Altria Reports ‘Resilient’ Year

Cigarettes remain profitable; vape had challenges
Photograph: Shutterstock

RICHMOND, Va. — Major tobacco manufacturer Altria Group reported a strong year with regard to its core business of traditional, combustible cigarettes but expressed “disappointment” in its investment in e-cigarette maker Juul Labs as the vapor industry generally navigated a barrage of negative publicity and flavor bans toward the end of 2019, officials said.

The Richmond, Va.-based tobacco manufacturer reported net revenues of $25 billion, representing a 1% decline vs. 2018. Excluding excise taxes, revenues were $20 billion, an increase of 0.9% over the year before.

In its smokeable-products segment, income grew by 8.6%, with margins increasing by 3.9% in 2019, officials said. Retail share of its Marlboro-branded cigarettes remained stable at 43.1%, although down 10% vs. prior year. Product expansions with new resale packaging and other brand equity investments continue to support Marlboro’s performance, officials said during a Jan. 30 investor call.

The Marlboro Rewards equity program, launched nationally a year ago, exceeded expectations, with more than 2.6 million adult smokers enrolled and 200 million pack codes entered since its launch, officials said. Mobile coupons are driving repeat purchases and remain the No. 1 redeemed item.

At the industry level, Billy Gifford, vice chairman and chief financial officer for Altria, estimated that U.S. cigarette volumes declined by 4.5% in the fourth quarter and by 5.5% for the full year when adjusted for trade inventory movements and other factors. “We continue to believe that accelerated movement of adult smokers to other categories, primarily e-vapor, and increased exclusive e-vapor category usage drove the incremental year-over-year decline,” Gifford said.

For full-year 2019, cigarette industry prices at retail increased by about 4%. “Given the recent regulatory and legislative developments in e-vapor and the national move to 21 as the legal age to purchase all tobacco products, we expect cigarette industry volume trends to remain dynamic,” Gifford said.

Taking these factors into account, Gifford projected full-year 2020 adjusted industry cigarette volumes to decline 4% to 6%.

Moving to e-vapor, the subcategory experienced rapid growth through the first nine months of 2019, growing volume by approximately 35%. The category’s growth was driven almost entirely by Juul, Gifford said. Late in the third quarter, news of vapor-related illnesses and deaths and the release of government survey data showing a significant rise in youth e-vapor use drove legislative and regulatory action. Several states moved to ban flavored or all e-vapor products, he said. In the fourth quarter, the e-vapor category declined nearly 8% sequentially and growth slowed to 3% year over year. Also, in the fourth quarter, the company estimates Juul’s share of the market declined sequentially to 44% from 48%, Gifford reported.

In preparing its quarterly and year-end financials, Altria performed a valuation analysis of its 2019 investment of $12.8 billion in San Francisco-based Juul Labs. As a result, Altria recorded a $4.1 billion impairment charge—about a third of its original deal—to its Juul investment, primarily driven by the increased number of legal cases pending against Juul and the expectation that the number of legal cases against Juul will continue to increase. Since its last quarterly earnings announcement on Oct. 31, 2019, the number of cases pending against Juul has increased by more than 80%, Gifford said.

The news followed a move back in October, when Altria announced a write down of $4.5 billion on its investment in Juul, recording it as a pretax charge against its third-quarter earnings, according to CNBC.

“We’re disappointed in the performance of the past year and hope Juul can move forward more constructively,” Gifford said.

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