Altria Reports 2016 Fourth-Quarter and Full-Year Results; Provides 2017 Full-Year Earnings Guidance

  • Altria’s 2016 fourth-quarter reported diluted earnings per share
    (EPS) increased 723.4% to $5.27, as comparisons were affected by
    special items, including the AB InBev/SABMiller transaction gain.
  • Altria’s 2016 fourth-quarter adjusted diluted EPS, which excludes
    the impact of special items, increased 1.5% to $0.68.
  • Altria’s 2016 full-year reported diluted EPS increased 172.7% to
    $7.28, as comparisons were affected by special items, including the AB
    InBev/SABMiller transaction gain.
  • Altria’s 2016 full-year adjusted diluted EPS, which excludes the
    impact of special items, increased 8.2% to $3.03.

RICHMOND, Va.–(BUSINESS WIRE)–Altria Group, Inc. (Altria) (NYSE:MO) today announced its 2016
fourth-quarter and full-year business results and provided guidance for
2017 full-year adjusted diluted EPS.

“Altria had another outstanding year,” said Marty Barrington, Altria’s
Chairman, Chief Executive Officer and President. “We grew our earnings
in line with our long-term objectives while returning a large amount of
cash to shareholders, improving our balance sheet and strengthening our
organizational capability, thus positioning Altria to continue to
deliver on our long-term financial goals. In 2016, Altria’s total return
to shareholders of 20.5% outpaced both the S&P 500 and the S&P Food,
Beverage and Tobacco Index, marking the fourth consecutive year that
total shareholder return exceeded 20%.”

“During the year, we also rewarded our shareholders by paying out over
$4.5 billion in dividends, raising our dividend by 8%, and repurchasing
over $1 billion of our shares under an expanded $3 billion share
repurchase program. And with Altria’s support of Anheuser-Busch InBev’s
landmark business combination with SABMiller, we enhanced the value of
our beer investment and our position in the global brewing profit pool.”

Conference Call

As previously announced, a conference call with the investment community
and news media will be webcast on February 1, 2017 at 9:00 a.m. Eastern
Time. Access to the webcast is available at www.altria.com/webcasts
and via the Altria Investor app.

Cash Returns to Shareholders – Dividends and
Share Repurchase Program

In December 2016, Altria’s Board of Directors (Board) declared a regular
quarterly dividend of $0.61 per share. Altria’s current annualized
dividend rate is $2.44 per share. As of January 27, 2017, Altria’s
annualized dividend yield was 3.4%. Altria paid nearly $1.2 billion in
dividends in the fourth quarter and over $4.5 billion in 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.

In October 2016, Altria’s Board expanded and extended the $1 billion
share repurchase program to $3 billion. Altria expects to complete the
share repurchase program by the end of the second quarter of 2018.
During the fourth quarter, Altria repurchased 8.1 million shares at an
average price of $63.67, for a total cost of approximately $518 million.
For the full year, Altria repurchased 16.2 million shares at an average
price of $63.48 for a total cost of approximately $1 billion. Since the
beginning of 2011, Altria has repurchased over 150 million shares at an
average price of $37.05, for a total cost of approximately $5.6 billion.
As of December 31, 2016, Altria had approximately $1.9 billion remaining
in the share repurchase program. The timing of share repurchases depends
upon marketplace conditions and other factors. This program remains
subject to the discretion of the Board.

Product Innovation

In e-vapor, Nu Mark LLC (Nu Mark) continued its disciplined expansion of MarkTen.
At year-end, MarkTen was available in stores representing about
55% of the e-vapor category volume in retail channels, including
c-stores.

In heated tobacco, Altria continues to partner with Philip Morris
International Inc. (PMI) on its U.S. Food and Drug Administration (FDA)
applications for IQOS. In December, PMI submitted a modified risk
tobacco product application to the FDA for its heated tobacco product.
PMI has announced that it plans on filing its pre-market tobacco product
application during the first quarter of 2017. Philip Morris USA Inc. (PM
USA) continues to make progress on its U.S. plans for IQOS, including
the implementation of a dedicated commercialization team.

Productivity Initiative

In January 2016, Altria announced a productivity initiative designed to
maintain its operating companies’ leadership and cost competitiveness
(Productivity Initiative). Altria continues to expect the Productivity
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.

For the full year, Altria recorded total pre-tax restructuring charges
in connection with the Productivity Initiative of $132 million. These
charges, substantially all of which result in cash expenditures, consist
of employee separation costs of $117 million and other associated costs
of $15 million.

Facilities Consolidation

In October 2016, Altria announced the consolidation of certain of its
operating companies’ manufacturing facilities to streamline operations
and achieve greater efficiencies (Facilities Consolidation). The
Facilities Consolidation is expected to be completed by the first
quarter of 2018 and deliver approximately $50 million in annualized cost
savings by the end of 2018.

As a result of the Facilities Consolidation, Altria expects to record
total pre-tax charges of approximately $150 million, or $0.05 per share.
Of this amount, Altria recorded pre-tax charges of $71 million, or
approximately $0.03 per share, in the fourth quarter of 2016. Altria
expects to record pre-tax charges of approximately $70 million in 2017
and the remainder in 2018. The total estimated pre-tax charges relate
primarily to accelerated depreciation ($55 million), employee separation
costs ($45 million) and other exit and implementation costs ($50
million). Approximately $90 million of the total pre-tax charges are
expected to result in cash expenditures.

Completion of Anheuser-Busch InBev’s Business
Combination with SABMiller

In October 2016, Anheuser-Busch InBev SA/NV (AB InBev) completed its
business combination with SABMiller plc (the Transaction) with Altria
receiving shares representing a 9.6% ownership in the combined company.
Subsequently, Altria purchased approximately 12 million ordinary shares
of AB InBev, increasing its ownership to approximately 10.2%. As a
result of the business combination, including the impact of the currency
derivatives that Altria entered into to hedge its British pound exposure
on the cash consideration received, Altria recorded a pre-tax gain of
$13.9 billion for full year 2016 (together, Gain on Transaction).

Altria uses the equity method of accounting for its investment in AB
InBev and will report its share of AB InBev’s results using a
one-quarter lag (ABI Timing Lag). Altria’s share of AB InBev’s 2016
fourth-quarter results will be recorded in Altria’s 2017 first-quarter
statement of earnings. The ABI Timing Lag will not affect Altria’s cash
flows, but will impact year-over-year comparability of reported and
adjusted diluted EPS in the short term.

Sherman Group Acquisition

On January 17, 2017, Altria acquired privately-held Sherman Group
Holdings, LLC and its subsidiaries (Nat Sherman). Nat Sherman sells
super-premium cigarettes and premium cigars and joins Altria’s smokeable
products segment for reporting purposes.

2017 Full-Year Guidance

Altria forecasts 2017 full-year adjusted diluted EPS to be in a range of
$3.26 to $3.32, which excludes the estimated Facilities Consolidation
charges for 2017 (approximately $0.02 per share). This represents a
growth rate of 7.5% to 9.5% from an adjusted diluted EPS base of $3.03
in 2016, which excludes the special items shown in Table 1. Altria
expects that its 2017 full-year effective tax rate on operations will be
approximately 36%.

Altria expects capital expenditures for 2017 in the range of $180
million to $220 million and depreciation and amortization expenses of
approximately $220 million.

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, Gain on
Transaction, AB InBev/SABMiller plc 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 under the
Master Settlement Agreement (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 U.S. generally accepted
accounting principles (GAAP) measure for, or reconciliation to, its
adjusted diluted EPS guidance or its effective tax rate on operations
forecast.

The factors described in the Forward-Looking and Cautionary Statements
section of this release represent continuing risks to Altria’s forecast.

ALTRIA GROUP, INC.

Altria reports its financial results in accordance with 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 “2017
Full-Year Guidance” above.
Altria’s management does not view any
of these special items to be part of Altria’s underlying 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 PM USA, John Middleton Co. (Middleton) and Nat Sherman;
smokeless products, 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 1.0% to $6.3 billion in the fourth
quarter and increased 1.2% to $25.7 billion for full year 2016. Altria’s
revenues net of excise taxes grew 0.1% to $4.7 billion in the quarter
and grew 2.6% to $19.3 billion for the full year.

Altria’s 2016 fourth-quarter reported diluted EPS increased 723.4% to
$5.27, primarily driven by the Gain on Transaction. Altria’s
fourth-quarter adjusted diluted EPS, which excludes the special items
shown in Table 1, grew 1.5% to $0.68, primarily driven by a lower
effective tax rate on operations, higher adjusted OCI in the smokeable
and smokeless products segments and fewer shares outstanding, partially
offset by the ABI Timing Lag. Altria’s lower fourth-quarter effective
tax rate on operations was driven by tax benefits associated with a
dividend from AB InBev that was larger than the dividend received from
SABMiller in the fourth quarter of 2015.

Altria’s 2016 full-year reported diluted EPS increased 172.7% to $7.28,
primarily driven by the Gain on Transaction, higher reported OCI in the
smokeable and smokeless products segments (which includes the
Productivity Initiative and Facilities Consolidation charges), a lower
effective tax rate, lower interest and other debt expense, lower
investment spending in innovative tobacco products and higher operating
results at Philip Morris Capital Corporation (PMCC), partially offset by
the higher loss on early extinguishment of debt. Altria’s full-year
adjusted diluted EPS, which excludes the special items shown in Table 1,
grew 8.2% to $3.03, primarily driven by higher adjusted OCI in the
smokeable and smokeless products segments, a lower effective tax rate on
operations, lower investment spending in innovative tobacco products,
lower interest and other debt expense, higher operating results at PMCC
and fewer shares outstanding, partially offset by the ABI Timing Lag.
Altria’s lower full-year effective tax rate on operations was driven by
tax benefits associated with the higher cumulative dividends received
from SABMiller plc (SABMiller) and AB InBev in 2016.

 
Table 1 – Altria’s Adjusted Results
                   
Fourth Quarter Full Year
2016 2015 Change 2016 2015 Change
Reported diluted EPS $ 5.27 $ 0.64 100%+ $ 7.28 $ 2.67 100%+
NPM Adjustment Items 0.01 0.01 (0.03 )
Tobacco and health litigation items 0.01 0.01 0.04 0.05
SABMiller special items (0.07 ) 0.01 (0.03 ) 0.04
Loss on early extinguishment of debt 0.28 0.07
Asset impairment, exit and implementation costs 0.03 0.07
Patent litigation settlement 0.01 0.01
Gain on AB InBev/SABMiller business combination (4.56 ) (4.61 )
Tax items       (0.01 )   (0.02 )  
Adjusted diluted EPS       $ 0.68   $ 0.67   1.5%   $ 3.03   $ 2.80   8.2%

Note: For details of pre-tax, tax and after-tax amounts, see
Schedules 7 and 9.

NPM Adjustment Items

For full year 2016, PM USA recorded a pre-tax charge of $18 million
related to a dispute with the State of Maryland. For full year 2015, PM
USA recorded pre-tax earnings of $84 million, comprised of a reduction
to cost of sales of $97 million, partially offset by a decrease to
interest income of $13 million for NPM Adjustment Items. The EPS impact
of the NPM Adjustment Items is shown in Table 1 and Schedules 7 and 9.

Tobacco and Health Litigation Items

In the fourth quarter of 2016, PM USA recorded pre-tax charges for
tobacco and health litigation items of $17 million related to a judgment
in the Merino case. For full year 2016 and 2015, PM USA recorded
total pre-tax charges for tobacco and health litigation items and
related interest costs of $105 million and $150 million, respectively.
The EPS impact of these charges, including interest costs, is shown in
Table 1 and Schedules 7 and 9.

SABMiller Special Items

Altria’s earnings from its equity investment in SABMiller for the fourth
quarter of 2016 included net pre-tax income of $236 million, consisting
primarily of a gain related to SABMiller’s formation of a bottling
business, partially offset by SABMiller’s Transaction-related costs. For
full year 2016 and 2015, SABMiller special items included net pre-tax
income of $89 million and net pre-tax charges of $126 million,
respectively. The EPS impact of these items is shown in Table 1 and
Schedules 7 and 9.

Loss on Early Extinguishment of Debt

In September 2016, Altria completed a cash tender offer in which it
purchased approximately $933 million aggregate principal amount of its
senior unsecured 9.95% and 10.20% Notes due in 2038 and 2039,
respectively. That resulted in a one-time, pre-tax charge against
reported earnings in the third quarter of 2016 of $823 million,
reflecting the loss on early extinguishment of debt.

In March 2015, Altria completed a cash tender offer in which it
purchased approximately $793 million aggregate principal amount of its
senior unsecured 9.700% Notes due in 2018. That resulted in a one-time,
pre-tax charge against reported earnings of $228 million in the first
quarter of 2015.

The EPS impact of these charges is shown in Table 1 and Schedules 7 and
9.

Asset Impairment, Exit and Implementation Costs

In the fourth quarter of 2016, Altria recorded pre-tax charges of $73
million, substantially all of which related to the Facilities
Consolidation. For full year 2016, Altria recorded pre-tax charges of
$132 million related to the Productivity Initiative and $71 million
related to the Facilities Consolidation. The EPS impact of these costs
is shown in Table 1 and Schedules 7 and 9.

Gain on AB InBev/SABMiller Business Combination

In the fourth quarter of 2016, Altria recorded a pre-tax Gain on
Transaction of approximately $13.7 billion. For full year 2016, Altria
recorded a pre-tax Gain on Transaction of approximately $13.9 billion.
The EPS impact is shown in Table 1 and Schedules 7 and 9.

SMOKEABLE PRODUCTS

The smokeable products segment grew income in the fourth quarter and
delivered strong income growth for the full year despite tough 2015 full
year comparisons. PM USA maintained its leading retail share position in
the fourth quarter and gained a tenth of a share point for the full year.

Smokeable products segment’s net revenues decreased by 1.9% in the
fourth quarter, primarily driven by lower volume, partially offset by
higher pricing. For full year 2016, net revenues increased by 0.3%,
primarily driven by higher pricing, partially offset by lower volume and
higher promotional investments. Revenues net of excise taxes decreased
0.9% in the fourth quarter and increased 1.4% for the full year.

Smokeable products segment’s fourth-quarter reported OCI increased 4.3%,
primarily driven by higher pricing, 2015 NPM Adjustment Items and lower
benefits costs, partially offset by lower volume, Facilities
Consolidation charges and higher promotional investments. Adjusted OCI,
which is calculated excluding the special items identified in Table 2,
grew 3.7%, and adjusted OCI margins expanded 2.0 percentage points to
46.7%.

For the full year, smokeable products segment’s reported OCI increased
2.6% primarily driven by higher pricing, lower benefits costs and lower
tobacco and health litigation items. These factors were partially offset
by lower volume, higher promotional investments, higher resolution
expenses, Productivity Initiative and Facilities Consolidation charges
and 2015 NPM Adjustment Items. Adjusted OCI grew 5.3% for the full year,
and adjusted OCI margins expanded 1.8 percentage points to 48.2%. Table
2 summarizes revenues, OCI and OCI margins and special items for the
smokeable products segment.

 
Table 2 – Smokeable Products: Revenues and OCI ($ in millions)
             
Fourth Quarter Full Year
2016 2015 Change 2016 2015 Change
Net revenues $ 5,453 $ 5,557 (1.9)% $ 22,851 $ 22,792 0.3%
Excise taxes (1,478 ) (1,547 ) (6,247 ) (6,423 )
Revenues net of excise taxes $ 3,975   $ 4,010   (0.9)% $ 16,604   $ 16,369   1.4%
 
Reported OCI $ 1,813 $ 1,738 4.3% $ 7,768 $ 7,569 2.6%
NPM Adjustment Items 29 12 (97 )
Asset impairment, exit and implementation costs 29 134
Tobacco and health litigation items 16   25   88   127  
Adjusted OCI $ 1,858   $ 1,792   3.7% $ 8,002   $ 7,599   5.3%
Adjusted OCI margins 1 46.7 % 44.7 % 2.0 pp   48.2 % 46.4 % 1.8 pp

1 Adjusted OCI margins are calculated as adjusted
OCI divided by revenues net of excise taxes.

PM USA’s reported domestic cigarettes shipment volume decreased 4.8% in
the fourth quarter of 2016, primarily driven by the industry’s rate of
decline and one fewer shipping day. When adjusted for calendar
differences, PM USA estimates that its fourth-quarter domestic
cigarettes shipment volume decreased by approximately 3.5%. PM USA
estimates that fourth-quarter total industry cigarette volumes also
declined by approximately 3.5%.

For the full year, PM USA’s reported and adjusted domestic cigarettes
shipment volume decreased approximately 2.5%, primarily driven by the
industry’s rate of decline. PM USA estimates that full-year total
industry cigarette volumes also declined by approximately 2.5%.

Middleton grew its fourth-quarter and full-year 2016 reported cigars
shipment volume by 5.3% and 5.9%, respectively, driven primarily by Black
& Mild
in the tipped cigars segment. Table 3 summarizes
smokeable products segment shipment volume performance.

 
Table 3 – Smokeable Products: Shipment Volume (sticks in millions)
                   
Fourth Quarter Full Year
2016 2015 Change 2016 2015 Change
Cigarettes:
Marlboro 24,851 26,106 (4.8)% 105,297 108,113 (2.6)%
Other premium 1,524 1,639 (7.0)% 6,382 6,753 (5.5)%
Discount 2,682   2,769   (3.1)% 11,251   11,152   0.9%
Total cigarettes 29,057   30,514   (4.8)% 122,930   126,018   (2.5)%
 
Cigars:
Black & Mild 351 332 5.7% 1,379 1,295 6.5%
Other 5   6   (16.7)% 24   30   (20.0)%
Total cigars 356   338   5.3% 1,403   1,325   5.9%
       
Total smokeable products       29,413   30,852   (4.7)%   124,333   127,343   (2.4)%

Note: Cigarettes volume includes units sold as well as promotional
units, but excludes units sold for distribution to and in Puerto Rico,
and units sold in U.S. Territories, to overseas military and by Philip
Morris Duty Free Inc., none of which, individually or in the aggregate,
is material to the smokeable products segment.

Marlboro’s retail share was 44.0% in the fourth quarter and for
the full year. PM USA’s total retail share was 51.4% for both periods,
unchanged in the fourth quarter and up 0.1 percentage point for the full
year.

Black & Mild’s retail share in the machine-made large cigars
category declined by 0.5 points in the fourth quarter and 1.0 point for
the full year. Table 4 summarizes retail share performance by PM USA in
cigarettes and Middleton in machine-made large cigars.

 
Table 4 – Smokeable Products: Retail Share (percent)
                     
Fourth Quarter Full Year
2016   2015  

Percentage
point change

2016   2015  

Percentage
point change

Cigarettes:        
Marlboro 44.0 % 44.0 % 44.0 % 44.0 %
Other premium 2.7 2.8 (0.1 ) 2.7 2.8 (0.1 )
Discount 4.7     4.6     0.1   4.7     4.5     0.2  
Total cigarettes 51.4 %   51.4 %     51.4 %   51.3 %   0.1  
 
Cigars:
Black & Mild 26.4 % 26.9 % (0.5 ) 26.3 % 27.3 % (1.0 )
Other 0.2     0.5     (0.3 ) 0.4     0.3     0.1  
Total cigars 26.6 %   27.4 %   (0.8 )   26.7 %   27.6 %   (0.9 )

Note: Retail share results for cigarettes are based on data
from IRI/MSAi, a tracking service that uses a sample of stores and
certain wholesale shipments to project market share and depict share
trends.
Retail share results for cigars are based on data from
IRI InfoScan, a tracking service that uses a sample of stores to project
market share and depict share trends.
Both services track sales
in the food, drug and mass merchandisers (including Wal-Mart),
convenience, military, dollar store and club trade classes.

Contacts

Altria Client Services
Investor Relations
804-484-8222

Altria Client Services
Media Relations
804-484-8897

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