RICHMOND, Va.--(BUSINESS WIRE)--Altria Group, Inc. (Altria) (NYSE:MO) today announced its 2016 second-quarter and first-half business results and, as further discussed below under “2016 Full-Year Guidance,” raised its outlook for 2016 full-year adjusted diluted EPS.
“Altria had strong 2016 second-quarter and first-half results, delivering excellent earnings per share growth for both periods despite comparisons to very strong 2015 results,” said Marty Barrington, Altria’s Chairman, Chief Executive Officer and President. “Our core tobacco companies performed extremely well behind solid performance from their leading premium brands. And we continued to reward our shareholders, including paying out more than $2.2 billion in dividends in the first six months.”
Cash Returns to Shareholders - Dividends and Share Repurchase Program
In May 2016, Altria’s Board of Directors (Board) declared a regular quarterly dividend of $0.565 per share. The current annualized dividend rate is $2.26 per share. As of July 22, 2016, Altria’s annualized dividend yield was 3.3%. Altria paid more than $1.1 billion in dividends in the second quarter and $2.2 billion for the first half of 2016. Altria expects to continue to return a large amount of cash to shareholders in the form of dividends by maintaining a dividend payout ratio target of approximately 80% of its adjusted diluted EPS. Future dividend payments remain subject to the discretion of the Board.
During the second quarter, Altria repurchased 2.7 million shares at an average price of $64.06 for a total of $173 million. As of June 30, 2016, Altria had approximately $624 million remaining in the current $1 billion share repurchase program, which it expects to complete by the end of 2016. The timing of share repurchases depends upon marketplace conditions and other factors. This program remains subject to the discretion of the Board.
Innovative Tobacco Products
In e-vapor, Nu Mark, LLC (NuMark) continued its disciplined expansion of MarkTen XL based on encouraging consumer and marketplace results. MarkTen XL is now available in stores representing approximately 50% of e-vapor category volume in mainstream retail channels, including convenience stores. On the heated tobacco platform, Altria continues to work with Philip Morris International Inc. (PMI) on PMI’s applications for pre-market authorization and a modified risk tobacco product claim and preparations remain on track for submission to the U.S. Food and Drug Administration (FDA) by the end of 2016. Altria continues to develop its marketing and U.S. commercialization plans.
Productivity Initiative
In January 2016, Altria announced a productivity initiative designed to maintain its operating companies’ leadership and cost competitiveness. Altria continues to expect the initiative, which reduces spending on certain selling, general and administrative (SG&A) infrastructure and implements a leaner organizational structure, to deliver approximately $300 million in annualized productivity savings by the end of 2017.
Altria estimates total pre-tax restructuring charges in connection with the initiative of approximately $140 million. These charges, substantially all of which will result in cash expenditures, consist of employee separation costs of approximately $120 million and other associated costs of approximately $20 million. During the first half of 2016, Altria recorded pre-tax charges of $124 million and expects the remaining charges to be incurred during the balance of 2016.
Update on AB InBev’s Proposed Business Combination with SABMiller
Anheuser-Busch InBev SA/NV (AB InBev) has reported continued progress in securing regulatory clearances for its pending business combination with SABMiller plc (SABMiller). On July 26, 2016, AB InBev announced that it had obtained approval in 22 jurisdictions, including approvals in the United States, North America, Asia-Pacific, Africa, Europe and Latin America. AB InBev continues to pursue the remaining regulatory clearances that are necessary to close the transaction.
Also on July 26, 2016, AB InBev announced its revised and final offer to SABMiller for the proposed business combination (Revised and Final Offer) under which the all-cash offer was increased from £44 to £45 per SABMiller share and the cash element of the partial share alternative (PSA) was increased from £3.7788 to £4.6588 per SABMiller share. The equity component of the PSA remains unchanged. Altria has committed to elect the PSA. Under the Revised and Final Offer, the pre-tax cash that Altria expects to receive increases to approximately $3 billion from the $2.5 billion in pre-tax cash previously announced by Altria. Upon closing, Altria expects to exchange its approximate 27% economic and voting interest in SABMiller for an interest that will be converted into approximately 10.5% equity ownership in the new, combined company (NewCo). Further, Altria anticipates this transaction will provide two seats on NewCo’s board of directors and continued use of equity accounting for the beer asset’s contribution to Altria’s earnings. Altria’s expected equity ownership level, as well as these anticipated benefits, are subject to any proration that may occur depending on the number of SABMiller shares that elect the PSA.
From an accounting perspective, Altria currently records results for its SABMiller investment concurrent with Altria’s reporting calendar. Upon closing of the transaction, because NewCo’s results will not be available in time to record them in the concurrent period, Altria expects to report its share of NewCo’s results using a one-quarter lag. For example, Altria’s share of NewCo’s results in the quarter in which the transaction closes will be recorded in the subsequent quarter.
This timing lag will not affect Altria’s cash flows or quarterly dividends per share, but Altria does expect it to impact year-over-year comparability of Altria’s reported and adjusted diluted EPS in the short-term and could also affect 2016 full-year adjusted diluted EPS guidance. The precise periods affected will depend on when the transaction closes.
2016 Full-Year Guidance
Altria raises its guidance for 2016 full-year adjusted diluted EPS, which excludes the special items for the first half of 2016 as shown in Table 2, to a range of $3.01 to $3.07 representing a growth rate of 7.5% to 9.5% from an adjusted diluted EPS base of $2.80 in 2015 as shown in Table 1 below. This guidance does not include any impact from the anticipated AB InBev/SABMiller business combination, including effects from the anticipated reporting lag described above, as the transaction remains subject to certain approvals and the closing date has not yet been determined.
Altria continues to expect that its 2016 full-year effective tax rate on operations will be approximately 35.3%.
Altria’s full-year adjusted diluted EPS guidance and full-year forecast for its effective tax rate on operations exclude the impact of certain income and expense items that management believes are not part of underlying operations. These items may include, for example, loss on early extinguishment of debt, restructuring charges, SABMiller special items, certain tax items, charges associated with tobacco and health litigation items, and settlements of, and determinations made in connection with, certain non-participating manufacturer (NPM) adjustment disputes (such settlements and determinations are referred to collectively as NPM Adjustment Items).
Altria’s management cannot estimate on a forward-looking basis the impact of certain income and expense items, including those items noted in the preceding paragraph, on its reported diluted EPS and its reported effective tax rate because these items, which could be significant, are difficult to predict and may be highly variable. As a result, Altria does not provide a corresponding GAAP (as defined below) measure for, or reconciliation to, its adjusted diluted EPS guidance or its effective tax rate on operations forecast.
ALTRIA GROUP, INC.
Altria reports its financial results in accordance with U.S. generally accepted accounting principles (GAAP). Altria’s management reviews operating companies income (OCI), which is defined as operating income before general corporate expenses and amortization of intangibles, to evaluate the performance of, and allocate resources to, the segments. Altria’s management also reviews OCI, operating margins and diluted EPS on an adjusted basis, which excludes certain income and expense items, including those items noted under “2016 Full-Year Guidance” above. Altria’s management does not view any of these special items to be part of Altria’s sustainable results as they may be highly variable, are difficult to predict and can distort underlying business trends and results. Altria’s management also reviews income tax rates on an adjusted basis. Altria’s effective tax rate on operations may exclude certain tax items from its reported effective tax rate.Altria’s management believes that adjusted financial measures provide useful insight into underlying business trends and results and provide a more meaningful comparison of year-over-year results. Altria’s management uses adjusted financial measures for planning, forecasting and evaluating business and financial performance, including allocating resources and evaluating results relative to employee compensation targets. These adjusted financial measures are not consistent with GAAP and may not be calculated the same as similarly titled measures used by other companies. These adjusted financial measures should thus be considered as supplemental in nature and not considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. Reconciliations of historical adjusted financial measures to corresponding GAAP measures are provided in this release.
Altria’s reportable segments are smokeable products, manufactured and sold by Philip Morris USA Inc. (PM USA) and John Middleton Co. (Middleton); smokeless products, substantially all of which are manufactured and sold by U.S. Smokeless Tobacco Company LLC (USSTC); and wine, produced and/or distributed by Ste. Michelle Wine Estates Ltd. (Ste. Michelle).
Comparisons are to the corresponding prior-year period unless otherwise stated.
Altria’s net revenues decreased 1.4% to $6.5 billion in the second quarter and increased 1.4% to $12.6 billion for the first half of 2016. Altria’s revenues net of excise taxes were essentially unchanged at $4.9 billion in the second quarter and increased 2.9% to $9.4 billion for the first half of 2016.
Altria’s 2016 second-quarter reported diluted EPS increased 13.5% to $0.84, primarily driven by higher reported OCI in the smokeable and smokeless products segments, the unrealized gain on Altria’s derivative hedge of British pound exposure related to the cash consideration that Altria expects to receive from the AB InBev/SABMiller business combination (Currency Derivative), higher operating results at Philip Morris Capital Corporation (PMCC) and lower investment spending in innovative tobacco products. Altria’s second-quarter adjusted diluted EPS, which excludes the special items shown in Table 2, grew 9.5% to $0.81, primarily driven by higher adjusted OCI in the smokeable and smokeless products segments, higher operating results at PMCC, lower investment spending in innovative tobacco products and lower general corporate expenses.
Altria’s 2016 first-half reported diluted EPS increased 17.6% to $1.47, primarily driven by higher reported OCI in the smokeable and smokeless products segments, which included restructuring charges associated with the productivity initiative, the 2015 loss on early extinguishment of debt, the unrealized gain on the Currency Derivative, lower investment spending in innovative tobacco products and higher operating results at PMCC. These items were partially offset by lower earnings from Altria’s equity investment in SABMiller (due to special items). Altria’s first-half adjusted diluted EPS, which excludes the special items shown in Table 2, grew 10.9% to $1.53, primarily driven by higher adjusted OCI in the smokeable and smokeless products segments, lower investment spending in innovative tobacco products, higher operating results at PMCC and lower interest and other debt expense.
