Q4 2019 Earnings Call

[music].

Good day and welcome to the Altria group, She doesn't 19 fourth quarter and full year earnings conference call.

Today's call is going over the last about one hour concluding remarks by Altrias management in a question and answer session.

In order to Miss Your question. Please press star followed by the number one on your teletext showing phone at any time.

Representatives of the investment community and media on the call, we'll be able to ask questions falling because it was at the conclusion of their prepared remarks.

I would now I shouldn't call over to Mr., Mike Livingston, Vice President Investor Relations for Algeria client services. Please go ahead Sir.

Thanks Brandy good.

Good morning, Thank you for joining us.

Here this morning, with Howard Willard Altria, CEO and Billy Gifford, our CFO to discuss L. Three is 2019 fourth quarter and for your business results.

Earlier today, we issued a press release, providing these results.

The release presentation and quarterly metrics are all available on our website at L. Three dot com and through the Altria Investor App.

During our call today, unless otherwise stated what comparing results to the same period in 2018.

Our remarks contain forward looking and cautionary statements and projections of future results.

Please review the forward looking and cautionary statements section at the end of today's earnings release for various factors that could cause actual results to differ materially from projections.

Future dividend payments and share repurchases remains subject to the discretion of L. Three is board.

Share repurchases also depend on marketplace conditions and other factors.

Altria reports its financial results in accordance with U.S. generally accepted accounting principles.

Today's call will contain various operating results on both 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 todays earnings release and on our web site at Altria Dotcom.

That I'll turn the call over to Howard.

Thanks, Matt Good morning, everyone.

Thousand 19 was a dynamic year for the tobacco category.

For our create was a year characterized by two distinct stories.

The outstanding performance of out three is core tobacco businesses and significant progress advancing our non combustible business platform.

Alongside disappointing performance from our dual investments.

Across our businesses, our employees accomplished more with less and responsibly delivered outstanding results.

Despite unexpected challenges with our investment in July , which led to impairment charges and reported losses. We grew adjusted diluted earnings per share by 5.8% and continued to reward our shareholders with growing cash dividends.

In 2019, we paid $6 billion in dividends to shareholders and increase the dividend for the 54th time in 50 years.

Our core tobacco businesses delivered strong financial performance.

With each of the Smokeable and smokeless product segments, delivering high single digit adjusted operating companies income growth.

Significantly expanding their adjusted operating companies income margins and maintaining strength on their leading premium brands.

In fact, if you look at the performance of our Smokeable and smokeless product segments on a combined basis over the past five years 2019 was a high watermark for combined adjusted Oaky and margin expansion.

In addition, we exceeded our 575 million dollar cost reduction target.

Made significant progress advancing and building our non combustible business platform with the launch of Ipos in two lead markets and the completion of beyond transaction.

And we successfully advocated for moving the legal age to purchase all tobacco products to 21 to address social access concerns among you.

Turning to jewel, we're disappointed in the performance of our jewel investment in 2019, and we reported a second impairment of the dual investment, which believe will discuss in more detail shortly.

It's a critical time for the ebay per category and we believe manufacturers must take responsible steps in the short term to protect the long term opportunity that the category presents for adult smokers looking for alternatives.

We believe that the E vapor category in its current form needs are reset.

And we believe the most important next steps to create a sustainable path forward, our FDA review and ultimate decisions on PMTA filings and driving down youth usage of ebay.

This morning, we announced that Weve reached an agreement with jewel to revise some of the terms governing our investment.

We've agreed with jewel to continue providing regulatory affairs services, including supporting Goulds efforts to prepare and submit it's PMTA filings by May 2020.

And we will discontinue all other services by the end of March 2020.

Our regulatory affairs team is working collaboratively with jewel on its PMTA effort and we're committed to helping dual achieve this critical milestone.

We also agreed the jewel will create a new or independent board structure. After we receive antitrust clearance from the FTC.

We believe the new board structure will provide diverse perspectives and independent expertise to help jewels management team successfully and responsibly navigate the very dynamic ebay per market going forward.

For outreach, we remain committed to preventing kids and non tobacco users from using tobacco products.

According to 2019 monitoring the future under-age use of cigarettes is at a historic low at 3.7%.

Down more than 85% from its 1997 peak.

Although this is significant progress we're troubled by the alarming rise in youth ebay per use.

This is why in early 2019, we launched a national campaign to raise the minimum tobacco purchase purchase age to 21.

And work to persistently with state and federal lawmakers to support this legislation.

In December Congress enacted landmark federal legislation moving the legal age to purchase all tobacco products to 21.

We have much more work ahead of us in reversing the youth E vapor trends and our efforts will not stop at tobacco 21.

We must continue to advance harm reduction.

There are approximately 40 million adult smokers in the us today with more than half interested in alternative products.

While jewel forges its way and an ever changing E vapor category, we remain highly focused on our portfolio approach with alternative products like Ipos and Don.

We want our organization, including our Salesforce.

The most effectively and responsibly advanced the non combustible portfolio options were building.

And we're moving forward on these opportunities responsibly and with increased resources.

With I coast, we're encouraged by early interest from adult smokers and excitement from the trade.

Heatsticks are now distributed across more than 500 retail stores in Atlanta, and Richmond combined.

Both launch markets include an innovative retail ecosystem that focuses on the consumer journey of awareness engagement trial purchase and conversion.

We now have more than 100 train die coast professionals to provide guided trials.

We continue to advance our commercialization plans and our gathering insights from our lead markets to inform them going forward.

Philip Morris International them RTP application for Ipos remains pending with the FDA and we remain optimistic about its authorization.

Additionally, PMI plans to submit a supplemental PMTA in the coming months for Ico Sthree.

Device offers a more premium and modern design and a rapid charge battery compared to the currently authorized 2.4 device.

We plan to capitalize on our first mover advantage, while considering the opportunities presented by an FDA authorized reduced risk claim for Ipos 2.4, and the launch of a more modern device.

In oral nicotine pouches, we're advancing our plans quickly in this rapidly growing category.

Focusing on regulatory manufacturing and distribution efforts.

First our helix subsidiary expects to submit its PMT A's for on by the May 2020 deadline.

Second our best Engineers are building manufacturing capability for on at our Richmond Manufacturing Center, and we expect to begin manufacturing there this quarter.

We are targeting annualized manufacturing capacity of 50 million cans by mid year, and 75 million cans by the end of 2020.

On can be purchased on its premium branded website through robust age verification platform and is now sold nationally in 15000 stores, including circle K sheets, and Murphy USA, representing three of the top five retail chain accounts for smokeless volume.

Beyond brand team will use our adult tobacco consumer database to communicate responsibly with adult tobacco consumers about on and it's broad portfolio. In addition beyond team plans to enhance the packaging to build brand equity and increase the visibility of the broad range of nicotine strengths in flavors to address the very.

I mean preferences of adult smokers and differs.

As the vapor goes through a period of transition we believe it's an opportune time to further invest in our plans in heated tobacco and oral nicotine.

The strength of our core tobacco businesses provides us with the financial flexibility to make these investments as we capitalize on our first mover advantage in heated tobacco and ons compelling proposition and broad portfolio.

We entered 2020 with continued focus on harm reduction.

And preparing for a future where adult tobacco consumers overwhelmingly prefer non combustible products over combustible products.

We look forward to sharing more at cagney.

Let's turn to our financial outlook.

For our dual investment we now expect HSR resolution in the first half of 2020.

Upon antitrust clearance, we expect to account for our equity investment in jewel using the fair value options.

Under this option outreach is income statement will include any cash dividends received from the investments.

In quarterly changes in the fair value of the investment.

Quarterly changes in the fair value of the investment will be treated as a special item and excluded from adjusted diluted EPS.

We don't currently expect to receive equity earnings contributions from jewel over the next three years. Therefore, we've lowered our 2020 through 2022 compounded annual adjusted diluted EPS earnings growth objective to 4% to 7% from our previously announced objective of 5% to 8%.

For our 2020 guidance, we expect to deliver full year adjusted diluted earnings per share of $4 in 39 cents to $4.51.

This range represents a growth rate of 4% to 7% from a 2019 adjusted diluted EPS base of $4 in 22 cents.

The 2020 guidance includes increased investments in our non combustible platform and one extra shipping day in the first quarter.

I will remind you that in 2019, the benefits from our annualized cost reduction program were uneven and ramped up as the year progressed.

I'll now turn it over to ability to provide more detail on our 2019 performance.

Thanks, Howard and good morning, everyone.

We expect the tobacco category to remain dynamic with continued evolution and adult tobacco consumer preferences and tobacco regulation.

We believe we're well positioned to deliver steady performance in this environment and that our enhanced business platform allows it allows us to continue to deliver strong financial results and generate significant cash returned to shareholders.

Commercialized long combustible tobacco products to provide satisfying alternatives for adult tobacco consumers all participate in the adjacent and emerging cannabis category through our investment in credits.

As Howard mentioned earlier in 2019, our core tobacco segments more resilient and delivered excellent performance against their stated objectives.

And the Smokeable products segment. The segment grew adjusted OCI by 8.6% and expanded its adjusted OCI margins by 3.9 percentage points to 54.5%.

Our pricing significant cost savings and more efficient promotional spending more than offset lower cigarette volume to drive strong income growth for the year.

The smokeable products segments price realization was up 8.4% for the year.

For efficient more efficient promotional spending enabled through data analytics contributed to the segment's strong net net pricing.

Although retail share remained stable at 43.1% data test versus prior year.

Product expansions with innovative resale packaging and other brand equity investments continue to support marbles performance.

The mobile rewards equity program launched nationally a year ago continues to exceed our expectations.

There were $2.6 million adult smokers enrolled.

200 million pack codes entered since its launch.

Mobile coupons are driving repeat purchases and remained a number one redeem guidance.

At the industry level, we estimate that us cigarette volumes declined by 4% to 5% in the fourth quarter and by 5.5% for the full year when adjusted for trade inventory movements and other factors.

We continue to believe that accelerated movement of adult smokers to other categories, primarily E vapor and increased exclusive ebay per category usage drove the incremental year over year decline.

For cigarette price elasticity will remind investors that this component of the client Gray is based on retail price changes that include excise taxes manufacturer pricing and trade margin changes.

For the full year 2019 cigarette industry prices at retail increased by approximately 4%.

When this is multiplied by the Alaska to city coefficient of negative 0.3.

The result is a volume impact of 1.2% for the year.

Given the recent regulatory and legislative developments in E vapor and the national move to 21 as a legal age to purchase all tobacco products, we expect cigarette industry volume trends to remain dynamic.

Taking these factors into account we project for year 2020, adjusted industry cigarette volumes declined 4% to 6%.

However, due to our expectations for continued volatility across tobacco categories, we're no longer providing a multiyear forecasts forced us cigarette industry volume declines.

In discount we estimate that total that total discount category share was up four tenths for the full year, but remained in line with historical share levels at 24.2%.

While we have seen us some share unbranded discount PM USA continues to be pleased with elements performance and its increased profitability over time.

And cigars JMC had a great year with 3.1% volume growth exceeding the machine made large cigar category.

We're pleased with the continued strength of black and mild and the profitable tipped cigars segment and the cigars businesses contribution to Smokeable segment adjusted OCI growth.

Our smokeless products segment performed well in 2019, delivering more than $1.6 billion, and adjusted OCI and maintaining strength behind Copenhagen.

The smokeless products segments, adjusted OCI increased by 9.7% and adjusted OCI margins expanded by three percentage points to 71.7% as higher pricing more efficient promotional spending and lower costs more than offset lower volume.

Copenhagen continue to lead the category and grew at share by three tenths for the year to 34.8%.

When adjusted for trade inventory movements in calendar differences adjusted smokeless volumes declined by an estimated 3% in 2019.

In the last six months total smokeless industry volume decreased by an estimated 1%.

We continue to believe that adult diaper interest and the all nicotine patch and ebay per categories impacted smokeless volumes.

Moving to E vapor.

E vapor category experienced rapid growth through the first nine months growing volume approximately 35%.

The categories growth was driven almost entirely by jewel.

Late in the third quarter news of vapor related illnesses and das and the release of government survey data showed a significant rise and use E Baker Hughes drove legislative and regulatory action.

Several states moved to band flavored or all E vapor products.

In the fourth quarter the E vapor category declined nearly 8% sequentially and growth slowed to 3% year over year.

Also in the fourth quarter, we estimate jewel share of the market declined sequentially to 44% from 48%.

In preparing our quarterly and year end financials, we performed evaluation analysis of our investment in Joel.

As a result of this analysis, we recorded an additional 4.1 billion dollar impairment to our jewel investment.

Primarily driven by the increased number of legal cases pending against Joel and the expectation that the number of legal cases against Jewel, we'll continue to increase.

Since our last quarterly earnings announcement on October 30, Onest 2019, the number of cases pending against jewel has increased by more than 80%.

For a brief overview and the third quarter, we adjusted expected cash flows from July to reflect slower future ebay per category growth due to likely regulatory action in the us on various E vapor bands in the us and internationally.

In the fourth quarter as a result of the legal environment. We just described we increased the discount rate to reflect greater uncertainty around Jules future cash flows.

The latest apparent brings the current value of our investment to $4.2 billion.

As we said earlier, we're disappointed in the performance of the past year and helped jewel can move forward more constructively.

Turning to our strategic cannabis investment.

Sonos.

They are executing against the strategy of building differentiated brands and disruptive intellectual property.

Last year Kronos entered the rapidly growing use CBD market through its acquisition of Redwood holdings, which manufactures and distributes to the lower Jones luxury brand.

Products has been preparing for Canada's legalization of derivative products, including vaporizers.

Furnace also made significant progress with talent acquisition hiring and filling critical business roles.

We believe the U.S. cannabis market, if recently reasonably regulated and legalized at the federal level presents a tremendous opportunity.

And we're pleased with Cronus this progress in building these key capabilities and business platform.

And alcohol the results of our walk in our wind segment reflects ongoing challenges in sync Michelle's business, which they continue to work to address.

Adjusted OCI for the year was $73 million down nearly 30% driven primarily by higher cost and promotional investments.

Thanks, Michelle continues to invest in innovative packaging digital marketing and brand often optimization.

For example, 14 hands is now the number one selling premium kenwyne in several of in stores.

In beer abiotic delivered $875 million and adjusted equity earnings representing an increase of 8.8, 0.7% for the year.

Maybe I also contributed nearly $400 million in cash dividends in 2019.

Turning to capital allocation.

We repurchased $500 million in shares in the fourth quarter.

We had $500 million remaining under our previously announced $1 billion share buyback program.

And expect to complete the program by the end of this year.

And last August we increased the dividend for the 54th time in that 50 years, our current annualized dividend rate of $3.36 per share.

Represents a dividend yield of 6.8% as of January 27, 2020.

That wraps up our results 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 on our dot com.

We've also posted our usual quarterly metrics, which include pricing inventory and other housekeeping items.

With that I'll up the question and answer period.

Randy do we have any questions.

Thank you once again as a reminder, if you'd like to answer your question. Please press the star key followed by number one on your Touchtone phone this time.

Sure as analysts can leave our presenters are non vice participate in the question and answer session.

We'll take questions from the investment community first.

Your first question no sign of Chris squarely at Stifel.

Please.

Hi, good morning.

Good morning.

Hi.

I just wanted to ask the question if I could first on just looking at that volume Skillet cigarette category you had.

Number. This is the number of puts and takes to volume than 2020 as we look ahead.

I guess I was wondering is it a little stronger performance for the category in the fourth quarter. As we look ahead you have tobacco 20 warmest give you a drag on volume I guess I'm curious about like the cross category movement. It seems like we're seeing a pretty mark deceleration in E cigarettes, which has been a big drag there.

Maybe like a 21 and hikes with Essentre category performance in 2020.

And then just to understand how that's going to help.

Affect the volume for cigarettes in 2020.

Sure I think when you look at.

Cigarette volume declines are ranges is 4% to 6%.

With regard to tobacco 21 in the first half of last year, we estimated about 2% of cigarette industry volume.

It was legal age to 20.

And so certainly that's going to be an impact.

This year going forward.

But I would say that you already had a certain number of states that we're already at a legal age of purchase of 21 before we made that measurement and some of that got factored in the has more than 50% of the U.S. volume was covered by 21 by mid year. So some of that decline is in the base of the decline.

Line rate.

I think with regard to E vapor, it's hard to precisely predict what's going to happen to that category.

But if you just turn to the fourth quarter of this year is year over year growth rate was was only 3%.

And.

I think that.

We really expect that we're going to see a continued slow down or even maybe a decline in the E vapor category.

Over the next couple of years and I think Thats, that's going to result in less pressure on on the cigarette category.

The other products that potentially could impact the cigarette category, though of course our.

Icosahedron, not burn and the tobacco drive nicotine pouch business.

Okay. Thank you for that I had just one other follow question, which is in relation to the cost savings you achieved in two.

2019.

Noted that you hit about a 600 million dollar annualized rate you exit the year.

Clear is that puts you around $150 million in the fourth quarter and is there any way to discuss what's your less the 2020 coming through from the actions you took in 2019.

Yeah, Chris you're right, we were wrapping up as we went to the year 2019, the biggest annualization will come from the head count reduction related dollars because remember that most of the head count exited towards the end of the first quarter. So that'll be the biggest part of the Annualization.

And are you willing to say are able say really how much is left in terms of savings you expect in 2020, yes, probably all going to that level of detail, but I think that 600 million is a good number from an annualized run rate.

Okay. Thank you.

Your next question comes the line of Vivien Azer of Cowen.

Good morning.

Morning.

So I.

I wanted.

Just touched base on some of your market share aspiration given.

Your next the cigarette industry volume back to occupancy has proven to be so our do you think about possibly.

Worst outlook relative to what you guys used to it you think it's not three or four anymore. So does that change how you think about holding or modestly growing gear cigarette market here. Thanks.

Now I have to say that.

That we were pleased with our performance last year.

We had stability on Marlboro.

We we had a modest step down in our share on any of them, but it's at a much higher level of profitability.

And and we had strong profit growth from the cigarette category. So we believe that the the performance we had last year was.

It was quite strong and quite acceptable.

Okay. That's helpful. Thank you and just a follow up on Jewel can you comment at all about what your expectations are now for revenue mix on over the next few years.

Tool domestic versus internationally.

Yes, Vivian from a standpoint of.