Q2 2020 Altria Group Inc Earnings Call
[music].
Good day, and welcome to actually agree 2022nd quarter and first half earnings Conference call. Today's call is scheduled to last about one hour and closing remarks, well actually I'm mentioning I had a question answer session.
Representatives of the investment community and media on the call, we'll be able to ask questions. Following the conclusion of the prepared remarks I.
I would now like to turn the call over to Mr. Mac Livingston, Vice President of investors relations plants for your client services. Please go ahead Sir.
Thanks Adrian.
Good morning, and thank you for joining us this morning, Billy Gifford Altria CEO and Selman crew. So our CFO will discuss altria second quarter business results.
Earlier today, we issued a press release, providing our result, the release presentation and quarterly metrics for all available on our web site at Altria Dot com and through the Altria investor out.
During our call today, unless otherwise stated we're comparing results to the same period in 2019.
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 todays 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 Altrias Board.
Al through reports its financial results in accordance with U.S. generally accepted accounting principles.
This 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 today's earnings release and on our website at <unk> Altria Dot com.
With that I'll turn the call over to Billy.
Thanks, Matt Good morning, everyone and thank you for joining us.
Despite the challenges of the cobot 19 pandemic in the U.S., our employees continue to execute against or 10 year vision with strong focus and commitment.
Over the first half of 2020, we believe Altria showed resilience and volatile market conditions drilling adjusted diluted earnings per share by 8% driven by the outstanding financial performance of our core tobacco businesses.
Combined the Smokeable old tobacco products segments grew adjusted OCI by nearly 11%.
And expanded adjusted OCI margins by nearly two and a half percentage points.
We've also hit key milestones and made steady progress behind your non combustible product portfolio.
Specifically ft A's recent authorization.
<unk> PM USA to market I coast, Heatsticks as modified risk tobacco products with a reduced exposure claim.
Let me say launch heico's in Charlotte, It's thirdly market.
Helix submitted PMT age with the FDA.
All 35 on products, which are now in scientific review.
And helix continues to expand manufacturing capacity and distribution for oil.
We're excited to Reaccelerate, our engagement with adult smokers looking for alternatives to their traditional cigarettes in pursuit of our vision to responsibly lead the transition of adult smokers to a non combustible future.
Before diving deeper into our business results I'd like to take a moment to address the social change underway in the United States in globally.
Like many other companies, we're operating in the context of importance and long overdue Society will change.
The recent senseless death of Black Americas showed that systemic racism and social injustice still widely exist today.
Our black and Brown colleagues have faced these injustices before too long.
Well I clubs matter, and we must take meaningful actions to drive long lasting change.
We understand the significant work ahead of us and we have taken a number of initial steps.
Including holding courageous conversations that provide a safe platform for our black colleagues to share Ics their experiences as other seek to listen and understand.
Partnering with unified armed Black employing network to identify internal opportunities and create action plans.
Supporting the responsible removal of Confederate statues and our hometown.
On June 19th raising the June team flag at our facilities and declaring today, a company paid holiday for healing and reflection.
And committing an initial $5 million to primarily support criminal Justice reform and black owned business development.
Earlier this year, we established aspirationally inclusion and diversity aiming points for our organization.
We recognized that achieving our 10 year vision will require us to think and act differently.
Our organization needs to better reflect the diversity of the world around us and all of our employees should feel fully included and empowered to contribute to our success.
These endpoints include achieving at our VP and above levels 50, 50 gender parity.
And it could composition of at least 30% ethnically diverse executives, which we determined using the composition of the US College educated workforce and projections of population demographic changes.
Currently approximately 30% of mbps are women and 15% or ethnically diverse.
We're committed to driving change, we're holding ourselves accountable and expect to report on progress periodically.
This is a top priority for out area and the communities, where we live and work.
Let's now turn to our results.
Altria second quarter adjusted diluted earnings per share grew nearly 1% from the prior year.
As growth and our adjusted operating companies income was offset by lower contributions from our equity investment in Abbey.
We believe a mix of macroeconomic effects factors in the second quarter influenced adult tobacco consumer behavior.
While the pandemic led to historic unemployment rates.
Federal government efforts through stimulus checks and increased unemployment benefits hope to ease economic hardship for low end middle income Americans.
And these efforts have likewise benefited our adult tobacco consumers.
As a result of local restrictions, we believe adult tobacco consumers reduced purchases for non tobacco discretionary items like gas transit and entertainment.
Contributing to an increase in available discretionary income.
Adult tobacco consumers continue to make fewer trips to the store putting increase their tobacco expenditures by buying more packs and cans per trip.
We also believe fewer social engagements allow for more tobacco usage occasions.
All of these factors contributed to improved tobacco industry volume performance in the second quarter.
Moving to our reporting segments.
Our Smokeable products segment strategy is to maximize profitability, while appropriately balancing investments in Marlboro with funding the growth of our non combustible products.
In the second quarter adjusted OCI increased 3.3%.
Driven by higher pricing and lower costs, which more than offset lower volumes.
For the first half this segment generated strong adjusted OCI growth of 10.9%.
Second quarter repair reported domestic cigarette volumes in the Smokeable products segment decreased by 8.8%, which primarily reflected the impact of trade inventory movements in both the current and prior year periods.
For the first half reported domestic cigarette volumes decreased 1.9%.
When adjusted for trade inventories calendar differences and other factors first half cigarette volumes decreased by an estimated 3%.
For the industry, we estimate adjusted Dimmit domestic cigarette volumes were unchanged in the second quarter compared to the year ago period and declined 1% the first half.
As we discussed in our first quarter earnings results first quarter industry volumes benefited from pantry loading in March and we expected to see this payback in the second quarter.
Due to the macroeconomic factors, we described earlier that impacted adult tobacco consumers behavior, we saw only minimal volume payback in the second quarter as underlying demand remained consistent across the quarter.
Looking over the past four quarters adjusted domestic cigarette volume declined steadily moderated.
Since the third quarter 2019.
Driven primarily by a reduction in cross category movement.
This cigarette category has demonstrated resilience and based on year to date industry volume performance. We revised our 2020 estimated full year adjusted cigarette industry volume decline rate to a range of 2% to 3.5% from our previous estimate a 4% to 6%.
Mobile second quarter retail share the total cigarette category was 42.8%.
Down six tenths versus the year ago period.
As you'll recall earlier this year, we noted an increase in the number of adult smokers, aged 50, plus who moved from the E vapor category back into cigarettes.
Benefiting volumes for marble and the cigarette category.
This demographic has a greater tendency to purchase discount brands than younger adult smokers, which increased discount segment share the start the year.
We believe the effect of this dynamic will have a lingering impact on multiples year over year retail share comparisons through 2020.
Sequentially marble was stable in the second quarter.
We believe PM USA strategic investments in innovative loyalty programs resealable packaging and its leading trade programs reinforced the strength of Marvel and position at well to deliver on its long term profit potential.
In discount total segment retail share grew 14th year over year, but declined three tenths sequentially to 24.5%.
Sequential share losses in both branded and deep discount products drove the discount share contraction.
We continue to be pleased with the performance of PM USA branded discount offerings and their increased profitability over time.
For both our industry volume and Downtrading expectations, we will continue to monitor the factors. We described earlier that influenced adult tobacco consumer behavior in the first half.
We believe our Smokeable businesses have the right tools in place to help successfully navigate through these uncertain times.
Turning now to our non combustible portfolio. We're excited to continue expanding our non combustible product offerings, and making progress towards our 10 year vision.
We believe all tobacco products E vapor and heated tobacco present significant opportunities for adult smoker conversion to non combustible products.
This strategy of our old tobacco products segment is to maximize profitability over time in traditional MST through the strength of Copenhagen and to responsibly and rapidly grow on old nicotine couches.
So old tobacco products segment grew adjusted OCI by 8.1% in the second quarter and tenant a half percentage for the first half driven by higher pricing and volume, which more than offset investments in oil.
Reported domestic oil tobacco products segment volumes increased 2.8% in the first half.
When adjusted for calendar differences.
Trade inventory movements and other factors volumes were unchanged in the first half.
For the old tobacco industry volumes increased by an estimated 6% over the last six months.
Driven by the growth of all nicotine pouches.
In the second quarter total oil tobacco products segment retail share declined three percentage points to 50%.
Copenhagen's retail share declined two percentage points to 32.1%, primarily driven by the growth of all nicotine couches.
We're excited about the progress helix is making in oil nicotine pouches.
Helix is top priorities are to increased manufacturing capacity.
And expand orange retail footprint.
Helix continues to install manufacturing equipment and expects to remove capacity constraints in 2021.
Retail distribution for on continues to steadily increase.
Helix expects to continue its store expansion this year.
At the ended the second quarter on was sold in the top six change for old tobacco volumes.
And in over 40000 stores, an increase of nearly 43% since the first quarter.
Yes. Its is testing various go to market strategies for oil, including the use of our innovative tobacco product fixture space at retail.
We believe oil and is proving to be a competitive product and has been successful with both adult smokers and dippers.
Based on our analysis of purchases in a large convenient chain.
37% of owns purchasers were exclusive cigarette smokers as compared with 23% present.
One's ability to attract adult smokers is important and achieving our 10 year vision.
Today, there are approximately 40 million us adult smokers compared with approximately 6 million us adult differs.
We attribute launch early success to the variety of nicotine strengths and flavors in its portfolio.
Additionally, on is attracting female tobacco consumers due to its fitness white and compact format.
Forms rectangular shake packaging also distinguishes it from two did traditional MST products.
Our data indicates that women now account for 30% of adult all tobacco derived nicotine consumers as compared to only 5% of adult differs.
We believe our ability to successfully navigate the regulatory process and communicate potential reduced hard benefits of our NOL combustible tobacco products is critical to achieving our vision.
In May helix submitted comprehensive PMT days for all 35, Boeing skews with the FDA.
And in June the FDA remove the applications into scientific review.
We've also started the foundational work for a future modified risk application for on.
Any vapor total estimated volumes in the second quarter decreased 14% versus a year ago.
We believe the E vapor category growth may encounter a pause over the next few years as many products will be removed from the market. If PMT A's are not submitted or FDA does not grant market authorization.
All manufacturers are required to submit PMT days by September night.
In heated tobacco were very pleased with the recent FDA authorization to market Ipos as a modified risk tobacco product with a reduced exposure claim.
Hi Coast is the first next generation product to receive an m. RTP and meet the standard of benefiting the population as a whole.
Im USA is making the necessary preparations to communicate the reduced exposure claim to adult smokers, which includes developing new marketing assets and submitting them to the FDA in advance of using them.
We view this as a significant step towards their vision and we're looking forward to communicating with adult smokers the additional benefits of switching to heico's.
We're excited to get back on track with our Iqos rollout and our future expansion plans to accelerate adult smoker conversion.
As many parts of the country began lifting restrictions in June PM USA reopened the Atlanta enrichment Ipos boutiques.
And just last week launched Ipos in its thirdly market by opening a boutique and the Southpark mall in Charlotte.
In Charlotte PM USA launched a more disruptive retail fixture.
That communicates the benefits of real tobacco, no ash and less odor and expects to begin heatstick distribution to retail stores in the next few weeks.
By the end of August we expect Heatsticks to being a total of 700 retail stores across the three lead markets.
Im USA will continue to leverage it's I coast retail ecosystem, including Ipos mobile top up and kiosk retail formats.
Which allows for more strategic and agile marketing plans.
We're making several digital enhancements to the icons website.
The website now includes virtual tutorials.
And the expert video chat functionality will be available this fall.
These digital enhancements and the ability to have devices delivered to smokers in lead markets.
With the proper age verification will provide smokeable smokers with flexible options to learn about and access lycos.
Over the next 18 months PM USA plans to launch Ipos and four new markets with large adult smoker populations and expand the availability of I coast devices through retail partnerships.
Jim USA also plans to expand heatstick distribution to the surrounding geographies and all seven I coast markets.
Im USA expects to use its first mover advantage to expand interest responsibly and in a disciplined manner.
Our commercialization strategy is based on the learnings from our Iqos lead markets and PM Ice International results.
Paired with their desire to continue awarding use by unintended audiences.
We believe that a sustained focus on the consumer journey from awareness to conversion is the key to achieving our vision.
Word of mouth, among I coast users and their fellow adult smokers has been a critical factor to the global success of Ipos.
Our commercialization approach is designed to maximize the organic growth potential lycos.
Mike purchasing first on the densely populated metro areas.
And then expanding outwards as a user base grows.
Our Ipos agreement with PMI has two important milestones.
First PM USA would maintain exclusive license for Ipos.
Upon achieving a five cents dollar share of the cigarette category in a single geographic area within a specified time period, but April 2022.
And second our distribution agreement has an initial five year term expiring in April 2024.
The initial term has the performance objective of reaching a five tip file share.
Of the cigarette category and a certain number of geographic areas each within a specified time period.
Once achieved PM USA has the option to renew for an additional five year term.
Based on it early results, we've seen in Atlanta enrichment and our robust expansion plans, we believe PM USA will achieve the performance objectives.
We're excited to continue building icons momentum and executing our expansion plans.
Turning to guidance.
We've seen outstanding performance from our core tobacco businesses in the first half.
Because we now have a better understanding of cobot 19 impacts on adult tobacco consumer purchasing behavior and an additional quarter of maybe high earnings contributions were re establishing full year 2020, adjusted diluted EPS guidance.
We now expect 2024 year adjusted EPS to be in a range of photos and 21 cents to $4.38.
This range represents an adjusted diluted EPS growth rate of flat to 4% from a $4 21 set base in 2019.
Our guidance accounts for ranges scenarios.
However were still facing a dynamic and quickly changing external environment and we're monitoring abiotic performance.
Our first half results were strong and reflected the ice fourth and first quarter results.
As we account for avionics results on a one quarter lag we expect the year over year equity income comparisons to be more difficult in our second half.
We also continue to monitor conditions for adult tobacco consumers.
Including unemployment rates disposable income and purchasing behaviors.
These factors could be influenced by government decisions or future stimulus and unemployment benefit payments.
Looking beyond 2020, we will continue to balance earnings growth with making appropriate investments in pursuit of our mission.
Reestablished EPS guidance reflects a 2024 year adjusted effective tax rate expectation in a range of 24% to 26%.
Our adjusted effective tax rate increased from 24% in the first quarter to 24.4% in the second quarter, primarily driven by reduced tax benefits as a result of AI dividend reduction in June.
I'll now turn it over to sell to provide more detail on our financial performance.
Our alcohol and cannabis assets and capital allocation.
Thanks Billy.
Let me first provide some additional detail on the Smokeable products segment.
Segment, adjusted OCI margins expanded 3.4 percentage points to 57.8% for the second quarter and 2.6 percentage points to 56.5% for the first half.
We believe our strong topline performance has been aided by our revenue group management framework.
Which allows us to more efficiently and effectively deploy promotional resources.
We achieved strong net price realization of 6.4 person in the second quarter and 7.7% for the first half.
We're continuing to enhance our AARGM toolkit and recently introduced manufacturers supported off Invoiced promotions for Marlboro in select states.
This enhancement allows us to more efficiently support Marlboro in key geographies.
In cigars middle since reported volume increased 5.4% in the first half.
Well I can mild continues to be the leader in the profitable tipped cigars segments.
Middleton is successfully navigating the FDA regulatory process with market orders covering over 90% of its current volume and plans to address the remaining volume with submissions prior to the September nine deadline.
In our oral tobacco products segment, Copenhagen continues to be the leading MST brands.
In Copenhagen packs is contributing to the brands continued relevance with adult dippers through which satisfying combination of the two fastest growing MST segments of when agreed and package.
USSTC has expanded Copenhagen packs into 20000 stores across 36 states.
World Tobacco products segment, adjusted OCI margins in decreased 1.2 percentage points to 72.8% in the second quarter.
Investments behind the on impacted adjusted OCI margins, which we expect to continue as we seek to expand its retail footprint and our manufacturing capacity. We remain pleased with the rule tobacco segment's strong adjusted OCI margin performance.
Turning to or alcohol assets to covert 19 pandemic negatively impacted our second quarter results.
In wine seem to show continues to operate in a highly competitive category.
Adjusted OCI decreased 21.1% in the second quarter, driven primarily by lower on premise and direct to consumer sales.
Hi, Michelle has started a strategic reset to maximize profitability and improve long term cash flows.
In beer, we recorded $98 million of adjusted equity earnings in the second quarter.
Representing outreach to share of as ice first quarter 2020 results and a decrease of 43.4% from last year.
Turning to cannabis in the second quarter, we recorded an adjusted loss of $17 million related to work from those investments.
Which primarily represents our share furnaces adjusted first quarter 2020 results.
Furnaces executing a strategy of developing disruptive intellectual property in building iconic brands, we believe promises making progress in executing its asset late strategy.
Recently.
So in partnership with diesel Bioworks successfully produced one of their target to Nab denies using fermentation in an R&D test setting.
This is an important step toward the company's goal of producing snapping noise at large scale that can drive future cost efficiency and product consistency.
From this remains to be long term strategic investment.
We believe legalize cannabis market in the U.S presents a tremendous growth opportunity.
We reiterate the importance of an appropriate regulatory framework and intend to work with policymakers and regulators to create a responsible use cannabis market.
Turning to capital allocation, we're pleased to announce that yesterday, our board declared a quarterly dividends ahead of that are normally scheduled declaration date.
The board declared a quarterly dividend of 86 cents per share representing a new annualized dividend rate of $3.44 per share.
This represents an increase of 2.4% from the previous annualized rate of $3.36 per share in marks the 50 50 dividend increase in the past 51 years.
Our balance sheet is strong and our core tobacco businesses continue to generate significant cash.
During the second quarter, we issued $2 billion of senior unsecured notes in payback the $3 billion that we borrowed under our revolving credit agreement in March.
At the end of the second quarter, we had $4.8 billion some cash on hand.
And after making our dividend income tax payments in July.
Current cash balance is approximately $3 billion.
We expect to continue to maintain a higher cash balance than normal to preserve financial flexibility.
Before today I'd like to provide some highlights on the progress we are making in our SG efforts.
In June we published our 2019 corporate responsibility progress report, which is available on our treated dotcom.
For our environmental efforts, we've been systematically reducing our environmental footprint and we're pleased with the science based target initiatives recent approval of the carbon reduction goals, we set for 2030.
Among other important BSG effort DS Iasci focus areas, we're committed to having a diverse forward in management team that reflects the organizations they lead.
More than half of outboard members are women were ethnically diverse.
For the diversity of our management as Billy shared earlier, we've said aiming points that we will be accountable for reaching.
We continue to make as she progress and look forward to sharing more as we advance in these efforts.
That concludes our remarks, and we'll be happy to take your questions.
Operator, do we have any questions.
Thank you once again as a reminder, if you like to ask your question. Please press star followed by the number one are you touched on phones at this time investors analyst and media Representatives are now invited to participate in the question answer session. We would say the price question from.
Muni bonds.
Our first question comes from.
Chris Growe with Stifel.
Hi, good morning.
Good morning, Chris Good morning, Thank you for the time.
Wanted to ask you first of all as we think about your outlook for the the cigarette category, which is obviously showing a marked improvement in relation to previous expectations.
Just curious how we associate that outlook with your outlook for the consumer. So do you expect a weaker consumer picture in the second half and does that inform your second half outlook and then as I think about what happened in the quarter were Marlboro share was flat sequentially uneven discount share was down a little bit sequentially.
Do you expect those to reverse a bit or change a bit in the second half based on your outlook for volume.
Yes, thanks for the questions Chris first on volume I think it's important to remember how fluid the environment is out there.
In the second quarter, we didnt see a lot of pressure for the consumer to experience that need to down trade because we saw government stimulus in the unemployment benefits being paid by the government.
Now we know that's in front of the government right now and they're considering it but it's still somewhat of an unknown until they are able to pass something and we certainly think if they do it will benefit the adult tobacco consumer.
From a standpoint of as we progressed through year I think it's important to remember the comparisons for the first half were a bit easier comps than they will be in the second half remember last year. The cigarette category peaked its decline at 6% minute proceeded to 5.5% in the third and then down to 4.5 in the fourth so a little bit tougher comparisons will also.
Included in that forecast, but at the fluid environment in something that we'll continue to monitor.
As far as marble share your second question.
We're very pleased with the way marble performed in the marketplace in the second quarter, you mentioned sequentially. It was flat I think what you saw it is that manufacturers responded to the coated 19 pen did differently.
We saw some of our competitive manufacturers discount across the entire brand portfolio of certain brands, but with our AARGM tools, we felt like we could provide.
For the mobile consumer that was facing any economic hardship, a pretty safe planning by really discounting a portion of our mobile Brad and so with the AARGM tools and with the sequential share. We're very pleased with how mobile performed from first to second quarter.
That's great. Thank you and I had just one quick follow up on on within Ico. So the question there on your marketing strategy and I'm thinking about sort of as you ended the quarter.
Do you do you expect to expand the product as you get more once you have the approved marketing claims from the FDA I know you're trying to get a new device upgraded device approved.
And do you expect this reduced exposure clean any more prominently featured going forward in the marketing.
And once approved by the FDA.
Yeah, I think you touched on the two key points, Chris one was the MRT approved in RTP approval and as I mentioned, we have to produce those assets and then get them approve or send them to the FDA 30 days ahead of using them in the marketplace. I think the others that you mentioned was version three and application has been filed with the FDA.
And so we'll see how that progresses I don't want to lead you to believe that will slow down of wait for that but certainly you can imagine putting your best foot forward in any new lead markets by having both the M. RTP claim as well as the version three with the enhancements that are Daryl version. Three then I think as we move forward, we'll just have to balance that.
And Thats why for competitive reasons, we didn't mention the four markets, but we're also balancing how cobot is is progressing in various states around the use and so all of that will factor in as we make additional expansion decisions.
Okay. Thank you very much I appreciate your time thank you.
The next question comes from the line, maybe add there with Cowen.
Thank you good morning.
Good morning.
Good morning, Thanks, so much for that on incremental detail on at year end consumer demographics with on yeah, clearly very compelling in terms of R&D attractiveness and the proposition both to think right now frankly volume and to women I'm curious believes you kind of reflect on its early success on any take away is if you juxtapose seminars consumer Democrat.
Thanks relative to what you saw early days nets category or even on anything like Hadley. Thanks.
Yes. Thanks for the question Vivien I think you're exactly right look we're very excited now the caveat that with its early on and we're expanding as fast as we can but we're very excited about the attraction that has to both smokers and dippers and we want to make sure that we capitalize on that as well as the attraction to the female consumer I mentioned that in my remarks, but we believe.
It's the rectangular packaging has some to do with it to distinguish it from if you will traditional MST in the consumers' minds as they're making decisions as well as the variety of strengths and flavors that we have we think all of that plays into the consumer and our ability to disrupt them as they're making purchases in marketplace. So we're moving as fast.
Yes. This weekend on manufacturing capacity, so thats no longer constraint as we.
Progress into 2021 and remove that constraint in 2021, and then get it to the stores, where we wanted to be and so we're extremely excited about what we've got in place with plans for on.
Yeah. That's really helpful. Thank you just said just a follow up on that it's fair to assume that with no snack category over index to differ is relative to what you're seeing with on.
That is correct Vivien I think when you looked at in the consumers mine at least what we heard qualitatively is that they saw that as in the traditional MSP category.
Both for the packaging as well as having tobacco that you're putting your mouth I think that distinction with on is that its white is very discrete variety of strings in flavors and it's more intriguing for what we're hearing from consumers in the marketplace.
Got it thanks, Matt I'll squeeze one last one in on in terms of your on investment in Kronos, There's certainly some growing chatter around potential regulatory change depending on the outcome of the election of course, but any sense that the Democrats are able to take control of the white house. It does.
Term for equity, meaning potential company meaningful change in terms of candidates regulation. Its I'd love to hear your thoughts on how the election is potential catalyst will change your thinking on the kind of ethnic thanks.
Yes, so to be clear, we support federal legalization to regulation of cannabis and to your point, we could see look we've been successful under both Republicans and Democrats.
To support both through a DNA efforts and so it remains to be seen how the election will turn out, but we certainly support appropriate regulation, because we believe that prevents under-age use implements consistent regulatory controls and quality centers across the entire industry and we really believe it advances the science and addresses social.
Just as issue. So that's why we are we think it's important under either a Republican or Democratic administration to have the legalization. So that the right regulatory framework is put in place for us.
Understood. Thanks, very much thank you.
Your next question comes from the line of Pamela Kaufman with Morgan Stanley.
Hi, good morning.
Good morning.
Can you talk about you our full year guidance imply is relatively wide range for back half, earning and I guess can you touch on some other drivers the important thing that range and what do you see economic factors needed to reinstate your near term earnings growth algorithm.
Yes, I'll take them in reverse order Pamela I think on the mid term. We look we are in unprecedented times as you see on the new the changes daily with where hot spots are across the us and so we monitor that but there's a lot of uncertainty around how things will stay open or shutdown and how the consumer will be impacted as well as.
The economics.
Stimulus, whether there will be another version of that that passes through Congress and gets enacted so there's a lot of uncertainty thats why you see a bit as a broader range and then a highlighted in his remarks, our equity investment in avionics. They have a global exposure to the cobot 19 pandemic.
They're doing a very good job of a monitoring that and making changes as necessary but.
Again on a much broader scale on a global basis, having to respond to that those would be the major factors in the wider range in what we see as we go through the remainder of this year.
Great and can you discuss how you're thinking about the relative contribution can improve industry cigarette volumes from higher stimulus and unemployment benefits versus more opportunity to smoke and the shift back from E bags and does the performance. This year influence your outlook for long time, the industry volume decline.
Yes, I think you touched on the two major factors Pamela I think the first was the stimulus certainly benefited as I mentioned in both the lower Middle income Americans and included in that of course is our adult tobacco consumers. So they certainly benefited from that as well as the lower discretionary output for non tobacco items.
Less commuting so less gas less entertainment. So they had more discretionary income from not spending as much in that non tobacco discretionary space.
I think the other factor.
You mentioned was really related to the.
The movement of consumers back to cigarettes from E vapor as we saw the FDA regulation banning flavors outside of tobacco, menthol and marketplace and that consumer space with choices.
Now that tends to skew as I said older adult smokers and we know older adult smokers tend to skew discount it benefited the entire cigarette category.
But certainly it's skewed to the discount side and so when you think about that it's a bit early on to tease out the exact impact from both of those book that's something that we'll continue to monitor as we move forward.
Great and I'm just one last question on it.
How are you thinking about the implications to the industry from the upcoming presidential election, and the likelihood of the potential federal excise tax increase obviously, that's something that on investors' minds and maybe you can just touch on how you manage.
The prior excise tax increase.
Sure I think if you look at it certainly both the federal government end state governments have racked up significant bills in risk their response to the coven 19.
Pandemic I think certainly there will look for our turn to at the appropriate time on how to pay for those bills and certainly excise taxes could be part of that we have an extremely strong government affairs team that regularly engages on that as far as whether it's a democratic and Republican I think if you look back in our history Weve show, we know how to successfully.
Navigate both of those administrations and so we feel like we have the right tools in place we have a strong government affairs teams, we support both sides of the aisle and so we feel like we have the right tools in place in there right employee base to navigate that successfully.
Thank you. Thank you.
The next question comes from the line of Bunny hard.
With Goldman Sachs.
Thank you good morning, everyone. Good morning, I am I have a question on your guidance first on could you tell us what is factored into your guidance this year.
The teacher stimulus package in Sac assumed.
Basically does your guidance extend the worse I'm just trying to understand that and then second you now I'd be curious to hear can you see why you're not comfortable and reinstating your three year guidance.
I guess I'm a bit surprised sense. It sounds like you guys have enough visibility to reestablish your EPS guidance and industry volume guidance. This year, but as you look out over the long term is there something changing with the resilience of this category that makes your insurance. If you could just touch on that I would appreciate it.
Sure I would agree with you all hardly Bonnie that the category is resilient I think and again I'll take them in reverse order the three year guidance, just because the external environment is so fluid I.
I mentioned earlier, the stimulus and whether the stimulus continues or doesn't continue I mentioned various hot spots popping up around the us and how that could impact the consumers' ability to go out and get product and then how it impacts their overall outlook on their economic situation will be a factor of both of those I think from this.
It was standpoint and its impact on guidance look we run it ranges scenarios when we provide guidance and so we we factor in if you will worst case M. best case, and we try to really provide guidance based on what we think is the right combination of those scenarios and so that's why you see a bit wider guidance based on those as well as.
As I mentioned, the avionics and so that we felt like we miss that reestablish the appropriate guidance range.
Okay. That's helpful and then.
I also wanted to ask about your share I do you get a lot of questions from investors inside the curious to hear from you. How you guys are thinking about it really your total cigarette retail share.
49% this quarter, which I think we spend the lowest it's Dan for almost 10 years. So im curious to hear from your perspective. It. This kid's worrisome to you and then you know what do you think it than some of the key drivers fish share loss and then.
Now as we think about your guidance on does that imply in year over year share losses will continue in the second half arc.
Or something that youre implementing and I'm thinking about every cent pricing actions that may start to minimize comments some of the share losses.
Yes, I think it's important to remember body that the overall strategy, we employee in the cigarette category is to maximize profitability over the long term, while balancing investments in mobile and funding the future growth of our NOL combustible portfolio. So that the overall strategy, we haven't cigarettes as far as share I mentioned.
Earlier, we're very pleased with what we saw from first quarter to second quarter with Marlboro. We're pleased with the increased profitability in the category as you saw from the OCI as what was the increase.
Gross margin if you will were both mobile as well as our brands discount offerings, we will compete in the breadth discount, but profitability will be a major factor and the way we compete in that branded discount category. You'll remember we're a premium focused company, we participate in branded discount, but it has to be at the right profitability. We're very pleased with.
We were at with from a share standpoint, and especially on Marlboro, It's something that we monitor remember when we look at the health of the brand we really look across four factors profitability is one share is wrong if the.
Equity score the equity strengthen the brand which is both is remaining popular and is it remaining relevant meaning is it keeping pace with the consumer as they evolve and then the final one of the for his demographics and we look at that age cohorts of 10 years, starting at 21 and going up and we're really looking to see if we're in.
The agent appropriately across those age cohorts based on the overall share the brands. So we feel good about marble, but it's certainly something we'll monitor.
As we I mentioned, the economic pressures that consumers could face potentially in the second half.
However, we have the right tools in place and I think we've shown we know how to navigate that type of environment.
These uncertain times.
That was really helpful deal and I think it is important I think it's quite impressive to margin expansion that you've been Shang as you mentioned and that's certainly that balance and if I may just squeeze one last question on items and your agreement with Philip Morris curious why you Falcon what's important to.
Share to the milestones at this point I guess I'm, asking because historically you've been quite guarded with providing a lot of details about your business. So for me.
And maybe a bit of a question and then second you know the bar to achieve the milestones seems relatively low given the timeframe yet even with covance everything going on this year. So wondering you know really what the incentives are to achieve greater market share from your perspective.
And how much you're willing to invest, especially if I kind of seen as margin dilutive for you guys relative to your core sick business, just trying to understand how you're going to match that thank you sure sure I. Appreciate the additional question Bonnie I think when you think about the disclosure we thought it was good disclosure with where we're at and making progress against the expansion plans for.
Coasts. So we really felt like it was important for the investor to know that tournaments and we disclose that as you mentioned, we've been fairly quiet because we have cross confidentiality in place with PMI on that the detailed terms of the agreement, but we did feel like it was good disclosure as we continue to make progress against expanding ikonos in.
The lead markets.
From a standpoint of how we're thinking about balancing look we're going to invest the appropriate dollars behind.
Because we think it can be very successful in the US if you look at the total length of time of the agreement. That's in currently in place 10 years 10 years ago long time, and so we're going to make the appropriate investments.
Certainly we feel like we can meet the performance objectives.
And then thinking about that total 10 year runway based on the credit agreement. So we feel excited about ipos and the success. It can have in the U.S.
Thank you.
Thank you.
The next question comes from the line, Michael Lately with Piper similar.
Good morning, Thank you.
Good morning, Michael.
You mentioned, how the fair value was below carrying value, but that you view that as temporary and obviously, there's there's a hopefully onetime transitory environment would depend dentek endemic but can you just give a sense of.
How.
Temporary is defined and does it depend on a specific amount of time as at the nature of the issue that's weighing on that stock and what if anything should we look for that that my.
Consider you to change your view on how to think about that's nothing that asset.
Good morning, Michael This is Sal you are correct, we have deemed fee.
AB.
Impairment as a temporary item.
Look we perform a detailed analysis as part of our closing process every quarter.
You have seen recent recovery in the valuation of Dbi. So we're going to continue monitoring going forward, but under SCC guidance. We believe that this impairment is temporary and it will recover to our book value.
For a dbi asset.
Okay. Thanks, that's helpful and welcome so.
Just on on the margins in Smokeable specifically.
Just would love a little sense of maybe some of the cost piece. There. Your your price mix was very strong, but at a little bit less than the roughly 8% pace of previous five quarters, but your your margin expansion was comparable to the the five quarter previously average of around 350 basis points and.
So I guess the question is just in.
Costs were a bigger driver is there an acceleration of some of your cost savings initiatives and should we expect those to continue into the second half or with some of that more onetime in nature for some of them.
Yes, Michael I would just caution you to look at this short period of time and try to make comparisons you have differences in timing of costs that occur through the year or any given quarter on a year over year basis, you're right. The cadence of pricing can affect margin expansion any any short term period I think if you step back.
From that and look at how we've been able to improve margin through time. It has been the levers you're referring to it has been being very disciplined and very focused on reducing costs through time as well as pricing and pricing is really two components. It's manufacturer list price and the implementation of revenue growth management and we.
We really believe the revenue growth management has afforded us the opportunity to really look at the retail promotions, we have in the marketplace be much more efficient and much more precise and where we put those promotions in the marketplace. So when you step back and get our short term period and really look at the three factors, it's really cause its pricing, but pricing is.
The different pieces its manufacturer list price as well as the revenue growth management, we put in place and Michael I will add the restructuring program that we implemented last year.
Savings happened over the course would be year more towards the back in the years you were lapping that but cost management is part of our ongoing management of the business. We take a very strategic approach and it is an important leverage Billy just said as we think about margins in our tobacco businesses.
Okay. Thank you that's helpful. And then just one last one on.
Those rollout. Thank you for the color on the kind of 18 month roadmap and you're thinking there.
Can you give us a sense of what if anything might accelerate that or how flexible are those plans it.
Could you move but faster into more markets or is this pretty well set.
No I think thats, what we wanted to mention to investors and analysts today, certainly we always look at what would allow us to move faster. If we so desire based on experience we're having in the marketplace. So we're prepared we are also balancing that as I mentioned earlier with the cobot 19, Pandemics that is in different areas in the USA.
Difference rates of increase and so all of that will factor into the speed with what we continue our expansion of items.
Okay. That's great. Thank you very much thank you.
The next question comes from the line.
Steve powers with Deutsche Bank.
Yes, Hey, guys good morning.
Good morning, two quick ones from me good morning severely the first one is with respect to on.
The confirmation of your ability to hit that 50 million can capacity banner year I think it's a good thing just given the delays that work percolating.
But I apologies if I missed it could you talk about the timing of getting to 75 million, which I think originally was the end of your target and should we think about that level as a ceiling for 2021 capacity or are there plans to increase further beyond that level.
Yes, so certainly the 50 million is what we stated for year end. We also mentioned that we will remove capacity constraints in 2021, I I from a personal standpoint, Steve I'm tired of being behind the curve. So we're going to expand to stay ahead of that demand curve as we move forward.
Remember, it's important and I think sometimes it gets overlooked we closed on this transaction 11 months ago and when you look at what the employee base here at Hunter has been able to achieve its quite remarkable. It. We did 40000 stores, we've expanded manufacturing capacity, we now produce it out of their Insee campus here enrichment.
Weve filed 35, PMTA phase with the FDA, we're starting the foundational work. So we're moving very rapidly, but I'm with you I don't like being behind the curve I want to get ahead of it.
Okay. Okay, and then is that maybe maybe billy's desire to get ahead of the curve planes is a bit but as they think about that higher cash balance that you're carrying.
Through this cold period can you frame.
Your capital allocation priorities.
Looking out once things.
Hopefully normalized.
Yeah look we think having a higher than normal cash balance.
During these from unprecedented times is prudent in the right thing to do but we're going to make the investments we need to make in our business. Obviously on isn't important product for our future and we're going to make the necessary capital investments, but we are accompany that Fortunately has a low level.
Capital expenditures overall, especially for accompanied by our size in our capital expenditures tend to be at about the same level of depreciation for the year.
Well, we think about capital allocation, if you remember and we've talked about this in the past after paying dividends and after investing in our business through capital expenditures, we generally have about $1 billion in excess cash and we won through a very detailed analysis and we think about the best capital allocation.
For our shareholders in the long term health of our businesses.
Understood. Thank you very much.
Thank you.
The next question comes from the line of Adam Spielman with Citi.
Thank you very much good morning, everyone. Good morning, Adam.
Kelly <unk> through <unk> I'd like to us to follow up questions and then another one on the encores contract. So that's that's cool.
Is it really on my own capacity.
I mean, clearly that you do it wouldn't be behind the kind of in terms of capacity in 2021.
I'm just wondering if you can be a little bit more specific about that and particularly no as I think it bounces.
You guys don't 2021 with constitute 50 million Kinsey Wilson.
So in my mind is clearly no behind the curve and I mean, it by the end of the a you'll you'll be really going to have massively more capacity. So I was wondering if you can be a little bit specific.
In terms of the sort of capacity, let's say that run rate you'd hope to have at the end between 21 I mean, when the next big trunk should capacity is going to come along because 50.
The isn't to now which is where you'll be at the beginning of 2021.
Yeah I appreciate the follow up Adam what I really meant as I no longer what capacity be to be a constraint or what we would like to do in the marketplace and so I want to remove capacity from being a constraint and thats specifically manufacturing capacity. So that we have the ability to produce the product we desire to have in the marketplace in the stores, where we want it and to be a.
Had if you will have that curve of wanting to have.
The product and more stores and not the ability to produce it and so thats what I meant by being ahead of the curve.
And then let's say in mid 2021, whats. So we talked about 100 million capacity 200 million, what was sort of capacity will be fine.
Do you plan to question I mean, what your desire there Adam I'm going to refrain from going too far I think the 50 million with the environment. We're in is about as far as we want to go and just knowing that we're going to remove capacity constraints in 2020.
Okay. Thank you [laughter] Carson, though so the question about molecules. So obviously and I was just really what's going to stem. The d. So you obviously had a huge margin increase in.
Into Q no. My understanding is there was some in America. This wrong is this some expenses you just couldn't make because of the situation with the with the pandemic.
And so as we go forward I guess should we think of this is being a bit of a high watermark in the second hall from the beginning of 2021, you will be back to more regular marketing more regular activities.
Oh should we think of this is a new level and you're going to build from this new level.
Yes, again, Adam I do appreciate the follow up but I'm not going to get into systems specifics about where this margin is in wherever go I think overall you can consider us to take of.
We'd like increase in margins through time, we really do that through as I mentioned earlier to Michael we do that through cost reductions and you're right. There is some extensive certainly in the second quarter related to coded that wouldn't be able to be spent but they're also additional expenses and we highlighted those in our earnings release.
From a standpoint of the other levers as pricing and around pricing, there's manufacturer list price and the cadence of that year over year can affect margins in any given quarter, but as well as the implementation of revenue growth management and that's a piece even though it shows up in pricing is more like a reduction in expense through time, because what you're doing as European.
More precise.
More efficient with the promotional resources, you're putting in the marketplace.
With the ability to achieve like or better results and so with the implementation of that you can continue to expect us to get better with that modestly.
We're extremely pleased with where we're at but were never satisfied and so the more data that goes to that modeling the experience to get the sharper that to becomes.
Okay. That's that's actually a very helpful. And then I don't think Muni finance.
Because my sense My third question.
And this is about the new cone through all the new decent was with the contracts you gave its not on cost can you talk about you have to get to a 50 basis point values and I think refers you to specific geographic areas.
I was wondering maybe.
And I'm just not familiar enough with the way you you you talk internally, but what does that mean is that would not be a specific states over.
It wouldn't be a specific.
Metro area or would it be let's say a quarter of Metro Atlanta, Oh, There's a how should we think about not just not phrase specific geographic area.
Yeah, we thought it was important to disclose that term as I mentioned earlier with this cross confidentiality, we haven't place I'm going to refrain from going much deeper in describing each of those.
Items.
Without mentioning whether weve medidur haven't met it just to share a data point with you out of India Atlanta market, we have a 0.6.
Chair of the cigarette category in store selling icons and so that's where we were at at the end of the second quarter, but Thats just shared a data point as a point of reference and again will be shorter disclosures as we move forward.
Progress against meaning the financial objectives.
But when it but if you think about it from my point of view I mean, just to be clear. It is no really possible to tell whether that phrase specific geographic area is a state a metro area.
Something smaller.
That count heal.
I agree with and I understand the question, you're asking I'm, just going to refrain from going deeper that's kind of like that was good disclosure for investors.
Okay. Thank you very much thank you Adam.
The next question comes from the line of God Jain with Barclays.
Hi, good morning.
Good morning.
Hi, South Korea questions.
The first question is on the boat SB seven nine Korean California. So there is a flavor ban that happens in California could you just talk about holiday it's been bottomed in different categories that you have so that should smokeless auto nicotine pouches and what might be done that's been done so.
Yes, I think it's important to look we think that the FDA is the entity best situated to make decisions on flavors all of the product that you mentioned.
Either go through the FDA or had been through the FDA from a scientific basis and they'll make those decisions based on science in evidence specific to that Bill I think it's important to remember in the cigarette category menthol overall tends to under index in California and of course, we tend to under index intimate fall into cigarette category.
I think when you get to the other categories.
You can think about the in California in the traditional MSP space.
Somewhere around equal share nothing really to mention as far as over indexing are under indexing and then in the alternative space as I mentioned all of those products will be in front of the FDA here shortly.
Sure.
My second question on the order tobacco category. So Pat Thanks for sharing that slide where you mentioned that 37% off on user thought a small bose.
It does 63% is it possible to decide to get into users coming from March snuff E cigarettes, and what other new come to us coming into the into the product.
It is possible we wanted to share what we saw from exclusive smokers, just because of the opportunity that presents.
Yes.
We will consider whether we go into the other detail of the other categories in the future, but we havent thus far.
Sure that's very helpful and my last question as you know on the E cigarette category. So even on the first indication from the you would still about possibly over the next three months of Brian Yes on a guy now that might be delayed because of call. It but what do you think you will see with risk.
Do you would access trend and do you think thats on them five Jewell PMPM, although it would be the 2021, you would still that fulfillment that will be more relevant.
Yeah, I think it remains to be seen what we'll see certainly if you consider what's taken place in the external environment remember jewel voluntarily started pulling flavors well before the actual FDA mainly came in place and so we actually saw their share go down slightly now that there's more of an even plainfield. If you will across all manufacturers we've seen.
In share.
Joel recapture some of that share I think that as well as even to covert 19 pandemic with.
Under-age use being out of school remember social access was where we saw the is access for under-age used to have access to these types of products and what I mean by that is if I am 18 in high school and your 17.
There will be more chance for me to buy it for you and so that's why we and jewel also independent of US supported the minimum age to purchase a 21 across the U.S. So that was passed federally.
At the end of last year and has made steady progress and being passed at the state Government Affairs team is really engage in those states that have been passed the yet so I think all of those factors should certainly have an impact on underage use there's always more than to be done and we believe no wonder age consumer should have access.
Us or.
Use any type of dictate.
That's very helpful package.
Thank you.
The next question comes from the line up only been it with Jefferies.
Morning, Jan so for awhile.
Good morning hour.
Yeah, just that the bomb send me coming back to the note, 25% I costs dollar share and obviously doesn't seem not challenging, especially you talked about the excitement and I'm hospital success and UK those Atlanta data point that could you, perhaps the most specific intensive.
You think is a realistic foundation Catholicism.
And in those specific geographies over the next 18 months to two years and any color to that as I'm guessing you may not be able to and your main competitor continues to say he took tobacco won't be successful in the U.S. and if you always see kind of what makes you guys. So confident that then it will be a success. Thank you.
Yeah I appreciate the questions on and you're right on the first one I'm going to refrain from going into detail, where we project share to be I think right. We think heated tobacco will be a success of the U.S. is really related to if you go back to the cigarette consumer so somewhere roughly half to slightly over half of those consumers has shown.
And express desire to move to a potentially reduce our product and a lot of those consumers whenever and tried to various forms of vapor and rejected it and so we believe heated tobacco really fits if you allow me to put combustible or conventional cigarettes on one of a scale and E vapor on the other with.
It goes experience I was pretty closer to cigarettes from a consumer experience base.
They get satisfaction the heatstick as you're well aware is what goes into mouth, even though you have a device to the mouth feel is very similar your inhaling the product. So we think because a large group of those conventional cigarette consumers.
I'd vapor rejected it that that is a great category.
Hi coast to satisfy what their look.
Well. Thank you very much appreciate it thank you.
Yes, good question from Robert Renton would you be yes.
Hi, Good morning, three good questions for me sure and what is the first come on at the first as you privilege previously mentioned that use the kids at state excise tax breaks if I guess with receive MRT piece spaces.
Does that still hold for the reduced exposure set sketchy unforeseen and what's your outlook for further state tax breaks.
Yeah, you're exactly right. Some of those were secured now it differs by state. So some states have one rate for reduced risk and a different rate for reduced exposure as some incorporate both.
At a similar rate so it differs by state as far as outlook you know our government affairs team and I mentioned the strength of the come to fair team. They were able to secure most of those without that type of product.
Having approval from the FDA in the marketplace and not you see that we have some I think as far as the conversation goes with the various state legislatures it'd be a very fruitful conversation and we believe excise taxes should not be a deterrent for consumers desire to move down the continuum of like risk and so.
I think we'll see more conversations take place and I will put a prediction o'neil.
And just a probably just a follow up and that you mentioned at one point score phase is that still the number what if anything that its oh, yes, I will actually have IR because it does change period to period I don't have handy off the top of my head how many states. It is either four or five but I will make sure I our call is up with.
Great. Thanks, very much I think my next question and I was looking at them. So I look at 29 teen yes pricing increases in net revenue in retail price the stick.
Elevated but you know at hindsight should we view that year is kind of a one off elevated level and things should be.
More historic normal going forward.
Yeah, I'll be careful not to talk about future pricing a price realization I wouldn't read any anything into any one particular a year of exactly how we're going to think about it going forward I think when you step back from the specifics and think about pricing in general we know pricing is an important part of a algorithm we balanced that with.
The if you will the overall strategy and maximizing profitability through time cost reductions that were able to achieve as well as how we feel that consumers economic outlook is and what they're facing and so we balance all that on a year to year basis and throughout any given year and thats, how we make pricing decisions.
Right. Okay. Thank you very much and Robert It was five states salaries ever looked at a fight spot.
Yeah.
Thank you at this time I would like to turn the call back over to management for closing comments.
Well, thanks, very much for joining us look the tobacco category continues to evolve, but outreach as core tobacco businesses have a track record a delivering strong and consistent financial performance in challenging environments.
We continue to reward our shareholders by returning a significant amount of cash in the form of dividends.
We believe our non combustible platform has a winning brands and is unmatched.
And we're excited to continue to make progress in achieving our vision of responsibly transition transitioning adult smokers to a non combustible future. Thank you again for joining us and stay home.
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