Q3 2021 Altria Group Inc Earnings Call
Mobility.
Thanks, Matt Good morning, and thank you for joining us.
In the third quarter Altria continued to balance maximizing profitability from our core tobacco businesses with investing to realize that vision of responsibly, leading the transition of adult smokers to a smoke free future.
Our tobacco businesses performed well against difficult year over year comparisons and we're encouraged by the significant retail share growth from <unk> in the third quarter.
We also continued to reward shareholders with a strong and growing dividend and announced today the expansion of our share repurchase program to $3 5 billion.
Both altra in the tobacco industry are evolving and with transformation comes opportunity.
It also brings uncertainty and adversity, including the recently International Trade Commission decision related to Iqos.
We knew our journey to a smoke free future would not be easy.
But our determined and talented employees have demonstrated they are up to the challenge.
The pursuit of our vision is not based on a single brand or product platform <unk>.
Our vision is built on our understanding of tobacco consumers their capabilities as a leading tobacco company.
And a portfolio of Smokefree brands and product formats.
We made progress through the performance of our current smoke free portfolio and advancement and regulatory sciences data analytics, and a robust consumer engagement system.
Our tobacco businesses remained strong and our vision keeps us focused.
And guides us forward.
Let's now turn to our business results.
Altria grew its third quarter adjusted diluted earnings per share two 5% despite a.
Backdrop of challenging comparisons and unfavorable year over year trade inventory movement.
For the first nine months of the year adjusted EPS grew four 5%.
Primarily driven by the strong financial performance of our tobacco businesses and higher API adjusted earnings.
Our smokable products segment continues to generate significant cash and return to shareholders to return to shareholders and fuel our vision.
Third quarter adjusted operating company's income decreased two 2%, reflecting the impact of trade inventory swings, but grew two 6% to seven $9 billion.
For the first nine months, while marble remained strong.
The oral tobacco products segment continued to deliver robust profit margins, while Copenhagen maintained its leadership position.
And oral nicotine pouches, we have accelerated investment behind helix and believe that the oil portfolio is well positioned in this fast growing category.
We're advancing the sophistication of our analytics across our companies.
The helix team uses this capability to evaluate the impact of promotional tools on tobacco consumers and understand what actions effectively drive trial repeat purchase and adoption.
For retail share of all tobacco increased a full share point sequentially, reaching.
Reaching three share points for the third quarter and nearly tripling since the end of last year.
These strong results were driven by increased smoker trial and repeat purchase from existing on consumers.
We're excited by the performance of <unk> during the first nine months of the year and believe consumer insights disruptive retail executions and consumer engagement will continue to appeal its growth.
Last year, we submitted premarket tobacco applications to the FDA for the entire portfolio.
While the FDA has made substantial progress in reviewing millions of PMT as they received air applications for on are still pending.
A week ago, the FDA authorized the marketing of four of our oral nicotine products Verve discs and verb choose and the flavors of green met and Bluebird.
And determined that the marketing of these products is appropriate for the protection of public health.
This is the first flavor product authorization issued by the FDA for newly deemed tobacco products.
While our products are not currently in market. We believe <unk> learnings, we gained from developing out FERC submission were critical and falling compelling and Tommy submissions for on.
Which we completed in only nine months after closing the Orange transaction.
We're also actively working on modified risk tobacco.
<unk> applications for <unk>.
We believe in <unk>.
It would be an impactful point of differentiation for the brand and an important tool in educating and ultimately transitioning smokers to less harmful products.
In the in the E vapor, we estimate that the total category volume increased 17%.
Versus the year ago period, and increased 2% sequentially as a result of continued elevated levels of competitive activity.
While we had hoped for clarity on the categories outlook as manufacturers received pmk decisions the future of E vapor is still uncertain.
For most of the leading E vapor products the applications are still pending including those submitted by June.
Moving forward, we expect E vapor volume trends to be influenced by regulatory activity, which has the potential to impact the degree of cross category movement.
Recently, the CDC published an update from their National Youth Tobacco survey.
While caution is warranted when comparing results year over year due to the impact of the pandemic on the survey methodology under H E vapor use including use of dual shows continued signs of decline.
We're encouraged by the progress.
More still needs to be done and we remain committed to continuing our work to drive down underage use.
Turning to heated tobacco the Iqos team continues to refine its go to market approach for new and innovative products.
Across the four states, where iqos is available total marble heat sticks volume continued to grow with repeat purchase accounting for approximately 85% of sales.
According to Iqos consumers.
Our Iqos experts program played a significant role in the repeat purchases.
The program offers smokers personalized support and encouragement through consistent tailored engagements.
And then northern Virginia lead market device penetrations as a percent of the smoker population continued to exceed the performance of previous Rollouts.
And the last four weeks of the third quarter mobile heat sticks achieved a cigarette category retail share of one 8% in northern Virginia stores with distributions.
As we mentioned earlier the international Trade Commission recently imposed an importation banned and issued cease and desist orders on Iqos mobile heat sticks and infringing components.
We're disappointed in this decision as Iqos is the only available tobacco product to have received FDA authorization as a modified risk tobacco product.
The Itc's importation band will make the product unavailable for all consumers have switched to iqos.
Reduce the options for over 20 million smokers looking for alternatives to cigarettes.
And ultimately is detrimental to public health.
We continue to believe the plaintiffs patents are invalid and that Iqos does not infringe on those patents.
The Itc's decision is currently under 60 day review by the administrations U S trade representative.
In the event that the administration does not rejected decision.
We are preparing to comply with the order.
We've been focused on our contingency plans surrounding sales and distribution and have been in communication with PMI on their domestic manufacturing plans.
We view the Itc's decision as a frustrating ops obstacle, but we're not deterred from the work required to realize our vision.
We remain committed to the heated tobacco category and believe it can play an important role in transitioning smokers to a smoke free future.
Going forward, we expect to apply the knowledge and capabilities, we gained from introducing and responsibly marketing a brand new product category.
For example, we've learned how to blend behavioral science data insights and consumer engagement.
<unk> support smokers on their smoke free journey.
Leverage MLR TPS to educate consumers on the benefits of reduced risk products.
<unk> established a robust post market surveillance system as required to monitor FDA authorized products.
I'm optimistic about the future for tobacco harm reduction in the U S. We have an unprecedented opportunity to lead the way and shifting millions of smokers away from cigarettes, if we follow the science and foster innovation with the support of reasonable regulation.
Let's turn to our financial outlook.
We are raising the lower end of our full year 2021 guidance and now expect to deliver adjusted diluted EPS in a range of $4 58.
To $4 62.
This range represents a growth rate of 5% to 6% from a $4 and 36% base in 2020.
I'd also like to welcome Marge Connelly and Matt Davis to our board of directors as announced this morning.
He brings significant combined expertise in operations business strategy consumer insights and public policy and we will be tremendous assets as we pursue our vision.
I'll now turn it over to us to sell to provide more detail on the business environment and our results.
Billy.
Like to begin by discussing the macroeconomic factors, we believe influence the tobacco consumer.
We believe rising gas prices inflation and the conclusion of COVID-19 relief programs led to a decrease in disposable income versus the previous quarter. In addition increased consumer mobility offered consumers more options for their discretionary spending.
At retail trends were unchanged sequentially.
We estimate that compared to pre pandemic levels, the number of tobacco consumer trips to the store continue to be depressed, but tobacco expenditures remained elevated.
We continue to monitor tobacco consumer behaviors and will provide our insights on the factors impacting those behaviors as we move forward.
Moving to our businesses.
<unk> products segment expanded its adjusted OCI margins to 58% an increase of five percentage points for the third quarter and more than one percentage point for the first nine months. This performance was supported by strong net price realization of 11, 3% in the third.
Third quarter and nine 2% for the first nine months.
Smokable segment reported domestic cigarette volumes declined 12, 9% in the third quarter and 8% in the first nine months.
We believe reported volumes reflect an absolute wholesale inventory swing of one 5 billion sticks as wholesalers built inventory in the third quarter of last year, but depleted inventories this quarter.
When adjusted for trade inventory movements calendar differences and other factors domestic cigarette volumes for the third quarter and first nine months declined by an estimated 7% and 5% respectively.
At the industry level, we estimate that adjusted domestic cigarette volumes declined by six 5% in the third quarter and by 5% in the first nine months.
Marlboro remains strong and resilient, despite a widening price gap and that dynamic macroeconomic environment.
In the third quarter Marlboro retail share of the total cigarette category was unchanged both sequentially and versus the year ago period at 43, 2%.
And then discount total segment retail share in the third quarter continued to fluctuate increasing 0.3 percentage points sequentially to 25, 3%.
In cigars, we continue to believe black and mild is the most profitable brand in the large mass machine made cigar category.
Reported cigar shipment volume increased by two 7% in the first nine months of 2021.
Turning to the oral tobacco products segment, adjusted OCI and adjusted OCI margins contracted for the third quarter and first nine months, primarily due to increased spending behind on and shifting mix between MST and oral nicotine pouches.
We're pleased with the strong overall margins for the segment and continue to be excited about the opportunity for on in the oral nicotine pouch category.
Total reported oral tobacco products segment volume decreased by three 8% for the third quarter and <unk>, 5% for the first nine months when.
When adjusted for trade inventory movements and calendar differences.
<unk> volume decreased by an estimated two 5% for the third quarter and 0.5% for the first nine months.
Oral tobacco products segment retail share for the third quarter was sequentially unchanged and strong share gains for an offset declines in MSP.
This segment declined two two percentage points versus the third quarter last year due to the continued growth of the oral nicotine pouch category.
Looking ahead, we're monitoring several factors as we move towards the end of this year and into the next.
Many industries are experiencing rising input costs and supply chain disruptions.
Thanks to the foresight and hard work of our procurement team. We are successfully managing through these issues without significant impact to date.
For Algeria, we foresee modest inflation in the year ahead.
This could have some impact on the input costs and the inflation adjustment to our master settlement agreement payments. However, our tobacco businesses remained strong and we are confident in our ability to manage through short term economic challenges.
As a reminder, we contemplate an array of scenarios in our financial forecast and intend to incorporate these factors into our 2022 EPS guidance, which we expect to provide in January.
Turning to our investment in Abi.
The five year lockup on our restricted shares expired earlier this month.
We've been invent an investor in the beer category <unk> 1970 in our original investment of $230 million has served us extremely well over the past half century.
In fact since 2003, our beer investment.
<unk> has served as a diverse income stream that contributed over $12 billion of adjusted equity earnings.
<unk> contributed over $10 billion of cash from both dividends in 2016 merger proceeds and strengthen our balance sheet.
We performed rigorous analysis regarding the <unk> investment.
First as part of the preparation of our third quarter financial statements and second in anticipation of the expiration of the lockup.
In preparing our third quarter financials, we assessed the latest outlook for <unk> business under the applicable accounting guidance and recorded an impairment to the asset.
While we continue to believe API share price will recover we now do not expected to fully recover to its carrying value as soon as previously expected.
As a result, we have written our investment in Abi down two at September 30 market value of $11 2 billion.
Regarding our decisions around the lockup.
We view, our API stake as a financial investment and our goal is to maximize the long term value of the investment for our shareholders.
We consider several factors as we analyze the investment including the strategic rationale of continuing as a long term investor in the beer category.
API share price, which has declined by more than 30% since October 2019, due in large part to impacts of the Covid pandemic.
Our expectations of <unk> business alternative uses of capital and tax considerations.
We have determined that selling our Abi investment at this time would not maximize long term shareholder value.
Therefore, we continue to plan to maintain our API investment.
We continue to have confidence in <unk> long term strategies premium global brands experienced management team and capability to successfully navigate near term challenges.
We will continue to monitor and evaluate market conditions and the analytical factors mentioned previously on a regular basis consistent with our goal of maximizing the long term value of this investment for our shareholders.
We remain committed to creating long term shareholder value through the pursuit of our vision and our significant capital returns, which we demonstrated in the third quarter by paying approximately one 6 billion in dividends and raising the dividend for the 56 time and 52 years.
Selling St Michelle wine estates, and expanding our share repurchase program from $2 billion to $3 $5 billion, and repurchasing $6 7 million shares totaling $322 million.
We have approximately $2 5 billion remaining under the newly expanded three $5 billion share repurchase program, which we expect to complete by December 31 2022.
With that we'll wrap up and billing 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 <unk> Dot com.
We've also posted our usual quarterly metrics, which include pricing inventory and other items.
Let's open the question and answer period.
Operator, do we have any questions.
Thank you once again as a reminder, if you would like to ask a question. Please press the star key followed by the number one on your Touchtone phone at this time investors analysts and media Representatives are now invited to participate in the question and answer session. We will take questions from the investment community first.
First question comes from Pamela Kaufman with Morgan Stanley. Please go ahead.
Hi, good morning.
Pamela.
I had a question on pricing.
Net pricing growth was very strong this quarter can you discuss the levers that you're managing to drive net price realization and how much of the growth in net pricing has been driven by your strategy around Alan M versus how youre, managing Marlboro and what Youre doing differently from an RPM perspective.
Yes. Thanks for the question Pamela I think when you think about pricing it's important to remember our price realization is really two major components. The first component everybody is aware of it and talks about regularly which are list price increases and that's across our portfolios when.
When you think about the other component.
And we've referred to it before is the investments we've made around advanced analytics and the amount of data, we get from retail and with that advanced analytics. Some companies referred to it as revenue growth management, but it's really taken the retail promotions, we put in the marketplace.
For consumers and really making it more efficient and as.
Effective or may be at times more effective than.
Then without the revenue growth management, and so that's allowing us to increase the price realization I think thats, what you experienced through the quarter and through the first nine months.
From a standpoint of LNR look we've increased our profitability on the O&M, we have ceded some share there, but we are premium focused company.
We like the results that we've experienced in <unk> and I think you see what the advanced analytics mobile has been rock solid for call. It five to six quarters.
Thanks, and as a follow up how are you thinking about the balance between generating price realization in light of some of the macro headwinds that you highlighted that might weigh on tobacco consumers and.
Got it.
So I am sorry <unk>.
So I guess related to that it looks like the discount segment experienced stronger here again this quarter driven by the deep discount segment now.
Are you seeing any increase in propensity of down trading in the current environment.
Yes, I think if you look at the slides we provided I will take the discount question first you can see discount bounces around from time to time.
It's still in the range, where it has been for quite a while I think you see the propensity for consumers to still.
Lastly up.
Premium brands over discount brands.
From a standpoint of how we think about pricing and I'll be careful not to talk about future pricing.
I've mentioned before there are several factors, we think about we think about.
The health of our brands the demographics that are associated with our brands, while we've been relevant across all adult cohort.
And we think about the.
Economic health of our consumers that is a factor that we factor in and then we think about overall corporate objectives and so we look to balance.
How we make decisions there.
When you think about the overall strategy that we.
Applied to the combustible segment, it's really about maximizing profitability over the long term, while making appropriate investments and balancing investments in Marlboro with investments in the Noncombustible portfolio.
Thank you.
I'll pass it on.
We'll take our next question from Vivien <unk> with Cowen Your line is open.
Hi, Thank you good morning, good morning Vivian.
So in terms of the consumer I think you guys rightly pointed out gas prices as a key consideration in terms of watching out for the health of your core tobacco consumer I recognize we're possibly kind of early cycle in placing in gap and I'm curious as you.
The various regions in the United States, obviously very different gas price dynamic anything to call out in terms of kind of the underlying initial response.
From consumers higher gas prices.
Nothing there to call out Vivien, you're right, we actually look at it down to the state level and below that and I would say nothing really to call out specifically different from what youre seeing on a national basis.
Okay. Okay. That's helpful. Thank you for that.
All tobacco segment I was wondering if you could kind of unpack the components of the 430 basis point decline in EBIT margin mix versus the higher level of promo and on and to follow up on that.
The current levels.
Our profitability in that segment, but youre focused on do we think that this kind of 60% is the right one which should we expect a recovery.
To more normalized rates like we've seen in past years. Thank you.
Thank you Vivien I think when you think about our strategy in all tobacco.
You can see what we're doing is we have.
Great margins in traditional MST, we continue to lead in that category and we're making great strides in the on and the novel oil space and we're very pleased with what we saw with the results. Once we got past manufacturing capacity constraints. The progress we've been able to make with our sales force and the helix team.
It's important to remember you're disrupting the consumer and introducing them to a new category. That's growing extensively and so we're not just investing in price promotion, we're investing in making it a premium brand and really engaging with the consumer both digitally as well as with equity images. So that they understand the nature of the brand so you're disrupting.
At retail and then your reinforcement with equity through time, and so that's how we're approaching the oral tobacco category. We believe on through time, we can achieve tobacco like margins, but certainly we're in the investment fees right now.
Okay. Thank you very much thank.
Thank you.
Our next question comes from Owen Bennett with Jefferies. Your line is open.
Good morning, Ken hopeful well and first question is just coming back to the pricing dynamic, Sweden growing deep discount segment and the price gaps with the Boston market.
It does it paying right now the industry share loss.
Count is coming from discount.
Same time with the aggressive pricing, we've seen the price gap between the top and bottom of the market is now 98%.
Historically held constant at around 30% you were seeing quite a sharp increase there is there any basic EPS continues to take hold in the premium segment. All finished off the lead share I guess, what I'm trying to get our Ethernet 18 point, where you think that price got becomes and two sizable.
Yes, it's something we certainly monitor Owen. Thank you for the question and it's something that we supply to you guys. The overall national price gap, but we look at it back to Vivian question at a much lower level I think when you think about that price gap I would point to the performance of marble through time.
Being able to achieve that price realization and I had mentioned advanced analytics before and what that team has been able to do in making the retail promotions, we put in the marketplace effective and more efficient and so you see the steadiness of marble through time, you see the price realization.
What we were able to achieve for the first nine months.
But it's certainly something we monitor but we feel good about the position that our tobacco businesses.
Okay. Thanks, and then second question just wanted to come back to the Abi stake in some of the default process around that.
Typically.
Penske, creating more value from holding on to that.
And potentially owning Q outright some in Q4.
<unk> tends to be hyper growth, especially if it gets traction internationally until a few SaaS witnessed cannibalizing cigarette so incentive.
And all mix and then arguably as well it can also.
ESG credentials and on the flip side, you've got Abi arguably.
Not cannibalizing youll see that and it was nothing for ESG credentials and then you've got potentially the corporate tax rate increasing soon the tax charge on sale could increase slightly shrinking given those dynamics I mean, why do you think Abi can potentially offer more long term value for shareholders than owning jewel outright code.
Good morning, this is Sal.
So theres a lot to unpack in that question, let me start by saying.
As you know, we don't comment on hypotheticals or speculation around M&A.
So let me move on to the Abi question, which you've touched on a lot of the analytical factors I talked about in my opening remarks at the center of the analysis, though is really thinking about what's best for the shareholders over the long term.
At this time, we believe holding the asset is what's best for the shareholders over the long term as I said earlier, we will continue to monitor the asset and perform the detail and analysis that we perform as we do with all capital allocation decisions and we will continue to do that moving forward, Yes, I think the only thing I would.
<unk> you can think of it you've been following us for quite a while it's no different than the analysis, we went through with us we.
We look at the asset we look at does go through the analytics and does it make sense to hold the asset or reallocate that capital somewhere else and so that's something now that the restriction has gone that we'll do on a regular basis and we'll update you at the appropriate times.
Great. Thanks, John appreciate the question.
Thank you.
Once again, if you would like to ask a question. Please press the star and then the one key on your Touchtone phone will go now to Gaurav Jain with Barclays. Your line is open.
Hi, Good morning, Good morning, Bill and good morning, Sal Good morning, Hi.
I have three questions. So the first one on the another question have been asked earlier on the marlboro's price premium with the lowest effective so what I understand is that <unk> lucky strike below Guatemala.
And then used to compete against ball model I'd say, Colin price and now you do not actually have a brand which is competing on this lucky strike, which is why we are seeing these 20% plus volume declines.
Hello, NIM side of things.
Do you think you also need to reposition a brand to compete more effectively against Lucky strike.
Yes.
I would remind you how we think about the combustible category and it's really about maximizing profitability over the long term and then balancing investments in Marlboro, because we're premium focus with investments in the Noncombustible portfolio that we have and so that's how we the overall strategy for the combustible segment.
I would point to the performance of Marlboro again of five to six quarters of rock steady performance.
The price realization, we've been able to achieve both from list price as well as the advanced analytics and applying that to the marketplace and so we feel good about where we're positioned.
As far as other companies they can make decisions independent of us.
Sure. Thank you the second question I Havent been component shortages, so we have a home.
A lot of industries.
So.
Have you seen any shorter isn't a bad thing, but E cigarette market, which could help the cigarette volumes and the.
Next few quarters and we also hired one of your competitors talked yesterday about charter and some sugata components. So are you seeing any shorter than for us as well.
Yes, nothing to point out that would be material, we've had from a standpoint of our procurement team. They stay on top of this they are able to work around whether it's storms are shortages of supply chains, but we haven't experienced any shortages either from a labor standpoint or from a product input standpoint, so we're extremely.
Pleased with what our procurement and our hourly workforce has been able to achieve through this process.
Sure.
Last question on the MSA calculation and you have a flat is that because of inflation next year could be.
That adjustment so could you just remind us how that calculation works on how inflation plays a role in it.
Sure. Good morning, this is Sal.
The MSA does have an inflation factor associated with the calculation of the payments it has a floor of 3%.
And anything above 3% impacts that cost now.
Point in time calculation, so with CPI you as of December 31 for the current year versus the prior year, we have had times, where we've been above the 3%. It's something we are used to managing and we've managed in the past I pointed it out only because it is a differential.
Aspect of inflation for the tobacco business versus other CPG industries.
Okay Sure Peninsula South.
Sure.
We will take our next question from Jennifer Maloney with Wall Street Journal Your line is open.
Hi, good morning, good morning, Jennifer.
I just wanted to talk about consumer behaviors could you talk a little bit about why you are seeing.
Robin industry cigarette volumes of six 5%.
Is it because people are spending more on travel and gas is it because they're out and about more and not spending as much time at home.
Yes, it's a great question I would point to the mobility of our consumer and we talked about the extra nicotine occasions that we believe were added last year because of the stay at home practices.
And so as they increase their mobility and you pointed to both factors out and about more and they are using their discretionary income on other things. The only other thing I would highlight that you did not highlight as gas prices and we know gas prices affect our consumers, but these are characteristics of the consumer we know how to navigate through and I think you've seen we've been successful in that.
Past, but those would be the major factors I would highlight.
And.
R E cigarette sales of factor.
Are you seeing.
That continued.
The downturn in E cigarette sales as affecting is that easing.
Using somewhat.
And and hurting cigarette sales.
Yes, I think if you if you refer to we try to provide a decomposition of industry volume and so we do it on a 12 month moving and so as of the end of the third quarter on a 12 month moving remember in secular decline, which is people smoking less or quoting spoken or moving to other categories. That's always contained about 1% of people, leaving cigarettes for us.
Other categories and then if we see additional cross category movement beyond that we highlight that new C that was up 2%.
So you can think about one 2% of consumers, leaving <unk>.
Cigarettes for whatever other category they choose.
Okay. Thanks, very much thank you.
Our next question comes from Patrick Folan with Redburn. Your line is open.
I'm Patrick please check the mute function on your phone.
Patrick Please check the mute function on your phone we're unable to hear you at this time.
Katherine maybe we move on and come back to Patrick.
We have no further questions in queue at this time I would like to turn the call back to Mac Livingston for closing comments.
Well. Thank you all for joining US please contact the Investor Relations team. If you have further questions. Thanks and have a great day.
This does conclude today's program. Thank you for your participation you may disconnect at any time.
Okay.
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