Altria Group Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2023

There are 10 speakers on the call.

Operator

Good day and welcome to the Altria Group 2023 Second Quarter and First Half Earnings Conference Call.

Speaker 1

I would now like to turn the call over to

Operator

Matt Livingston, Vice President of Investor Relations for Altria and Client Services. Please go ahead, sir.

Speaker 2

Thank you, Shelby. Good morning, and thank you for joining us. This morning, Billy Gilbert, Altria's CEO and Salome Mancuso, our CFO, We will discuss how the Q2 and Q1 and Q1 results. Earlier today, we issued a press release providing our results. The release, presentation, quarterly metrics and our latest quarterly reports are all available at algria.com.

Speaker 2

During our call today, unless otherwise stated, we're comparing results to the same period in 2022. We will report our financial results in accordance with the U. S. Generally Accepted Accounting Principles. Today's call will contain various operating results on both a reported and adjusted basis.

Speaker 2

Adjusted results exclude special items that affect comparisons with reported results. The description of these non GAAP financial measures and reconciliations are included in today's earnings release and on our website at algry.com. Finally, all references in today's remarks to tobacco consumers Consumer

Speaker 3

consumers who have been in a specific tobacco category or segment

Speaker 2

prefer to existing tobacco consumers 21

Speaker 4

years of

Speaker 2

age or older. With that, I'll turn the call over to Billy.

Speaker 4

Thanks, Matt. Good morning and thank you for joining us. We completed our acquisition of inventory

Speaker 2

and delivered strong business results,

Speaker 4

growing adjusted diluted earnings per share by 5% in the first half. And we returned $3,800,000,000 to shareholders while investing in infrastructure. This trend represents an adjusted diluted EPS growth rate of 1% to 4% Currently, the only positive key payment product with marketing authorization from the FDA. The integration and business plans and international supply chain and expertise. We believe their skills will accelerate our progress Black complete inventory of the device and all five pods used.

Speaker 4

Our worldwide sales organization We expect to further expand distribution of 70,000 stores by the end of this year. We represent This remarkable progress is a testament to the highly talented employees across the entire company. And I applaud the hard work which drove the estimated 2.5% increase in total U. S. Holdback volumes over the past 6 months.

Speaker 4

And then it is the 15th consecutive quarter of 4.0.0 growth. Killam delivered the impressive results While growing on retail price 17% versus the year ago period, we believe Von's ability to continue to grow share While effectively reducing its promotional investments, demonstrates the strength of its product portfolio and growing brand equity. In 2020 We're excited about Oneplus and believe consumers will be too. While a small sample size, early research indicates About 3 out of 4th quarters and 15,000 consumers in our study preferred volume costs over 10 on a line basis. However, the However, we believe we have the appropriate tools to navigate this challenging environment.

Speaker 2

For example,

Speaker 4

earlier this year. For example, roughly 65,000 OTT branded labor cards were sold in California in the first half of the year. OTP branded labor card volume was less volatile in California in the year ago period, but the minimal cigarettes were still legally available. To further understand consumer use of illicit nicotine products, we commissioned a 3rd party study in California where researchers collected and analyzed nearly 20,000 discarded tobacco products. Their findings suggest that almost half of the cigarettes consumed were not tax stamped for sale in California And approximately 20% of the cigarette packs were menthol or products we believe other manufacturers recently introduced to sidestep the purpose of the law.

Speaker 4

In comparison, NINFOL represented And finally, while disposable e vapor products were overrepresented in the study, 98% of the collected e vapor products were flavored Despite being subject to the California flavor ban and authorized unauthorized by the FDA. These figures are alarming and indicate substantial illicit market activity. We believe the best way to prevent illicit markets is to keep tobacco products legal and regulated. We have made this clear in the public comments we submitted in response to the FDA's proposed menthol ban. Our goal is for policymakers to embrace farm reduction as the proper framework for tobacco and nicotine product regulation.

Speaker 4

And there's a growing chorus of diverse stakeholders who agree, including consumers, our trade partners, public health advocates, criminal justice reform advocates, Law enforcement and tobacco brokers. In fact, public opinion overwhelmingly supports harm reduction over prohibition. And science shows a significant public health benefit of moving smokers away from combustible products toward a smoke free future. We will continue to advocate for a well regulated U. S.

Speaker 4

Tobacco industry that embraces farm reduction. We have an unprecedented opportunity to lead the way in shifting millions of smokers away from cigarettes if we follow the science and foster innovation with the support of reasonable regulation. I'll now turn it over to Sal to provide more detail on our results and the

Speaker 5

business environment. Thanks, Billy. The Smokeable Products segment continued to deliver on its strategy of maximizing profitability in combustibles over the long term, while appropriately balancing investments in Marlboro with funding the growth of Smokeree Products. The segment grew its adjusted operating company's income by 3.1% in the 2nd quarter And by 1.7% in the first half. Adjusted OCI margins expanded to more than 60% For the Q2 and first half, this performance was supported by robust net price realization of 10.1% in the 2nd quarter and 10.5% for the first half.

Speaker 5

At retail, Marlboro net pack price increased 6.1% in the 2nd quarter compared to last year. Smokeable Products segment reported domestic cigarette volumes declined by 8.7% in the 2nd quarter and 10% in the first half. When adjusted for calendar differences and trade inventory movements, 2nd quarter and first half Domestic cigarette volumes declined by an estimated 10% and 10.5%, respectively. At the industry level, We estimate that adjusted domestic cigarette volumes declined by 7.5% in the 2nd quarter and by 8% in the first half. At retail, the total discount segment share grew 1.8 percentage points year over year to 28.2%, but was flat sequentially.

Speaker 5

We believe some smokers are trading down as a result of the adverse financial conditions that Billy described. We also continue to see increased competitive in the discount segment, including multiple branded discount offerings priced at the discount levels. As Billy mentioned, Marlboro displayed resiliency during a period of economic pressure for consumers. In the Q2, Marlboro's retail share of the cigarette category grew a 10th sequentially to 42.1%, while declining 0.6 versus the year ago period, partially driven by the discount dynamics that I described. We have also seen a decline in Marlboro's menthol share of the total category as a result of the California flavor ban and increased competitive from premium menthol brands in the balance of the country.

Speaker 5

Additionally, Marlboro grew its share within the premium segment to 58.6 percent, an increase of 0.0.01 percent sequentially and 0.5 percent year over year, While other brands ceded share in the segment over the past year, we believe Marlboro's 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 5% in the first half. To continue this momentum, the Middleton team is expanding Royale, which will further enhance Black and Mild's plastic tip offerings. The team expects Black and Mild Royale to be available nationally later this month. Moving to the oral tobacco product segment.

Speaker 5

2nd quarter adjusted OCI grew 3% and the segment expanded adjusted OCI margins to 68%. This performance was supported by robust net price realization due in part to more efficient on promotional investments. In the first half, the segment grew adjusted OCI by 2.6% with strong adjusted OCI margins of 68.7%. Total segment reported shipment volume decreased by 1.7% and 1.8% for the 2nd quarter and the first half respectively. The segment's volume decline was driven by declines in MSD volumes, partially offset by the growth of ON.

Speaker 5

When adjusted for trade inventory movements and calendar differences, segment volume declined by an estimated 2.5% for both the 2nd quarter and first half. Oral Tobacco Products segment retail share Declined 2.8 percentage points in the 2nd quarter as declines in our MST brands were partially offset by the continued growth of ON. We continue to be encouraged by the performance of our oral tobacco products as ON continued to grow share in a competitive category Copenhagen remain the category leader. Moving to our investment in ABI, We recorded $132,000,000 of adjusted equity earnings in the 2nd quarter. This was an increase of approximately 6 point Our balance sheet remains strong.

Speaker 5

And as of the end of the second quarter, our debt to EBITDA ratio was 2.2 times. In July, we received the remaining $1,700,000,000 plus interest from Philip Morris International As a part of the IQOS agreement we announced last fall, after receiving the payment, we repaid the term loan we entered to finance the Enjoy transaction. We remain committed to creating long term shareholder value through the pursuit of our vision and our focus on significant capital returns and maintaining a strong balance sheet. We demonstrated this commitment in the first half by completing our acquisition of Enjoy, retiring approximately $1,600,000,000 In long term notes at maturity with available cash, paying approximately $3,400,000,000 in dividends and repurchasing 10,400,000 shares totaling $472,000,000 At the end of June, we had $528,000,000 remaining under the currently authorized $1,000,000,000 share repurchase program, which we expect to complete by the end of this year. With that, we'll wrap up and Billy and I will be happy to take your questions.

Speaker 5

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. Operator, do we have any questions? Just quickly before we turn over to the Q and

Speaker 2

A, I just want to apologize to those of you on the webcast for some audio issues we had early on in the call. So we will work to expedite the posting of our

Operator

At this time, investors, analysts and media representatives are now invited to participate in the question and answer session. We will take questions from the investment community first. We'll take our first question from Pam Kaufman with Morgan Stanley.

Speaker 1

Hi, good morning.

Speaker 4

Good morning.

Speaker 1

How do you think about the long term industry volume outlook For the cigarette category, cigarette industry volumes were down 8% in the first half of this year. Do you expect industry volumes will return to the mid single digit decline rate? And what would need to happen for them to normalize towards that level?

Speaker 4

Yes. Thanks for the question, Pamela. I think when you think about it and we discussed this a little bit in the Q1, but I think it's worth a reminder. Remember in the COVID pandemic, we actually saw what we believe added nicotine occasions to adult smokers day. As we came out of the COVID pandemic and you saw mobility increase, you would Some of those nicotine occasions to come back out of their day.

Speaker 4

And I think that was exacerbated by the cumulative effect of inflation. So We had nicotine occasions coming back out of their day and exacerbated by cumulative inflation. So when you think about it, I think it's best to go back history a bit, look at similar occurrences where the adult tobacco consumer was under Extreme economic pressure. And you can look at 'eight, 'nine and you see similar occurrences there. What we see with the adult Cigarette consumers, it takes a bit of time for them to adjust to their new situation.

Speaker 4

And you see typically, and we saw it in 'eight, 'nine And 1, 2002, the consumer returned to their basic normal nicotine occasions in the day. So I think what we're seeing right now, even though inflation is coming down on a cumulative basis, it's still growing. So the consumer is still in their economic pressure. You recall that In the Q1, we put some extra investments behind a couple of pockets of areas where we saw competitor get aggressive with midball offerings And where we saw the consumer under pressure and looking to discount. And you see we're extremely pleased with the results Those investments as Marlboro ticked up a 10th quarter over quarter.

Speaker 1

Thanks. That's helpful. And in your prepared remarks, you touched on some of the initiatives that you have to drive Enjoy growth. Now that you've owned the business for 2 months, Can you just elaborate on where you see opportunity to operate the brand more efficiently? And how are you thinking about the contribution from Enjoy over the coming quarters and the level of investment that you'll need to make behind the brand?

Speaker 4

Yes. Thanks for the question. You're right.

Speaker 6

There was

Speaker 4

a month in the results for the quarter and now we've surpassed another month. Our focus will be on the pod based product, the ACE Enjoy. And you've heard my remarks filling distribution gaps as well as visibility. Just to characterize that, only 3,000 stores Currently in distribution carry all top 3 Ace Pods SKUs and about 10,000 stores carry the pods but no devices. So the focus will be both on filling those distribution gaps and improving visibility, while at the same time Enhancing ACE's brand equity to increase both brand awareness and appeal amongst adult smokers and bankers.

Speaker 1

Great. Thank you.

Speaker 4

Thank you.

Operator

And we'll take our next Question from Bonnie Herzog with Goldman Sachs.

Speaker 7

All right. Thank you. Good morning, everyone. Good morning, Bonnie. I had Question on your guidance.

Speaker 7

You reaffirmed your EPS growth guidance of 1% to 4% this year, which remains pretty darn wide, especially given only 5 months left this year. So I guess I'm trying to understand this. And what headwinds do you see that would cause you to come in at the lower end of your guidance, which implies negative low single digit EPS growth in the second half?

Speaker 4

Well, certainly we highlighted for you, Bonnie, that we'll be investing behind the Enjoy brand as we expand distribution and have equity spending. I think the other thing is the book the economy is very dynamic right now and we've highlighted for you that the The adult cigarette consumer is under extreme pressures and we want the flexibility to adapt to them and be there for consumers if necessary. So I think we'll see how the economy progresses and we'll see how the adult cigarette consumer returns to, if you will, more of a Comfortable position from an economic standpoint.

Speaker 7

Okay. I guess that makes sense. I mean you have stability with some of your investments. So I'm curious, Billy, can you give us a sense of how much you expect your investment to this year versus last year?

Speaker 4

Yes, I won't go into detail just for competitive reasons. Certainly, we'll be, As I mentioned, really enhancing the brand equity to increase awareness amongst both adult vapers and adult cigarette consumers. And then we'll be looking for distribution. So both filling distribution gaps as well as improving the visibility of ACE In stores where it's currently distributed and then expanding to new stores.

Speaker 7

Okay. And then just maybe one final question for me, just on the relative price gap, which continue to widen. I guess, I think it's now the widest it's been for maybe 15 years. I know I've asked you this before, but given It keeps widening. I guess I'd like to hear how your strategy might be changing given the calls you just mentioned on the consumer and then what The deep discount manufacturers are doing.

Speaker 7

Just curious to hear how flexible you might be with your pricing, promo strategy and Certainly, your strategy behind leveraging Marlboro Black to potentially minimize down trading. Thanks, Billy.

Speaker 4

Thanks. And I'll be careful to not talk about future pricing, but I think you can see like going from 1st to 2nd quarter, we highlighted for you some areas of where we thought additional investment was Necessary and you saw the significant result

Speaker 8

of those

Speaker 4

Marlboro increasing a 10th sequentially. So we want that flexibility, but I would remind you that the RDM tools, so that price gap that you're seeing is on a national basis And the RDM tools that we have in the Advanced Analytics allows us to monitor that price gap down to a very, very low level. And we can be efficient with spend and even move spend around if necessary around the U. S. So That's how we're thinking about it.

Speaker 4

From a standpoint of Marlboro itself, you see it continues to grow in the premium It's performing very well. And as I highlighted for Pamela, we've seen instances of this in the history of when the consumer is under pressure That you see discount grow, you see premium from a total industry perspective and then you see that moderate through time.

Speaker 7

Thank you.

Speaker 6

Thank you.

Operator

And we'll take our next Question from Vivien Azer with TD Cowen. Good morning.

Speaker 4

Good morning.

Speaker 9

So I want to start on your oral tobacco margins, please. Quite nice to see some year over year improvement given kind of the multi year degradation we've seen in support of ON. So Sal, I was wondering, can you just comment on how we should think about margins for Old Tobacco in the back half? Thanks.

Speaker 5

Yes, I'm going to be careful not to talk about future quarters. I will Agree with you. We're really happy with the margin performance in the OTP segment. For year to date, OTP margins, as I said in my remarks, we're over 68%. What you're seeing, I think, is the success of ON where we've grown Share each quarter, and as we talked about in our earlier remarks, you see increased Pricing of 17% on a year over year basis.

Speaker 5

So I think that shows the strength of ON in the marketplace, but We're really excited about the progress ON is making and the overall OTP performance.

Speaker 9

Certainly. Thank you for that. And then for my follow-up question, Billy, nice to see the Marlboro market share advance sequentially despite some of the heightened competitive activity that you called out from competitive premium menthol offerings. Do you just given kind of the competitive backdrop, do you think that you need to have the Marlboro Black Gold in the marketplace longer than you had originally contemplated?

Speaker 4

Look, we think that's an addition to our portfolio. It certainly gives the Marlboro team, it rounds out the Black portfolio. The Marvel Black, the family has been around a while. We saw this as a gap in that portfolio and we filled that. So from a Standpoint of overall Marlboro Black, you can think about that as about 10% of Marlboro and it certainly gives the consumer A safe place or a place to land if they're under economic pressure.

Speaker 4

And as you've seen previously, when we use tools like this, We're able to shrink the gap to mainline through time. So it's about keeping mainline very strong, which we're very pleased that it is And then having a place for the Marlboro consumer because Marlboro is still the aspirational brand in the cigarette category. Having a place for them to land when they're under economic pressure And as the situation changes, we can shrink back after May 1.

Speaker 9

Certainly. Thank you so much for that.

Speaker 4

Thank you.

Operator

And we'll take our next question from Matt Smith with Stifel.

Speaker 4

Hi, good morning. Good morning, Matt.

Speaker 6

Billy, I just I wanted to follow-up on your commentary about the level of investment in the cigarette business. And are we in an environment now With the enhanced digital tools and more efficient ways to engage with your consumers, do you expect more volume to be sold using promotional activity Even as economic conditions improve?

Speaker 4

Yes, I wouldn't think of it as more volume under promotional. I think it's being more efficient and effective with that promotional spend. It's Trying to get it to the individual consumer as close as we can get to that, that needs it, while not subsidizing adult cigarette consumers that don't need it. And I think you've seen that with Both the growth in Marvell in the premium space, the investments we made first to second, it's had the 10th Sequentially bumped and the price realization we're experiencing in the cigarette space.

Speaker 6

Okay. Thank you for that. And if I could ask another question on the growth on The ON Oral brand, the growth there remains robust even as you've reduced promotional activity. Can you remind us where the brand stands today in terms Distribution and how we should think about the drivers of growth for ON in the second half of the year?

Speaker 4

Yes. I think from a distribution, we got it in the stores we want. You may see All fluctuations as we decide if we want to add additional stores and distribution, but we've got it to where we want it. You'll recall, we were Capacity constraint from a manufacturing basis, we're beyond that. It continues to grow.

Speaker 4

I would say the growth as we move forward, as it continues, Even though we've been talking about it and you guys have been talking about it for a while, it's still fairly new to the consumer. So it's continuing to Drive awareness and specifically trial. Once the consumer tries it, they enjoy the product. So that's where the growth will come as the success in achieving New consumers to the category as they transition. I think when you think about that Transition through time, it's important to remember that you're looking at the consumer specifically dippers that are moving Currently in large amounts, but it's also talking to the cigarette consumer and it allows an oral tobacco product to be available To consumers that previously rejected moist smokeless tobacco.

Speaker 6

Thanks for that Billy. I'll pass it on.

Speaker 4

Thank you.

Operator

We'll take our next question from Andre Kondreya with UBS.

Speaker 8

Hi, good morning, everyone. Thanks for taking my questions. 2 from me, please, if you don't mind. Firstly, when looking at The U. S.

Speaker 8

Cigarette industry, we saw that discount was stable on a sequential basis, Bucking the trend for the past 3 to 4 years, how much of that do you think could be attributed to your Marlboro Black Gold, for instance, just increased promo activity from you and peers? Thank you.

Speaker 4

Yes. I don't know if I would specifically attribute it to increased As we've highlighted for you, the adult cigarette consumer in the U. S. Is really under economic pressure. And so You look to certainly give them places to land, specifically in Marlboro, a place to land where they can continue to engage with Marlboro.

Speaker 4

We see that as both less expensive versus them leaving and returning and we've been successful with that in the past and I think you see the results 1st to second quarter.

Speaker 8

Makes sense. Thank you. And secondly, this is a bit more medium term, But as you're pushing hard and innovating now with Enjoy, illicit products are a problem on the market As flagged by one of your peers, what can you and said peer do more to Basically improve enforcement in the area and get those numbers down?

Speaker 4

Yes. I think it's continued engagement both with Congress as well as the FDA to really make this their top priority. You saw underage use of e vapor come down, But it's essential that the FDA really focused on enforcement. It's a list of product in the marketplace with flavors that are not authorized. And so you saw in the most recent National Youth Tobacco Survey, that the most popular product with youth following Was on the list of product in the marketplace.

Speaker 4

Now they have started stepping up their enforcement, but it needs to be more vigorous in the Even if they would just publish a list of those products that are authorized and those that are under review, it would Certainly levels up with the trade because the enforcement that they're doing, while encouraging, isn't enough to change what the marketplace It's what we're experiencing in the marketplace.

Speaker 8

Very clear. Thank you. I'll pass it on.

Operator

On your touch tone phone.

Speaker 9

We'll take

Operator

our next question from Gaurav Jain with Barclays.

Speaker 3

Hi, good morning, Willy. Good morning, Sal.

Speaker 4

Good morning.

Speaker 3

Hi. Couple of questions from me. So one is on the e cigarette industry Clearly disposables are cannibalizing closed end e cigarettes. So why are you launching the EnjoyACE and not the Enjoy daily product? And in that context, can you also just tell

Speaker 8

us where

Speaker 3

you are with the PMTA application of the next gen product, which is Which you have mentioned you have filed?

Speaker 4

Yes. So let's break that down. So the first part, I think if you think about the e vapor category, Certainly, there's a large pod base of consumers and so we certainly see that as an opportunity. And you heard in the remarks, The ENJOYACE is the only pod that has received FDA authorization. When you think about the disposable side, The growth at least what we're seeing in the marketplace is with the plethora of flavors that are listed in the marketplace.

Speaker 4

So as the FDA certainly steps up enforcement and we see enforcement take place and those illicit products come out of the marketplace, we see Again, because Enjoy was able to receive authorization for the disposable, the opportunity for growth in that space. But We feel like the appropriate focus is on that large pod based consumer base until they elicit Plethora of flavors and its flavors that are listed in the marketplace are cleaned up. From a standpoint of the age restriction I think you were referring We just recently closed it and we're excited about that technology. We're assessing the timing of following that. We would Have a target in mind by the end of this year.

Speaker 4

But I think what's so exciting about it is it's the regulatory team that we Certainly welcome on board from the Enjoy that was that successfully navigated. It's the only pod based product that has navigated the regulatory. So we're excited they had Started the application, and again, we would target following that by the end of the year.

Speaker 3

Sure. Thank you. And can you also update us on this June Patent litigation that they have filed against Enjoy, which I found very surprising considering I thought you would have When you walked away from JUUL, you would have gained access to all their IP. So could you just help us understand what's happening there?

Speaker 4

Sure. We believe that the litigation against us is meritless and we're vigorously looking to respond to that. When you step back for it, we think it's interesting that Juul only brought the suit after we completed the acquisition. The litigation, if you think about it from a standpoint of the merits of it, it really feels like a bit I have an active desperation, if you will, to stifle competition really from the only pod based product that the FDA has determined appropriate for the protection Public Health. So we see it as Merit.

Speaker 3

Okay, sure. And if I could just sneak in one last one because you mentioned that On Plus, you will launch in Sweden even if it is targeted. Would you also be looking at launching Enjoy internationally at some point of time?

Speaker 4

Yes. Our focus currently is, as we mentioned, filling the distribution gaps on existing stores in the U. S, expanding distributions to approximately 70,000 stores by the end of this year and we'll come back to you on international and any international plans when it's appropriate.

Speaker 3

Well, thank you so much. Thank you.

Operator

And there appear 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 2

Thank you for your time this morning. If you have any follow-up questions, please feel free to reach out to the Investor Relations team. Thanks and have a great day.

Operator

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

Powered by Quartr
Earnings Conference Call
Altria Group Q2 2023
00:00 / 00:00