Higher Prices Drive Altria’s Growth, But Results Miss Expectations

by Trefis Team
Altria Group, Inc.
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Altria (NYSE:MO) released its first quarter results on May 2, wherein it reported growth in both revenue and earnings per share. However, it failed to meet expectations on both. The earnings for the company came in at $0.73 per share, a penny short of analysts’ estimates, while the revenues of $4.59 billion missed projections by $50 million.

Altria Q1 2017 Earnings

Strong results in the smokeable products segment was offset by lower equity earnings from its beer investment, as well as the negative effects from the voluntary product recall in the smokeless segment, which had an approximately 1-retail share point impact and drove the shipment volume down by 5% in the quarter. It was also a tough quarter for Wine, as the adjusted OCI (Operating Companies Income) contracted by 25% year-on-year, and margins fell by 4.6 percentage points, due to higher cost and lower volume, as a result of the timing of the Easter holiday and reduced year-end inventory by wholesalers. The company also reaffirmed its full year guidance, calling for a 7.5% to 9.5% increase in the EPS over the previous year, with growth expected to be skewed towards the second half of the financial year.

Altria Smokeless Volume and Share

Declining Cigarette Volumes

It is not an unknown fact that the smoking rate has been falling, with the U.S. region witnessing one of the biggest declines in the world. In the face of this, a majority of the company’s growth in the past has been a result of increasing the prices of the tobacco products. This trend continued in the first quarter as well, when the cigarette shipment volume declined 2.7%. Once this figure is adjusted for trade inventory movements and other factors, the company estimates that the rate of fall was approximately 3%, in line with the industry decline rate.

Altria Smokeable Volume and Share

Another factor that will dampen the cigarette volumes, at least in the short term, is the excise tax implemented in California, which raises the tax on a pack of cigarettes by $2, from $0.87 currently,effective from April 1. This move is bound to affect the volumes for the company, as the cigarette market in California is the second largest in the nation, after Texas, and constitutes 8% of the US cigarette market. The company estimates that the tax hikes in the aforementioned region, as well as in Pennsylvania, will negatively impact the volumes by 1% this year. While the tobacco company routinely undertakes price hikes bi-annually, it normally does so in May and in November. However, as a response to this hike, Altria raised the price of its pack by $0.08 beginning March 18, 2017. This move was undertaken to soften the blow of the expected volume reduction.

iQOS Update

Philip Morris International submitted a Premarket Tobacco Product Application (PMTA) for the heat-not-burn technology product, iQOS, with the US Food and Drug Administration (FDA) on March 31st, in order to seek authorization to commercialize the product in the US. This was consistent with the company’s goal of submitting the application in the first quarter of 2017. This follows the Modified Risk Tobacco Product (MRTP) application filed with the FDA in December 2016. Once iQOS gets a go ahead, Altria will get exclusive rights to sell these products in the US.

Altria and Philip Morris have been working on reduced risk tobacco products for a while. In 2015, the companies entered into a strategic agreement under which PMI markets Altria’s MarkTen e-cigarettes internationally, while Altria distributes PMI’s heated tobacco products in the US. The companies have also decided to partner on regulatory matters in relation to the products. In this regard, the two companies are working together on the PMTA for iQOS.

During the first quarter conference call, the CEO Marty Barrington stated that the company was talking to state legislators about having lower taxes on reduced risk products. The company is also working closely with Philip Morris, in order to learn from each product launch in a new market, as well as from the performance in existing markets. This is being done to gain trade and consumer insights, to be able to apply them in the US when the time comes.

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