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Altria's (MO) Q3 Earnings & Revenues Up Y/Y on Solid Pricing

Zacks Equity Research

Altria Group Inc. MO has released third-quarter 2019 results, with the top and the bottom line increasing year over year. The quarterly results gained from higher revenues in the smokeless and smokeable products businesses, mainly due to higher pricing.

Quarter in Detail

Adjusted earnings came in at $1.19 per share, which rose 10.2% year over year. The uptick can be attributed to increased adjusted operating companies income (OCI) in the smokeable and smokeless products segments, higher adjusted earnings from Altria’s equity investment in AB InBev (BUD) and lower spending. These were partly offset by higher interest expenses.

Net revenues inched up 0.3% year over year to $6,856 million. Higher revenues in the smokeless and smokeable units drove the top line. Revenues net of excise taxes rose 2.3% to $5,412 million.

Gross profit in the reported quarter improved 7.4% to $3,497 million from the prior-year quarter’s number. Notably, reported OCI increased 13.8% to 3,002 million and reported operating income rose 15.1% to $2,944 million.

Segment Details

Smokeable Products: Net revenues in the category inched up 0.2% year over year to $6,049 million, owing to higher pricing and lower spending on promotions. The upsides were countered by lower shipment volumes. Revenues, net of excise taxes, rose 2.5% year over year to $4,643 million.

Total smokeable Products shipment volume declined 6.5% from the prior-year quarter’s number. Reported domestic cigarette shipment volumes slipped 6.6% year over year due to adverse trade inventory movements, cigarette industry’s rate of decline and retail share losses. Adjusting for the aforementioned items, domestic cigarette shipment volume declined nearly 7%. During the quarter, the company’s total cigarette retail share dipped 0.6 percentage point to 49.6%. Meanwhile, reported cigar shipment volume rose 4.1%.

Adjusted OCI in the segment improved 12.6% to $2,568 million, owing to better pricing as well as reduced costs and promotional spending. Adjusted OCI margins rose 4.9 percentage points to 55.3%.

Smokeless Products: Net revenues in the segment improved 5.8% from the year-ago quarter’s figure to $620 million, driven by higher pricing and reduced promotional investments. These were partially countered by low shipment volume. Revenues, net of excise taxes, increased 6.3% to $587 million in the quarter.

Domestic shipment volume for the segment fell 2.5% due to the industry’s rate of decline and retail share losses. Total smokeless products retail share went down 0.4 percentage points to 53.9%.

Adjusted OCI rose 10.2% to $422 million, owing to improved pricing as well as reduced promotional investments and costs. These were partially offset by lower shipment volume. Adjusted OCI margin expanded 2.5 percentage points to 71.9%.

Wine: Net revenues declined 7.7% year on year to $167 million, due to increased promotional investments and reduced shipment volumes. The segment’s revenues, net of excise taxes, dropped 7.4% to $162 million. Wine shipment volume declined 9.6% to about 2 million cases.

Adjusted OCI in the category declined 44.8% to $16 million as a result of increased promotional investment and reduced shipment volumes. Adjusted OCI margin contracted 6.7 percentage points to 9.9%.

Financial Updates

During the third quarter, the company paid out dividends worth almost $1.5 billion. We note that in August, this Zacks Rank #3 (Hold) company raised its dividends from 80 cents per share to 84 cents. This marks the company’s 54th dividend hike in the past 50 years. As a result, the company’s annualized dividend rate is now pegged at $3.36 per share. The raised dividend were paid on Oct 10, 2019 to shareholders of record as on Sep 16.

The company expects to complete its current 1-billion share repurchase program by the end of 2020.

Other Developments

In August, the company completed the buyout of Burger Sohne Holding (Burger Group) to commercialize on! oral nicotine pouches. In September, Altria through its subsidiary — PM USA — commenced the commercialization of IQOS in Atlanta, Georgia. In respect of JUUL, Altria recorded pre-tax impairment charge worth $4.5 billion, during the third quarter.

Further, the company is on track with its savings initiatives. It continues to expect annualized cost savings of nearly $575 million by the end of 2019. The program includes savings generated through reductions in workforce and third-party spending as well as the closure of Nu Mark operations.

Outlook

Management reiterated its guidance for 2019, wherein it expects adjusted earnings in the range of $4.19-$4.27 that suggests 5-7% year-over-year growth. Further, Altria expects domestic cigarette industry volume to decline 5-6% in 2019. Also, it continues to expect 2019 adjusted effective tax rate of 23.5-24.5%.

Further the company expects to achieve compounded annual adjusted earnings growth of 5% to 8% during 2020-2022.