Thursday, April 28, 2022

Altria Reports Q1 2022 Earnings ($MO)

[Recent posts: Altria Reports 2021 Fourth-Quarter and Full-Year Results and Checking on Re-Nicotinization Thesis.]

Altria reported results for the first quarter this morning. The current market capitalization at $55.20 per share is $100 billion. They have $28 billion of net debt but they also have ten percent ownership of Anheuser-Busch InBev which is worth $10 billion at current market value. That makes for an adjusted enterprise value of $118 billion.

Earnings for Q1 were $1.959 billion net, which is a 7.8% earnings yield, or an 8.7% earnings yield if you subtract the value of the BUD stake from the market capitalization. (Altria could conceivably spin these shares out to shareholders, although we might prefer that they use the capital to buy Swedish Match.)

Some highlights:

  • "Net revenues decreased 2.4% to $5.9 billion, primarily driven by the sale of our wine business in October 2021. Excluding the wine segment, net revenues were essentially unchanged."
  • Cigarette business: "Net revenues increased 0.3% primarily driven by higher pricing and lower promotional investments, partially offset by lower shipment volume. Revenues net of excise taxes increased 2.2%. Reported OCI increased 7.9%, primarily driven by higher pricing, lower promotional investments, higher NPM Adjustment Items and lower tobacco and health litigation items, partially offset by lower shipment volume and higher per unit settlement charges."
  • "Smokeable products segment reported domestic cigarette shipment volume decreased 6.3%, primarily driven by the industry’s decline rate and retail share losses, partially offset by trade inventory movements."
  • Oral tobacco: "Net revenues decreased 2.1%, primarily driven by higher promotional investments in on!, lower shipment volume, and a shift between MST and on! shipment volumes resulting in a higher percentage of on! volumes versus the prior year (mix shift), partially offset by higher pricing. Revenues net of excise taxes decreased 1.8%."
  • "Reported OCI increased 3.8%, primarily driven by higher pricing and 2021 acquisition-related costs, partially offset by higher promotional investments in on!, lower shipment volume, mix shift and higher costs."
  • Volumes of on! doubled year over year, to 18 million packs in the quarter. If they stopped dumping this inferior product and bought Swedish Match instead, Zyn would have less competition and the combined entity would be more profitable. Remember, U.S. Smokeless Tobacco was an acquisition as well, and it has done well.

Free cash flow for the quarter was $2.7 billion, which is a 9% FCF/EV yield. Altria spent $576 million on share repurchases and $1.6 billion on dividends, for a total of $2.2 billion returned to shareholders. (Check out the share count decline.) Their cash balance also grew by $800 million during the quarter.

Altria's operating income, EBITDA continues to show steady growth. This has been thanks to the ability to raise the price of a pack of cigarettes or oral tobacco faster than the volume declines. Going forward, it will be important for big tobacco to keep small vaping competitors out through regulatory capture. The CEO had this to say on the conference call:

Moving to the regulatory environment, President Biden signed a bill last month to bring synthetic nicotine products under FDA regulation by updating the definition of a tobacco product within the Food, Drug, and Cosmetic Act to include any product that contains nicotine, including synthetic nicotine products. The bill allows manufacturers of synthetic nicotine products currently on market to keep those products on the market for 120 days after the bill's enactment provided that they have submitted a PMTA for those products by May 14.

Unless the FDA grants a PMTA within that time period, the products become unlawful and subject to the FDA's enforcement discretion. The bill creates a certain exception for this review period for those circumstances where the FDA issued a denial of a marketing order and the manufacturer thereafter marketed the product with synthetic nicotine. We believe this legislation is an important step toward the creation of a responsible, smoke-free marketplace consisting solely of FDA-authorized products.

Remember the plan to build a regulatory moat around electronic nicotine delivery systems that we talked about two years ago.


CP said...

Comment on gasoline cost:

Certainly, gas prices has an impact on our consumers because usually they're filling up their car or truck and then going in and purchasing the product. So it's something that we'll continue to watch, but we feel pleased through the first quarter with the resiliency we've seen in the tobacco consumer. As far as Marlboro, we're extremely excited with the stability of Marlboro.

And if you go back, you can see pre-COVID, we had the benefit of the strength of Marlboro, and we benefited from the consumer having extra discretionary income as we proceeded through the COVID pandemic. And I think that pointed to that Marlboro's still the aspirational brand in the marketplace. And then as we've seen discretionary income come under pressure, we gave a little bit of that share back that we had benefited during the COVID virus. But through that entire period, the Marlboro brand has held up.

CP said...

Bonnie Herzog -- Goldman Sachs -- Analyst
All right. Yeah, I mean, so I guess the right way to think about your smokeable business, I mean, it's an industry that's in secular decline in terms of volumes. They've been declining for a very, very long time. So the way you're managing this is offsetting that with pricing and trying to drive whether it's low- or mid-single-digit operating income growth and expanding your margins.

And you feel good, even in this environment, that you're going to be able to continue to do that.

Billy Gifford -- Chief Executive Officer
Yeah. I think you see with the results through the first quarter. I think that was from a macroeconomic standpoint, it was a pretty tough quarter. And you've seen other industries be impacted by that, and we were able to navigate that very nicely.