Good day, and welcome to the Altria Group 2015 First Quarter Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by Andrea's management and a question and answer session. Questions following the conclusion of the prepared remarks.
I would now like to turn
the call over to Ms. Sarah Nokmas, Vice President, Investor Relations for Altria Client Services. Please go ahead, ma'am.
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 2015 Q1 business results. During our call today, unless otherwise stated, we're comparing results to the same period in 2014. Earlier today, we issued a press release regarding our Q1 results. For a detailed review of them, please review the earnings release on our website at altria.com or via the Altria Investor app.
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 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 a 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 earnings 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, and thanks for joining our call. Altria is off to a strong start in 2015. Our core tobacco businesses continued to deliver on their strategies backed by the strengths of their leading premium brands. Each of our reportable segments grew operating companies' income and expanded their margins.
Altria grew its adjusted diluted EPS by 10.5 percent, paid approximately $1,000,000,000 in dividends and repurchased 3 point 6,000,000 shares in the Q1. And earlier this morning, we reaffirmed our guidance for 2015 full year adjusted diluted EPS growth of 7% to 9%. Here are some important highlights from the quarter. PM USA delivered on its smokeable segment strategy of maximizing income, while maintaining modest share momentum on Marlboro over time. The segment produced outstanding results in the Q1 driven by higher pricing, higher volume and Marlboro retail share growth.
PM USA has invested steadily to strengthen Marlboro and those investments continue to pay off. As a result, the Smokeable segment grew adjusted operating company's income by over 12% in the quarter. PM USA's reported cigarette shipment volumes grew 1.6% in the quarter benefiting from a moderation in the industry decline rate, trade inventory movements and retail share gains. In the machine made large cigar category, John Middleton continued to strengthen its leadership position in the profitable tipped cigars segment. The company posted strong double digit volume growth in the quarter, driven primarily by Black and Mild.
In the Smokeless Products segment, U. S. STC grew 1st quarter operating company's income by 5 percent and expanded its operating company's income margin by 1 percentage point to over 63%. USSTC estimates that its adjusted smokeless segment volumes grew approximately 4% in the quarter, while smokeless industry volumes grew 2% over the past 12 months. Copenhagen and Skol grew their combined retail share by half of a percentage point in the quarter.
Turning to innovative tobacco products. Newmark remains focused on building a robust portfolio of innovative tobacco products for adults smokers and vapers. Newmark began shipping its next generation e vapor product Mark 10 XL into lead markets this month. In the wine segment, St. Michel posted a quarter of nearly 23% operating company's income growth, primarily through improved premium mix.
In the Q1, equity earnings from our SABMiller investment were negatively affected by SAB Miller special items and unfavorable provides cash flow through its dividend. So we came into 2015 with momentum and our Q1 results reflect another quarter of strong execution against our well defined strategies. We believe our businesses are positioned to help us deliver against our full year guidance. Billy Gifford will now discuss our business results in more detail.
Thank you, Marty. Good morning, everyone. Our Smokeable Products segment helped drive adjusted diluted EPS growth of 10.5% in the Q1. The Smokeless Products segment and fewer shares outstanding also contributed to that growth. The Smokeable Products segment delivered strong adjusted operating company's income growth of 12.6%, primarily driven by higher pricing, higher shipment volume and lower resolution expenses, primarily to the end of the federal tobacco quota buyout payments.
Despite cost being higher in the quarter, due primarily to higher pension and benefit costs and timing of SG and A spending, the smokeable segment expanded its adjusted OCI margins by 2.3 percentage points. Volume was also strong. After adjusting for trade inventory changes and other factors, PM USA estimates that its 1st quarter cigarette shipment volume was essentially unchanged and that total industry volumes declined approximately 0.5%. For the quarter, PM USA grew Marlboro's retail share by 0.3% to 44% and grew its total cigarette category retail share by 0.4 share point. L and M share gains also contributed to PM USA's 1st quarter performance as the brand continued to grow its share while the overall industry discount category declined in the quarter.
In the total machine made large cigars category, Black and Mild's retail share declined 0.6th of a share point in the Q1. As Marty mentioned, Middleton continued to concentrate on the more profitable tipped cigar segment where Black and Mild gained share. In the Smokeless Products segment, operating companies income increased 5% in the Q1 as higher pricing was partially offset by higher promotional investments. After adjusting for trade inventory changes and other factors, USSTC estimates that its domestic spokeless product shipment volume grew approximately 4% in the quarter, while the industry grew approximately 2% over the past 12 months. Copenhagen and Skol's combined retail share grew 5 tenths of a share point in the quarter to 51.2%.
Copenhagen's retail share grew 1 share point, while Skol's retail share declined 0.5 of a share point. The Wine segment delivered very strong results in the Q1. Ste. Michelle grew operating company's income by 22.7% in the 1st quarter, primarily driven by improved premium mix. Shipments increased by 0.5% in the quarter.
That wraps up our operating results. Marty and I will now take your questions. While the calls are being compiled, let's cover a few housekeeping items. As a reminder, comparisons when made are against the Q1 of 2014, unless we note otherwise. Marlboro's price gap versus the lowest effective price cigarette was 31% in the 1st quarter, down 2 percentage points.
For the Q1, Marbled's net pack price was 6.06 dollars and the lowest effective price cigarette was $4.62 up $0.17 The estimated weighted average cigarette state excise tax was $1.49 per pack for the Q1, up $0.01 Wholesale inventory changes are one factor PM USA uses to estimate adjusted PM USA and industry volumes. PM USA estimates that its wholesale inventories were approximately 2,600,000,000 units at the end of the Q1 of 2015 and 2,400,000,000 units at the end of the Q4 of 2014. At the end of the Q1 of 2014, PM USA's wholesale inventories were estimated to be approximately 2,500,000,000 units. PM USA estimates that cigarette industry wholesale inventory levels were 5.5 1,000,000,000 units at the end of the Q1 of 2015 and 5,400,000,000 units at the end of the Q4 of 2014. PM USA estimates that Q1 of 2014 wholesale inventory levels were 5,500,000,000 units.
Copenhagen's price gap versus the leading discount brand was 29% in the Q1, down 3 percentage points. Copenhagen's retail price was $4.22 in the 1st quarter, up $0.13 The price of the leading discount brand was $3.26 in the 1st quarter, up $0.17 CapEx was $48,000,000 for the Q1. Ongoing depreciation and amortization was $49,000,000 for the quarter. Operator, do we have any questions?
Thank you. Our first question comes from the line of Owen Bennett of Nomura.
Good morning, guys.
Hello, Owen.
Couple of questions, please. I mean, firstly, any commentary on Marlborough Black? Is that still taking share? And if you could say, I mean, how much of Marlborough share growth is being driven by Black? And then secondly, any update on recent market share trends for Mark 10?
I noticed how you no longer have the statements about being amongst the top e vapor brands nationally like you did at year end. Should we read anything into that? Thanks very much.
Sure. Let's start with Marlboro Black. It continues to do a terrific job. In fact, it's grown for 17 consecutive quarters. We don't break the shares out by SKUs as you know Owen, but Marlboro Black is doing a terrific job particularly in the important segment of adult smokers 21 to 29.
I hope you had a chance to see our remarks at CAGNY about our vapor business. Our aspiration there is to succeed in the long term. What that means is we're moving with appropriate dispatch, but with financial discipline, always learning from the consumer. And frankly, what we're working on principally right now in addition to our distribution and brand building is product development. Consumers are telling e vapor manufacturers that the products are not yet there.
That's why you see us improving our product development pipeline. And to be sure share is important, but it will be important as soon as the products are established with the consumer. So we're not unduly focused on share. We are focused on getting the right products in the consumers' hands.
Okay. Thanks very much.
Your next question comes from Bonnie Herzog of Wells Fargo.
Good morning.
Hi, Bonnie.
Hi. My first question is on consumption. Given the strong industry cigarette volume and the decelerating smokeless industry volume, do you have a sense of underlying total tobacco consumption when considering both of these categories? And then do you believe it's rising? And if so, why?
And then maybe touch on your outlook for the cigarette decline rate? Is the 3% to 4% decline rate realistic going forward?
Okay. Great. Thanks for those questions. Let me start with cigarette volume. We don't forecast volume going forward as you know.
It's been 3% to 4% over the last several years and we think that you have to look at that over time. To be sure this quarter is a break, but it's only a quarter. So we'll have to see. Probably the best answer to your question about consumption is the total consumption rate over the last several years as measured by government sources, which has been declining at about call it 1% to 1.5% total pounds. So that takes into account Fani all of the products that adult tobacco consumers are trying.
And of course it's a dynamic time. We've seen more movement among the categories. That's probably the best marker.
Right. Yes. I mean that was kind of the basis for my question because of how smokers industry volume hasn't or
has been
performing not as well. So I think there's been a lot of interplay between the 2 categories. So you would agree with that.
Yes. There's still growth there of course.
Right. Sure, which has been decelerating slightly. And then I did want to touch on Mark 10 and just to hear from you. Just any updates you have about recent consumer behavior for Mark 10? And then could you talk about the revenue for the business given it was down quite a bit sequentially, but was up year over year.
But I'm trying to also understand how much of a drag potentially was in those numbers from your financial service business. So if you could help me understand that that would be helpful.
I'll try to give you a little help. It's in the all other category as you know. So we don't kind of break it out too much under that. But we're in investment mode. That's the best way to understand it.
And in response to Owen's question, I pointed out that we have a lot of work underway to make sure that we have a robust portfolio of products, because that's what the consumer is saying to everyone, which is, I'm willing to try these products, but they're not quite there yet. And so we are continually working to improve our offerings. That's why we've come out with Mark 10 XL twice the battery size and so forth. And so I think that's the way to understand it and we're going to be in investment mode here. But we do it in a financially disciplined way always cognizant of our long term financial goal of 7% to 9% growth in our EPS.
And we've been able to pull that off and I'm confident that we will over time.
Okay. Thank you. And then speaking of Mark 10 XL, when do you nationwide expansion? I think you mentioned you're rolling out into lead markets. And then how incremental do you anticipate this is going to be?
And how concerned are you with cannibalization for that extension?
Well, we'll talk about national once we get in lead markets and we see how it does. That's our innovation system, which is to put products in consumers' hands, conducting experiments about whether the offering is interesting to them, find out how we can improve it and then we roll forward. And you saw that's how we did Mark 10. I think that's what you should expect with Mark 10 XL.
Okay. And
then just my final last question is, your discount volume has been strong especially L and M. So I'd like to hear what's been driving that especially given the stronger consumer? And maybe hear have you touched on how you're balancing the growth of this segment with margin expansion? And what your strategy is in this space?
Yes. Good questions both. Look our focus is on the premium end of the business. More than 90% of PM USA cigarette shipments are premium and that's where the action is for us. But of course, there is a discount segment out there.
It's declining over time. The real reason that we're growing our discount business there is because of L and M. It's a terrific albeit small.
All right. Thank you.
Thanks for your questions, Bonnie.
Your next question comes from Chris Growe of Stifel.
Hi, good morning.
Hi, Chris.
Hi. Just had a question for you. This is several quarters in a row where the price gap between Marlboro and the lowest price product in the market has been down and you've been taking very strong pricing. So I have 2 questions around that. One would be, as you look at your promotional setting overall in the quarter, could you say if that was up or down?
And I mean for the cigarette business overall. And then is there any are you pulling back on promotions say on the premium side versus discount to help widen that gap? We're seeing a little better economic position today perhaps that gap could widen a bit from this level?
Okay. Thanks for your questions. Let me go at it this way. We had net pricing realization in the smokeless segment of more than 5%. So you can see that despite the fact that the price gaps narrowed were as you point out taking strong pricing which is great.
The reason the price gaps narrowed in the quarter is because some discount brands increased their pricing faster than the premium brands did. And that's what accounts for the math including some rounding frankly when you do the math and the price gaps. So price gaps are important metric as we've spoken about and we keep an eye on them. But boy to have a quarter where we can grow our volume, grow our margin, get strong pricing realization, you can see the result of that Chris with nearly 13% operating company income growth. That's a pretty good algorithm for us price caps narrowing or not.
I don't know Bill you want to say a word about promotional spend?
Yes. I think if you think about it Chris you recall last year we actually had started dialing back promotional spend around Marlboro and so we're lapping that as we go through the Q1.
Okay, great. Thanks for your time today.
Thanks for calling in, Chris.
Your next question comes from Judy Hong of Goldman Sachs.
Thank you. Good morning.
Good morning, Judy.
So I guess I wanted to just go back to the cigarette consumption question. And I hear you this is 1 quarter we really have to look at it on a longer term basis. But I don't recall a quarter where you've had this kind of volume performance with the price growth that you're seeing across all the players. So I'm just wondering if you could give us a little bit more color just in terms of the sustainability of this kind of performance within the current macro and competitive backdrop, as well, because it seems to kind of imply that historically when you saw the volume performance really come through typically that was associated with lower pricing and certainly that's not what we're seeing today?
Yes. Let me see if I can give you a bit more color try to help you with it. You're right. It has been some time since we've seen numbers like this. Part of it is the comp versus a year ago.
I mean the volume was down pretty significantly in the Q1 of 2014 as you remember. But there's no denying that several factors are at play here. The economy is improving. It is improving for our consumer set finally happily after this very difficult time during the recession. We have the phenomenon of dropping gas prices.
And it occurs for us at a time after we've made very significant investments in Marlboro. We implement the Marlboro architecture. We launch Marlboro Black. I would say all of those factors came together to contribute to what's a very strong quarter for PM USA. That's our analysis for our business at least.
Okay. And then Billy just thinking about the SABMiller contribution, clearly the FX and some of the headwinds from a macro perspective is depressing SAB contribution right now. It's a business that obviously you don't necessarily have a control over in terms of the operating performance. How do you sort of think about your 7% to 9% earnings growth algorithm to the extent that if I say B. Miller the currency continues to weaken?
Do you have levers either buyback or at the operating line that you can offset the weakness? Or because it's sort of outside of your control, do you kind of look at that as more of a transient factor?
Yes, Judy. I think when you think about the SABMiller asset, it's been a great asset for us. It's performed very well. We're talking about 1 quarter and you mentioned the negative drivers on that equity income year over year. 1 being the special items, which were primarily related to asset impairment and then the negative currency drag.
We don't provide that down to that level for the total year, but know at the beginning of the year when we provide that guidance, we incorporate a number of factors and SAB was incorporated in that.
Okay. So basically you have a view of how SABMiller would perform throughout the year and that gets baked into your guidance. But to the extent that SABMiller piece gets worse than your anticipation, I guess the question is really do you have other levers to kind of drive the offset?
Yes. I think Judy overall you heard us reiterate guidance today. We feel good about that and we feel good about where the business is.
I do think Judy it's Marty that your reference to levers is exactly correct. That's what differentiates the Altria offering. We have numerous levers that we can use to try to meet our long term goal of 7% to 9%. And if you look over the last several years, we've been able to do that as various businesses have been up or down.
Understood. Okay. Thank you.
Thanks for your question.
Your next question comes from Matthew Granger of Morgan Stanley.
Hi, good morning.
Hi, Matt.
Hi. Two questions. 1, first I wanted to ask you about the performance in the smokeless products segment and the specifically the acceleration in consumption for your products during the quarter, the improvement to 4%. Marty, I just wanted your assessment of what actions you've taken or what factors during the quarter would have driven that acceleration? Is that a function of perhaps addressing the value proposition around some of the brands and the degree of pricing that you've taken?
Or would you attribute some of that to tactical efforts that you've made on Skol or whether you're seeing any impact there?
Sure. I think you've identified the 2 drivers. One is Copenhagen continues to grow strongly. You see it grew a share point in the quarter. And I do think the actions we are taking on Skol are improving.
In fact, if you look at the quarterly results for Skol, it's down 0.5 share point, but it's the 4th consecutive quarter where it's narrowed those share losses year over year. We gave it a new equity campaign. We have terrific equity based promotions I think that are improving its relationship with its consumer set. And then as you know we've been working on the price gaps on Skol classic. I think all of that is helping to steady up Skol and that's spot on strategy for us.
So I think it's a combination of Copenhagen's continued growth and our work on the value
equation on Skol. Okay. And I think we saw more improvement in UST volumes than we did for the category overall. But would you say there's any change in the level of interaction between smokeless and other alternatives other smoke bowl alternatives?
Yes. No, it's just hard to tease that out right now. It's been a couple of quarters. We do know that some of the growth previously in smokeless was due to cigarette smokers coming into the category. We now know that there are vapor alternatives.
We now have a recovering economy. It's just really hard to tease out Matt what exactly those factors are. But we'll be able to do it over time I would
expect. Okay. Thanks. And just one question on the cigar performance as well. Just if you could help me better understand the mismatch between the volume growth and the market share trend.
I know you're focused on tipped. But with volumes up 10% and share down roughly 50 basis points, does that imply that growth is up 15%, 20% in untipped? Or is that just noise in the data I suppose?
It's probably short term noise although untipped does continue to grow. What we're trying to do as you know is to balance the share question with profitability. In this segment, we always try to maximize income first. So Black and Mild happily has a very strong share position in the segment that is providing frankly most of the profitability and we think that's the better course at this time.
Okay. Great. Thank you both.
Thanks for calling in.
Your next question comes from Vivien Azer of Cowen and Company.
Hi, good morning.
Good morning, Vivien.
So not to belabor the point, but I do also have a question on smokeless tobacco. Marty, we've talked a lot about price elasticities in cigarettes and clearly they're holding up quite well. Can you just remind us how you guys think about or calc out price elasticities in the smokeless segment?
Yes. We have some proprietary models for that allow us to try to get some sense. They're not as highly developed as you might expect in a category that's been around as long as cigarettes. But those that's really proprietary view of it, which I'm not prepared to talk about on the phone candidly.
Okay. Fair enough. As we look ahead to the mix shift that's ongoing in the cigarette segment, Suffice it to say, if the consumer continues to hold up, can you point back to another time where we've seen this much kind of trade up or resumption in trade up? And how we should think about that trajectory continuing all else being equal from a macro perspective?
Well, we do know that when adult tobacco consumers are feeling better about their economic situation, they want to be in premium brands. And in this category, the premium brand they want to be in is Marlboro. We've seen that several times. If you go back in history, for example and you look at the infamous Marlboro Friday price gaps got out of line. The consumer was not feeling good about that.
You're much too young to remember Vivien, but people predicted that it was going to be the end of brands and so forth. And in fact it wasn't. It was that when the consumers thought that the price gap was appropriate they came right back roaring into Marlboro. So Marlboro has that kind of equity and we would expect that as consumers continue to consolidate around premium brands that Marlboro will do just fine.
Terrific. Thank you very much.
Thanks for calling.
Your next question comes from Michael Lavery of CLSA.
Good morning.
Hi, Michael.
Just back on Marlboro, obviously, it had a strong share performance in the quarter. Can you just highlight any of maybe what the key drivers were there? And how much Rich Blue may have contributed?
Well, it's early for Rich Blue. It's having a nice little effect. In a phrase, I would say Marlboro architecture, Marlboro Black, strong Marlboro Equity. Those continue to be the drivers of Marlboro's growth.
Okay. That's helpful. And then just looking at it on a longer view going back 5, 6 years, it's up a little over 2 share points. Your discount share is up slightly as well, but it is partly offset by about 1.5% share loss for the other premium. You just said obviously you're a premium focused company and clearly Marlboro is the focus and the star.
But is there anything you can do with the other premium brands that would make sense to invest there? Or is there any way how do you think about those as a piece of the puzzle? And is there any way to hold or gain share in those that makes sense?
Yes. That's really a terrific question. We do have these other terrific premium brands that we offer for adult smokers. They don't get a lot of support because frankly they have their franchise pretty well settled and they're very profitable. But Parliament is probably the best example.
We gave some limited support to Parliament last year and it really paid back very well. Our focus is Marlboro. The other premium brands produce nice profitability contribution. And if we can do some modest things for them that help them stabilize their share while producing that profitability that we're open to that.
Okay. That's helpful. Thanks. And then just lastly on maybe a little bit just broader view. Where do you see sort of risk either near term or long term?
And just what do you kind of see as where the watch outs are? Maybe specifically for this year in terms of what could put you at the lower end of the guidance or just longer term in terms of strategically?
Well, there's always risks in every right? And we kind of look at that at the beginning of the year. In a category like this, you always are watching volume. You're watching your pricing power. You're watching regulation.
You're watching excise tax. I mean you're watching competitive activity now. Those have all been well handled over time and we have good plans in place for all of them. But if you're trying to identify factors in this industry that present risk as well as opportunity those are probably some of them.
Okay. Thank you very much.
Thanks for calling.
Your next question comes from Bill Marshall of Barclays.
Hi. Thank you. Good morning.
Hi, Bill.
Hi. Just kind of building off of Judy's question, I think from earlier in your comments, Marty, obviously, there's a lot of top line momentum here and even underlying the consumer seems to be doing better. And you pointed out that the levers that you have across the P and L. Just wanted to put into context your strong first quarter into context with your full year outlook of 7% to 9% earnings growth. Is there anything specific we should be looking out for?
Does the spending ramp up? Is it just a matter of a tougher 4Q comparison? Anything specifically in there and as you launch your new Mark 10 product anything that we should be looking out for?
No, I don't think in particular. I think Billy said it best earlier, which is when we put the year together for our guidance, there are always puts and takes and we look at the operating company performance, we look at SAB contribution, you always look at excise taxes and so forth and so on. So I think the guidance that we put together which we reaffirm today just reflects our view particularly early in the year about how we can do. I think we pointed out previously, I think when we gave the guidance that we've got some pension and benefit expense which is flowing in. We're winding up the Phil Morse Capital Corp business, so it's not contributing at the same rate it used to contribute at.
And we're making disciplined investments in the innovative space. That's probably the best way to look at that Bill.
Okay. Thank you. And then just a quick question. I'm just curious on your thoughts. As you see one of your competitors go through the MRTP, modified risk tobacco product process with the FDA.
Just wanted to get your thoughts about prospects for the PM technology IQOS and if you had any idea of a timeline when you think that could be commercialized in kind of the process that you're looking at going through to get that into
market? Yes. That's an interesting area to ask about. Thank you. Listen the one of the reasons we supported FDA was because this process now allows manufacturers to bring products to the FDA to try to see if we can get them qualified as modified risk or reduced risk.
And so the Swedish Match hearing was the first hearing and there was quite a lot of buzz about that. But gee it was just the first hearing and what's expected to be a long term project to bring these projects to market. So I think I wouldn't be over reading that too much. We continue to work with PMI on our own process regarding heat not burn. The first milestone to watch for will be the filing of the application.
And then hopefully the one after that will be its approval. And we continue to work in the meantime on our branding and marketing and go to market strategies as we're very hopeful about that product being brought. And as you know we'll have the exclusive on that product in the United States. So we continue to pursue that.
Thank you.
Thanks for calling.
Thank you. There are no further questions at this time. I would like to turn the call back over to Ms. Sarah Nachmus for any closing comments.
Thank you everyone for joining our call this morning. If you have any follow-up please contact us at Investor Relations.
Thank you. This does conclude today's conference call.