Jan 25 - Fitch Ratings has affirmed Altria's ratings as follows:
--Long-term Issuer Default Rating (IDR) at 'BBB+';
--Guaranteed bank credit facility at 'BBB+';
--Guaranteed senior unsecured debt at 'BBB+';
--Short-term IDR at 'F2';
--Commercial paper (CP) at 'F2.'
Philip Morris Capital Corp. (a wholly owned subsidiary of Altria)
--Long-term IDR at 'BBB+';
--Short-term IDR at 'F2';
--CP at 'F2'.
UST LLC (a wholly owned subsidiary of Altria)
--Senior unsecured debt at 'BBB+'.
The Rating Outlook is Stable. Altria had $13.9 billion of debt at Sept 30, 2012.
Superior Market Share Positions:
Altria Group, Inc.'s (Altria) ratings are supported by the company's commanding
market share positions in the U.S. tobacco industry. The company's Philip Morris
USA, Inc. (PM USA) subsidiary has held about 50% share of the total cigarette
market for several years while its Marlboro brand currently has an estimated
42.6% market share. Altria's U.S. Smokeless Tobacco Company (USSTC) has roughly
a 55% share of the smokeless market, driven by the two large brands of
Copenhagen and Skoal.
Substantial Cash Flow Generation:
Altria's operations consistently generate large operating cash flows. For the
LTM ended Sept. 30, 2012, the company generated $3.2 billion of cash from
operations, which was in line with Fitch's forecast. Altria's healthy operating
EBITDA margins exceeds 40% and drives its high operating cash flow to revenue
ratio. Fitch anticipates that pricing and cost savings from the company's
periodic rationalization of manufacturing, distribution and marketing foot print
will continue to support its margins.
Credit Metrics Meet Expectations:
Fitch estimates that total debt-to-EBITDA to be at approximately 2.0 times (x)
for 2012 which is in line with Altria's LTM ratio for the period ended Sept. 30,
2012. Leverage is up slightly over the past two years as debt levels increased
to finance the company's share repurchases and other items discussed in recent
Operating Performance/Debt levels and Cash Flow Utilization section below. Gross
interest coverage was 5.5x for the LTM period similar to the prior year end
period and FFO adjusted leverage was 3.4x. These credit measures are adequate
for rating given the industry factors (discussed below) and they are expected to
remain stable within the near-term due mainly to EBITDA growth, as debt levels
are expected to continuing rising at a moderate pace and any excess cash flow is
likely to be used for share repurchases.
Altria has ample internally generated liquidity which Fitch expects will be
maintained given the company's high levels of CFFO. External liquidity is
provided by the company's five-year revolving credit facility that expires June
2016. At Sept. 30, 2012 Altria had $2.2 billion of cash and full revolver
availability of $3.0 billion. Significantly bolstering Altria's liquidity is the
company's 27.1% share of SABMiller plc, one of the world's largest brewers,
currently valued at approximately $20 billion.
Dividends for the LTM period ended Sept. 30, 2012 was $3.4 billion. The
company's target dividend payout ratio of 80% is high, but typical for U.S.
tobacco firms. Altria's Board of Directors authorized an expansion of its share
repurchase program from $1.0 billion to $1.5 billion on October 23, 2012. The
company had $550 million remaining under the expanded program, which it expects
to complete by June 30, 2013. As of Sept. 30, 2012 Altria repurchased 31.4
million shares of its common stock under the program at an aggregate cost of
approximately $950 million. Net spending on share repurchases was $922 million
for the LTM period ending Sept 30.
Industry Factors Limit Ratings:
Altria's ratings are lower than those of companies with similar credit metrics,
largely due to industry factors of continued annual mid-single digits cigarette
volume declines; ongoing, albeit reduced, litigation risk; and regulatory risk.
Recent Operating Performance/Debt levels and Cash flow Utilization:
For the nine months ended Sept.30 total revenues increased 6.2% to $13.04
billion due mainly to Philip Morris Capital Corp., which while winding down its
operations incurred a pre-tax operating charge of $490 million in the prior year
period. The charge reduced revenue and operating income. Net revenues for
smokeable products increased 1.6% to $11.38 billion resulting from price
increases and greater market share, substantially offset by volume declines.
Smokeless products revenues increased 2.8 % to $1.16 billion. Total operating
income increased $776 million or 16.5% to $5.5 billion mainly due to due to
financial services lapping the prior year charge and improved profitability on
cigarettes due to the success of the company's cost saving programs.
Altria total debt was $13.8 billion at Sept. 30, 2012 up $1.68 billion from
$12.19 billion at Dec. 31, 2010. Altria's high dividend payout ratio coupled
with shares repurchases, pension contributions and tax payments for PMCC's
leverage lease transactions has resulted in incremental borrowing. Fitch does
not expect future material cash charges from Philip Morris Capital Corp. as the
company signed a closing agreement with the IRS that resolved the outstanding
issues. Furthermore pension contributions are not expected to result in
incremental borrowing in the near-term either. Nonetheless, Fitch anticipates
that debt levels will grow in line with operating earnings and cash flow growth.
GUIDANCE FOR FURTHER RATING ACTIONS
Future development that may individually or collectively, lead to a positive
--Deceleration of industry volume declines or volume growth;
--Continue moderation of litigation risk;
--Significant diversification, or
--Demonstrated commitment to more conservative financial policies related to
dividends and share repurchases.
Future development that may individually or collectively, lead to a negative
--Increased litigation risks similar to those experienced in early 2000s which
was marked by material adverse judgment(s), prompting renewed legal scrutiny in
--Significant increase of leverage due to (i) material declines in EBITDA
resulting from volume and/or margin contraction, possibly due to heightened
competition; (ii) alarge debt-financed acquisition without meaningful EBITDA and
cash flow contribution; (iii) a large debt-financed share repurchase moving
leverage beyond the mid-2.0x
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology