Altria Group, Inc. (MO) Q2 2025 Earnings Call Transcript

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Overview

The earnings call presents a mixed outlook. While there are positive aspects like growth in the on! brand and strategic initiatives, there are also concerns such as the NJOY ACE market re-entry and challenges from illicit vapes. The guidance is cautious with a modest EPS growth projection. The Q&A highlights uncertainties, particularly regarding competitive challenges and regulatory issues. Overall, the sentiment is balanced, with no strong positive or negative indicators.

Key Financial Performance

Adjusted diluted earnings per share Increased 8.3% to $1.44 in the second quarter and increased by 7.2% for the first half, driven by robust adjusted OCI growth and the benefit of share repurchases over the past year.

Adjusted operating companies income (smokeable products segment) Grew by 4.2% to $2.9 billion in the second quarter and by 3.5% to $5.5 billion in the first half. This performance was supported by strong net price realization of 10% for the quarter and 10.4% for the first half.

Adjusted OCI margins (smokeable products segment) Expanded to 64.5% for the second quarter and the first half.

Total smokeable products segment reported domestic cigarette volumes Declined by 10.2% in the second quarter and 11.9% for the first half. When adjusted for calendar differences and trade inventory movements, the segment's domestic cigarette volumes for the second quarter and first half declined by an estimated 10.5% and 11%, respectively. Decline attributed to macroeconomic pressures and inflation exceeding wage growth, especially among low-income consumers.

Adjusted OCI (oral tobacco products segment) Grew by 10.9% in the second quarter and 5.5% in the first half. These results were mainly driven by on!'s strong performance in the second quarter.

Adjusted OCI margins (oral tobacco products segment) Increased by 3.1 percentage points for the second quarter and 1.4 percentage points for the first half.

Total segment reported shipment volume (oral tobacco products) Decreased 1% for the second quarter and 2.9% for the first half. When adjusted for calendar differences and trade inventory movements, volumes declined by approximately 4% and 2.5%, respectively. Decline attributed to lower MST volumes despite growth in on!.

ABI adjusted equity earnings Recorded $130 million in the second quarter, down 10.3% versus the prior year. Decline driven by a lower ownership interest compared to the year ago period, reflecting the sale of a portion of the ABI investment last year.

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Operating Highlights

on! nicotine pouches: Strong performance with a 26.5% increase in shipment volume to 52.1 million cans year-over-year. Retail share of the oral tobacco category increased to 8.7%, up 0.7 points. Brand awareness among adult tobacco consumers increased by 7 percentage points in the first half of 2025.

NJOY ACE: Completed product design of a modified solution addressing disputed patents. Actively building a broader vapor portfolio to align with consumer expectations.

Basic brand expansion: Expanded into approximately 30,000 targeted stores to compete in the discount segment. Retail share grew 0.4 sequentially, with limited impact on Marlboro.

Adjusted diluted EPS: Increased by 8.3% to $1.44 in Q2 and by 7.2% for the first half of 2025.

Dividends and share repurchases: Returned over $4 billion to shareholders in the first half of 2025, including $3.5 billion in dividends and $600 million in share repurchases.

Oral tobacco products segment: Adjusted operating companies income grew by 10.9% in Q2, driven by on!'s strong performance.

Regulatory advocacy: Advocating for enforcement against illicit e-vapor products and acceleration of FDA market authorizations to create a responsible smoke-free marketplace.

Illicit e-vapor enforcement: Encouraged by increased enforcement actions, including tighter border controls and FDA warnings to importers. However, more consistent action is needed for long-term results.

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Risk or Challenges

Regulatory Challenges: The company faces significant regulatory hurdles, including delays in FDA product authorizations, which have exceeded the statutory 180-day review period, impacting the timely introduction of new products. Additionally, the prevalence of illicit e-vapor products that evade regulatory scrutiny poses a challenge to creating a responsible marketplace.

Market Competition: The nicotine pouch category is becoming increasingly competitive, with the company needing to differentiate its products and maintain market share. The discount cigarette segment is also growing, driven by macroeconomic pressures, which could impact the company's premium product sales.

Economic Pressures: Inflation exceeding wage growth, particularly among low-income consumers, is affecting purchasing behaviors, leading to a shift towards discount tobacco products. This could challenge the company's profitability in its premium segments.

Supply Chain and Illicit Products: The importation of illicit e-vapor products remains a significant issue, despite some progress in enforcement actions. These products undermine the regulated market and create supply chain challenges for compliant products.

Patent Disputes: The company lost a patent dispute with JUUL, which could impact its e-vapor business and necessitate modifications to its NJOY ACE product to address patent issues.

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Guidance & Outlook

2025 Adjusted Diluted EPS Guidance: Altria raised the lower end of its 2025 adjusted diluted EPS guidance range to $5.35 to $5.45, representing a growth rate of 3% to 5% from a base of $5.19 in 2024.

Oral Tobacco Products Growth: The on! nicotine pouches are expected to continue driving growth in the oral tobacco segment, with a focus on increasing profitability and building long-term brand equity.

E-Vapor Business Development: Altria is actively developing a broader vapor portfolio, including a modified NJOY ACE solution to address patent disputes and align with evolving consumer expectations.

Regulatory Environment Outlook: Altria anticipates progress in regulatory enforcement against illicit e-vapor products and urges the FDA to accelerate product authorizations to create a responsible marketplace for smoke-free products.

Share Repurchase Program: Altria plans to complete its current $400 million share repurchase program by the end of 2025.

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Shareholder Return Plan

Dividend Payments: Altria paid approximately $3.5 billion in dividends during the first half of 2025.

Share Repurchase Program: Altria repurchased 10.4 million shares for $600 million in the first half of 2025. There is $400 million remaining under the current share repurchase program, which is expected to be completed by the end of the year.

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Key Q&A

Q:Can you discuss your expectations for the second half of the year, particularly in light of the uncertain consumer environment and inflationary pressures?

A:Management expressed satisfaction with first-half results and updated EPS guidance. They acknowledged the dynamic and unsettled macroeconomic environment, including inflation and trade deals, and emphasized monitoring consumer purchasing behaviors. They highlighted positive signs like lower gas prices and increased consumer confidence but noted the need for vigilance.

Q:Can you provide an update on the development and FDA application process for the new NJOY ACE device?

A:Management stated that they are working on patent workarounds for the NJOY ACE device and have filed for three patents, with the fourth in progress. They are optimistic about bringing the product back to market but did not provide a specific timeline. They also emphasized focusing on consumer preferences and incorporating desirable traits into their product pipeline.

Q:How confident are you in achieving your long-term EPS growth target of mid-single digits through FY '28?

A:Management reiterated their confidence in achieving the mid-single-digit CAGR target, citing disciplined market moves and consumer loyalty. They acknowledged economic strain on consumers but noted stabilization in gas prices and consumer adaptability to stagnant conditions.

Q:What is your strategy for the Basic brand, and how are you balancing discount share versus retaining consumers in your brand family?

A:Management explained that Basic has been repositioned as a discount brand using targeted revenue growth management analytics. They aim to retain consumers within their portfolio and market to them as their economic situations change. They are pleased with the results so far but did not disclose future plans to avoid giving competitors an advantage.

Q:What is the impact of import restrictions and mislabeling on illicit vapes, and how does it affect cigarette volumes?

A:Management noted some momentum in enforcement against illicit vapes but stated it is too early to determine a trend. They emphasized the need for consistent action and highlighted the challenges posed by mislabeling. They believe enforcement could benefit cigarette volumes but stressed the importance of FDA authorization for harm reduction products.

Q:Have you observed shortages in illicit vape products, and how are illicit actors adapting?

A:Management acknowledged reports of shortages but noted that consumers often switch to other illicit brands or products. They emphasized the need for consistent enforcement to clean up the market and observed instances of misdeclaration to evade customs and FDA regulations.

Q:Has your view on the timing and ability to compete in the vape market changed?

A:Management stated that their view has not changed. They remain disciplined and are excited to bring NJOY back to market when appropriate. They highlighted the challenges posed by the prevalence of illicit disposable vapes and the decline in pod-based products.

Q:Can you explain the double duty drawback policy and its impact on your business?

A:Management criticized the policy, stating it disadvantages domestic manufacturers like themselves. They explained that competitors with international manufacturing can avoid federal excise taxes by flipping production locations. They are seeking partnerships to address this competitive disadvantage.

Q:What is driving the improvement in cigarette volumes, and how does it relate to enforcement on e-cigarettes?

A:Management attributed the improvement in cigarette volumes to macroeconomic factors and cross-category dynamics. They believe enforcement on illicit e-cigarettes could benefit the cigarette industry and emphasized the need for FDA authorization of harm reduction products.

Q:Do you see opportunities for an NGP-only business in international markets?

A:Management expressed belief in the potential for an NGP-only business internationally. They cited their nicotine pouch distribution in the Nordic region and the U.K. as examples and emphasized a disciplined approach to international expansion.

Q:What are your plans for the on! brand in the second half of the year, and how well is it distributed in the U.S.?

A:Management did not disclose specific plans for the second half but expressed satisfaction with the brand's performance and sustainability. They emphasized reinforcing brand equity and using targeted revenue growth management analytics to induce trial without oversubsidizing loyal consumers.

Q:What is driving the strong performance of Middleton cigars?

A:Management attributed Middleton's strong performance to its dominance in the premium large mass machine-made cigar category. They noted that inventory movements within the distribution channel can affect quarterly volume but emphasized the brand's overall strength.

Q:How are you addressing competition and protecting your share position in the nicotine pouch category?

A:Management emphasized reinforcing brand equity and using revenue growth management analytics to target consumers effectively. They acknowledged increasing competition but highlighted their focus on trial, awareness, and conversion for the on! brand.

Q:What is the impact of tariffs on your business, and how are you mitigating it?

A:Management stated that tariffs have a minimal impact on their overall costs and are accounted for in their guidance. They monitor the impact on consumers and have flexibility in their supply chain to manage tariff-related challenges.

Q:How are you addressing tariffs on NJOY products when they return to the market?

A:Management stated that they are considering tariffs in their supply chain planning for NJOY products. They emphasized their flexibility and optionality in managing supply chain challenges related to tariffs.

Q:Review of Unclear Management Responses

A:Management avoided providing specific timelines for the NJOY ACE device's FDA application and market re-entry. They also refrained from disclosing future promotional activities for the Basic and on! brands, citing competitive reasons. Additionally, they did not provide detailed plans for addressing tariffs on NJOY products or changes to the supply chain.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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The earnings call presents a mixed but overall positive picture. Strong financial metrics include an increase in oral tobacco margins and cigarette retail share. Despite a decline in shipment volume, the growth in the on! product line and increased retail share are positives. The Q&A reveals confidence in future performance and strategic initiatives like international expansion and product differentiation. Although there are concerns about deceleration in earnings growth and competitive pressures, the raised EPS guidance and share repurchase plan are positive signals. Given these factors, a positive stock price movement is likely.

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The earnings call presents a mixed picture: while there are positive aspects such as increased EPS and shareholder returns, there are significant concerns about regulatory challenges, particularly with the NJOY ACE withdrawal and impairment charge. The Q&A reveals management's confidence in pricing strategies but acknowledges consumer pressures and market uncertainties. The overall sentiment is balanced by these opposing factors, leading to a neutral prediction for stock price movement.

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The earnings call presents a mixed picture: strong shareholder returns through dividends and share repurchases, growth in smoke-free products, and strategic goals focused on future growth. However, the negative impact of the ITC orders, impairment charges, and declining cigarette volumes due to economic pressures and illicit market challenges offset these positives. The Q&A reveals consumer pressure from inflation and management's cautious approach to the discount segment and tariffs. Overall, the sentiment is balanced, suggesting minimal stock price movement in the short term.

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