Altria: Q3 2023 Results

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Top-line & Bottom-line Results1

Revenue: $5.28Bn (exp. $5.43Bn; down -2.5% vs. Q3 2022)

EPS: $1.28 (exp. $1.29; unchanged vs. Q3 2022)

Narrows the FY23 guidance: adj. EPS in a range of $4.91 to $4.98, representing 1.5% to 3% growth from $4.84 in FY22 (previously, in a range of $4.89 to $5.03; thereby, the midpoint is now 1.5¢ lower). FY23 growth will be lower than the 5% growth recorded in FY22 and H1 2023.

Business Segments

Smokeable products:

– Revenue: -3.7%; Operating profit: -2.5%; OI margin: 59.6% (+0.7pp)

– Volume: -11.4% (including cigars), -11.6% (cigarettes only)

– When adjusted for trade inventory movements, calendar days and other factors, cigarette shipment volume is down -10% (vs. industry volume down -8%)

– Cigarette SoM: 47.0% in Q3 2023 (0.9pp lower than Q3 2022)

– Marlboro SoM: 42.3% in Q3 2023 (0.3pp lower than Q3 2022). However, Marlboro gained +0.4pp share in Premium Segment: up from 58.5% to 58.9% (note: BAT Brands down -0.4pp)

– Marlboro price gap vs. lowest effective: 43% (- it was 40% a year ago); Marlboro net RSP: $8.77 (+$0.44; +5% vs. Q3 2022)

– Discount segment size: 28.2% of the market (+1.1pp)

– Altria attributes 1.5%-2.5% decline in cigarette market volume to consumption moving from cigarettes to e-vapor, primarily driven by illegal flavored disposable e-vapor products (total decline: -8.5%, on 12-month rolling basis)

Oral tobacco:

– Revenue: +2.7% Operating profit: +7.1% OI margin: 69.3% (+2.9pp)

– Volume: -3.3%; the fast growth in on! (+36.7% to 28.7Mn cans; smokeless segment share up +1.7pp to 6.9%) fails to compensate for the volume/SoM losses in Copenhagen & Skoal

– Total smokeless SoS: 42.1% (-4.2pp; Copenhagen & Skoal SoS loss continues)

– One bright point is that on!’s retail price is up +52% versus Q3 2022 – leading to improved segment profitability for Altria. However, on! growth in Q3 is slower than the previous quarters (+43% in H1 2023) and ZYN (+65.7% in Q3 2023). Quarterly sales volume: 29Mn cans for on! vs. 105Mn cans for ZYN.

Key Highlights

– NJOY Expansion: Grew distribution of NJOY ACE to 42k stores. ACE is now distributed in all the top-25 c-store chains by e-vapor volume. Aims to be in 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). NJOY’s retail share is unchanged versus the pre-acquisition period. Altria shipped 7.5Mn NJOY pods in Q3 2023; considering BAT’s 75-80Mn pods quarterly sales volume and relative segment share, we estimate that Altria has built 3+Mn NJOY pods inventory at the trade.

– 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. Marlboro and its brand power matter (i.e. gaining share in the premium segment at the expense of BAT Brands). Nevertheless, price hikes and RGM initiatives failed to compensate for the persistent/sharp cigarette volume decline in Q3 2023. Both the smokeable revenue and operating profit are down. Market will scrutinize whether the peak revenue (and even the peak profit) has been reached for the cigarette business. Such a paradigm shift in Altria’s financial model could lead to a further devaluation in Altria stock as, unlike the other tobacco majors, Altria is almost a pure-play US cigarette company:

– In YTD23, Altria generated 87.5% of its revenue and 86.7% of its adjusted operating profit in combustibles

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

Since Q2 2021, Altria’s 12-month rolling cigarette volume is down more than 20Bn/20%. Accordingly, Altria’s 12-months rolling smokeable revenue is flat at $18.1Bn (+/-$0.1Bn) in this period. As the smokeable revenue base stagnates, it is becoming increasingly difficult for Altria to deliver bottom-line growth – especially when it is also forced to do major NGP catch-up investment.

We have highlighted Altria’s fundamental challenges many times over the past 18 months; in this period, Altria shares (ticker: MO) are down almost 30% (from $55 to less than $40). Until Altria has a proven/working strategy to break out of the ailing US cigarette business, we don’t expect Altria share price to recover sustainably – even if “rotation to value” trade, “news not that bad” misperception and “attractiveness of the dividend yield” could occasionally help MO venture a move towards mid-40s. A share price of $39.2 implies 10% dividend yield for Altria. Income/value-oriented investors could be lured into Altria as the yield goes above 10% (2x short-term treasury yields) and P/E approaches the 7-7.5x range; thereby, providing support to MO in the $36-$39 range.

Further Readings:

Altria – Q3 2023 Results: Preview

Altria: Dividends

Altria: Q2 2023 Results

Altria: Q1 2023 Results

Altria: Q4 & FY22 Results


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