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Altria: Recalibration
“Regulation not enforced is indistinguishable from no regulation at all.” - William Gifford, Altria CEO, Q3 2023 Call
Altria’s Q3 2023 presentation included a change to its decomposition estimates for U.S. cigarette industry volumes. Prior, the company provided “Additional Cross Category Movement” and “Macroeconomic & Other Factors” as separate figures, and over the last several years had attributed higher volume declines largely to macro factors. However, in Q3 2023, the company stated it had underestimated Additional Cross-Category Movement to e-vapor and now believes it to be 1.5-2.5% TTM. The company combined these two figures, somewhat obfuscating the change, which is found in the footnotes of slide 16 of the Q3 earnings presentation. I have illustrated the midpoint of the new ACCM adjustment—unmissably visualized in yellow on the most recent trailing twelve-month figure below:
Management addressed the change directly on the Q3 call, admitting to the difficulty of measuring illicit e-vapor volumes as they are predominantly sold in untracked channels (that difficulty is also implied by the sheer fact the company provided the wide 1.5-2.5% range). Tucking the data into the footnotes is a flagrant foul that management should sit in the penalty box for. But does this break the Altria thesis?
Poor enforcement. Government lip service. Uncertain litigation. Without favorable outcomes, U.S. cigarette volumes likely continue to decline at an elevated rate to an extent—even if macro pressures ease, additional cross category movement will persist. But this isn’t new information. This has been continually pointed to by industry data and a number of analysts, and I questioned these exact dynamics in April following Q1 results (emphasis added):
"None of this is to say that the trend will fully mean-revert to the 4-5% annual decline rate we’ve seen historically. That should have never been expected. For starters, an additional concern related to the US cigarette industry volume declines is cross-category movement. The secular decline rate of -2.5% remains unchanged and automatically includes a 1% impact of cross-category movement, but Q1 2023 listed a 0% additional contribution. Can this be right? We know there is a cross-category shift occurring from legacy to modern oral, but according to Altria, the shift to e-vapor, which was for a time the largest driver, has been stunted. Gifford explained on the Q1 call:
'“We believe the category is continuing to undergo a significant reset, and we estimate that first-quarter e-vapor volumes decreased 11% versus a year ago and 1% sequentially. We have observed a decline in traditional multi-outlet and convenience channel volumes, which we believe is primarily a result of the FDA marketing denial orders issued for JUUL and MyBlu. This volume decline has been partially offset by increased volume in nontraditional channels, such as e-commerce and vape stores.”'
While Altria’s explanation makes sense and is supported by the category volume chart above, I think it’s still worth questioning. We’ve seen evidence of the proliferating popularity of disposable vapes, and many of the sales channels in which they’re sold simply aren’t tracked as well. And since e-vapor broadly is converting smokers and would-be smokers, this assuredly continues to impact legacy volumes."
Is it the mere fact that Altria is attempting to now more appropriately quantify the impact that has investors spooked? Perhaps. Maybe it’s animal spirits with Halloween around the corner. Regardless, while attribution has changed, volume declines remain elevated—and yet, Altria’s value-creating formula remains intact.
Smokeable Products
Q3 Smokeable volumes fell -11.36% y/y. Adjusted for channel movements and factoring one less shipping day in the quarter vs. last year, volumes decreased by an estimated -10%—unchanged sequentially. However, unlike Q2, pricing did not offset volume declines, leading to reported and adjusted operating income falling by -1.72% and -2.52%, respectively...
Read the full piece at the link below:
invariant.substack.com
Altria: Recalibration
Q3 2023 exploration.
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