Altria Group Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
October 27, 2022

There are 11 speakers on the call.

Operator

Good day, and welcome to the Altria Group 2022 Third Quarter 9 Months Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by Altria's management and a Q and A 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 conference over to Mac Livingston, Vice President of Investor Relations for Altria Client Services. Please go ahead, sir.

Speaker 1

Thanks, Katie. Good morning and thank you for joining us. This morning, Billy Gifford, Altria's CEO and Sal Mancuso, our CFO, will discuss Altria's 3rd quarter and 1st 9 months 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 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 For 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.

Speaker 2

Thanks, Mac. Good morning and thank you for joining us. This is an exciting moment on our journey towards moving beyond smoking. Our tobacco businesses remained resilient during the 1st 9 months of the year And we continue to reward shareholders while making investments in pursuit of our vision. We have deepened our consumer understanding, Enhanced our capabilities and built the science to support smoker transition away from cigarettes.

Speaker 2

The tobacco harm reduction opportunity remains in front of us and we continue to believe Altria is uniquely positioned to responsibly lead adult smokers to a smoke free future. Our remarks this morning will focus on our progress to date and several exciting steps Further detail on our business and financial results. Let's begin with the heated tobacco category. Last week, we entered into an agreement with Fort Morris International under which we will receive $2,700,000,000 in cash In exchange for assigning our exclusive U. S.

Speaker 2

Commercialization rights to the IQOS system at the end of April 2024. We believe this agreement provides us with fair compensation and greater flexibility to allocate resources toward moving beyond smoking. The heated tobacco category is still undeveloped in the U. S. And we believe we can lead in this space supported by our robust infrastructure and deep understanding of the U.

Speaker 2

S. Tobacco consumers. This morning, we announced the pursuit of a global Smokefree partnership with JT Group. We signed a non binding memorandum of understanding with JT signifying the commitment of both parties towards further smoke free collaboration. JT is a leading international tobacco company committed to investing and growing in reduced risk products.

Speaker 2

We believe that together Altria and JT can accelerate global harm reduction by collaborating on product on the product development and global commercialization of smoke free products. We believe this potential collaboration can leverage the strength and resources of both companies to transition more smokers away from cigarettes. As a first step in this partnership, We announced the formation of Horizon Innovations, a joint venture between Altria and JT for the U. S. Commercialization of heated tobacco stick or HTS products.

Speaker 2

We believe that HTS products can appeal to certain smokers as they provide a more familiar, tactile and sensorial experience to cigarettes. Under the terms of the JV, both parties will combine their scientific and regulatory expertise to jointly prepare PMTA filings for the latest version of the Plume HTS products, which are not yet commercially available. The parties expect to file a PMTA in the first half of twenty twenty five. Upon authorization, Horizon will become the exclusive entity through which the parties market and commercialize stick products in the U. S.

Speaker 2

JTI will supply Plume heated tobacco stick devices and PM USA will manufacture Marvel HTS The parties have agreed to Commercialization milestones for Horizon, which include distribution requirements and minimal levels of cumulative marketing investment. Under the financial terms of the JV, PM USA has a 75% economic interest in Horizon with JPI having 25%. We're excited about the prospect of introducing the latest version of Plume HTS products to U. S. Smokers.

Speaker 2

JT has demonstrated success innovating in the heated tobacco space. For example, JT launched Ploom X last year in Japan And since its introduction, JT's doubled its share of the Japanese HTS segment. JT estimates that there are more than 1,000,000 And according to their research, these consumers perceive Ploomax as a stylish, Credible and unique brand. Consumers also describe the product as easy to use. We look forward to bringing the newest version of this Exciting product to U.

Speaker 2

S. Smokers. We have discussed our increased focus and investment in internal Wholly owned heated tobacco product development. Our approach puts the consumer at the center of everything that we do. We receive more data on their preferences, purchasing patterns and friction points than we ever have.

Speaker 2

Additionally, we embedded a We believe these efforts are building a promising pipeline of wholly owned heated tobacco products and intellectual property consisting of can appeal to smokers who are open to novel smoke free products, but have not yet found a satisfying alternative to cigarettes. This audience includes the millions of U. S. Smokers who tried but ultimately rejected e vapor products. We by the end of 2024.

Speaker 2

We also expect to partner with JT to launch this product in an international test market using JT's Sales and distribution network. We plan to share more on this product platform once the design We believe moving beyond smoking in the U. S. Requires multiple FDA authorized products within each smoke free category to appeal to a diverse range of smokers and help them transition away from cigarettes. We believe that our pipeline of heated tobacco products and partnership with JT, combined with the internal capabilities I described earlier, positions us well to increase adoption of smoke free products for the millions of smokers interested in these products.

Speaker 2

Let's now move to the e vapor category. In the Q3, total estimated e vapor volumes declined by 4% versus a year ago and were flat sequentially. We believe the regulatory uncertainty related to Juul caused market disruptions in the quarter And we observed a reduction in Juul purchases throughout the supply chain. We previously disclosed that we have exercised our option to be released from our non compete obligations related to our Juul investment. While we retain our 35% economic stake in Juul, We're exploring all options to build an FDA authorized portfolio of e vapor products that will help smokers transition away from cigarettes.

Speaker 2

For example, our teams are conducting consumer research, performing external scans and evaluating internal product development options. We're excited about the opportunity to increase our participation in the largest smoke free category in the U. S. Turning to oral tobacco, we remain encouraged by the growth of novel oral Tobacco Products, which grew its share of the total oral tobacco category for the 18th consecutive quarter. The category grew 6.5 share points year over year and now represents approximately 23% of the overall oral tobacco category.

Speaker 2

In the Q3, on reported shipment volume increased nearly 70% to 21,000,000 cans. And on retail share increased 3 tenths sequentially reaching 5.2 share points of the oral tobacco category in the 3rd quarter. We believe these strong results were driven by increased brand awareness and adoption of ON supported by continued equity and promotional investment. Building on its Q2 launch of the Carry On brand equity campaign, Helix recently introduced On Rewards, A digital program that enables Boeing consumers to track their rewards balance online and redeem their points for coupons for other items. We're excited about Boeing's continued momentum, increasing brand loyalty and the opportunity for future growth.

Speaker 2

Let's now turn to our view of the regulatory environment. We continue to believe that more should be done to advance harm reduction in the U. S. And that the FDA should move more deliberately toward creating a market of authorized smoke free products to help accelerate smoker transition away from cigarettes. The fact remains that today only a small percentage Avivapril volume has been authorized and no oral nicotine pouch products have received market authorization.

Speaker 2

We believe collaboration and accountability from all stakeholders are required for this market transition to take place. We also believe that smoke free products should serve as an offering for smokers, not a road ramp for youth users. We remain encouraged that youth smoking rates in the U. S. Are at the lowest levels ever recorded.

Speaker 2

In fact, the latest Monitoring study estimated that in 2021, the combined past 30 day smoking rates among 8th, 10th and 12th graders was 2.3%, a nearly 92% reduction from its 1997 peak. Additionally, data from the 2022 National Youth Tobacco Survey indicate that while e vapor usage remained high Among middle and high schoolers, the levels were significantly lower than the peak observed in 2019. Per the 2022 NYTS survey, 50% of the middle and high school current e vapor users indicated that they most often used disposable e cigarettes such as Puff Bar. Moving forward, We hope to see timely science and evidence based determinations on pending PMK applications across all smoke free categories and further enforcement on non compliant manufacturers. Our journey towards Responsibly moving beyond smoking continues and we are optimistic that the actions we have taken to date have strengthened our portfolio in the 3 major We have built a compelling portfolio in the heated tobacco, enhanced our ability to compete in e vapor and continue to strengthen Orin's position in the oral tobacco category.

Speaker 2

And we believe that we are able to maximize the value of these actions by leveraging our existing scale and infrastructure such as our manufacturing centers and sales force. For example, our flagship Richmond Manufacturing Center began production of oil and nicotine pouches in 2020. We now expect to add production of heated tobacco sticks for our new JV. Our sales and distribution Driven by our world class sales force gives us the ability to responsibly market products in over 200,000 stores. And we have decades of experience navigating dynamic U.

Speaker 2

S. Regulatory and political environments through the strength of our regulatory and government affairs organizations. These functions together with our many other talented employees gives me confidence that we can achieve our vision. Before I conclude, I'd like to thank Leo Cawley for his distinguished service Leo has served on the Board since 2011 and will retire at the completion of his term early next year. I'd also like to welcome Jose Hernandez to our Board Pate will serve on the Finance and Innovation Committees.

Speaker 2

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

Speaker 3

Thanks, Billy. I'd like to begin with a review of the macroeconomic backdrop and its impact on U. S. Tobacco consumers. In the Q3, consumer discretionary income levels remained under pressure as higher gas prices and inflation persisted.

Speaker 3

However, we saw signs of continued brand loyalty in the tobacco space. In September, 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 continue to stick with their preferred tobacco brands at a higher rate compared to other categories when experiencing higher prices. These results were consistent with the results from our previous surveys. We believe Inflation and the rise in gas prices was partially offset for some consumers by a strong job market and wage growth.

Speaker 3

Overall, average wages increased 6.9% in the 3rd quarter compared to an average 8 0.3% increase in CPI. And for some occupations, including the service industry, Wage growth outpaced inflation. We continue to monitor tobacco consumer behaviors and changes in marketplace conditions. Despite these macroeconomic challenges, our core businesses performed extremely well in the 3rd quarter, Underpinned by the strength of our premium brands, Marlboro, Copenhagen and Black and Mild Continued to grow profitably and ON's momentum and growth reflected strong positioning in the marketplace. This strong business performance combined with fewer shares outstanding drove Altria's adjusted diluted earnings per share results.

Speaker 3

Altria grew adjusted diluted EPS by 4.9% in the 3rd quarter and by 4% in the 1st 9 months. Turning to our business results. The Smokable Products segment continued to deliver on a strategy of maximizing profitability in combustibles, while appropriately balancing investments in Marlboro with funding the growth of smoke free products. The segment grew with adjusted operating companies income by 1.8% in the 3rd quarter and by 2.6% in the 1st 9 months. The Smokeable Products segment expanded its adjusted OCI margins to 58.9 percent, an increase of 0.9 percentage points for the 3rd quarter and 1.2 percentage points for the 1st 9 months.

Speaker 3

This performance was supported by strong net price realization of Marlboro price per packet retail increased 6% in the 3rd quarter compared to last year, which was below overall inflation for the quarter. Smokeables segment reported domestic cigarette volumes declined 9.2% in the 3rd quarter and 9% for the 1st 9 months, driven in part by the continued macroeconomic pressures I described. When adjusted for trade inventory movement and other factors, Domestic cigarette volumes for the 3rd quarter and 1st 9 months declined by an estimated 10% and 9.5%, respectively. At the industry level, we estimate that the adjusted domestic cigarette volumes declined by 8.8% in the 3rd quarter by 7.5% in the 1st 9 months. We believe it's important to analyze cigarette volume trends over the longer term As decline rates in any one period can be influenced by various factors.

Speaker 3

In fact, Q3 year to date adjusted industry In the Q3, the total discount segment retail share of the cigarette category increased 1 point and the challenging macroeconomic environment. We are encouraged that the discount segment share growth largely and 0.4 versus the year ago period. We are pleased with Marlboro's performance and stability over the long term. In the Q1 of 2020, Marlboro's retail share was 42.5 percentage points. We believe that increased discretionary income driven in part by government stimulus checks and lower consumer mobility led to an increase in Marlboro's retail share throughout the pandemic.

Speaker 3

As Consumer mobility returned to pre pandemic levels and federal stimulus checks ended, Marlboro share returned to its pre pandemic levels and has remained stable through the subsequent quarters. In fact, since the Q1 of 20 20, Marlboro has performed better than many of the other premium brands in the category. As a result, Marlboro continued to grow its share of the premium segment to 58.4%, an increase of 0.4% sequentially and 0.07 versus a year ago. We believe its performance over the long term is a testament to its positioning within the premium segment as the aspirational brand with strong consumer loyalty. In cigars, reported cigar shipment volume increased by 3.3% in the 3rd quarter.

Speaker 3

Black and Mild continued its longstanding leadership in the profitable tipped cigar segment and Middleton continued to provide a strong contribution to Smokeable segment financial results. Turning to the Oral Tobacco Products segment, Adjusted OCI grew 4.9% in the 3rd quarter, but declined 3.4% for the 1st 9 months, primarily due to higher investments behind ON. We're pleased with the strong overall margins for the segment and excited about ON's performance in the marketplace. Total reported Oral Tobacco Products segment volume increased by 1.3% for the 3rd quarter and decreased 1.8% for the 1st 9 months. When adjusted for trade inventory movement and calendar differences, segment volume decreased by an estimated 2% for the 3rd quarter and 1.5% for the 1st 9 months.

Speaker 3

Oral Tobacco Products segment retail share declined 1.5 percentage points as declines in MST were partially offset by the continued growth of Aon. Turning to our investment in ABI, We recorded a non cash pre tax impairment charge of approximately $2,500,000,000 for the Q3 1st 9 months of 2022. This impairment reflects the difference between the fair value and carrying value of our investment in ABI as of September 30. We continue to believe that ABI's share price performance is not reflective of its underlying long term equity value and that ABI share price will recover. However, we believe that it will take longer than previously expected as macroeconomic and geopolitical factors may continue to impact foreign exchange rates and ABI's financial results and share price performance in the near term.

Speaker 3

As we have previously shared, we view our ABI stake as a financial investment and our goal We remain committed to creating long term shareholder value through the pursuit of our vision and our significant capital returns, which we demonstrated in the 3rd quarter by paying approximately $1,600,000,000 in dividends and raising the dividend for the 57 times in 53 years and repurchasing 8,500,000 shares totaling $368,000,000 We have approximately $375,000,000 remaining under the currently authorized 3.5 Our balance sheet remains strong and as of the end of the third quarter, our debt to EBITDA ratio was 2.1 times. In August, we retired $1,100,000,000 of notes that came due with available cash. As Billy stated, due to our vision, debt repayment, share repurchases or general corporate purposes. Share repurchases depend on marketplace conditions and other factors and remain subject to the discretion of our Board of Directors. Turning to our financial outlook, we are narrowing our full year 2022 guidance and now expect to deliver adjusted diluted EPS in a range of $4.81 to $4.89 This range represents a growth of 4.5% to 6% from a base of 4 point 6 $1 in 2021.

Speaker 3

We believe this range allows us the flexibility to react to marketplace conditions. With that, we'll 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've also posted our usual quarterly metrics, which include pricing, inventory and other items. Let's open the question and answer period.

Speaker 3

Operator, do we have any questions?

Operator

Thank you. Investors, analysts and media representatives are now invited to participate in the question and answer session. We will take questions from the investment community first. Our first question will come from Bonnie Herzog with Goldman Sachs.

Speaker 4

Your line is now open.

Speaker 5

Thank you. Good morning, everyone.

Speaker 2

Good morning, Donnie.

Speaker 5

A lot going on with a lot of announcements, but I wanted to maybe touch on what you announced this Related to your JV with JT, I just was hoping, Billy, maybe you could help us better understand The opportunity potential for HTC versus HTS formats and then the target consumers for each. And also just wanted to verify something. The timeline with, I think, HTC is earlier and it's 100% owned and controlled by you. Is that correct?

Speaker 2

Yes. So there was a lot in that, Bonnie. So I'll take them in reversal. The HTC is 100% owned by us. It is not part of the JV.

Speaker 2

I think when you think about HTS and HTC, you've got this huge group of adult smokers looking for products That satisfy their desires and needs. And so you have some that weren't familiar experience as close as they can get to cigarettes And that's what we believe the HTS product fulfills for them. There are other consumers and a lot of as we've Pointed out before, a lot of consumers went over to try to e vapor, so they were willing to go with a more novel type product. And we believe the HTC Fulfills those desires and needs. So we actually see room for both to be successful and it actually allows us to reach a larger group of consumers that are looking to switch.

Speaker 5

Okay. And then just a follow-up on that. How do we think about this potentially changing Either your near or long term growth algorithm. And then I'm just thinking through it in terms of future investments I assume there will be some other than the initial $250,000,000 to develop and ultimately commercialize these products. Could you touch on that?

Speaker 2

Yes. I think, look, we certainly are going to, as we said previously, remember our overall All strategy, even in the smokeable products categories to maximize our income through time, but to make appropriate investments both in marble and balancing that with Investments in the growth area. So there are always puts and takes. I don't want you to think all of the investments that we make are completely incremental to the P and L. We try to leverage and We tried to point out some of that in our remarks this morning.

Speaker 2

So for instance, the manufacturing center, where we expanded our Production for oil in that facility. The heat sticks for the JV will be produced by the manufacturing center. So there you have the infrastructure in place. You have a strong talented group of employees that are familiar with running those machines. So you leverage some.

Speaker 2

So yes, they're investments and you have reallocation Across the P and L, but it's not all incremental investment.

Speaker 5

Okay. And then just maybe my final Shen, is related to your guidance, which you narrowed this morning. You narrowed it slightly, I guess, 20 bps at the midpoint. You stated just to give you more So I just wanted to maybe hear from you what got a little bit worse uncertain, is it the pressures on the consumer or is there something else that we should be mindful of? Thank you.

Speaker 2

Yes, I appreciate the question, Bonnie. I think you can think of most That narrowing is the passage of time, right? We have more certainty because remember we're on a quarter lag with ABI and you saw them release results this morning. But certainly, it's no surprise that our consumers are under pressure and we want to maintain that flexibility, but nothing out of the ordinary that I would point out.

Speaker 5

All right. Thanks. I'll pass it on.

Operator

Thank you. Our next question will come from Pamela Kaufman with Morgan Stanley. Your line is now open.

Speaker 4

Hi, good morning.

Speaker 2

Good morning, Pamela.

Speaker 4

I wanted to follow-up on Bonnie's question and Ask about how you're thinking about the evolution of the U. S. Tobacco market over the next 5 to 10 years. How do you think about the relative size of the e vapor versus heat not burn categories over time? And now that you have greater flexibility to invest in e vapor, given the non compete termination with JUUL And the partnership with JT, how are you going to prioritize your investment between heat not burn and e vapor?

Speaker 2

Yes, it's a great question, Pamela. And I think it's important to remember as you step back. And that's why we tried to highlight in the remarks that The reduced harm in the U. S. Is really undeveloped.

Speaker 2

And the reason I say that is from an authorization standpoint, take 2 that exist today, e vapor and novel oral. A very low percentage has been authorized by the FDA in e vapor and we believe that's going to go through a period Transition as those authorizations come out and some make it and some get denied. When you move to the novel oral, really no authorizations have And so that again depending on how the regulatory body goes about assessing and authorizing those, there Could be a bit of transition there. And then in the heated tobacco space, it's really non existent. I think when you think about those 3 categories, we believe the extent of those 3 categories We'll really be shaped by 3 factors.

Speaker 2

So one I mentioned is the regulatory decisions that are taken in each of the individual categories. It will be legislative and tax policy. How does that develop through time related to the individual categories? And then really through time is the innovation in the spaces that best address the consumer preferences based on What they desire. So that's really what's going to shape the size of the 3 individual categories.

Speaker 2

We believe those are the 3 categories that We'll grow through time as consumers continue to move away from cigarettes to the smoke free products. As far as prioritizing, we're going to prioritize based on where we see the consumer moving and how we see the consumer moving. It's going to be completely consumer driven. That's why we're excited to be able to leverage the sales force to get the products in the right stores as well as the amount of data we receive and the insights that we can garner from that.

Speaker 4

Great. Thank you. My second question is on ABI. So you previously expected This recovery to take longer than expected. So how does this impact your thinking around the investment?

Speaker 4

And does this Further extend your plans to hold on to the stake or does it increase your willingness to sell it at a lower price?

Speaker 3

Good morning, Pamela. The impairment of the ABI asset, the reduction in our carrying value is really accounting driven. When you think about whether an impairment is temporary or not, you have to look at timing of your expected recovery. As far as the ABI asset, as we stated, we view it as a financial investment. Our focus is to maximize the value for our shareholders.

Speaker 3

But share price value is one of many variables that go in It's an analysis that we do on an ongoing basis, and we'll continue to focus on what's best for our stakeholders over the long term.

Speaker 4

Thanks. And maybe if I could squeeze one more in. Can you just talk about what you plan to do with the proceeds from the IQOS termination agreement and if there is any e vapor assets that would be attractive to you to help accelerate your entry into the category. Thanks.

Speaker 3

Thanks, Pamela. We mentioned them in our opening remarks. I don't have a lot to add to that. I mean, obviously, The proceeds provide us with increased flexibility, which is always a good thing. So there's really nothing more to add.

Speaker 3

I mean, we're Going to continue to look at all capital allocations through the lens of what's best for our shareholder, be it Investments in our long term vision, continuing to manage a strong balance sheet will provide further returns to our shareholders. But Again, that's part of our broader capital allocation strategies.

Speaker 4

Thank you.

Speaker 6

You're welcome.

Operator

Thank you. Our next question will come from Chris Growe with Stifel. Your line is now open.

Speaker 7

Hi, good morning.

Speaker 2

Good morning, Chris.

Speaker 7

Good morning. I had a question for you, a bit of a follow on to the agreement with JT. Obviously, it's very encouraging to get you back into that category. Given the timeline for development of your products and obviously FDA review, do you have a reasonable Timeframe for launching a product in the U. S.

Speaker 7

And if I could ask related to that, you'll have this international capability in terms of launching a product. So Should we expect that you'd be able to develop products to kind of test and learn internationally to refine those for an ultimate PMTA application in the U. S?

Speaker 2

Yes, Chris. Thanks for the question. And you're right, we are excited about the opportunities we have in front of us. I think when you think about the timeline for launch, So what we try to provide you is when we would anticipate being able to file PMTAs, then it will be dependent on how long it takes the FDA to authorize those products. I believe through time, those authorizations will become more predictable and quicker, whether that's the next product that they authorize or it takes For them to get used to the new categories remains to be seen.

Speaker 2

I think when you think about the launch internationally, yes, we're excited about the potential there for Being able to test products in the live market in the international realm, we're excited about the ability to Whether it's in any of the new categories to be able to leverage that. But I don't want to get ahead of myself. We mentioned the memorandum of understanding About future collaboration and we'll share more when it's appropriate to share.

Speaker 7

And just to be clear on that, Billy, Would it be given your timeline for when you expect to have PMTA in for the product you're developing, would it be reasonable to assume we'd see that like next Your international market being tested at least and then moving to an application in 2024 or am I getting too far ahead of myself here?

Speaker 2

I think you get a little bit ahead of yourself. I think from an international launch, we tried to say, look, when we would anticipate getting to launch that into international market. Maybe your question underlying that is why are you taking so long? And I think it really goes back to, look, we want to be disciplined. We want to conduct preliminary studies Certify that we can consistently meet the high standards for product quality that we hold ourselves to as well as the constituent reductions.

Speaker 2

And so are going to go about it in a thoughtful manner, but yes, we are excited to get it into an international market and look forward to it.

Speaker 7

Okay. And I had a question just in relation to your As part of your guidance, you have this flexibility to react to current marketplace conditions. And as I look at your business today on the smokeable side, in particular, you're gaining Share in the premium segment, obviously premiums losing share though overall. So I guess as I think about where you need to invest, I would be curious, is it in the premium brands and the premium category to take back share from discount? Or is it more in the discount side where you're losing share Do you want to invest going forward?

Speaker 2

Yes. I understand your question, Chris. I really would look at the narrowing of guidance as a passage of time. Look, we wanted to make everybody aware that Our consumer is under pressure just like consumers across all industry. And we like the flexibility.

Speaker 2

That's more of the range we had maintained For the establishment of the guidance, I wouldn't point out anything specific. We're very excited about the price realization we've been able to realize, Being on track for our guidance for the total year and the stability that Marbles experienced in the marketplace, I mean, when you look at pre pandemic to post pandemic, And Sal mentioned this in his comments. When you saw government stimulus and less mobility in the marketplace, we actually saw it as encouraging. We weren't attempting to gain share. We were performing the business like we normally do.

Speaker 2

It shows that Marvel is still the aspirational brand in the cigarette space. And that's what we saw take place During the pandemic. As disposable incomes got a little bit tighter, mobility is affecting that as well. We see that we see some of that share But pre pandemic to post pandemic, call it roughly flat, maybe up a tenth and we're extremely pleased with where we're at.

Speaker 7

Okay. Thank you for your time today.

Speaker 2

Thank you.

Operator

Thank you. Our next question will come from Gaurav Yane with Barclays. Your line is now open.

Speaker 2

Hi. Good morning. Good morning, Varun.

Speaker 6

Hi. So a few questions from me. So first is on the oral tobacco pricing this quarter, which was I think up 5.5% and it was flat to manage just 3% last year. And if I look at Copenhagen's pricing based on your fiscal year, it is still running at the same level of plus 7%. So does it mean that you are pulling back on ON promotions or you are increasing actually ON's pricing now that ON is

Speaker 2

And look, we're excited about what ON has been able to perform, how It's been able to perform and grow in the marketplace. Certainly with the learnings we've had in the other two categories where we have the analytics and the RGM tools that we have in place, We certainly see the opportunity to be able to apply that in the new spaces as we gain volume and market share. And so Overall, I think from a standpoint of the strategy in the oil space, it's really to maximize profitability through the long term with the strength of Copenhagen while balancing Investments with Owen and I think that's exactly what you see taking place in that space.

Speaker 6

Sure. My second question is on the logic And we'll be on mentholi synthesis for the season. I appreciate it's about your product. But just Broadly, like if FDNL goes ahead and starts denying menthol e cigarettes, would it make any sense to invest in U. S.

Speaker 6

E cigarettes right now because Maybe all the commentary should be denied.

Speaker 2

Yes. I think it remains to be seen and that's what we try to highlight for the Size of each category and you highlighted an important one that's in front of the entire industry in all of these spaces is regulatory decisions. That will decide How large the individual categories can be? I would also highlight the other 2. It's really legislative and tax policy.

Speaker 2

How does that mature through time. And then the last would be innovation. But I hear you. And that's why we try to highlight those three That could ultimately decide the size of each of those categories relative to each other.

Speaker 6

On the California flavor plan that could happen Next quarter, how are you planning to approach that?

Speaker 2

Yes. So we've engaged with our government affairs team. We don't believe the science Supports it from a standpoint and we've highlighted that and we've been pretty vocal with that even with the FDA as they've looked at some of these things. We think Those decisions are better based with the FDA where it's science and evidence based. But when you think about the overall category Certainly, you can have an industry impact, but we as a reminder skew non menthol in cigarettes And we SKU non flavored products in the more smokeless space.

Speaker 2

So again, I think it could have an impact to the industry. The science doesn't support it. But I just wanted to remind you of our positions from a SKU standpoint.

Speaker 6

Sure. And if I could just be the last one on CapEx, like you reduced the CapEx Guidance slightly. Would you be able to help us understand why that happened?

Speaker 1

Can you repeat that,

Speaker 6

The CapEx number, the CapEx guidance was reduced. So what are the factors driving that?

Speaker 3

Yes. If you think about capital projects, Laura, the Spending is not necessarily linear, right? The projects are moving along quite well. The year time has passed throughout the year, so we're 3 quarters through the year. So we just lowered our forecast for spending.

Speaker 3

So that's more timing. The projects remain on track. Of course, there Some delays in supply chain when you're ordering equipment, but nothing material. We've been able to manage that quite well. So it's

Speaker 8

You're welcome.

Operator

Thank you. Our next question will come from Vivien Azar with Cowen. Your line is now open. Hi, good morning.

Speaker 2

Good morning, Vivien.

Speaker 9

So I also wanted to touch on keep not burn, please. So it reminds me of the original Ploom innovation that JT launched in 2016, 2017. Can you just expand on how that's different, if at all, because that doesn't really resonate with consumers in Japan? Thanks.

Speaker 2

Sure. And I don't want to get too far ahead of myself. We'll come forward with the actual product and I know you'll be excited about it when we're able to bring it forward once we complete design. If you think about the stick, that's pretty evident because everybody's seen that in the marketplace. If you think about the capsule, the tobacco is contained within a capsule.

Speaker 2

It's different than the technology you're familiar with with the team. But again, I don't want to get too far ahead of myself from a standpoint of describing the device Performer ready.

Speaker 9

Okay, fair enough. But it is different in terms of the nicotine delivery?

Speaker 2

That is correct.

Speaker 9

Okay, perfect. Thank you. I do look forward to seeing that for sure. Maybe just pivoting to the smokeable segment, please. Understanding perfectly well that your objectives are really focused on profit growth, it's Hard to ignore the fact that your price gap is now the highest it's been since 2009.

Speaker 9

And so I'm just curious how you think about Operating leverage for that segment, modest market share declines are fine. You're right, obviously, that On a 3 year basis, industry declines haven't gotten that much worse, but your 2 year stack is deteriorating on an industry adjusted basis. And so how do you think operating leverage in that segment from a volume perspective? Thanks.

Speaker 2

Yes, sure. I think when you look at the price gap, I just want to remind you, Vivien, and I know you know this, But that 40% price gap that we disclosed is really at a barometer for the national level. We put that out because it allows you all to a parameter, but we manage it much lower than that. I think you see as the introduction and execution against the data analytics and the Revenue growth management, most people refer to it as. Those tools that we have available allows us to manage the price gap at a much lower level.

Speaker 2

And so that is I think what you're seeing in the success of the Marvel market share through time. And so We're extremely pleased with where we're at. We feel good about the performance of Marlboro and being able to expand the price gap and increase the profitability through time the way

Speaker 9

Absolutely. And that segues really nicely into my last question, which is on the performance The discount category, it's obvious that deep discount share gains are now reaccelerating. You've I think very helpfully, the puts and takes in terms of the backdrop of the consumer. But just any updates on how you're thinking about kind of positioning your discount brands against that backdrop? Thanks.

Speaker 2

Yes. In your recall, Vivien, we're premium focused. We participate in the discount because it's important to our retailers to have a portfolio that services all of their customers that visit their stores, but we're premium focused. You'll know that We ceded share in L and M. We felt like we would cede share in L and M as we increased profitability, but we're pleased with The increased profitability we've experienced on L and M and with the willingness to cede some of that showed a deep discount.

Speaker 2

You remember our consumers at the lower end of that So, socioeconomic status. Loyalty is extremely high, over 90% for premium brands. And so you always have that group of consumers when they get under pressure are going Pop around and move around depending on what their individual situations are.

Speaker 9

Absolutely. Thank you so much. Thank

Operator

Our next question will come from Carlo Cascia with JPMorgan. Your line is now open.

Speaker 7

Hi, this is Oliver Brotman on for Carlo. Just a couple from us. So with regards to the announcement made last week on the agreement reached with Philip Morris, is there any risk The remaining $1,700,000,000 that Philip Morris owes, could that value change between now and then?

Speaker 2

Yes. With that value, it was In exchange of $2,700,000 the only thing that would change the $1,700,000 is the interest that Would accumulate through time depending on when they made that payment. Exclusivity remains with us until the final payment is made.

Speaker 7

Got it. Thank you. And then just secondly on dual, while the non compete is no longer in place and you're turning your focus to Varying options to build out the portfolio, you still retain that 35% stake. Is there a plan longer term what you would maybe do with that stake?

Speaker 2

Really no plan at this point. We hold the economic state. We'll see what their performance is in the marketplace. But we thought it was important at that

Operator

Thank you. Our next question will come from Priya Ori Gupta with Barclays. Your line is now open.

Speaker 10

Hi. Thank you for taking my question. This is August in for Priya. One quick question. You have a euro debt maturity early next year.

Speaker 10

Do you need to have that euro exposure or could you be flexible in refinancing that in U. S. Dollars?

Speaker 3

Yes. I don't want to get ahead of ourselves on that maturing debt. So how we retire that debt and As we go through, we'll wait and see. Obviously, we'll do the necessary analytics from a market perspective, from a capital allocation perspective. To your question though, while we have flexibility on where we could issue debt, We do not necessarily need to have the euro exposure, no.

Speaker 10

And one last one. What your thoughts on the relative attractiveness of the U. S. Dollar market versus the European market in terms of swap rates?

Speaker 3

Well, obviously, FX exchange rates are a factor that goes into that allocation. I don't want to necessarily predetermine what's more attractive. But for us, What's important is to have flexibility in the marketplace. We are fortunate in that we have a strong balance sheet. We've got Operating companies that do a tremendous job of converting income to cash.

Speaker 3

So As debt comes due, we can refinance or we can think about other methods of retiring the debt. So For us, it's really the flexibility to determine how we want to handle that debt coming due, but also with markets

Operator

Thank you. Our next question will come from Calum Elliott with Bernstein. Your line is now open.

Speaker 8

Hi, thank you for the question. I wanted to ask you guys a little bit more about Horizon, if that's okay. I guess our sense is it feels like giving away a 25 percent economic share is a huge amount given that candidly this is Poorly performing product, so weak number 4 brand globally without regulatory approval in the U. S. And so hoping you can just talk about the drivers behind why you entered this JV, how you arrived at a 70five-twenty 5 economic split.

Speaker 8

It feels just To ask and then based on the conversations we've had this morning to investors as well, this is going to be very difficult for this to be economically viable for you.

Speaker 2

Yes, we think about it a bit differently. I mean, let me describe. You'll recall when we equalize volumes across the nicotine space in the U. S, it greatly reduces The decline rate. So if you look over the past 5 years, declines at about 1%.

Speaker 2

We think it's important to have a portfolio of products in each of these And across the categories that attract consumers to them from a standpoint of being able to participate in those categories, have Strong products and brands across those categories, which will be a benefit to volume and attract a larger group of consumers to transition from cigarettes over to the smoke free space. I think it's important to remember that the JV that's in place is for a product that hasn't even been commercialized yet as they continue to garner learnings and consumer insights And so we're extremely excited and we think this is a foundation for future collaboration and Potential exposure to international revenue as well.

Speaker 8

Okay. Thanks, Bill. And I guess just one follow-up, unrelated. Wonder if I get you to talk a little bit about cannabis as well. I think you obviously still have your stake in Cronos.

Speaker 8

Your warrants are set to expire in a few months. Presumably, you're not likely to exercise them given they're way after the money. But more broadly, my question is

Speaker 2

Yes. I think when you think back, we highlighted when we made that investment in cannabis that it was going to be a long term investment. We still believe it has long term potential in the U. Certainly with the current political environment, it doesn't feel imminent that anything will switch in the U. S.

Speaker 2

I think the President made an important first step in some of the partners, It's a first step and it's a lot more to take place before the industry dynamics change in the U. S. To be able to capitalize on that. So We still believe it has long term potential in the U. S, but certainly in the political environment, nothing is imminent.

Speaker 3

Okay. Thank you.

Speaker 2

Thank you.

Operator

Thank Thank you. At this time, I will now turn the call back over to Billy Gifford for closing remarks.

Speaker 2

Yes. Thank you, Katie. I'd like to conclude our remarks by going back to where I started. We're in an exciting period of Altria's history and have an unprecedented opportunity And moving beyond smoking, we expect that our actions will lead to a strengthened portfolio across the 3 major smoke free categories that will help smokers transition away from cigarettes. In heated tobacco, we believe we have taken a huge step forward with our new joint venture with JT and our internal product development efforts.

Speaker 2

We now have the ability to compete in the e vapor category and are already assessing our options in this space. And we have demonstrated progress in the growing novel ore category with Orin's continued growth. I continue to be confident in my belief that we can achieve our vision and create long term value for our shareholders. Thank you for joining us and have a great day.

Powered by Quartr
Earnings Conference Call
Altria Group Q3 2022
00:00 / 00:00