Smoke signals

Americans may be smoking less and paying more in taxes to do it, but Richmond-based Marlboro manufacturer Altria Group Inc. announced last week a 15% rise over last year in first quarter net income. Despite lower sales and falling U.S. market share of Marlboro cigarettes, Altria still enjoyed profits because of lower costs and higher prices.

"Altria delivered solid financial results in the first quarter as our businesses navigated through high unemployment, low consumer confidence and a competitive business environment," said Michael E. Szymanczyk, Chairman and Chief Executive Officer of Altria.

Virginia's economy was historically dependent on the crop, although North Carolina and Kentucky now account for about two-thirds of U.S. production. According to the American Lung Association of Virginia, tobacco-related illnesses remain the leading cause of preventable death in the United States, claiming more than 440,000 lives annually, yet Virginia does not do enough to reduce smoking. "Each year more than 9,200 Virginians die from tobacco-related illnesses and secondhand smoke exposure. In addition, it costs the state's economy more than $4.7 billion annually in health care costs and lost productivity," wrote executive director Dennis Alexander in an editorial in the Roanoke times.

He called for the state to spend more money on smoking prevention and support programs to help smokers quit, along with a hike in the cigarette tax from 30 cents to $1.45 (the national average) per pack.

The U.S. Centers for Disease Control and Prevention estimates that the health costs and lost productivity caused by smoking total $10.47 per cigarette pack sold in the United States. Health care costs of smoking cost the U.S. economy $96 billion in 2009. In Virginia, 16.4% of the adult population (aged 18+ years)-over 976,000 individuals-are current cigarette smokers. Across all states, the prevalence of cigarette smoking among adults ranges from 9.3% to 26.5%. Virginia ranks 12th among states.

Altria, the owner of Philip Morris USA, earned 45 cents per share, up 6 cents from 2010, for a total of $937 million for the period ending on March 31st. The earnings matched or exceeded most analyst predictions, and Altria re-stated its expected earnings for 2011 of $2 to $2.06 per share.

The company sold 5.7 percent fewer Marlboro brand cigarettes and saw Marlboro's market share drop 0.5 points. Marlboro brand cigarettes made up 42.3 percent of cigarettes sold in the country. In a company statement, Altria indicated that it was difficult to compare profits to the previous year because of new product launches and the economic pressure on customers. Cheaper cigarette brands from rival companies such as Pall Mall from Reynolds American Inc. offer alternatives to cash-strapped customers.

Overall, the cigarette industry is shrinking due to tax increases, health risks, and smoking bans. On April 15th, Philip Morris USA, the nation's top cigarette seller, announced that it paid $3.5 billion to a group of U.S. states for healthcare costs linked to smoking. The payment was part of the 1998 Master Settlement Agreement.

Altria has brought several new Marlboro products onto the market that are sold at less than the average Marlboro price of $5.70 per pack. These new products, including special blends and menthol cigarettes, helped the company make up for some of the ground lost for lower overall Marlboro, Basic, Virginia Slim, and Parliament sales.

Declining cigarette sales have encouraged companies such as Altria to move towards cigarette alternatives, such as cigars, snuff, and chewing tobacco, to find future profit. Altria's smokeless tobacco brands made up 54.7% of the market, but the company's popular cigar brand, Black & Mild, saw revenue fall approximately 24 percent because of increased spending on promotion.

Altria drew media attention earlier this month when it revealed that it had given a pay package of more than $20.7 million to Szymanczyk for the 2010 fiscal year. The compensation was twice the amount he received in 2009 with increases in salary, performance-based bonuses, and value of stock awards. Szymancyk has been the Altria CEO since March 2008, and was previously the chairman and CEO of Philip Morris USA for six years.

Altria credits cost savings for the positive results of the quarter, and hopes to cut $110 million more in costs by the end of the year.

The Associated Press contributed to this report.

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