Altria Group (MO) reported strong third-quarter results, with earnings of 48 cents per share. Earnings were 2 cents above the Zacks Consensus Estimate and up 4.3% year-over-year. Profits were primarily driven by the company’s cost savings efforts and growth in the cigar unit.
Net revenues increased 20.3% year-over-year to $6.3 billion, primarily driven by cigar segment results that increased 56.1%. The cigarette segment revenues increased only 10.7% for the quarter, as it was impacted by higher pricing related to the Apr 1, 2009, federal excise tax (FET) increase. Altria’s smokeless products segment posted revenues of $352 million. Altria had acquired UST and its smokeless tobacco business, USSTC, on Jan 6, 2009. (As a result, financial results are from Jan 6 through Sep 30, 2009).
Total industry cigarette shipments declined approximately 10%, as expected, while cigarette shipments for the company declined 16.4% after adjustments in trade inventories. Volume for the company’s core brand Marlboro also declined 15%, while its market share increased marginally by 0.1 point. Competitors stepped up promotional activity in April and May, widening the price gap between Marlboro and the lowest priced brands by about 50%. Virginia Slims, Parliament, and Basic shared the same fate as their volumes declined 27.4%, 19.3% and 28.5% respectively. Their market shares also declined 0.3, 0.1 and 0.6 points, respectively.
Gross margins for the quarter contracted 403 basis points (bps) to 36.3% versus 40.3% in the comparable prior-year quarter. The decline is primarily attributable to the FET increase on tobacco products, effective Apr 1, 2009. The operating margin for the quarter also declined 166 bps to 25.1% versus 26.7% in the comparable prior-year quarter.
Altria generated $76 million in cost savings in the third quarter and $241 million in savings year-to-date. The company expects to achieve approximately $619 million in additional cost savings by 2011. Furthermore, as part of its corporate expense and selling, general & administrative (SG&A) cost reduction initiatives, the company incurred pre-tax charges of $54 million in the third quarter, consisting primarily of employee separation costs.
In addition, earlier this year the company’s cigarette segment (Phillip Morris USA) closed its production of cigarettes in the Cabarrus County, North Carolina plant. The facility closure is part of Phillip Morris USA’s Manufacturing Optimization Program, which is expected to deliver ongoing cost savings of $188 million by 2011. Altria incurred pre-tax charges of $96 million in the third quarter for exit and implementation costs related to this initiative. The company expects to incur pre-tax charges of approximately $90 million in the fourth quarter of 2009 and $40 million in 2010 related to this initiative.
Based on the results year-to-date, management narrowed its guidance for full year 2009. Annual earnings are now expected to be $1.53 to $1.56. The previous guidance was $1.51 to $1.56. The revised guidance includes estimated net charges of 21 cents related to exit, integration and implementation costs, UST acquisition-related costs, SABMiller special items, and tax items.
Non-GAAP earnings are expected to range between $1.74 and $1.77 per share, compared to $1.70 to $1.75 as per previous guidance.
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