Altria Group Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2022

There are 10 speakers on the call.

Operator

Good day, and welcome to the Altria Group 2022 Second Quarter and First Half Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by Altria's management and a question and answer session. Representatives of the investment community and media on the call will be able to ask questions following the conclusion of the prepared remarks. I would now like to turn the call over to Mac Livingston, Vice President of Investor Relations for Altria Client Services. Please go ahead, sir.

Speaker 1

Thanks, Ashley. Good morning and thank you for joining us. This morning, Billy Gifford, Altria's CEO and Sal Mancuso, our CFO, We'll discuss Altria's 2nd quarter and first half business results. Earlier today, we issued a press release providing our results. The release, presentation, quarterly metrics and our latest corporate responsibility reports are all available at altria.com.

Speaker 1

During our call today, unless otherwise stated, we're comparing results to the same period in 2021. Our remarks contain forward looking and cautionary statements and projections of future results. Please review the forward looking and cautionary statements section Future dividend payments and share repurchases remain subject to the discretion of Altria's Board. Altria reports its financial results in accordance with U. S.

Speaker 1

Generally Accepted Accounting Principles. Today's call will contain various operating results on both a reported and adjusted basis. Adjusted results exclude special items that affect comparisons with reported results. Descriptions of these non GAAP financial measures and reconciliations are included in today's earnings release and on our website ataltria.com. Finally, All references in today's remarks to tobacco consumers or consumers within a specific tobacco category or segment Refer to existing adult tobacco consumers 21 years of age or older.

Speaker 1

With that, I'll turn the call over to Billy. Thanks, Mac. Good morning and thank you for joining us.

Speaker 2

Altria's tobacco businesses performed well in a challenging macroeconomic environment for the first half of the year. The Smokeable Products segment delivered solid operating company's income growth behind the resilience of Marlboro Our moist smokeless tobacco brands continued to drive profitability. We also continued to make progress toward our vision Through the investments we laid out in January, which included supporting the expansion of ON, we are encouraged by ON's retail momentum and significant share growth since achieving unconstrained capacity last summer. We believe this is a pivotal point in the U. S.

Speaker 2

Tobacco industry. The FDA has the opportunity to create a mature, Regulated marketplace of smoke free products that can successfully realize tobacco harm reduction and improve the lives of millions of smokers. We share the FDA's goal to transition smokers away from cigarettes, But we continue to believe that harm reduction, not prohibition, is the best path forward. My remarks this morning will focus on 3 topics. Our core tobacco businesses, including the macroeconomic backdrop and potential combustible tobacco product regulation.

Speaker 2

The smoke free opportunity in the U. S. And our smoke free product portfolio and our continued confidence in our vision. I'll then turn it over to Sal, who will provide further detail on our business and financial results. Let's begin with a review of the macroeconomic backdrop and its impact on U.

Speaker 2

S. Tobacco consumers. In the Q2, rising gas prices and inflation continued to pressure tobacco consumers disposable income, resulting in volume declines across the tobacco space. However, we believe that tobacco consumers adapted their Some of the tactics used by consumers to manage their spending included only partially filling their gas tank and shifting their tobacco purchases from multipack towards single pack purchases, particularly among discount smokers. We also saw signs of continued brand loyalty in the tobacco space.

Speaker 2

In May, we conducted research to understand how tobacco consumers were managing their spending in several categories, including tobacco, alcohol, groceries and Household Items. Our research indicates that tobacco consumers were more likely to stick to their preferred brand regardless of price in the tobacco category compared to other categories. Additionally, tobacco consumers saw price relief in other categories before doing so within the tobacco category. We believe that this prioritization is reflected in the sequential stability of Marlboro Retail Share despite greater economic pressures on consumers. We believe inflation and the rising gas prices increased 5.2% in the 2nd quarter compared to an average of 8.6% increase in CPI.

Speaker 2

And for some occupations, including the service industry, wage growth outpaced inflation. We continue to monitor tobacco consumer behaviors and changes in marketplace conditions, such as the declining gas price that we have observed in recent weeks, and we will continue to provide our insights as the year progresses. These macroeconomic factors contributed to accelerated cigarette volume declines in the second quarter and first half, which Sal will discuss in his remarks. In combustible regulatory news, The FDA proposed rules that would ban mint on cigarettes and characterizing flavors in cigars. The FDA has already received over 200,000 comments on the proposals and we expect to submit our comments by the August 2 deadline.

Speaker 2

The FDA will need to address all of these comments before advancing to the next step in the rulemaking process. As our comments will make clear, we believe that there are compelling reasons for the FDA to reconsider its proposed rules relating to menthol and cigars. Additionally, the Biden administration announced plans for future FDA rulemaking to develop a product standard that would set a maximum nicotine level for cigarettes. If and when the FDA proceeds with rulemaking, We expect to be fully engaged in the multi year process. We believe harm reduction is the best approach toward reducing smoking and improving public health.

Speaker 2

And according to a nationwide survey, others agree. Based on our research, a majority of the surveyed public policy professionals, smokers and general population adults support the concept of tobacco harm reduction and prefer this policy approach over tobacco prohibition. But to achieve harm reduction, we believe manufacturers must develop and the FDA must authorize an array of potentially reduced harm products that can appeal to and transition smokers. This brings me to my next topic, Today, over 20,000,000 U. S.

Speaker 2

Smokers seek less harmful alternatives to cigarettes. Our strategy is to deliver a compelling portfolio of smoke free products that offers a range of satisfying product choices for smokers and to responsibly lead them to these alternatives. Our approach spans 3 of the most promising smoke free categories with the potential In oral tobacco, We're encouraged by the growth of the novel oil products, which comprise more than a 5th of total industry oral tobacco volume in the 2nd quarter. The category grew 6.8 share points year over year with ON representing more than 40% of this growth. In the Q2, ON reported shipment volume increased nearly 60% versus the year ago period And on retail share of oral tobacco increased 0.8th sequentially reaching 4.9 share points in the 2nd quarter.

Speaker 2

This represents a growth rate of almost 150% year over year. These strong results were driven by increased adoption of Elix, increased brand awareness and higher levels of investment. Helix achieved unconstrained on manufacturing for the current U. S. Market in the Q2 of 2021.

Speaker 2

Over the 4 quarters since then, Helix enhanced the retail visibility and awareness of 1, leading to an over 70% increase in consumer awareness, tripled on repurchases and continue to increase trial using transition marketing and data driven strategies and grew on retail share to be a top 5 U. S. Oral tobacco brand and solidified its position as the 2nd largest oral nicotine pouch brand in each region of the U. S. More recently, Helix launched the new Carry On Equity campaign, which encourages smokers to make progress in their transition journey.

Speaker 2

The campaign highlights that by converting to ON, Looking ahead, Helix expects to use its understanding of the smoker journey, the smoke free products to drive repeat purchases and adoption among smokers. We are excited about the performance of OARN and the opportunity for future growth. I'll now move to the e vapor category, which we continue to believe will be significantly influenced by regulatory actions. In the 2nd quarter, total estimated e vapor volumes declined 2% versus a year ago and 7% sequentially as a result of decreased volume in the vape store channel, a reversal of the trend we observed in the Q1. Currently, slightly over half of the category's volume is comprised of pod based products such as Juul and VuSulto.

Speaker 2

Within e vapor, Disposables represent the fastest growth segment since January 2020, which corresponds to when the FDA Issued in guidance, banning flavors only in pod based de vapor products. Many of these disposable brands, including Puff Bar, contain synthetic nicotine. Recent legislation, which we strongly supported, clarified the FDA's authority to regulate tobacco products containing nicotine from any source. Manufacturers of synthetic nicotine products were required to obtain FDA authorization by July 13 to continue legally marketing their products. So far, no synthetic nicotine product has been granted authorization and the FDA has committed to pursuing compliance and enforcement action against companies found to be marketing, selling or distributing illegal synthetic nicotine products.

Speaker 2

Thus far, the FDA has authorized only 23 total e vapor applications, accounting for only 8 products and approximately 1% of estimated e vapor category volume. Further, the FDA has only authorized tobacco flavored e vapor products, most of which were for cigalite style products, which we believe generally do not meet smoker expectations or deliver a satisfying product experience. Given the limited number of authorizations today, we believe that the e vapor category is Still in its early phases, but with the support of reasonable regulations, we believe it could play an important role in harm reduction. Moving forward, we hope to see timely, science and evidence based determinations on pending PMTA applications and further enforcement on non compliant manufacturers. In the second quarter, JUUL Products received marketing denial orders Or MDOs, earlier this month, the FDA administratively stayed the JUUL MDOs, citing unique scientific issues that warrant additional FDA review.

Speaker 2

The administrative stay temporarily suspends the MDOs during the additional review, but does not rescind them. Regarding our investment in JUUL, we recorded for the 2nd quarter a non cash Pretax unrealized loss of $1,200,000,000 as a result of a decrease in the estimated fair value of our investment. The decrease in fair value was driven by several factors, including uncertainty created by the FDA's action related to JUUL and uncertainty relating to Juul's ability to maintain adequate liquidity. As of June 30, Our estimated valuation is $450,000,000 which reflects a range of regulatory, liquidity and market outcomes. Under the terms of our relationship agreement with JUUL, we have the option to be released from our non compete obligations under several conditions, Including the fair value of our investments, if the fair value of our investment is not more than 10% of the initial carrying value of $12,800,000,000 However, if we elect to be released from our non compete obligations, we would lose many of our investment rights, including our consent rights, our preemptive rights and most of our Board designation rights.

Speaker 2

At this time, we continue to believe that these investment rights are beneficial to us. Therefore, We have not opted to be released from our non compete obligations at this time, but retain the option to do so in the future In accordance with our agreement with JUUL, we continue to believe that e vapor products including JUUL can play an important role in tobacco harm reduction. In heated tobacco, our teams remain in discussions with PMI related to IQOS. We continue to believe in the potential of the heated tobacco category in the U. S.

Speaker 2

Our plans remain on track to finalize designs by year end for 2 product platforms within heated and oil tobacco and then begin regulatory preparations. Our journey towards responsibly transition adult smokers to a smoke free future continues. And while we may face near term challenges, we believe that the tobacco harm reduction opportunity remains in front of us. As the leader in the U. S.

Speaker 2

Tobacco industry, we have continued confidence in our ability to achieve our vision for several reasons, including our robust manufacturing, sales and distribution system and understanding of U. S. Tobacco consumers Our science based approach to tobacco harm reduction, which we believe is aligned with tobacco consumers, society and the FDA. Our portfolio of products and investments across the most promising milk free categories and our significant cash flows and flexible balance sheet, which support our investments and shareholder returns. With these in mind and the resiliency of our organization, we believe we can lead the U.

Speaker 2

S. In moving beyond smoking. I'll now turn it over to Sal to provide more detail on the business environment and our results.

Speaker 3

Thanks, Billy. Altria grew adjusted diluted earnings per share by 2.4% in 2nd quarter and by 3.5% in the first half across the challenging macroeconomic environment that Billy described. The Smokeable Products segment continued to deliver on its strategy of maximizing profitability in combustibles, while appropriately balancing investments in Marlboro with funding the growth of smoke free products. The segment grew its adjusted operating company's income by 0.6% in the 2nd quarter and by 2.9% in the first half. Adjusted OCI margins expanded by 0.7 percentage points to 59.1 percent for the 2nd quarter and by 1.3 percentage points to 59.3 percent for the first half.

Speaker 3

This performance was supported by robust net price realization of 11.5% in the 2nd quarter and 10.4% for the first half. I'll remind you that manufacturer price realization does not reflect retail price change for smokers. For example, Marlboro net retail PAP price increased 5.6% in the 2nd quarter compared to last year. Smokeable Products segment reported domestic cigarette volumes declined by 11.1% in the 2nd quarter and 8.9% in the first half, primarily due to changes in consumer purchasing behavior as a result of increased gas prices and inflation. When adjusted for trade inventory movements and other factors, 2nd quarter and first half domestic cigarette volumes declined by an estimated 10% and 9%, respectively.

Speaker 3

At the industry level, we estimate that adjusted domestic Cigarette volumes declined by 8.5% in the 2nd quarter and by 7.5% in the first half. As Billy mentioned, Marlboro displayed resiliency during a period of continued uncertainty for consumers. In the Q2, Marlboro's retail share of the cigarette category grew a 10th sequentially to 42.7% while declining 0.4% versus the year ago period. Additionally, Marlboro grew its share within the premium segment to 58.1%, an increase of 0.3% sequentially and 0.5% versus a year ago. Moving to the total discount segment.

Speaker 3

Total share was flat sequentially even as gas prices rose significantly From the first to second quarter, discount increased 1.3 percentage points year over year to 26.4% as we lapped a period when the discount segment contracted from smokers having higher disposable income. Additionally, we observed increased churn between the branded and deep discount segments as a result of a deep discount manufacturer's Volume decreased by 5% in the 2nd quarter due to macroeconomic pressures on consumer disposable income, trade inventory movements and other factors. However, Middleton continued to provide a strong contribution to And adjusted OCI margins contracted in the 2nd quarter and first half due to several factors, including Declines in MST volumes, increased investments behind ON and unfavorable mix. We remain pleased with the strong overall margins for the segment as we made progress with ON. At the industry level, total oral tobacco volume declined 0.5% over the past 6 months.

Speaker 3

We continue to observe steady growth from the oral nicotine pouch category, but this has been offset by declining MST volumes due to the challenging macroeconomic environment and its effect on consumer behavior, consumer movement to oral nicotine pouches and other factors. Total segment reported shipment volume decreased by 4.4% for the 2nd quarter and by 3.2% for the first half. The segment's volume decline was driven by declines in MST volumes, partially offset by the growth of ON. When adjusted for trade inventory movements, segment volume declined by an estimated 5% for the 2nd quarter and 1% for the first half. The total Oral Tobacco Products segment's Retail share for the 2nd quarter contracted 0.2% sequentially and 1 share point versus the prior year to 46.7 percent.

Speaker 3

Copenhagen is celebrating its 200th anniversary this year. We are extremely proud of Copenhagen's long history and the fantastic employees who have supported the brand over the years. To them, we say thank you. After 200 years, Copenhagen remains the number one dip brand because of your hard work, Dedication and passion. To honor this impressive milestone, the team introduced Cope Rewards, The first and only national rewards program for an MST brand.

Speaker 3

Under the program, Dippers can earn points by entering codes from their Copenhagen cans and can redeem them for coupons or rewards. We're excited about Cote Rewards and its potential contributions to Copenhagen's sustained leadership in MST. Turning to our investment in ABI, we recorded $124,000,000 of adjusted equity earnings in the 2nd quarter. This was an increase of approximately 9.7% from the year ago period and represent Altria's share of ABI's Q1 We remain committed to creating long term shareholder value through the pursuit of our vision and our focus on significant capital returns. We demonstrated this commitment in the first half by acquiring intellectual property and other assets for a multi substrate heated capsule technology from POTA, Paying approximately $3,300,000,000 in dividends and repurchasing 21,400,000 shares, totaling $1,100,000,000 We have approximately $750,000,000 remaining under the currently authorized $3,500,000,000 share repurchase program, which we expect to complete by the end of this year.

Speaker 3

Our balance sheet remains strong and as of the end of the second quarter, our debt to EBITDA ratio was 2.3 times. In August, we expect to retire $1,100,000,000 of notes coming due with available cash. And lastly, our financial plans for the year remain on track and we reaffirm our guidance to deliver 2022 Full year adjusted diluted EPS in the range of $4.79 to $4.93 This range represents an adjusted diluted EPS growth rate of 4% to 7% from a $4.61 base

Speaker 2

in 2021. With that, we will

Speaker 3

wrap up and Billy and I will be happy to take your questions. While the calls are being compiled, I'll remind you that today's earnings release and our non GAAP reconciliations are available on altria.com. We have also posted our usual quarterly metrics, which include pricing, inventory and other items. Let's open the question and answer period. Operator, do we have any questions?

Operator

At this time, investors, analysts and media representatives are now invited to participate in the question and answer session. We will take questions from our investment community first. Our first question comes from Chris Growe with Stifel. Please go ahead. Your line is open.

Speaker 4

Thank you. Good morning.

Speaker 2

Good morning, Chris.

Speaker 4

Good morning. Billy, I have a question for you and you made a good point about it's clear we're at a very pivotal moment for category. I was hoping to get just some better perspective from you on how you're investing today to be able to internally develop RRP, reduced risk products. You've got some uncertainty around your positions in JUUL and IQOS and there's risk those are no longer in your portfolio, certainly just a risk at But I guess I just want to get a sense of what you're doing internally and you talked about having a product ready this year at the end of this year. And then to what degree maybe M and A could

Speaker 2

Thanks for the question, Chris. I think when you think about where we're investing, Certainly, we invested in our innovation process. We have the internal development going on and I've spoken previously about Changing that innovation process so that it's laser focused on the consumer, it monitors the marketplace, but I think before we were I would characterize as the most chasing the market Sitting side by side with the consumer. And so there's a lot of consumer interaction almost to the point of co developing with the consumer in those categories that we can develop in. To your point, we can't develop per agreement with Juul in the e vapor category, but it's something we continue to monitor Understand consumer satisfactions with the various products in the marketplace.

Speaker 2

We monitor The entire globe as far as alternative products, to both influence how we think about internal development, But looking for products that could be emerging in the other markets as well.

Speaker 3

And so would M and A be

Speaker 4

an important contributor you think going forward For Altria's position in this category?

Speaker 2

It certainly won't be off the table, Chris. But I think for the investments we're making in our internal development, We feel good about the pipe bottle products that we have.

Speaker 4

Okay. And I had just one other question in relation to pricing in the cigarette category. It's been larger than expected and it's occurred sooner than I expected at least this year. And I guess in this environment where there's obviously More burdensome kind of macroeconomic factor that's weighing on your volume. Are you seeing a greater shift to some of the lower priced or more heavily promoted marble varieties?

Speaker 4

And do you see a need to have to increase promotional investments in light of the heavy pricing coming through in this environment?

Speaker 2

Yes, Chris, it's a good question and it's something we monitor. But I think when you look at the sequential performance of Marlboro and even the discount category, you saw sequential Mobility, mobile actually grew a 10th and the discount category stayed flat. So when you think about that, the changes that were experienced Q1 to Q2, From a standpoint of the tools that we put in place with Advanced Analytics, we feel good about the position. Sally raised an important point. When you think about the impact to the consumer and you think about industry wide, call it a 5% to 6% price increase, that's well below the inflation And you saw the results in their remarks of the where we went to the consumer and talked about How they think about the tobacco categories and other categories and you see they continue to prioritize the tobacco category at the top of their list.

Speaker 2

And I think that's telling. And you saw we get a lot of questions about I think you have to step back and think Longer term on this, if you think about Marlboro share, we're right where we were pre pandemic. Certainly during the pandemic, as they We received additional funds, whether that be from government or unemployment or things of that nature. It reinforced that Marvel is the aspirational brand. So Marvel benefited during that period.

Speaker 2

Certainly, we've given a little bit of that share back and feel satisfied with where Marlboro is. We've really the teams in Advanced Analytics as well as the Marlboro team

Operator

We'll take our next question from Pamela Kaufman with Morgan Stanley. Please go ahead. Your line is open. Hi, good morning.

Speaker 2

Hi, Pamela.

Speaker 5

So industry cigarette volumes have weakened considerably during the Q2. You highlighted the headwinds Spacing smokers and how they're adjusting their purchasing behavior. I guess, how are you thinking about the outlook for cigarette volumes over the remainder of the year. And then related to that, how much more pricing do you think Consumers can tolerate just given so far we really haven't seen a meaningful acceleration in trade down to the discount segment. It's been consistent but over the last couple of quarters.

Speaker 5

Do you see an accelerated risk of Trade down within the category?

Speaker 2

Yes. Let me see if I can unpack that a little bit, Pamela, and if I miss anything, please follow-up. I think when you think about the Change for our consumer, you see that they make short term adjustments and then they adapt to it through time. I think certainly through the first half And we saw a little bit of a downshift in gas prices as we entered the Q3. I think we've seen a high correlation in gas price Just because our consumers usually filling up their vehicle and then going in and making those purchases.

Speaker 2

But again, I think the research that we did is telling that the consumer is adjusting those behaviors To be able to prioritize their tobacco choices in the mostly in the C store or gas stores. I think from a standpoint of pricing and Pamela we've shared with This with you before, if you look at minutes worked in the U. S. And benchmark that around with other countries around the world that have mature tobacco categories, When you look at that, you still see that the U. S.

Speaker 2

Is at the low end of that scale. So certainly, we feel like there's room to price, but that's Something that we monitor, you remember that the factors that we think about when pricing is the strength of the brand, Certainly, corporate objectives play a part in that. But then we think about the economic health of the consumer and what those competitive activities do. And I think it's important to mention here again the tools that we put in place. We put out the price gap.

Speaker 2

We put out kind of national metrics. But with the advanced analytics, we're able to use those tools and be very specific. So it could be different in Cleveland, Ohio than in Dallas, Texas, because those tools allow us to adapt The retail promotions we put in the marketplace, depending on what the individual consumers are feeling in that local area.

Speaker 5

Thanks. That's helpful. And definitely, I just wanted to ask about how you're thinking about the implications Your relationship with Philip Morris in the heat not burn category given their planned acquisition of Swedish Match And how are you preparing for changes in the competitive landscape in the U. S?

Speaker 2

Well, Pamela, you know this as well as I do that it's always been a competitive marketplace. We've always had major players. Certainly, this brings a new major player, Marketplace, we've always had major players. Certainly, this brings a new major player to the marketplace, but we feel like we have the tools in place. I don't want to go much further than that for competitive reasons.

Speaker 2

I think from a standpoint of heat not burn, I shared in my remarks that we're continuing discussions with them about IQOS.

Speaker 5

Thank you.

Speaker 2

Thank you.

Operator

We'll take our next question from Azar Vivien with Cowen. Please go ahead. Your line is open.

Speaker 6

Hi, good morning.

Speaker 2

Good morning, Vivien.

Speaker 6

I wanted to touch on Billy. So your commentary around the IMPROVE trial Through the expanded Helix manufacturing capacity was interesting. I was curious if you could just expand and touch on repeat and how you're measuring that given promotional intensity in the category? Thank you.

Speaker 2

Yes. Vivien, it's a great question. I think when you think about on, our research teams are really looking at repeat And we want to have increases in both. If you think about repeat purchases, we're very pleased with where we're at. Certainly to your point, as we're investing, you have those repeat purchases that take place and you want to see the concreteness of that and we feel very Pleased and enjoy the repeat purchases that we have.

Speaker 2

But we felt like there was still opportunity to drive awareness and you've seen the increase in awareness we've been able to drive. And it's specific to the adult cigarette consumer. The product is very satisfying to the adult cigarette consumer and we feel like there's still opportunity for trial there.

Speaker 6

Understood. Thank you. And then my other question is just on the industry outlook. I know you guys have shied away from offering industry volume guidance for a while now and I fully appreciate why. But if 12 months against a very challenging macro backdrop and that does account for it in the table that you disclosed.

Speaker 6

I'm just Curious though, has your thinking around the underlying macro drivers changed at all?

Speaker 2

It has not, Vivien. When you think about it and you can take those quarters that we provide and stretch them back and you thought you saw macroeconomic was a benefit Not that many quarters ago. So you certainly see the swing. It's no different than the swings we see through history. You have the macroeconomic can be a benefit at times.

Speaker 2

We saw gas prices in 2015 were a huge benefit. And so I think the only thing I would point out is we're seeing a higher correlation with gas prices And purchasing behavior. That would be the only because historically we tried to correlate gas prices to it And they were moving nickels and dimes at a time. I think you're seeing faster swings in gas prices, so there's a higher correlation to consumer behavior as they adapt to the short term nature of those changes.

Speaker 6

Understood. That's helpful. Thank you so much.

Speaker 2

Thank you.

Operator

And we'll take our next question from Bonnie Herzog with Goldman Sachs. Please go ahead. Your line is open.

Speaker 2

All right.

Speaker 7

Thank you. Good morning, everyone.

Speaker 2

Good morning,

Speaker 6

Bonnie. I just have

Speaker 7

a question on your guidance. You maintain your full year mid single digit EPS growth guidance, but That does imply the second half EPS growth will need to accelerate versus the first half to hit the midpoint of your full year guide. So just want to hear from What gives you the confidence this is going to happen, especially during an economic slowdown? I mean, are your expectations that this will be driven From greater net price realization, assuming volumes remain pretty pressured or decelerate further, are there any expected cost savings that hoping to realize in the second half that you could share with us. And then just finally, how do we think about stepped up investments that you might be making towards your smoke FreeVision, is that something that's factored into your guidance?

Speaker 3

Yes. So, Bonnie, first, thank you for the question and good morning. I'll take you through how we think about guidance. So throughout the year, we have communicated that we expected the second half to really drive the growth of our EPS on a year over year basis. And just to remind you of a couple of factors that we are seeing in the back half of the year.

Speaker 3

One is, we begin to lap Quarters where we had unconstrained manufacturing in the nicotine pouch category. Also in the 4th quarter, we're For the first time going to be lapping a quarter without wine income, right? That will happen in the Q4. And then In the back half of the year, as inflation accelerated and we adjusted our MSA inflation assumptions, you So there's some comparative factors that Are part of the first half versus second half EPS growth. As far as investments, Spending isn't linear necessarily throughout the year, especially when you are making investments in infrastructure and things like that.

Speaker 3

So I definitely wouldn't look at 1 quarter spending when it comes to that and read into it. It is something that ebbs and flows throughout the year.

Speaker 7

All right. Thank you. And then I did just want to ask about the

Speaker 6

I guess

Speaker 7

the uncertainty around your smoke free future given everything going on from JUUL to Philip Morris entering in the U. S. Via I guess the dispute you have with Philip Morris as it relates to IQOS, this continues to be one of the key concerns for investors. I know you've touched on this, but any more color you can provide or share with us as to your goal to kind of Hit the smoke free future, transform your business in the next, I guess, decade would be helpful. I mean, I know with your Agreement with JUUL, now that the fair value is below the agreement, I think you have the ability to compete in the e vapor market.

Speaker 7

So is that an option you're And then just maybe color, a little more color on the timing as it relates to your heat not burn. You mentioned it's And final designs by the end of the year and then you're going to begin regulatory preparations. But how long before you will have a product that you can Bring to the market, do you think? Is that 2 years out, 3 years out? Just trying to get a sense of some parameters as to how you're going to Achieve your goal.

Speaker 7

Thank you.

Speaker 2

Yes. Thanks for the question, Bonnie. I think it's really important to step back and I said it in my remarks, but let me add some color to it. The entire harm reduction opportunities in front of us in the U. S.

Speaker 2

And let me explain why I say that. You remember in my remarks, I talked about the authorizations that Taking place in e vapor thus far and they represent 1% of the e vapor category volume. So there's still 99% of authorizations That could go either way. And so that category will be in a bit of transition while we're waiting for the FDA to make those authorizations And then the outcome of those authorizations. If you think about novel oral, yes, we're making progress and competitors are making progress, but we're still waiting for FDA authorizations in that category.

Speaker 2

And so while we're making progress, there will be decisions from the FDA regarding that category. And then keep that burn, while it's been gaining momentum internationally, it's non existent in the U. S. And so that non existent, so those are the 3 major growth categories. That's why I keep saying I just wanted to add some color to that the entire Harm Reduction opportunities in front of us.

Speaker 2

You're right to mention that we have development underway in 2 of those categories. We feel good about the pipeline. I know You would love to see those products and I would love to show them to you and we will at the appropriate time. But we feel good about that, as I mentioned earlier, the co development with the I think with e vapor, the color I would add there is and I mentioned it earlier, We've always monitored the marketplace to understand consumer satisfaction with the various products in the marketplace, both in the U. S.

Speaker 2

And outside of the U. S. Additionally, with this quarter with us going below, you're right, we have the option to get out of the non compete, If we so elect to do so. And we really feel like in the process with the stay from the FDA and that decision still looming, As well as the rights that I mentioned in my remarks, we believe are beneficial to us at this point in the process, but we'll continue to really gauge what our

Operator

And we'll take our next question from Priya Arougouta with Barclays. Please go ahead. Your line is open.

Speaker 6

Hi, this is Pooja on behalf of Priya. And my question is, so based on your comments indicating that you plan to repay your

Speaker 2

upcoming maturity with available cash, how

Speaker 6

are you thinking about with available cash. How are you thinking about any subsequent need to access the market for refinancing? And I also have a follow-up after that.

Speaker 3

Sure, and thank you for the question. I'm really not going to signal future capital allocation In those decisions, including marketplace dynamics, we manage our balance sheet Very carefully, we want to have a strong balance sheet. We want to continue to have investment grade credit rating. So when we think about Capital allocation, we take a balanced approach and we've made the decision in August to use available cash to retire That debt, but future debt maturity towers, we will analyze the marketplace at the time and make the appropriate decision.

Speaker 6

Okay. That makes sense. Thank you. And as a quick follow-up, where should we sort of

Speaker 3

Yes. Look, we are very fortunate in that we have operating companies that generate a significant amount of growth in cash. In a typical year, after paying our dividend and making the necessary investments, We traditionally have had, let's call it $1,000,000,000 in excess cash and at the time we make various decisions. There are times where we've I've gone to the Board and asked for a share buyback program. There are times where we've done some liability management We manage our maturity towers going forward and strengthen the balance sheet.

Speaker 3

And there were times where we've made some investments such as the investment we made for the POTA Technology recently. So that's how we think about cash going forward. But again, our operating companies do a

Operator

And our next question will come from Gaurav Jain with Barclays. Please go ahead. Your line is open.

Speaker 8

Billy, good morning, Sal. Couple of questions from my side. So look, we have had some discussion around the harm reduction opportunity in front of us and how it is very early. But if we really look where harm reduction is really developing, it is all international because it's very hard to introduce new products in the U. S.

Speaker 8

Market Because of the PMTA process, do you think that to really explore the harm reduction opportunity, you need to go international, Much like Philip Morris' entering U. S.

Speaker 2

Yes. To your point, and I appreciate You're recognizing that the PMTA process and the entire home reduction opportunities in front of us in the U. S, It's something that we consider on a regular basis of how to get early consumer feedback outside of research in a live marketplace. And thus far, we've opted to go the route we are, which is with consumer research, but it's something that we consider on a regular basis.

Speaker 8

Sure. And just also a follow-up on the questions around JUUL and potential end of exclusivity. And you also referenced the synthetic nicotine market and some of these companies have applied for PMTAs and can potentially get PMTAs. So how do you think of synthetic nicotine as an ingredient? Like is that a market you would like to And if some of the companies can get PMTAs, that's an area you would like to enter?

Speaker 2

Yes. Certainly, we were pleased that with the Support that took place that synthetic nicotine is now under FDA authority. We believe in the process as As far as the FDA being able to assess the science and evidence, again, we watch all products that are in the marketplace, both in the U. S. And internationally To understand how the consumer is interacting with them, what benefits they receive from them as far as Satisfaction, enjoyment, the brand itself, and so it's something that stays on our radar.

Speaker 8

Okay. Thanks a lot.

Operator

We'll go Jennifer Maloney with Wall Street Journal. Please go ahead. Your line is open.

Speaker 9

Good morning. I wanted to follow-up on your statement, Billy, that M and A is not off the table for reduced risk products and I wanted to ask specifically about the e vapor category. Would you be open to the possibility of acquiring an e cigarette brand, for example, that already has FDA authorization?

Speaker 2

Yes. While I don't speak to M and A in any regards, As I mentioned, look, we've always been monitoring the marketplace in the e vapor space. We want to make sure we understand consumers' interactions with the various brands in the marketplace, Whether they like those brands, whether they like the product satisfaction that those products give them, Now that we've written down this quarter below 10%, it affords us the opportunity to really explore those opportunities and make different decisions If we so choose. At this point in the process, we've chosen not to make any different decisions. We believe that where it's at in the process, as I mentioned earlier, With the FDA stay and relooking through the review process of the applications, as well as forfeiting some of our rights that we have as part of the agreement, We think those are beneficial and we think as we stated the right decision currently is to stay under the non compete.

Operator

For your smoke free future

Speaker 9

goals, do you expect or plan to Focus on one particular category like is modern oral going to be the focus of your efforts there? Or do you hope to play in all of the reduced risk category?

Speaker 2

Yes. We highlight that we see 3 categories right now as the growth potential in the U. S. That's the heat not burn category, the e vapor category and the novel oils. Certainly, they will be shaped by regulatory decisions, Federal and legislative decisions on excise taxes and future innovation in those categories from the various manufacturers.

Speaker 2

So that will shape how large they are, but we see those as The 3 potential growth areas and we look to participate in those. I would remind you that's why we went with the portfolio approach Because we see consumers going from cigarettes to those various categories and we want to be there for the consumer depending on what category they choose.

Speaker 9

Thanks.

Speaker 2

Thank you.

Operator

And there appears to be no further questions at this time. I would like to turn the call back over to Livingston for any closing comments.

Speaker 1

Thanks, Ashley, and thanks everybody for joining us. Please contact the Investor Relations team if you have any further questions. Thanks a lot.

Speaker 2

Thank you.

Operator

And this does conclude today's call. Thank you for your participation. You may disconnect at any time.

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Earnings Conference Call
Altria Group Q2 2022
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