Altria Group Q3 2023 Earnings Call Transcript

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October 26, 2023

Key Takeaways

  • Altria’s traditional tobacco businesses drove a 3.3% increase in adjusted diluted EPS for the first nine months and returned over $5.7 billion to shareholders via dividends and share repurchases.
  • EnjoyACE—the only pod-based e-vapor product with an FDA marketing authorization—expanded distribution from about 42,000 to a targeted 70,000 stores by year-end, with no anticipated supply constraints.
  • The nicotine pouch category continued to surge, with On! shipments up nearly 37% in Q3, On!’s retail share rising to 6.9%, and improved profitability through more efficient promotional spending.
  • Illegal flavored disposable e-vapor products are estimated to have dragged down cigarette volumes by 1.5%–2.5% over the past 12 months, prompting Altria to pursue litigation and urge stronger FDA enforcement.
  • Cigarette industry volumes fell 11.6% in Q3 (approximately 10% when adjusted), leading to a 2.5% decline in smokeable products’ adjusted operating company income despite a 0.7 percentage point margin expansion.
AI Generated. May Contain Errors.
Earnings Conference Call
Altria Group Q3 2023
00:00 / 00:00

There are 11 speakers on the call.

Operator

Day, everyone, and welcome to the Altria Group 2023 Third Quarter and 9 Months Earnings Conference Call. Today's call is scheduled to last about 1 hour, hour. 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.

Operator

Hour.

Speaker 1

Thanks, Ashley. Good morning and thank you for joining us. This morning, Billy Gifford, Altria's CEO hour and Sal Mancuso, our CFO, will discuss Altria's 3rd quarter and 1st 9 months business results. Hour. Earlier today, we issued a press release providing our results.

Speaker 1

The release, presentation, quarterly metrics and our latest corporate responsibility reports hour. During our call today, unless otherwise stated, we're comparing results to the same period in 2022. Hour. Our remarks contain forward looking and cautionary statements and projections of future results. Please review the forward looking and cautionary statements section at the end of today's earnings release for various factors that could cause actual results to differ materially from projection.

Speaker 1

Hour. Future dividend payments and share repurchases remain subject to the discretion of our Board. We report our financial results in accordance with U. S. Hour.

Speaker 1

Today's call will contain various operating results on both a reported and adjusted basis. Hour. Adjusted results exclude special items that affect comparisons with reported results. Descriptions of these non GAAP financial measures hour and reconciliations are included in today's earnings release and on our website at altria.com. Hour.

Speaker 1

Finally, all references in today's remarks to tobacco consumers or consumers within a specific tobacco category or segment hour. With that, I'll turn the call over to Billy.

Speaker 2

Thanks, Mac. Good morning and thank you for joining us. Our highly profitable traditional tobacco businesses were resilient in a dynamic operating environment hour during the Q3 and 1st 9 months, providing fuel for our business transformation and significant cash returns to our shareholders. Hour. We grew adjusted diluted earnings per share by 3.3% for the 1st 9 months hour and returned more than $5,700,000,000 to shareholders through dividends and share repurchases.

Speaker 2

Hour. We continue to balance maximizing profitability from our smokeable and moist smokeless tobacco businesses hour with investments to realize our vision of responsibly leading the transition of adult smokers to a smoke free future. Hour. This morning, I will focus on our progress with Enjoy, the state of the e vapor category and the encouraging third quarter results from ON. Hour.

Speaker 2

I'll then turn it over to Sal, who will provide an update on consumer and industry dynamics, further detail on our financial results hour and outlook for the remainder of the year. Let's begin in the e vapor category. In our 1st full quarter of ownership, hour. Our teams executed Enjoy's business plans with speed and focus to lay the foundation for Enjoy's long term success. Hour.

Speaker 2

Today, EnjoyACE remains the only pod based e vapor product with a marketing authorization from the FDA. Hour. We're actively working to bring this compelling smoke free alternative to more smokers and vapers across the United States. Hour. We believe that the long term success in e vapor will be influenced by our actions in the near term hour and we're executing in the marketplace to grow the business responsibly and sustainably.

Speaker 2

First, while already strong, hour. Strengthening Enjoy's supply chain was a necessary step to begin the initial phase of our expansion with ACE. Hour. Our teams work diligently to solidify the entire supply chain from sourcing direct materials through the shipment to retail. Hour.

Speaker 2

As a result, we do not anticipate capacity constraints as we execute our initial expansion plan. Hour. Next, during the Q3, our teams prioritize closing inventory gaps at retail and expanding distribution of ACE. Hour. Prior to the acquisition, Enjoy had a small scale sales force, which resulted in inventory volatility and significant distribution gaps hour.

Speaker 2

Upon completion of the Enjoy transaction, we immediately unleashed our sales force to focus on closing the inventory gaps in hour. We improved inventory conditions in stores and are actively working to close remaining gaps hour at retail. For expansion, base distribution grew to approximately 42,000 stores during the 3rd quarter hour and is now distributed in all of the top 25 convenience store chains by eBay per volume. Hour. In addition, we began to amplify visibility with new point of sale and fixture signage at retail.

Speaker 2

Hour. During the Q4, we continue to expect ACE expansion to reach a total of 70,000 stores by year end, hour, representing approximately 70% of e vapor volume and 55% of cigarette volume sold in the U. S. Multi outlet hour. As we continue to expand distribution and close inventory gaps, hour.

Speaker 2

We expect to further enhance visibility and product fixture space at retail. Last month, hour Enjoy unveiled its 1st retail trade program. Retail partners can sign up for the program at various levels with merchandising options hour. Designed to position Enjoy strategically and responsibly to tobacco consumers, while creating further awareness of the brand. Hour.

Speaker 2

And as we move to our next phase of e vapor consumer engagement, we're beginning to test a variety of promotional plans hour and anticipate more disruptive execution at retail in the Q4. Moving into 2024, We will continue to refine our promotional plans, implement Enjoy's retail trade program, further expand distribution hour and evolve our consumer engagement strategy. Our strategies will focus on informing adult vapers and smokers of the attributes of ACE, such as battery capacity and pod size relative to other leading brands, hour. In addition, plans for a new brand equity campaign are well underway. We expect the equity campaign to further amplify the brand's presence at retail and drive consumer engagement with the brand.

Speaker 2

Hour. We're excited to share more on this campaign and the next phases of our growth plans in the near future. Hour. Looking more broadly at the e vapor category, the current state of the market is intolerable for both legitimate manufacturers and consumers. Hour.

Speaker 2

As we have noted repeatedly for months, the regulated market is being overrun by illegal hour. Flavored disposable e vapor products made and distributed by companies violating virtually every rule and guidance FDA has issued hour since 2016. Regulation not enforced is indistinguishable from no regulation hour. Illegal e vapor products circumvent the actions of regulators, responsible manufacturers and retailers hour by evading scientific review, quality and manufacturing controls, marketing oversight and legal aids or purchase restrictions. Hour.

Speaker 2

Despite recent actions by the FDA, enforcement has been inadequate and ineffective. Hour. We believe the FDA has the tools necessary to bring order to the market. For our part, we are actively engaged with regulators, hour. State and federal lawmakers and trade partners and other stakeholders to build awareness of these serious issues hour and drive marketplace enforcement.

Speaker 2

We have also taken more targeted but necessary action and initiated litigation hour. In the United States District Quarter in California against 34 Organizations, including manufacturers, hour. Distributors and online retailers related to the sale of unlawful products. Hour. A strong course direction is needed to protect the tobacco farm reduction opportunity for the 30,000,000 adult smokers in the U.

Speaker 2

S. Hour. Turning to oral tobacco, the nicotine pouch category experienced sizable growth once again, hour resulting in an estimated 5% increase in total U. S. Oral tobacco volumes over the past 6 months.

Speaker 2

Hour. All nicotine pouches grew nearly 10 share points year over year and now represent more than 32% hour of the U. S. Old tobacco category. Oren participated in the category growth hour as 3rd quarter reported shipment volumes increased nearly 37% versus the year ago period.

Speaker 2

Hour. During the quarter, Helix focused on continued volume growth while improving profitability. Helix applied its evolving analytical resources hour to be more flexible with its promotions in the marketplace. As a result, Thorne's retail price increased 33% hour. And 52% versus the prior year, closing the gap to Zen by over $1 year over year.

Speaker 2

Hour. Encouragingly, we continue to see increasing levels of both trial and adoption of the brand. With repeat hour. Up more than 35% year over year despite the substantial increase in retail price. Hour.

Speaker 2

In addition, Orange retail share of the old tobacco category was 6.9%, up 1.7 share points hour versus the prior year and stable sequentially. Internationally, ON plus began its test launch in Sweden, hour. 1 of the largest moderate oral tobacco markets in the world and consumers are engaging with the brand through both e commerce hour. While still early days, we're encouraged by the feedback we've received from consumers. Hour.

Speaker 2

Initial consumer data show that Oren Plus performed well in the areas of comfort, flavor and overall satisfaction. Hour. We believe that 1 plus's long lasting flavor system and proprietary softening material are differentiators in the category. Hour. We're at an exciting period in our history.

Speaker 2

We have an unprecedented opportunity to responsibly lead the transition of adult smokers to our hour. Our smoke free portfolio is compelling and I am encouraged by our initial progress with Enjoy and ON's strong hour. I believe we have the appropriate strategies and people in place to execute our growth plans. Hour. I continue to believe that we can achieve our vision and create long term value for our shareholders.

Speaker 2

I'll now turn it over

Speaker 3

hour. Thanks, Billy. Let's begin hour. With an update on consumer and industry dynamics. During the Q3, cigarette industry volume declines hour.

Speaker 3

Continued to be elevated from their historical levels, due in part to macroeconomic factors and the growth of illegal flavored hour. By design, illicit products are largely distributed through non traditional untracked channels, hour requiring us to refine our ability to estimate their impacts on the industry. With the information we have today, hour. We believe that there is more cross category movement than previously assumed. And we now estimate hour.

Speaker 3

That growth of illegal flavored disposable e vapor products contributed to cigarette industry declines hour in a range of 1.5% to 2.5% over the last 12 months. Hour. These updated estimates have been reflected in our decomposition of cigarette industry decline rates. We will continue to monitor this dynamic trend and are actively pursuing better data sources to enhance our estimates in this space. Hour.

Speaker 3

Turning to results for the quarter. The Smokeable Products segment continued to deliver on its strategy hour of maximizing profitability in combustibles over the long term, while appropriately balancing investments in Marlboro hour with funding the growth of smoke free products. In fact, during the Q3, the smokeable product segment hour expanded adjusted OCI margins, while Marlboro grew its retail share sequentially in the cigarette category and within the premium segment. Hour. Adjusted operating company's income declined by 2.5% in the 3rd quarter, but grew by 0.2% hour for the 1st 9 months.

Speaker 3

The adjusted OCI decline during the Q3 was primarily driven by elevated industry volume declines hour due to the factors I mentioned and higher promotional investments. As a reminder, hour. There was also one fewer shipping day in the Q3 of 2023 compared to the Q3 of 2022. Hour. Adjusted OCI margins expanded by 0.7 and 0.9 in the 3rd quarter and the 1st 9 months respectively.

Speaker 3

Hour. Net pricing remained robust and net price realization for the segment was 8.6% in the 3rd quarter hour and 9.8 percent for the 1st 9 months. Marlboro was resilient during the quarter and its retail share of the cigarette category hour. Grew 3 tenths sequentially to 42.3%, while declining 3 tenths versus the year ago period. Hour.

Speaker 3

Promotional investments across the Marlboro portfolio, such as investments in Marlboro Black supported the strong share performance for the quarter. Hour. Additionally, Marbo grew its share within the stable premium segment to 58.9%, hour, an increase of 0.3% sequentially and 0.4% year over year, while other brands ceded share in the premium segment sequentially hour. Total discount segment share grew 1.1 percentage points year over year to 28.2%, but it's been flat since the Q1 of 2023. We believe the recent stability in discount is an encouraging sign, hour considering the adverse macroeconomic conditions impacting smokers in the premium position hour.

Speaker 3

Smokable Products segment reported domestic cigarette volumes declined hour by 11.6% in the 3rd quarter and 10.5% for the 1st 9 months. Hour. When adjusted for calendar differences and trade inventory movements, 3rd quarter domestic cigarette volumes declined by an estimated 10%. Hour. For the 1st 9 months, adjusted domestic cigarette volumes declined by an estimated 10.5%.

Speaker 3

At the industry level, hour. We estimate that adjusted domestic cigarette volumes declined by 8% in the 3rd quarter and for the 1st 9 months. Hour. John Middleton reported exceptional performance through the 1st 9 months and cigar shipment volume hour. Increased 4.2 percent.

Speaker 3

The Oral Tobacco Products segment reported strong results during the quarter hour as adjusted OCI and OCI margins increased, while ON continued to grow its retail share hour. For the Q3, adjusted OCI grew 7.1% hour and the segment expanded adjusted OCI margins to 69.3%, an increase of nearly 3 percentage points versus hour. This performance was supported by robust net price realization due in part hour to the more efficient on promotional investments Billy described earlier.

Speaker 2

For the

Speaker 3

1st 9 months, the segment grew adjusted OCI hour by 4.1% with adjusted OCI margins of 68.9%, up nearly 1 percentage point. Hour. Total segment reported shipment volume decreased by 3.3% and 2.3% for the 3rd quarter hour and for the 1st 9 months respectively. The segment's volume decline was driven by declines in MST volumes, hour, partially offset by the growth of VON. When adjusted for calendar differences and trade inventory movements, hour.

Speaker 3

Segment volumes declined by an estimated 2% and 2.5% for the 3rd quarter hour and 1st 9 months respectively. Oral Tobacco Products segment retail share declined 4.2 percentage points in the 3rd quarter as declines in our MST brands were partially offset by the year over year growth of Aon. Hour. Turning to capital allocation, we continue to return significant cash to shareholders. Hour.

Speaker 3

In the Q3, we paid approximately $1,600,000,000 in dividends and raised our dividend by 4.3% in August, hour in line with our new progressive dividend goal. This increase marked our 58th increase in the last 54 years hour and repurchased 5,900,000 shares for $260,000,000 As of the end of the quarter, hour. We had $268,000,000 remaining under our current share repurchase program, which we expect to complete by the end of the year. Hour. In addition, our balance sheet remains strong through the quarter.

Speaker 3

As of the end of the third quarter, our debt to EBITDA ratio hour. Let's turn to our financial outlook for the remainder of the year. Hour. We are narrowing our full year 2023 guidance range and now expect to deliver hour. Adjusted diluted earnings per share in a range of $4.91 to $4.98 hour.

Speaker 3

This range represents a growth rate of 1.5% to 3% from a base of $4.84 hour in 2022. Finally, at our Investor Day, we announced the creation of our Connect and Transform hour. Open Innovation System, which is focused on partnering externally to leverage subject matter expertise, hour. New technologies and disruptive innovations to augment our internal capabilities and support our innovation strategies. Hour.

Speaker 3

As part of this system, today we are publishing 11 innovation briefs. More information is available on altria.com. Hour. With that, we'll wrap up and Billy and I will be happy to take your questions. While the calls are being compiled, hour.

Speaker 3

I'll remind you that today's earnings release and our non GAAP reconciliations are available on altria.com. Hour. We've also posted our usual quarterly metrics, which include pricing, inventory and other items. Hour. Let's open the question and answer period.

Speaker 3

Operator, do we have any questions?

Speaker 4

Hour.

Operator

Thank you. Hour. We will take a question from the investment community first. Hour. Our first question comes from Pamela Kaufman with Morgan Stanley.

Operator

Please go ahead.

Speaker 5

Hi, good morning. Good morning, Pamela. Hour. Can you talk about the puts and takes influencing the outlook for the cigarette category as you look over the next few quarters? How are you thinking about the category?

Speaker 5

And do you view high single digit industry volume declines as the new normal?

Speaker 3

Hour. Pamela, first, good morning, and I'll start the answer. Hour. This is very typical of us to narrow guidance as the year plays out and we're through 3 quarters and we were hour. Happy to provide a more transparency in narrowing our guidance to 1.5% to 3% growth off of point last year's adjusted EPS.

Speaker 3

We feel really good about the guidance we've been able to provide. Of course, across the hour. There's always puts and takes. We feel that we have enough levers to deal with any changes in the marketplace, but we feel good about the narrowing of the hour. And I think that's as I said pretty typical of how we manage guidance as the year progresses.

Speaker 5

Hour. Okay. I was also curious about how you're thinking about the outlook hour for the cigarette category and if you expect high single digit industry volume declines to continue going forward?

Speaker 2

Hour. Yes, Pamela. As you know, we don't provide look forward guidance. But I think when you think about volume and it's important to look at the heat comp, we tried to highlight hour. Look, our consumer is still under macroeconomic pressure, both the cumulative impact of inflation, but even gas prices moving hour.

Speaker 2

But more importantly, what we're seeing is an influence of the illicit vapor and the impact it's having on the cigarette industry. And you see that we're estimating that hour to 2.5. The reason that's such a broad range is the nature of the illicit product. It's going through distribution channels hour. That we feel like we have some information gaps on and we're going to be looking to fill those information gaps.

Speaker 2

But we wanted to highlight that too that as we discovered it, what we did is we hour. Use the data sources we had and we're able to triangulate it. I would point you to our quarterly metrics that we shared and you see the significant jump up in adult vapers hour. Just over the 9 months thus far in 2023. So, we think that's having an impact on cigarette volume 2.

Speaker 2

Hour. We talked about some of the enforcement activities, some of the things the FDA could do, some of the things we're doing, and we would look to get that enforcement active in the marketplace. Hour.

Speaker 5

Thanks. And also one area that I was kind of surprised about in the quarter was just the limited hour. So can you elaborate on how you're hour. Thinking about Envoy investment over the coming quarters and do you think that the Envoy brand can be successful and grow in an environment where illicit e cigs hour.

Speaker 2

We believe we can grow the Android brand. Remember, it competes and our focus is in the pod base. Hour. The FDA still needs to get through its authorizations, and we believe that is going to cause transition in the marketplace as well. Hour.

Speaker 2

I've tried to step you through the plan with Enjoy as we progress through what we did in the Q3 as we progress through the Q4, but I'll just highlight it. Hour. We really wanted to make sure we had the foundation built. And so the focus was on making sure that the supply chain would support the increased volume and we feel good about that. Hour.

Speaker 2

We wanted to fill the inventory gaps and improve visibility in the stores that injury was already present and we made significant progress on that. Hour. Then we're going to expand to 70,000 stores by the end of the year, really with some disruption at retail. We feel like the visibility will continue to improve. Hour.

Speaker 2

But we're in the midst of selling in our trade program, which we think is a sustainable position on the retail fixture at retail. Hour. That will take place as we progress into the New Year. And I highlighted the equity campaign is really establishing the brand equity for Enjoy hour and being able to unveil that as we progress into the New Year for the consumer.

Speaker 5

Thank you.

Speaker 6

I'll pass it on.

Speaker 2

Thank you.

Operator

Hour. Thank you. And we will take our next question from Bonnie Herzog with Goldman Sachs. Please go ahead.

Speaker 6

Hour. All right. Thank you. Good morning, everyone.

Speaker 2

Good morning, Brian.

Speaker 6

Good morning. I had a question on your guidance. You narrowed it, but essentially lowered hour. Your EPS growth this year and then your new EPS guidance this year is below your mid hour. So I guess I'm trying to understand how much of this is due to hour.

Speaker 6

As you build your smoke free vision versus maybe greater than expected headwinds. If you could touch on that hour.

Speaker 2

Yes, I appreciate your question, Bonnie. I think this is very typical as we progress through the year. We are able to narrow guidance. That's what we did. Hour.

Speaker 2

I think when you think about the enterprise goals of mid single digit growth, that's really on a compounded annual basis. And we hour. Suggested when we did that, we were going to invest in the businesses as we feel like that we need to invest and that's exactly what we're doing. So as we progress through the year, certainly hour. The enforcement I referred to earlier, as that steps up, that should affect multiple categories in the hour.

Speaker 2

And so I think it's very typical as we progress in the year to be able to narrow it. We brought up the bottom and brought down the top. Hour. So that's what we've provided to you.

Speaker 3

Bonnie, I'll also remind you that when we restated guidance upon the Envoy deal, there is hour. Amortization, it's a non cash expense drag on the year over year comparison.

Speaker 6

Hour. Okay. That's helpful. And then I guess just my next question would be on your smokeable segment. Despite expanding hour.

Speaker 6

Margins in the quarter, your dollar profit didn't increase. And then your price realization, I hour. I guess wasn't as robust as I would have thought, given the 3 SIG price increases this year, I mean, we've announced a 4th. And then your controllable cost hour. So in the context of all that, could you just talk about some of these drivers hour as well as your expectations for the rest of the year as it relates to those items.

Speaker 6

Thanks.

Speaker 2

Yes. Certainly, you saw the hour. Overall industry volume at an increased rate of decline and we tried to highlight that in the decomposition and the impact that the illicit vape was having on the cigarette category. I I think when you think about it, look, we're very pleased that margins overall were to step up. I wouldn't get hung up in 8 quarters price realization.

Speaker 2

We really think about it through time. Hour. So we highlighted as we progressed into the year that there are a couple of pockets that we needed to invest in and I think you see the benefit of those investments hour. And so again, I wouldn't get hung up on a particular quarter. I would we tend to look at it over a bit longer term than hour quarter to quarter.

Speaker 2

And so that's the way we manage the business. I think when you think about the cost as you have fluctuations again in a quarter as you have fluctuations in volume that's going to hour. And volume that's going to gyrate that controllable cost per pack.

Speaker 6

All right. Thank you.

Speaker 2

Thank you, Bonnie.

Speaker 4

Hour.

Operator

Thank you. And we will take our next question from Andre Kondria with UBS. Please go ahead.

Speaker 7

Hour. Thank you for taking my question and good morning, Billy. Good morning, Sal. One from me, please. When thinking hour.

Speaker 7

Just about your price increases, obviously, the one you took hour. In Q4 was large appears to be larger than your previous increases over the past, call it, 2 years. Hour. Basically, my question is, should we kind of expect this higher and higher level of price taking hour from you and your peers as volumes come under pressure from macro factors. Sorry, hour.

Speaker 7

Sorry, it was a bit long winded. That's okay.

Speaker 2

I think I followed it. Did you have any more there? I didn't want to cut you off.

Speaker 7

Yes, I got another one after that.

Speaker 2

Hour. Yes, I'll be careful not to talk about future pricing. But I think when you think about it, again, I would give this in advice that I gave to Bonnie is I wouldn't get hung up on one price increase that took place. Hour. We really look at the factors that go into pricing and we've mentioned those before, but I think you see with the stability of mobile share in the market hour.

Speaker 2

We feel good about the strength of the brand and we have been able to take those price increases. I would remind you that price will last 50 for the industry is a negative hour. We haven't seen anything that would determine that that would need to move and we feel good about that. So I think when you think about hour. Pricing, again, typically we look at it as price realization versus specific list price.

Speaker 2

And remember, price hour. Realization is made up of 2 pieces. 1 is list price that you saw us take and the other is promotional spend in the market

Speaker 7

hour. Thank you. That makes sense. And secondly, I mean, we saw, obviously, you filed a lot of litigation versus hour. Elisit vape manufacturers and well, BAT did the same, just by another avenue.

Speaker 7

Probably what we'd be looking for is that any inkling on how long this would take to crystallize one way or the other? Hour.

Speaker 2

Yes. Certainly, the legal system will be the legal system, so it's hard to predict how that will transpire. Hour. I think there what we're looking for is an injunction. These products are illegal.

Speaker 2

And with the lack of enforcement that's taken place by the FDA, we felt that we needed to take action. Hour. So we did that with litigation and we've done that in other ways with communications to the FDA, meeting with government officials to really hour. Show the intolerable nature of what's taking place in the marketplace. Again, you heard it in my remarks, hour.

Speaker 2

Regulation without enforcement is truly indistinguishable from having no regulation. If you don't enforce it, hour. It's basically words on paper. So we want to protect harm reduction and the opportunity for the 30,000,000 smokers in the U. S.

Speaker 2

So we really need to have enforcement where hour. The smokers can make informed choices as they are moving across categories. I think if there's an underlying positive is that we see adult smokers moving over. Hour. So they're ready to have potentially reduced farm products.

Speaker 2

We just need them to be regulated and based on science to be in the marketplace.

Speaker 7

Hour. Very clear. Thank you. I'll pass it on. Thank you very much.

Speaker 2

Thank you.

Operator

Hour. Thank you. We'll take our next question from Vivien Azer with TD Cowen. Please go ahead.

Speaker 6

Hi, thank you. Good morning.

Speaker 2

Hour. Good morning, Vivien.

Speaker 6

So I wanted to talk about your smokeless margins just to start very healthy hour. Margin improvement. I was wondering if you could just dimensionalize the magnitude of the benefits that you guys saw from hour. The reduction in promo spend on on versus kind of the normalized operating leverage that you get from pricing on MST? Thanks.

Speaker 3

Hour. Good morning, Vivian, and thank you for the question. And yes, we're really happy with the OTP margins. Hour. And I would say both traditional smokeless and oral TDN are contributing to the strength of those margins.

Speaker 3

Hour. You're right to point out the strength of, in particular, Copenhagen in the MST category. Hour. And then, as we discussed in our opening remarks, the net pricing increases for on hour, both on a year over year basis and a sequential basis.

Speaker 6

Okay, hour. Understood. And then on Marlboro market share, healthy 30 basis point improvement sequentially as the premium segment hour. Which is certainly good to see, given the continued macro pressures you guys have called out on the consumer. I was wondering if you hour.

Speaker 6

Comment at all on kind of the impact that Marlboro Black Gold had on that sequential improvement? Thanks.

Speaker 2

Yes. We're certainly pleased with the Marlboro hour. We're sort of pleased with the utilization that the PMUS-eighteen has put on Marlboro Black and use it in the marketplace hour. To give consumers that are under economic strain a place to stay with Marvel because that's what the consumer wants. I think when you think about hour.

Speaker 2

Overall, Marlboro Black represents about 10% of the Marlboro franchise. It's very similar as far as being used as a tool. Hour. You'll recall this, Vivian, that back when we used Special Blend and the other downturn that we saw in 2008, 2009. And so when you think about it, it's being able to utilize that tool.

Speaker 2

Hour. We're very pleased with the rounding out of the portfolio in Marlboro Black with Marlboro Black Gold and very pleased with the results we're seeing in the marketplace. Hour.

Speaker 6

That's great. Thanks for that. I'll just squeeze in one last one, if you don't mind. On the last slide of the presentation, you guys highlighted hour. The Nevada menthol, fair, which did fall off sequentially in the Q3.

Speaker 6

Can you offer any color on why you think that is? Thanks.

Speaker 2

Hour. I think it really highlights the listed activity that takes place in California. You'll recall previously, so some of it was cross border, hour. But as a list of activity takes place in California, whether that be menthol cards that we highlighted last time or even menthol cigarettes finding their way into the state of Again, it's another example where prohibition doesn't work. You don't have enforcement and that hour.

Speaker 2

These legal activities take place to get the consumer what they're desiring and that's what we're seeing take place in California. Hour. Thank you.

Operator

Thank you. We'll take our next question from Owen Bennett with Jefferies. Please go ahead.

Speaker 4

Hour. Good morning, Jen. So far, well. I had a couple of questions around vape again. And first one hour.

Speaker 4

Just coming back to disposable enforcement. So realistically, ignoring the actions by yourselves and BAT and looking at hour. Specifically, do you actually see kind of any chance of meaningful measures in the next 6 to 12 months, given obviously in the middle of last year, hour. The FDA spoke that they're now working with other government agencies to address this. And then they also flagged the possibility of possible federal hour.

Speaker 4

Statutory changes to address this. So just I'd love to get your thoughts around if we could see kind of any meaningful actions from the statutory perspective or the FDA in the next six hour.

Speaker 2

Yes, it's a good question, Owen. I'm very optimistic. I mean, if you think about it, I can think of 4 simple steps that the FDA could take to really rein in and hour. One, they could help the trade be able to identify products that are out of compliance. When you think about that, that's just providing a list that's hour.

Speaker 2

Clear either the ones that are authorized or those that have been denied so that they're not in the marketplace. Once they do that, conduct a broad based hour. Retail inspection program. They've done that. They did that in the cigarette category.

Speaker 2

They can do that in the e vapor space. And once they do that, issue maximum penalties and then bring injunction actions against manufacturers and distributors that are openly defying hour. FDA regulation. And then I think adopting comprehensive border programs to prevent importation. A lot of these products are imported.

Speaker 2

Hour. They're imported illegally and then they're sold illegally. So they seem to be very, very simple. That's why I'm optimistic that the FDA will take action and be able to work to hour. And

Speaker 4

then when they spoke about statutory changes, you see any possibility of that happening?

Speaker 2

Hour. They have the tools and the authority now for illegal products in the marketplace. So certainly, we would be open to statutory changes. But I mean, when you think about it, hour. They have the ability to do that now, Owen.

Speaker 2

So it seems like and then I highlighted those 4 simple steps. They have the tools And they have the authority to do it today.

Speaker 4

Okay, fine. And then just my second question, on the quarterly metrics, hour. You showed the slide highlighting the spike in the number of adult vapers. This has replaced the You showed historically, it actually showed estimated industry vape volumes. Can you maybe talk about what the volume number was for

Speaker 1

the quarter? I just want to get

Speaker 2

hour. What we tried to do, hour. The reason we went with the vapers as we had previously, but didn't show the volume is the nature of this listed marketplace. Hour. It's hard to track, and that's the nature of it being elicited.

Speaker 2

It's going through different distribution channels than what typical products go through because it's illegally hour. I think when you think about the impact of the cigarette volume, what we tried to do on the de comp page is show you that we estimated to be between 1.5 hour to 2.5 over the last 12 months. So we tried to provide you with that data. Again, as I mentioned earlier, I know that's a bit of a wide range. Hour.

Speaker 2

We're trying to fill what we feel like there's some data gaps so that we have a better read of what's taking place in the marketplace through distribution channels hour. That is different than typical products.

Speaker 4

Okay. And then any broad guess of what the sequential volume increase was industry wise in the second quarter hour Given kind of the coffee stake variance?

Speaker 2

Yes, again, it's tough just because of the nature of all of the growth. We feel like most of the growth that occurred in the e vapor space, hour. What we saw was pod industry was down slightly. Overall, e vapor was up and that growth was coming from the list of disposables that are in the marketplace.

Speaker 4

Hour. And then how overall was it, the overall e vapor?

Speaker 2

Yes. Again, with the inability to be able to estimate the total market space hour. Because of the listed product in the marketplace, we didn't want to put an overall growth. We have an estimate, but we don't want to

Speaker 3

put an overall hour. Hey, Owen, this is Sal Tew. I would also point out not only is it flavors in the solicit disposable hour. Category of flavors are really not in line with regulations. They're flavors like Bubblicious, cotton candy.

Speaker 3

I mean, the I agree with Billy. The need for enforcement is very important and we need it to happen. We'd like it to happen as soon as possible.

Speaker 4

Hour. Okay. Thanks, Ken. Very helpful. Appreciate it.

Speaker 2

Thank you.

Operator

One hour. We will take our next question from Matt Smith with Stifel. Please go ahead.

Speaker 8

Hour. Thank you, operator, and good morning all.

Speaker 2

Good morning, Matt.

Speaker 8

I wanted to ask a follow-up question around the change in the impact of cross hour category dynamics and now the 2% drag you're seeing on cigarette volumes. Can you talk about your expectations for how these hour. Consumers that are using the illicit products that are generating that higher drag, how do you expect them to behave once you do see enforcement in the category hour. And these products that they're using today are removed from the marketplace. Do you expect those current users to shift into hour.

Speaker 8

Lawful smoke free products, including vapor. And then do you then expect the drag to be hour. Going forward, given the removal of the flavor products or do you expect the vapor category to continue to grow through the illicit hour Correct. The enforcement of illicit products.

Speaker 2

Yes, it's a great question. I think when you think about it, certainly the youth that are using the e vapor, we want them completely out of the category, hour. Just to be clear on that. I think when you think about the adults that are moving over, we would want them to stay in Reducer's products. That's why we're excited about hour.

Speaker 2

Android product can be in order to have the distribution and have it readily available for them. It's authorized and have it readily available for them to choose. Hour. I think if you look historically, you'll recall when the FDA eliminated flavors and pause, we did see some consumers go back to cigarettes. And so hour.

Speaker 2

That's best estimate, but it's ultimately up to the consumer and we'll do our best to keep them in the e vapor space with the Enjoy product.

Speaker 8

Hour. Thank you for that, Billy. And just as a quick follow-up, I wanted to ask about the distribution opportunity around Enjoin. You understand that you laid out the priorities in your hour. In your Q1 of ownership focusing on the supply chain, but I was curious if there is any prioritization of hour.

Speaker 8

Expanding distribution for if and when FDA actually picks up its enforcement against illicit products. Do you need to see hour. A more proactive FDA before you expand the distribution of Enjoy to take advantage of the disruption in the marketplace?

Speaker 2

Hour. We do not. We have the target of 70,000 stores by the end of the year. We feel good about getting into those stores. Hour.

Speaker 2

Certainly, we would appreciate FDA enforcement more so for the being able to protect the Harm Reduction opportunity in the U. S. Hour. But no, we will move forward with our distribution plans as we laid out.

Speaker 8

Thank you, Billy. I'll pass it on.

Speaker 2

Thanks.

Operator

Hour. Thank you. We'll take our next question from guraj Jain with Barclays. Please go ahead.

Speaker 9

Hour. Good morning, Willy. Good morning, Sal.

Speaker 2

Good morning.

Speaker 9

A few questions from me. So first is on these, the cannibalization impacts that you're sharing from e cigarettes. So even the on the modern oral front, it seems that the cannibalization has hour. On cigarettes because the oral tobacco volumes are much better than what would have thought. So isn't it that modern oral is about a 1% hour cannibalization impact on cigarette volumes and then the e cigarette cannibalization impact is probably lesser than what you had highlighted.

Speaker 9

Hour.

Speaker 2

Yes. I understand your question, Laura. I think when we look at the information, certainly we're having some impact and we try to highlight that from hour. Perspective with Novel Oral Products. What we highlighted for disposable is what we feel is what's hour.

Speaker 2

Taken place from the disposable, so that's separate and distinct from novel oral. So no, we feel like what we've estimated that 1.5 to 2.5 and I explained why it's a range hour. Is really the impact of disposable e cigarettes on cigarettes.

Speaker 9

Sure. Thank you. Hour. And then second question is clearly GLP-one drug, big focus of investors right now across Staples. Hour.

Speaker 9

Would you have any indication of what's the cigarette prevalence amongst consumers whose BMI is greater than 27 versus hour. Prevalence amongst consumers with BMI less than 27. And that 27 number is where I believe vis a vis gets prescribed half. For consumers with comorbidities, so that's why I'm referencing that 27 number.

Speaker 2

Yes, I understand the theory that you have hour. I think when you look at the science, you look at the trends and you look at the facts of even what's taking place to date related to GLP-one drugs, hour. We see no indication of that. We'll certainly continue to monitor, but we don't see any indication.

Speaker 9

Sure. And then a final question is around the menthol cigarette rulemaking hour. What should we expect from here on in terms of timelines?

Speaker 2

Yes, I think you saw that hour. It went to the OMD, the Office of Management Budget on October 13. It sits with them. The FDA has announced publicly that they anticipate hour. Issuing that by the end of the year, but I think it remains to be seen when that will be issued.

Speaker 2

So from that standpoint, really you've seen our hour. We don't think it's based on or supported by science and evidence. And so if it's issued, I think you could hour. Anticipate potential legal challenges from the industry.

Speaker 9

Sure. Thank you so much.

Speaker 2

Thank you.

Operator

Hour. Thank you. We'll take our next question from Priya O'Riguhta with Barclays. Please go ahead.

Speaker 2

Hi. Thank you for taking our questions. This is August in hour. We saw that you just filed your updated shelf. How are you thinking about addressing the January maturity in light of the current market backdrop?

Speaker 2

Thank you.

Speaker 3

Hour. Yes. As you think about debt coming due and maturities, we've done a really nice job, I believe, the Treasury Department in managing hour. Our debt portfolio and the maturity towers. So they do a fantastic job of monitoring the market.

Speaker 3

I think we have flexibility on how we handle that. Hour. And so I really have nothing else to report at this time regarding our maturities early next year.

Speaker 2

Hour. Thank you.

Operator

Thank you. We will take our next question from Jacob DeClerc with Redburn Atlantic. Please. Hour. Jacob, your line is open.

Operator

Please check your mute function. Hour. We will continue on with Steve Marcia with Capital Securities Management. Please go ahead.

Speaker 1

Hour. Thank you. Good morning, gentlemen. Just a sort of follow-up. Looking at your consolidated statement of earnings, you guys reported interest and debt expense about 272,000,000 hour.

Speaker 1

Given the current ongoing in the Treasury Department, rise in rates, do you anticipate that number remaining level? Or should we expect some hour. Type of bump up? And if so, any idea in terms of bump up towards what?

Speaker 3

Yes. Hour. We provide a guidance or an estimate on our depreciation and amortization. It's about $280,000,000 for the year. You are right to point out that there are higher levels of interest hour.

Speaker 3

Rates in the capital in the debt market. But again, we believe we have appropriate flexibility as we think hour refinancing or paying down debt in the future. We've also provided our debt to EBITDA corporate goals, if you will, our targets and it could hour. Fluctuate a little bit over time depending on corporate needs and things like that. Hour.

Speaker 3

We've dealt with high interest markets in the past. They are higher than that we've seen in recent past, but hour. In the recent past, but again, we have strong cash generation by our operating companies and we hour. We have really good flexibility as we think about managing our maturities.

Speaker 2

Thank you.

Speaker 3

Sure.

Operator

Hour. We will take our next question from Jacob clerical with Fred Verdelen. Please go ahead.

Speaker 10

Good morning, guys. Can you hear me now?

Speaker 2

Yes, we can hear you.

Speaker 10

Perfect. Hour. I just have a quick question on Enjoy. If all of the brands are not allowed in flavors, hour. Including Mentil, do you think there's still enough demand for tobacco flavored vapes to have a profitable business in the U.

Speaker 10

S. Going forward?

Speaker 2

Hour. We believe there is. I think when you think about it, I wouldn't rule out menthol. We feel good about the application, the current application in front of the FDA hour from a mid fall standpoint. I think if you look at some of the recent marketing denial orders, it was related to youth following.

Speaker 2

Hour. And as we pointed out, when we made the Android transaction, there was virtually no youth following. As far as additional flavors, we're hour. I'm currently looking forward to being able to file in the near future and we'll come back to you when we are able to do that hour of additional flavors with access control. We believe that allows for adult consumers to have it as an off ramp, hour.

Speaker 2

But not an on ramp for underage users. So we still see the potential for flavors, but to answer your question, we feel like hour. The consumer wants alternative products. We've highlighted that previously, and they'll continue to want that.

Speaker 10

Perfect. And then just a quick follow-up on your oral business. Hour. How do you kind of stop the flow of consumers moving to nicotine pouch category? And I know you've got the On brand there.

Speaker 10

But is this a structural

Speaker 2

hour That certainly is the biggest hour. Outflow or inflow into nicotine pouches is coming from traditional MST consumers. Our plans there and we highlighted them is participate with 1 hour. And then we're excited to be able to follow the PMTA for 1 plus and we highlighted while it's early, some of the hour. Engagement that we're having over in Sweden and we feel like that's a great product and we're looking forward to be able to bring that to market once we receive authorization.

Speaker 2

Hour.

Speaker 9

Thank you.

Operator

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

Speaker 1

Thanks, Ashley. Thanks to all for joining us. Please contact the Investor Relations team if you have further hour. Thanks and have a great day.

Operator

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

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