Altria Launching E-Cig Amid Softening Cigarette Demand

Altria Group Inc. MO, which reported softening first-quarter cigarette volumes, will enter the e-cigarette market later this year, a move to address a pocket of the tobacco market that is gaining heightened attention among consumers. Profitability grew 16% for the quarter, aided by higher pricing for cigarettes and smokeless products, as well as a credit tied to a landmark tobacco settlement. But Altria's decision to enter the e-cigarettes business is notable as some tobacco executives this week suggested cigarette volumes were being cannibalized by rising interest in e-cigarettes. Altria, which hadn't yet addressed the category, said a subsidiary designed to develop new products will introduce e-cigarettes in the second half of the year. Altria is trailing smaller peers Lorillard Inc. LO and Reynolds American Inc. RAI, which have already began to address the relatively new market. E-cigarettes, which began to appear in the U.S. market in 2006, turn heated nicotine-laced liquid into a vapor mist, and come in several flavors. In the traditional cigarettes business, Altria has been gaining market share the past several quarters, in part driven by promotions that have lowered the price for some of its products. The maker of Marlboro, L&M and other cigarettes expanded on those gains early in 2013, with total cigarette market share climbing to its highest level in four years. In the first quarter, Altria's total cigarette volume dropped 5.2%, hurt by one less shipping day though retail share gained. The overall category's volume fell at estimated 6.2%. Marlboro's shipments were down 5.5% while discount brands grew 5.8%. Altria's overall cigarette market share grew to 50.5% from 50%, the fifth consecutive year-over-year increase. Tobacco companies face a difficult operating environment as cigarette volumes have been declining for years. A weak economy and high unemployment have continued to pressure consumers' disposable income. But the declines in overall cigarette volumes in the latest quarter was more bruising than historical trends, as consumers were stung by an increase in payroll taxes, while also seeing higher gas prices at the pump. Overall, Altria reported a profit of $1.39 billion, or 69 cents a share, up from $1.2 billion, or 59 cents a share, a year earlier. Excluding items such as a credit tied to a deal to recoup some payments made under the 1998 Master Settlement Agreement, per-share earnings rose to 54 cents from 49 cents. Revenue, excluding excise taxes, dropped 0.5% to $3.97 billion. Analysts surveyed by Thomson Reuters expected a profit of 53 cents on revenue of $4.04 billion. Altria's smokeless products saw continued strength, with volume rising 3.4% as growth for Copenhagen offset declines for Skoal and other brands in the portfolio. The company spent about $57 million to repurchase 1.7 million shares during the quarter, completing a $1.5 billion buyback program. On Wednesday, Altria's board authorized a new $300 million repurchase program that the company expects to complete by the end of the year.