Altria Group (NYSE: MO) has done an amazing job of dealing with the long-term decline in the popularity of cigarette smoking without letting it have adverse impacts on its revenue and profits.
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In the third quarter, the Marlboro maker's profit grew despite unusually strong headwinds that sent revenue down very slightly from year-earlier figures. Altria has high hopes for its long-term future, and moves toward a potential strategic transformation are gaining momentum. After reporting its results, Altria executives shared their views about where the company is headed and what challenges it will face.
Below, you'll find five of the most important things Altria wants you to know about.
1. California's tax move is hitting Altria harder than its peers
Marlboro's over-indexed share in California [is] at over 50%, and Marlboro thus continues to experience disproportionate share impact during this period due to the [state excise tax] increase.
Altria has had to deal with taxes from federal and state governments throughout most of its history, and as the financial health of state and local governments across the nation has deteriorated, lawmakers have looked to tobacco as a way to generate tax revenue. California passed a $2-per-pack addition to its excise tax in late 2016, taking effect earlier this year.
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California's tax increase had negative impacts on tobacco companies across the industry, but Altria's impact was harder because of the exceptional success that Marlboro has had in appealing to customers in the Golden State. Altria expects the negative impacts to lessen through the end of 2017, but the threat of similar tax increases elsewhere is always a factor for the company.
2. Smokeless tobacco keeps climbing
USSTC delivered outstanding adjusted operating company income growth of 15.7% in the third quarter, as higher net pricing and lower costs more than offset lower shipment volume.
Altria has almost completely recovered from its smokeless tobacco recall earlier this year, and the company is using a similar model to what has brought it success in the cigarette segment. Altria has chosen to emphasize Copenhagen as its premier brand in the space, choosing it over Skoal. Overall retail market share fell in the third quarter, but that didn't hold back the segment's bottom line. Smokeless products are responsible for a relatively small part of the company's total business, but solid results remain an important part of Altria's overall operations.
3. Altria looks at new packaging
PM USA recently announced the expansion of Marlboro Black Label in California and Washington state. Marlboro Black Label features the latest in Marlboro's packaging innovation, [with] its exclusive soft-touch technology.
Altria is still trying to keep customers happy by introducing new products. Marlboro Black Label is intended to be a "bold and robust non-menthol cigarette in a premium, contemporary and stylish pack," in the words of Philip Morris USA CEO K.C. Crosthwaite. Altria also intends to introduce a national expansion of menthol cigarette Marlboro Ice, with a resealable pack that will be the first of its kind in the U.S. market. By using the Marlboro brand more extensively, Altria hopes to remain connected to customers while offering them innovative new smoking experiences.
4. MarkTen keeps rising
In e-vapor, Nu Mark grew MarkTen's third quarter volume by more than 50%, driven by expanded distribution and category growth.
E-cigarettes are a key growth driver for the industry, and Altria is working hard not to get left behind in the space. MarkTen has seen considerable success, reaching national retail share of about 13.5% in mainstream channels during the quarter. Moreover, Altria has plans to expand distribution of the company's MarkTen Bold product to 15,000 additional stores in the fourth quarter. That could give the brand even greater market penetration and support growth into 2018 and beyond.
5. Greater regulation looms
In July, FDA announced its comprehensive plan for U.S. tobacco in nicotine regulation. FDA stated its belief that this approach will strike and appropriate balance between regulation and encouraging development of innovative tobacco products that may be less risky than cigarettes.
Altria has watched the U.S. Food and Drug Administration closely to see how it decides to address regulation of cigarette alternatives like the iQOS heated-tobacco system, which it hopes to distribute in the U.S. market. The company praised the FDA in adopting what it sees as an innovation-friendly decision-making process for future approvals. Although Altria will also potentially have to deal with restrictions on its traditional cigarettes with respect to nicotine content, it noted that the rule-making process will likely be long and complicated, giving it a chance to weigh in appropriately.
Altria has a lot on its plate, but its financial strength remains secure. For investors, its future prospects include plenty of positives to go with the ever-present challenges that it has to overcome regularly.
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