Q3 2020 Altria Group Inc Earnings Call
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Good day and welcome to the Altria group 2023rd quarter earnings Conference call.
Today's call is scheduled to last about one hour, including remarks by L. trends management, and a question and answer session.
Representatives of the investment community and media on the call will be as 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 Investor Relations for Altria client services. Please go ahead Sir.
Thank you Maria.
Good morning, and thank you for joining us this morning, Billy Gifford Altrias, CEO and sell Mancuso, our CFO will discuss L. Three's third quarter business results earlier.
Earlier today, we issued a press release, providing our 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 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 statement section at the 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 remain subject to the discretion of L. Three was born.
Altria reports its financial results in accordance with US generally accepted accounting principles.
Today's call will contain various operating results on both a reported and adjusted basis.
Adjusted results exclude special items that affect comparisons with reported results.
Descriptions of these non-GAAP financial measures and reconciliations are included in today's earnings release and on our website at Altria Dot com.
Finally, all references in todays remarks to tobacco consumers or consumers within a specific tobacco category or segment referred to existing adult tobacco consumers 21 years of age or older.
With that I'll turn the call over to Billy.
Thanks, Matt Good morning, and thank you for joining us.
Altria continues to demonstrate its resilience during the third quarter, while navigating the challenges presented by the COVID-19 pandemic.
We've maintained our focus on employee wellbeing to make sure. They feel supported in these challenging times and our people continue to move the or our organization forward.
They are advancing our trust commitment to address systemic racism and social in equities.
Power in each other and leading our efforts to build a more diverse organization.
And they're doing all this while continuing to deliver a fantastic business results as you saw in our earnings release this morning.
In the third quarter, our tobacco businesses delivered strong financial performance once again.
And we made steady progress against our 10 year vision.
Combined the Smokeable and all tobacco products segments.
Group third quarter, adjusted operating companies income by more than 9%.
And expanded adjusted OCI margins by two percentage points.
At the same time, we are pursuing our vision to responsibly lead the transition of smokers to a non combustible future.
During the third quarter helix expanded the retail distribution have fallen by an additional 16000 stores.
Our talented regulatory affairs team completed its critical support services for jewels, PMTA submissions and PM USA began to market I coast NT Dick has modified risk tobacco products using the FDA authorized reduced exposure claim.
Alter your third quarter adjusted diluted earnings per share was unchanged at $1.19 cents.
For the first nine months of the year adjusted EPS grew 5.6% to $3.37 driven by the strong financial performance of our tobacco businesses.
Let's discuss the third quarter in more detail beginning with an update on us tobacco consumers.
External environment remains dynamic and we believe a mix of macroeconomic and social factors influence consumer behavior and contributed to the sequential stability tobacco industry volumes.
An increasing number of Americans, including many tobacco consumers faced economic hardships.
The ended the third quarter had unemployment.
It's remained high and the enhanced federal unemployment benefits expired at the end of July.
The executive orders temporarily reestablished some of these benefits at lower amounts, but the wing and timing of federal funding available to eligible consumers varies by state.
However, we believe non tobacco discretionary spending on items like gas and entertainment remains below pre pandemic levels, helping offset some of the economic headwinds facing tobacco consumers.
At retail we estimate the number of tobacco consumer trips to the store rebounded in the third quarter and that tobacco expenditures per trip remained elevated versus the year ago period.
We also continue to believe that consumer stay at home practices allow for more tobacco usage occasions in the quarter.
Turning now to our businesses.
The Smokeable products segment delivered strong financial and marketplace results in the quarter.
This segment delivered third quarter, adjusted OCI of $2.8 billion up nearly 10% from the same period last year.
And for the first nine months Smokeable segment, adjusted OCI increased 10.5% to $7.7 billion.
Local segment reported domestic cigarette volumes decreased by 0.4% in the third quarter.
When adjusted for trade inventory movements segment cigarette volumes declined by an estimated 1%.
For the first nine months, we estimate that Smokeable script volumes decreased by 2% on an adjusted basis.
At the industry level, we estimate that adjusted domestic cigarette volumes increased by 1% in the third quarter compared to the year ago period.
And for the first nine months of 2020.
We estimate that adjusted industry volumes were unchanged versus the prior year.
Based on year to date performance and expectations for continued category resiliency, we are revising their industry estimates and now project full year 2020, adjusted cigarette industry volumes to.
To be in the range of flat versus the prior year to down 1.5%.
Mobile's third quarter retail share was 43.3%.
Unchanged versus the prior year and up 5% sequentially.
We believe marbles improved third quarter performance can be attributed to several factors.
As we described last quarter, we expect mobile 2020 retail share to be pressured by the cross category movement back into cigarettes that we observed earlier this year.
And while this dynamic continue to affect more barrels year over year share in the third quarter. It was more than offset by favorable trends in the premium segment of the category, including increased smoker preference for premium products. During these disruptive times.
Mobile also benefited in the quarter from lower promotional spending among competitive premium brands.
In the end discount total segment retail share was 24.3% in the third quarter up two tenths versus the year ago period, driven by deep discount products.
Sequentially. However, the discount segment contracted for the second consecutive quarter due to share losses in both branded and deep discount.
We're continuing to monitor tobacco consumer behavior, and believe that our smokeable businesses have the right tools in place to deliver against their strategy of maximizing profitability in support of our vision.
Turning to our non combustible portfolio.
Companies have made steady progress against their expansion plans for oral anti coasts.
These products together with USSTC, leading moist smokeless business and our investment in jewel present significant opportunities for smoker conversion to long combustible alternatives.
And oral tobacco, we believe we have an unmatched portfolio of MSP and all nicotine patch products.
Our companys offerings with the Copenhagen, Skoal, and Oren brands provide tobacco consumers with a wide range of satisfying formats flavors and strength.
We believe oil is a strong product proposition and has been successful with both smokers and dippers.
Or was sold and 56000 stores at the end of the third quarter up 40% from the second quarter and more than triple the store count from the end of last year.
In stores with distribution Olin achieved a retail share of 2.1 percentage points of the old tobacco category in the first nine months of 2020.
Helix continues to continues to test different trial generating promotions and has benefited from strong trade partnerships.
In the third quarter helix tested promotions using retail platforms, such as circle K's lift system.
And the Murphy drive rewards program.
We believe these tests were highly successful as it generated significant trial among smokers and dippers.
We're very pleased with these results and our helix team is continuing its efforts to retain these consumers and optimize future promotional activity.
We are encouraged by the early performance of alone and believed the breadth of its portfolio sets it apart in the marketplace.
Moving to ebay for the September 9th deadline for PMTA submissions represented an important milestone in the regulatory process for the E vapor category.
We believe it's important that E vapor remain alternatives for smokers and believe that a sustainable E vapor category will be one that consist solely of FDA authorized products.
We are encouraged FDA enforcement against Noncompliant manufacturers include.
Including those who continue sell E vapor products without a PMTA submission.
We estimate that total ebay for volumes decreased by 13% for both the third quarter and the first nine months of 2020.
We believe the E vapor category will continue to undergo a transition period over the next few years.
FDA makes market determinations on the thousands of PMTA fall before the September deadline.
In July Jewel submitted PMTA sports device.
For June pod skews.
As part of its application drew also included its plans to address under a use of its products.
The FDA reported that it has accepted jewels application and moved it into scientific review.
We believe jewel submitted a thorough application due to the critical support services provided by our talented regulatory affairs team.
In September Jewel announced a strategic update which included its plans for a significant global workforce reduction.
Evaluation of resource allocation.
And the possibility of exiting various international markets.
In preparing our third quarter financial statements, we performed a valuation analysis of our investment in jewel, which considered both its in international prospects.
Current us E vapor category dynamics.
As a result of this analysis.
We recorded a $2.6 billion impairment to our jewel investment, bringing its carrying value to $1.6 billion as of September thirtyth.
We are now projecting lower jewel revenues overtime due to lower pricing assumptions and delays in jewel achieving previously forecasted operating margin performance.
These changes are due to jewels revised international expansion plans and the evolving use E vapor category and associated competitive dynamics.
We continue to believe that E vapor products, including Jewel can play an important role in tobacco harm reduction.
And the heated tobacco category PM USA continues to expand I coast responsibly and in a disciplined manner.
We believe that a relentless focus on the consumer journey from awareness to conversion is the key to success in this category.
Going back in history, one of the reasons, we supported the tobacco control Act.
Was that it provided a pathway to communicate with smokers about the relative risk of FDA authorized long combustible products.
Compared to cigarettes.
And with the recent authorization of a reduced exposure claim on the Ico system.
PM USA is now marketing the iconic device and heatsticks as modified risk tobacco products.
Today PM USA has primarily used its robust digital assets and tobacco consumer database to communicate with smokers, including through web sites E Mail and direct mail.
We believe that the combination of these modified risk communications and PM USA is more disruptive retail fixture will significantly enhance the quality of ico somewhere in us among smokers.
As smokers move along the journey to engagement and trial PM USA is providing flexible options toward about coast and purchase devices.
Tim Youre, saying now offers a video chat option.
For AIDS graphite smokers to use their mobile phones and connect directly with Icap experts for product education and support.
Bottom line the actress web site offer smokers additional options.
Including access to virtual neutral tutorials.
And the ability with proper atria application to order devices for at home delivery.
Jim USA is also expanding the availability of devices into the convenience store channel.
And beginning next month month PM USA expect.
Hi coast devices to be available in select Charlotte convenience stores.
Turning now to guidance, we're very pleased with the strong financial performance of our tobacco businesses.
Based on our year to date results and insight into an additional quarter of earnings contributions.
We are narrowing our full year 2020, adjusted diluted EPS guidance.
We now expect to deliver 2024 year adjusted diluted EPS in a range of four hours and 30 cents to 40 miles and 38 cents.
This range represents an adjusted diluted EPS growth rate of 2% to 4% from a $4.21 base in 2019.
Altrias tobacco businesses have delivered excellent results in 2020 income.
In credit for our success belongs to our talented employees.
Through hard work and dedication after his employees have balanced multiple priorities, while making meaningful contributions to their communities and our company.
And we greatly appreciate their efforts.
I'd also like to welcome Dr. Allen strongly to our board of directors as announced this morning.
Dr. Stallman extensive medical and R&D experience will be a tremendous asset to the company as we pursue our 10 year vision.
I'll now turn it over to Sal to provide more detail on our financial performance and capital allocation. Thanks.
Thanks Billy.
Let me begin by providing some additional color on the Smokeable products segment.
The segment achieved strong net price realization of 5.9% for the third quarter and 7.1% for the first nine months.
The segment's top line performance has been aided by PM you assays revenue growth management framework, which enables the business to more efficiently and effectively deploy its promotional resources.
Segment, adjusted OCI margins expanded over two percentage points in the third quarter to 57.5% as higher pricing and lower costs more than offset higher promotional investments and higher resolution expenses.
For the first nine months adjusted OCI margins were 56.9%, a two and a half percentage point increase over the same period in 2019.
In cigars Middleton has performed exceptionally well this year and has been a valuable contributor to Smokeable segment adjusted OCI growth.
Reported cigar shipment volumes increased 7% in the first nine months of the year and black and mild remains the leading tipped cigar brand.
Last month Middleton expanded the black and mild to per room, a rewards program, which allows cigar smokers nationwide the ability to earn points on specialty marked black and mild packs the points can be redeemed online for items, such as mobile coupons and gift cards.
Yeah.
Middleton is successfully navigating the regulatory environment and has received from market orders for except for exemptions from the FDA covering over 97% of its volume.
Turning to non combustibles, our oral tobacco products segment continues to deliver excellent financial results Tim.
Segment, adjusted OCI increased by 4.3% in the third quarter and by 8.3% for the first nine months, primarily driven by higher pricing, partially offset by investments in on.
Oral tobacco segment reported volumes decreased by 1.1% in the third quarter.
When adjusted for calendar differences trade inventory movements and other factors estimated segment volumes increased by 4%.
And for the first nine months, we estimate that oral tobacco segment volumes increased by 1.5% on an adjusted basis.
Adjusted OCI margins for the World Tobacco segment increased by 0.6 percentage points in the third quarter.
For the first nine months segment adjusted OCI margins were essentially unchanged versus the prior year as investments in on offset margin expansion in our traditional MSP business.
We expect to continue our investments behind on and we remain very pleased with the segment's strong adjusted OCI margin performance.
Third quarter retail share for the oral tobacco segment was 49.9%.
Copenhagen's category, leading retail share declined two percentage points to 31.8%.
And its year over year performance continues to reflect increased tobacco consumer adoption of Korlym nicotine patches.
Turning to our alcohol assets 2020 has been a challenging year for both seem to show and abiotic.
Our thoughts and support or with St Michelle's employees and their families as they deal with the tragic impact of the West coast wildfires.
We've made donations to several disaster recovery funds, including the American Red Cross and local foundations and started an employee giving campaign to support the relief efforts.
In beer, we recorded $95 million of adjusted equity earnings in the third quarter.
Representing outrageous share of <unk> EAI second quarter 2020 results in a decrease of more than 58% from the same period last year.
For the first nine months of the year, we recorded $383 million in adjusted equity earnings down more than 41% from the same period in 2019 due to the impact of COVID-19 on underlying.
Underlying results.
Moving to capital allocation, our balance sheet remains strong in our tobacco businesses are highly cash generative.
Our board of directors declared a dividend increase during the third quarter represent representing outreach 55th increase in the past 51 years.
Our current annualized dividend rate is $3.44 per share.
The 2.4% increase versus our previous rate.
Dividends remain our primary vehicle for returning cash to shareholders in our long term objective is a dividend target payout ratio of approximately 80% of adjusted diluted earnings per share.
With that we'll wrap up and Billy and I will be happy to take your questions.
While the calls are being compiled I'll remind you that today's earnings release, and our non-GAAP reconciliations are available on Algeria dotcom.
We've also posted our usual quarterly metrics, which include pricing inventory and other items.
Operator, do we have any questions.
Operator, do we have any questions.
Thank you once again as a reminder, if you would like to ask a question. Please press star key followed by the number one on your Touchtone phone.
Investors analysts and media Representatives are now not going to participate in the Q and a question session.
We'll take questions from the investment community first.
Our first question comes from the line of Pamela Kaufman of Morgan Stanley.
Okay.
Good morning.
Hi, Michael.
Good morning, I wanted to ask about your guidance for 2020 industry volumes.
Which are flat year to date, yet your guidance for the industry to be flat to down for the full year and it implies a very wide range for the fourth quarter.
So I was hoping to understand what it's contributing to that given that we're already a third of the rate root acquired tax and then looking towards next year. How are you thinking about the implications does this year.
Our strength in the industry.
On the outlook for next year.
Yes. Thanks for your question Pamela I'll take them in turn I'll start with.
Thanks.
Industry guidance for this year Youre right through the first nine months I think the tobacco category is certainly shown its resiliency we.
We have seen and we try to highlight for you the changing consumer behavior a bit.
Certainly they benefited from government stimulus of course that has been absent and run out we.
We do believe that is offset by them, having some extra discretionary spend as they're spending less with.
Whether it be gas, our entertainment are going out and about and even their stay at home practices.
Have benefited with additional usage occasions, but we were on a range of scenarios and so there is a.
Headwinds and Tailwinds as we progress into the into the year, depending on how the consumer behavior changes with the lack of government stimulus payments and the progression of the pandemic and so.
We run a range of scenarios and we felt like that was the most appropriate range to put forward for the remainder of the year. When you think about next year I want to be careful not to get too far ahead of myself and provide guidance for next year. I think if you think about some of the headwinds and Tailwinds we have going.
Through the end of this year into the beginning of next certainly unemployment remains very high from a headwind standpoint, I had already highlighted government stimulus. So unless any action is taking that we'd be absent in exacerbating. If you have a high unemployment rates some of the tailwinds that we see our discretionary spend.
And.
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Steve Cobot and it certainly looks likely that it continues kind of on its path it's been a one.
There will be stay at home practices and certainly we've seen the consumer react to that from a standpoint of we believe adding additional nicotine occasions to their day, but we'll be sure to come forward with what we think is the best estimate for industry as we progress to the end of the year.
Thank you.
I also wanted to ask about how you our outlook has changed I think you lot took an impairment charge on fuel.
Then if you can explain the rationale behind the magnitude of the write down which it had about a total value for the company, our four and a half billion and seems to be a very significant difference relative to Jules recorded internal value creation over that time barrier.
Yes, as you recall Pamela when we put together a valuation for the company, we do our best to make the best assumptions, we can based on the future cash flows how.
How large the industry, we would expected to become.
Both on the domestic side and the international side.
We highlighted for you that we believe the category is going to go through a two to three year transition as all manufacturers in the ebay per category navigate this FDA regulatory process.
Certainly we've seen a number of manufacturers again fairly competitive and step up their competitive activities in the marketplace.
And we believe it's really due to as the FDA makes decisions and products can remain in some products leave the category that there will be consumers at play and so all of those factors went into the devaluation that we have and we came forward with our best estimate.
I think.
While we are disappointed in the investment we do believe that E vapor will play an important role as we progress and harm reduction, especially in the us, but even worldwide and we incurred the FDA to get through their process because really if you think about where E. Vapor is now on the other side of the FDA Rick.
Tori process it to.
The marketplace should consist of fully FDA offer us products that have been through the scientific evaluation.
Thank you.
Thank you Pamela.
Our next question comes from the line of Vivien Azer of Cowen.
Hi, good morning good.
Good morning Vivien.
So I wanted to follow up on your commentary around the ship on the consumer.
Consumer spending on that with the velocity Simeon. Thank you for your transparency on.
On that I'm, just curious did you notice any differences across the nicotine categories was that a broad comment was that cigarette specific thanks, yes.
Yes, we made the comment specifically to cigarettes, but I would say that.
Large I can't think of anything to highlight differences in categories with the exception of what we highlighted early in the year with the vapor category. We certainly saw consumers there as the FDA restricted flavors in the marketplace. We saw a number of consumers moving out of ebay bird some back into cigarettes, and we highlighted the impact we thought that had omar.
But I would say basically.
In essence, Vivien, we're talking about the same consumer moving around on categories. So their behavior has been fairly consistent.
Okay. That's helpful. Thank you for that and my follow up is on I coast encouraging that you guys are continuing to expand retail distribution in particular on T. store I'm. Just wondering if you could just offer any incremental color on what you know consumers would expect in terms of that experience relative to some of the initiative.
The early on in the Eyeq, let's rollout given that none of us have the capacity to actually go into the market, let's start with our south thanks.
Absolutely. Thank you for the question Vivien I think when you think about it because with look we're extremely excited to be able to come forward with a modified risk claimed that the FDA authorized and we really are looking at the ico. His team is looking at how do we meet the consumer where they are at and putting it in select convenient stores it really.
He is meeting the consumer where they make their point of purchase and you can think about the guided trial being very similar to what takes place even in our mobile units that at times are outside of convenience stores, its really an education process.
But our focus team has done some excellent work and as you mentioned from the coated pandemic standpoint of implementing digital tools. So that there is some tutorials that they can do digitally and we're also testing at home delivery once the consumer has gone through the.
Tutorial.
And has been age verified that we could actually have at home delivery of devices and so we're excited about the opportunity here and very excited about what has transpired in the three markets ran thus far.
Terrific. Thank you very much thank you Vivian.
Our next question comes from the line of Bonnie Herzog of Goldman Sachs.
Hi, Thank you good morning, good morning.
Good morning, really I guess I would love to hear any initial thoughts you may have on the potential outcomes from the election, I guess I'm thinking about it it given the pandemic, we're in and the massive budget shortfalls that we have here in this country I guess it seems logical to anticipate.
Peter Excise tax increases you and the next year or two so what are your thoughts on Nash and then maybe remind us how you typically manage your business through this higher tax environment.
And then also any thoughts on the potential for greater regulation, depending on the outcome of the election, you know thinking about in the context of maybe more state level flavor bands are possible.
Stepped out movement at the federal level on the potential for for nicotine reduction on sex. Thanks.
Sure. Thanks for the question, Bonnie and I'll try to remember I was taking notes to make sure how tomorrow. If I. Miss me. Please follow up I think from a overall election standpoint, certainly its been a turbulent time across the us as we progress to election, but I think the best predictors to step back and think about the success, we've had under both types of administrations through or how.
History, I think we have the right tools in place and the talented employees that know how to navigate this type of environment. So whether you think about excise taxes I think if you look through history Weve been very successful in the way you characterize that is high excise tax environment and we've been successful in those certainly if you look over.
Kind of a lower excise tax increase environment, we've shown the ability to navigate through those as well.
To address your regulation question.
I think it's important to remember that we've had both administrations through the regulatory process, both Democratic and Republican and we engaged.
Not at the presidential level was certainly at the congressional level with both sides of the aisle, we don't necessarily pick one or the other we engage with both and so at the FDA. If you think about the makeup of the FDA those employees, maybe with the exception of the commissioner who gets appointed politically.
The same employees in our team regulatory affairs team has built an excellent relationship and I think both the FDA and the us have learned how to interact with each other and anticipate what each other needs and wants as far as when an application takes place and begin to put those applications forward. So we've had great success in that.
It's certainly something we'll be engage with because you're right certainly at the state levels and at the federal levels. The governments have rack up significant bills related to their response to the Cobi pandemic and they will have to turn to holiday pay for that so certainly could be a bit more challenging excise tax.
Environment, but as I said earlier I think we've shown the ability to navigate both sides.
Yes, that's helpful perspective, Thanks, Billy and then I did want to touch on something else is nice I.
I guess I can't help myself I I know, it's early but as you look out over the next year or two yeah. How are you thinking about spending levels and investments behind your biggest risk portfolio as you execute on your 10 year vision for.
For instance, assuming.
Get the PMT and I can say Plano will you get more aggressive in marketing and rolling out this newer technology into our markets and then thinking about at all so far on I assume you get more aggressive with that business as well as we look out over the next couple of years. So in thinking about it you know I am wondering if.
We are entering a period as Nate great maybe lower margin expansion possible slower earnings growth then your historical some the 9% growth rate as you really are I think trying to pivot your business.
When I think about this on the backdrop of what we're just talking about possibly entering a period of.
Higher excise tax that so just trying to think about how you are here looking at your business over the next couple of years in that regard.
Yeah, you're right Bonnie I'll be careful not to get too far ahead of myself I think at the highest level. If you think about it it's really balancing earnings growth and the associated cash that we return to shareholders. So so having that and then balancing to your point investments behind our non combustible portfolio, we know that a big group of our conventional.
Cigarette consumers are looking for alternative products and we want to make sure and that's exactly why we went into this portfolio approach the portfolio products approach to harm reduction because consumers are going to make it various decisions based on their individual choices and so we want to make sure. We have the best products in each of these categories and certainly as you're introducing new.
Categories, you have to invest behind them, but at its essence, it's balancing kind of continued growth and associated cash returned to shareholders in conjunction with making investments and turn on the combustible portfolio.
Okay. Thank you Billy.
Thank you Bonnie.
Our next question comes from the line of Nik Modi of RBC capital.
Good morning, everyone. Good.
Good morning, Nick.
Good morning, Blake I understand you guys recently put out a new wholesale program. So I was just hoping you could provide some context on how you hope it will help your marketplace performance and then my kind of second question unrelated and forgive me for being so lump sum.
I think it's kind of stating the obvious that the stock is not done well over the last year and some change your two years in fact, just now as being the CEO now in the seat for a few quarters. How do you think what do you want to tell your investors on how you expect to get this stock price backup and create some value. Thank you Melissa absolutely a nickel in the wholesale condo.
Correct.
Whenever we partner, whether it be with wholesalers or retailers, we truly really tried to listen to their feedback and really establish these contracts where they are winning and we're winning both the wholesaler and us and so we feel good about what we've put in place with the new wholesale trade program. We think it did meet some of the things.
Things that our wholesale if we're asking for but at the same time.
Positions us to do well as they do well I think from the stock year exactly right. Nick I think we feel like it's underperformed, we certainly feel like it's undervalued for the unmatched portfolio. We put together I really believe we've lost some trust with investors and so were below.
Looking to build that back and we really believe building that back is keeping our tobacco businesses. If you think about cigarettes, and our traditional moist smokeless tobacco keeping those businesses strong, which we believe they're in a great position and you can see the results that they contributed year to date, thus far but at the same time.
Focusing on if you will very quality flawless execution against making progress against their 10 year vision and posting those consistent results quarter to quarter. So that is what we're focused on.
We believe through time, the Investor one will hopefully.
Hopefully.
We can re garner the trust and they will see the progress we made against achieving their 10 year vision.
I also believe good luck. Thank you. Thank.
Thank you Nick.
Our next question comes from one of cross James of Barclays.
Good morning, Bill is probably good good morning.
Yes.
Good question, so running on the June right, now, which nahs almost $11 billion and I think yard capital gains on aviation stake is about $7 billion.
So then that caveat lockup expires next year, then, yes, you're making our decision of whether to sell or not.
Capital gains considerations are not enter the picture is that a fair entertaining.
Good morning. This is Sal thank you for that question.
In terms of the B shares you are absolutely correct. The lockup on the shares due to expire October of 2021.
And the way I would articulate this is as we did with the US a bee transaction and really other capital allocation decisions will perform our analysis.
And determine if maintaining interest in ABC is the best use of capital.
You know low 2020 has been a challenging year overtime, our investment in both SCB NSPI.
Has been beneficial and you are correct in terms of capital gains.
Offsetting capital losses. So I think your comment there is correct that would be one of the factors as we do our capital allocation analysis.
Sure. That's very helpful. My second question is on the excise tax type question. So.
So you know this excise taxes to go up meaningfully then what you are seeing for implementation of many months and refreshing.
Yeah, I would see those as two different events.
Really from a high excise tax position when you think of the position of the company. We oppose excise taxes, we think there were aggressive in nature.
Certainly from a standpoint of taxing a small portion of the population to pay usually for programs that benefit the entire population and so we think of those as separate events and.
That said positioned hi, excise taxes.
Sure Pat just a last question on that is global and our investments in next generation products.
When we had the advance the European guidance down from seven to nine then to 5.5 to eight and then before considering there are two components of that whenever they extract investments and loaded run over by the post and loss from Junes equity income the potential portfolio investments were about $200 million.
Is that still the goal both investments as we look out next year.
Yes, I'll be careful not to get too much into next year I know you guys you're interested in we'll certainly provided at the appropriate time.
I'd go back to my answer I gave mining if you think about what we are looking to achieve it is a balance between continued growth and the associated growth and cash returns to shareholders and balancing that with investments in the non combustible portfolio. So there are always puts and takes as you move through time, but thats really what were we are.
Going to be guided by as we move forward.
Thanks, Good luck thank.
Thank you.
Our next question comes from the line of Michael Lavery of Piper Sandler.
Good morning, Thank you.
Good morning.
I know cagney feels like a few years ago, but back then you had laid out some of the.
Purchaser profile for those consumers in Atlanta, and even though the retail boutiques are important I'm sure.
You have much lower cannibalization.
From consumers that came through connections through your experts.
I think 38%.
Marlboro users can.
Can you just update us if that's still.
Kind of roughly holding and what amount of your consumers are coming from from those expert connections versus the retail boutiques.
Yeah, you're right the highlight Michael that's exactly what we brought forward at Cagney and you can see some of those learnings that we had in Atlanta, we are incorporating as we move to Richmond, and certainly learnings from both of those as we go into Charlotte and you heard some of the moves that the I. coast team has put in place introducing.
Consumer interactions at the convenience store channel at home delivery.
From a standpoint of updating those specific numbers, we shown at Cagney, we will certainly do that at the appropriate time, we want to more time to relax as we progress through.
One number I can give you remember we talked about a 0.6 share and Atlanta of store.
Goes in stores and distribution that current number through the quarter was 0.9.
Okay. That's helpful. And then just one other you had mentioned some pretty encouraging initial awareness momentum in Atlanta, as well I think around 40%.
As of the second half of 19 any sense of how that might look in the couple other markets or how it's progressed in Atlanta is that moving along pretty well.
Yes, I think it's important to remember Michael we just introduced the reduced exposure claim and those learnings we got in those both Atlanta and Richmond, we have a much more disruptive retail look at Charlotte, So I think those two couples.
Certainly should drive much higher awareness numbers, it's just too early yet to get the good measure from a standpoint of the it reduced exposure claim it's early yet but it certainly has benefited in driving awareness. So we're very excited to be able to use that.
Okay. That's great very helpful. Thank you.
Thank you.
Okay.
Our next question comes from the line of Chris Grayling of Stifel.
Hi, good morning good.
Good morning.
Hi, I just had a question for you if I could start on Marlboro the market share was up strongly sequentially.
You mentioned as more consumers moved back into the cigarette category, there's some risk to marlboro's share, but it performed well and I just did give a better sense of the incremental investments you're making behind Marlboro. How those are eating your sooner and then those 27 states, where you're investing more heavily or are those the main driver of the market share gains if you could tell us on that yes.
The only difference I would point out Chris is we think mobile performed very strong all year long certainly as we try to highlight that we were panic, we saw consumers moving back from E vapor into this cigarette category and we tried to highlight look those consumers that moved back tended to skew a bit older adult smoker, who we know has a.
If you will a preference to discount branded products. So we feel like models to perform very strong all year long.
From a standpoint of investment I think we've gotten much more efficient and effective with the investments. We've highlighted for you the revenue growth management tool and you know you highlighted the 29 states, it's really being very using the advanced analytics, we've put in place to be very targeted and what we're looking at is the health of the brand the performance.
The brand the economic.
Position of our consumers in various geographies and locales and so I think we've gotten much more precise and efficient with our resource deployment.
And can you say ability those those 29 states or it would be the main driver of the share improvement or is it occurring kind of across the country.
Yes.
Hi, I'm hesitant to to too many details around our revenue growth management, we feel like our mobile brand is very strong across the U.S.. We highlighted that in this pandemic, we've seen the consumer really have a preference for premium branded products.
And remember our through the last downturn when I sat behind the glass with consumers and focus groups. They would talk about this being a.
Moment in time in their day as they sophie's usage occasions that brought a bit of normalcy and they wanted to have a brand that they trust us. So we think that is certainly impacted at some and we did see some different competitive activity in the second quarter compared to the third.
Okay, and then I had just one follow up question for on its obviously growing very strongly I just want to see is capacity a limiting factor for the brand in your expansion plans and make good sequential progress expanding the brand but is there is there a capacity limitation. There that you would you would cite and I'm just curious at least expected you to expect distribution.
You know were increases for the brand from here.
Yes, certainly you should expect distribution increases.
We are still under a bit of manufacturing capacity constraints.
That is on track to what we shared last time, we we took the best engineers, we had on how to kind of from the old tobacco space and Eric moist smokeless business.
Best Engineers from the high speed manufacturing and cigarette and I think they're making great progress certainly they had some disruption around covered but we're on track to what we shared last time.
Okay, great. Thanks, so much thank you Chris.
Our next question comes from the line of Adam Spielman of Citi.
Hi, Thank you very much I can just follow up.
Some questions.
Previously given.
So I think Nick said and.
And if that your share price is very low and you will reply was we agree is undervalued.
As the obvious solutions is not is probably backs if the shares are undervalued falling back makes sense.
And I'm wondering what it would take for.
The use of buyback in terms of your balance sheet, because I look at your balance sheet is strong. So that's my first question. Thank you.
Good morning, Adam This is Sal in thank you it's.
Really good question, here's wed like to answering.
Answer it if you think about capital allocation.
Algeria.
Dividends continue to remain to be the primary vehicle for returning value to our shareholders and we're fortunate to have a strong balance sheet.
And operating companies that generate significant cash.
As we said we do agree that the stock is undervalued, but.
But we continue to be in the middle of a pandemic and we believe that maintaining a higher than normal cash balance is really the most prudent strategy to support our operating companies and our strategies going forward, but you're right, we'll continue to evaluate expectations of.
Business performance the impact on adult tobacco consumers of the pandemic the general environment in really make our recommendations to the board of directors.
The best way, we can and at the appropriate time.
We will think about all aspects of capital allocation.
Is there a specific target you have for that.
EBITDA for example that would allow you to make your recommendation.
To the board of the drug products.
Yes, Adam I think I understand the question is there isn't a specific target in mind, certainly we want to always have debt management in mind. When we think about that capital allocation process. Certainly we are dividends is a top priority for us and when you think about share buybacks thats always top of mind as well and so we look at that and their capital allocation process.
So we don't have a specific target in mind.
Okay. Thank you so moving on though O'neal. So thank you very much so is it sort of look at your.
The metrics and and then the second sheets.
Are you going to see the cigarette industry volume decomposition estimates, which is always very useful so thank you for that.
In the last 12 months you are the she tells me that's not crazy economic and other factors have increased.
The cigarette industry by 2.1 percentage points how.
Oh, just when will the sense.
Well that means all you are doing so creates exciting if there was a normal year.
Without any impact from credit rating the pandemic to stay ahead of orders.
[laughter] offensively your volumes are industry volumes are school about two percentage points in other words I speak of this is saying well actually visit the pandemic has caused a huge numbers of pluses and minuses, but net net it's clearly benefits.
Uhhuh consumption in the last 12 months.
I didn't know more yes.
These would be just two percentage points lower.
We know 2021 isn't going to be a new yorker, well reserved the right way to refinance not to forget since each points.
Yeah, Adam if when you look at the sheet that those macroeconomics, we try to highlight what we really felt like debt, what's driving that certainly government stimulus over the last 12 months has been a piece of it discretionary spend being having more availability through our consumer base as they spend less in gas and entertainment and other types of discrete.