ALTRIA GROUP, INC. Annual Report Summary

Altria Group, Inc. (Altria) navigated a dynamic market in the past fiscal year, making significant strategic moves to reshape its future while delivering consistent shareholder returns. This summary offers investors key insights into the company's performance and strategic direction.

1. Business Overview (What the company does)

Altria Group, Inc. (Altria) stands as a leading tobacco company, primarily operating in the United States. Its core business segments include Smokeable Products (featuring Marlboro cigarettes and Black & Mild cigars), Oral Tobacco Products (such as Copenhagen and Skoal moist snuff), and a growing presence in E-Vapor.

The past year saw significant strategic realignment:

• IQOS Business Divestiture: In April 2024, Altria completed the sale of its IQOS tobacco heating system business. It returned the U.S. commercialization rights to Philip Morris International (PMI). This move, which did not significantly affect Altria's finances, allows the company to streamline its focus on its core U.S. market and other reduced-risk product categories.
• NJOY Acquisition: In June 2023, Altria significantly strengthened its e-vapor portfolio by acquiring NJOY Holdings Inc. for approximately $2.75 billion. NJOY is a leading e-vapor brand with a portfolio of FDA-authorized products, including menthol, blueberry, and watermelon flavored pods. This acquisition positions Altria to compete more effectively in the evolving e-vapor market and meet changing consumer preferences.

2. Financial Performance (Revenue, profit, year-over-year changes)

Altria reported mixed financial performance for the fiscal year ended December 31, 2023:

• Net Revenues: Net revenues fell by 2.0% to $24.5 billion, primarily due to lower shipment volumes in the smokeable products segment, partially offset by higher pricing.
• Operating Income: Operating income reached $11.2 billion, reflecting revenue trends and strategic investments.
• Net Income: Net income increased by 5.5% to $6.3 billion, benefiting from effective cost management and investment performance.
• Adjusted Diluted Earnings Per Share (EPS): Adjusted diluted EPS grew by 4.8% to $5.05, demonstrating resilience despite market challenges.
• Share Repurchase Program: Altria's Board of Directors authorized a new $1.0 billion share repurchase program, effective through December 31, 2025. This program underscores management's confidence in the company's financial strength and its dedication to enhancing shareholder value.
• Dividends: Altria continued its strong track record of returning capital to shareholders, with a strong dividend yield, a testament to its consistent dividend policy.

3. Financial Health (Debt, cash, liquidity)

Altria maintains a robust financial position:

• Cash and Cash Equivalents: As of December 31, 2023, Altria held approximately $2.5 billion in cash and cash equivalents.
• Total Debt: The company reported total consolidated debt of approximately $28.5 billion.
• Revolving Credit Facility: Altria has access to a $3.0 billion revolving credit facility, available until October 2028, providing significant liquidity and financial flexibility.
• Debt Maturity Profile: Altria manages a diversified debt portfolio with various USD and Euro notes. Approximately $1.5 billion in USD and Euro notes will mature and be paid off in 2025. Altria plans to address this through a combination of cash flow and potential refinancing. Interest rates on its debt range from approximately 2.000% to 10.20%, with maturities extending as far as 2061.

4. Risk Factors (Key risks)

Investors should be aware of several significant risks:

• Customer Concentration: Approximately 35% of Altria's net revenues comes from its top three customers (major retailers). This concentration creates a risk if any of these key customers face financial difficulties, change purchasing strategies, or reduce their orders.
• Investments in Other Companies: Altria holds significant equity investments, which are subject to market and regulatory volatility:
  • AB InBev: Altria's investment in the global brewer AB InBev had a market value of approximately $13.5 billion as of year-end, compared to a carrying value of $10.0 billion. Its performance ties to the global beer market and AB InBev's operational results.
  • Cronos Group Inc.: The investment in the cannabis company Cronos Group Inc. has a carrying value of approximately $1.2 billion. This investment faces significant risk from the evolving and often uncertain regulatory landscape of the cannabis industry in the U.S. and internationally.
  • JUUL Labs, Inc.: Altria significantly wrote down its investment in JUUL Labs, Inc., which now has a current carrying value of approximately $250 million. This investment remains highly speculative, facing ongoing regulatory scrutiny from the FDA (including the status of its Premarket Tobacco Product Applications - PMTAs), extensive litigation, and a challenging market environment for e-cigarettes.
• Regulatory Environment: The tobacco and nicotine industry faces intense regulatory pressure. This includes potential federal nicotine caps, menthol bans, and ongoing FDA review of e-vapor products (PMTAs). State and local flavor bans for e-cigarettes also significantly threaten product sales and market access.

5. Competitive Position

Altria maintains a dominant position in traditional tobacco products while actively expanding in reduced-risk categories:

• Smokeable Products: Altria's Marlboro brand remains the leading cigarette brand in the U.S., with a significant market share. However, the segment's volumes decline due to public health initiatives and shifting consumer preferences.
• Oral Tobacco Products: Altria holds a strong leadership position in the moist snuff category with brands like Copenhagen and Skoal.
• E-Vapor: The NJOY acquisition significantly strengthens Altria's competitive stance in the e-vapor market. NJOY's FDA-authorized products provide a crucial advantage in a highly regulated and fragmented market, enabling Altria to compete against both established players and the rise of unauthorized disposable vape products. By exiting IQOS, Altria now focuses its reduced-risk product strategy primarily on e-vapor and oral nicotine pouches.

6. Future Outlook (Guidance, strategy)

Management's outlook for the upcoming fiscal year reflects a focus on strategic execution and shareholder returns:

• FY2024 Adjusted Diluted EPS Guidance: Altria anticipates adjusted diluted EPS for fiscal year 2024 to be in the range of $5.00 to $5.15, a growth range of -1.0% to 2.0% from the prior year. This reflects continued investment in reduced-risk products and ongoing market dynamics.
• Reduced-Risk Product Focus: The NJOY acquisition underscores Altria's long-term strategy to transition adult smokers to reduced-risk products. The company plans to invest in NJOY's growth, expand its market presence, and pursue further product innovations in this category.
• Capital Allocation: Altria remains committed to its balanced capital allocation strategy, prioritizing consistent dividend growth, strategic investments in reduced-risk products, and opportunistic share repurchases.
• ESG Initiatives: Altria continues to advance its environmental, social, and governance (ESG) initiatives, focusing on responsible product marketing, harm reduction, and sustainable operations, as these are increasingly important for long-term value creation and investor appeal.

7. Management Discussion and Analysis (MD&A) Highlights

This section provides management's perspective on the operating environment, key trends, and uncertainties impacting Altria's financial condition and results of operations. The industry continues to be shaped by evolving market trends and a dynamic regulatory landscape:

• Declining Combustible Volumes: The long-term trend of declining cigarette consumption in the U.S. persists, driven by public health campaigns and consumer shifts towards alternative nicotine products. Altria mitigates this through strategic pricing actions and cost management.
• Evolving Consumer Preferences: Adult nicotine consumers are clearly shifting towards reduced-risk products, including e-vapor and oral nicotine pouches. Altria's investment in NJOY directly addresses this trend.
• FDA Oversight: The FDA's rigorous Premarket Tobacco Product Application (PMTA) process continues to shape the e-vapor market, and only a limited number of products receive marketing authorization. NJOY's authorized products provide a competitive edge. The potential for federal flavor bans or stricter marketing regulations for e-vapor products remains a key concern.
• Potential Federal Regulations: The industry faces the ongoing threat of potential federal regulations such as nicotine content standards for combustible cigarettes and a federal ban on menthol cigarettes. These could significantly impact Altria's core smokeable products segment.