Q3 2022 Altria Group Inc Earnings Call
Good day and welcome to the Altria Group 2022 third quarter and nine months earnings Conference call.
Today's call is scheduled to last about one hour, including remarks by <unk> management and a Q&A session.
You may registered to ask a question at any time by pressing star one on your Touchtone phone you may withdraw yourself from the queue by pressing star two.
Representatives of the investment community and media on the call will be able to ask questions. Following the conclusion of the prepared remarks.
I would now like to turn the conference over to Mac Livingston, Vice President of Investor Relations for Altria client services. Please go ahead Sir.
Thanks, Katie and.
Good morning, and thank you for joining us this morning, Billy Gifford, <unk>, CEO and Sal Mancuso, our CFO , who will discuss <unk> third quarter and first nine months business results.
Earlier today, we issued a press release, providing our results the release presentation quarterly metrics and our latest corporate responsibility reports are all available at <unk> Dot com.
During our call today, unless otherwise stated we're comparing results to the same period in 2021.
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.
<unk> 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.
Finally, all references in today's 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 will turn the call over to Billy.
Thanks, Matt Good morning, and thank you for joining us.
This is an exciting moment on our journey towards moving beyond smoking.
Our tobacco businesses remained resilient during the first nine months of the year and we continue to reward shareholders, while making investments in pursuit of our vision.
We have deepened our consumer understanding enhanced capabilities.
And built the science supports smoker transition away from cigarettes.
The tobacco harm reduction opportunity remains in front of us.
We continue to believe Altria is uniquely positioned to responsibly lead adult smokers to a smoke free future.
Our remarks. This morning will focus on our progress to date and some exciting steps. We've recently taken taken that we believe will accelerate our progress toward harm reduction.
I will then turn it over to Sal, who will provide further detail on our business and financial results.
Let's begin with the heated tobacco category.
Last week, we entered into an agreement with Philip Morris International under which we will receive $2 7 billion in cash in exchange for assigning our exclusive U S commercialization rights to the Iqos system at the end of April 2024.
We believe this agreement provides us with fair compensation and greater flexibility to allocate resources toward moving beyond smoking.
The heated tobacco category is still undeveloped in the U S and we believe we can lead in this space supported by our robust infrastructure and deep understanding of the U S tobacco consumers.
This morning, we announced the pursuit of a global smoke treat partnership with JT group.
We signed a non binding memorandum of understanding with JT signifying the commitment of both parties towards further smoke free collaborations.
<unk> is a leading international tobacco company committed to investing and growing and reduced risk products.
We believe that together <unk> and J T can accelerate global harm reduction by collaborating on product or the product development and global commercialization of smoke free products.
We believe this potential collaboration can leverage the strengths and resources of both companies to transition more smokers away from cigarettes.
As a first step in this partnership we announced the formation of Horizon innovations.
<unk> venture between <unk> and <unk> for the U S commercialization of heated tobacco stick or HTS products.
We believe that HTS products can appeal to certain smokers as they provide a more familiar tactile and sensorial experience to cigarettes.
Under the terms of the JV, both parties will combined our scientific and regulatory expertise to jewelry prepare pmk falling through the latest version of the plume HTS HTS products, which are not yet commercially available.
The parties expect to file a <unk> in the first half of 2025.
Upon authorization horizon will become the exclusive entity through which the parties market and commercialize stick products in the U S.
GTI will supply plume heated tobacco stick devices and PM USA will manufacture marble HTS consumers consumables for U S commercialization.
The parties have agreed to commercial commercialization milestones for horizon.
Which include distribution requirements and minimal levels of cumulative marketing investment.
Under the financial terms of the JV PM USA has a 75% economic interest in horizon with GTI, having 25%.
We're excited about the prospect of introducing the latest version of <unk> HTS products to U S smokers.
J T has demonstrated success innovating in the heated tobacco space.
For example, J T launched <unk> last year in Japan, and since its introduction J keys doubled its share of the Japanese HTS segment.
J T estimates that there are more than 1 million <unk> consumers and according to their research. These consumers perceive <unk> as a stylish incredible and unique brand.
Consumers also described the product is easy to use.
We look forward to bringing the newest version of this exciting product to U S smokers.
We have discussed our increased focus and investment in internal wholly owned heated tobacco product development.
Our approach puts the consumer at the center of everything that we do.
We are seeing more data on their preferences purchasing patterns and friction points than we ever have.
We believe these efforts are building a promising pipeline of wholly owned heated tobacco products and intellectual property consisting of heated tobacco capsule for HTC formats, and new to market technologies.
This audience includes millions of U S smokers, who tried but ultimately rejected E vapor products.
We expect to finalize the design of our first capsule product by the end of this year and we expect to file a <unk> by the end of 2024.
We also expect to partner with <unk> to launch this product in an international test market using J T cell at sales and distribution network.
We believe the regulatory uncertainty related to June caused market disruptions in the quarter and we observed a reduction in jewelry purchases throughout the supply chain.
We previously disclosed that we have exercised our option to be released from our noncompete obligations related to our juul investment.
While we retain our 35% economic stake in Joel we're exploring all options to build an FDA authorized portfolio of E vapor products that will help smokers transition away from cigarettes.
For example, our teams are conducting consumer research performing external scans.
We're excited about the opportunity to increase our participation in the largest smokefree category in the U S.
Turning to all tobacco, we remain encouraged by the growth of novel tobacco products, which grew its share of the total oral tobacco category for the 18th consecutive quarter.
The category grew six five share points year over year, and now represents approximately 23% of the overall oral tobacco category.
In the third quarter, one reported shipment volume increased nearly 70% to 21 million cans.
On retail share increased three tenths sequentially, reaching five two share points of the old tobacco category in the third quarter.
We believe these strong results were driven by increased brand awareness and adoption of on supported by continued equity and promotional investments.
Building on its second quarter launch of the carry on brand equity campaign Helix recently introduced four New awards, a digital program that enables pulling consumers to track the rewards balanced online and redeem their points for coupons for other items.
We're excited about <unk> continued momentum increasing brand loyalty and the opportunity for future growth.
Let's now turn our view of the regulatory environment. We continue to believe that more should be done to advanced harm reduction in the U S.
And if the FDA should move more deliberately toward creating a market of authorized smoke free products to help accelerate smoker transition away from cigarettes.
The fact remains that to date only a small percentage of E. Vapor volume has been authorized and no oral nicotine pouch products have received marketing authorization.
We believe collaboration and accountability from all stakeholders are required for this market transition to take place.
We also believe that smoke free products should serve as an offering for smokers not an on ramp for youth users.
We remain encouraged that youth smoking rates in the U S are at the lowest levels ever recorded.
In fact latest monitoring the future study estimated that in 2021, the combined past 30 day smoking rates among 810th and 12th graders was two 3%.
Nearly 92% reduction from its 1997 peak.
Additionally, data from the 2022 National Youth Tobacco survey indicate that while E vapor usage remained high among middle and high schoolers the levels were significantly lower than the peak observed in 2019.
Per the 2022 and <unk> TFS survey, 50% of the Middle and high School current E vapor users indicated that they most often used disposable E cigarettes, such as tough bar.
Moving forward, we hope to see timely science and evidence based to terminations on pending PMT applications across all smoke free categories.
And further enforcement on Noncompliant manufacturers.
Her journey towards responsibly moving beyond smoking continues and we are optimistic that the actions we have taken to date have strengthened our portfolio and the three major smokefree categories.
We have built a compelling portfolio in the heated tobacco.
Enhanced our ability to compete in E vapor.
And continue to strengthen <unk> position in the oral tobacco category.
And we believe that we are able to maximize the value of these actions by leveraging our existing scale and infrastructure.
Such as our manufacturing centers and sales force.
For example, our flagship Richmond manufacturing center for Gan production of only nicotine pouches in 2020.
We now expect to add production of heated tobacco sticks for a new JV.
Our sales and distribution system, driven by our World Class sales force gives us the ability to responsibly market products.
And over 200000 stores.
And we have decades of experience navigating dynamic U S regulatory and political environments through the strength of our regulatory and government affairs organizations.
These functions together with our many other talented employees gives me confidence that we can achieve our vision.
Before I conclude I'd like to thank Leo colleague for his distinguished service to <unk> Board.
Leo has served on the board since 2011 and will retire at the completion of his term early next year.
I'd also like to welcome Jose Hernandez to our board of Directors effective November one.
How let's say brings a significant and deep understanding of the tobacco landscape. Following his years as an investment analysts covering the tobacco industry.
Hossein will serve on the finance and innovation committees.
Now I'll turn it over to sell to provide more detail on the business environment and our results.
Thanks Billy.
I'd like to begin with the review with the macroeconomic backdrop and its impact on U S tobacco consumers.
In the third quarter consumer discretionary income levels remained under pressure as hydro cash prices and inflation persisted.
However, we saw signs of continued brand loyalty in the tobacco space.
In September we conducted research to understand how tobacco consumers, we're managing their spending in several categories, including tobacco alcohol groceries and household items.
Our research indicates that tobacco consumers continue to stick with their preferred tobacco brands at a higher rate compared to other categories when experiencing higher prices.
These results were consistent with the results from our previous surveys.
We believe.
Inflation, and the rising gas prices, which partially offset for some consumers pace.
<unk> job market and wage growth.
Overall average wages increased six 9% in the third quarter compared to an average eight 3% increase in CPI.
And for some occupations, including the service industry wage growth outpaced inflation.
We continue to monitor tobacco consumer behaviors and changing marketplace conditions.
Despite these macroeconomic challenges.
Core business businesses performed extremely well in the third quarter.
Underpinning the strength of our premium brands.
Marlboro, Copenhagen, and black and mild continue to grow profitably and <unk> momentum and growth reflected strong positioning in the marketplace.
This strong business performance combined with fewer shares outstanding drove our <unk> as adjusted diluted earnings per share results.
<unk> grew adjusted diluted EPS by four 9% in the third quarter and by 4% in the first nine months.
Turning to our business results. The smokable products segment continued to deliver on its strategy of maximizing profitability in combustibles, while appropriately balancing investments in Marlboro with funding the growth of smoke free products.
The segment grew its adjusted operating companies income by one.
8% in the third quarter and by two 6% in the first nine months.
The smokable products segment expanded its adjusted OCI margins to 58, 9%.
An increase of zero nine percentage points for the third quarter and one two percentage points for the first nine months.
This performance was supported by strong net price realization of 10, 2% in the third quarter and 10, 3% for the first nine months.
I'll remind you that manufacturer price realization does not reflect retail price change for smokers for example.
Marvel price per pack at retail increased 6% in the third quarter compared to last year, which was below overall inflation for the quarter.
Multiple segment reported domestic cigarette volumes declined nine 2% in third quarter and 9% for the first nine months driven in part by the continued macroeconomic pressures I described.
When adjusted for trade inventory movements and other factors domestic cigarette volumes for the third quarter and first nine months declined by an estimated 10% and nine 5% respectively.
At the industry level, we estimate that the adjusted domestic cigarette volumes declined by eight 8% in the third quarter and by seven 5% in the first nine months.
We believe it's important to analyze sugar at volume trends over the longer term.
As decline rates in any one period can be influenced by various factors in fact Q3 year to date adjusted industry cigarette volumes have declined by an average of four 5% over the past five years.
In the third quarter. The total discount segment retail share of the cigarette category increased one six percentage points versus the year ago period, and 7% sequentially.
Reflecting increased competitive activity and the challenging macroeconomic environment.
We are encouraged that the discount segment share growth largely sourced from <unk>.
Interest attempt sequentially in <unk> versus the year ago period.
We are pleased with <unk> performance and stability over the long term.
In the first quarter of 2020.
<unk> retail share was 42 five percentage points.
We believe that increased the discretionary income driven in part by government stimulus checks and lower consumer mobility led to an increase in <unk> retail share throughout the pandemic.
As consumer mobility returned to pre pandemic levels and federal stimulus checks ended marble share return to its pre pandemic levels and has remained stable through the subsequent quarters.
In fact since the first quarter of 2020, Marvell has performed better than many of the other premium brands in the category.
As a result, <unk> continued to grow its share of the premium segment to 58, 4%.
An increase of four tenths sequentially and seven tenths versus a year ago.
We believe its performance over the long term is a testament to its positioning within the premium segment as the aspirational brand with strong consumer loyalty.
In cigars reported cigar shipment volume increased by three 3% in the third quarter.
Black and mild continued its long standing leadership in the profitable tipped cigar segment and Middleton continued to provide a strong contribution to smokable segment financial results.
Turning to the oral tobacco products segment adjusted OCI grew four 9% in the third quarter, but declined three 4% for the first nine months, primarily due to higher investments behind on.
We're pleased with the strong overall margins for the segment and excited about <unk> performance in the marketplace.
Total reported oral tobacco products segment volume increased by one 3% for the third quarter and decreased one 8% for the first nine months.
When adjusted for trade inventory movements and calendar differences segment volume decreased by an estimated 2% for the third quarter and one 5% for the first nine months.
Oral tobacco products segment retail share declined one five percentage points as declines in MST were partially offset by the continued growth of bonds.
Turning to our investment in Abi, we recorded a noncash pretax impairment charge of approximately $2 5 billion.
For the third quarter and first nine months of 2022.
This impairment reflects the difference between the fair value and carrying value of our investment in API as of September 30.
We continue to believe that <unk> share price performance is not reflective of its underlying long term equity value and that <unk> share price will recover.
However, we believe that it will take longer than previously expected as macroeconomic and geopolitical factors may continue to impact foreign exchange rates and Api's financial results and share price performance in the near term.
As we have previously shared we view, our abi's stake as a financial investment and our goal is to maximize the long term value of the 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 57 time 50.
Three years.
And repurchasing eight 5 million shares totaling $368 million.
We have approximately $375 million remaining under the currently authorized three $5 billion share repurchase program, which we expect to complete by the end of this year.
Our balance sheet remains strong and as of the end of the third quarter, our debt to EBITDA ratio was two one times.
In August we retired $1 $1 billion of notes that came due with available cash.
As Billy stated, we will receive $2 $7 billion in support of the Guideposts agreement.
We received $1 billion upon entry into the agreement and we will receive the remaining $1 $7 billion plus interest by July of 2023.
Our expected use of the cash proceeds may include investments in pursuit of our vision debt repayment share repurchases for general corporate purposes.
Share repurchases depends on marketplace conditions, and other factors and remains subject to the discretion of our board of directors.
Turning to our financial outlook, we are narrowing our full year 2022 guidance and now expect to deliver adjusted diluted EPS in a range of $4 81.
To $4 89.
This range represents growth of four 5% to 6% from a base of $4 61 and 2021.
We believe this range allows us flexibility so we got to marketplace conditions.
With that we'll wrap up and Billy and I will be happy to take your questions.
While the closer 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.
Our first question will come from Bonnie Herzog with Goldman Sachs. Your line is now open.
Thank you good morning, everyone. Good morning, Bonnie.
A lot going on.
With a lot of announcements, but I wanted to maybe touch on what you announced this morning related to your JV with J P. I just was hoping maybe you could help us better understand the opportunity potential for HTC versus HTS formats, and then the target consumers for <unk>.
Each.
And also just wanted to verify something the timeline with I think HTC is earlier and it's 100% owned and controlled by you is that correct.
Yes. So there was a lot in that Bonnie so I will take them a reversal of the HTC is 100% owned by US. It is not part of the JV I think when you think about HTS and HTC you've got this huge group of adult smokers looking for products that satisfy the desires and needs and so you have some that want a familiar of experience as closest.
Can get the cigarettes and Thats, what we believe the HTS product fulfills for them there are other consumers and a lot of.
Pointed out before a lot of consumers whenever and tried to E. Vapor. So they were willing to go with a more novel type product and.
And we believe the HTC fulfills those desires and needs. So we actually see room for both to be successful and it actually allows us to reach a larger group of consumers that are looking to switch.
Okay, and then just a follow up on that.
How do we think about this potentially changing either you or near our long term growth algorithm and then I'm just thinking through it.
Future investments required I assume there will be some other than the initial $250 million to develop and ultimately commercialize these products.
Could you touch on that yes, I think look we're certainly are going to as we've said previously, but remember our overall strategy even in the smokable products categories to maximize.
Our income through time, but to make appropriate investments both in marble and balancing that with investments in the growth areas. So there are always puts and takes I don't want you to think all of the investments that we make are completely incremental to the P&L, we try to leverage and we tried to point out some of that in our remarks. This morning. So for instance, the manufacturing center.
Where we expanded our production for on in that facility.
Heat sticks for the JV will be produced by the the manufacturing center. So there you have the infrastructure in place you have a strong talented group of employees that are familiar with running those machines. So you leverage some so yes. They are investments and you have reallocation across the P&L, but it's not all incremental investments.
Okay and then just maybe my final question is related to your guidance, which you've narrowed. This morning, you narrowed it slightly I guess 20 bps at the midpoint. You stated just to give you more flexibility to react to marketplace conditions. So I just wanted to.
Maybe hear from you.
Got a little bit worse or on certain is that the pressure is on the consumer or is there something else that we should be mindful of.
Yes, I appreciate the question Bonnie I think you can think of most of that narrowing as the passage of time right. We have more certainty because remember we're on a quarter lag with API and you saw them released results. This morning.
Certainly.
It's no surprise that our consumers are under pressure and we want to maintain that flexibility, but nothing out of the ordinary that I would point out.
Alright, Thanks, I'll pass it on.
Thank you. Our next question will come from Pamela Kaufman with Morgan Stanley . Your line is now open.
Hi, good morning, good morning Pamela.
I wanted to follow up on Bonnie's question.
Ask about how you are thinking about the evolution of the U S tobacco market over the next five to 10 years, how do you think about the relative size of.
Ebay Berg versa heat not burn category overtime, and now that you have greater flexibility to invest in EBIT Park, given the noncompete termination with fuel and the partnership with JP. How are you going to prioritize your earn back.
Heat not burn and E vapor.
Question Pamela.
It's important to remember as you step back and that's why we tried to highlight in the remarks that the reduced harm and the U S is really undeveloped and the reason I say that is from an authorization standpoint take the two that exist today. He based on novel <unk>, a very low percentage has been authorized by the FDA in E vapor and we believe that's going to go.
Through a period of transition as those authorizations come out and some make it and some get denied when you move to the novel all really no authorizations have been received in that space and so that again, depending on how the regulatory body goes about assessing and authorizing those that could be a bit of transition there and then the heat.
Tobacco space, it's really non existent I think when you think about those three categories. We believe the extent of those three categories were really be shaped by three factors. So one I mentioned is the regulatory decisions that are taken in each of the individual categories.
It'll be legislative in tax policy, how does that develop through time related to the individual categories and then.
Really through time as the innovation in the spaces that best address the consumer preferences based on what what they desire so thats really whats going to shape the size of the three individual categories. We believe those are the three categories.
That will grow through time as consumers continue to move away from cigarettes to the smoke free products.
As far as prioritizing, we're going to prioritize based on where we see the consumer moving and how we see the consumer moving thats going to be completely consumer driven and Thats. Why we are excited to be able to leverage the sales force to get the products in the right stores as well as the amount of data we receive and the insights that we can garner from that.
Great. Thank you.
My second question Ed.
So you previously expected shares to recover and decided to hold on peering backman lockup expired. It seems that now you expect this recovery to take longer than expected. So how does this impact your thinking around the investment and does that further extend your plans to hold onto the.
Our stake or the increased or willingness to sell it at a lower price.
Good morning Pamela.
The impairment of the Abi asset reduction in our carrying value is really accounting driven.
When you think about whether an impairment is temporary or not you.
You have to look at timing of your expected recovery.
As far as the <unk>.
<unk> asset as we stated we view it as a financial investment our focus is to maximize the value for our shareholders but.
Share price value was one of many variables that go into that analysis. It's an analysis that we do on an ongoing basis.
And we will continue to focus on what's best for our stakeholders over the long term.
And maybe if I could squeeze one more and can you just talk about what you plan to do with the proceeds from the Iqos termination agreement and if there is any E vapor assets that would be attractive to you to help accelerate our entry into the category.
Thanks Pamela.
We mentioned them in our opening remarks, I don't have a lot to add to that I mean, obviously.
The proceeds provide us with increased flexibility, which is always a good thing.
So there's really nothing more to add them and we're going to continue to look at all capital allocations through the lens of.
Whats best for our shareholders be it investments in our long term vision.
Continuing to manage a strong balance sheet or provide further returns to our shareholders, but again thats part of our broader capital allocation strategies.
Thank you Youre welcome.
Thank you. Our next question will come from Chris Growe with Stifel. Your line is now open.
Hi, Good morning, good morning, Chris.
I had a question for you a bit of a follow on to the agreement with JT, obviously is or encourage you to get you back into that category.
Given the timeline for development of your products and obviously FDA review do you have a reasonable timeframe for launching the product in the U S and if I can ask related to that Youll have this international capabilities in terms of launching a product. So should we expect that you'd be able to develop products to kind of test and learn.
Italy to refine those for an ultimate PMT I agree.
Application in the U S.
Yes, Chris Thanks for the question and Youre right. We are excited about the opportunities we have in front of US I think when you think about the timeline for launch so what we tried to provide you is when we would anticipate being able to fall PMT. As then it will be dependent on how long. It takes the FDA to authorize those products I believe through tie those authors.
<unk> will become more predictable and quicker.
Whether thats the next product that they authorized or it takes a couple for them to get used to the new categories remains to be seen I think when you think about the launch internationally. Yes. We're excited about the potential there for being able to test products in a large market in the international realm. We're.
We're excited about the ability to.
Whether it's in any of the new categories to be able to leverage that but I don't want to get ahead of myself. We mentioned the memorandum of understanding about future collaboration and we'll share more when its appropriate share.
And just to be clear on that ability.
Given your timeline for when you're starting with <unk> for the product you are developing.
What would be reasonable to assume we'd see that like next year in international market being tested at least and then moving to an application in 2024 or am I getting too far ahead of myself here.
A little bit ahead of yourself I think from an international launch.
We tried to say look when we would anticipate getting launched that into international market. Maybe your question underlying that is why why are you, taking so long and I think it really goes back to what we want to be disciplined we want to conduct preliminary studies.
Defy that we can consistently meet the high standards for product quality that we hold ourselves to as well as the constituent reductions and so we're going to go about it in a thoughtful manner, but yes. We are excited to get it into an international market look forward too.
Okay and I had a question just in relation to your part of your guidance.
Flexibility to react to current marketplace conditions.
As I look at your business today on the smokable side in particular youre gaining share in the treatment segment, obviously tradings moving share, though overall, so I guess as I think about where you need to invest I would be curious is it in the premium brands in the premium category. If you take back share from discount or is it more on the discount side, where your lease.
Sure do you want to invest going forward.
I understand your question, Chris I really would look at the narrowing our guidance since the passage of time look we wanted to make everybody aware that our consumers under pressure just like conservative across all industry and we like the flexibility that's more of the range we had.
Maintain for the establishment of the guidance.
Didn't point out anything specific.
Very excited about the price realization, we've been able to realize VL on track for our guidance for the total year and the stability of that <unk> experienced in the marketplace. I mean, when you look at pre pandemic to post pandemic and Sal mentioned this in his comments.
When you saw government stimulus to less mobility in the marketplace. We actually saw it is encouraging we weren't attempting to gain share.
Performing the business like we normally do it shows that mobile is still the aspirational brands and the cigarette space and that's what we saw take place during the pandemic.
Disposable income has got a little bit tighter mobility is up affecting that as well, we see that we see that some of that share back, but pre pandemic post pandemic call. It roughly flat maybe up a 10th.
<unk> pleased with where we're at.
Okay. Thank you for your time today.
Thank you.
Thank you. Our next question will come from Gaurav Yang with Barclays. Your line is now open.
Hi, good morning, Simona guar.
Hi, just a few questions from me.
So we're.
I wanted to come back with pricing this quarter, which was I think of five on behalf question and it was flat to minus 3% last year.
I look at Copenhagen pricing based on your disclosure it is still running at the same level of plus 7%.
Does it mean that you are pulling back on promotions.
Leasing activity on pricing now that we're coming up with a bulk of the portfolio and it has.
Maybe some critical market share.
Yes look we're excited about what <unk> been able to perform how it's been able to perform and grow in the marketplace.
Currently with the learnings we've had in the other two categories, where we have the analytics and the <unk> tools that we have in place, we certainly see the opportunity to be able to apply that into new spaces, as we gain volume and market share and so overall I think from a standpoint of the strategy in the all space is really to maximize profitability through the wall.
With the strength of Copenhagen, while balancing and vessels with one and I think thats exactly what you see taking place in that space.
Sure.
Second question is on your number.
Logic and mobile mentality from different program than our prefix but your product.
Okay.
But at midnight.
BMO goes ahead, then discuss the nine months.
Would it make any sense to lithium lithium right because maybe all of them and how do you think that the debate.
Sure.
Yes, I think it remains to be seen and that's what we tried to highlight for the size of each category and you highlighted an important one that's in front of the entire industry and all of these spaces as regulatory decisions that will define how large the individual categories can be.
I would also highlight the other two its really legislative and tax policy and how does that.
Sure through time, and then the last would be innovation.
But I hear you and that's why we try to highlight those three factors that can ultimately decide the size of each of those categories relative to each other.
Yes.
California flavor ban that could help them next quarter.
Your final golf course milk.
Yes, so we've engaged with our dominant fares team, we don't believe the science supports it.
From our standpoint, and we've highlighted that and we've been pretty vocal with that even with the FDA as they've looked at some of these things.
<unk>, we think those decisions are better base with the FDA, where it science and evidence based.
But when you think about the overall category in California, certainly it could have an industry impact, but we as a reminder, SKU.
Non menthol in cigarettes, and we skew non flavored products.
The more smokeless space. So again I think it could have an impact to the industry. The science vessel support it but I just wanted to remind you of our positions from a SKU standpoint.
Sure Dan if I could.
Basically the last one on Capex, the Capex guidance nicely.
Would you be able to help us understand.
That happened.
Can you repeat that curve.
And the Capex number the Capex guidance was reduced.
Which are the factors driving that.
Yes, if you think about capital projects, Florida.
<unk>.
Spending is not necessarily linear rate the projects are moving along quite well the year time has passed throughout the year. So we're three quarters through the year. So we just lowered our forecast for spending so that's more timing the projects remain on track of course, there are some delays in supply chain, when you're ordering equipment, but not.
<unk> material, we have been able to manage that quite well so.
It's not uncommon for fluctuations in capital forecast.
As the year progresses.
Sure. Thank you.
You're welcome.
Thank you. Our next question will come from Vivien <unk> with Cowen. Your line is now open.
Hi, good morning, good morning Vivian.
I also wanted to touch on heat not burn please.
I apologize maybe the lack of imagination on my part daily, but when you guide that.
The capsules.
Mike.
The original mini basin J T y.
2016 2017.
Can you just expand on how thats different is it if at all because that isn't really resonate with consumers.
Sure and I don't want to get too far ahead of myself, we'll come forward with the actual product and I know you'll be excited about it when we're able to bring it forward. Once we complete design. If you think about the stick thats pretty evident because everybody has seen that in the marketplace. If you think about the capsule. The tobacco is contained within our capsule.
It's different than the technology are familiar with the plan, but again I don't want to get too far ahead of myself from a standpoint of describing the device before pro forma ready.
Okay fair enough any different in terms of the coupon rate.
That is correct.
Okay perfect. Thank you.
I do look forward to seeing that for sure.
Thank you.
The smokable technology.
Understanding perfectly well.
<unk> are really focused on profit growth.
Hard to ignore the fact that your pipe that is now the highest.
Okay.
And so I'm just curious how you think about operating leverage for that segment modest market share declines are fine youre right obviously.
On a three year basis.
Lyons hasn't gotten that much work, but yes.
You're back with deteriorating industry.
That's the data.
How do you think about operating leverage in that segment from a volume perspective.
Yes, sure I think when you look at the price cap I just want to remind you Vivian and I know you know this but that 40% price gap that we disclosed is really at a barometer for the national level, we put that out because it allows you all to have a parameter, but we manage it much lower than that I think you see is the introduction and execution against the data.
<unk> and the revenue growth management, most people refer to it as those tools that we have available allows us to manage the price gap at a much lower level and so that is I think what youre seeing in the success of the mobile market share through time, and so we're extremely pleased with where we're at.
We feel good about the performance of Marlboro and being able to expand the price gap and increase the profitability through Tom the way we've done.
Absolutely.
My last question, which is on the performance of that.
Count category.
Obviously deep account share gains are now re accelerating you've articulated.
Hopefully that.
Puts and takes in terms of the backup of the consumer but just any update on how you're thinking about kind of strategically positioning here that brand against that backdrop. Thanks.
And Youll recall Vivien, we're premium focused we participated in a discount because it is important for our retailers to have a portfolio that services all of their customers that visit the stores, but where premium focused a low that we shoot that we seeded Sharon Allen and we felt like we would see Shannon Ellen M. As we increase profitability, but we're pleased with the.
The increased profitability, we've experienced on <unk> and with a willingness to seed some of that share to deep discount you'll remember our consumers at the lower end of that socioeconomic status royalties extremely high over 90% for premium brands and so you always have that group of consumers when they get under pressure, we're going to shop around and move around.
Depending on what their individual situations are.
Absolutely. Thank you so much thank you.
Thank you once again, if you'd like to ask a question. Please press star one touch tone.
Telephone.
Our next question will come from Carla Casella with Jpmorgan. Your line is now open.
Hi, This is Oliver abutment on for Carla. Thanks for the question just a couple from us So with regards to the announcement made last week on the agreement reached with Philip Morris.
Any risk to the remaining $1 7 billion.
Morris.
That value changed between now and then.
Yes with that value it was.
In exchange of $2 seven.
Only thing that would change the $1 seven as the interest that with accumulate through time dependent on when they made that payment.
Exclusivity remains with us until the final payment is made.
Got it. Thank you and then just secondly on juul, while the non compete is no longer in place.
Turning your focus too.
Bearing options to build out the portfolio, we still retain that 35% stake is there a plan longer term what you would maybe do it that stake.
Really no plan at this point, we hold the economic state, we'll see what their performances in the marketplace, but we thought it was important at that point in time to get out of the noncompete to open up our flexibility on the EBIT per category.
Got it thank you so much.
Thank you. Our next question will come from Priya <unk> Gupta with Barclays. Your line is now open.
Hi, Thank you for taking my question. This is August and four one.
One quick question you have a euro debt maturity early next year.
You need to have that your exposure or could you be flexible and refinancing that in U S dollars.
Yes, I don't want to get ahead of ourselves on that maturing debt.
So how we retire that debt.
The process, we go through we'll wait and see obviously, we will do the necessary analytics from a market perspective from a capital allocation perspective to your question though.
While we have flexibility on where we could issue that we.
We do not necessarily need to have the euro exposure now.
Thank you and one last one what are your thoughts on the relative attractiveness of the U S dollar market versus the European market in terms of swap rates.
Well, obviously FX exchange.
Exchange rates are a factor that goes into that allocation I don't want to necessarily pre determine what's more attractive.
But for US what's important is to have flexibility in the marketplace.
We are fortunate in that we have a strong balance sheet. We've got operating companies that do a tremendous job of converting income the cash so as debt comes due we can refinance or we can think about other methods of retiring the debt so for us.
It's really the flexibility too.
Determine how we want to handle that debt coming due but also with markets. We may or may not want to enter FX exchange is definitely part of that process, though.
Thank you Youre.
Youre welcome.
Thank you. Our next question will come from Callum Elliot with Bernstein. Your line is now open.
Hi, Thank you for the question.
I wanted to ask you guys, a little bit more about horizon, if thats okay.
I guess I'll sense is it feels like giving away at 25% economic share is a huge amount given the candidly. This is a poorly performing products. The week number for brand globally without regulatory approval in the U S and so hoping you can just talk about the majority of the behind why you entered this JV how you arrived at.
$75 25 economic split.
Phil just to US and then based on the conversations we've had this morning to the investors as well that this is going to be very difficult for them to be economically viable for you.
Yes, we think about it a bit differently, let me describe youll recall, when we accrual loss volumes across the nicotine space in the U S. It greatly reduces the decline rate. So if you look over the past five years declines at about 1%. We think it's important to have a portfolio of products in each of these categories and across the categories.
That attract consumers to them from a standpoint of.
Being able to participate in those categories have strong products and brands across those categories, which will be a benefit for volume and attract a larger group of consumers to transition from cigarettes to the smoke free space.
I think it's important to remember that the JV that's in place for a product that hasnt, even been commercialized yet as they continue to garner learnings and consumer insights and feedback and so we're extremely excited and we think this is a foundation for future collaboration.
Potential exposure to international revenue as well.
Okay, Thanks, and I guess, just one follow up unrelated.
Wondering if I can get you to talk a little bit about cannabis as well I think what you obviously still have just taken kronos warrants was set to expire in a few months.
Presumably youre not ready to exercise them, given the way out to the money.
More broadly my question is how youre thinking about the cannabis category has changed over the past three and a half years since you've made the investment.
And where does it sit on the list of capital allocation priorities today, Yes, I think when you think back we highlighted when we made that investment in cannabis that it was going to be a long term investment we still believe it has long term potential in the U S.
Certainly with the current political environment. It doesn't feel imminent that anything will switch in the U S. I think the president made an important first step in some of the partners, but it's a first step and it's a lot more to take place before the.
Industry dynamics change in the U S to be able to capitalize on that so we still believe it has long term potential in the U S. But certainly in the political environment nothing is eminent.
Okay. Thank you.
Thank you.
Thank you once again, we will hold for a moment for additional questions. Please press star one now if you would like to ask a question.
Thank you at this time I will now turn the call back over to Billy Gifford for closing remarks, yes.
Yes. Thank you Katy I'd like to conclude our remarks by going back to where I started.
We are in an exciting period of vouchers history and have an unprecedented opportunity in moving beyond smoking.
We expect that our actions will lead to a strengthened portfolio across the three major smoke free categories that will help smokers transition away from cigarettes.
In heated tobacco, we believe we have taken a huge step forward with our new joint venture with J T.
And our internal product development efforts.
We now have the ability to compete in the E vapor category and are already assessing our options in this space.
And we have demonstrated progress in the growing novel or category with <unk> continued growth.
I continue to be confident in my belief that we can achieve our vision and create long term value for our shareholders.
Thank you for joining us and have a great day.
Ladies.
Okay.
You may have.
Yes.
Sure.
Okay.
Yes.
[music].
Okay.
Okay.
Yes.
Yes.
[music].