RICHMOND, Va.- Altria Group, Inc. (Altria) (NYSE: MO) today announces its 2020 second-quarter and first-half business results. Altria re-establishes 2020 adjusted diluted earnings per share (EPS) guidance and announces an increase in its quarterly dividend ahead of its previously scheduled dividend declaration date.
'Despite the challenges of the COVID-19 pandemic in the U.S., our employees continue to execute against our 10-year Vision with strong focus and commitment. Over the first-half of 2020, we believe Altria showed resilience in volatile market conditions, growing adjusted diluted earnings per share by 8.5%, driven by the outstanding financial performance of our core tobacco businesses. We've also hit key milestones and made steady progress behind our noncombustible product portfolio.'
'With a better understanding of COVID-19 impacts on adult tobacco consumer purchasing behavior and an additional quarter of ABI earnings contributions, we're re-establishing full-year 2020 adjusted diluted EPS guidance,' said Billy Gifford, Altria's Chief Executive Officer.
'We're pleased to announce that yesterday, our Board declared a quarterly dividend of $0.86 per share, representing a new annualized dividend rate of $3.44 per share and an increase of 2.4% from the previous annualized rate of $3.36 per share. This dividend increase marks the 55th dividend increase in the past 51 years,' said Sal Mancuso, Altria's Chief Financial Officer.
Altria Headline Financials1
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1 'Adjusted' financial measures presented in this release exclude the impact of special items. See 'Basis of Presentation' for more information.
2 'EPS' represents diluted earnings (losses) per share attributable to Altria.
3 Prior period amounts have been recast to conform with current period presentation for certain ABI market-to-market adjustments that were not previously identified as special items and that are now excluded from Altria's adjusted financial measures.
As previously announced, a conference call with the investment community and news media will be webcast on July 28, 2020 at 9:00 a.m. Eastern Time. Access to the webcast is available at www.altria.com/webcasts and via the Altria Investor app.
Noncombustible Products Business Platform
IQOS
In July, the U.S. Food and Drug Administration (FDA) authorized IQOS and HeatSticks to be marketed as Modified Risk Tobacco Products with a 'reduced exposure' claim.
In July,PM USA launched IQOS in Charlotte with the opening of its boutique under enhanced safety protocols. PM USA expects HeatSticks to be sold in more than 700 retail stores across the Atlanta, Richmond and Charlotte markets by the end of August.
Over the next 18 months, PM USA plans to expand IQOS to four additional markets, partner with trade retailers to make IQOS devices more broadly available and expand HeatSticks distribution in surrounding geographies of the seven lead markets.
PM USA's exclusive license and distribution agreement for IQOS with Philip Morris International Inc., has two important milestones:
PM USA would maintain exclusive U.S. distribution rights upon achieving 0.5% dollar share in a single geographic area, within a specified time period by April 2022.
Additionally, PM USA's distribution rights are subject to an initial five-year term. The initial term expires in April 2024 and renews at PM USA's option for an additional five-year term upon achieving 0.5% dollar share of the cigarette category in a certain number of geographic areas, each within a specified time period.
on!
In May, Helix submitted Premarket Tobacco Applications (PMTAs) to the FDA for all 35 on! SKUs. These PMTAs are now in scientific review.
Helix continues to make progress installing manufacturing equipment and expanding distribution.
Helix now expects to reach 50 million cans in annualized manufacturing capacity by the end of 2020 and continues to expect to remove capacity constraints in 2021.
Helix expanded distribution into 40,000 stores as of the end of the second quarter, an increase of nearly 43% from the end of the first quarter.
Impact of COVID-19 Pandemic
Effect on Financial Results
To date, Altria recorded net pre-tax charges of $50 million, directly related to costs for disruptions caused by, or efforts to mitigate the impact of, the COVID-19 pandemic. These pre-tax charges included premium pay, personal protective equipment and health screenings, partially offset by certain employment tax credits.
Ste. Michelle's on premise and direct-to-consumer sales have been significantly impacted by COVID-19. Future Ste. Michelle sales may continue to be impacted given the many restrictions still imposed on dining and gatherings, which also may have an impact on adult wine consumers going forward.
In the first-quarter of 2020, Ste. Michelle recorded pre-tax charges of $392 million in cost of sales, including a $292 million inventory write off and $100 million in estimated losses on future non-cancelable grape purchase commitments. The pre-tax charges were based on wine inventory levels significantly exceeding forecasted product demand as of March 31, 2020.
Impact on Business Operations
In June, PM USA re-opened its IQOS boutiques in Atlanta and Richmond under enhanced safety protocols.
To date, Altria's tobacco businesses have not experienced any material adverse effects associated with governmental actions to restrict consumer movement or business operations, but continue to monitor these factors. The majority of retail stores in which their products are sold, including convenience stores, have been deemed to be essential businesses by authorities and remain open.
Altria continues to monitor the macroeconomic risks of COVID-19 and its effect on adult tobacco consumers, including impacts to unemployment rates, consumer confidence levels, number of housing starts and gasoline prices.
Ste. Michelle continues to be significantly impacted by COVID-19, primarily due to lower on-premise and direct-to-consumer sales.
Impact on Investments
ABI has made several public disclosures regarding the impact of COVID-19 on its business, including withdrawing its financial forecast and its decision to reduce the final 2019 dividend payment in June 2020. In addition, the extreme market disruption and volatility associated with the COVID-19 pandemic have resulted in a steep decline in ABI's stock price, and the fair value of Altria's investment in ABI is now well below the carrying value. While Altria believes that this decline is temporary, it will continue to monitor its investment in ABI, including the impact of the COVID-19 pandemic on ABI's business and market valuation and the associated risks to Altria.
Altria considered the impact of COVID-19 on the business of JUUL, including its sales, distribution, operations, supply chain and liquidity, in conducting its periodic impairment assessment. Altria's assessment did not result in impairment at June 30, 2020. Altria will continue to monitor its investment in JUUL and the impact of COVID-19 on JUUL's business.
Altria considered the impact of COVID-19 on the business of Cronos, including its sales, distribution, operations, supply chain and liquidity. Altria believes Cronos has been impacted by COVID-19, due in part to government action requiring closures of retail stores in the United States. In addition, the fair value of Altria's equity method investment in Cronos was less than its carrying value at June 30, 2020. While Altria believes that this decline in fair value is temporary, it will continue to monitor its equity method investment in Cronos, including the impact of COVID-19 on Cronos's business and market valuation and the associated risks to Altria.
Dividends and Capital Markets Activity
Dividend
On July 27, 2020, Altria's Board of Directors declared an increase in the quarterly dividend to $0.86 per share from $0.84 per share. The quarterly dividend will be paid on October 9, 2020 to shareholders of record on September 15, 2020. The ex-dividend date is September 14, 2020.
The new annualized dividend rate is $3.44 per share, representing an increase of 2.4% from $3.36 per share.
Altria maintains its long-term objective of a dividend payout ratio target of approximately 80% of adjusted diluted EPS. Future dividend payments remain subject to the Board's discretion.
Capital Markets Activity
In March, Altria borrowed the full $3 billion available under its revolving credit agreement due to the uncertainty of the COVID-19 pandemic.
In May, Altria issued long-term senior unsecured notes in an aggregate principal amount of $2 billion.
In June, Altria re-paid the $3 billion borrowed under the revolving credit agreement. The amount available under the agreement was $3 billion at June 30, 2020.
At the end of the second quarter, Altria's cash balance was $4.8 billion. After paying July dividends and tax payments, Altria's estimated cash balance was $3 billion.
For the coming quarters, Altria expects to continue to maintain a higher cash balance than normal to preserve its financial flexibility.
2020 Full-Year Guidance
Altria reestablishes 2020 full-year earnings guidance based on a better understanding of COVID-19 impacts on adult tobacco consumer purchasing behavior and an additional quarter of ABI earnings contributions.
Altria expects its 2020 full-year adjusted diluted EPS to be in a range of $4.21 to $4.38, representing a growth rate of 0% to 4% from an adjusted diluted EPS base of $4.21 in 2019.
While the 2020 full-year adjusted diluted EPS guidance accounts for a range of scenarios, the external environment remains dynamic. Altria will continue to monitor ABI performance and conditions for adult tobacco consumers, including unemployment rates, disposable income (which may be impacted by potential changes in government stimulus and unemployment payments) and purchasing behaviors.
Altria is not reinstating its 2020 to 2022 compounded annual adjusted diluted EPS growth objective at this time.
Altria revises its 2020 estimated full-year domestic cigarette industry adjusted decline rate to be in a range of 2% to 3.5% from a range of 4% to 6% based on better year-to-date industry performance and expectations for continued category resilience.
Altria expects its 2020 full-year adjusted effective tax rate to be in a range of 24% to 26%.
Altria continues to expect 2020 capital expenditures of between $200 million and $250 million and depreciation and amortization expenses of approximately $240 million.
Altria's full-year adjusted diluted EPS guidance and full-year forecast for its adjusted effective tax rate exclude the impact of certain income and expense items that management believes are not part of underlying operations. These items may include, for example, restructuring charges, asset impairment charges, acquisition-related costs, COVID-19 special items, equity investment-related special items (including any changes in fair value for the equity investment and any related warrants and preemptive rights), certain tax items, charges associated with tobacco and health litigation items, and resolutions of certain nonparticipating manufacturer (NPM) adjustment disputes under the Master Settlement Agreement (such dispute resolutions are referred to as NPM Adjustment Items).
Altria's management cannot estimate on a forward-looking basis the impact of certain income and expense items, including those items noted in the preceding paragraph, on its reported diluted EPS or its reported effective tax rate because these items, which could be significant, may be unusual or infrequent, are difficult to predict and may be highly variable. As a result, Altria does not provide a corresponding U.S. generally accepted accounting principles (GAAP) measure for, or reconciliation to, its adjusted diluted EPS guidance or its adjusted effective tax rate forecast.
The factors described in the 'Forward-Looking and Cautionary Statements' section of this release represent continuing risks to Altria's forecast.
Environmental, Social and Governance (ESG) Progress
In June, Altria released its 2019 Corporate Responsibility Progress Report.
Altria set ambitious carbon reduction targets that aim to reduce Altria's environmental footprint by 2030. These targets were approved by the Science Based Targets initiative.
Altria supports the social movement underway for Black Lives Matter and has taken initial steps to address societal racism and social injustice, including an initial commitment of $5 million. Altria is committed to driving meaningful and long-lasting change.
Altria is committed to creating a more inclusive and diverse culture and has established aspirational Inclusion and Diversity Aiming Points, which includes increasing ethnic diversity representation in the organization's senior management, as part of Altria's 10-year Vision. Altria expects to report progress against these Aiming Points periodically.
ALTRIA GROUP, INC.
See 'Basis of Presentation' below for an explanation of financial measures and reporting segments discussed in this release.
Financial Performance
Second Quarter
Net revenues decreased 3.8% to $6.4 billion, primarily due to lower net revenues in the smokeable products segment. Revenues net of excise taxes decreased 2.5% to $5.1 billion.
Reported diluted EPS decreased 2.8% to $1.04, primarily driven by losses from Altria's equity investment in ABI and higher losses in the all other category (primarily driven by the reduction of the estimated residual value of an asset at PMCC in 2020). These factors were partially offset by favorable Cronos-related special items, higher reported operating companies income (OCI) in the smokeable products and oral tobacco products segments and fewer shares outstanding.
Adjusted diluted EPS increased 0.9% to $1.09, primarily driven by higher adjusted OCI in the smokeable products and oral tobacco products segments and fewer shares outstanding, partially offset by lower adjusted earnings from Altria's equity investment in ABI and higher losses in the all other category (primarily driven by the reduction of the estimated residual value of an asset at PMCC in 2020).
First Half
Net revenues increased 3.9% to $12.7 billion, primarily due to higher net revenues in the smokeable products and oral tobacco products segments. Revenues net of excise taxes increased 5.5% to $10.1 billion.
Reported diluted EPS increased 13.3% to $1.88, primarily driven by higher reported operating companies income (OCI) in the smokeable products and oral tobacco products segments, 2019 Cronos-related special items, 2019 acquisition-related costs associated with the JUUL and Cronos transactions and fewer shares outstanding, partially offset by inventory-related charges in the wine segment and lower reported earnings from Altria's equity investment in ABI.
Adjusted diluted EPS increased 8.5% to $2.18, primarily driven by higher adjusted OCI in the smokeable products and oral tobacco products segments and fewer shares outstanding, partially offset by lower adjusted earnings from Altria's equity investments in ABI and Cronos.
1 In 2020, Altria changed its treatment of Altria's share of ABI's mark-to-market activity relating to certain ABI financial instruments associated with its share-based compensation programs that were previously included in Altria's adjusted results. These amounts are now treated as special items and excluded from Altria's adjusted results. The change is consistent with Altria's treatment of its share of ABI's mark-to-market activity on ABI's financial instruments associated with its other share commitments. Altria has recast prior period results to conform with current period presentation.
Note: For details of pre-tax, tax and after-tax amounts, see Schedules 7 and 9.
Special Items
The EPS impact of the following special items is shown in Table 1 and Schedules 6, 7, 8 and 9.
Asset Impairment, Exit, Implementation and Acquisition-Related Costs
In the first half of 2020, Altria recorded pre-tax charges of $403 million (or $0.16 per share), primarily consisting of $292 million for a wine inventory write-off and $100 million for estimated losses on future, non-cancelable grape purchase commitments (both recorded in the first quarter) that Ste. Michelle believes no longer have a future economic benefit.
In the second quarter of 2019, Altria recorded pre-tax charges of $45 million (or $0.02 per share), primarily due to the cost reduction program announced in 2018.
In the first half of 2019, Altria recorded pre-tax charges of $204 million (or $0.08 per share), primarily due to acquisition-related costs associated with the JUUL and Cronos transactions and the cost reduction program announced in 2018.
ABI-Related Special Items
In the second quarter of 2020, earnings from Altria's equity investment in ABI included net pre-tax charges of $120 million (or $0.05 per share), consisting primarily of Altria's share of ABI's net mark-to-market losses on certain ABI financial instruments associated with its share commitments, partially offset by a mark-to-market gain resulting from ABI's hedge on a portion of the expected proceeds from ABI's sale of its Australia subsidiary.
In the first half of 2020, earnings from Altria's equity investment in ABI included net pre-tax charges of $176 million (or $0.07 per share), consisting primarily of Altria's share of ABI's net mark-to-market losses on certain ABI financial instruments associated with its share commitments, partially offset by a mark-to-market gain resulting from ABI's hedge on a portion of the expected proceeds from ABI's sale of its Australia subsidiary and an additional net gain related to ABI's completion of its initial public offering of a minority stake of its Asia Pacific subsidiary.
In the second quarter of 2019, earnings from Altria's equity investment in ABI included net pre-tax income of $129 million (or $0.06 per share), consisting primarily of Altria's share of ABI's net mark-to-market gains on certain ABI financial instruments associated with its share commitments.
COVID-19 Special Items
In the second quarter of 2020, Altria recorded net pre-tax charges of $50 million (or $0.02 per share), directly related to costs for disruptions caused by or efforts to mitigate the impact of the COVID-19 pandemic. These pre-tax charges included premium pay, personal protective equipment and health screenings, partially offset by certain employment tax credits. The COVID-19 special items do not include the inventory-related implementation costs associated with the wine business strategic reset.
Cronos-Related Special Items
In the second-quarter and first-half, Altria recorded net pre-tax losses (gains) consisting of the following:
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