Altria: Q2 2023 Results

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Top-line & Bottom-line Results1

Revenue: $5.44Bn (exp. $5.43Bn; up +1.2% vs. Q2 2022)

EPS: $1.31 (exp. $1.30; up 4% vs. Q2 2022)

Reaffirms the FY23 guidance: adj. EPS in a range of $4.89 to $5.03, representing 1% to 4% growth from $4.84 in FY22 (midpoint 2.5% is lower than the 5% growth recorded in FY22 and H1 2023)

Business Segments

Smokeable products:

– Revenue: +0.9%; Operating profit: +3.1%; OI margin: 59.1% (+1.3pp)

– Volume: -8.3% (including cigars), -8.7% (cigarettes only)

– When adjusted for trade inventory movements (+0.3Bn inventory build-up), cigarette shipment volume is down -10% (vs. industry volume down -7.5%). The reported rate is at the limit of -9% to -10% decline priced in by the Market.

– Cigarette SoM: 46.9% in Q2 2023 (1.3pp lower than Q2 2022)

– Marlboro SoM: 42.1% in Q2 2023 (0.6pp lower than Q2 2022). However, Marlboro gained +0.5pp share in Premium Segment: up from 58.1% to 58.6% (note: BAT Brands down -0.5pp)

– Marlboro price gap vs. lowest effective: 45% (- it was 38% a year ago); Marlboro net RSP: $8.68 (+$0.50; +6.1% vs. Q2 2022)

– Discount segment share: 28.2% (+1.8pp)

Oral tobacco:

– Revenue: +2.8% Operating profit: +3.0% OI margin: 68% (+0.1pp)

– Volume: -1.7%; the fast growth in on! (+48% to 30Mn cans; smokeless segment share up +2.1pp to 7%) fails to compensate for the volume/SoM losses in Copenhagen & Skoal

– Total smokeless SoS: 44% (-2.8pp; Copenhagen & Skoal SoS loss continues)

Key Highlights

– NJOY Expansion Plan: 70k stores by the end of 2023 (corresponding to a weighted distribution of 70% for the e-cigarette category and 55% for the cigarette category)

– on! PLUS: New wet pouch product. In Sept 2023, an international test begins via e-commerce in Sweden (to gain learnings for the US launch). On track to file a PMTA next year

– California Menthol Ban: Smokers in California are buying Menthol flavor cards to make their own menthol cigarettes (similar to the EU case). Empty pack survey results: ~45% of cigarettes were not tax stamped for sale in California. ~20% of cigarette packs were menthol. 98% of e-vapor products were flavored, despite being subject to the California flavor ban and unauthorized by the FDA

– Slightly more share repurchase budget for H2: repurchased 10.4Mn shares in H1 at an average price of $45.37 (cost: $472Mn). $528Mn remaining (to be completed by Dec 31, 2023)

– Effective tax rate: 24.5% – 25.5%; FY23 Capex: $175-$225Mn; FY23 D&A Expense: $280Mn (as a result of the NJOY transaction)

Our take-away

Altria manages the ailing US cigarette business well. Altria reported +1.2% revenue increase and +3.4% operating income increase despite the -10% (adj. -10.5%) cigarette volume decline in H1 2023. Its arch-rival, BAT Reynolds, reported -5.4% revenue decline and -0.2% operating income decline in the US in the same period (driven by -12.4% cigarette volume decline). Marlboro and its brand power matter (i.e. gaining share in the premium segment at the expense of BAT Brands).

“One market, one product”. However, unlike BAT, Altria is almost a pure-play US cigarette company:

– In H1 2023, Altria generated 87.6% of its revenue and 86.3% of its adjusted operating profit in combustibles

– Cigarettes have 97.7% volume weight in Altria’s combustibles business.  

Since Q2 2021 (in two years), Altria’s 12-month rolling cigarette volume is down almost 20Bn/-20%. Accordingly, Altria’s 12-months rolling (total) revenue is flat at $18.1Bn (+/-$0.1Bn) in this period. It is becoming increasingly difficult for Altria to extract more profit from a stagnant revenue base – especially when it is also forced to do major NGP catch-up investment (note: Altria’s FY23 EPS guidance is below H1 2023 EPS growth, mainly due to the planned investments behind the commercialization of NJOY ACE).

Altria’s new-found RRP/NGP focus is undeniable. Altria is trying to push its boundaries to break out of the ailing US cigarette business (i.e. transformation to RRP/NGPs and/or expansion to new categories/geographies). We like Altria going above and beyond what is expected: testing a new RRP/NGP product online in Sweden (3D-challenge: new product, new geography, new channel). Is it too little too late? Time will tell.

Until Altria has a proven/working strategy to break out of the ailing US cigarette business, we don’t expect its share price (“MO”) to sustainably break above the concrete wall of $48-$50 – even if “rotation to value” trade and “news not that bad” misperception occasionally helping MO to venture a move towards $48-50. Moreover, we see a downside risk to $40s depending the US cigarette market dynamics and the regulatory developments.


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