset by higher promotional investments and unfavorable mix due to the growth in products introduced in recent years at a lower popular price.

When adjusted for the special items identified in our earnings press release, the smokeless product segment's operating Company's income grew 9.1% for both periods.

For the third quarter USSTC and PM USA’s combined reported domestic smokeless product shipment volume increased 9.5%, primarily due to one extra shipping day and volume growth for Copenhagen and Skoal.

For the first nine months USSTC and PM USA’s combined reported domestic smokeless shipment volume increased 6% due to volume growth for Copenhagen and Skoal, partially offset by declines for the other portfolio brands. Copenhagen and Skoal’s combined reported shipment volume increased 10.5% for the third quarter and 7.2% for the first nine months.

After adjusting for an extra shipping day, trade inventory changes and other factors USSTC and PMUSA estimate that their combined domestic smokeless product shipment volume grew approximately 4% for the third quarter. After adjusting for trade inventory changes and other factors USSTC and PM USA estimate that their combined domestic smokeless product shipment volume grew approximately 5% for the first nine months, in line with estimated volume growth for the smokeless products category over the 12 months ending September 30, 2013.

For the third quarter and the first nine months Copenhagen and Skoal’s combined retail share increased 0.1 and 0.4 of a share point, respectively. USSTC and PMUSA’s combined retail share for the third and the first nine months decreased 0.3 and 0.2 of a share point, respectively, as retail share losses for Skoal and other portfolio brands were mostly offset by retail share gains for Copenhagen.

Ste. Michelle grew operating company’s income by 7.7% for the third quarter due to improved premium mix and higher pricing, partially offset by higher selling general and administrative expenses and lower shipment volume. For the first nine months, Ste. Michelle grew operating company’s income by 15.9% due to higher shipment volume, improved premium mix and higher pricing, partially offset by higher selling, general and administrative expenses.

Ste. Michelle’s shipment volume decreased 2% for the third quarter primarily due to changes in trade inventories. For the first nine months Ste. Michelle’s shipment volume grew 4.7% primarily due to increased distribution of 14 hands [ph].

During the third quarter Altria paid $883 million in dividends and purchased shares valued at approximately $156 million. Marty and I will now take your questions.

While the calls are compiled let me cover a few housekeeping items. As a reminder the tobacco product pricing and retail share figures are from the tracking services we introduced in the first quarter of 2013. We will also provide you with restated figures from the third quarter of 2012 so you will be able to compare the periods.

Marlboro’s price gap versus the lowest effective price cigarette was 34% in the third quarter of 2013 and 35% in the third quarter of 2012. Marlboro’s net pack price in the third quarter of 2013 was $5.86 while the lowest effective price cigarette was $4.36. For the third quarter of 2012 Marlboro’s net pack price was $5.77 while the lowest effective price cigarette was $4.27.

The cigarette discount category’s retail share was 25.3% for third quarter of 2013, flat versus third quarter of 2012. The estimated weighted average cigarette state excise tax as of September 30, 2013 was $1.47 per pack, an increase of $0.06 per pack versus the third quarter of 2012. This includes the $1.60 per pack increase that took effect on July 1 in Minnesota, the $1.00 per pack increase that took effect on July 31 in Massachusetts and the $0.10 increase that became effective August 1 in New Hampshire.

For the third quarter of 2013 Copenhagen’s retail price was $4.06 and its price gap versus the leading discount brand was approximately 36%. For the third quarter of 2012 Copenhagen’s retail price was $4.02 and its price gap versus the leading discount brand was approximately 36%. For the third quarter of 2012 Copenhagen's retail price was $4.02 and its price gap versus the leading discount brand was approximately 37%.

CapEx was $49 million for the third quarter and $90 million for the first nine months of 2013. Ongoing depreciation and amortization was $52 million for the third quarter, we estimate that 2013 full year ongoing depreciation and amortization will be approximately $215 million.

Thank you for your time this morning. Operator, do we have any questions?

Earnings Call Part 2: