MO reported adjusted EPS of $1.31 in the second quarter, versus $1.25 in the second quarter of 2022, which equates to a 4% increase year over year. Basically all of the increase related to wholesaler inventory build, plus some financial benefit from lower shares and higher interest income.
Following the acquisition of NJOY in June, MO adjusted their estimates for the full year to include additional investment behind that & their other next generation products. Those adjusted estimates are for full year adjusted EPS of $4.89 to $5.03, or an increase of 1% to 4% over 2022. Given that, earnings for the second half of 2023 will likely be mostly flat year-over-year. Based on their statements when outlining their 5 year plans at the beginning of this year, I assume they will still hike their dividend by around 4-5% when they announce it next month.
Once again, operationally nothing much changed. In cigarettes, MO's volumes sold dropped by 10% during the quarter, versus an overall industry decline of 7.5%. All of the market share loss was to the deep discount segment of the market, which grew to 28.2% versus 26.4% in the previous year. Perhaps slightly positive, the deep discount segment was flat from the first quarter of 2023, which might signal a cap on its growth. In addition, MO took some market share in the premium segment, probably mostly due to dynamics in the menthol category due to the menthol flavor ban implemented in California since MO is underweighted in menthol.
In oral tobacco, the growth of the nicotine pouch segment at the loss of traditional moist tobacco products like Copenhagen & Skoal strongly continued. And while MO's brand "on!" continued to take some modest share (0.5 share points), it remains far behind PM's market leader brand Zyn which has maintained over 75% share of the modern oral category, despite "on!" being sold at a fairly steep discount in price to Zyn. Combined, MO's market share in the oral segment declined to 44.0% versus 46.8% in last years second quarter, as the volume Zyn is taking away from Copenhagen & Skoal far exceeds what "on!" in recapturing.
MO benefitted once again from double digit price increases on their remaining volume of cigarettes & oral tobacco products sold to keep their overall revenues mostly flat. However, as previously stated, that included some wholesaler inventory build, which is just a timing issue.
While it is impressive that MO has been able to increase prices as much as they have over the past 1-2 years, they have significantly widened the price gap between Marlboro and discount brands during that time. Whether that leads to more downtrading going forward remains to be seen. In addition, PM's relaunch of IQOS is now only 9 months away, which will further increase competition, this time from a premium product. Meanwhile, the strength of Zyn shows little sign of diminishing despite it being the premium product in modern oral.
Overall, MO remains in a difficult position and has to hope that its brand loyalty in remaining Marlboro & Copenhagen consumers will hold, at least for long enough to build viable premium competitors in next generation products.