Altria Investor Day 2023
“Based on the strength of our core tobacco businesses, we expect to maintain our ability to grow full year adjusted diluted EPS over time. Our goal is to deliver mid-single digits adjusted diluted EPS growth on a compounded annual basis through 2028. We believe this goal provides flexibility to allocate the necessary resources to advance our vision while continuing to drive earnings growth through our core tobacco businesses.” - Salvatore Mancuso, Executive Vice President and CFO of Altria Group
Digitization at scale
The most insightful presentation given during Altria Investor Day, without question, came from Scott Myers. He is the President and CEO of Altria Group Distribution Company. Humorously, this is also the section that has received the smallest amount of interest and coverage. What a mistake.
When you operate in a tightly-regulated industry largely barred from advertising and marketing, distribution and getting your product in front of the eyes of would-be consumers becomes as critical as the product itself. Myers's comments highlighted Altria’s unmatched trove of warehouses and vast network of direct wholesale customers paired with an industry-leading salesforce supporting over 200,000 stores and established trade partnerships with every major c-store chain in the United States. Myers illustrated how Altria leverages this scale even further (emphasis added):
As an example, through PM USA's retail leaders trade program, stores receive incentives and promotional resources to help them grow their cigarette business. In return, retailers are required to agree to certain merchandising requirements and display underage the back of prevention signage. This program provides us best-in-class visibility and product placement behind the selling counter, connecting smokers with our leading cigarette brands. PM USA has achieved the #1 placement on cigarette fixtures and over 93% of its volume.
Our trade programs also contain incentives for retailers to provide transaction-level scan data to PM USA. This is the data Jane mentioned earlier, which enables us a feedback loop between our brands and our consumers, serving as a data engine for our revenue growth management infrastructure.
Beyond the most obvious, these dynamics allow Altria to be the most nimble participant in the U.S. market despite being the largest. Myers went on to highlight the impact of pairing these advantages with digital tools (emphasis added):
Moving to our digital efforts. We launched a new digital trade program last spring, and we believe this program enhances our ongoing commitment to responsible retailing. The program includes multiple participation options for our retailers. And for those participating at the highest level, we introduced incentives for retailers to include age and identity verification solutions in their digital platforms. Once a consumer is verified, retailers can provide offers and messaging from our brands within their apps. Currently, consumers can view offers from smokeable and MST brands. But going forward, we expect to expand this program to include on! and other smoke-free brands.
Altria’s ability to raise prices is often cited, but there is a widespread misconception that the company blindly cranks up prices at a whim. Age validation technology paired with advanced analytics provides the company with extreme granularity. Promotions used to be run on a national level and then became product-specific. Eventually, optimization reached the state level, and now, the store level. The next stage in evolution is optimizing at a personal level. From rapidly raising product awareness, running promotions to spur trial, repeat purchase, and adoption, Altria is gaining the ability to connect with adult consumers while maximizing sales efficiency. Critically, the investments and incentives around age validation technology are also leading to continued decreases in underage use of the company’s products - an outcome where the company, consumers, retailers, regulators, and communities all benefit.
Capturing opportunity
Everyone wants to obsess over new products.
There is the still-in-its-infancy joint venture with JT, aiming to bring Ploom, a heated tobacco product, to the U.S. Then there’s the yet-to-be-finalized acquisition of e-vapor company NJOY. And Altria unveiled SWIC, a new heated tobacco capsule device, based on IP acquired before the Poda deal, which looks rather slick but is still in development. Timelines and potential impact of all of these remain unclear. Even more speculative is the company considering future international sales and other categories such as caffeine and cannabis. It would be dreadfully premature to feed such hypotheticals.
More promising is the continued performance of Helix Innovations, which produces the modern oral nicotine pouch on!. The product has rapidly taken share thanks to Altria’s distribution paired with aggressive promotional discounting. Altria has finally guided to the endeavor flipping to profitability in 2025. Additionally, the company revealed on! Plus, a larger and stronger pouch. The most critical detail is that this version is a moist pouch. Since moisture contents affect how quickly nicotine is released and how much is absorbed, the appeal of this product is easily understood - especially when looking at similarly designed products dominating European markets.
Overall, Altria appears much better positioned than most give it credit for. However, out of all the products covered above, only NJOY holds MGOs for related products via the PMTA pathway at the moment. This means that regardless of how wonderful or terrible any particular product may seem, the trajectories of next-generation categories remain not only contingent on consumer and competitive behaviors but also on government. No one should be counting chicks before they hatch, even if recent FDA behavior may be a positive signal. Todd Walker, Altria's Senior Vice President of Government Affairs & Public Policy, explained the continued importance regulation will have:
What we're focused on now is really enforcement in the illicit market. And you all know the e-vapor market has been in a bit of a flux throughout this PMTA process. And that's contributed to a growth in illicit e-vapor products on the market. The FDA and others are now focusing on this and -- but we think there's an opportunity to do more and to do it quicker. So we're going to support the FDA and encourage the FDA to use all the tools they have in their toolbox to partner with others to make sure that the enforcement is effective.
The formula
As much as the investment community wants to focus on next-generation products, the majority of the U.S. profit pool still firmly rests with legacy products. PMUSA has Marlboro, whose market share in 2022 was larger than the next 11 brands combined - 42.5% vs 41.9%. UST leads in the legacy oral tobacco segment with Copenhagen, which just received authorization to be marketed as a modified risk tobacco product. John Middleton Co. leads in the machine-rolled cigar segment with Black & Mild. New products have great regulatory uncertainty, but these older products are surrounded by much more rigid policies. Yes, there is the federally proposed methol cigarette ban. We can look to Massachusetts following its 2020 ban on those products and the ridiculous ramifications that followed. And then there are fears of rules set to substantially reduce the maximum nicotine level in cigarettes. As I’ve written before, this is not new and is exceedingly unlikely to happen. With all of this in mind, I point to the words of Altria CEO William Gifford (emphasis added):
We also observed certain branded discount offerings priced at deep discount levels. As we've noted in the past, some smokers will adjust their purchase behaviors based on short-term economic conditions. However, over the long term, we believe the majority of smokers continue to value the premium quality and consistency of brands like Marlboro. We remain premium focused to maximize long-term profit over low-margin share gains.
Despite a great number of new details coming out at Investor Day, the same old core thesis remains intact. Margin, earnings, and allocation targets should force discipline, and the company is positioned to generate substantial value, and beyond modest reinvestment, most will be returned to shareholders via dividends and additional excess toward share repurchases and debt repayment. For Altria, the sun is still climbing in the sky. When it does begin to finally set, it will take far longer for darkness to touch the cowboy’s aspirational brands than most think.
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Ownership Disclaimer
I own positions in Altria and other tobacco companies such as British American Tobacco and Philip Morris International.
Disclaimer
This publication’s content is for entertainment and educational purposes only. I am not a licensed investment professional. Nothing produced under the Invariant brand should be thought of as investment advice. Do your own research. All content is subject to interpretation.
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