Few stocks have been able to match Altria Group (NYSE:MO) in terms of long-term performance, and the tobacco giant's ability to weather falling cigarette demand and still produce sales and earnings gains is impressive. Yet some investors weren't fully satisfied with how Altria did during the first quarter.
After the company released its quarterly results, Altria CEO Marty Barrington and his executive team went through the numbers and answered questions. Here are five of the things that they discussed that every investor should know about Altria.
1. Marlboro is the key asset for Altria
Marlboro remains the strongest brand by far in the cigarette category... and our strategy in smokeable is to maximize income while maintaining momentum on Marlboro over time.
One key concern among investors was the fact that the smokeable products segment came under pressure during the quarter, with cigarette shipments again posting declines of nearly 3%. Marlboro also lost some market share, falling 0.2 percentage points to 43.6%. Yet Barrington noted that brand equity for Marlboro has never been higher, and changing promotions in the industry tend to make quarter-to-quarter market share figures volatile. Over the long run, Altria has every confidence that Marlboro will sustain its popularity going forward.
2. Altria keeps its hands-off policy on Ste. Michelle
I don't see the need for anyone to think that we have to step up in any material way the investment in the wine company. It was just a tough quarter.
Many people don't realize that Altria owns a wine business, but the Ste. Michelle Wine Estates holding quietly produces solid results for the tobacco giant. Yet during the most recent quarter, Ste. Michelle suffered a hit, with sales falling 3% and operating company income falling by 25% on a 10% drop in shipments. The unit blamed the timing of the Easter holiday and some inventory missteps for the poor performance, but more important for wine aficionados is that Altria isn't looking at changing its hands-off approach toward the wine business. Instead, Ste. Michelle will still be in control of its own destiny and find its own ways to get back to profit growth.
3. Altria gets a minor beer boost
Altria's reported equity earnings from our investment in [Anheuser-Busch InBev (NYSE:BUD)] were $23 million. ... [These] underlying results were negatively impacted by a challenging environment in Brazil and mark-to-market losses related to ABI's hedging of share-based compensation payment programs.
With the SABMiller deal now done, Altria has a more than 10% stake in Anheuser-Busch InBev, and because of the one-quarter delay in incorporating the beer-maker's results into Altria's financials, this was the first quarter that A-B InBev performance appeared. Altria is hopeful that the beer business will overcome its challenges and make a more substantial contribution to the tobacco company's earnings in the remainder of 2017 and beyond, but it could take a while for A-B InBev to find more favorable industry conditions.
4. Here's how the Philip Morris iQOS partnership will work
They're sourcing the product to us. ... They're licensing it to us for commercialization. ... There's nothing that would foreclose a different arrangement being struck than the one we have today.
Many analysts believe that the iQOS heated-tobacco product that Philip Morris International (NYSE:PM) has pushed hard could become popular in the U.S., especially if Philip Morris' applications with the U.S. Food and Drug Administration get approved. When asked about how marketing iQOS in the U.S. would work, Barrington emphasized that the current arrangement involves Philip Morris sourcing iQOS products and licensing the trademark to Altria. Some think that Altria should make an outright purchase of the intellectual property behind iQOS, and the CEO said that would be possible. But everything hinges on an actual FDA authorization for marketing the product domestically.
5. Fallout from the smokeless tobacco recall
We are pretty much done replenishing the out-of-stock [situations] that occurred because of the recall at retail. And we are seeing share recover.
Altria had to recall some of its smokeless tobacco products due to an incident at its manufacturing facility in Illinois, and that had a $60 million impact on operating income for the smokeless division. Yet Altria has worked hard to make sure that the reputation of its products remains intact, especially because the success of the Copenhagen brand has been important to its overall growth. Altria remains confident that it will be able to regain any temporary loss in market share over time.
Altria didn't make all of its investors happy with its earnings report, but its long-term outlook remains sound. Going forward, longtime shareholders should feel comfortable that Altria is still on track with its broad strategy vision for the future.