Altria Group, Inc. (NYSE:MO) Q2 2023 Earnings Call Transcript

Altria Group, Inc. (NYSE:MO) Q2 2023 Earnings Call Transcript August 1, 2023

Altria Group, Inc. beats earnings expectations. Reported EPS is $1.26, expectations were $1.18.

Operator: Good day, and welcome to the Altria Group 2023 Second Quarter and First Half Earnings Conference Call. Today’s call is scheduled to last about one hour, including remarks by Altria’s management and a question-and-answer session. [Operator Instructions]. 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 for Altria Client Services. Please go ahead, sir.

Mac Livingston: Thanks, Charley. Good morning and thank you for joining us. This morning, Billy Gifford, Altria’s CEO; and Sal Mancuso, our CFO, will discuss Altria’s second quarter and first half 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 altria.com. During our call today, unless otherwise stated, we’re comparing results to the same period in 2022. 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 our Board. We report our 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 the reconciliations are included in today’s earnings release and on our website at altria.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 Billy.

Billy Gifford: Thanks, Matt. Good morning and thank you for joining us. We had a solid first half of the year, and we continue on our exciting journey towards Moving Beyond Smoking. We completed our acquisition of NJOY and delivered strong business results, growing adjusted diluted earnings per share by 5% in the first half, and we returned $3.8 billion to shareholders while investing in pursuit of our Vision. We look forward to executing our commercialization plan for NJOY in the second half of the year, and we reaffirm our guidance to deliver 2023 full-year adjusted diluted EPS in a range of $4.89 to $5.03. This range represents an adjusted diluted EPS growth rate of 1% to 4% from a $4.84 base in 2022. My remarks this morning will focus on three topics: Our enhanced smoke-free product portfolio, including our recent acquisition of NJOY; the consumer dynamics impacting our core tobacco businesses; and an update on the California flavor ban and its impact on the market.

I’ll then turn it over to Sal, who will provide further details on our business and financial results. Let’s began with e-vapor, which has been the most successful category in the U.S. in transitioning smokers to alternative products. In June, we took a transformative step towards our goals of Moving Beyond Smoking by completing our acquisition of NJOY. We are fully focused on responsibly accelerating U.S. smoker and vapor adoption of NJOY ACE, currently the only pod-based e-vapor products with marketing authorization from the FDA. The integration and business plan is already well underway and we welcome the NJOY team to the Altria family of companies. They bring wealth and knowledge and capabilities that complement our own, such as vapor product development, device manufacturing partnerships, and international supply chain and expertise.

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. Prior to close, limited [visibility] (ph) and frequent out of stocks make it difficult for the NJOY team to communicate offers and build awareness [Indiscernible] to stores. In fact, 95% of stores with distribution of ACE, lack complete inventory of the device and all [five] (ph) pod SKUs. Our world class sales organization of over 1,600 employees have already started using their strong trade relationships to address these opportunities. They’ve engaged with the nation’s top 25 convenient store chains by [bringing] (ph) e-vapor volume to improve visibility and inventory of NJOY in stores with existing distribution.

It is because of their tremendous efforts that starting this week NJOY will begin to have an enhanced retail presence through premium fixture space and improved retail inventory, only two months after we completed the transaction. And later this month, we plan to broaden distribution base to a total of approximately 43,000 stores, a 25% increase since we competed the transaction. We expect to further expand distribution to a total of 70,000 stores by the end of this year, which represents approximately 70% of e-vapor volume and 55% of cigarette volume sold in the U.S. multi-outlet and convenience channel. This remarkable progress is a testament to the highly talented employees across the Altria family of companies and I applaud the hard work and the collaboration.

In Oral Tobacco, we are encouraged by the continued growth of novel oral products, which drove the estimated 2.5% increase in total U.S. oral tobacco volumes over the past six months. Oral Nicotine Pouch just grew 8.4 share points year-over-year and now represents 29.1% of the total U.S. Oral Tobacco Category. In the second quarter, on! reported shipment volume increased nearly 50% versus the year-ago period and on! retail share of oral tobacco increased 5% sequentially, reaching 7 share points in the second quarter. This represents a growth rate of almost 45% year-over-year and it’s the 15th consecutive quarter of on! share growth. Helix delivered these impressive results while growing on! retail price [17%] (ph) versus the year-ago period.

We believe on!’s ability to continue growth share while effectively reducing its promotional investments demonstrates the strength of its product portfolio and growing brand equity. Helix is focused on strategically investing behind this brand as their [effort] (ph) grows and continues to expect profitability in 2025. In September, our teams plan to begin an international test of on! PLUS. Our new tobacco-derived nicotine wet pouch product that features an optimized long lasting flavor system and a proprietary soft feel material. But the product will be available via e-commerce in Sweden, where our teams plan to take a disciplined approach to gain learnings that can inform a future U.S. launch. We are excited about on! PLUS and believe consumers will be too.

While a small sample size, our early research indicates about three out of four dippers and nicotine pouch consumers and [inaudible] prefer on! PLUS over [Indiscernible] basis. We are on track to file our PMTA for on! PLUS in the first half of next year. Let’s now move to our core Tobacco businesses. In the second quarter, cigarette industry volume declines moderated. However, the consumer dynamics we observed the past year largely continued. And with gas prices, combined with the cumulative effect of higher inflation, continued to pressure consumer discretionary [spending levels] (ph). However, we believe we have the appropriate tools to navigate this challenging environment. For example, PM USA used its RGM capabilities to deploy a series of strategic investments behind the marked Marlboro® Black family of products earlier this year.

Using advanced analytics, the team provided additional support for price-sensitive Marlboro smokers, while being efficient with their commercial investments. As a result, Marlboro second quarter retail share of the cigarette category grew sequentially to 42.1%. Let’s now turn to California, where the ban on the sale of flavored tobacco products and tobacco product flavor enhancers went into effect late last year. While our brand continued to perform well at the end of the day, we remain concerned with the [Indiscernible] enforcement and the negative unintended consequence of prohibitionary policies. We observed continued evidence of the issues we commented in our first quarter remarks, such as lower rated products, retailer and manufacturer non-compliance and the illicit market activity.

For example, roughly 65,000 OCB branded Flavor Cards were sold in California in the first half of the year, more than triple the amount solid in the other 49 states combined. In comparison, OCB branded Flavor Card volume was negligible in California in the year-ago period when the menthol cigarettes were still legally available. To further understand consumer use of illicit nicotine products, we commissioned a third party study in California, where researchers collected and analyzed nearly 20,000 discarded tobacco products. Their 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 and products we believe other manufacturers recently introduced to sidestep the purpose of the law.

In comparison, menthol represented approximately a quarter of the total California cigarette category prior to the ban enactment. And finally, while disposable e-vapor products were over represented in the study, 98% of the collected e-vapor products were flavored, despite being subject to the California Flavor Ban and authorized – 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 in the public comments we submitted in response to the FDA’s proposed menthol 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 towards a smoke-free future. We will continue to advocate for a well-regulated U.S. tobacco industry that embraces harm 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.

Sal Mancuso: 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% in the second quarter and by 1.7% in the first half. Adjusted OCI margins expanded to more than 60% 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 net pack price increased 6.1% in the second quarter compared to last year. Smokeable product segment reported domestic cigarette volumes decline 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 the 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 to 42.1% while declining six-tenths versus the year ago period, partially driven by the discount dynamics that I 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 seated 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 cigars shipment volume increased 5% in the first half. To continue this momentum, the Middleton team is expanding Royal, which will further enhance Black & Mild past the tip [ph] offerings. The team expects Black & Mild and Royal 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%. Total segment reported shipment volume decreased by 1.7% and 1.8% for the second quarter and the first half respectively.

The segments volume decline was driven by declines in MSP volumes, partially offset by the growth of on! When adjusted for trade inventory movements and calendar differences, segment volume declined by an estimated 2.5% for both the second quarter and first half. 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 Altria’s share of ABI’s first quarter 2023 results.

Our balance sheet remains strong and as of the end of the second quarter, our debt to EBITDA ratio was 2.2x. In July, we received the remaining $1.7 billion plus interest from Philip Morris International as a part of the ICO’s agreement we announced last fall. After receiving the payment, we repaid the term loan we entered to finance the NJOY transaction. We remain committed to creating long-term shareholder value through the pursuit of our vision and our focus on significant capital returns and maintaining a strong balance sheet. We demonstrated this commitment in the first half by completing our acquisition of NJOY, retiring approximately $1.6 billion in long-term notes at maturity with available cash, paying approximately $3.4 billion in dividends, and repurchasing $10.4 million shares totaling $472 million.

At the end of June, we had $528 million remaining under the currently authorized $1 billion share repurchases program, which we expect to complete by the end of this year. With that, we’ll wrap up and Billy and I will be happy to take your questions. While the calls are being compiled, I’ll remind you that today’s earnings release and our non-GAAP reconciliations are available on altri.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?

Billy Gifford : Just quickly before we turn it over to the Q&A, I just want to apologize to those of you on the webcast for some audio issues we had early on in the call. So we will work to expedite the posting of our replay, so you’ll have full access to the remarks. So with that, we’ll turn to Q&A.

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Q&A Session

Operator: Thank you. [Operator Instructions] 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. We’ll take our first question from Pam Kaufman with Morgan Stanley.

Pam Kaufman: Hi! Good morning.

Billy Gifford: Good morning.

Pam Kaufman: How do you think about the long-term industry volume outlook for the cigarette category? Cigarette 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?

Billy Gifford: Yes, thanks for the question Pamela. I think when you think about it, and we’ve 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 to adult smokers day. 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 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 and look at similar occurrences where the adult tobacco consumer was under extreme economic pressure.

And you can look at ’08, ’09 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 their new situation. And you see typically, and we saw it in ’08, ’09 and ’01, ’02, the consumer returned to their basic normal nicotine occasions in the day. So I think what we’re seeing right now, even though inflation is coming down on a cumulative basis, it’s still growing. So the consumer is still under economic pressure. You recall that in the first quarter we put some extra investments behind a couple of pockets of areas where we saw a competitor get aggressive with menthol offerings, and where we saw the consumer under pressure and looking to discount. And you see we’re extremely pleased with the results of those investments as Marlboro picked up a tenth quarter-over-quarter.

Pam Kaufman: Thanks, that’s helpful. And in your prepared remarks, you touched on some of the initiatives that you have to drive NJOY growth. Now that you’ve owned the business for two months, can you just elaborate on where you see opportunities to operate the brand more efficiently? And how are you thinking about the contribution from NJOY over the coming quarters and the level of investment that you’ll need to make behind the brand?

Billy Gifford: Yes, thanks for the question. You’re right. There was a month in the results for the quarter, and now we’ve surpassed another month. Our focus will be on the pod-based product, the ACE NJOY, and you heard my remarks, filling distribution gaps as well as visibility. Just to characterize that, only 3,000 stores currently in distribution carry all top three ACE pod SKUs and about 10,000 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 Ace’s brand equity to increase both brand awareness and appeal amongst adult smokers and vapors.

Pam Kaufman: Great. Thank you.

A – Billy Gifford: Thank you.

Operator: And we’ll take our next question from Bonnie Herzog with Goldman Sachs.

Bonnie Herzog: All right, thank you. Good morning, everyone.

Billy Gifford: Good morning, Bonnie.

Bonnie Herzog: I had a question on your guidance. You reaffirmed your EPS growth guidance of 1% to 4% this year, which remains pretty darn wide, especially given only five months left this year. So I guess I’m trying to understand this, and what headwinds do you see that would cause you to come in at the lower end of your guidance, which implies negative low single-digit EPS growth in the second half?