Altria reported second-quarter results on 30 July showing operating income in its smokeable-products segment — overwhelmingly cigarettes — at $2,942m, up $12m on a year earlier, an increase of 0.4%. The press release credited pricing and "higher refunds of taxes and duties paid on imported cigarettes", and left the second item unquantified. The quarterly report filed the same day does quantify it: those refunds contributed $27m in the quarter and $78m across the first half.
How large that looks depends on which profit line you use, and Altria publishes both. Against the reported $12m, the $27m is 2.25 times the whole increase — remove it from the arithmetic and the segment’s reported income sits about $15m below last year rather than above it. But the reported figure is held down by a $63m year-on-year swing in tobacco-and-health and other litigation items, which rose from $4m to $67m. On the adjusted line, which excludes them, the segment rose $71m and the refunds account for 38% of the increase. The honest version is that a customs refund is somewhere between a third and all of the improvement, depending on which of the company’s own two measures you take.
The mechanism is duty drawback, a long-standing customs provision refunding duties, taxes and fees paid on imported goods when offsetting quantities are subsequently exported. Altria describes it in its own risk factors. What has changed is the volume on the export leg: the earnings release shows contract-manufactured export cigarettes at 736 million sticks in the quarter against 475 million a year earlier, and 1,346 million for the half against 475 million. Consolidated excise taxes on products fell $57m in the quarter and $127m across the half; the smokeable segment’s own excise line fell $55m and $122m.
This is the second quarter running that the figure has appeared only in the filing. Altria’s first-quarter 10-Q, filed on 30 April, put the equivalent benefit at $51m, and $51m plus $27m is the $78m half-year figure. Neither press release carried a number. The company’s narrowed full-year guidance does say it "continues to reflect our expectation for a greater benefit from cigarette import and export activity in the second half of the year than in the first half", which is an unusual sentence to find in tobacco guidance and a clear signal the trade is being run deliberately.
Underneath it, the domestic picture is worse than the headline. Reported domestic cigarette volumes fell 3.2% in the quarter, and that number is a blend: premium volumes — Marlboro and the rest of the premium portfolio — fell 7.31%, while discount volumes rose 67.3%, backfilling 54% of the premium loss. Had discount volume merely held flat at last year’s level, the reported decline would have been 6.91% rather than 3.2%. Altria is not selling as many fewer cigarettes as the headline implies; it is selling meaningfully cheaper ones.
Neither observation is available from the press release, and neither appeared in the coverage of the quarter. Both are in the filing.