Altria 2Q Profit Falls 57% On Charges, Cigarette Volume

NEW YORK -Altria Group Inc.’s (MO) second-quarter earnings fell 57% on a previously disclosed tax-related charge and lower cigarette volume, and the company warned the remainder of the year would remain challenging.

The maker of Marlboro cigarettes and other brands has benefited from increases at its smokeless-tobacco products, such as Copenhagen, along with higher prices and cost cuts, but those factors haven’t been able to outweigh declining demand for its traditional cigarettes. Sellers built up inventory in the first half of the year, and Altria said volumes could be particularly weak in the third quarter as retailers work through their loaded stockrooms. Continued economic pressure, high unemployment and widespread smoking bans may dissuade buyers, too.

Altria, whose products also include Black & Mild cigars and Chateau Ste. Michelle wine, operated in a “highly competitive market” in the latest period, Chief Executive Michael Szymanczyk said on a conference call. Still, Altria said fourth-quarter volumes should be stronger and the company reiterated its full-year forecast of per-share earnings between $1.70 and $1.76.

Shares slid 2.5% to $26.35 in early trading. The company’s stock is up 24% so far this year.

Altria reported a profit of $444 million, or 21 cents a share, down from $1.04 billion, or 50 cents, a year earlier. Excluding items, such as restructuring charges and a charge related to a court decision, earnings rose to 53 cents from 50 cents. Revenue, net of excise tax, fell 7.8% to $4 billion.

Analysts polled by Thomson Reuters had most recently forecast earnings of 53 cents on net revenue of $4.43 billion.

Gross margin fell to 33.3% from 37.8%.

The quarter included a one-time charge of $630 million, or 30 cents a share, related to the tax treatment of some leveraged lease transactions. The charge was recorded after the Internal Revenue Service decided to disallow for the years 1996 through 2003 tax benefits related to lease-in/lease-out and sale-in/sale-out transactions entered into by an Altria subsidiary.

Marlboro cigarette shipment volumes rose 1.1%, thanks to growth in menthol and Special Blend products, while other premium-cigarette volume fell 7.8% and discount cigarettes dropped 16%. Overall cigarette volume fell 0.7%, or about 4.5% excluding the inventory build. The company said it believes total category cigarette volume was down about 3.5%, excluding inventory effects.

Smokeless-product shipment volume fell 2.1%, as Copenhagen’s gains were partially offset by weak Skoal sales and limited Marlboro Snus promotions. Altria had been focusing on building the Copenhagen brand but more recently turned to the struggling Skoal, introducing a series of new products to stem market-share losses.

Still, revenue from cigarettes rose 3.6% excluding excise tax to $3.88 billion, and smokeless-product revenue increased 3.9% to $377 million. Altria announced a spate of price increases recently for both cigarettes and smokeless tobacco, which should help boost those figures going forward.

Chris Growe, an analyst at Stifel Nicolaus, said the company seems to be focusing on profitability over market share by pricing some products above the competition. However, given the major investment Altria has made in its marquis Marlboro brand of late, including new products and promotions, Growe said it would become a concern if that brand begins losing significant share. Marlboro’s market share increased 40 basis points sequentially, to 42.6% of the market, but fell 20 points from the prior-year period.

Net of excise tax, cigar revenue fell 5% to $95 million, while revenue from the wine segment rose 9.8% to $112 million.

Meanwhile, Altria said it bought back 22.8 million shares for about $616 million during the second quarter under its one-year, $1B share repurchase program. The company had said earlier that the one-time tax charge wouldn’t affect stock repurchase plans.

By Melissa Korn
Dow Jones Newswires

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