10-QPeriod: Q1 FY2019

ALTRIA GROUP, INC. Quarterly Report for Q1 Ended Mar 31, 2019

Filed April 25, 2019For Securities:MO

Summary

Altria Group, Inc. (MO) reported a decrease in net earnings attributable to Altria for the first quarter of 2019 compared to the same period in 2018. This decline was primarily driven by significant investments in Cronos Group Inc. and JUUL Labs, Inc., which resulted in higher interest expenses and a substantial loss on Cronos-related financial instruments. The company's traditional smokeable products segment experienced a notable decrease in net revenues and shipment volume, impacted by trade inventory movements and an overall industry decline. Despite the earnings dip, Altria reaffirmed its 2019 full-year adjusted diluted EPS growth guidance of 4% to 7%. The company continues to manage its debt effectively, having repaid short-term borrowings with proceeds from long-term note issuances. Altria's traditional segments, while facing volume declines, are showing resilience through pricing strategies and market share management, particularly in the smokeless products segment. Investors should monitor the ongoing integration and performance of the significant investments in Cronos and JUUL, as well as the continued impact of regulatory pressures and evolving consumer preferences on the tobacco industry.

Financial Highlights

48 data points
Beta

Revenue

$5.63B

49.9% Gross Margin

Net Income

$1.12B

19.9% Net Margin

EPS (Diluted)

$0.60

Total Assets

$59.23B

Cash & Equivalents

$3.35B

Free Cash Flow

$2.25B

Financial Statements
Beta
Revenue$5.63B
Cost of Revenue$1.58B
Gross Profit$2.81B
Operating Income$2.24B
Net Income$1.12B
EPS (Basic)$0.60
EPS (Diluted)$0.60
Shares Outstanding (Basic)1.87B

Key Highlights

  • 1Net earnings attributable to Altria decreased by 40.9% to $1,120 million for the three months ended March 31, 2019, compared to $1,894 million in the prior year period.
  • 2Diluted EPS attributable to Altria decreased by 40.0% to $0.60 for the first quarter of 2019, down from $1.00 in the first quarter of 2018.
  • 3The company made significant strategic investments, including a substantial cash outflow for the Cronos acquisition, leading to increased interest and debt expenses.
  • 4Net revenues decreased by 7.9% to $5,628 million, primarily due to lower net revenues in the smokeable products segment.
  • 5Smokeable products shipment volume decreased by 14.1%, with a notable 14.3% decline in cigarette volume.
  • 6Smokeless products segment saw a slight increase in net revenues by 2.9% to $540 million, with a modest shipment volume decline of 2.2%.
  • 7Altria reaffirmed its 2019 full-year adjusted diluted EPS growth rate guidance of 4% to 7% over its 2018 adjusted diluted EPS of $3.99.

Frequently Asked Questions

The primary drivers for the decrease in net earnings and EPS were higher interest and other debt expenses due to debt incurred for the Cronos and JUUL transactions, a significant loss on Cronos-related financial instruments, and lower earnings from Altria's equity investment in AB InBev. Additionally, the smokeable products segment experienced lower operating results.

The investments in Cronos and JUUL significantly impacted the financial results. The Cronos transaction involved substantial cash outlays, leading to increased debt and interest expenses. Additionally, Altria recognized a pre-tax unrealized loss of $394 million related to financial instruments associated with the Cronos investment in the first quarter of 2019. The JUUL investment, while large, is accounted for as an equity security and its impact is not yet reflected in earnings through the equity method of accounting, pending antitrust clearance.

Altria reaffirmed its 2019 full-year adjusted diluted EPS growth rate guidance of 4% to 7%, based on a 2018 adjusted diluted EPS of $3.99. This guidance anticipates higher full-year adjusted effective tax rate, increased interest expense from recent transactions, cost savings from a cost reduction program, and increased investments for the planned IQOS launch. The guidance assumes little to no earnings or cash contributions from the Cronos and JUUL investments.

The smokeable products segment experienced a decrease in net revenues by 8.8% and a 14.1% decline in shipment volume. This was primarily driven by lower shipment volume, partially offset by higher pricing strategies. The company noted that the domestic cigarette industry volume decline rate is estimated to be 4%-5% for 2019. While Marlboro's retail share saw a slight decline, the premium cigarette segment still accounts for a significant majority of the volume.