Altria Group reports Q1 net earnings of US$1.18B, down 15.2% from year-ago period as net revenues fall 0.2% to US$5.52B

Nevin Barich

RICHMOND, Virginia , April 24, 2014 (press release) – Altria’s 2014 first-quarter reported diluted earnings per share (EPS) decreased 14.5% to $0.59, as comparisons were affected by special items.

Altria’s 2014 first-quarter adjusted diluted EPS, which excludes the impact of special items, increased 5.6% to $0.57.

Altria revises its 2014 full-year reported diluted EPS guidance from a range of $2.51 to $2.58 to a range of $2.53 to $2.60.

Altria reaffirms its 2014 full-year adjusted diluted EPS guidance to be in a range of $2.52 to $2.59, representing a growth rate of 6% to 9% from an adjusted diluted EPS base of $2.38 in 2013.

Altria Group, Inc. (Altria) (NYSE:MO) today announced its 2014 first-quarter business results, revised its 2014 full-year guidance for reported diluted EPS and reaffirmed its 2014 full-year guidance for adjusted diluted EPS.

“During the first quarter, Altria grew adjusted diluted EPS by 5.6% behind the strength of our core tobacco businesses and their leading premium brands,” said Marty Barrington, Chairman and Chief Executive Officer of Altria. “Our smokeable and smokeless products segments grew their adjusted operating companies income and expanded margins.”

“We also continued to make disciplined investments to grow new income streams with innovative products,” said Mr. Barrington. “In e-vapor, Nu Mark will begin its national launch of MarkTen in June. Nu Mark also closed the Green Smoke acquisition earlier this month.”

Conference Call

As previously announced, a conference call with the investment community and news media will be webcast on April 24, 2014 at 9:00 a.m. Eastern Time. Access to the webcast is available at altria.com.

Cash Returns to Shareholders - Dividends and Share Repurchase Program

In February 2014, Altria’s Board of Directors (Board) declared a regular quarterly dividend of $0.48 per common share. The current annualized dividend rate is $1.92 per common share. As of April 17, 2014, Altria’s annualized dividend yield was 5.0%. Altria expects to continue to return a large amount of cash to shareholders in the form of dividends by maintaining a dividend payout ratio target of approximately 80% of its adjusted diluted EPS. Future dividend payments remain subject to the discretion of the Board.

During the first quarter of 2014, Altria repurchased approximately 7.5 million shares of its common stock at an average price of $35.98 for a total cost of approximately $272 million. Altria has approximately $185 million remaining in the current $1 billion program, which it expects to complete by the end of the third quarter of 2014. The timing of share repurchases depends upon marketplace conditions and other factors. The program remains subject to the discretion of the Board.

Innovative Products

During the first quarter of 2014, Altria and its companies continued to invest in innovative products to grow new income streams. In June, Nu Mark LLC (Nu Mark) will begin its rolling national launch of MarkTen e-cigarettes. Earlier this month, Nu Mark completed its acquisition of the e-vapor business of Green Smoke, Inc. and its affiliates. The acquisition complements Nu Mark’s capabilities and enhances its competitive position by adding significant e-vapor experience, broadening Nu Mark’s product offerings and strengthening its supply chain capabilities.

Interest Income Related to NPM Arbitration Panel Decision

In the first quarter of 2014, Philip Morris USA Inc. (PM USA) recorded approximately $64 million of interest income related to the previously disclosed decision by the arbitration panel presiding over the non-participating manufacturer (NPM) adjustment dispute for 2003. In September 2013, the arbitration panel determined that six of 15 states failed to diligently enforce laws that require escrow payments from the cigarette manufacturers that have not signed the 1998 Master Settlement Agreement (NPM Arbitration Panel Decision).

2014 Full-Year Guidance

Altria has revised its guidance for 2014 full-year reported diluted EPS from a range of $2.51 to $2.58 to a range of $2.53 to $2.60 to reflect the impact of interest income related to the NPM Arbitration Panel Decision. The forecast also reflects estimated SABMiller plc (SABMiller) special items.

Altria reaffirms its guidance for 2014 full-year adjusted diluted EPS, which excludes the special items shown in Table 1, to be in a range of $2.52 to $2.59, representing a growth rate of 6% to 9% from an adjusted diluted EPS base of $2.38 in 2013. Altria expects stronger adjusted diluted EPS growth in the second half of the year compared to the first half driven by various factors. These include lower fourth-quarter costs in the smokeable products segment due to the end of the quota buyout payments and a significantly lower fourth-quarter effective tax rate on operations compared to the fourth quarter of 2013 resulting from Altria’s 2013 debt tender offer.

The factors described in the Forward-Looking and Cautionary Statements section of this release represent continuing risks to this forecast. 

Altria expects that its 2014 full-year reported effective tax rate and effective tax rate on operations will be approximately 34.9%.

ALTRIA GROUP, INC.

Altria reports its financial results, including diluted EPS, in accordance with U.S. generally accepted accounting principles (GAAP). Altria’s management reviews operating companies income (OCI), which is defined as operating income before corporate expenses and amortization of intangibles, to evaluate the performance of, and allocate resources to, the segments. Altria’s management also reviews OCI, operating margins and diluted EPS on an adjusted basis, which excludes certain income and expense items that management believes are not part of underlying operations. These items may include, for example, loss on early extinguishment of debt, restructuring charges, SABMiller special items, certain tax items, tobacco and health judgments, and settlements of, and determinations made in connection with, certain NPM adjustment disputes (such settlements and determinations are referred to collectively as NPM Adjustment Items). Altria’s management does not view any of these special items to be part of Altria’s sustainable results as they may be highly variable and difficult to predict and can distort underlying business trends and results. Altria’s management also reviews income tax rates on an adjusted basis. Altria’s effective tax rate on operations may exclude certain tax items from its reported effective tax rate. Altria’s management believes that these adjusted measures provide useful insight into underlying business trends and results and provide a more meaningful comparison of year-over-year results. Altria’s management uses adjusted measures for planning, forecasting and evaluating business and financial performance, including allocating resources and evaluating results relative to employee compensation targets. These adjusted financial measures are not consistent with GAAP, and should thus be considered as supplemental in nature and not considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. Reconciliations of adjusted measures to corresponding GAAP measures are provided in the release. Comparisons are to the corresponding prior-year period unless otherwise stated.

Altria’s reportable segments are smokeable products, manufactured and sold by PM USA and John Middleton Co. (Middleton); smokeless products, manufactured and sold by U.S. Smokeless Tobacco Company LLC (USSTC) and PM USA; and wine, produced and/or distributed by Ste. Michelle Wine Estates Ltd. (Ste. Michelle).

Altria’s 2014 first-quarter net revenues were essentially unchanged as lower gains on asset sales at Philip Morris Capital Corporation (PMCC) were offset by higher net revenues in the smokeless products segment. Altria’s revenues net of excise taxes increased 0.9% to $4.0 billion.

Altria’s 2014 first-quarter reported diluted EPS decreased 14.5% to $0.59 primarily driven by lower OCI in the smokeable products segment resulting from the NPM Adjustment Settlement in the first quarter of 2013. Lower gains on asset sales at PMCC and lower earnings from Altria’s equity investment in SABMiller (principally due to gains from common stock issuances by SABMiller in the first quarter of 2013) also negatively affected reported diluted EPS in the first quarter. These factors were partially offset by interest income related to the NPM Arbitration Panel Decision, lower interest expense and higher OCI in the smokeless products segment.

Altria’s 2014 first-quarter adjusted diluted EPS, which excludes the special items shown in Table 2, increased 5.6% to $0.57 primarily driven by higher adjusted OCI in the smokeable and smokeless products segments and lower interest and other debt expense. These factors were partially offset by lower gains on asset sales at PMCC and lower earnings from Altria’s equity investment in SABMiller (principally due to gains from common stock issuances by SABMiller in the first quarter of 2013).

NPM Adjustment Items

NPM Adjustment Items affected comparisons of Altria’s first-quarter reported diluted EPS. For the first quarter of 2014, PM USA recorded approximately $64 million, or $0.02 per share, of interest income related to the NPM Arbitration Panel Decision. For the first quarter of 2013, PM USA recorded a reduction to cost of sales of $483 million, or $0.15 per share, related to the NPM Adjustment Settlement. The EPS impact of the NPM Adjustment Items is shown in Table 2 and Schedule 4.

SMOKEABLE PRODUCTS

The smokeable products segment delivered strong adjusted OCI and adjusted OCI margin growth in the first quarter of 2014 primarily through higher pricing. PM USA grew Marlboro’s retail share and its retail share of the total cigarette category.

The smokeable products segment’s 2014 first-quarter net revenues were essentially unchanged as lower reported shipment volume was offset by higher pricing. Revenues net of excise taxes increased 1.2%.

The smokeable products segment’s 2014 first-quarter reported OCI decreased 20.3% primarily due to the NPM Adjustment Settlement in the first quarter of 2013 and lower reported shipment volume, partially offset by higher pricing. Adjusted OCI, which is calculated excluding the special items identified in Table 3, grew 6.4% and adjusted OCI margins expanded by 2.2 percentage points to 44.1%. 

PM USA’s 2014 first-quarter reported domestic cigarettes shipment volume decreased 2.5%, primarily due to the industry’s decline, partially offset by changes in trade inventories and retail share gains. PM USA’s first-quarter OCI and reported shipment volume benefited from modestly higher wholesale inventories compared to the same period last year; PM USA expects wholesale inventory levels to moderate during the year. When adjusted for trade inventory changes, PM USA estimates that its first-quarter domestic cigarettes shipment volume decreased approximately 3.5% and that total cigarette category volume declined approximately 4% for the same period. PM USA’s cigarette volume performance is summarized in Table 4.

Middleton’s 2014 first-quarter reported cigars shipment volume was essentially unchanged. 

Note: Cigarettes volume includes units sold as well as promotional units, but excludes units sold in Puerto Rico and U.S. Territories, to overseas military and by Philip Morris Duty Free Inc., none of which, individually or in the aggregate, is material to the smokeable products segment.

Marlboro gained 0.2 retail share points in the first quarter of 2014. PM USA grew its total retail share by 0.2 share points due to gains by Marlboro, and L&M in Discount, partially offset by share losses on other portfolio brands. PM USA’s cigarette retail share performance is summarized in Table 5.

In the machine-made large cigars category, Black & Mild gained 0.3 share points for the first quarter of 2014. 

SMOKELESS PRODUCTS

The smokeless products segment grew 2014 first-quarter OCI primarily through higher volume. USSTC grew Copenhagen and Skoal’s combined volume and retail share.

The smokeless products segment’s 2014 first-quarter net revenues grew 6.4%, primarily driven by higher volume and higher pricing, partially offset by higher promotional spending. The smokeless products segment’s revenues net of excise taxes increased 5.8%.

The smokeless products segment’s 2014 first-quarter OCI increased 7.7% primarily driven by the factors discussed above. OCI margins for the smokeless products segment increased by 1.1 percentage points to 62.1%. 

For the first quarter of 2014, USSTC and PM USA’s combined reported domestic smokeless products shipment volume increased 5.9% primarily due to volume growth for Copenhagen, partially offset by volume declines for Skoal. USSTC and PM USA’s first-quarter reported shipment volume benefited from an extra shipping day that was partially offset by trade inventory movements related to changes in Skoal’s promotional strategy. Copenhagen and Skoal’s combined reported shipment volume increased 6.3%.

After adjusting for calendar differences and trade inventory changes, USSTC and PM USA estimate that their combined domestic smokeless products shipment volume grew approximately 4% for the first quarter, while smokeless products category volume grew approximately 5.5% over the last 12 months. 

Copenhagen and Skoal’s combined retail share increased 0.2 share points to 50.8% for the first quarter of 2014. Copenhagen’s retail share grew 1.5 share points, benefiting from Copenhagen Long Cut Wintergreen and other products introduced over the past several years. Skoal’s retail share declined 1.3 share points.

USSTC and PM USA’s combined smokeless products retail share for the first quarter of 2014 decreased 0.1 share point, as retail share losses for Skoal and Other portfolio brands were mostly offset by retail share gains for Copenhagen. 

WINE

Ste. Michelle grew 2014 first-quarter net revenues by 2.4% and OCI by 10%, primarily due to improved premium mix. Revenues net of excise taxes increased 2.5%. Ste. Michelle’s OCI margins expanded by 1.2 percentage points to 17.7%. 

Ste. Michelle’s 2014 first-quarter wine shipment volume grew 1.1% primarily driven by increased distribution of 14 Hands, partially offset by changes in trade inventories. 

Altria’s Profile

Altria owns 100% of each of PM USA, USSTC, Middleton, Nu Mark, Ste. Michelle and PMCC. Altria holds a continuing economic and voting interest in SABMiller.

The brand portfolios of Altria’s tobacco operating companies include Marlboro®, Black & Mild®, Copenhagen®, Skoal®, MarkTen™ and Green Smoke®. Ste. Michelle produces and markets premium wines sold under various labels, including Chateau Ste. Michelle®, Columbia Crest®, 14 Hands® and Stag’s Leap Wine Cellars®, and it imports and markets Antinori®, Champagne Nicolas Feuillatte™ and Villa Maria Estate™ products in the United States. Trademarks and service marks related to Altria referenced in this release are the property of Altria or its subsidiaries or are used with permission. More information about Altria is available at altria.com.

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