Q4 2020 Altria Group Inc Earnings Call

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Good day and welcome to the Altria group, 2024th quarter and full year earnings Conference call. Today's call is scheduled to last about one hour, including remarks by Altria as management and a question and answer session Representatives of the investment community and media on the call.

All will be able to ask questions. Following the conclusion of the prepared remarks to ask a question. During this time simply press Star then the number one on your telephone keypad. If your question has been answered and you wish to remove yourself from the queue press the pound key I would now like to turn the call over to Mac Livingston Vice.

<unk> of Investor Relations for Altria client services. Please go ahead Sir.

Thanks, Lori good morning, and thank you for joining us this morning, Billy Gifford Altria as CEO and Sal Mancuso, our CFO will discuss <unk> fourth quarter and full year business results.

Earlier today, we issued a press release, providing on our results the release presentation and quarterly metrics are all available on our website at Altria Dot com.

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 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 <unk> Board.

Altria reports its financial results in accordance with U S. 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 <unk> Dot Com <unk>.

Finally, all references in today's remarks to tobacco consumers or consumers within a specific tobacco category or segment refer to existing adult tobacco consumers 21 years of age or older.

With that I'll turn the call over to Billy.

Good morning, and thank you for joining us all.

<unk> delivered outstanding results in 2020 and manage through the challenges presented by the COVID-19 pandemic.

Our tobacco businesses were resilient and.

And our employees demonstrated unwavering commitment to their work colleagues and communities.

Our employees continue to move out here forward and we believe we're making steady progress towards toward our 10 year vision to responsibly lead the transition of adult smokers to noncombustible future.

We continue to execute against the strategies, we've previously shared including maximizing profits in our combustible businesses.

Responsibly, expanding our noncombustible products and.

And demonstrating science based leadership in the external environment.

We've remained active in our communities supporting relief efforts for the pandemic and the West Coast wildfires were.

We're committed to driving positive change and addressing racial and economic and equities.

Change starts from within and our employees are leading our efforts to build a more diverse inclusive and equitable organization.

Our 11 employee resource groups are helping promote cultural awareness and diversity in our workplace and within our communities.

Two of these organizations mosaic and see were recently recognized for their contributions.

The National LGBT Chamber of Commerce.

And by the Virginia Hispanic Chamber of Commerce, respectively.

We also acknowledged the importance of addressing environmental challenges and we've established ambitious goals for 2030.

Last month, we were among the 1% of companies awarded a double a rating from CDP for climate and water stewardship.

We're proud of these efforts and I look forward to sharing more details about our ESG initiatives next month at Cagny.

2020 was a dynamic year in the tobacco industry with notable changes in each category.

Tobacco consumers continue to adopt non combustible alternatives to cigarettes.

This significantly in the all tobacco space.

With rapid growth in all nicotine pouches off of a small base.

And it returned to moderate volume growth in moist smokeless tobacco.

The heated tobacco category also showed encouraging signs of smoker interest bill it remains in its early stages.

The E vapor category, However, which had been the biggest driver a smoker conversion over the last several years contracted in 2020 as it continues to undergo a transition period pending FDA market determinations.

And in Combustibles cigarette volumes were little changed from 2019, as the COVID-19, pandemic ultra smoker behaviors and purchasing patterns.

Looking at the tobacco space in total estimated equivalent as volumes remained stable.

In fact over the last five years, we estimate the total tobacco volumes have only decreased by 1% on a compounded annual basis.

While 2020 represented a pause in some industry trends away from combustible products are.

Plans to achieve our 10 year vision remains centered around building a deep understanding of evolving tobacco consumer preferences.

Meeting these preferences by expanding the awareness and availability of our non combustible product portfolio.

And when authorized by the FDA engaging with smokers to educate them on the benefits of switching to alternative products.

Let's now turn to our 2020 business results.

<unk> full year adjusted diluted earnings per share grew three 6% driven by strong performance from our tobacco businesses.

We also returned nearly $6 3 billion in cash to our shareholders in the form of dividends and our board increased the dividend for the 55th time in the past 51 years.

Our smokable products segment continues to be the engine that powers, our 10 year vision.

Generation significant cash that can be invested in noncombustible products and returned to shareholders.

This segment has demonstrated strong profit growth and a variety of marketplace conditions.

Over the last five years Smokable segment adjusted OCI has grown by five 5% on a compounded annual basis.

On the segment has delivered excellent financial performance across very volume.

And market share dynamics.

We continue to be pleased with the performance of our combustible businesses and Sal will provide more details on this segment in his remarks.

Moving to our Noncombustible offerings.

We're pleased with the continued strength of USS Tcs moist smokeless tobacco business and the encouraging results from our other noncombustible products.

We believe our products and investments with the oral tobacco E vapor and heated tobacco categories.

Compelling options for the millions of U S smokers looking for alternatives to cigarettes.

And all tobacco, we believe we have an unmatched portfolio of MST.

And all nicotine pouch products.

Copenhagen remains the leading all tobacco brand and delivered strong volume and profit performance for the year.

We're also excited about the potential for on and believe it's a satisfying product for both smokers and dippers.

Helix made significant progress in its first full year of operations.

Over the last 12 months, our talented regulatory affairs team assist the helix and falling PMT as for the all portfolio.

Which we believe demonstrate that the products are appropriate for the protection of public health.

Our highly skilled engineers and machine operators supported helix and establishing a manufacturing footprint for on in our Richmond facility.

And helix has reached annualized capacity for on of 50 million cans.

The team continues to install machinery and helix expect unconstrained manufacturing capacity for the U S market by mid year 2021.

And the helix brand management and <unk> sales teams collaborated to steadily increase the retail distribution of on during the year and executed innovative trial generating promotions that demonstrates the ability for on to.

To gain traction with smokers and dippers.

Owen was sold in approximately 78000 stores at the end of 2020.

Up nearly 40% from the third quarter and more than five times the store count from the end of 2019.

In stores with distribution on achieved a retail share of two four percentage points.

Of the all tobacco category in 2020 with significant growth coming in the second half of the year.

Yeah.

No. It's has strong plans for the year ahead and is focused on removing capacity constraints.

<unk> its retail distribution targets bill.

Building brand equity and converting smokers.

We're confident in the on proposition and.

And believe it satisfying range of nicotine strength to flavors and unique packaging position it well for success in the rapidly growing nicotine pouch space.

Moving to E vapor.

We estimate that total category volumes decreased by 10% for the full year.

The category continues to undergo a transition period.

FDA prepares to make market determinations on the thousands of PMT as filed by the September 2020 statutory deadline.

We continue to believe that E vapor products can play an important role in tobacco harm reduction and Thats sustainable E vapor category.

One that consist solely of FDA authorized products.

We believe the categories long term trajectory will be determined by regulatory decisions legislative.

Legislative and tax policy and innovation that best addresses smoker and vapor preferences.

And the heated tobacco category PM USA continues to expand iqos in marble heat sticks responsibly and in a disciplined manner.

PM USA is 2020 accomplishments included launching in Charlotte with a more disruptive retail fixture.

Expanding the retail distribution of heat sticks to approximately 1000 total stores.

Introducing devices into select Charlotte convenience stores.

Developing an array of new digital tools, including mobile video chat capability, which gives PM usa's customer care experts, a virtual option to build connections and support age verified smokers through their conversion journey.

And communicating with smokers using the FDA authorized reduced exposure claim about the benefits of switching from cigarettes.

We're excited that the FDA has authorized the iqos three device for sale in the U S.

The new device offer offers several enhancements compared to the current two four version <unk>.

Including a longer battery life, and a faster recharging time.

PM USA expects to begin selling the new device shortly and it will be available across all existing retail channels and the Atlanta, Charlotte and Richmond markets.

<unk> also recently introduced new packaging for heat sticks and has renamed the three currently authorized key six skus as Amber Blumenthal and Green menthol.

The new packs feature a cleaner look and PM USA believes the naming convention will facilitate heat stick launch line extensions in the future should additional variance be authorized by the FDA.

Kim USA is focused on expanding the availability and awareness of Iqos.

<unk>, it's <unk> performance requirements.

It remains on track with its 2021 plans to expand Iqos and heat sticks into four new metro markets and surrounding the geographies.

We believe that PM USA has the right approach to maximize its first mover advantage.

Responsibly positioning the U S heated tobacco category for long term growth and profitability.

Let's now turn to our financial outlook for 2021.

Our plans for the year ahead include accelerating investments in support of our 10 year vision.

We expect to fund through the financial strength of our tobacco businesses.

The external environment remains dynamic, however, and we're monitoring various factors, including unemployment rates.

Fiscal stimulus tabak.

Tobacco consumer dynamics, including stay at home practices disposable income purchasing patterns and adoption of Noncombustible products.

Regulatory and legislative developments.

The timing and breadth of COVID-19 vaccine deployment.

And expectations for adjusted earnings contributions from our alcohol assets.

Taking these factors into consideration, we expect to deliver 2021 full year adjusted diluted EPS in a range of $4 49.

To $4 62.

This range represents an adjusted diluted EPS growth rate of 3% to 6% from a $4 and 36 base in 2020.

Our 2021 guidance incorporates planned investments to drive smoker conversion to non combustible products, including <unk>.

Continued marketplace investments to expand the availability and awareness of our noncombustible offerings.

Building on industry, leading consumer engagement system that enhances data collection and insights in support of conversion.

And increased non combustible product research and development.

We expect our 2021 adjusted EPS growth to come in the last three quarters of the year, primarily due to prior year comparisons, which includes one fewer smokable products shipping day in the first quarter.

Altra is tobacco businesses delivered excellent results over the past year and I'd like to thank our employees for their hard work.

Their dedication drives our strong performance and it's their passion and commitment that makes me excited for <unk> future.

I'll now turn it over to <unk> to provide more detail on the business environment and our financial performance.

Billy let.

Let me begin by providing an update on U S tobacco consumers economic.

Conditions remain challenging for consumers in the fourth quarter as unemployment rates remained high and the enhanced benefits from the original pandemic assistance package, we're fully exhausted.

However, we believe consumers continued their stay at home practices in the fourth quarter.

Contributing to more tobacco usage occasions, and higher tobacco discretionary spending.

At retail, we estimate that the fourth quarter to a number of tobacco consumer trips to the store.

Was slightly lower than prior levels.

But tobacco expenditures per trip remained elevated versus the year ago period.

Turning now to our businesses the smokable products segment delivered excellent financial and marketplace results in 2020.

The segment grew full year adjusted OCI by over 10% in.

And expanded its adjusted OCI margins by almost two percentage points.

The Smokable segment also achieved robust net price realization of six 7% for the year with PM Usa's revenue growth management framework continuing to enhance the segment's top line performance.

Smokable segment reported domestic cigarette volumes declined by 0.0, I'm, sorry zero, 4% in 2020 versus the prior year.

When adjusted for trade inventories calendar differences and other factors, we estimate that full year segment cigarette volumes declined by 2%.

At the industry level, we estimate that full year domestic cigarette volumes were unchanged versus the prior year after adjusting for the same factors.

Looking ahead.

We expect 2021 cigarette industry volume trends to be most influenced by smokers stay at home practices unemployment rates fiscal stimulus cross category movement, the timing and breadth of COVID-19 vaccine deployment and consumer purchasing behavior.

Moving to vaccines.

Due to the uncertain timing and magnitude of each of these dynamics, we're not providing a cigarette industry outlook.

We believe the degree of cross category movement will be influenced by several factors, including consumer perceptions of the relative risks of noncombustible products compared to cigarettes FTE.

FDA determinations on PMT eight filings and legislative actions will continue to monitor these factors and update you on the pandemic driven and underlying small group behaviors that we observed in the category.

Turning to marketplace performance more barrels fourth quarter retail share was 43, 3% of <unk> versus the prior year and unchanged sequentially.

Our group continued to benefit in the fourth quarter from smoker preferences toward familiar products during disruptive times and continued lower promotional spending among competitive brands versus the first half of 2020.

For the full year marlboro's retail share declined <unk>, 243%.

<unk> full year share performance was impacted by the movement of all through consumers coming back into cigarettes from E vapor.

We observed at the beginning of 2020.

This demographic has a greater tendency to purchase discount cigarettes than the category average, which increased discounts sigma share to start the year.

We continue to be pleased with more gross performance and believe its leading brand equity positions the brand well to deliver on its long term profit potential.

And discount total segment retail share was 24, 5% in the fourth quarter.

Unchanged versus the year ago period, and up two tenths sequentially.

For the full year.

Discount segment retail share increased three tenths to 24, 5% drill.

Driven by the cross category movement observed at the beginning of 2020 and group and deep discount products.

Moving to cigars Middleton provided a strong contribution to the smokable segments financial.