- Volume of cigarette brand dropped 5.5 percent last quarter
- Altria is counting on smokeless products to reignite growth
Altria Group Inc. saw shipment volume of its Marlboro cigarettes tumble 5.5 percent last quarter, putting pressure on the largest U.S. tobacco company to generate more revenue from emerging smokeless products.
Volume for all its cigarette brands dropped 5 percent in the second quarter, the Richmond, Virginia-based company said in a statement on Wednesday. That contributed to weaker-than-projected revenue. Excluding excise taxes, sales were $4.88 billion, missing analysts’ $5 billion average projection.
In the face of traditional tobacco’s long decline, the race is on to develop smokeless and vapor products, which are seen as less harmful than combustible cigarettes. The company is teaming up with Philip Morris International Inc., which sells Marlboros outside the U.S., to create lower-risk tobacco products. Philip Morris previously announced it plans to apply for a “modified risk” designation for its iQOS heat-not-burn product in the second half of 2016.
The shares fell as much as 2.6 percent to $66.14 in New York after the results were released, marking the biggest intraday drop in more than three months. They had gained 17 percent this year through Tuesday.
Even as sales slid, higher cigarette prices helped bolster profit last quarter. Earnings were 81 cents a share in the period, excluding some items. Analysts estimated 80 cents on average. Altria also raised its earnings forecast for the year to $3.01 to $3.07 a share, excluding some items. That’s up from an earlier prediction of $3 to $3.05.
“Higher cigarette pricing and cost cuts helped grow earnings,” said Jack Russo, an analyst at Edward Jones.
U.S. smokers have seen their disposable income rise due to cheaper gasoline prices and higher wages. That may have led many to spend more on cigarettes in the past year, but the long-term trend for traditional tobacco is still bleak. Revenue from smokeable products declined 2.4 percent in the second quarter, while smokeless products climbed 8.7 percent.
Altria also said in January that it’s working to cut $300 million in annual expenses by the end of 2017. The initiative will focus on reducing selling, general and administrative costs, as well as creating a leaner organizational structure.
Altria, the largest shareholder of SABMiller Plc, also looks to benefit from another smokeless product: beer. Anheuser-Busch InBev NV raised its bid for SABMiller Plc to 79 billion pounds ($103 billion) Tuesday, bowing to investor concerns that the flagging British pound had hurt the price.
Under the new terms, Altria would receive $3 billion in pretax cash from the deal, up from the $2.5 billion previously announced by the company. Altria would also receive a 10.5 percent equity stake in the newly created brewer and two board seats, according to the statement.
But the deal isn’t a sure thing. SABMiller management has suspended work on integrating the brewers’ operations, according to a person familiar with the matter. That’s raised concerns that the transaction will hit a roadblock.