Good day, and welcome to the Altria Group 2016 First Quarter Earnings Conference Call. Today's call is scheduled to last about 1 hour, including I would now like to turn the call over to Ms. Sarah Nokomis, Vice President, Investor Relations for Altria Client Services. Please go ahead, ma'am.
Thank you. Good morning, and thank you for joining us. We're here this morning with Marty Barrington, Altria's CEO and Billy Gifford, Altria's CFO to discuss Altria's 2016 Q1 business results. Earlier today, we issued a press release regarding these results. For additional review, please see the earnings release on our website at altria.com or through the Altria Investor app.
During our call today, unless otherwise stated, we're comparing results to the same period in 2015. 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. The timing of share repurchases depends on marketplace conditions and other factors.
Altria reports its financial results in accordance with U. S. Generally Accepted Accounting Principles. Today's call will contain various operating results on both the reported and adjusted basis, which excludes items that affect the comparability of reported results. Descriptions of these non GAAP financial measures and reconciliations are included in today's release, which is available on our website and via the Altria Investor app.
Now, I'll turn the call over to Marty.
Thanks, Sarah. Good morning, everyone. Altria is off to an excellent start in 2016, growing adjusted diluted earnings per share by 14.3% despite a tough 2015 comparison. Both the smokeable and smokeless product segments saw robust adjusted operating companies income growth and expanded margins. Altria paid over $1,100,000,000 in dividends.
So once again, our Q1 results illustrate the strength of our core tobacco businesses and our focus on execution. Here are the highlights from the quarter. The smokeable product segment continued its outstanding performance with contributions across the brand portfolio. In the quarter, adjusted operating company's income grew 9.2%, primarily driven by higher net pricing, higher volume and lower SG and A and manufacturing costs, partially offset by higher resolution expense. Cigarette industry volume declines were moderate in the quarter, supported by lower gas prices and employment and wage growth, which continued to benefit adult tobacco consumers.
PM USA's volume did even better than the industry decline rate due to modest share gains, though the growth was flattered a bit by an additional shipping day and trade inventory movements. For the quarter, PM USA's total retail share was 51.4%, up 0.3 percentage point. Marlboro's retail share remained at 44% and L&M gained share in discount. In the machine made large cigar category, Middleton's focus on the more profitable tipped cigar segment continued to produce strong results. Middleton's volumes were up 8.3%.
So we're very pleased with the smokeable segment's performance. PM USA's investments to maintain a vibrant Marlboro franchise and our long term approach to the business continue to pay off. Turning to the smokeless product segment, USSTC continues to execute against its strategies and that produced a strong quarter. Adjusted operating income grew 16.7 percent driven by higher net pricing and higher volume, which benefited from the national expansion of Copenhagen Mint and modest overall share gains. Copenhagen and Skol grew their combined retail share by half of a share point.
Once again, Copenhagen was both the fastest growing smokeless brand and the largest, growing its retail share by 1.1 percentage points to 32.4%. In mid March, USSTC expanded Copenhagen Mint nationally with a strong awareness and trial generating plan. Copenhagen Mint is rooted in Copenhagen's essence of authenticity, masculinity and craftsmanship and allows the brand to compete in all major smokeless flavor categories. Our sales force quickly gained strong distribution and we're receiving positive response from our trade partners. In innovative tobacco products, Altria continues to invest in developing a leading portfolio of products to meet evolving adult tobacco consumer preferences.
In e vapor, Newmark continued to expand distribution of Mark 10 XL as early marketplace results have been encouraging in lead markets. On the heated tobacco platform, our work with Philip Morris International on an FDA application for a modified risk tobacco product claim remains on plan and our teams are making excellent progress on branding and go to market strategies for the U. S. Turning to beer, AB InBev and SABMiller report that they are targeting the second half of twenty sixteen to obtain the necessary approvals needed to complete the transaction. We remain excited about the transaction and look forward to supporting the combination of these 2 great companies.
Internally, our teams are preparing to transition our investment from SABMiller to the new combined entity and we look forward to sharing more details about that at the appropriate time. In late January, Altria announced a $300,000,000 productivity initiative designed to maintain its operating company's leadership and cost competitiveness. We've made significant progress on the program. In particular, we have completed the design and realignment of our organization. So in summary, we're off to a strong start.
We're reaffirming our guidance for 20 16 full year adjusted diluted EPS in a range of $3 to $3.05 representing growth of 7% to 9% from our 2015 adjusted diluted EPS base of $2.80 As a reminder, this guidance does not include any impact from the proposed AB InBev and SABMiller business combination as the transaction remains subject to certain approvals and the closing date has not yet been determined. Now I'll turn things over to Billy for more details on our performance.
Thanks, Marty, and good morning, everyone. As Marty mentioned, we saw great results across our core tobacco businesses led by our smokeable products segment. The smokeable products segment increased adjusted OCI margins by 1.7 percentage points in the Q1 to 48.1% due primarily to higher net pricing, higher volume and lower SG and A and manufacturing costs, partially offset by higher resolution expense. For the quarter, PM USA's reported cigarette shipment volume increased 1.2%. After adjusting for an extra shipping day, trade inventory changes and other factors, PM USA estimates that its cigarette volume decreased approximately 0.5%.
PM USA estimates that total industry cigarette volumes decreased approximately 1% in the Q1. In the smokeless product segment, adjusted OCI margins expanded by 2.4 percentage points to 65.5 percent driven principally by higher net pricing. For the quarter, USSTC reported shipment volumes grew 7.8%. After adjusting for trade inventory changes, including Copenhagen met pipeline volume and other factors, USSTC estimates that smokeless volume increased approximately 3%. Both Copenhagen and Skol grew volumes, which were partially offset by declines in other brands.
USSTC estimates that smokeless industry volume grew at approximately 2.5% over the past 6 months. In wine, net revenues grew 8.2% driven by solid volume growth of 8.1%. Volume growth was primarily driven by strong performance among its core premium brands and the timing of the Easter early Easter holiday. Ste. Michelle's operating company's income grew 3.7%, while segment margin contracted 9 tenths of a percentage point to 20% due to increased costs.
In beer, Altria recorded reported equity earnings from our SABMiller investment of $66,000,000 down from $134,000,000 last year. This decrease is due to Altria's share of SABMiller pre tax special items, primarily reflecting asset impairment charges. Finally, we continue to make returning cash to shareholders a priority, paying over $1,100,000,000 in dividends and repurchasing $168,000,000 in shares. As of March 31, Altria had approximately $797,000,000 remaining in the current $1,000,000,000 share repurchase program. We continue to expect to complete the program by the end of 2016.
An important part of our strategy is to manage our strong balance sheet to deliver consistent financial performance. We are pleased to report that last month, Moody's and Standard and Poor's both upgraded Altria's long term corporate credit rating one notch to A3 and A- respectively, reflecting our solid balance sheet, strong business fundamentals and the leading market positions of our businesses. That wraps up our results. Marty and I will now take your questions. While the calls are being compiled, I'll direct your attention to outria.com.
Along with today's earnings release, for your reference, we posted a list of quarterly metrics, including pricing, inventory and other housekeeping items. Operator, do we have any questions?
Thank you. Our first question comes from the line of Matthew Granger of Morgan Stanley.
Hi, good morning everyone. Thanks for the questions.
Good morning Matt.
I just had 2. First, I guess with 14% EPS growth this quarter and Marty, I think you characterized it as a relatively tough comp versus last year and a continuation of the volume and pricing trends that we saw last year still carrying through. Did you consider taking up full year guidance or taking up the low end of the range at all? And I guess what are the arguments against getting a bit more optimistic at this point in the year?
Yes. Listen, we're 12 weeks in, I guess is the honest answer. It's a great start. The businesses are in good shape, Matt. We're very pleased with the performance.
I want to congratulate the teams at Altria for the work they've done. But we're 12 weeks in and we're always careful as we start out the year. Remember, we've also got some state excise tax threats that remain out there that we're working our way through. And so that's how I would recommend that we think about that right at this moment.
Okay. Thanks, Marty. And from a regulatory or legislative stand point, there continues to be a fair amount of activity around efforts to raise the smoking age to 21 in a few states. There was a bill that didn't make it through in New Jersey and now there's another bill in Massachusetts this week. So I know it's difficult to predict how and whether these things actually go forward.
But I'm just curious if you could give us a sense of what, if anything, you think the practical impact might be if 21 plus law goes into effect in the state? Is there a tangible impact on volumes? And I guess is there anything underlying from a regulatory standpoint that you think is contributing to this higher level of legislative momentum?
Okay, good question. Let me try to take maybe it in 2 pieces. One is what should be happening and then I guess what is happening. What should be happening, I think, is that the FDA statute should be observed. We're all in favor of minimum age.
We're the company I pointed out that led the efforts to get minimum ages, the age laws in place where they weren't. But the reference point has historically been 18. There are a few differences in a few states, but if we look at the master settlement agreement or the FDA bill itself or other reference points, it's been 18. I think we can all remember that when the statute was passed by FDA, what was supposed to happen was the question was supposed to have been studied by FDA, a report filed with Congress, and then you could have a debate about whether it should be raised or not. And so that's what should happen, and we support that process as we supported the FDA bill.
Unfortunately, what's happening is we have states and localities, with all respect that are not observing that, approach. And so there are these efforts and the efforts have taken a bit of an uptick. To dimensionalize the volume and the population, I think the population of that cohort say 18 to 20 is roughly, I don't know, call it 3% or 4%, Matt. The volume estimate, I think that I've seen one published, it's about 2.5%. So that assumes that it all happens and it all comes in at once.
So obviously the impacts would be more muted over time. But I think the most important thing would be to encourage people to allow an informed debate based on science and evidence over at the Congress and that's what our position is on it.
Okay. That's very helpful. Thanks, Marty.
Okay. Thanks for calling in, Matt.
Your next question comes from
the line of Steve Powers of UBS. Great.
Good morning. So obviously, strong volumes this quarter across the board, but drilling down into smokeable and smokeless, what do you think accounts for the sequential volume acceleration versus where you were in Q4, even on the more difficult year over year comparisons? And how do you think your shipments compare to sell through? In other words, was there any degree of catch up from last quarter or any degree of selling ahead of demand in Q1? Maybe I'll start there.
Okay. Thanks for the questions both. Let me separate out the categories, I think, which might be helpful for Precision. Let's start with smokeable. So on a if we look back at full year of 2015, PM USA actually grew its volume right by roughly 0.5% if memory serves.
And then in this quarter, Steve, what we've got is on an adjusted basis down actually 0.5%. So it's obviously well below the historical trends of 3% to 4%, but actually on a sequential basis in cigarettes, it's the decline has picked up a little bit, but just a little bit. I think that's the way we think about smokeable. The smokeless volumes, our industry estimate is on a 6 month trailing basis. We estimate about 2.5%.
That's actually relatively consistent with our estimate, I think, for the last 2 years, if you look at it on an average basis. Our shipments were flattered a little bit, obviously, because we had the launch of Copenhagen Mint. So that's how we look at the volume. I guess what I would say is the volumes continue to be strong on both segments and that's good for our business.
Okay. If I shift gears a little bit, you alluded to it in your opening prepared remarks, but there's obviously a lot of chatter and excitement around IQOS and heat not burn generally. Based on what you're seeing in other markets around the world and the progress that you've made yourselves here. Could you just update us a little more detail on your thinking about that platform and what a launch in the U. S.
Will sort of ultimately look like in terms of its cadence over time? Thanks.
Sure. Thanks for those questions. We continue to be excited about IQOS. As you know, we will have the exclusive rights to that product in the United States. We're working on 2 tracks.
We mentioned this, I think, in our remarks. We're working closely with PMI on the FDA application to get it approved in the United States and hopefully approved as a reduced harm claim and that's an important strategic development for the category generally and certainly for Altria. The other thing that we're doing is we're working on our branding plans and our go to market plans and how we intend to commercialize it in the United States. And I don't want to get ahead of the work because we haven't announced anything yet, but I continue to be very excited about what I see. I think it's important to bring these kinds of products to the adult tobacco consumers and I think it represents a major opportunity for FDA to work with the industry on harm reduction.
So we're excited about all that. Thank you, Marty. Okay, Steve. Thanks for calling in.
Your next question comes from
the line of Bonnie Herzog of Wells Fargo.
Good morning.
Hi, Bonnie.
Hi. I just had a quick follow on question on your guidance. Other than the potential for state excise tax increases that you mentioned, are there other factors or possible drags you're anticipating in your business over the next three quarters that you could highlight for us since your guidance implies slower EPS growth of around 6.5% for the remainder of the year at the midpoint of your range.
I'm not sure I have much to add to what I said earlier Bonnie, which is there's no question we're off to a very good start. We're very pleased about that. The businesses are all in very good shape. We're just 12 weeks in, that's all. And we're trying to be prudent about that.
That's the sum total of it, if you want to know the truth.
Okay. No, that helps that there's no other big headwinds that you're foreseeing. It's just being prudent at this point. And then in terms of Marlboro, I was hoping you could give us a sense of what Marlboro volume was during the quarter adjusted for the extra shipping day and inventory fluctuations. And then I'd love to hear more color on your Marlboro app and where you're at with the rollout as well as any incremental learnings you've gleaned from this new app in terms of consumer behavior for instance?
Right. So we give reported numbers as you know for the brands which are in the tables in the release and then we try to do an adjustment at the category level. That's about all I can help you with on that. On a more positive note, we continue to do really good work in the digital space. The Marlboro app has been very well received.
We've had very good cooperation with a number of our trade partners who I'd like to thank for that. We have now have the Marlboro couponing app for example on their platform in many places. We've got the Marlboro coupons are being accepted in more than 100,000 retail locations. It covers about 70% of industry volume. Marlboro.com, the digital platform for age verified adult smokers is really doing great things.
We had several promotions over on the marlboro.com side that had some of the biggest interest that we've had in a very long time. So, you know everybody is working in the space. We're very proud of the teams that are doing the work on this. I think it's a terrific and a responsible way to connect with both our Marlboro smokers and competitive adult smokers. So we're very pleased about how digital is going.
Okay. That's helpful. And then just one final, if I may. I was just hoping you could share your thoughts or views on the recently released Royal College of Physicians report out of the UK, which recommends the widespread promotion of electronic cigarettes for smoking cessation. And then it also states that e cigs are likely to be beneficial to U.
K. Public health. So Marty, I don't know if you have had a chance to kind of look at that, but I'd love to hear your thoughts on it if you have.
No, I was getting ready to take your questions this morning, Bonnie.
So I
did read the headline. I saw the headline. I think I'm going to read the report when I have some time later today. The headline does seem to be consistent with what many in public health are saying, which is these innovative products hold promise and they have to be done responsibly of course, but they do hold promise for helping adult smokers migrate to less harmful products. But I'd like to if you can allow me, I'd like to read the report in full.
Okay, fair. Thank you.
All right. Good to talk to you.
Your next question comes from the line
of Michael Lavery of CLSA.
Good morning.
Hi, Michael.
Just back on IQOS, a couple of things. Could you just talk a little bit about, I know at one point, if I'm not wrong, you were talking about thinking you might have the FDA application in maybe a little earlier this year, now it's later in the year. Are you able to work with the FDA offline ahead of that? Or can you just give some color on how the preparations look and what might be driving some of the timing?
Sure. Let me separate out for purposes of my answer this application and the process generally. I think that's probably the way to do it. We remain, I think you've seen PMI say this that I think the schedule remains for late Q3, perhaps Q4 of this year to file the application, which is consistent with I think what we've said before. These applications are quite voluminous.
There's a lot of science and clinical. I'm sure you've been briefed on that. It's a lot of work. I don't want to comment about talking to FDA about this application, but generally speaking, I can tell you how it works, which is when you want to have applications like this, you want to partner with FDA. And so we communicate with FDA regularly on our issues and try to get feedback from them.
I think in the pharmaceutical side, for example, it's well known that if you're going to design clinical trials, you want to go in and talk to your regulator and show them your trial protocols and get feedback on that before you go to that time and expense. So it's I would say generally it's working about the same way and that's what you would expect you're going to have a good relationship with your regulators, which is what we see.
Okay. That's very helpful. And then on just a follow-up on that on IQOS, if and when it does get into the market, would that be subject to MSA payments? And could it depend on how you brand it?
Yes. I think there are some questions to be worked through there. I think at a very high level without getting ahead of ourselves, I think if it's characterized as a cigarette, which as you know, there's the device and then the cigarette, which is warmed, The cigarettes would be covered by the MSA. I think that's the thinking.
Okay. Thanks. And then just one last one on the cost savings. You've got the $300,000,000 productivity restructuring initiative. Can you give any sense of the pacing of that?
You talked about how the reorganization was complete in, I think, March. Would that mean that the bulk of the savings that you expect are now on track to be realized the rest of the year?
Let me just start and then I'll hand it to Billy for a word of detail. Remember the productivity initiative consists of a couple of pieces, one of which is the organizational realignment. That is largely completed and our organization is now really in place and going. And then there are other SG and A savings. Bill, you may want to say a word about that.
Yes, Michael, we had a little bit of those savings in the Q1, but you're correct in thinking that the majority of those savings will be progressing as we move through the year. And that was all incorporated in the guidance.
All right.
Good. Perfect. Thank you very much.
Thanks for calling, Michael.
Your next question comes from the
line of Judy Hong of Goldman Sachs.
Thank you. Good morning.
Good morning, Judy.
So on the cigarette industry, just from a competitive standpoint, it seems like the environment hasn't really changed all that much since all of the deals have happened. So just wanted to get your color on how you'd characterize the competitive environment today after all of the new contracts from your competitors have been implemented? And then in that context, how would you characterize Marlboro share performance? I know you look at it on a longer term basis, but it looks like Marlboro share has been relatively stable over the last 6 or 7 quarters. So can you just talk to that situation?
Sure. Let's start with the competitive environment. It's always competitive and it continues to be competitive. But I think you're right that there hasn't been a marked change in that regard. Subsequent to some owners getting new brands.
They're executing the strategies that I think they said they would execute. They're the strategies that we would expect for them to execute. And as you might expect, we have very good plans in place. At a very high level, what I would say is, we have been the market leader for decades. There's a reason for that through thick and thin, which is we have very good people.
We have the leading brands in the leading positions. And so while we respect our competition, I assure you that our people are ready to compete in this new environment. We haven't seen anything that's markedly different there. With respect to Marlboro, I'm tempted, but I won't reprise the presentation that we put on in CAGNY just a few months ago about all the many strengths of Marlboro. You're right, Judy.
I mean, it's modest share momentum over time and a quarter is not over time. I think when we were talking about this several weeks ago, we looked back and you know Marlboro has actually grown about 2 full share points if you look back from the period, call it 2,007, 2008 to date, which is terrific share performance for a brand that's as big as that. One way to look at the competitive environment is how PM USA did in the quarter. So just to call out again a few of the highlights, it grew its income more than 9% over tough comp. It expanded its margins.
It had net pricing realization in line with the long term trends. So it's a terrific performance despite the fact that we have a transaction and there are some new owners of new brands out there. I think that's how we'd look at it.
And then Billy, just a quick question on your MSA settlement cost in the quarter. It looks like it went up something like 9% on an absolute dollar basis, and your volume was up 1.2%. So it looks like per unit cost went up more than I would have anticipated. So is that sort of the run rate number we should be using for the rest of the year? Was there anything unusual about the Q1 expense?
Yes. Thanks for the question, Judy. Nothing significantly unusual in that. You hit the first point, which was volume was up, so that drove it up higher. And then every year, we have the inflation factor that gets topped on for the MSA.
So, those are the 2 major drivers of MSA for the quarter. But thanks for your question.
Got it. Okay. Thank you.
See you.
Our next question comes from the line
of Priya Uro Gupta of Barclays.
Thank you so much for taking the question. Given your recent upgrade to A3A- is there any change in your philosophy around balance sheet management and shareholder returns?
Yes,
thanks for your question. No change in strategy or philosophy. Look, we want to maintain our investment grade credit rating and that's what we strive to do. We're pleased with the upgrades because we think it's recognition of the strong balance sheet that we have and the strength of the businesses. But yes, no change in the underlying strategy.
Thank you so much.
Thanks for calling.
Your next question comes from
the line of Gregg Trotke of Goldman Sachs.
Thanks so much for the question. Maybe just following up on the credit questions. In terms of use of cash or the prospect of paying down some of the high coupon debt given the recent upgrade, I know you've done that previously. How are you thinking about your maturities and in particular the potential for enacting another tender for some of the higher coupon debt?
Yes, thanks for your question. Here's the way we think about it. We feel very comfortable where we're at. We always monitor market conditions and try to take advantage of market conditions. So, I'm not going to commit to any future actions one way or the other, but that's the way we think about it.
We're comfortable where we're at, but we do monitor the market conditions.
Thank you.
Your next question comes
from the line of Nik Modi of RBC Capital Markets.
Good morning, guys.
Hi, Dave.
Hey, couple of questions. The extra selling day, any way you can just give us the impact it had on volume, etcetera? And then the other two questions is L and M, just curious, it looks like picked up some market share. Just curious if there's any discrete initiatives going on that's driving that. And then the last question for you, Marty, is Mitch Zeller was speaking at a conference recently.
It looked like he made some pretty constructive comments regarding relative risk and risk continuum. And just wanted to get your reaction and thoughts on that now that he's being a lot more vocal about the positioning of the FDA on that?
Sure. Thanks for those, Nick. Look, we did have an extra shipping day for PM USA, so it obviously flattered the volume a little bit. We have one fewer in the Q4. So on a yearly basis, which is how we think about it, it will wash itself out.
On L and M, I would say that it's doing exactly what we want it to do. We want to have L and M participate in the declining discount segment that industry segment continues to decline as the premium effect in the category obtains, but L and M is doing a very good job there, but we don't want to grow the discount category and L and M is doing exactly that. I read with interest and listened to the reports about Director Zeller. I've seen his presentation. We continue to be encouraged and optimistic that the FDA will adopt the continuum of risk with respect to products.
It's the right thing for consumers. I think it's the right public policy and it should promote innovation. This is a category in which the FDA in our opinion should be promoting innovation to bring new products to smokers in particular. And I thought it was great that Director Zella went out and shared his views at the conference.
Great. Thanks, Marty.
Thanks for calling, Nick.
Media representatives are now invited to participate in the question and answer session. Thank you. At this time, I would like to turn the call back over to Ms. Sarah Nokomis for any closing remarks.
Thank you, everyone, for joining our call this morning. If you have any follow-up questions, please contact us at Investor Relations.
Thank you. This does conclude today's conference call. You may now disconnect.