Credit Ratings: Altria

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Fitch: June 2023

Fitch Ratings affirms Altria’s BBB Long-Term Issuer Default Rating (IDR) and F2 Short-Term IDR. The rating outlook is Stable. Fitch expects Altria to maintain a consistent capital allocation framework with a shareholder-friendly posture that includes mid-single digit growth in dividend payouts and active share repurchases while maintaining the EBITDA leverage around 2x1.

Rationale for the Rating

Leading tobacco market share in the US: Altria’s smokable portfolio is anchored by its Marlboro franchise that holds ~59% share of the premium segment. Overall, Altria’s smokable portfolio captures roughly half of the US market volume and generates the majority of its cash flow (~86% of consolidated operating income).

Strong profitability amid secular volume decline: Combined US nicotine market (combustible, oral tobacco and e-vapor; excluding illicit e-vapor) have declined at a low-single digit rate on annual basis during past five years. Cigarette decline accelerated from mid-single digits to the high-single digits in 2022/2023 due to the macro-economic pressures and volume loss to the illicit e-vapor market. Volume declines are expected to remain elevated although the regulatory efforts to curb illicit e-vapor usage have intensified. Altria offsets volume decline with pricing, resulting in a relatively stable top-line of around $20 billion. Reflecting the reduced variable costs and operating efficiencies, Fitch-adjusted EBITDA of $11.9 billion and EBITDA margin of 58% in 2023 is markedly higher than the $9.2 billion and 48% in 2016.

Limited geographic diversification: Sole reliance on the US market heightens Altria’s exposure to potential changes in regulatory, legal and excise taxes. Business profile constraints also include a consumer preference shift to reduced-risk nicotine products, amplifying long-term combustible cigarette declines.

Long-term portfolio uncertainties: Altria’s key long-term rating risk centers on its ability to develop a strong smoke-free product portfolio that maintains its nicotine share amid regulatory, competitive and consumer uncertainties. As the portfolio migration occurs, Altria needs to generate top-line growth and contribution margins that are at least on par with existing mature tobacco business to support stable to growing cash flows. Based on the recent announcements, Fitch believes Altria’s innovation pipeline for smoke-free products has improved. Nevertheless, given the current US regulatory environment and enforcement issues for illegal e-vapor products, Altria and other US manufacturers have made little progress in transition to smoke-free products.

Increased competition: Philip Morris International (PMI) operates in the US market following the Swedish Match acquisition. PMI is awaiting FDA approval of IQOS ILUMA device for a larger-scale heated tobacco product launch and owns ZYN which leads the oral nicotine pouch category in the US.

Anheuser-Busch Inbev (ABI) stake: Fitch believes the ABI stake (8.1% stake valued at about $9.6 billion) provides financial flexibility and credit profile support as Altria migrates from combustible tobacco portfolio to reduced risk products. However, further ABI share sales would begin to have more of a negative effect on ratings if used solely for shareholder returns instead of investments in the business, particularly if there is a lack of clarity and progress with the transition to smoke-free products.

2x Leverage: Altria’s EBITDA leverage was 2.1x in Q1 2024 following $1.2 billion in debt repayment during the quarter (vs. 2.2x at the end of 2023). Altria’s capital allocation policy includes a target of EBITDA leverage sustained around 2.0x, annual dividend growth in the mid-single digits and long-term mid-single-digit adjusted diluted EPS growth. Fitch believes Altria’s leverage target supports its credit profile, given the long-term secular changes occurring in its tobacco portfolio. Fitch expects EBITDA leverage of ~2x in 2024 and 2025.

Key Assumptions

– FY24 revenue (net of excise taxes): modest decline from $20.5 billion in 2023 to around $20 billion in 2024. The forecast assumes high-single digit combustible industry volume decline and elevated down-trading trends to discount brands to be largely offset by price realization

– FY25 revenue: flattish in 2025. The forecast assumes mid-single digit combustible industry volume decline (slower than 2022-2024 due to the reduction in illicit e-vapor product use), good price realization and increased revenue from innovative smoke-free products

– EBITDA: $12 billion in 2024 (essentially flat vs. 2023) and in the low $12 billion area in 2025. The forecast assumes the factors listed above (affecting the revenue progression) plus the investments in smoke-free products

– Capital allocation: Annual dividend payment of $6.8 billion in 2024 (to increase mid-single digit annually). Share repurchase of $3.4 billion in 2024 (mostly funded by the $2.4 billion ABI stake sale) and $1 billion in 2025

– FCF: Around $1.5 billion per annum ($2.3 billion in 2023)

– Debt structure: Mostly fixed rate debt

– EBITDA leverage: Sustained around 2x, barring any debt financed acquisitions.

Catalysts for future rating action

Positive: Tangible progress toward increased financial contribution from smoke-free products (offsetting the long-term volume erosion in the base tobacco business); EBITDA leverage sustained below 2.5x; FCF margin sustained above 3%.

Negative: Long-term volume erosion in base tobacco business, resulting in deterioration in financial delivery (lack of meaningful growth in financial contribution from smoke-free products); further ABI stake sale proceeds used solely for shareholder returns; EBITDA leverage sustained above the low-3x range; unexpected adverse change in regulatory environment and substantial reversal in litigation environment.

Liquidity & Debt Structure

– Liquidity: Cash balances of $3.6 billion and revolving credit facility of $3.0 billion (maturing October 2028)

– Annual MSA and FDA user fee payments: $4.6 billion and $4.3 billion in 2022 and 2023, respectively. Estimated average of $3.4 billion in the next three years

– Long-Term debt: $750 million in 2025, $1.6 billion in 2026 and $2.5 billion in 2027 (to be re-financed)

ESG Considerations

Altria’s Environmental, Social and Corporate Governance (ESG) Relevance Score (RS) of 4 for Customer Welfare/Fair Messaging, Privacy and Data Security (due to the risks its products pose to consumers’ health) and Exposure to Social Impacts (due to continued decline consumption and regulatory risk connected with the widespread, well-publicized health effects of tobacco products) negatively affect its credit profile.

Fitch: October 2023

Fitch Ratings assigns “BBB” rating to Altria’s senior unsecured notes2. Other comparable peers include Philip Morris International (PMI; A/Stable), British American Tobacco (BAT; BBB/Positive) and Imperial Brands (IMB; BBB/Stable).

Altria’s rating reflect its position as the industry leader in the US cigarette category, anchored by its Marlboro franchise (58% Premium segment share, 42% overall market share), and in the US moist smokeless tobacco (MST) category with strong profitability and cash flow that benefits from good pricing power. Altria’s business profile is constrained by limited geographic diversification, given its reliance on the US market and associated regulatory risks, secular combustible cigarette declines and uncertainties around the long-term portfolio shift to smoke-free products.

Altria will continue to focus on maximizing profitability in its core tobacco operations while reallocating resources to fund increased investments in smoke-free products. Fitch believes the robustness of Altria’s innovation pipeline materially increased given recent announcements (e.g. partnership with Japan Tobacco and NJOY acquisition). The key long-term risk centers on whether Altria’s product mix will evolve into a strong portfolio of non-combustible tobacco brands that maintains long-term nicotine share, particularly in light of the burdensome regulatory process, heightened competitive environment and uncertain consumer product acceptance. Altria will need to scale the smoke-free businesses, which are loss-making today, to generate contribution margins that are at least on par with existing mature tobacco brands, to support stable to growing cash flows. 

Fitch: September 2023

Fitch Ratings issued a Credit Analysis report for the Global Tobacco companies3: PMI (A/Stable), BAT (BBB/Positive), Altria (BBB/Stable) and Imperial Brands (BBB/Stable). The ratings remain underpinned by strong operational cash flow generation across the industry.

Fitch states that US/UK tobacco companies show solid performance supported by continued good pricing power, along with resilient demand with only moderate volume pressure from weakening consumer purchasing power in some markets. In the medium term. Fitch believes most global tobacco companies to maintain their ability to implement price increases and develop product mixes that compensate for continuous volume declines in the core combustible segment.

Fitch expects smoke-free products – an increasingly material share of revenue for many – to gradually support sector revenue and profit. However, Fitch views the business risk profiles for rated tobacco companies as increasingly differentiated by the development of smoke-free products and notes that the smoke-free products require careful strategic execution to reflect differing and developing consumer tastes and preferences, as well as growing regulatory pressure on non-combustible products in many markets.

Fitch notes that credit rating headroom has improved for PMI with deleveraging on track after its significant Swedish Match acquisition in 2022 and BAT’s deleveraging supports the Positive outlook on the rating.

References:

  1. Fitch Affirms Altria’s IDR at ‘BBB’; Outlook Stable (fitchratings.com) ↩︎
  2. https://www.fitchratings.com/research/corporate-finance/fitch-rates-altria-sr-unsecured-notes-bbb-30-10-2023 ↩︎
  3. https://www.fitchratings.com/research/corporate-finance/global-tobacco-ratings-gain-headroom-on-solid-profits-capital-allocation-19-09-2023 ↩︎

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