Q4 2022 Altria Group Inc Earnings Call
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Please stand by your program is about to begin.
Good day, and welcome to the <unk> group, 2022% fourth quarter and full year earnings conference call.
Today's call is scheduled to last about one hour, including remarks by <unk> management and the question and answer session.
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 call over to Mac Livingston, Vice President of Investor Relations flip out to your client services. Please go ahead Sir.
Thanks, Todd Good morning, and thank you for joining us this morning, Billy Gifford, <unk>, CEO and Sal Mancuso, our CFO will discuss <unk> fourth quarter and full year business results.
Earlier today, we issued a press release, providing our results.
The release presentation quarterly metrics and our latest corporate responsibility report 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.
Now I'll turn <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.
Versions 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 refer to existing adult tobacco consumers 21 years of age or older.
With that I'll turn the call over to Bill.
Thanks, Matt Good morning, and thank you for joining us.
It was an exciting year for Algeria, as our businesses delivered strong financial performance and we continue to strategically invest toward our vision.
We grew our adjusted diluted earnings per share by 5%.
And our tobacco businesses remained resilient and successfully executed their strategies.
We also returned significant cash to shareholders through dividends and share repurchases.
Last year, we returned more than $8 $4 billion to shareholders.
Pacing our record returns from 2021 and.
And representing the largest single year cash return since 2002.
Our vision guided our actions and we believe we've made meaningful progress on our journey towards moving beyond smoking.
Our teams took several steps forward during the year, including.
Accelerating the growth of all nicotine pouches.
Creating long term optionality from our inhalable smoke free product portfolio.
Hansen, our digital consumer engagement.
And continuing to advocate for tobacco harm reduction.
Helix grew on reported shipment volume to $82 5 million cans during its first full year of unconstrained manufacturing capacity.
An increase of more than 70% versus the prior year.
At retail.
Sure momentum continued in the fourth quarter as the brand reached five 9% of the total bold tobacco category.
And 24% of the nicotine pouch category.
This impressive performance was driven by continued increases in brand awareness and adoption by smokers and dippers.
Additionally, we believe helix effectively.
<unk>.
And promotional spend as the year progressed.
And reduced on promotional spend per can by approximately 15% during the second half of the year compared to the first half.
And all tobacco product development, we're excited to announce we have finalized a new product design, which will provide tobacco consumers more smoke free options within our portfolio.
We also began regulatory preparations for the product.
And we are encouraged by the initial research results and the response, we have received from dippers and nicotine pouch users.
We look forward to sharing more details and unveiling this innovative product at our Investor Day next month.
Turning to our inhalable smoke free portfolio.
We created long term optionality in the heated tobacco and E vapor spaces.
Internally, we have not yet finalized the design of our heated tobacco capsule product.
But our teams continue to make progress.
The consumer remains the focal point of our innovation system and our teams are tailoring the product to appeal to smokers, who have not yet.
Who have not yet found a satisfying alternative to cigarettes.
We also look forward to unveiling this exciting new product at our Investor Day next month as well.
And in October we announced a strategic partnership with JT group, including a joint venture for the U S commercialization of heated tobacco stick products.
We're encouraged by the initial collaboration between our teams.
And the pace at which they are operating.
Horizon is optimizing <unk> for the U S market and plans to begin regulatory preparations later this year.
We're excited about the opportunity and are working diligently to bring plume to smokers in the U S.
In E vapor, we previously announced we elected to be released from the noncompete obligations related to our juul investment.
We retain our economic stake in juul.
E vapour remains the largest smokefree category in the U S.
And the most successful category and transitioning U S smokers away from cigarettes.
We believe the category can play an important role in harm reduction and we're continuing to evaluate all options.
The best compete in the category.
Next let's discuss the progress we made to enhance our digital consumer engagement.
We launched a new digital trade program last spring and we believe this program responses, our ongoing commitment to responsible retail.
The program includes multiple participation options for retailers.
For those participating at the highest level.
We introduced incentives for retailers to include age and its entity verification solutions and their digital platforms.
And what's the consumer's verified retailers can then provide offers and messaging from our brands within the retailer's App.
I'm excited to share that we implemented these solutions in more than 33000 stores exceeding the goal we outlined last year at Cagny.
Currently consumers can view offers from our smokable and moist smokeless tobacco brands, but.
But going forward, we expect to expand the program to include on.
And other Smokefree brands.
As we continue to broaden our digital reach data will help us better understand each smokers journey and help them successfully transitioned to other smoke free alternatives.
Our portfolio.
Moving to the regulatory environment, we remain optimistic about the future of harm reduction in the U S.
We believe we have an unprecedented opportunity to lead the way in shifting millions of smokers to smoke free alternatives.
If we followed the science and foster innovation with the support of reasonable regulation.
In December the Reagan you'd all foundation published its operational evaluation of the Fda's center for tobacco products.
We were among the stakeholders, who provided input into this evaluation.
Among its recommendation the report urges the FDA.
Clearly defined product pathways and accelerate PMT decision, making.
Take enforcement actions against manufacturers and products in violation of the law.
And address the need for risk communications to tobacco consumers.
We agree these are important opportunities and believe that the FDA should direct its focus toward implementing a framework to advanced harm reduction.
Rather than focusing on prohibition policies that.
That we believe will further expand the illicit market and create other unintended consequences.
Let's now move to the operating environment.
We estimate that total equivalence tobacco volumes.
Declined 6% for the year and one 7% over the past five years on a compounded annual basis.
Combustible volumes declined by an estimated seven 8% last year as smokers faced increasing economic challenges.
We are encouraged that smoked smokefree volumes were stable compared to the prior year at $3 8 billion equivalent units.
And now represent an estimated 26% of the total tobacco space.
E vapor has been a major contributor to the growth of smoke free products over the five year period.
Although volumes declined by an estimated 1% year over year.
Considerable regulatory uncertainty.
Such as the FDA is marketing debacle, Lola and subsequent temporary stay home fuel products.
Cause market disruptions for both consumers and retailers.
And all tobacco volumes grew by an estimated one 5% driven by the continued adoption of all nicotine pouches.
Turning to our financial outlook and plans for 2023 include a continuation of our strategy to balance earnings growth and shareholder returns with strategic investments towards our vision.
For 2023, our planned investment areas include <unk>.
Continued to smoke free product research development and regulatory preparations.
Digital consumer engagement.
And marketplace activities in support of our smoke free products.
We believe the external environment will remain dynamic in 2023.
We will continue to monitor.
The economy, including the impact of high inflation.
Tobacco consumer dynamics.
And regulatory and legislative developments.
Considering these factors, we expect to deliver 2023 full year adjusted diluted EPS in a range of $4 98.
So $5 13.
This range represents an adjusted diluted EPS growth rate of 3% to 6% from a $4 84 set base in 2022.
Before I turn it over to style I would like to send a sincere. Thank you to our employees.
I continue to be impressed by the talent within our companies and our ability to adapt and overcome challenges and a dynamic operating environment.
The passion and dedication of our employee base is evident and.
And I'm confident in our ability to execute our vision because of you.
Also I'd like to honor the memory of Leo colleague the long standing member of our board, who recently passed away.
Leo served on our board since 2011 and made many contributions to altra, including as chair of the compensation and talent Development Committee.
And as a member of the Innovation Committee.
We will Miss his leadership guidance and friendship.
I'll now turn it over to Sal.
Thanks Billy.
We were very fortunate to have legal 12 years of service at our trio.
Our thoughts remain with the Kylie family.
Moving to our results our tobacco businesses generated strong financial performance again, this year and we're responsive to changes in the dynamic external environment.
In the fourth quarter. The Smokable products segment grew its adjusted operating companies income by 4% and expanded its adjusted OCI margins to 58, 4%.
The segment also reported robust net price realization of.
13, 5%.
As a reminder, manufacturer price realization does not reflect retail price changes for smokers for example, <unk>.
<unk> net retail pack price increased six 4% in the fourth quarter compared to last year.
We continue to successfully execute against our strategy in the Smokable segment match.
Maximizing profitability, while balancing investments in Marlboro with funding the growth of smoke free products.
For the full year Smokable segment adjusted OCI grew two 9% to 10 $7 billion.
And adjusted OCI margins expanded by one four percentage points to 59%.
And Smokable segment net price realization for the year was 11, 1%.
In addition over the past five years, the Smokable segment has grown adjusted OCI by $2 2 billion.
Representing a compounded annual growth rate of four 7%.
Over the same time period, adjusted OCI margins have expanded from 51% to 59% an impressive increase of eight percentage points.
Turning to volumes, our smokable products segment reported domestic cigarette volumes declined 12, 1% in the fourth quarter and nine 7% for the full year.
When adjusted for calendar differences and trade inventory movements domestic cigarette volumes for the fourth quarter and full year declined by an estimated 11% and nine 5% respectively.
At the industry level, when adjusted for trade inventory movements calendar differences and other factors, we estimate that adjusted domestic cigarette volumes declined by 9% in the fourth quarter and by 8% for the full year.
Next let's discuss retail share performance.
Full year retail share for the industry discount segment increased one four share points.
We believe these results were driven by increased pressure on smokers disposable income and increased competitive activity, including multiple branded discount offerings priced at deep discount levels.
Marlboro retail share declined by four tenths for the full year.
Most of the full year share losses were attributable to the value options within the Marlboro brand family such as special select Enmarble 70 twos.
Some price sensitive consumers continue to seek additional price relief.
Meanwhile, the brand's mainline non mental offerings, including the iconic red and gold pack varieties were resilient and performs well for the year.
Mark will share of the premium segment grew to 58, 2% for the full year.
Marlboro has performed better than many other premium brands over the last several years in fact over.
Over the past three years marble grew its share of premium by one full share point.
We are encouraged by <unk> resilient performance as the brand celebrates 50 years of leadership in the cigarette category.
In cigars.
Reported cigar shipment volume decreased 4% for the full year, while black and mild continued to maintain its leadership in the profitable machine made tipped cigar segment.
Next we will move to the oral tobacco products segment.
Full year segment, adjusted OCI and adjusted OCI margins contracted as we continue to invest behind on.
Totally.
Maybe 2%.
Full year oral tobacco products segment retail share declined one three percentage points as declines in MST were partially offset by the continued growth of on.
Within the traditional smokeless category of MST and snus products Copenhagen share performance has been stable over the last three years declining only three tenths from 2019, whereas the second largest traditional smokeless brand has ceded one six share points.
Overall, we continue to be encouraged by the performance of our oral tobacco products as on grew volume and share in a competitive category and Copenhagen remains the category leader.
Turning to our investment in Abi.
We recorded $571 million of adjusted equity earnings for the full year down 10, 6% versus 2021.
We continue to view the abi's stake as a financial investment and our goal remains to maximize the long term value of the investment for our shareholders.
In our all other operating category, we have completed our wind down of Philip Morris Capital Corporation, and no finance assets remain.
I would like to thank the many <unk> employees, who contributed to its success over the years and.
And to the other <unk> employees, who helped to complete a successful wind down.
Finally, we continue to effectively manage our balance sheet, while generating strong financial performance and returning significant cash to shareholders.
These results were driven by our tobacco businesses that continue to be highly cash generative.
Our yearend credit metrics remained strong.
Our debt to EBITDA ratio was two one times down four tenths over the past three years.
And our weighted average coupon was 4%.
Decrease of two times over the past three years.
We also expect to retire approximately one $3 billion of notes coming due later this month with available cash.
In addition, we returned more than $8 $4 billion in cash to shareholders last year through dividends and share repurchases.
These record cash returns included paying $6 6 billion in dividends and raising the dividend for the 57 time and 53 years.
We also repurchased more than 38 million shares during the year.
Totaling $1 8 billion.
Which completed our previously authorized program.
Earlier this week, our board our board authorized a new $1 billion share repurchase program, which we expect to complete by the end of 2023.
I'll now turn it back to Billy to conclude our remarks.
Thanks Al 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.
As we mentioned during the call we have exciting topics to discuss at our Investor Day next month.
We look forward to having a fulsome conversation about our smoke free future and we are excited to share more about our journey toward moving beyond smoking.
Todd will now transition to the Q&A period.
Thank you at this time, if you would like to ask a question. Please press the star key followed by the number one on your Touchtone phone.
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.
Again to ask a question. Please press star one our first question comes from Vivien <unk> with Cowen.
Okay.
Hi, good morning.
Vivian.
So I just wanted to start with the industry volume backdrop I recognize you guys have kind of suspended the historical practice of offering industry guidance and that makes good sense to me.
But just hoping to get some color on how you're thinking about the potential impact of the menthol ban in California.
Or do you think thats, an incremental headwind for the year. Thanks.
Sure, Yes, I think it's a little early to say exactly what that headwind will be Vivian certainly it will be a headwind from the state of California, having bad debt. It went into effect you remember in December So, we'll see how that proceeds, but yes, I would say that would be a headwind as we enter 2023.
Fantastic. Thanks for that and then just pivoting to the oral tobacco segment encouraging to hear some rationalization on the on promo having fallen 15%.
To have 22 can you talk a little color on where that position is on relative to the competitive set.
Yes, we think it actually we were very pleased with the results. We as you mentioned, we reduced it to 15% first half the second happened to continued its momentum and grew share. We think it's a growing category Vivian and that the the.
Entire segment is growing and we want to participate in that growth. So we're continuing to invest behind it and as we move forward I think you see the benefit of data analytics and then in the future. The application of what most people refer to as revenue growth management that leasing success in traditional smokeless as well as cigarettes. So that's what you can expect from us as we move forward.
A word.
Perfect. Thanks for that and just one last one for you.
Please I recognize it's premature for us to start modeling.
LTE is from the IP litigation with British American tobacco, because theres, certainly an appeals process, but if you could just kind of contextualize, how we should be thinking about that incremental revenue stream is litigation Joshua conclusion. Please thank you.
Yes, sure Vivien you're right there is an appeals process.
We developed our guidance, we have not considered the royalty any potential royalties in that guidance, but as you know with any year you put plans in place and there are always puts and takes so I think it's early to really.
Think about how you might model that lets see how the appeals process plays out.
Fair enough. Thank you so much for being part of the analyst day.
Thank you.
Thank you. Our next question comes from Pamela Kaufman with Morgan Stanley .
Good morning.
Good morning Pamela.
Yes.
Do you characterize the current state of your consumer.
Thanks Bill.
<unk> question, but just wanted to hear how you're thinking about the puts and takes to cigarette volumes in 'twenty three.
Declines were clearly elevated in 2010, so do you expect a more normalized mid single digit volume declines given easier comparison.
Moderating gas.
Yes, Vivien I know Youre looking for I think I'm, sorry, Pamela Youre looking for guidance on.
Upcoming volume, let's talk about the headwinds and tailwind as we progress through the year I'll talk about the consumer first because thats. The most important when you think about volumes I think the consumer remains under pressure. We tried to highlight that it was the compounding of the inflation impact as we progress through 2022, I think you've heard as many predictions.
I had a soft landing no deep recession, so I think even the experts in it.
From an economy standpoint are all under the board we feel good about the guidance that we put out we feel good about where the consumer is but we want the adaptability and the flexibility to be able to move with the consumer needs. So I think the consumer will remain under pressure until we see some relief if you will from inflationary pressures in the marketplace gas.
Prices is just one aspect that we certainly have seen a decline, but nowhere near the lows, we're seeing as we were.
Pre pandemic levels.
Gas prices can move around depending on China, reopening and things of that nature. So we'll see where that goes I think when you think about volte.
Volumes, specifically combustible volume, it's important to remember that what we're looking at is how the consumers impacted tobacco the industry is not immune to macroeconomic environment, it's just less impacted than other industry categories and so from that standpoint, historically, what we've seen.
Is that as the consumer is experiencing this rapid change in their economic condition, whether up or down they make changes in their purchasing behavior and then it becomes more comfortable to them through time and they adjust various factors in their purchasing basket. So it remains to be seen we will see how the macroeconomic it shapes up but I would say that's the big.
<unk> bank, and how that macroeconomic impacts purchasing behavior.
Thanks, that's helpful.
My other question is just on your 2020 earnings guidance.
Slightly lower growth rate compared to EUR, 4% to 7% guidance over the last several years. So can you talk about the puts and takes influencing the outlook for 'twenty three.
How much incremental investment is best reflected behind reduced risk and are there any other discrete factor contributing capex right.
And the growth rate.
Yes, I think the last comment you made I would see it as a slight shift we're very excited about the guidance. We put out I think when you think about it it's really the uncertainty around the macroeconomic environment was the biggest impact to the overall guidance and you've mentioned it and you asked about that earlier, it's where does the macroeconomic environment go through.
As we progressed through 2023, and how does that specifically impact our tobacco consumer across all categories.
Alright. Thank you. Thank you.
Thank you. Our next question comes from Bonnie Herzog with Goldman Sachs.
Great. Thanks, Good morning, everyone. Good morning.
I had a question about your pricing and I guess thinking about that Bryan and your net price realization in <unk> over the past several quarters.
Thanks, Don.
I just wanted to hear from you how sustainable you think this is especially true.
Considering I guess a question on the consumer and kind of the other things you called out.
Sure Bonnie and I'll be careful not to talk about future price increases, but the way we think about pricing as you know it's an important part of the algorithm when youre in a declining category remember our strategy in that category is maximize profitability over the long term, while making appropriate investments in marlboro in the growth areas. So we see that as the engine that does but when you think.
About pricing I think it's important to really focus in on what <unk> mentioned in his remarks, you see high price realization, but at retail to the consumer from a consumer facing mobile on an average went up about six just shy of six 5% six 4% so the.
The price increase to the consumer is much lower than what you've seen in the price realization and we've mentioned before our price realization is really two components for us with list price as you would expect across the industry, but it's also the implementation of our GM and so with that price realization.
Usually Bonnie you or one of the other analysts will ask us about price gap and its up 41% I think it's important to remember as we get the data and really that data.
Somewhat in personal it's consumer purchasing behaviors through time as we annualize that what we're able to do as the price gap varies locality to locality. It can vary store to store and it can vary within even within the Marvel franchise.
You heard Sal talk about if you think about that overall price cap of 41%.
Have the packaging, so take red and gold and the Marvel franchise. If you look at total year 2022 total year 2021, you can see it was very stable, where we're seeing it is in those.
Packings of Skus, we have within marble that are there for price sensitive consumers to have a safe landing point and so we'll continue to implement those tools.
Far as how do we think about pricing going forward. We've shared with you whether it's percentage of discretionary income of minutes work and when you benchmark us against other countries around the world. We're still at the very low end of that.
Yeah, no that actually.
Super helpful on that one.
As you might think please.
Please do you kind of walk through the gap that's useful context.
Switching gears, if I may a question on your oral tobacco business.
You highlighted house Jong on volume growth has been and.
But in the context of that total tobacco revenue and.
Profit growth have been under pressure with a fair amount of margin contraction.
Did sort of touch on this but hoping maybe you could talk a little bit further about maybe your strategy for turning around the entire royalty.
Oral tobacco business any key initiatives that you could highlight for us ABL talk about this more in March.
Yes, we will split we're certainly excited to be able to talk about it in March you're exactly right within the old tobacco space. If you think about that total space you have traditional moist smokeless tobacco and we have novel whole pouches. Some of the margin contraction. You are seeing is just true mix right as consumers are moving from traditional.
Moist smokeless tobacco and novel oil is growing youre going to have some mix impacts in that overall margin.
Highlighted for you the reductions we made in promotional spend for Cam, but still had momentum and share I think the biggest thing that were excited as to be able to unveil the product that we have designed and have locked down and be able to show at Investor day, what that product is in some of the research related to that so more to come at Investor day.
Okay final one for me just speaking of that any more color you could provide.
On your smoke the vision today and it may be just how confident you are that youre going to be able to get the labor on your long term strategy, yes, Im sure Youre going to talk to you that's an investor meeting and I'm excited to hear about it.
Any preview.
Are most excited about.
I wont necessarily give you a sneak preview because I don't want to get ahead of myself for Investor day, we'd like to unveil it in total context and paint that solar picture for investors. So I. Appreciate the question I'll look forward to be able to unveil that for you at Investor Day, Alright, I'll be patient. Thank you. Thanks Bonnie.
Thank you. Our next question comes from Callum Elliot with Bernstein.
Hi, guys. Thank you for the question.
Bill you spoke in the release and in your prepared remarks about making some quote meaningful progress on the smoke free portfolio.
And you also mentioned strategic investments in the region.
But at the same time your Capex guide is flat versus last year's guidance.
You will continuing to deliver on algorithm EPS growth and I think as you said, Japan did any slight reduction it is more driven by the macro environment.
As presumably also implies little incremental P&L investment.
<unk> as well. So my question is what all of the strategic investments you are talking about how meaningful are they work.
Can we see them in the financial statements.
I think it's a great question I appreciate it I think when you think about where those investments show up but it's important to remember they're not all incremental spend there are always puts and takes youre going to shift some of those.
Infrastructure that the <unk>.
Combustible our traditional MST has.
Boiler cost through history, and Youre going to shift that to the <unk> space, we do have incremental investments around <unk> product development.
The regulatory preparations associated with that and the research associated with that.
Here's an example for economy, if you think about like even the <unk>.
Digital consumer engagement.
We are implementing in traditional smokable, our combustible and MST and we mentioned in the remarks being able to transition that over so youll see those costs will actually appear in the combustible and the smokeless before it appears in the <unk>.
GP categories, So theres a lot going on beneath the surface. If you will from an investment standpoint, but there are always puts and takes we're trying to be wise with the investment, but not restrict growing categories.
So thanks for that just the natural follow up is.
If I benchmark relative to your big competitors, both in the U S and internationally.
The two biggest amongst them are spending literally billions of dollars a year and Mike.
Cash season instinctively, if youll just talking about switching a portion of youll cigarette spend over in <unk> youre not going to get anywhere close to that billions of dollars a year and so.
The question is.
Genuinely believe you can be successful if you are spending so much less than those competitors and how.
Yes, we do believe that we're trying to really be driven by the consumer learning from the global marketplace our products in the marketplace and use those as if you will a launch point for our products and really trying to meet what the desires and needs of the consumers are in the marketplace that are met by those existing products in the marketplace and so we feel like we can.
10 achieved division we've highlighted for you guys that we really believe we can navigate strong returns to shareholders at the same time, making the appropriate investments in these growing categories and we believe we can do that I think you'll continue to hear us talk about investments and will provide a lot more detail of some of the progress we've made at Investor day.
Okay. Thank you thank.
Thank you.
Thank you. Our next question comes from Gaurav Jain with Barclays.
Hi, Good morning, Lee Good morning Sal.
Good morning.
Three questions. So first one favorably.
We will have a new competitor next year in the U S market with Iqos and letting you.
Distributing high cost then the volumes were much less so than any of us had expected.
What did you find robots islanders when U S consumers came to Iqos.
Yes, it's a great question I appreciate you asking acquirer, but I think when you think about Iqos. It was really about the the disciplined approach that we were taken introducing a brand new category. The consumer in the U S was used to the E vapor space. They had understood that when you're introducing a new category.
That requires some education on how to use the product.
And how to maintain the product that there is investment there that takes place and we talked about the learnings we had as long as we went along the way.
But I would say the biggest challenge is educating the consumer on the product and then leaving their desires.
I think there is still unmet needs in the marketplace.
Sure.
The next question, perhaps to use is around in Mississippi, and then next year and how we should factor in inflation.
If you could just help us understand because I think there is a confusion that how does that 3% number work.
As inflation audited, but change of inflation that we should be looking at.
Laura you are correct to point out that inflation is a factor when you think about MSA expense.
A couple of points I'll make one is the high rate of inflation in 2022 has been accounted for and is already in the base. You are correct to point out that when you think about inflation related to MSA. There is a 3% floor. So even if inflation were measured below 3% it would be.
3% increase in the MSA expense and I'll also remind you that.
Inflation is measured at a point in time December 31.
Current year to December 31 prior year.
So we have consider that when you think about 2023, there will be an elevated level of inflation.
We have seen some receiving of the rate of inflation, but still expect it to be elevated. So we have considered that when we put together our guidance and then finally I'll say there are other factors besides inflation too.
To consider when you think about MSA expense, including volume shouldn't share and other such factors.
Sure and my last question is on share repurchases for next year right at $1 billion or below what we thought and I think where most people were and even though EBITDA is growing.
Operating free cash flow after dividends will leverage where there are new every down when you have the abi's stake so what mix you by $2 billion of stock and not $1 billion.
Well first let me say.
Happy that the board authorized a $1 billion share repurchase and if you think about <unk>.
Capital allocation I think we have a history of taking a balanced approach.
As you know as I noted in our opening remarks.
We plan on paying back about one 3 billion in notes coming due with available cash we continue to pay a strong dividend as well as a $1 billion share repurchase.
Gaurav I really have nothing to report on the Abi asset we continue or continue to do the analysis that we do with our capital allocations.
Lee we believe the best thing for the shareholder over the long term is to hold the asset.
Sure. Thank you so much.
Thank you our next question will come from Chris.
Growe with Stifel.
Hi, good morning, Alright.
Alright.
Hi, I just had a quick question for you on Marlboro you have to be very happy with the resilient performance of Marlboro and obviously around that though discount and deep discount share is accelerating which is seem to provide some risks to the brand.
I'm sure I could I get your promotional program on this call, but I Wonder if you could talk about how you see the brand performing in 'twenty, three and maybe more pointedly have you increased promotions at a faster rate behind Marlboro to preserve that.
Sure.
So well there.
Yes, they are great questions, Chris I think when you think about the resiliency of Marlboro, We're very pleased with it we're pleased with how it is positioned with the consumer we are pleased with that it's still the aspirational brand within the cigarette space I think when you think about your question around promotions I would point to you that the high price realization actually shows that we're able to be more effective.
And efficient.
Our marble price promotion.
It may be useful to I talked about Marlboro red gold versus some of the price sensitive but.
Some of the tools that we have in place actually allows the precision. So just walk through a quick example, with three consumers. We have one consumer that's purchasing premium brands and occasionally pops up and buys a discount brands.
The other consumer is continuing to flip flopping between premium and discount and the third consumers of discounts consumer that occasionally pops up the slopes are premium cigarette when you think about those consumers you're going to treat those differently.
Make them more of a continuous premium brand smoker that discount smoker, you may never be able to get them to convert to a premium because of the condition of the economic condition that they are in so as we move to personal value delivery as close as we can get to the consumer we can tailor that across those three and so that's why I refer to them.
<unk> been at the National level, we're doing this down at the local level.
On our journey to move as close as we can get to the consumer and so that allows us to have Martin will be resilient.
The address the consumer's needs on a case by case basis, if we can get really close to the consumer and spend those resources accordingly to have a more consistent premium consider consumer through time.
Thanks for that.
I appreciate that.
One other.
A follow up which would be you do have two relatively unique profit drags this year with PMC winding down obviously pensions moving around could you give some more color around or context around how much that's weighing on profitability. This year.
Yes, Chris Avi.
So let's talk about pension for a moment, if you think about pensions.
Obviously, there is a P&L impact related to return on assets changes in discount rate, but I would say the pension is really well funded.
We have strong funding in that pension plan essentially fully funded so we feel really good about that and I would say the changes in pension expense I'll remind you are noncash.
We have successfully.
Completed the wind down of P&C. So you are correct.
And that we had earnings and cash flow last year and this year, we will not and it is a year on a year over year basis is a slight lag, but remember PMC was part of our all other category. It was so we consider it fairly immaterial to the total earnings about Korea.
Okay. Thank you very much.
Thank you.
Thank you. Our next question comes from Entre Contra with UBS.
Hey, good morning <unk>.
Thanks for taking my question one for me. Please if you don't mind.
On your smokeless business, especially on.
From what we've seen the brand has the brand has been driven by strong discounting versus the main peer.
Now do.
Do you expect that to continue going forward or rather just closing the price gap between you and your ramp here given if your product your promo expense per Canada's decreasing thank you.
Sure. Thank you I think when you think about it.
And this is not an excuse it's just box they had a first mover advantage and when consumers.
Get consumers to have new brands in their consideration set you have to induce trial and Thats why we feel like we're doing I would say from a consumer standpoint, it's still very small compared to the total nicotine space. So we're going to spend wala and <unk>, while the overall category is growing so we can participate in that growth.
We've mentioned previously it was intuitive that the adult Dipper would move to the product pretty quickly and that the adult cigarette consumer year and a half to induce trial and that's what we're in the process of doing and are excited about the results. Thus far I think through time, we did reduce the promotional spend per ton. So when you think about the the.
Price gap, if you will the way you referred to it.
For a competitive product in the marketplace.
Youre going to invest while the category is growing so you get these products in the consideration set I talked about bringing some of the data analytics I think you saw the benefit of that.
This past year, but we have more to do there and I think as we continue to progress and move forward, we feel good about it.
Don't want you to think though it's all discount if oil price off thats to induce trial, we really see it as a complete marketing ecosystem. If you will and I hate to use the business turn but it's surrounding the consumer and really meeting them, where they're at in their journey and then supporting them in that journey to fully transition over if you will from cigarettes to this novel oil.
Pouch and so.
That's where we're at we feel good about the progress we've made thus far but we certainly have to continue to drive awareness of induce trial.
That's very clear. Thank you and yes, you are completely right has been fantastic progress for lung and if I could squeeze in just one more if you don't mind as Marlboro It Hasnt deed.
Very well congratulations for that.
The rest of your portfolio.
Small as it is buses Marlboro.
What steps are you taking to defend your market share versus pressure both from peers on the very top end of the price band and the bottom end.
Thank you Yeah, I would say if you look at growth I would say the.
If you look at.
Competitors has really been hit the very very bottom end.
As Tom highlighted in his comment there are a number of major manufacturers that have what we would consider branded discount pricing deep discount space and so.
When we look at total portfolios for some of those we don't see the benefit of having gone down to that low priced here. They may grow one brand to the to the <unk>.
Detriment of another brand within the discount space. So we want to participate in the discount category.
We think it's important but we certainly don't want to grow the discount category and I think being premium focus where we feel the profitability on a high loyalty as an E. Cigarette space is an important place to play and that's where we're focused and <unk> highlighted for you. Our premium brands are growing total premium share of the premium space is growing through time on the <unk>.
<unk>. So we're pleased with that we've talked about the RG <unk>, so I won't repeat that but being able to continue to get closer to our.
Consumer by consumer basis, and meet them, where they're at when they have needs is where we're headed and we're excited about that progress.
Thank you that was very clear.
Thank you.
Thank you once again, if you would like to ask a question. Please press star one.
Our next question comes from Priya, <unk> Gupta with Barclays.
Good morning. Thank you so much for the question.
So really appreciate your commentary around the intent to pay down your upcoming Euro maturity later this month.
If we take a step back.
Euro denominated that has really come down.
Partly driven by sort of the.
Income that you're receiving from the Abi's stake given that that was sort of a natural hedge.
Given where your euro exposure stands now in terms of your portfolio are you pretty comfortable with where that is or is there too.
Continue to grow that euro exposure over time, either synthetically or through outright issuance in that market.
Yes.
First I'm going to start my answer by just reiterating I really have nothing to report as it pertains to Abi.
We continue to believe holding the asset is in the best interest long term interests of our stakeholders.
Second I would tell you that while we have flexibility, it's really a market by market analysis and a transaction by transaction analysis related to with markets. We may or may not enter as we think about managing our debt going forward.
So that's kind of Hollywood answer.
<unk>.
Thank you that's helpful.
Sure.
Okay.
Thank you at this time, we will open the Q&A to members of the media.
Minder to ask a question please press star one.
We will take our next question from Jennifer Maloney with Wall Street Journal.
Good morning.
Good morning, Jennifer.
My first question is about your two evaluation.
Thank you Laura.
Value of your stake to your price.
As Joe and Kevin Hogan and $14 million and I wondered if you could explain the reasoning behind that.
And decrease I was a little surprised because in the fourth quarter, our dual resolved the large projects.
Litigation.
Which eliminates some of the uncertainties around the company so could you explain that.
That valuation.
Sure Good morning, Jennifer.
First I will remind you that we.
We had taken an impairment.
Related to litigation and we really capture that within kind of our overall discount rate.
<unk> assets should we had accounted for that but you don't want a quarterly basis.
The way we account for jewel is.
Has us run an analysis of the fair market value of the investment it's not publicly traded so we have to do an independent analysis.
And from quarter to quarter, there is going to be changes.
We've we've been pretty communicative about that.
This quarter it did our investment was reduced to $100 million.
And it's really macro driven it's really macroeconomics and other factors.
That are considered when doing that analysis.
So things like inflation lens possible recession.
Yes, macro market conditions inflation and placed discount rates things like interest rates.
Consumer dynamics all of that goes into the analysis.
Got it.
Jennifer when you build a discount rate it starts with a risk free rate and so certainly the interest rate increases we are seeing through time are going to continue to impact that as long as they are some of the upper trajectory.
Got it.
By taking a question.
A little more color around the consumer purchasing patterns right now.
Can you can you talk a little bit more about what youre seeing consumers doing.
The volume has come down so is it because people are making fewer trips to the store to purchase cigarettes or are they buying less.
Each time can you sort of talk about what the actual pattern is.
Yes, it's a great question, what we're seeing is as we see mobility increase.
Will the U S is coming out of the Covid pandemic.
<unk> seen a return to more frequent trips per member or consumer pre COVID-19, but go either everyday or every other day I think what youre seeing and what consumers tend to do when they get under <unk>.
Economic pressure as they reduced their number of nicotine occasions in a day, so through time that factors into their purchasing behavior.
Say, a little bit and we highlighted that which was the consumers that are under dire economic conditions at times will either switch aldar trade out to cheaper brand, we try to give them a safe landing place within the mobile franchise.
But as far as number of trips we haven't seen a reduction in the number of trips it's more about through time reduced nicotine occasions.
So there are smoking cigarettes per day.
That's correct. So remember as we came into the.
There is no change in the overall trend if you will the long term trend as we went through Covid and there was less mobility less societal pressures, we actually thought we believe nicotine occasions go up we see in.
When the economic conditions of the macroeconomic environment is greatly impacting the consumer those stricter Nick communications as they become more comfortable with that they tend to return to a normal trend.
Alright, Thank you very much thank.
Thank you.
Thank you. It appears at this time, we have no further questions I'll turn the call back over to Mac Livingston for any additional or closing remarks.
Thanks to everyone for joining us please contact the Investor Relations team. If you have further questions. Thanks and have a great day.
Okay.
Okay.
This concludes today's call. Thank you for your participation you may disconnect at anytime.
Okay.
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Okay.