Altria Group, Inc.

Good day, and welcome to the Altria Group 2019 Second Quarter 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. In order to ask a question, please press star followed by the number one on your telephone keypad at any time. 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 Ms. Paige Magnus, Vice President of Investor Relations and Communications for Altria Client Services. Please go ahead, ma'am.

Good morning, and thank you for joining us. We're here this morning with Howard Willard, Altria's CEO, and Billy Gifford, our CFO, to discuss Altria's 2019 second quarter and first half business results. Earlier today, we issued a press release providing these results. We're also including slides to accompany our remarks, and all of this information is available on our website at altria.com and through the Altria Investor app. During our call today, unless otherwise stated, we're comparing results to the same period of 2018. 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 our projections. Future dividend payments and share repurchases remain subject to the discretion of Altria's board. Share repurchases depend on marketplace conditions and other factors. Altria reports its financial results in accordance with U.S. generally accepted accounting principles. Today's call will contain various operating results on both a reported and adjusted basis. Adjusted results exclude special items that affect comparisons with reported results. Descriptions of these non-GAAP financial measures and reconciliations are included in today's earnings release and on our website at Altria.com. With that, I'll turn the call over to Howard.

Thanks, Paige, and good morning, everyone. Altria delivered excellent second quarter results driven by the performance of our core tobacco businesses. We grew adjusted diluted earnings per share nearly 9% in the second quarter, with each of our core tobacco segments delivering double-digit adjusted operating companies' income growth, expanding their already impressive adjusted operating companies' income margins, and maintaining momentum on their leading premium brands. The strong second quarter was a big step up from the first. as the negative smokable inventory impact in the first quarter reversed to a benefit in the second. The second quarter also saw the benefits of our cost reduction program ramp up, and we expect these will continue to build through the year. In the second quarter, we made important progress further enhancing our business platform and noncombustible product offerings for adult tobacco consumers. In April, FDA authorized PMI's ICOS product for U.S. commercialization in the heated tobacco category. And in June, we signed an agreement to acquire 80% ownership of the companies that we'll globally commercialize on, a leading product in the rapidly growing oral nicotine pouch category. We also saw an acceleration of consumer trends that we believe further validate the strategic actions that we've taken over the years. We believe that with our leading premium tobacco brands, U.S. commercialization rights to Icos, the leading global heated tobacco product, our investment in Juul, and pending transaction for Ahn, we're best positioned with a strong and resilient combustible business and the best noncombustible portfolio in the U.S. tobacco market. Let's turn first to our smokable product segment. The smokable product segment generated strong adjusted operating companies income growth of 11% in the second quarter, primarily driven by the benefit of higher pricing and the impact of our cost reduction efforts. For the first half, the smokable segment delivered 5.7% adjusted operating companies income growth. PMUSA is pleased with Marlboro's continued stability with retail share of 43.3% unchanged versus the year-ago quarter, and up two-tenths sequentially. Marlboro's performance continues to be supported by its leading brand equity, bolstered by investments in product expansions, packaging innovation, and digital loyalty and trade programs. In discount, L&M is performing in line with expectations. and we are pleased with its increased profitability over time. We believe discount category dynamics continue to primarily reflect a churn between branded discount and deep discount offerings. The overall discount category grew a tenth sequentially in the quarter to 24.2%, and the discount category remains essentially in line with historical share. Turning to cigarette volumes, the first half of 2019 saw large inventory fluctuations. Wholesalers depleted PMUSA inventories by 400 million units in the first quarter and rebuilt inventories by 500 million units in the second quarter, the net result being a 100 million unit benefit to reported volumes in the first half compared to a 400 million unit depletion in the first half of 2018. We estimate that the adjusted industry decline rate in the second quarter was 6%, up from 5% in the fourth quarter of 2018 and first quarter of 2019. Over the first half, the adjusted cigarette industry decline rate was an estimated 5.5%. Let me provide you with some perspective on the factors driving category volume declines. Over the past 12 months, U.S. cigarette industry volumes declined by an estimated 5%. This represents a half percent increase versus the 12 months ended in the first quarter of 2019, which we estimate is primarily due to increased adult smoker movement to the eVapor category. We believe this reflects both increased availability of satisfying eVapor products that began mid-year 2018 and higher levels of exclusive eVapor use. After considering the latest information, we are revising our 2019 estimate of U.S. cigarette industry volume decline rate to 5% to 6% from a range of 4% to 5%. We have also considered the combined effects of the current acceleration in adult smoker movement across categories and the recent strong national momentum behind raising the legal age to purchase all tobacco products to 21, and our estimate of cigarette declines through 2023. Specifically, we expand our five-year compounded annual average rate of category decline estimate to 4% to 6% for our previous range of 4% to 5%. It's informative to compare smokable business results versus historic category volume declines. In the first half, adjusted category volumes were down 5.5%, and the smokable segment grew adjusted operating company's income 5.7%. By comparison, over the past four years, adjusted category volumes declined approximately 3% on a compounded annual basis, and the smokable segment grew adjusted operating company's income 5.2%. We believe this demonstrates how our strong and resilient smokeable platform can deliver profit growth in the current volume decline environment. Solid profit growth is also demonstrated in our smokeless product segment results. USSTC is successfully executing against its strategy of maximizing income while maintaining momentum on Copenhagen over time. USSTC is one of the most profitable non-combustible tobacco businesses in the world and offers a portfolio of satisfying products with the potential for harm reduction. USSTC grew its adjusted operating company's income by 10.8% in the second quarter and 9.4% for the first half, reflecting consistently strong results so far this year. And Copenhagen's category-leading retail share grew by three-tenths to 34.6% in the second quarter. USSTC's smokeless volumes decreased an estimated 2% in the first half when adjusted for calendar differences and trade inventory movement. USSTC estimates that smokeless industry volume decreased 1.5% in the last six months. We believe these declines reflect increasing adult tobacco consumer interest in both evapor and oral nicotine pouches. In June, we announced an agreement to acquire 80% ownership of the companies that will commercialize on oral nicotine pouches through Helix Innovations, a newly formed operating company. Ahn offers a total of 35 SKUs representing the broadest oral nicotine pouch portfolio in the U.S. market today. We expect the transaction to close in the second half of this year. In advance of closing, Altria Group Distribution Company began expanding availability of the Ahn portfolio to select retailers this month. Upon closing, our focus for Ahn will include further expanding retail distribution and visibility building U.S. production capacity, building the on-brand through adult tobacco consumer engagement, and preparing PMTAs for the on-portfolio. We're excited about adding on to our business platform and pursuing a leadership position in this new and rapidly growing category. Also in non-combustibles, ICOS has shown to be a leading product internationally. We're pleased to have access to an inhalable alternative that represents the first next-generation tobacco product to receive FDA premarket authorization. We're ready to begin commercializing Icos in the U.S. and are committed to its success. We expect the first Icos store to open in Atlanta in September, along with other retail touchpoints, including mobile retail units and retail kiosks, all restricted to adult smokers. We plan to have the Icos website live in August, where adult smokers will be able to pre-order their Icos devices for pickup at the Icos Atlanta store. Initially, we expect heat stick distribution to be in approximately 500 Atlanta area stores. We are very excited to bring Icos to adult smokers in the U.S. and intend to capitalize on this first mover advantage. Turning to eVapor. The category continues to grow as adult smokers increasingly find satisfying options in the category. We, of course, participate in the eVapor category through our investment in JUUL. After initial trial and experimentation with eVapor, adult vapor participation in the category declined from 2014 to 2016. The number of adult vapors re-accelerated upon the availability of more satisfying pod-based products. Based on our 12-month moving data, we estimate there are now 13.8 million adult vapors as of June 2019, up from 12.2 million at the end of 2018. Importantly, that growth trend coincides with a trend towards more exclusive use in the category. According to our adult consumer tracking data, we estimate more than 7 million adults vape and do not smoke as of June 2019. In the first half of 2019, we estimate that evaper category volume grew by approximately 40% year-over-year across open and closed systems and all trade classes. Since 2017, And even considering more recent competitive product expansions, our data indicates that Juul has driven nearly all of the category growth. Juul's share of the category across both open and closed systems grew to 48% in Q2, up from 44% in the first quarter, and its full year 2018 share of 33%. Juul continues to be the category leader despite the removal of certain flavors at retail that caused a first quarter sequential volume slowdown. While competitors have responded by increasing the availability of non-traditional flavors, we believe their tactics will ultimately be addressed with full implementation of FDA's ENDS guidance later this year. Internationally, Juul continues to make progress expanding to additional markets. Since April, Juul launched in several new markets, which include Ireland, South Korea, Austria, and the Philippines. Juul plans to launch in additional markets by the end of this year. It's still early days for Juul international distribution. However, we are working to establish a measurement system that appropriately captures trade channels in overseas markets and provides a more complete view on consumer takeaway. Providing thoughtful solutions to address youth evaper use is a top priority. We know that the future viability of these products is at risk unless more is done to reverse the underage evaper use trend. We strongly believe that raising the legal age nationwide to purchase all tobacco products to 21 is one important step toward addressing this issue. So far, our advocacy has helped drive significant progress at both the federal and state levels. Earlier this month, Ohio became the 18th state to make 21 the legal age of purchase, and now over half of the U.S. population is covered by legislation requiring 21 as the minimum age. Bipartisan federal legislation has also been introduced with broad support, so the effort has strong momentum. We believe it is critical to preserve evapor products as an option for the more than 13 million adults who use them and the millions more adult smokers who are interested in noncombustible alternatives. Earlier this month, in the case pending against FDA and federal court in Maryland, the court revised PMTA deadlines for new tobacco products on the market as of August 8, 2016, to be May 2020. According to the court order, new products for which applications have not been filed within this period will be subject to FDA enforcement discretion. We expect the new timelines to present a challenge for all companies impacted by the court's ruling. Juul is investing significant resources in preparing their applications, and we are offering regulatory consulting services. In summary, our 2019 plans remain on track. We're operating in a rapidly changing industry. We've long anticipated consumer adoption of new types of products with potentially lower risk. This is one of the main reasons we supported FDA regulation many years ago, to facilitate this change. And it's why we've invested in the leading noncombustible products. The dynamics during the first half of the year further validate our strategy. With increasing success migrating adult smokers to noncombustible products, We're pleased that our strong core businesses are well positioned to provide profit growth through this transition. We continue to believe that we're building a business platform that enhances our ability to deliver solid performance in returns to shareholders over time and across a variety of scenarios. We reaffirm our guidance to deliver full year 2019 adjusted diluted earnings per share of $4.15 to $4.27. This range represents a growth rate of 4% to 7% from a 2018 adjusted diluted EPS base of $3.99. I'll now turn it over to Billy to provide more detail on our performance and other investments. Thanks, Howard, and good morning, everyone.