Q3 2019 Earnings Call
During our call today, unless otherwise stated we're comparing results to the same period in 2018.
Our remarks contain forward looking and cautionary statements and projections of future results.
Share repurchases also depend on marketplace conditions and other factors.
Adjusted results exclude special items that affect comparisons with reported results.
Descriptions of these non-GAAP financial measures and reconciliations are included in todays earnings release and on our website at al treated Dot com.
With that I'll turn the call over to Howard.
Thanks, Matt and good morning, everyone.
We are in the midst of a remarkable transformation within the tobacco with industry.
Once predictable the industry has become increasingly dynamic in complex.
And while this evolution made both short term challenges, we believe tobacco Herman production due to significant opportunity for the industry and adult tobacco consumers.
We believe that into the next decade, non combustible products can surpass combustibles as the preferred choice among adult tobacco consumers.
We intend to lead this historic transformation with our unmatched portfolio of non combustible products.
In new investments.
Before moving to our strong third quarter performance I'd like to provide you with our perspective on Altrias strategy and the key non combustible platforms.
Over the last two years, we believe we've built a business platform with the ability to deliver strong long term results across a variety of future industry scenarios.
And that the regulatory environment for non combustible products, we continue to evolve.
We assessed our portfolio and believe that we have addressed gaps with investments in vapor and oral nicotine pouches.
As well as an adjacent investment in Canada.
Today, we believe we have the strongest portfolio across multiple tobacco platforms and are well positioned for future growth in a rapidly evolving us tobacco industry.
Hey, more than 50% of the U.S population is governed by tobacco 21 laws.
And while there is strong momentum behind this change more activity is required from the federal government and remaining states to an act tobacco 21 last nationally.
We also word swift action from the FDA and other public health authorities to take the appropriate actions regarding flavored E vapor products and to identify the sources of the recent vaping injuries.
We believe that these actions could reset the course for the E vapor category and preserve its long term potential for harm reduction.
We're also excited about the opportunity that heated tobacco presents to adult smokers.
Based on third party research approximately 40% of US adult smokers have tried but ultimately rejected E vapor products.
We believe heated tobacco could be an appealing alternative for these adult smokers.
Unlike E vapor products. These systems contain real tobacco and offer a sense sorial experienced closer to that of traditional cigarettes.
The ipos heated tobacco system is the first and only heated tobacco product that's received pre market authorization from the FDA.
And it also has a pending am RTP application.
We believe that heated tobacco systems, and ico, specifically are well positioned to meet the preferences of adult smokers, who are looking for but have not found a satisfying alternative to cigarettes.
Finally, we believe that oral tobacco can provide a compelling alternative for adult smokers.
Moist smokeless tobacco, we filed a modified risk application with the FDA for Copenhagen snuff based on decades of available science.
Additionally, we have invested in a rapidly growing oral nicotine pouch segment.
Which offers adult tobacco consumers convenient nicotine satisfaction.
Ultimately the adult tobacco consumer and the regulatory framework will dictate which categories grow and at what pace.
We believe our broad portfolio investments and leading capabilities position us to win in multiple future scenarios.
Turning to third quarter performance, Algeria continued to deliver excellent results driven by our core tobacco businesses.
We grew adjusted diluted earnings per share over 10% in the third quarter with both of our core tobacco segments delivering double digit adjusted operating companies income growth.
Expanding their adjusted operating companies income margins and maintaining momentum on their leading premium brands.
The Smokeable products segment delivered another remarkable quarter.
Growing its third quarter adjusted operating companies income, 12.6% and increasing its year to date adjusted operating companies income growth to 8.1%.
Tire pricing in the impact of our cost reduction efforts more than offset lower cigarette volumes to drive income growth in both the third quarter and the first nine months.
In discount Alan M is performing inline with expectations and we are pleased with its increased profitability over time.
We believe discount category dynamics continue to primarily reflected churn between branded discount and deep discount offerings.
Overall discount category retail share was flat sequentially in the quarter at 24.2% and remains in line with historical share levels.
We estimate that use cigarette industry volumes declined by 5.5% in the third quarter in first nine months when adjusted for trade inventory movements calendar differences and other factors.
Based on our 12 month moving data we estimate there are now 12.6 million adult vapors 21, plus as of September 2019.
Up from 10.3 million at the end of 2018.
Importantly that growth trend coincides with the trend toward more exclusive usage in the category.
Which is the highest number of exclusive users since our study began in 2014.
Adult tobacco consumer movement across tobacco spaces remains highly dynamic and we will continue to monitor these trends.
Over the past 12 months us cigarette industry volumes declined by an estimated 5.5% when adjusted for trade inventory movements calendar differences and other factors.
We also maintain our 4% to 6% adjusted decline rate estimates through 2023.
Until more information is known about how adult tobacco consumers will respond to ebay per category dynamics, including regulation and legislative developments.
The smokeless product segment continued its strong 2019 performance growing its adjusted operating companies income by 10.2% in the third quarter and 9.7% for the first nine months of 2019.
USSTC smokeless volumes decreased an estimated 3% in the first nine months of the year when adjusted for trade inventory movements in calendar differences.
In the last six months smokeless industry volume decreased by an estimated 1.5%.
We believe these declines reflect increasing adult tobacco consumer interest in both E vapor products and oral nicotine pouches.
We made the investment based on our belief that jewels product development strength.
Early signs of brand equity and potential to convert adult smokers set it apart from all other E vapor products in the market.
We also believe that the investment would enhance outreach growing portfolio of non combustible product offerings.
Given the dramatic shifts in the current E vapor regulatory and marketplace environments, we've revised our transaction assumptions.
In permit preparing our financials. This quarter, we performed evaluation analysis on our jewel investment.
We're now projecting lower ebay per category volumes in the us versus our original estimates.
Which resulted in a third quarter noncash impairment charge of $4.5 billion related to our jewel investment.
Also factoring into this determination where other changes to our original assumptions.
For example, we expect it may take longer for jewel to realize the strong margin performance that we previously communicated.
We've also revised our estimates of jewels international business due to recent market developments.
Despite this impairment charge, we remain committed to jewels success.
We're pleased with the recent decisions by jewel to change leadership.
And we are optimistic about jewels focus and prioritization in key areas, such as establishing industry, leading responsible practices and pursuing regulatory authorization of their products.
Finally regarding antitrust clearance weve certified substantial compliance with the FTC second request and we expect to resolution in the first quarter of next year.
Turning the heated tobacco PM USA is executing a robust marketing strategy for ipos in the Atlanta lead market.
First us Ico store opened in September and has since been supplemented by additional retail touch points.
We've also recently opened a second ipos boutique in them all of Georgia.
Of course responsible marketing is the foundation for all our consumer interactions I Kocis intended only for adult smokers and I coast boutique entrants must be 21 or older.
The performance of Mycosis, Atlanta, and other lead markets will be an important input to our future commercialization plan for the brand.
The primary goals of the lead markets are to determine how best to communicate with adult smokers and how to scale our efforts.
Additionally, we are encouraged that the FDA draft PMTA rules include a special pathway for technological changes to previously authorized products.
Which could support bringing newer versions of the iqos device to market.
Altria has a sizable employee base enrichment and deep connections with the community that could accelerate early adoption of ipos.
We also anticipate distributing heatsticks to approximately 150 retail outlets within the area and deploying a similar marketing strategy as the Atlanta lead market.
We're pleased to expand ipos availability as an alternative to adult smokers and look forward to sharing more details in the future.
In oral nicotine pouches, we are pleased to announce that the on transaction closed during the third quarter.
Now that the transaction is complete we'd like to update you on our plans to pursue leadership in this new in fast growing category.
We are focused on engaging adult tobacco consumers through both traditional retail and digital experiences.
We launched a premium branded website for on where age restricted adult tobacco consumers can explore the brand and will soon be able to purchase the product online.
We expect to begin production of on in our Richmond Manufacturing Center, beginning first quarter next year.
In addition, our strong regulatory affairs team is preparing PMT days for the on portfolio.
For the May 2020 deadline.
As a reminder, Algeria owns 80% of the helix innovations joint venture that will commercialize on globally.
On has a product portfolio consisting of 35 unique skews seven flavor varieties across five nicotine strengths.
We believe the breadth of nicotine strength in flavors is a tremendous competitive advantage as both adult smokers and dippers confined satisfying options within the on portfolio.
As I mentioned at the beginning of the call. We continue to believe the evolution of the tobacco industry represents a significant opportunity for altria.
We marked major milestones in our transformation journey, this year, including launching heico's and completing the on transaction.
We believe that with current adult smoker trends and E vapor disruption, it's an opportune time to expand the availability of these options.
We believe that incremental investment behind our non combustible portfolio will best position now trea for long term industry leadership.
In light of these considerations, we're replacing our long term adjusted diluted EPS growth aspiration of 7% to 9%.
With a compounded annual adjusted diluted EPS growth objective of 5% to 8% for the years 2020 through 2022.
We believe this new growth objective for that provides us the flexibility to make investments in non combustible offerings for the long term.
Generate sustainable income growth in our core tobacco businesses and return cash to shareholders through a strong dividend.
We also expect to maintain our dividend payout ratio target of approximately 80% of adjusted diluted EPS. During this period.
Turning to 2019 earnings we reaffirm our guidance for full year adjusted diluted EPS to be in a range of $4 in 19 cents to $4 in 27 cents.
Representing a growth rate of 5% to 7% from an adjusted diluted EPS base of $3, a 99 cents in 2018.
Altria is 2019 success to date can be attributed to our resilient core tobacco businesses and our talented employees.
Our employee base has embraced industry disruption with focus and dedication.
I'll now turn it over to ability to provide more detail on our performance and other investments.
Thanks, Howard and good morning, everyone.
And 7.5% for the first nine months.
In the third quarter, the Smokeable products segment expanded adjusted OCI margins by 4.9 percentage points to 55.3%.
Driven by higher pricing and lower controllable cost.
Thanks to investments made in trade programs data analytics and consumer data.
Net price realization was 9.6% in the third quarter.
8.4% for the first nine months of 2019.
Mobile performance continues to be supported by leading brand equity altered by investments in product expansion.
Packaging innovation digital walking and training programs.
Specifically the mobile rewards program continues to resonate well with adult smokers and drive visits to marble dot com.
Enrollment continued to grow into third quarter and the program now has two and a half million participants.
And 150 million pack codes have been entered since the program launched in January .
And cigars.
In the smokeless product segment, adjusted OCI margins expanded by 2.5 percentage points to 71.9% in the third quarter, primarily driven by higher pricing lower promotional investments and lower controllable costs.
USS Tcs third quarter retail share was 53.9%.
Turning to our alcohol assets.
Meanwhile, the premium segment continues to be Holly competitive.
Hi, Michelle delivered adjusted operating companies income a $16 million.
Now nearly 45% in the third quarter, primarily due to higher promotional investments and lower shipment volume.
And in their adjusted earnings from our equity investment in Abbey eyewear $238 million into third quarter up more than 6% year over year, reflecting ultra share of abbey second quarter results.
The kind of a space remains very active and Carlos is making progress in executing against its growth strategy.
Photos closed on its acquisition of read what holdings during the third quarter, which provides products with a leading us have based products platform.
Greg when manufactures and sells tempt derive CBD and key skin care and other consumer products under the Lord Jones luxury brand name.
We believe the acquisition fits well into current US a strategy of building differentiated brands and disruptive and intellectual property.
We're very excited about the future prospects of the Kennedy cannabis industry and the opportunity for current us to position itself for long term leadership.
Moving to our capital allocation.
We continue to return a significant amount of cash to shareholders and the former dividends and share buybacks.
In August we marked at 50 gear of dividend increases.
We are proud of our dividend growth history, and remain focused on providing long term value to shareholders through dividends.
With the recent increased Altria is current annualized dividend rate.
His $3.36 per share.
Represents an annual dividend yield a 7.3% as of October 20.
2019.
We paid 1.5 billion and dividends in the third quarter and we still expect to complete our previously announced 1 billion dollar share repurchase program by the end of 2020.
After his businesses businesses generate significant cash flow.
In fact, we've generally produced about $1 billion, a cash annually in excess of our dividend payments, which provides flexibility to repurchase shares finance debt maturities and invest strategically and the business.
Our cost reduction program remains on track and we still expect to realize approximately $575 million and annualized cost savings by the end of 2019.
Our savings continued to build from the second quarter into the third.
And as the year progresses this offering is more.
Or is this is offsetting more of the incremental interest expense, we incurred in connection with our investments in Kronos and Joel.
As a reminder program includes savings from workforce reductions.
Third party spending reductions and closure of our new Mark operations.
With that will wrap up and Howard 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 in outreach dot com.
We've also posted our usual accordion quarterly metrics, which include pricing inventory and other housekeeping items.
With that I'll open up the question and answer period, operator, do we have any questions. Thank you. Once again I should remind me I'd like to ask your question. Please press Star key followed by the number one you touched telephone at this time.
Thanks Analyst and media Representatives are now invited to participate and the question and answer session. We will take questions from the investment community. Thanks.
Our first question comes from the line of credit squarely with Stifel.
Hi, good morning.
Hi, Chris Hi, I, just wanted to lead out with a question in relation to your new medium term, if I'd call that EPS growth outlook and I just wanted to better understand the basis for the change you gave some color on the call I guess I would just asked is your I assume it does your 4% to 6% volume growth outlook remain the same and then embedded within that EPS growth outlook.
Much of the this is about the obviously, it's become a pretty fast changing environment. In this category lot of new products, obviously like hosted on how much that's about investment as opposed to some varying outlook in volume or that kind of thing for your business.
Sure.
I think first of all our current.
Mid term cigarette volume decline estimate remains the same at 4% to 6%.
Although certainly as we indicated before if the environment changes our view of that we will update you on that in the future.
I think there are a variety of reasons why we replaced our 7% to 9% EPS growth with a 5% to 8% EPS growth through 2022 to that I think are worthy of calling out.
First of all I think it gives us flexibility to increase our investments over the next couple of years in expanding both ipos and on.
At a time that I think that adult tobacco consumers would be particularly interested in those products and we could build a strong business that would contribute to EPS growth over the long term.
Now the second thing is that while we don't yet have the final FDA guidance on E vapor.
Hi, there is certainly the possibility that the E vapor category.
I could see its growth rate significantly slowed down or or even see the category contract.
In relation to that FDA guidance, and the 5% to 8% EPS growth gives us the opportunity if necessary.
To push out some of the contributions from June tool that we expected on our equity income line.
Beyond next year.
Okay. That's helpful. Thank you for that and then just another question in relation to Ipos.
Obviously, you're adding Richmond should we expect you to continue to just methodically add new locations or is there an idea that used to establish some learnings in these markets and then think about expanding this to other markets and trying to get US an idea. The phasing I know, we can get exactly but the phase and how to think about incremental locations for I guess.
He has a great question.
Chris the way, we're thinking about icons as we certainly want to get the learnings of the us consumer in their interactions what really resonates with them as far as the learning the product and engaging with the product.
We are excited about the loss that we had been and Atlanta, We're excited about BNS and expanded to Richmond, I think at pace will really matter.
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