Altria Group, Inc.

Good day and welcome to Altria Group 2020 second quarter and first half earnings conference call. Today's call is scheduled to last about one hour, including remarks about Altria management and a 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 Mr. Mack Livingston. Vice President of Investors Relations for Altria Client Services. Please go ahead, sir.

Thanks, Adrienne. 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 business results. Earlier today, we issued a press release providing our results. The release, presentation, and quarterly metrics are all 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 in 2019. Our remarks contain forward-looking and cautionary statements and projections of future results. 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 to differ materially from projections. Future dividend payments and share repurchases remain subject to the discretion of Altria's Board. 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 Billy.

Thanks, Mac. Good morning, everyone, and thank you for joining us. Despite the challenges of the COVID-19 pandemic in the U.S., our employees continue to execute against their 10-year vision with strong focus and commitment. Over the first half of 2020, we believe Altria showed resilience in volatile market conditions, growing adjusted diluted earnings per share by 8.5%, driven by the outstanding financial performance of our core tobacco businesses. Combined, the smokable and old tobacco products segments grew adjusted OCI by nearly 11% and expanded adjusted OCI margins by nearly 2.5 percentage points. We've also hit key milestones and made steady progress behind our noncombustible product portfolio. Specifically, FDA's recent authorization will permit PMUSA to market ICOS and heat sticks as modified risk tobacco products with a reduced exposure claim. PMUSA launched ICOS in Charlotte, its third lead market. Helix submitted PMTAs with the FDA for all 35 on-products. which are now in scientific review. And Helix continues to expand manufacturing capacity and distribution for on. We're excited to re-accelerate our engagement with adult smokers, looking for alternatives to their traditional cigarettes in pursuit of our vision to responsibly lead the transition of adult smokers to a non-combustible future. Before diving deeper into our business results, I'd like to take a moment to address the social change underway in the United States and globally. Like many other companies, we're operating in the context of important and long overdue societal change. The recent senseless deaths of black Americans show that systemic racism and social injustice still widely exist today. Our black and brown colleagues have faced these injustices for far too long. Black lives matter, and we must take meaningful actions to drive long-lasting change. We understand the significant work ahead of us, and we have taken a number of initial steps, including holding courageous conversations that provide a safe platform for our Black colleagues to share their experiences as others seek to listen and understand. Partnering with UNIFI, our Black employee network, to identify internal opportunities and create action plans. Supporting the responsible removal of Confederate statues in our hometown. On June 19th, raising the Juneteenth flag at our facilities and declaring today a company paid holiday for healing and reflection. And committing an initial $5 million to primarily support criminal justice reform and black owned business development. Earlier this year, we established aspirational inclusion and diversity aiming points for our organization. We recognize that achieving our 10-year vision will require us to think and act differently. Our organization needs to better reflect the diversity of the world around us, and all of our employees should feel fully included and empowered to contribute to our success. These aiming points include achieving, at our VP and above levels, 50-50 gender parity, and a composition of at least 30% ethically diverse executives, which we determined using the composition of the U.S. college educated workforce and projections of population demographic changes. Currently, approximately 30% of our VPs are women and 15% are ethnically diverse. We're committed to driving change. We hold ourselves accountable and expect to report on progress periodically. This is a top priority for Altria and the communities where we live and work. Let's now turn to our results. Altria's second quarter adjusted diluted earnings per share grew nearly 1% from the prior year as growth in our adjusted operating company's income was offset by lower contributions from our equity investment in ABI. We believe a mix of macroeconomic factors in the second quarter influenced adult tobacco consumer behavior. While the pandemic led to historic unemployment rates, federal government efforts through stimulus checks and increased unemployment benefits helped to ease economic hardship for low- and middle-income Americans. And these efforts have likewise benefited our adult tobacco consumers. As a result of local restrictions, we believe adult tobacco consumers reduced purchases for non-tobacco discretionary items like gas, transit, and entertainment, contributing to an increase in available discretionary income. Adult tobacco consumers continue to make fewer trips to the store, but increased their tobacco expenditures by buying more packs and cans per trip. We also believe fewer social engagements allow for more tobacco usage occasions. All of these factors contributed to improved tobacco industry volume performance in the second quarter. Moving to our reporting segments, our smokable products segment strategy is to maximize profitability while appropriately balancing investments in Marlboro with funding the growth of our noncombustible products. In the second quarter, adjusted OCI increased 3.3%, driven by higher pricing and lower cost. which more than offset lower volumes. For the first half, the segment generated strong adjusted OCI growth of 10.9%. Second quarter reported domestic cigarette volumes in the smokable products segment decreased by 8.8%, which primarily reflected the impact of trade inventory movements in both the current and prior year periods. For the first half, reported domestic cigarette volumes decreased 1.9%. When adjusted for trade inventories, calendar differences, and other factors, first half cigarette volumes decreased by an estimated 3%. For the industry, we estimate adjusted domestic cigarette volumes were unchanged in the second quarter compared to the year-ago period and declined 1% for the first half. As we discussed in our first quarter earnings results, First quarter industry volumes benefited from pantry loading in March, and we expected to see this payback in the second quarter. Due to the macroeconomic factors we described earlier that impacted adult tobacco consumers' behavior, we saw only minimal volume payback in the second quarter as underlying demand remained consistent across the quarter. Looking over the past four quarters, adjusted domestic cigarette volume declines steadily moderated since the third quarter of 2019, driven primarily by a reduction in cross-category movement. The cigarette category has demonstrated resilience, and based on year-to-date industry volume performance, we revised our 2020 estimated four-year adjusted cigarette industry volume decline rate to a range of 2% to 3.5% from our previous estimate of 4% to 6%. Marlboro's second quarter retail share of the total cigarette category was 42.8%, down 0.6% versus the year-ago period. As you'll recall, earlier this year, we noted an increase in the number of adult smokers aged 50-plus who moved from the evaporate category back into cigarettes. benefiting volumes from Marlboro and the cigarette category. This demographic has a greater tendency to purchase discount brands than younger adult smokers, which increased discount segment share to start the year. We believe the effect of this dynamic will have a lingering impact on Marlboro's year-over-year retail share comparisons through 2020. Sequentially, Marlboro was stable in the second quarter, We believe PMUSA's strategic investments in innovative loyalty programs, resealable packaging, and its leading trade programs reinforce the strength of Marvel and position it well to deliver on its long-term profit potential. In discount, total segment retail share grew four-tenths year-over-year, but declined three-tenths sequentially to 24.5%. Sequential share losses in both branded and deep discount products drove the discount share contraction. We continue to be pleased with the performance of PMUSA's branded discount offerings and their increased profitability over time. For both our industry volume and down trading expectations, we will continue to monitor the factors we described earlier that influenced adult tobacco consumer behavior in the first half. We believe our smokable businesses have the right tools in place to help successfully navigate through these uncertain times. Turning now to our noncombustible portfolio, we're excited to continue expanding our noncombustible product offerings and making progress towards our 10-year vision. We believe all tobacco products, evapor and heated tobacco, present significant opportunities for adult smoker conversion to noncombustible products. The strategy of our old tobacco products segment is to maximize profitability over time in traditional MST through the strength of Copenhagen and to responsibly and rapidly grow on old nicotine pouches. The old tobacco products segment grew adjusted OCI by 8.1% in the second quarter and 10.5% for the first half, driven by higher pricing and volume, which more than offset investments in oil. Reported domestic oil tobacco products segment volumes increased 2.8% in the first half. When adjusted for calendar differences, trade inventory movements, and other factors, volumes were unchanged in the first half. For the oil tobacco industry, volumes increased by an estimated 6% over the last six months, driven by the growth of oil nicotine pouches. In the second quarter, total oil tobacco products segment retail share declined three percentage points to 50%. Copenhagen's retail share declined two percentage points to 32.1%, primarily driven by the growth of oil nicotine pouches. We're excited about the progress Helix is making in oil nicotine pouches. Helix's top priorities are to increase manufacturing capacity, and expand ONN's retail footprint. Helix continues to install manufacturing equipment and expects to remove capacity constraints in 2021. Retail distribution for ONN continues to steadily increase and Helix expects to continue its store expansion this year. At the end of the second quarter, ONN was sold in the top six chains for all tobacco volumes and in over 40,000 stores. an increase of nearly 43% since the first quarter. Helix is testing various go-to-market strategies for Oren, including the use of our innovative tobacco product fixture space at retail. We believe Oren is proving to be a competitive product and has been successful with both adult smokers and dippers. Based on our analysis of purchases in a large convenience chain, 37% of Oren's purchasers were exclusive cigarette smokers, as compared with 23% Brazilian. Oren's ability to attract adult smokers is important in achieving their 10-year vision, as today there are approximately 40 million U.S. adult smokers, compared with approximately 6 million U.S. adult dippers. We attribute Oren's early success to the variety of nicotine streams and flavors in its portfolio. Additionally, O.R.N. is attracting female tobacco consumers due to its spitless, white, and compact format. O.R.N.' 's rectangular-shaped packaging also distinguishes it from traditional MST products. Our data indicates that women now account for 30% of adult oil tobacco-derived nicotine consumers as compared to only 5% of adult dippers. We believe our ability to successfully navigate the regulatory process and communicate potential reduced harm benefits of our noncombustible tobacco products is critical to achieving our vision. In May, Helix submitted comprehensive PMTAs for all 35 ONSCUs with the FDA. And in June, the FDA moved the applications into scientific review. We've also started the foundational work for a future modified risk application for ON. In eVapor, total estimated volumes in the second quarter decreased 14% versus a year ago. We believe the eVapor category growth may encounter a pause over the next few years as many products will be removed from the market if PMTAs are not submitted or FDA does not grant market authorization. All manufacturers are required to submit PMTAs by September 9th. In heated tobacco, we're very pleased with the recent FDA authorization to market ICOS as a modified risk tobacco product with a reduced exposure claim. ICOS is the first next-generation product to receive an MRTP and meet the standard of benefiting the population as a whole. TMUSA is making the necessary preparations to communicate the reduced exposure claim to adult smokers. which includes developing new marketing assets and submitting them to the FDA in advance of using them. We view this as a significant step towards our vision, and we're looking forward to communicating with adult smokers the additional benefits of switching to ICOS. We're excited to get back on track with our ICOS rollout and our future expansion plans to accelerate adult smoker conversion. As many parts of the country began lifting restrictions in June, PMUSA reopened the Atlanta and Richmond Icos boutiques, and just last week launched Icos in its third lead market by opening a boutique in the South Park Mall in Charlotte. In Charlotte, PMUSA launched a more disruptive retail fixture that communicates the benefits of real tobacco, no ash, and less odor. and expects to begin heat stick distribution to retail stores in the next few weeks. By the end of August, we expect heat sticks to be in a total of 700 retail stores across the three lead markets. PMUSA will continue to leverage its ICOS retail ecosystem, including ICOS mobile, pop-up, and kiosk retail formats, which allows for more strategic and agile marketing plans. We're making several digital enhancements to the ICO's website. The website now includes virtual tutorials and the expert video chat functionality will be available this fall. These digital enhancements and the ability to have devices delivered to smokers in lean markets with the proper age verification will provide smokers with flexible options to learn about and access ICOs. Over the next 18 months, PMUSA plans to launch ICOS in four new markets with large adult smoker populations and expand the availability of ICOS devices through retail partnerships. PMUSA also plans to expand heat stick distribution to the surrounding geographies in all seven ICOS markets. PMUSA expects to use its first mover advantage to expand ICOS responsibly and in a disciplined manner. Our commercialization strategy is based on the learnings from our ICOS lead markets and PMI's international results, paired with our desire to continue avoiding use by unintended audiences. We believe that a sustained focus on the consumer journey, from awareness to conversion, is the key to achieving our vision. Word of mouth among ICOS users and their fellow adult smokers has been a critical factor to the global success of ICOS. Our commercialization approach is designed to maximize the organic growth potential of ICOS by focusing first on the densely populated metro areas and then expanding outwards as the user base grows. Our ICOS agreement with PMI has two important milestones. First, PMUSA would maintain exclusive license for ICOS upon achieving a five-tenths dollar share of the cigarette category in a single geographic area within a specified time period by April 2022. And second, our distribution agreement has an initial five-year term expiring in April 2024. The initial term has a performance objective of reaching a five-tenth dollar share of the cigarette category in a certain number of geographic areas, each within a specified time period. Once achieved, PMUSA has the option to renew for an additional five-year term. Based on the early results we've seen in Atlanta and Richmond and our robust expansion plans, we believe PMUSA will achieve the performance objectives. We're excited to continue building ICO's momentum and executing our expansion plans. Turning to guidance, we've seen outstanding performance from our core tobacco businesses in the first half. Because we now have a better understanding of COVID-19 impacts on adult tobacco consumer purchasing behavior and an additional quarter of ABI earnings contributions, we're reestablishing four-year 2020 adjusted diluted EPS guidance. We now expect 2020 four-year adjusted EPS to be in a range of $4.21 to $4.38. This range represents an adjusted diluted EPS growth rate of flat to 4% from a $4.21 base in 2019. Our guidance accounts for a range of scenarios. However, we're still facing a dynamic and quickly changing external environment and we're monitoring ABI performance. Our first half results were strong and reflected ABI's fourth and first quarter results. As we account for ABI's results on a one quarter lag, we expect the year over year equity income comparisons to be more difficult in our second half. We also continue to monitor conditions for adult tobacco consumers, including unemployment rates, disposable income, and purchasing behaviors. These factors could be influenced by government decisions on future stimulus and unemployment benefit payments. Looking beyond 2020, we will continue to balance earnings growth with making appropriate investments in pursuit of our mission. A reestablished EPS guidance reflects a 2020 full-year adjusted effective tax rate expectation in a range of 24% to 26%. Our adjusted effective tax rate increased from 24% in the first quarter to 24.4% in the second quarter, primarily driven by reduced tax benefits as a result of ABI's dividend reduction in June. I'll now turn it over to Sal to provide more detail on our financial performance, our alcohol and cannabis assets, and capital allocation.