With Lower Volume Affecting Altria’s Top Line In Q1 2019, Will Inorganic Growth Strategy Help In FY 2019?

by Trefis Team
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Altria Group, Inc.
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Altria Group Inc. (NYSE: MO) released its Q1 2019 financial results recently, followed by a conference call with analysts. The company reported net revenue of $4.39 billion in Q1 2019, marking a decline of 6% from $4.67 billion in Q1 2018. On a sequential basis, net revenue decreased by 8.3% from Q4 2018. Lower revenue was primarily driven by a 7% decrease in sales from the smokeable products segment on the back of a 14.3% decline in cigarette shipments, partially offset by 3.2% increase in revenue from smokeless products segment. Revenue has been increasing over a few quarters till Q3 2018 on the back of a price increase for cigarettes and cigars and increasing share of Copenhagen, a premier product in the oral tobacco category. However, with millennials moving away from combustible products, lower cigarette volume has adversely affected total revenue. Adjusted earnings came in at $0.90 per share in Q1 2019, lower than $0.95 per share in the year-ago period. Lower earnings were mainly a reflection of higher interest expense and lower adjusted equity earnings from AB InBev.

We have summarized the key announcements in our interactive dashboard – How did Altria fare in Q1 2019 and what is the outlook for the full year? In addition, here is more Consumer Staples data.

Key Takeaways

A] Revenue Trends

a) Revenue From Smokeable Products

  • Revenue from smokeable products segment decreased by 8.8% (y-o-y) in Q1 2019, mainly due to lower shipments, partially offset by higher pricing and lower promotional investments.
  • Cigarette shipment declined by 14.3% (y-o-y) in Q1 2019, primarily driven by trade inventory movements, the industry’s rate of decline, retail share losses, and one fewer shipping day.
  • Cigarette and cigar volumes have also been decreasing over most of the recent quarters as people are moving away from combustible products.
  • Altria has resorted to price increases to avoid a sharp decline in revenue.

b) Revenue From Smokeless Products

  • Revenue from the segment increased by 2.9% (y-o-y) in Q1 2019, mainly due to premium pricing and partial phasing out of promotional investments and discounts, partially offset by lower volume.
  • Domestic shipment volume declined 2.2%, primarily driven by the industry’s rate of decline.
  • In spite of a sequential decline, on a y-o-y basis, revenue growth was also driven by increasing market share of Copenhagen, which is the premier offering in the oral tobacco category.

B] Trend in Expenses

Though sequentially total expenses decreased by 7.6% in Q1 2019 on the back of lower SG&A cost and low impairment charges, on a y-o-y basis total expenses increased by about 17.8% due to higher interest cost.

  • Interest expense: After increasing in Q2 2018, interest expense has been lower in Q3 and Q4. However, interest expense witnessed a sharp increase from $166 million in Q1 2018 to $384 million in Q1 2019, driven by the increased debt raised to fund the Cronos and JUUL transactions.
  • SG&A Expense: After increasing till Q3 2018, SG&A expenses decreased in Q4 2018 and Q1 2019 due to the recently announced cost reduction program, which includes third-party spending cuts and workforce reductions, and is expected to deliver $575 million in annualized cost savings by the end of 2019.
  • Impairment and other charges: Impairment cost has been negligible over the quarters. However, in Q4 2018, a one-time impairment charge of $381 million was recorded related to the discontinuation of production and distribution of all MarkTen and Green Smoke e-vapor products and impairment of the Columbia Crest trademark. In Q1 2019, the company recorded impairment and acquisition-related cost of $39 million, related to Cronos and JUUL transactions.

C] Profitability

  • Net income margin decreased sharply from 31% in Q1 2018 to 19.9% in Q1 2019.
  • Lower margins were driven by lower revenue and higher interest and acquisition-related costs.

Outlook for FY 2019

  • For the full year, we expect gross revenue to increase by 0.8% to $25.56 billion in 2019.
  • Higher revenue is mainly to be driven by a 15% rise in sales of smokeless products.
  • Net income margin is expected to increase from 27.5% in 2018 to about 30% in 2019, driven by the cost reduction program which is expected to deliver $575 million in annualized cost savings by the end of 2019, partially offset by higher interest cost.
  • Additionally, lower impairment charge compared to 2018, is also expected to contribute to higher profitability.

Trefis has a price estimate of $57 per share for Altria’s stock. The company still has $195 million remaining in its $2 billion share repurchase program, which it expects to complete by the end of Q2 2019. Altria has increased its annualized dividend yield, which stood at 5.9% as on April 29, 2019. We believe that the recent acquisitions, implementation of the cost reduction program, higher dividend pay-out, and additional share repurchases during the year will support the growth in Altria’s stock price in 2019.

 

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