Altria Group, Inc.

Good day and welcome to the Altria Group 2020 Third 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. 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 Investor Relations for Altria Client Services. Please go ahead, sir.

Thank you, Maria. Good morning, and thank you for joining us. This morning, Billy Gifford, Altria's CEO, and Sal Mancuso, our CFO, will discuss Altria's third 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. 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.

Thanks, Mac. Good morning and thank you for joining us. Altria continued to demonstrate its resilience during the third quarter while navigating the challenges presented by the COVID-19 pandemic. We've maintained our focus on employee well-being to make sure they feel supported in these challenging times. And our people continue to move our organization forward. They're advancing Altria's commitment to address systemic racism and social inequities, empowering each other, and leading their efforts to build a more diverse organization. And they're doing all of this while continuing to deliver the fantastic business results as you saw in our earnings release this morning. In the third quarter, our tobacco businesses delivered strong financial performance once again, and we made steady progress against our 10-year vision. Combined, the smokable and oral tobacco products segments grew third quarter adjusted operating companies' income by more than 9 percent and expanded adjusted OCI margins by 2 percentage points. At the same time, we're pursuing our vision to responsibly lead the transition of smokers to a noncombustible future. During the third quarter, Helix expanded the retail distribution of ON by an additional 16,000 stores. Our talented regulatory affairs team completed its critical support services for JUUL's PMTA submissions, and PMUSA began to market ICOs and heat sticks as modified risk tobacco products using the FDA-authorized reduced exposure claim. Altria's third quarter adjusted diluted earnings per share was unchanged at $1.19. For the first nine months of the year, adjusted EPS grew 5.6 percent to $3.37, driven by the strong financial performance of our tobacco businesses. Let's discuss the third quarter in more detail, beginning with an update on U.S. tobacco consumers. The external environment remained dynamic, and we believe a mix of macroeconomic and social factors influenced consumer behavior and contributed to the sequential stability of tobacco industry volumes. An increasing number of Americans, including many tobacco consumers, faced economic hardships. by the end of the third quarter as unemployment rates remained high and the enhanced federal unemployment benefits expired at the end of July. Executive orders temporarily reestablished some of these benefits at lower amounts, but the length and timing of federal funding available to eligible consumers varied by state. However, we believe non-tobacco discretionary spending on items like gas and entertainment remain below pre-pandemic levels, helping offset some of the economic headwinds facing tobacco consumers. At retail, we estimate the number of tobacco consumer trips to the store rebounded in the third quarter and that tobacco expenditures per trip remained elevated versus the year-ago period. We also continue to believe that consumer stay-at-home practices allowed for more tobacco usage occasions in the quarter. Turning now to our businesses. The smokable products segment delivered strong financial and marketplace results in the quarter. The segment delivered third quarter adjusted OCI of $2.8 billion, up nearly 10% from the same period last year. And for the first nine months, smokable segment adjusted OCI increased 10.5% to $7.7 billion. Smokable segment reported domestic cigarette volumes decreased by 0.4% in the third quarter. When adjusted for trade inventory movements, segment cigarette volumes declined by an estimated 1%. For the first nine months, we estimate that smokable cigarette volumes decreased by 2% on an adjusted basis. At the industry level, we estimate that adjusted domestic cigarette volumes increased by 1% in the third quarter compared to the year-ago period. And for the first nine months of 2020, we estimate that adjusted industry volumes were unchanged versus the prior year. Based on year-to-date performance and expectations for continued category resiliency, we're revising our industry estimates and now project four-year 2020 adjusted cigarette industry volumes to be in a range of flat versus the prior year to down 1.5%. Marlboro's third quarter retail share was 43.3%, unchanged versus the prior year, and up 5 tenths sequentially. We believe Marlboro's improved third quarter performance can be attributed to several factors. As we described last quarter, we expect Marlboro's 2020 retail share to be pressured by the cross-category movement back into cigarettes that we observed earlier this year. And while this dynamic continued to affect Marlboro's year-over-year share in the third quarter, it was more than offset by favorable trends in the premium segment of the category, including increased smoker preference for premium products during these disruptive times Marble also benefited in the quarter from lower promotional spending among competitive premium brands. In discount, total segment retail share was 24.3% in the third quarter, up two-tenths versus the year-ago period, driven by deep discount products. Sequentially, however, the discount segment contracted for the second consecutive quarter due to share losses in both branded and deep discounts. We're continuing to monitor tobacco consumer behavior and believe that our smokable businesses have the right tools in place to deliver against their strategy of maximizing profitability in support of our vision. Turning to our noncombustible portfolio, our companies have made steady progress against their expansion plans for Oren and Icos. These products, together with USSTC's leading moist smokeless business and our investment in JUUL, present significant opportunities for smoker conversion to noncombustible alternatives. In oral tobacco, we believe we have an unmatched portfolio of MST and oral nicotine pouch products. Our company's offerings with the Copenhagen, Skoll, and Orn brands provide tobacco consumers with a wide range of satisfying formats, flavors, and strengths. We believe OIN is a strong product proposition and has been successful with both smokers and dippers. OIN was sold in 56,000 stores at the end of the third quarter, up 40% from the second quarter, and more than tripled the store count from the end of last year. In stores with distribution, OIN achieved a retail share of 2.1 percentage points of the old tobacco category in the first nine months of 2020. Helix continues to test different trial-generating promotions and has benefited from strong trade partnerships. In the third quarter, Helix tested promotions using retailer platforms such as Circle K's Lift System and the Murphy Drive Rewards program. We believe these tests were highly successful as they generated significant trial amongst smokers and dippers. We're very pleased with these results and our Helix team is continuing its efforts to retain these consumers and optimize future promotional activity. We're encouraged by the early performance of ONN and believe the breadth of its portfolio sets it apart in the marketplace. Moving to eVapor. The September 9th deadline for PMTA submissions represented an important milestone in the regulatory process for the eVapor category. We believe it's important that eVapor remain an alternative for smokers and believe that a sustainable eVapor category will be one that consists solely of FDA authorized products. We encourage FDA enforcement against noncompliant manufacturers. including those who continue to sell eVapor products without a PMTA submission. We estimate that total eVapor volumes decreased by 13% for both the third quarter and the first nine months of 2020. We believe the eVapor category will continue to undergo a transition period over the next few years as FDA makes market determinations on the thousands of PMTAs followed before the September deadline. In July, JUUL submitted PMTAs for its device and four JUUL pod SKUs. As part of its application, JUUL also included its plans to address underage use of its products. The FDA reported that it has accepted JUUL's application and moved it into scientific review. We believe JUUL submitted a thorough application due to the critical support services provided by our talented regulatory affairs team. In September, JUUL announced a strategic update, which included its plans for a significant global workforce reduction, evaluation of resource allocation, and the possibility of exiting various international markets. In preparing our third quarter financial statements, we performed a valuation analysis of our investment in JUUL. which considered both its international prospects and current U.S. eVapor category dynamics. As a result of this analysis, we've recorded a $2.6 billion impairment to our Juul investment, bringing its carrying value to $1.6 billion as of September 30th. We're now projecting lower Juul revenues over time due to lower pricing assumptions and delays in JUUL achieving previously forecasted operating margin performance. These changes are due to JUUL's revised international expansion plans and the evolving U.S. eVapor category and associated competitive dynamics. We continue to believe that eVapor products, including JUUL, can play an important role in tobacco harm reduction. In the heated tobacco category, PMUSA continues to expand ICOs responsibly and in a disciplined manner. We believe that a relentless focus on the consumer journey from awareness to conversion is the key to success in this category. Going back in history, one of the reasons we supported the Tobacco Control Act was that it provided a pathway to communicate with smokers about the relative risk of FDA-authorized noncombustible products compared to cigarettes. And with the recent authorization of a reduced exposure claim on the ICO system, PMUSA is now marketing the ICO's device and heat sticks as modified risk tobacco products. Today, PMUSA has primarily used its robust digital assets and tobacco consumer database to communicate with smokers, including through websites, email, and direct mail. We believe that the combination of these modified risk communications and PMUSA's more disruptive retail fixture will significantly enhance the quality of ICOS awareness among smokers. As smokers move along the journey to engagement and trial, PMUSA is providing flexible options to learn about ICOS and purchase devices. PMUSA now offers a video chat option for age-verified smokers to use their mobile phones and connect directly with ICO's experts for product education and support. Online, the ICO's website offers smokers additional options, including access to virtual tutorials and the ability, with proper age verification, to order devices for at-home delivery. PMUSA is also expanding the availability of devices into the convenience store channel. And beginning next month, PMUSA expects ICOs devices to be available in select Charlotte convenience stores. Turning now to guidance. We're very pleased with the strong financial performance of our tobacco businesses. Based on their year-to-date results and insight into an additional quarter of ABI earnings contributions, we're narrowing our four-year 2020 adjusted diluted EPS guidance. We now expect to deliver 2020 full-year adjusted diluted EPS in a range of $4.30 to $4.38. This range represents an adjusted diluted EPS growth rate of 2% to 4% from a $4.21 base in 2019. Altria's tobacco businesses have delivered excellent results in 2020, and credit for our success belongs to our talented employees. Through hard work and dedication, Altria's employees have balanced multiple priorities while making meaningful contributions to their communities and their company, and we greatly appreciate their efforts. I'd also like to welcome Dr. Ellen Strallman to our Board of Directors as announced this morning. Dr. Strallman's extensive medical and R&D experience will be a tremendous asset to the company as we pursue our 10-year vision. I'll now turn it over to Sal to provide more detail on our financial performance and capital allocation.