Altria Group, Inc. (NYSE:MO) Q4 2022 Earnings Call Transcript February 1, 2023
Operator: Good day, and welcome to the Altria Group 2022 Fourth Quarter and Full Year Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by Altria's management and the question-and-answer session. Representatives of the investment community and media on the call will be able to ask questions following the conclusion of the prepared remarks. I would now like to turn the call over to Mac Livingston, Vice President of Investor Relations for the Altria Client Services. Please go ahead, sir.
Mac Livingston: Thanks, Todd. Good morning. And thank you for joining us. This morning, Billy Gifford, Altria's CEO; and Sal Mancuso, our CFO, will discuss Altria's fourth quarter and full year business results. Earlier today, we issued a press release providing our results. The release, presentation, quarterly metrics and our latest corporate responsibility report are all available at altria.com. During our call today, unless otherwise stated, we're comparing results to the same period in 2021. Our remarks contain forward-looking and cautionary statements and projections of future results. Please review the forward-looking and cautionary statements section at the end of today's earnings release for various factors that could cause actual results to differ materially from projections.
Future dividend payments and share repurchases remain subject to the discretion of Altria's Board. Altria reports its financial results in accordance with U.S. Generally Accepted Accounting Principles. Today's call will contain various operating results on both a reported and adjusted basis. Adjusted results exclude special items that affect comparisons with reported results. Descriptions of these non-GAAP financial measures and reconciliations are included in today's earnings release and on our website at altria.com. Finally, all references in today's remarks to tobacco consumers or consumers within a specific tobacco category or segment refer to existing adult tobacco consumers 21 years of age or older. With that, I'll turn the call over to Billy.
Billy Gifford: Thanks, Mac. Good morning. And thank you for joining us. It was an exciting year for Altria as our businesses delivered strong financial performance, and we continued to strategically invest toward our vision. We grew our adjusted diluted earnings per share by 5%, and our tobacco businesses remained resilient and successfully executed their strategies. We also returned significant cash to shareholders through dividends and share repurchases. Last year, we returned more than $8.4 billion to shareholders, outpacing our record returns from 2021 and representing the largest single year cash return since 2002. Our vision guided our actions, and we believe we made meaningful progress on our journey toward moving beyond smoking.
Our teams took several steps forward during the year, including accelerating the growth of on! nicotine pouches, creating long-term optionality for our inhalable smoke-free product portfolio, enhancing our digital consumer engagement and continuing to advocate for tobacco harm reduction. Helix grew on! reported shipment volume to 82.5 million cans during its first full year of unconstrained manufacturing capacity, an increase of more than 70% versus the prior year. At retail, on! share momentum continued in the fourth quarter as the brand reached 5.9% of the total oral tobacco category and 24% of the nicotine pouch category. This impressive performance was driven by continued increases in brand awareness and adoption by smokers and dippers.
Additionally, we believe Helix effectively managed on! promotional spend as the year progressed and reduced on! promotional spend per can by approximately 15% during the second half of the year compared to the first half. In oral tobacco product development, we are excited to announce we have finalized a new product design, which will provide tobacco consumers more smoke-free options within our portfolio. We also began regulatory preparations for the product, and we are encouraged by the initial research results and the response we have received from dippers and nicotine pouch users. We look forward to sharing more details and unveiling this innovative product at our Investor Day next month. Turning to our inhalable smoke-free portfolio. We created long-term optionality in the heated tobacco and e-vapor spaces.
Internally, we have not yet finalized the design of our heated tobacco capsule product, but our teams continue to make progress. The consumer remains the focal point of our innovation system and our teams are tailoring the product to appeal to smokers who have not yet found a satisfying alternative to cigarettes. We also look forward to unveiling this exciting new product at our Investor Day next month as well. And in October, we announced a strategic partnership with JT Group, including a joint venture for the U.S. commercialization of heated tobacco stick products. We're encouraged by the initial collaboration between our teams and the pace at which they are operating. Horizon is optimizing team for the U.S. market and plans to begin regulatory preparations later this year.
We're excited about the opportunity and are working diligently to bring Ploom to smokers in the U.S. In e-vapor, we previously announced we elected to be released from the noncompete obligations related to our JUUL investment. We retain our economic stake in JUUL. E-vapor remains the largest smoke-free category in the U.S. and the most successful category in transitioning U.S. smokers away from cigarettes. We believe the category can play an important role in harm reduction, and we're continuing to evaluate all options to best compete in the category. Next, let's discuss the progress we made to enhance our digital consumer engagement. We launched a new digital trade program last spring, and we believe this program enhances our ongoing commitment to responsible retail.
The program includes multiple participation options for retailers. For those participating at the highest level we introduced incentives for retailers to include age and identity verification solutions in their digital platforms. And once the consumer is verified, retailers can then provide offers and messaging from our brands within the retailer's app. I'm excited to share that we implemented these solutions in more than 33,000 stores, exceeding the goal we outlined last year at CAGNY. Currently, consumers can view offers from our smokeable and more smokeless tobacco brands. But going forward, we expect to expand the program to include on! and other smoke-free brands. As we continue to broaden our digital reach, data will help us better understand each smoker's journey and help them successfully transition to other smoke-free alternatives in our portfolio.
Moving to the regulatory environment. We remain optimistic about the future of harm reduction in the U.S. We believe we have an unprecedented opportunity to lead the way in shifting millions of smokers to smoke-free alternatives, if we follow the science and foster innovation with the support of reasonable regulation. In December, the Reagan-Udall Foundation published its operational evaluation of the FDA's Center for Tobacco Products. We were among the stakeholders who provided input into this evaluation. Among its recommendation, the report urges the FDA to clearly define product pathways and accelerate PMTA decision-making, take enforcement actions against manufacturers and products in violation of the law and address the need for risk communications to tobacco consumers.
We agree these are important opportunities and believe that the FDA should direct its focus toward implementing a framework to advance harm reduction, rather than focusing on prohibition policies that we believe will further expand the illicit market and create other unintended consequences. Let's now move to the operating environment. We estimate that total equivalized tobacco volumes declined 6% for the year and 1.7% over the past five years on a compounded annual basis. Combustible volumes declined by an estimated 7.8% last year as smokers faced increasing economic challenges. We are encouraged that smoke-free volumes were stable compared to the prior year at 3.8 billion equivalized units and now represent an estimated 26% of the total tobacco space.
E-vapor has been a major contributor to the growth of smoke-free products over the five-year period. Although volumes declined by an estimated 1% year-over-year amid considerable regulatory uncertainty such as the FDA from denial order and subsequent temporary stay on JUUL products, which caused market disruptions for both consumers and retailers. In oral tobacco, volumes grew by an estimated 1.5%, driven by the continued adoption of all nicotine pouches. Turning to our financial outlook. Our plans for 2023 include a continuation of our strategy to balance earnings growth and shareholder returns with strategic investments towards our vision. For 2023, our planned investment areas include: continued smoke-free product research, development and regulatory preparations; digital consumer engagement; and marketplace activities in support of our smoke-free products.
We believe the external environment will remain dynamic in 2023. We will continue to monitor the economy, including the impact of high inflation, tobacco consumer dynamics, and regulatory and legislative developments. Considering these factors, we expect to deliver 2023 full year adjusted diluted EPS in the range of $4.98 to $5.13. This range represents an adjusted diluted EPS growth rate of 3% to 6% from a $4.84 base in 2022. Before I turn it over to Sal, I would like to send a sincere thank you to our employees. I continue to be impressed by the talent within our companies and our ability to adapt and overcome challenges in a dynamic operating environment. The passion and dedication of our employee base is evident, and I'm confident in our ability to execute our vision because of you.
Also, I'd like to honor the memory of Leo Kiely, the long-standing member of our Board who recently passed away. Leo served on our Board since 2011 and made many contributions to Altria, including as Chair of the Compensation and Talent Development Committee and as a member of the Innovation Committee. We will miss his leadership, guidance and friendship. I'll now turn it over to Sal.
Sal Mancuso: Thanks, Billy. We were very fortunate to have Leo's 12 years of service at Altria and our thoughts remain with the Kiely family. Moving to our results. Our tobacco businesses generated strong financial performance again this year and were responsive to changes in a dynamic external environment. In the fourth quarter, the smokeable products segment grew its adjusted operating companies income by 4% and expanded its adjusted OCI margins to 58.4%. The segment also reported robust net price realization of 13.5%. As a reminder, manufacturer price realization does not reflect retail price changes for smokers. For example, Marlboro net retail pack price increased 6.4% in the fourth quarter compared to last year. We continue to successfully execute against our strategy in the smokeable segment, maximizing profitability while balancing investments in Marlboro with funding the growth of smoke-free products.
Weed, Smoke, Cigarette
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For the full year, smokeable segment adjusted OCI grew 2.9% to $10.7 billion, and adjusted OCI margins expanded by 1.4 percentage points to 59%. In smokeable segment net price realization for the year was 11.1%. In addition, over the past five years, the smokeable segment has grown adjusted OCI by $2.2 billion, representing a compounded annual growth rate of 4.7%. Over the same time period, adjusted OCI margins have expanded from 51% to 59%, an impressive increase of 8 percentage points. Turning to volumes. Our smokeable products segment reported domestic cigarette volumes declined 12.1% in the fourth quarter and 9.7% for the full year. When adjusted for calendar differences and trade inventory movements, domestic cigarette volumes for the fourth quarter and full year declined by an estimated 11% and 9.5%, respectively.
At the industry level, when adjusted for trade inventory movements, calendar differences and other factors, we estimate that adjusted domestic cigarette volumes declined by 9% in the fourth quarter and by 8% for the full year. Next, let's discuss retail share performance. Full year retail share for the industry discount segment increased 1.4 share points. We believe these results were driven by an increased pressure on smokers' disposable income and increased competitive activity, including multiple branded discount offerings priced at deep discount levels. Marlboro retail share declined by 0.4 for the full year. Most of the full year share losses were attributable to the value options within the Marlboro brand family, such as Special Select and Marlboro 72s as some price-sensitive consumers continue to seek additional price relief.
Meanwhile, the brand's mainline non-menthol offerings, including the iconic red and gold pack varieties were resilient and performed well for the year. Marlboro's share of the premium segment grew to 58.2% for the full year. Marlboro has performed better than many other premium brands over the last several years. In fact, over the past three years, Marlboro grew its share of premium by 1 full share point. We are encouraged by Marlboro's resilient performance as the brand celebrates 50 years of leadership in the cigarette category. In cigars, reported cigar shipment volume decreased 4% for the full year. While Black & Mild continued to maintain its leadership in a profitable machine-made tip cigar segment. Next, we will move to the oral tobacco products segment.
Full year segment adjusted OCI and adjusted OCI margins contracted as we continued to invest behind on!. Total segment reported shipment volume declined 2.4% for the year as growth in on! volume, which more than offset by lower reported MSP volumes. When adjusted for trade inventory movements and calendar differences, we estimate that full year total oral tobacco segment volumes declined by an estimated 2%. Full year oral tobacco products segment retail share declined 1.3 percentage points as declines in MST were partially offset by the continued growth of on!. Within the traditional smokeless category of MST and snus products, Copenhagen's share performance has been stable over the last three years, declining only 0.3 from 2019, whereas the second largest traditional smokeless brand has ceded 1.6 share points.
Overall, we continue to be encouraged by the performance of our oral tobacco products as on! grew volume and share in a competitive category and Copenhagen remained the category leader. Turning to our investment in ABI. We recorded $571 million of adjusted equity earnings for the full year, down 10.6% versus 2021. We continue to view the ABI stake as a financial investment, and our goal remains to maximize the long-term value of the investment for our shareholders. In our all other operating category, we have completed our wind-down of Philip Morris Capital Corporation and no finance assets remain. I would like to thank the many PMCC employees who contributed to its success over the years and to the other Altria employees who helped complete a successful wind-down.
Finally, we continue to effectively manage our balance sheet while generating strong financial performance and returning significant cash to shareholders. These results were driven by our tobacco businesses that continue to be highly cash generative. Our year-end credit metrics remain strong. Our debt-to-EBITDA ratio was 2.1 times, down 0.4 over the past three years, and our weighted average coupon was 4%, a decrease of 0.2 over the past three years. We also expect to retire approximately $1.3 billion of notes coming due later this month with available cash. In addition, we returned more than $8.4 billion in cash to shareholders last year through dividends and share repurchases. These record cash returns included paying $6.6 billion in dividends and raising the dividend for the 57 time in 53 years.
We also repurchased more than 38 million shares during the year, totaling $1.8 billion, which completed our previously authorized program. Earlier this week, our Board authorized a new $1 billion share repurchase program, which we expect to complete by the end of 2023. I'll now turn it back to Billy to conclude our remarks.
Billy Gifford: Thanks, Sal. While the calls are being compiled, I'll remind you that today's earnings release and our non-GAAP reconciliations are available on altria.com. We've also posted our usual quarterly metrics, which include pricing, inventory and other items. As we mentioned during the call, we have exciting topics to discuss at our Investor Day next month. We look forward to having a fulsome conversation about our smoke-free future and we are excited to share more about our journey toward moving beyond smoking. Todd, we'll now transition to the Q&A period.
