10-QPeriod: Q2 FY2019

ALTRIA GROUP, INC. Quarterly Report for Q2 Ended Jun 30, 2019

Filed July 30, 2019For Securities:MO

Summary

Altria Group, Inc. reported mixed financial results for the second quarter of 2019, with a decrease in net earnings attributable to Altria of 17.3% for the six-month period and a 6.4% increase for the three-month period compared to the prior year. This was primarily driven by significant investments and related financial instruments impacting earnings, notably the acquisition of a 35% economic interest in JUUL Labs, Inc. and a 45% interest in Cronos Group Inc. While traditional cigarette volumes continued to decline, the company saw improved performance in its smokeless products segment and a slight increase in wine segment revenues. Despite the earnings fluctuations, Altria maintained its full-year adjusted diluted EPS growth guidance of 4% to 7%. The company's liquidity remains strong, supported by operating cash flows and access to capital markets, although total debt increased due to funding these strategic investments. Investors should monitor the ongoing regulatory landscape for tobacco and nicotine products, as well as the performance and integration of Altria's recent large-scale investments in JUUL and Cronos.

Financial Highlights

49 data points
Beta

Revenue

$6.62B

50.1% Gross Margin

Net Income

$2.00B

30.2% Net Margin

EPS (Diluted)

$1.07

Total Assets

$57.50B

Cash & Equivalents

$1.80B

Free Cash Flow

$62.00M

Financial Statements
Beta
Revenue$6.62B
Cost of Revenue$1.87B
Gross Profit$3.32B
Operating Income$2.72B
Net Income$2.00B
EPS (Basic)$1.07
EPS (Diluted)$1.07
Shares Outstanding (Basic)1.87B
Shares Outstanding (Diluted)1.87B

Key Highlights

  • 1Net earnings attributable to Altria decreased by 17.3% to $3,116 million for the six months ended June 30, 2019, compared to the prior year, largely due to special items related to investments in Cronos and higher debt expenses.
  • 2For the three months ended June 30, 2019, net earnings attributable to Altria increased by 6.4% to $1,996 million, driven by higher operating income and equity investment earnings, partially offset by Cronos-related losses.
  • 3Altria reaffirms its full-year 2019 adjusted diluted EPS growth guidance in the range of 4% to 7% over its 2018 base of $3.99.
  • 4The company's smokeable products segment saw a 7.0% decrease in cigarette shipment volume for the six months ended June 30, 2019, though it experienced a slight increase of 0.3% for the three-month period due to trade inventory movements.
  • 5Smokeless products segment shipment volume declined by 2.9% for the six-month period and 3.6% for the three-month period, but Copenhagen brand retail share increased.
  • 6Altria significantly increased its total debt to $29.2 billion from $25.7 billion due to the issuance of long-term senior unsecured notes to fund investments in JUUL and Cronos.
  • 7The company continues to be subject to significant litigation risks, particularly related to tobacco and health cases, with ongoing legal proceedings that could materially impact financial results.

Frequently Asked Questions

The primary driver for the decrease in net earnings attributable to Altria for the six months ended June 30, 2019, was the significant loss on Cronos-related financial instruments ($691 million pre-tax unrealized losses) and higher interest and other debt expense, net, due to borrowings for the JUUL and Cronos transactions. These were partially offset by higher operating income from the smokeable and smokeless products segments.

Altria's investments in JUUL ($12.8 billion) and Cronos ($1.8 billion) significantly impacted its financial statements. For the six months ended June 30, 2019, Altria recorded $544 million in pre-tax losses related to Cronos-based financial instruments (warrant and preemptive rights). The company also incurred $98 million in acquisition-related costs for these transactions. These investments also contributed to a substantial increase in Altria's long-term debt.

Altria reaffirmed its full-year 2019 adjusted diluted EPS growth guidance in the range of 4% to 7%. This outlook considers expected savings from a cost reduction program, higher interest expenses from recent debt issuances, and increased investments related to the IQOS product launch. The guidance excludes certain income and expense items that management deems not part of underlying operations, such as litigation expenses and acquisition costs. The company also anticipates a higher full-year adjusted effective tax rate, primarily due to lower dividends from ABI.

Regulatory and litigation risks remain significant for Altria. The company is subject to extensive FDA regulations impacting tobacco and nicotine products. Furthermore, ongoing tobacco and health litigation, particularly class actions and individual smoking and health cases, continues to pose a financial risk. While Altria has had success in managing litigation, adverse outcomes could materially affect its financial position, cash flows, or results of operations. The company also faces risks related to new regulations for e-vapor and other innovative tobacco products.