Altria Group, Inc. — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Good day, and welcome to the Altria Group 2024 First Quarter Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by Altria's management and a question-and-answer session. [Operator Instructions] Representatives of the investment community and media on the call will be able to ask questions following the conclusion of the prepared remarks.
Thanks, Savannah. Good morning, and thank you for joining us. This morning, Billy Gifford, Altria's CEO; and Sal Mancuso, our CFO, will discuss Altria's first quarter business results. Earlier today, we issued a press release providing our results. The release, presentation, quarterly metrics and our latest corporate responsibility reports are all available at altria.com.
Thanks, Mac. Good morning, and thank you for joining us. We made meaningful progress in pursuit of our vision, and our highly profitable traditional tobacco businesses continued to perform well in a challenging environment. In spite of the absence of an effective regulatory environment, we saw continued early momentum from NJOY and believe our businesses are on track to deliver against full-year plans.
Thank, Billy. First quarter adjusted diluted earnings per share declined by 2.5%. As we previously noted, we expect that 2024 adjusted diluted EPS growth will be weighted to the second half of the year, resulting from two main factors.
[Operator Instructions] Our first question will come from Pamela Kaufman with Morgan Stanley. Please go ahead.
I wanted to ask about the modest of raise to your full-year guidance following the ABI share sale despite your plans to repurchase an incremental 3% of your stock. What considerations went into that? And is it a reflection of weaker-than-expected underlying performance relative to your outlook at the beginning of the year?
Thanks for the question. We were really happy to be able to revise our guidance and take up the bottom end of the guidance by a full percentage point. We took the top half -- the top end of the guidance up about 0.5 percentage point. I would read into that the confidence in our core businesses.
Okay. And the second -- my second question is a bit more philosophical. Historically, your strategy has been to maximize operating profit by [ taking ] price in excess of cigarette volume declines. And given this is becoming increasingly difficult because of the magnitude of volume declines and the need to reinvest behind alternatives, do you think that this strategy is sustainable in the changing operating backdrop? And have you considered other approaches to maximizing profitability?
Yes. We always look at our strategies, Pamela, but we feel like that is the right strategy. I would phrase it a little bit differently than you did. It's to maximize profitability over the long term while making appropriate investments in Marlboro and the growth segment.
Our next question will come from Bonnie Herzog with Goldman Sachs.
Maybe a bit of a follow-up question to Pamela. Just one thing I certainly saw in the quarter was your controllable cost in smokable per pack were up quite a bit, I think up mid-teens. So hoping you could touch on the drivers of that, and how we should think about that moving forward? And then honestly, just ultimately, your expectations for improved dollar profit growth in smokable in the back half.
Bonnie, I'm going to unpack that question a little bit. Hopefully, I touch on all aspects of it. If I don't, please follow up.
Okay. And I guess that's helpful. But I guess if I'm hearing you correctly, it's really maybe more of a timing like the one-off that you mentioned. So as we think about just honestly, the controllable cost, if those moderate, moving forward and especially in the back half, that's going to help to drive the dollar profit growth? Is that part of the confidence you have?
Yes. The year-over-year increase was higher in the first quarter. And then finally, let me also point out, the smokeable products segment did benefit from lower SG&A costs that -- and it will continue to benefit from that throughout the year. So again, we feel very good about the smokable products segment, going forward.
No, that helps. And then maybe my next question or final question is on pricing. You guys have taken 2 increases so far this year, and I am talking about [ cig ] pricing. So that seems to follow your typical quarterly cadence, which sounds reasonable, given the unrelenting pressure on [ cig ] volumes, but your peers don't seem to be following in terms of frequency or strength.
Yes, I appreciate the question, Bonnie. I'd be careful not to talk about future pricing decisions. But I think when you step back and you look at how it's performed over time, I think what you see is the benefit of the investments we made in data analytics, really from a standpoint of being able to bring revenue growth management, where we started in traditional moist smokeless tobacco and brought it over to cigarettes.
Our next question comes from Faham Baig with UBS.
A couple of questions from me, both on the smokables division. I just want to understand if the industry volume decline remains at minus 9% for the rest of the year, whether that still allows you to hit the bottom end of your EPS outlook? In other words, you still have some room to reduce SG&A costs further and raise pricing higher?
Yes. I appreciate your question. I think from a standpoint of guidance, look, we run a range of scenarios of what could be the outcomes as we progress through the year. We reaffirmed that guidance and feel very good about the guidance that we have out in the marketplace.
Our next question comes from Matt Smith with Stifel.
There was a reacceleration of price realization in the combustible business in the quarter with pricing per pack, up 8.5%, that's above the 5.5% in the fourth quarter. Can you talk about the factors behind the stronger price realization? And are you now lapping some stepped-up investments in the Marlboro brand in response to the pressure on the -- in response to the economic pressure on the consumer?
Yes. I think from a standpoint, I would encourage you to look at price realization over the longer term. I think it's exactly what you referred to. We highlighted as we progressed through 2023, there are some investments we wanted to make, both on the menthol segment of Marlboro as well as some of the discount pressure we're seeing, in pockets.
And my second question, R&D spending is shifting to the all other segments. The impact from that shift, did that seem meaningful in the first quarter, given the unique higher costs in smokeable? Can you talk about the phasing of that R&D shift through 2024? Should we think of the smokable profitability growth weighted to the second half in addition to the overall company EPS growth weighted to the second half?
Matt, we don't -- as you know, we don't guide at the segment level, but you are correct in that you are seeing a shift in R&D spending towards the innovative products, and that's part of the SG&A benefit I talked about within the smokable segment earlier with Bonnie. The smokeable segment will continue to benefit from those lower SG&A costs as the year progresses.
And our next question will come from Gaurav Jain with Barclays.
Two questions from me. So one is on retail pricing. I think you are saying in Q1, it is [ 347 ]. And in Q4, it was [ 377 ]. So have you stepped up promotions on on! to stem the share loss that you have seen in oral nicotine pouches?
I wouldn't say stepped up for any purposes from a share standpoint. Really, what we -- you see happening, Gaurav, you see that the data that we have, I mentioned the investments in advanced analytics, being able to bring that from both moist smokeless tobacco and the smokeable segment over to the nicotine pouch segment. And so you're going to have pulse promotions through time.
Sure. And my second question is on ABI's stake. So you're highlighting that the remaining stake has a $1.2 billion tax basis. So just sort of 1 tranche, your [ JUUL ] losses expire in March 2028. So would we be fair in expecting a progressive exit from the rest of the stake over the next 4 years?
I want to make sure I'm answering your question, Gaurav, if I don't, please follow up.
Our next question comes from Callum Elliott with Bernstein. Please go ahead.
Couple of slightly different questions from me. On NJOY, you called it the 60 basis points of share gain, which we can see in this candidate and sounds impressive and a nice improvement. But this kind of data do also show us that the retail sales for the brand are down double digits for the past few months.
Yes. I think what you see is exactly what you pointed out, Callum, is that the overall disposable, specifically the illicit vapes in the marketplace, continue to grow, while pod, the segment that's pod are replaceable capsules, continue to shrink in the marketplace.
Okay. And then my second question is on oral tobacco. You touched on this a little bit earlier with, I think, Faham's question, but just building upon that. I think based on the numbers in your release, your share of total oral is now 33% and volumes declining slightly. I've got Zyn share, based on some numbers from PMI, at 28% on an apples-to-apples basis and growing 80% year-on-year. So it seems, to be clear, that you guys are on the cusp of losing your leadership position now in all tobacco as a whole.
Yes. I think when you think about the overall oral tobacco category, really the strategy there is to maximize profitability while balancing investments behind Copenhagen, which is the aspiration of Brian in [ MST ] and making appropriate investments in on!.
[Operator Instructions] Our next question comes from Jennifer Maloney with Wall Street Journal.
First, I wanted to ask about consumers under pressure. You said on this call that you were going to make appropriate investments and be there for them. Could you tell what do you mean by that? What kind of investments are you referring to?
Yes, Jennifer, really, it's around promotions in the marketplace. When you think about the data analytics that we received, and I highlighted earlier, the price gap in a store can be different than a store across a city or town. And it's really mining that data and seeing the consumer economic pressure and being able to dial those resources appropriately for the situation that they're facing.
And when you say promotional activity, would that apply to both the Marlboro brand and also some of your lower-priced brands?
When you look across the portfolio, we think of the portfolio as one big RGM pool. And just like I mentioned Marlboro Black and the Marlboro family, it allows us to take a small segment of Marlboro and be there for the consumer. It gives them a place to continue to engage with the brand, but we look across the entire portfolio.
Looking out at the rest of 2024, do you expect pressures on lower-income consumers to continue or to moderate?
Yes. I think when you think about the consumer being at the lower end of the socioeconomic status, they've been impacted. While inflation has slowed down a bit, it's still increasing and it's the cumulative impact of that inflation on their total market purchase, as well as the increase in debt levels. And that, coupled with increased interest rates through time has impacted discretionary spend for our consumers.
One more question on modern oral tobacco. So looking at the share losses in Skoal and Copenhagen and also the share performance in on!, it seems like Zyn is taking significant share from traditional oral tobacco and on! isn't catching up to Zyn. So what's your strategy for that overall oral tobacco category and then specifically for the modern oral subcategory?
Yes. You may have heard me mention earlier, the overall strategy in oral tobacco is to maximize profitability over the long term while making appropriate investments in Copenhagen and the investments in the -- in our on! product in the marketplace.
So would it be fair to say that your goal would be to capture those folks who are moving from Skoal and Copenhagen to modern oral to capture as many of those folks as possible with on! rather than losing them to Zyn?
That would be correct.
And there appears to be no further questions at this time. I would like to turn the call back to Mac Livingston for any closing remarks.
Thanks for joining the call today. Hope you all have a great day. Thanks so much.
And this concludes today's call. Thank you for your participation, and you may disconnect at any time.