Altria's (MO) Q2 Earnings Beat Estimates, Revenues Down Y/Y
Altria Group Inc. MO released second-quarter 2020 results, wherein the bottom line came ahead of the Zacks Consensus Estimate and climbed year over year on the back of higher adjusted operating companies income (OCI) in the smokeable and oral tobacco products segments. However, revenues were hurt by declines in the smokeable products unit.
Quarter in Detail
Adjusted earnings came in at $1.09 per share, which rose 0.9% year over year and beat the Zacks Consensus Estimate of $1.06. The uptick can be attributed to increased OCI in the smokeable and oral tobacco product segments along with a reduced number of outstanding shares. This was somewhat offset by a decrease in adjusted earnings from the company’s equity investment in AB InBev BUD.
Altria Group, Inc. Price, Consensus and EPS Surprise
Altria Group, Inc. price-consensus-eps-surprise-chart | Altria Group, Inc. Quote
Net revenues dropped 3.8% year over year to $6,367 million. Revenues, after deducting excise taxes, slipped 2.5% to $5,062 million. The consensus mark was $5,074 million. Revenues were hurt by softness in the smokeable products segment.
Segment Details
Smokeable Products: Net revenues in the category fell 4.3% year over year to $5,603 million due to reduced shipment volumes, somewhat negated by higher pricing and a decrease in promotional investments. Revenues, net of excise taxes, dropped 2.8% year over year to $4,338 million.
Reported domestic cigarette shipment volumes declined 8.8% year over year, mainly due to trade inventory movements. On an adjusted basis, however, smokeable products’ domestic cigarette shipment volumes fell an estimated 2% and total domestic cigarette industry volumes remained flat.
Meanwhile, Altria’s reported cigar shipment volumes dropped 1.4%. During the quarter, total cigarette retail share declined 1 percentage point to 49%. Adjusted OCI in the segment improved 3.3% to $2,508 million, owing to better pricing, lower costs and reduced promotional investments, partly countered by a decrease in shipment volumes. Adjusted OCI margin rose 3.4 percentage points to 57.8%.
Oral Tobacco Products: Net revenues in the segment improved 9.6% from the year-ago quarter to $660 million, driven by greater pricing and shipment volumes. Revenues, net of excise taxes, increased 9.8% to $626 million in the quarter.
Domestic shipment volumes for the segment grew 2.8% due to the industry’s growth rate as well as trade inventory movements. This was partly offset by calendar differences as well as retail share losses, which in turn stemmed from an increase in oral nicotine pouch sales. On an adjusted basis, however, oral tobacco products shipment volumes climbed an estimated 0.5%. Total oral tobacco products’ retail share went down 3 percentage points to 50%.
Adjusted OCI rose 8.1% to $456 million, owing to improved pricing and shipment volumes, somewhat negated by elevated costs related to the expansion of on! Adjusted OCI margin dropped 1.2 percentage points to 72.8%.
Wine: Net revenues fell 20.6% year on year to $131 million due to reduced shipment volumes. The segment’s revenues, net of excise taxes, slumped 21.3% to $126 million. Reported wine shipment volumes dropped 20.2% to about 1.6 million cases. We note that the pandemic has hurt the company’s wine business, which is likely to remain under pressure due to the restrictions on dining and gatherings. Thus, the company’s on-premise and direct-to-consumer sales have been soft.
Adjusted OCI in the category declined 21.1% to $15 million, resulting from escalated reduced shipment volumes, somewhat cushioned by a decline in SG&A costs. Adjusted OCI margin remained flat at 11.9%.
Financial Updates
On Jul 27, the company raised its quarterly dividend from 84 cents per share to 86 cents, which is payable on Oct 9, 2020, to shareholders of record as of Sep 15. The latest annualized rate of $3.44 per share reflects a 2.4% rise from the previous rate. Notably, the company maintains its long-term dividend payout ratio goal of about 80% of the adjusted EPS.
Further, the company borrowed the entire $3 billion under its revolving credit facility in March due to the pandemic-related uncertainty. However, the company repaid this amount in June and had $3 billion available under the revolving credit agreement as of Jun 30, 2020. Further, Altria issued long-term senior unsecured notes with a total principal amount of $2 billion in May.
At the end of the second quarter, the company had a cash balance of $4.8 billion, which came down to $3 billion after paying out dividends for July as well as taxes. The company remains focused on having a higher than normal cash balance to protect financial flexibility. Capital expenditures in 2020 are still envisioned in the range of $200-$250 million.
Other Developments & Guidance
Management stated that Altria has incurred pre-tax charges worth $50 million till now, related to COVID-19. These include costs related to PPE, increased pay and health screenings, among others. However, Altria noted that until now, its tobacco business has not witnessed any material disruption related to the government’s restrictions on consumer movements and business operations. Most of the retail stores where the company’s products are sold (like convenience stores) have been considered as essential businesses and remain open. Further, PM USA re-opened its IQOS boutiques in Richmond and Atlanta in June.
Talking of the IQOS, the FDA approved the marketing of IQOS and HeatSticks as Modified Risk Tobacco Products in July. Also, in the month, PM USA launched IQOS in Charlotte and expects to sell HeatSticks in more than 700 stores across Atlanta, Richmond and Charlotte by August-end. Additionally, PM USA intends to expand IQOS to four new markets, tie-up with trade retailers for its greater availability and expand the distribution of HeatSticks. With regards to on!, Helix submitted a PMTA with the FDA in May for all 35 on! SKUs. The PMTA is currently under review.
All said, Altria envisions adjusted earnings per share for 2020 in the range of $4.21-$4.38, indicating 0-4% growth from the year-ago period’s $4.21. The company now anticipates the domestic cigarette industry to drop 2-2.5% (on an adjusted basis) compared with a 4-6% decline expected earlier. This guidance is based on the better year-to-date industry trends and anticipations of continued buoyancy in the category. However, management will continue to analyze the scenario for adult tobacco consumers based on factors such as unemployment rates, purchasing behavior and disposable income, among others.
We note that shares of this Zacks Rank #3 (Hold) company have gained 4.1% in the past three months against the industry’s decline of 3.4%.
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