Altria Group Inc. (MO) posted adjusted earnings of 53 cents per share in the second quarter of 2011, which was up 6.0% from the prior-year quarter and in line with the Zacks Consensus Estimate.
The quarter benefited from strong operating income across its tobacco businesses, lower asset impairment and exit costs, and higher operating companies income (OCI) from its financial services.
Quarter in Detail
Altria’s total revenue declined 5.6% to $5.9 billion, as opposed to the prior-year period. However, it exceeded the Zacks Consensus Estimate of $4.4 billion. The decline was attributable to lower net revenues from financial services as a result of the previously-announced one-time charge related to certain leveraged lease transactions. Revenue net of excise taxes decreased 7.8% to $4.0 billion in the second quarter of 2011.
For the quarter under review, operating income plummeted 15.3% year over year to $1.3 billion.
Segment Details
Cigarettes Segment –Net revenue for the Cigarettes segment increased 2.1% year over year to $5.7 billion, primarily due to higher list prices, partially offset by lower shipment volume.
Furthermore, the adjusted operating income growth in the cigarettes segment increased 2.8% in the second quarter of 2011 to $1.5 billion. Adjusted operating income excludes the restructuring costs that were primarily related to the previously announced closure of PM USA’s Cabarrus manufacturing facility. Reported operating income in the quarter increased 5.9% to $1.5 billion, primarily due to higher list prices and lower asset impairment, exit and implementation costs. This was partially offset by lower shipment volume, higher U.S. Food and Drug Administration (FDA) user fees and a $36 million charge for the Scott case.
Smokeless Products –On the basis of the year-ago quarter, net revenue in the Smokeless Products increased 3.6% to $404 million, primarily due to higher pricing, partially offset by lower shipment volume.
Furthermore, adjusted operating income for the segment grew a robust 10.9% year over year to $224 million. Reported operating income increased 12.1% year over year to $222 million in the quarter, primarily due to higher pricing, lower selling, general & administrative costs (SG&A), and lower restructuring costs, partially offset by lower volume
Cigars –Net revenue for the Cigars segment declined 3.9% year over year to $149 million, primarily due to increased promotional investments. Furthermore, both the adjusted and the reported operating income growth decreased 16.1% in the second quarter of 2011 to $47 million.
Wine –Based on higher premium shipment volume, the Wine segment’s net revenues surged 9.4% to $116 million in the quarter. However, the adjusted operating income increased 11.8% year-over-year to $19 million. Reported operating income in the second quarter of 2011 increased 58.3% to $19 million, primarily due to lower restructuring costs and higher premium volume.
Financial Services –Reported operating income for the financial services segment in the second quarter of 2011 primarily decreased to $463 million, due to a charge of $490 million related to certain leveraged lease transactions and lower gains on asset sales. Adjusted operating income was $27 million in the second quarter of 2011.
Cost Savings, Share Repurchase and Financial Update
In the second quarter of 2011, Altria achieved cost savings of $80 million. The company expects to achieve at least $30 million in additional cost savings by the end of 2011 and is on track to exceed its goal of $1.5 billion in cost reductions versus 2006.
In the second quarter of 2011, Altria repurchased 22.8 million shares at an average price of $27.07 for a total cost of $616 million, as part of its previously announced $1 billion 2011 one-year share repurchase program. Altria also paid almost $1.6 billion in dividends in the first half of 2011. Share repurchases under this program depend upon marketplace conditions and other factors, and the program remains subject to the discretion of Altria’s Board of Directors.
Altria also issued $1.5 billion of senior unsecured notes with a coupon of 4.75% in the reported quarter. The notes mature in May 2021. Altria also entered into a senior unsecured five-year revolving credit agreement that provides for borrowings up to an aggregate principal amount of $3.0 billion and expires on June 30, 2016. The credit agreement replaced Altria’s $600 million senior unsecured 364-day revolving credit agreement, which was to expire on November 16, 2011, and Altria’s $2.4 billion senior unsecured three-year revolving credit agreement, which was to expire on November 20, 2012.
Altria exited the year with cash and cash equivalents of $2,064 million versus $2,314 million at the end of December 31, 2010. The company had long term debt of $13.7 billion.
Business Outlook
Altria reaffirmed its full-year 2011 guidance for reported EPS of between $1.70 and $1.76, which was previously revised in June 2011 in connection with a Philip Morris Capital Corporation (PMCC) leveraged lease charge. This forecast includes estimated net charges of 31 cents per share related to a PMCC leveraged lease charge and SABMiller plc (SABMiller) special items.
Additionally, Altria reaffirms its full-year 2011 guidance for adjusted EPS, excluding special items, of $2.01 to $2.07, representing a growth rate of 6% to 9% from an adjusted base of $1.90 per share in 2010.
Altria’s first-half of 2011 adjusted EPS results exceeded management’s expectations, due to trade inventory dynamics and higher equity earnings from Altria’s investment in SABMiller. Philip Morris USA (PM USA) believes that the trade has begun to deplete cigarette inventories built in the second quarter and first half of 2011, and expects this depletion to negatively impact PM USA’s 2011 third-quarter cigarette shipment volume and income. Consequently, Altria expects its adjusted EPS growth to be stronger in the fourth quarter of 2011 than in the third quarter of 2011. Altria anticipates that 2011 second-half adjusted EPS growth will be higher than the first half of 2011.
Management at Altria stated that the business environment for 2011 is expected to remain challenging. This is because adult consumers remain under economic pressure and face high unemployment. In addition, Altria’s tobacco operating companies also face a number of fears as they enter 2011.
Headquartered in Richmond, Virginia, Altria engages in the manufacture and sale of cigarettes, smokeless products, and wine in the United States and internationally. Also, it competes with Reynolds American Inc. (RAI) and Lorillard, Inc. (LO).
