Q2 2023 Altria Group Inc Earnings Call
Speaker 1: Billy Gifford, Alsia CEO and Stanley Mancuso, our CFO , will discuss Alsia's second quarter and first half of those results.
Speaker 1: Earlier today we issued a press release providing our results. The release, presentation, quarterly metrics and our latest court responsibility reports are all available at alpura.com.
Speaker 1: During our call today, unless otherwise stated, we're comparing the results to the same period in 2022.
Speaker 1: Our remarks are continuing and forward-looking, cautionary statements and projections of the future. So, hold.
Speaker 1: Please review the forward-looking and cautionary statement section at the end of today's earnings release for various factors that could cause actual results different materially from projections.
Speaker 1: future dividend payments and shared purchases remain subject to the discretion of our board. We report our financial results in accordance with U.S. generally accepted accounting principles.
Speaker 1: Today's call will contain various operating results on both a reported and adjusted basis.
Speaker 1: Executive Dull it Satu I know that if I can compare it and then the litter purport order is resolved.
Speaker 1: The descriptions of these non- GAAP financial letters and recommendations are included in the day of financial release and on our website at alfere.com.
Speaker 1: Finally, all references in today's remarks to tobacco consumers or consumers in a specific tobacco category or segment refer to existing adult tobacco consumers 21 years of age or older.
Speaker 1: With that, I'll turn the call to River Billy.
Speaker 1: This range represents an adjusted diluted EDS growth rate of 1% to 4% from a $4.84 set base in 2020 to 2020. My remarks this morning will focus on three topics. Our enhanced smoke-free product portfolio, including our recent acquisition in Envoy, the consumer dynamic impacting our quarterback businesses, and an update on the California flavor band and its impact on the market. I'll be in turn it over to Sal, who will provide further detail on our business.
Speaker 1: toward our goal of living beyond smoking by completing our acquisition of enjoy.
Speaker 1: Where our voice focuses on responsibly accelerating U.S. motor and vapor adoption of the UAA.
Speaker 1: Currently, the only holiday he made a product with marketing updates from the FDA.
Speaker 1: jay miniharrayton and Mrs.? have alreadymetal work and we welcome?? we were keen to be after adding agreedden
Speaker 1: They bring a wealth of knowledge and capabilities that complement our own.
Speaker 1: such as data product development, device manufacturing partnerships.
Speaker 1: and international supply chain expertise.
Speaker 1: We believe their skills will accelerate our progress towards our vision, and we are excited to build upon their recent experience operating in the category.
Speaker 1: Sending memory space to local Hollywood powers through ten at the
Speaker 1: At a roll five, the old organization of a more specific and 100 employees has already started to use their strong, trained relationship to address these hot opportunities. They engage with the nation's top 125 convening for a change by the E.J. for volume to improve the disability and inventory of a change way, and to store it with the decision-giver abuse. It is because of their administrative efforts that that started this week in joy, that we can have an enhanced retail presence through premium, pictures, or space, and an improved retail inventory.
We checked that the further advantage distribution put with the little 70,000 doors fighting in this year. We could represent a approximately 7% in the data volume and in 50% of the cigarette volume sold in the US, multi-allet and in the media channel. This is a remarkable progress. It is a testament to the highly talented employees across the healthcare family of companies. And I slow into hard work and then it's a collaboration.
And in life, the world is covered by the continued growth of the novel products, which drove the estimated 2.5% of its increased, and in total, U.S. full medical volumes of the toxic that mum has.
In the second quarter, long-reported shipping volume increased nearly 50% versus the year-over period. And for retail share of full tobacco, increased 5 cents sequentially, reaching 7 share points in the second quarter.
This represents the growth rate of the most 45% year over year and is the 15th consecutive quarter of foreign share growth.
team b?dziemy. gasps as well,
We believe one's ability to continue to grow share while effectively reducing its emotional investments demonstrates the strength of its product portfolio and growing brand equity. Keyless is focused on increasingly investing behind the brand as the category grows.
and continue to respect our profitability in 2025. In September , our teams plan to begin an international test of Eveline Plus, our new tobacco-derived, magnifying, WETOUCH product.
that features an optimized, long-line flavor system and a proprietary soft-field material.
The project will be available via e-commerce and in-week. Where it seems, I'm not particularly interested to find a way to gain learning. That's a name and form, a future you have to watch.
We're excited about one box and we leave some signatures. We'll leave these two.
We are on track to follow PMCA's one loss and then the first half of next year. Let's now move track for tobacco businesses. In the second quarter, cigarettes can be used to climb to climb moderate.
However, the consumer dynamics we observed over the past year largely continued.
elevated gas prices combined with the cumulative effect of higher inflation and continued pressure on consumer discretionary income levels.
However, we believe we have the appropriate tools to navigate this Australian environment. For example, can you say you did the audience make the little piece so that the boy a theory such that you can get a document behind the mark more for black family of products early in the year.
Using the VAN and analytics, the team provides additional support for price-sensitive marble motors while being efficient with their promoting motor systems.
As a result, mobile spectrum port of retail share of the cigarette category grew intense quickly to 42.1%
We would now turn to California where we hang on the sale of labor tax products and and the stock of the product labor and homeowners when we're back late last year. Our brand is being deployed well in the day. We remain concerned with the law enforcement and the negative and the negative cost of the business of a prohibitionary quality.
We observe continued evidence of the issues we've highlighted in our first quarter remarks.
such as adulterated products, retailer and manufacturer non-compliance,
and it was just more connectivity.
For example, roughly 65,000 OCP branded flavor cards were sold in California in the first half of the year. More than triple the amount sold in the other 49 states combined.
In comparison, OTP branded flavored card volume was inevitable in California in the year of the timing of the ins bluetooth Micro Trans Hearts mobile device for free.
Before the understand consumer use of elicit nicotine products, we commissioned a third party study in California where researchers collected and analyzed nearly 20,000 discarded tobacco products.
Air findings suggest that almost half of the cigarettes consumed were not tax stamped for sale in California.
And approximately 20% of the cigarette packs were menthol.
or products we believe other manufacturers recently introduced to sidestep the purpose of the law.
In comparison, Mintal represented approximately a quarter of the total California cigarette category prior to the band's enactment.
And finally, while disposable e-vapor products were overrepresented in the study,
98% of the collected e-vapor products were flavored, despite being subject to the California flavor ban and unauthorized by the FDA.
These figures are alarming and indicate substantial illicit market activity.
We believe the best way to prevent illicit markets is to keep tobacco products legal and regulated.
We have made this clear and the public comments we submitted in response to the FDA's proposed myth ball ban
Our goal is for policy makers to embrace harm reduction as the proper framework for tobacco and nicotine product regulation.
And there's a growing chorus of diverse stakeholders who agree.
including consumers, our trade partners.
public health advocates.
Criminal justice reform advocates.
law enforcement and tobacco growers.
In fact, public opinion overwhelmingly supports harm reduction over prohibition.
And science shows a significant public health benefit of moving smokers away from combustible products toward a smoke-free future.
We will continue to advocate for a well-regulated US tobacco industry that embraces farm reduction.
We have an unprecedented opportunity to lead the way in shifting millions of smokers away from cigarettes if we follow the science and foster innovation with the support of reasonable regulation.
I'll now turn it over to Sal to provide more detail on our results and the business environment.
Thanks, Billy.
the smokeable product segment continued to deliver on its strategy.
of maximizing profitability and combustibles over the long term, while appropriately balancing investments in Marlboro with funding the growth of smoke-free products.
The segment grew its adjusted operating company's income by 3.1 percent in the second quarter and by 1.7 percent in the first half.
Adjusted OCI margins expanded to more than 60 percent for the second quarter and first half.
This performance was supported by robust net price realization of 10.1% in the second quarter and 10.5% for the first half.
At retail, Marlboro Netpack price increased 6.1% in the second quarter compared to last year.
Smokeable product segment reported domestic cigarette volumes declined by 8.7% in the second quarter and 10% in the first half.
when adjusted for calendar differences and trade inventory movements.
second quarter and first half domestic cigarette volumes declined by an estimated 10% and 10.5% respectively.
At the industry level, we estimate that adjusted domestic cigarette volumes declined by 7.5% in the second quarter and by 8% in the first half.
At retail, the total discount segment share grew 1.8 percentage points year over year to 28.2%, but was flat sequentially.
We believe some smokers are trading down as a result of the adverse financial conditions that Billy described.
We also continue to see increased competitive activity in the discount segment, including multiple branded discount offerings priced at deep discount levels.
As Billy mentioned, Marlboro displayed resiliency during a period of economic pressure for consumers.
In the second quarter, Marlboro's retail share of the cigarette category grew a tenth sequentially, 242.1%, while declining six tenths versus the year-ago period, partially driven by the discount dynamics that I've described.
We have also seen a decline in Marlboro's menthol share of the total category as a result of the California flavor ban and increased competitive activity from premium menthol brands in the balance of the country.
Additionally, Marlboro grew its share within the premium segment to 58.6%, an increase of one-tenth sequentially and five-tenths year-over-year, while other brands seeded share in the segment over the past year.
We believe Marlboro's 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 5% in the first half.
To continue this momentum, the Middleton team is expanding Royale, which will further enhance Black & Miles plastic tip offerings.
The team expects Black and Mild Royale to be available nationally later this month.
Moving to the oral tobacco product segment. Second quarter adjusted OCI grew 3% and the segment expanded adjusted OCI margins to 68%.
This performance was supported by robust net price realization due in part to more efficient on promotional investments.
In the first half, the segment grew adjusted OCI by 2.6%, with strong adjusted OCI margins of 68.7%. Local segment reported shipment volume decreased by 1.7% and 1.8%.
for the second quarter and the first half respectively. The segment's volume decline was driven by declines in MSP volumes.
Oral tobacco product segment retail share declined 2.8 percentage points in the second quarter, as declines in our MST brands were partially offset by the continued growth of ON. We continue to be encouraged by the performance of our oral tobacco products, as ON continued to grow share in a competitive category, and Copenhagen remained the category leader.
Moving to our investment in ABI, we recorded $132 million of adjusted equity earnings in the second quarter.
This was an increase of approximately 6.5% from the year ago period, and represents Austria's share of ABI's first quarter, 2023 results. Our balance sheet remained strong, and as of the end of the second quarter, debt to EBITDA ratio was 2.2 times. In July , we received the remaining $1.7 billion plus interest
How do you think about the long term industry volume outlook for the cigarette category.
Hey, Greg industry volumes were down 8% in the first half of this year do you expect industry volumes will return to the mid single digit decline rate and what would need to happen for them to normalize towards that level.
Yes. Thanks for the question Pamela I think when you think about it and we discussed this a little bit in the first quarter, but I think it's worth a reminder.
Remember in the Covid pandemic, we actually saw what we believe added nicotine occasions for adult smokers that.
As we came out of the.
Covid pandemic and you saw mobility increase.
You would expect some of those nicotine occasions to come back out of the out of their day and I think that was exacerbated by the cumulative effect of inflation. So we had nicotine occasions coming back out of their day and exacerbated by cumulative inflation. So when you think about it I think it's best to go back in history a bit look.
At similar.
Currencies were the adult tobacco consumer was under extreme extreme economic pressure and you can look at <unk> nine and you see similar occurrences there what we see with the adult cigarette consumers. It takes a bit of time for them to adjust to that new situation and you see typically and we saw it in <unk> nine.
And <unk> the consumer returns to their <unk>.
Six normal nicotine occasions, and the debt. So I think what we're seeing right now even though inflation is coming down on accumulative basis, it's still growing so the consumer is still under economic pressure.
Recall that in the first quarter, we put some extra investments behind.
A couple of pockets of areas, where we saw competitive forget aggressive with menthol offerings, and where we saw the consumer under.
Pressure.
And looking to discount and you see where.
Extremely pleased with the results of those investments as marble ticked up.
Quarter over quarter.
Thanks, that's helpful.
And in your prepared remarks, you touched on some of the initiatives that you have to drive <unk> growth now that you've owned the business for two months can you just elaborate on where you see opportunity.
Operator brand more efficiently.
Are you thinking about the contribution from adding July over the coming quarter and the level of investment that youll need to make behind the brand.
Yes, thanks for the question.
Youre right there was a month and the results for the quarter and now we've surpassed another month, our focus will be on the pod based products. The ace enjoy and you heard my remarks filling distribution gaps as well as visibility.
Just to characterize that only 3000 stores currently in distribution carry all top three ace pump skus.
About 10000 stores carry the pods, but no devices. So the focus will be both on filling those distribution gaps and improving visibility while at the same time enhancing <unk> brand equity to increase both brand awareness and appeal amongst adult smokers and vapers.
Great. Thank you thank.
Thank you.
And we'll take our next question from Bonnie Herzog with Goldman Sachs.
Alright, Thank you Marnie underline.
I had a question on your guidance.
From your EPS growth guidance of one 4% this year.
Remain pretty darn wide, especially given only five months left this year. So I guess I'm trying to understand that and what headwinds E E.
That would cause you to come in at the lower end of your guidance, which implies.
<unk> low single digit EPS growth in the second half.
Well certainly we highlighted for you Bonnie that we'll be investing behind the enjoy brand as we expand distribution and have equity spending I think the other thing is the book the economy is very dynamic right now and we've highlighted for you that.
Cigarette consumers under extreme pressures and we want the flexibility to adapt to them and be there for our consumers if necessary. So I think we will see how the economy progresses, and we will see how the adult cigarette consumer.
Returns to if you will more of a.
Comfortable position from an economic standpoint.
Okay, I guess that makes sense and then you have flexibility with some of your investments.
Can you give us a sense of how much you expect your investments.
This year versus last year.
Yes, I won't go into detail just for competitive reasons, but certainly will be.
As I mentioned really enhancing the brand equity to increase awareness amongst both adult vapers in adult cigarette consumers and then we will be looking for distributions. So both filling distribution gaps as well as improving the visibility of ace and stores, where it's currently distributed and then expanding to new stores.
Okay and then just maybe one final question from me just on the relative price gap.
Continuing to widen I guess now the widest it's been.
For maybe 15 years by now.
I've asked you that so far but Kevin it keeps widening I guess I'd like to hear.
How your strategy might be changing given the call can you just mentioned on the consumer and then what the deep discount manufacturers doing just curious to hear how flexible you might be with your pricing promo strategy and then certainly.
Thank you behind leveraging mothball black potentially minimize down trading.
Yes, thanks, and I'll be careful not to talk about future pricing, but I think you can see like going from first to second quarter. We highlighted for you some areas of where we thought additional investment was necessary and you saw the significant result.
<unk>.
Marlboro, increasing a 10th sequentially. So we want that flexibility, but I would remind you that the RDM tools. So that price gap that you are seeing is on a national basis and the RDM tools that we have in the advanced analytics allows us to monitor that price got down to a very very low level and we can be efficient with the spend.
And even move spend around if necessary around the U S. So that's how we're thinking about it.
From a standpoint of.
Marbella, South you see it.
Continues to grow in the premium segment is performing very well and as.
Highlighted for Pamela we've seen instances of this in the history of when the consumers under pressure that you see discount grow you see premium from a total industry perspective, and then you see that moderate through time.
Thank you.
You.
And we'll take our next question from David <unk> with TD Cowen.
Good morning.
Good morning.
So I wanted to start on your oral tobacco margins. Please.
Nice to see some year over year increase Matt given kind of the multiyear degradation we'd seen.
Port as on so.
Just wondering can you just comment on how we should think about margin just for oral tobacco in the back half. Thanks.
Yes, I'm going to be careful not to talk about future quarters I will agree with you we're really happy with the margin performance in the Otp segment.
For year to date Otp margins as I said in my remarks were over 68%.
What youre seeing I think is the success of on where we've grown share each quarter.
And as we talked about in our early remarks, you see.
Increased pricing of 17% on a year over year basis. So I think that shows the strength of.
<unk>.
In the marketplace, but.
We're really excited about the progress on is making in the overall otp performance.
Certainly thank you.
For that and then for my follow up question on daily.
Nice to see.
<unk> market share.
Actually despite some of the heightened competitive activity that you called out from competitive premium menthol offerings.
Can you just given kind of the competitive backdrop do you think that you need to have the Marlboro black holes in the marketplace longer than you had originally contemplated.
Look we think Thats. An addition to our portfolio. It's certainly gives the marble team it rounds out the black portfolio Marvel block the family has been around a while we saw business a gap in that portfolio and we felt that.
So from a standpoint of overall mobile black you could think about that is about 10% of marble and it certainly gives the consumer a safe place or a place to land if theyre under economic pressure and as <unk> seen previously when we use tools like this we're able to shrink the gap to mainline through time, so it's about keeping mainline.
Very strong, which we're very pleased that it is and then having a place for the mobile consumer because Marlboro is still the aspirational brand in the cigarette category, having a place for them to land when they're under economic pressure and as the situation changes, we can shrink that gap to mainland.
Certainly thank you so much for that thank you.
And we will take our next question from Matt Smith with Stifel.
Hey, good morning, good morning, Matt.
Just I wanted to follow up on your commentary about the level of investment in the cigarette business and are we in an environment now with the enhanced digital tools and more efficient ways to engage with your consumers that you expect more volume to be sold using promotional activity.
Even as economic conditions improve.
Yes, I wouldn't think of it as more volume under promotional I think it's being more efficient and effective with that promotional spend it's trying to get it to the individual consumer as close as we can get to that that needs it while not subsidizing.
Adult cigarette consumers that don't need it and I think <unk> seen that with both the growth in mobile in the premium space. The investments we made first to second.
It's had the 10th sequentially bump and the price realization were experiencing in the cigarette space.
Okay. Thank you for that and if I could ask another question on the growth on the on oral brand.
There remains robust even as you've reduced promotional activity can you remind us where the brand stands today in terms of distribution and how we should think about the drivers of growth for on in the second half of the year.
Yes, I think from a distribution we've got it in the stores. We while you may see small fluctuations as we decide if we want to add additional stores and distribution that we've got it to where we bought it.
Recall, we were capacity constrained from a manufacturing basis, where beyond that it continues to grow I would say the growth as we move forward is as it continues even though we've been talking about it and you guys had been talking about it for a while is still fairly new to the consumer so it's continuing to drive awareness and specifically trial.
The consumer tries it they enjoy the products so that's where the growth will come as the success in achieving.
New consumers to the category as they transition I think when you think about that.
<unk>.
Transition through time, it is important to remember that.
You are looking at the consumer specifically dippers that are moving.
Currently in large amounts, but it's also talking to the cigarette consumer allows.
Oral tobacco product to be available to consumers that previously <unk>.
Projected moist smokeless tobacco.
And thank you for that affiliate personal.
Thank you.
We will take our next question from Richard <unk> with UBS.
Hi, Good morning, everyone. Thanks for taking my questions. Two from me. Please if you don't mind.
When looking at the U S cigarette industry, we saw that discount was stable.
On a sequential basis.
Bucking the trend.
Over the past three to four years, how much of that do you think could be attributed to Marlboro black gold placements.
Increased promo activity from you and peers. Thank you.
Yes, I don't know if I would specifically attributed to increased promo as we've highlighted for you that the adult cigarette consumer in the U S is really under economic pressure and so you look theres certainly give them places to land specifically marble are placed on land, where they can continue to engage with marvell, we see that as both.
<unk>.
Less expensive versus them, leaving and returning and we've been successful with that in the past and I think you see the results for the second quarter.
Makes sense. Thank you and secondly, this is a bit more medium term, but as you are pushing hard on developing now with enjoy.
Illicit product.
A problem on the market as flagged by one of your peers.
What can you say.
<unk> do more to basically improve enforced once in the area.
Get those numbers down.
Yes.
It's continued engagement both with.
Congress as well as the FDA to really make this the top priority you side underage use of E vapor come down, but it is essential that the FDA really focused on enforcement illicit product in the marketplace with flavors that are not authorized.
So you saw in the most recent national Youth Tobacco survey.
The most.
Most popular product with youth following wasn't illicit product in the marketplace now they have started stepping up the enforcement.
But if it needs to be more vigorous in the marketplace. Even if they would just published a list of.
Those products that authorized and those that are under review it would certainly level set with the trade because the enforcement that theyre doing.
While encouraging isn't enough to change what the marketplace is.
What we're experiencing in the marketplace.
Very clear thank you Pamela.
Thank you once again.
Like to ask a question please press star and one on your Touchtone phone.
We'll take our next question from Gaurav Jain with Barclays.
Hi, good morning liquid monarch south.
Good morning.
Hi couple of questions from me.
So one is on the E cigarette industry growth clearly disposables are cannibalizing.
Clothes MB cigarettes. So why are you launching they enjoy and not enjoyed daily product.
In that context can you also just tell US where you are with the MTA application of the Nexgen product which is.
Okay.
Which you have mentioned you are fighting.
Yes.
Break that down so the first part I think if you think about the E vapor category certainly there is a large part base of consumers and so we certainly see that as an opportunity and you heard in the remarks. The <unk>. The only part that has received FDA authorization.
When you think about the disposable side the growth at least what we're seeing in the marketplaces with the plethora of flavors that are listed in the marketplace. So as the FDA certainly stepped up enforcement and we see enforcement take place and those illicit products come out of the marketplace. We see the potential again because enjoy was.
<unk> able to receive authorization for the disposable the opportunity for growth in that space, but we feel like the appropriate focus is on that large pod based.
Consumer base.
Until they elicit a plethora of flavors and flavors that are listed in the marketplace are cleaned up.
From a standpoint of the age restriction I think youre, referring to we just recently closed it and we're excited about that technology.
We're assessing the timing of following that we would have a target in mind by the end of this year, but I think what's so exciting about it is it the regulatory team that.
Certainly welcome onboard from the enjoy that was that successfully navigated the state only pod based product that has navigated the regulatory so we're excited they had started the application and again, we would target following that by the end of the year.
Sure. Thank you Antonio also update us on this John patent litigation.
We have filed against enjoy which I found very surprising considering I talked to overdose.
When you walked away from Julien gained access to all their IP. So could you just help us understand what's happening there.
Sure.
Believe that the litigation against Us as meritless, and we are vigorously looking to respond to that.
When you step back from it we think it's interesting that juul only brought the suit after we completed the acquisition.
The litigation if you think about it from a standpoint of the merits of it it really feels like a bit of an act of desperation. If you will to stifle competition really from the only pod based products that the FDA has determined appropriate for the protection of public health.
So we see it as meritless.
Okay, and if I could just sneak in one last one because you mentioned that on plus you will launch in the street and even if it is targeted.
So we're looking at launching enjoying internationally at some point of time.
Our focus currently is as we've mentioned.
Building the distribution gains on existing stores in the U S.
Spanning distributions.
Approximately 70000 stores by the end of this year and we'll come back to you on international and any international plan when it's appropriate.
Well thank you so much.
<unk>.
Yeah.
And there appears to be no further questions at this time I would like to turn the call back over to Mac Livingston for any closing remarks.
Thank you for your time. This morning, if you have any follow up questions. Please feel free to reach out to the Investor Relations team, Thanks and have a great day.
This concludes today's call. Thank you for your participation you may disconnect at any time.
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