Altria Group, Inc.

Q2 2021 Earnings Conference Call

7/29/2021

spk11: Good day and welcome to the Altria Group 2021 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. To ask a question during this time, simply press star then the number one on your telephone keypad. 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 Mack Livingston, Vice President of Investor Relations for Altria Client Services. Please go ahead, sir.
spk05: Thanks, Christelle. Good morning, and thank you for joining us. This morning, Billy Gifford, Altria's CEO, and Sal Mancuso, our CFO, we'll discuss Altria's second quarter and first half 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. During our call today, unless otherwise stated, we're comparing results to the same period in 2020. 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.
spk06: Good morning, and thank you for joining us. Altria delivered outstanding results in the second quarter thanks to the continued strength of our tobacco businesses and the hard work of our highly talented employees. Our teams have continued their commitment to moving beyond smoking by deepening their understanding of tobacco consumer preferences, expanding the awareness and availability of our smoke-free product portfolio, and amplifying our voice on harm reduction within the scientific and public health communities. Their passion in pursuit of our vision gives me even greater confidence that we can responsibly lead the transition of adult smokers to a smoke-free future. Let's now turn to our business results. Altria grew its second quarter adjusted diluted earnings per share 12.8% to $1.23, primarily through the strength of our tobacco businesses. The smokable product segment continued to deliver on its strategy of maximizing profitability in combustibles, while appropriately balancing investments in Marlboro with funding the growth of smoke-free products. Marlboro continued to lead the cigarette category, while second quarter adjusted operating companies' income grew 11%. For the first half, the segment generated adjusted OCI growth of 5.3%. In the oral tobacco product segment, Copenhagen continued to lead the MST category and delivered strong profit performance. The oral tobacco product segment grew adjusted OCI by 3.5% in the second quarter and by 3.3% for the first half as strength in MST more than offset investments in support of Ong. The oil nicotine pouch category continued to grow, and Helix remained focused on expanding capacity, broadening distribution, and driving awareness and trial. The team has successfully achieved unconstrained manufacturing capacity for the current U.S. market And as the category grows, Helix plans to further increase on capacity ahead of expected demand. Additionally, Helix and AGDC broadened on retail distribution to 105,000 retail stores, which represents approximately 80% of U.S. oral tobacco volume and 70% of U.S. cigarette volume. In the second quarter, on retail share of oral tobacco was two percentage points, up three-tenths sequentially. In a heightened competitive environment, we believe Helix has made consistent progress against its 2021 goals, having achieved unconstrained manufacturing capacity, increased distribution, and nearly doubling on retail share over the first half. Helix deploys a broad suite of marketing tools to continue to build on-brand equity and transition smokers. At retail, Helix uses disruptive point of sale and trial and awareness generating promotions. Retail initiatives are complemented by one-to-one communications and digital marketing channels, which we believe provide a more immersive and educational on experience. These communications are tailored based on consumer preferences and insights to better resonate with individual smokers and dippers. Turning to heated tobacco, PMUSA expanded Icos and Marlboro heat sticks to retail stores across Georgia, Virginia. PMUSA expanded Icos and Marlboro heat sticks to retail stores across Georgia, Virginia, North Carolina, and South Carolina. This over two thirds of US cigarette volume is sold through the convenience store channel. So we believe the ability to effectively educate smokers about the ICO system in C stores is critical to the long term success of the product. Although early, we're encouraged that nearly half of second quarter ICOs device sales came from convenience stores. This highlights the impact of our sales force and their strong relationships with key retail partners. In line with our strategy to build ICOs in large metro markets, PMUSA expanded ICOs and marble heat sticks to Northern Virginia, its fourth metro market. We believe our commercialization team continues to improve its execution as we move into new metro markets. In early Northern Virginia metro market results, device penetrations as a percent of the smoker population has surpassed the performance of the Atlanta and Charlotte rollouts. We've discussed for some time the importance of bringing a strong commercialization package to smokers to help them on their journey. In the Northern Virginia market, we have deployed our full range of flexible marketing tools such as kiosk, mobile units, and experts. We also opened an I-Coast boutique in the Tysons Corner Mall, which is the center point for the area. We believe the favorable results in Northern Virginia reflect the strategic locations and enhanced execution within these marketing channels, the availability of the I-Coast 3 device, and built up awareness from the Richmond market. We previously stated the importance of responsibility and discipline in our ICOS expansion approach. PMUSA has been mindful of the pending International Trade Commission case, which may result in a ban on the importation of ICOS and marble heat sticks into the United States. Due to this uncertainty, PMUSA has delayed further expansion of ICOS and marble heat sticks. Each quarter, we make progress toward our vision. As we do so, we strengthen the capabilities that we believe are necessary to effectively transition smokers to our current and future innovative product portfolio. These capabilities include a flexible manufacturing system, which allows us to quickly redeploy our highly skilled employees and existing footprint in support of smoke-free products. a robust consumer engagement system that includes enhanced data collection, a portfolio of smoker engagement tools, and our trade partner relationships, and strong regulatory capabilities, including the talent to develop compelling PMTAs for smoke-free products, and the establishment of required post-market surveillance infrastructure. Tobacco harm reduction must be grounded in sound science, encouraged by reasonable regulation, and executed responsibly. We believe it's critical to have transparent and constructive dialogue about the science and evidence supporting tobacco harm reduction with all stakeholders. So far this year, we've published 10 articles in scientific journals, participated on four panels, and presented 24 posters at scientific and policy conferences. Unfortunately, not all stakeholders believe that industry participants should be part of these exchanges. Recently, a scientific organization decided to ban industry participation at its annual conference. We believe this is a mistake and that limiting the exchange of scientific research impedes tobacco harm reduction and hurt smokers looking for less harmful products. We will continue to advocate for open and inclusive dialogue among all stakeholders, which we believe is essential to addressing the significant public health opportunity in front of us. Let's now turn to guidance. With our strong financial performance in the first half, we've raised the lower end of our four-year 2021 adjusted diluted EPS guidance to be in the range of $4.56 to $4.62. This range represents a growth rate of 4.5% to 6% from a $4.36 base in 2020. This updated guidance reflects continued confidence in our tobacco businesses investment in smoke-free products, and the expected impact of the recently announced agreement to sell our St. Michelle Wine Estates business. I'll now turn it over to Sal to provide more detail on the business environment and our results.
spk00: Thanks, Billy. In the second quarter, the consumer behaviors we've observed over the past few quarters largely continued. Although overall consumer mobility increased, Workplace mobility appeared to be relatively unchanged, which we believe contributed to more tobacco usage occasions during the quarter as compared to pre-pandemic levels. Additionally, disposable income remained elevated, partially due to the residual effects of the third federal government stimulus package in March. At retail, we estimate that compared to pre-pandemic levels, the number of tobacco consumer trips to the store continued to be depressed, but tobacco expenditures per trip remained elevated. We are keeping a close eye on tobacco consumer behaviors, and we will continue to provide our insights on the factors impacting those behaviors as the year progresses. Moving to our businesses, The smokable product segment expanded its adjusted OCI margins by 0.6 percentage points to 58.4% for the second quarter, and by 1.5 percentage points to 58% for the first half. This performance was supported by PMUSA's Revenue Growth Management Framework. which leverages advanced analytics to guide the strategic and efficient allocation of our promotional resources. As a result, PMUSA achieved strong net price realization of 8.3% in the second quarter and 8.1% for the first half. Smokable segment reported domestic cigarette volumes increased by 1.4% in the second quarter, For the first half, reported domestic cigarette volumes declined by 5.3%. When adjusted for calendar differences, trade inventory movements, and other factors, second quarter and first half domestic cigarette volumes declined by an estimated 4.5% and 4% respectively. At the industry level, we estimate that adjusted domestic cigarette volumes declined by 5% in the second quarter and by 4% in the first half. Marlboro sustained the strong retail performance demonstrated in recent quarters and benefited from the overall strength of the premium segment in the second quarter. Marlboro's second quarter retail share of the total cigarette category was up 1 tenth sequentially to 43.2% and up 5 tenths versus the year-ago period. In discount, total segment retail share in the second quarter increased one-tenth year-over-year, but declined three-tenths sequentially to 25%. Sequential share losses in both branded and deep discount products drove the contraction, as consumers benefited from the federal government's third stimulus package and continued heightened promotional spending among competitive premium brands. We continue to observe some elevated promotional activity within the branded discount segment during the second quarter. And as a result, Marble's price gap to the lowest effective price cigarette remained elevated at 37%. In cigars, Middleton continues to perform well, and Black & Mild maintained its leadership position within the profitable tip cigar segment. Reported cigar shipment volume increased by 9.6% in the first half. Turning to the oral tobacco product segment, segment adjusted OCI margins decreased to 71.7% for the second quarter, and to 71.9% for the first half. We expect oral tobacco products margins to be impacted by increased investments behind on and shifting mix between MST and oral nicotine pouches. We remain extremely pleased with the strong overall margins for the segment. Total reported oral tobacco product segment volume increased by 1.8%, and by 1.2% for the second quarter and first half, respectively. The segment's volume growth was driven by on, which more than offset a moderate decline in MST volumes. When adjusted for trade inventory movements and calendar differences, segment volume increased by an estimated 1% for the second quarter and 0.5% for the first half. Oral tobacco product segment retail share for the second quarter declined 2.2 percentage points versus the prior year and three-tenths sequentially to 47.8% due to the continued growth of the oral nicotine pouch category. As Billy stated, Copenhagen maintained its leadership position in the MST category, and we continue to work diligently To execute our plans to transition smokers to on. Any vapor total estimated volumes in the second quarter increased 15% versus a year ago and 2% sequentially as a result of heightened competitive activity. The category continues to undergo a transition period. as FDA prepares to make market determinations on the millions of PMTAs filed by the September 2020 statutory deadline. We continue to believe that evapor products can play an important role in tobacco harm reduction and that a sustainable evapor category will be one that consists solely of FDA authorized products. we expect the category's long-term trajectory to be determined by regulatory decisions, legislative and tax policy, and innovation that best addresses smoker and vapor preferences. In alcohol, we recorded $113 million of pre-tax adjusted equity earnings from ABI in the second quarter. This was an increase of approximately 15% from the year ago period and represents Altria's share of ABI's first quarter 2021 results. In wine, St. Michelle's second quarter adjusted OCI increased approximately 80% to $27 million. St. Michelle's adjusted OCI growth was primarily due to higher volumes, including from the flagship Chateau St. Michelle brand and luxury brand Stag's Leap, as wine consumer preferences trended to more premium products. Three weeks ago, we announced the definitive agreement to sell our St. Michelle Wine Estates business in an all-cash transaction for a purchase price of approximately $1.2 billion and the assumption of certain St. Michelle liabilities. We expect the transaction to close in the second half of this year, and we expect to use the net proceeds for additional share repurchases subject to approval by our board. We believe this transaction demonstrates Altria's continued commitment to value creation for shareholders and to our vision, as it allows our management team to maintain its focus on responsibly transitioning adult smokers to a smoke-free future. St. Michelle and its talented employees have built an outstanding portfolio of premium wine brands, and we wish them future success. And in our all other operating category, we continue to make progress on our wind down of Philip Morris Capital Corporation. As of June 30th, the net finance assets balance was $261 million, down $59 million since the end of last year due to rents received and asset sales in the first and second quarters. We expect to continue reducing this balance in 2021. and expect to complete the PMCC wind down by the end of 2022. Turning to our equity investment in Kronos, we recorded a pre-tax loss of $21 million, representing Altria's share of Kronos' first quarter results. In the second quarter, Kronos announced that it had purchased an option to acquire an ownership stake in Pharmacan of approximately 10.5% on a fully diluted basis. Pharmacan is one of the largest vertically integrated cannabis companies in the United States. The option exercise will be based upon various factors, including the status of US federal cannabis legalization and regulatory approvals. In support of our investment in Kronos, We continue to advocate for a federally legal, regulated, and responsible U.S. cannabis market, and we're encouraged by the current momentum towards federal legalization. Next, let's discuss capital allocation. The highly cash-generative nature of our tobacco businesses contributes to our strong balance sheet. We believe this, in turn, allows us to invest in our vision while rewarding shareholders with cash returns. We were active in the capital markets during the second quarter as we repaid $1.5 billion of notes upon maturity, paid approximately $1.6 billion in dividends, and repurchased 6.6 million shares, totaling $325 million. We have $1.35 billion remaining under the current authorized $2 billion share repurchase program, which we expect to complete by June 30th, 2022. Because the current program is limited to $2 billion, additional share buybacks in connection with the sale of St. Michelle are subject to Board approval. Moving to corporate responsibility. we disclosed several updates in the ESG section of our release this morning. These updates included following through on our commitment to transparency around Altria's workforce data and publishing our ESG data tables and a report on value chain responsibility. As a reminder, additional corporate responsibility information can be found on altria.com. 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 Altria.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?
spk11: Thank you. Once again, as a reminder, if you would like to ask a question, please press star, then the number one on your telephone keypad at this time. 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. Our first question comes from the line of Pamela Kaufman with Morgan Stanley.
spk08: Hi, good morning. Good morning, Pamela. So I wanted to ask about your plans to delay ICOS expansion in the U.S. until you have more clarity from the ITC. I guess it's understandable that you would delay expanding it until you have more visibility. But I guess I wanted to understand what your plans are in existing markets because it seems like you're still operating as usual there. And then can you give more detail on what your options will be if there's ultimately an adverse decision from the ITC?
spk06: Yeah, thanks for the question, Pamela. Yeah, I want you to interpret the delay correctly. So the expansion markets that we're in, so the four states, the existing markets, including Northern Virginia, we're staying in and we'll complete the state expansions. It was just beyond that where we had previously announced by the end of the year we'd be in geographies representing 25% of cigarette volume. We wanted to let you guys know and our investors know that we're delaying that until we get some certainty around that. As far as plans, if it should ultimately go against us, and you know the process. I'm sure you're well aware of the process that we will step through. related to the actual case. But we're working closely with PMI on contingency plans. I think it's a bit too early to share the details of what those contingency plans are or could be. And so we'll share those when it's appropriate.
spk08: Great. Thank you. And then I just wanted to ask about how you're thinking about industry growth in the second half of the year and kind of discuss the puts and takes that might influence the category relative to the performance in the first half. And, you know, in relation to that, you know, we're seeing an inflationary pricing environment with companies across the CPG space intending on raising prices. I guess, what are the implications for cigarette volumes as you think about cross-elasticity relative to other categories? And secondly, does that in any way influence the ability to raise cigarette prices when you see higher prices elsewhere?
spk06: Yeah, there was a lot in that question, Pamela, so I'll try to dissect it and make sure I get all the pieces. I think when you think about, and I'll refer to cigarette volume, I know you said industry volume, so I'm assuming that's what you're talking about. I mean, I appreciate the fact that you recognize that we had a strong first half. I think when you think about the puts and takes or the headwinds, tailwinds, and these could go either way, I think the major factors that we're going to be watching for impact to volume are really the stay-at-home practices of our consumer. Do they decide that or are they required by their employer to go back to the work site or do they still have stay-at-home practices? I think you've seen various news on unemployment rates and any associated stimulus. How does that play out for the remainder of the year? I think it's important to keep an eye on cross-category movement. We know that the FDA has a lot of applications in front of them for PMTAs. So we'll see what their decisions are and how they can impact it. But most importantly, it's the consumer purchasing behavior. As you know, we believe they added nicotine occasions to their day. And so how do they think about that in this, whether it's a resurgent or vaccination rates or how the vaccine gets rolled out? How does that impact consumer purchasing behavior? Your question related to pricing is, and first I'll talk about the input side. As far as we really haven't seen any material inflation impact the input side of our business. As far as decisions that we take into consideration when we make pricing decisions, it's really the economic health of our consumer. How are they feeling right now? They still have elevated discretionary income. It's the brand strength, and you can see Marble's been performing extremely well, and we're very pleased with the strength of that brand. And I think last and utmost is company objectives and how are we thinking about investing in our innovative product portfolios and expanding that. And we mentioned some of the investment areas earlier. So those are really the factors that go into our pricing decisions.
spk08: Great. Thank you. Thank you.
spk11: Your next question comes from the line of Bonnie Herzog with Goldman Sachs.
spk02: Thank you. Good morning. Good morning, Bonnie. Hi, Billy. I actually wanted to circle back on, you know, the decision to delay the expansion of ICOs and maybe come at it from a different angle. I guess, you know, first, I assume your plan stepped up spending this year will also be lowered. If so, I guess I'm surprised you weren't able to take up the high end of your EPS growth guidance range this year. So could you maybe touch on that? And then finally, I'd like to understand how you think the delay in rolling out ICOs might impact your ability to deliver and execute on your 10-year vision to accelerate the transition of smokers to a noncombustible future.
spk06: Yeah, Bonnie, so let's deal with the guidance first. You know, as we say all along, we run a range of scenarios when we establish guidance at the beginning of the year. It's no different as we progress through the year. We run a range of scenarios. So as far as any individual category, there are always puts and takes. And so that's all incorporated in our guidance. As far as a delay, I want just to be clear on the delay in your question about the 10-year vision. I think when you think about the 10-year vision, it's important to step back and remember it's 10 years out. And so that's a long time. If you just take where we are today and look back 10 years, whether you think about the industry or Altria itself, There's been significant change in 10 years. And so we thought it prudent to finish the expansions we were in the midst of, but to delay those, knowing that we have 10 years. And we know the consumer wants to move, and we want to have the products that they want to move to. And so certainly there could be bumps in the road, but we think we have a great plan and feel confident about achieving our 10-year vision.
spk02: Okay, that's helpful and all fair. But, you know, just thinking about what you just mentioned and thinking about, you know, the beginning of the year, as we looked forward this year, there was going to be a level of stepped up spending to kind of pivot your business. And, you know, how do we reconcile that now? I mean, I guess I'd just like to understand that. Should I assume that the planned spending has been pulled back? This year, as you've delayed the rollout of ICOS, or are you still continuing to spend aggressively behind it in just these markets?
spk06: Sorry, Bonnie, I didn't mean to cut you off. Yeah, so when you think about it, I appreciate the fact that you are recognizing that we can be agile in our investments. We run a range of scenarios. We're prepared for what takes place in any of our categories to be able to adjust accordingly. and redeploy. And so we feel good about it. Yeah, certainly there was a level of investment in our base plan, but we run a range of scenarios around that base plan at the beginning of the year so that we're able to adjust. We have areas of the business that we've mentioned previously that we were investing in. And so we feel very good about the guidance we provided today and being able to bring up the bottom end of that guidance with more certainty.
spk02: Okay, that makes sense. And then just wanted to clarify something else on ICOs. I know you have this agreement, of course, with Philip Morris, and you shared some of those details. I think it was actually a year ago. So I'm curious, can you share with us if you've reached, you know, 50 bps of dollar share in any of the markets where ICOs is sold, which was, you know, defined in the agreement with PM? And the reason I'm asking, because I think that was one of the areas that you needed to maintain or to get to to maintain your exclusive distribution agreement for ICOs?
spk06: Yes, Bonnie. The answer is yes. We believe we have achieved it related to the exclusivity. We've shared that data with PMI. And that's why you saw us moving to other expansion areas.
spk02: Perfect. And then final question, if I may, just on switching gears to oral tobacco. Just any color you could share with us on your strategy with promos in your oral tobacco business. I'm asking, you know, as I look at your price realization, which has stepped down, I guess, a fair amount. So I'm wondering, you know, how big of a concern this could be in terms of sustaining, you know, any future top line growth for this business. You know, in other words, I guess I'm wondering, are you finding that you need to promote more than... anticipated to possibly drive any volume growth and or trial? Thanks.
spk06: Yeah, it's a great question, Bonnie. I think when you think about our approach in novel oral, we have been behind a manufacturing capacity constraint, so we've been somewhat limited. Now that that's behind us, and we'll keep it behind us as best we can, it allows us to turn our marketing and brand colleagues loose, and they can really be disruptive in the marketplace to disrupt the consumer as they're making their purchasing decisions. They can fully engage with consumers with one-to-one and digital channels. And so we look forward to being able to turn them loose, which they are now, and have them disrupt in the marketplace. I think whenever you think about a new category, you have to think about there is going to be competitive activity, and we've seen it in this space. And so you're going to want to dislodge those consumers. But at some point in time, that typically settles down, even if you take it outside of tobacco. being able to achieve tobacco-like margins in the future. Right now we're focused on consumer engagement and making them aware of our own product in the marketplace.
spk11: Okay. Thank you so much for that.
spk06: Thank you.
spk11: Your next question comes from the line of Vivian Azler with Cowan. Hi. Good morning.
spk06: Good morning, Vivian. Good morning.
spk10: So just one last housekeeping item on ICO. Sorry to belabor the issue, but can you give us a sense of the anticipated timing of any kind of decision from the ITC, please?
spk06: Yeah, so when you think about the ITC, just to level set on where we're at in that process, so you think about that in May we had the administrative law judge found in favor of the two of the plaintiff's patent challenges. And so they recommended that the administrative law judge recommended the importation process. for ban on the ICO system. But you saw earlier this week that the ITC accepted review of the ALGA findings and recommendations on certain issues, and that included the patent infringement claims and the scope of remedies. And they will review the benefit to public health. And so it's a bit different with the ITC. If you think about the factors around ICOs, It's the only inhalable smoke-free product authorized by the FDA. And in authorizing ICOs, the FDA found that the product would benefit the public health. And so we would expect to have a final ITC decision in September or October. And then you'll remember the process after that is it can be – it goes to presidential review, and that can take up to a period of 60 days after the ITC decision is final. And then any decision from the ITC can be appealed in the U.S. Court of Appeals for the federal circuit. And so that will be the process that plays out depending on how things progress.
spk10: That's really helpful. Thank you for that. Moving on to your smuggle segment, you called out heightened competitive activity as being a contributor to – the expanding Marlboro price gap. Seemingly, you should be fine with that, given that Marlboro gained year-over-year share. But how are you thinking about kind of the durability of that to the extent that you see heightened competitive activity persist, given that you do have some incremental resources at your disposal with pared-back investments on ICOs? Would you be willing to reinvest?
spk06: Yeah, we think of those decisions somewhat independently, Vivian, but as far as your question specifically to smokable and marble specifically, we're greatly pleased with the performance we've seen in marble over the last four to five quarters. And when you look at the price realization that was realized in the smokable segment, and then you look at the performance of marble in that segment, we're very pleased with where we're at. And so it's something, to your point, we always monitor, but we feel good about how the strategy is playing out thus far.
spk10: Perfect. Thanks very much. Thank you.
spk11: Your next question comes from the line of Chris Grohe with Stiefel.
spk01: Hi, good morning.
spk06: Good morning, Chris.
spk01: Good morning. I just had a question for you, just a very quick one on inventory, and it was a positive this quarter. And I know you don't like to talk about, you know, kind of future inventory moves, but if you could characterize where inventories are this quarter, And how do you believe that sets in relation to where inventories have been historically?
spk06: Yeah, I think it's a great question, Chris. And when you look at where we're at the end of the second quarter and you look back through history, maybe it's slightly elevated for the second quarter, but it's certainly not elevated to the positions we've seen wholesalers carry. With the pandemic and the way it's evolved up and down, we've seen it bounce around a lot. You'll remember through time we typically see it level out, but certainly the pandemic has had it bounce around a bit more than what is typical.
spk01: And amidst it bouncing around during the pandemic, inventory rates have been higher overall, is that fair to say, than where you would expect them to be?
spk06: I would say maybe slightly higher. I wouldn't call it out as something significant, but maybe slightly higher. I think also, you know, wholesalers in the beginning of the pandemic, as well as retailers, maybe got caught short a bit on inventory because they were nervous about what the pandemic was going to do to them. I think they saw consumers, as Sal mentioned in his remarks, make larger purchases. So I think they're taking a position to have a bit more inventory just to meet consumer demand.
spk01: Okay. And I had a second question, just thinking when you thought there couldn't be any more questions on ICOs, I had one more. And that just was to understand, there were a couple markets, especially the earlier markets like Atlanta, and I think you said North Carolina, where sequential share was down a little bit. And you talked about moving resources to Northern Virginia. I just want to understand that concept, meaning that in this early stage, I would have expected more overall dollars being committed and therefore not just moving resources around. But I want to understand kind of how you looked at that and then how you redeployed resources to Northern Virginia from some of those initial markets.
spk06: Yeah, I appreciate the question, Chris. And let me take a couple of things that went into that consideration. I think first and foremost, you remember we had flexible marketing processes. tools at our disposal, whether you consider it kiosks or mobile units. And so you move those from launch market to launch market. I think the other thing that's important to remember is we've always said we wanted to put our best commercialization foot forward. And as we got through to Charlotte, remember when we first launched Charlotte, we had the 2.4 device that did not have an MRTP authorization, nor did we have authorization on 3.0. And so as you move into a market, you're gonna put your best foot forward. We feel like that is the right package. And I think you've seen the results from the learnings as well as those both version three and the MRTP authorization in Northern Virginia. And so it doesn't mean we won't go back and relaunch in some of those markets with those added benefits to the consumer and consumer engagement, but we thought it was prudent to move that. And then the last note is as you move from densely populated areas, to a fully expanded across the state, you evolve your commercialization practice. And we know to launch across the total U.S., we're going to have to have that C-store experience. And so it's perfecting that. And we feel good about, as you heard in the remarks, the amount of device sales that we had through U.S. through the C-Store channel. You know, if you step back and just look in the second quarter, consumer takeaway overall volume was up 40%. And so I would consider that a great achievement.
spk01: Yeah. So really in that regard, Billy, the most recent market, at least in this case or where you stand today, is the best representation of your selling model. And we don't need to necessarily look back at other markets because you're kind of changing as you move into these new markets. Is that fair to say?
spk06: I think that's fair to say. I don't know if I would characterize it as – certainly we feel like that's the best commercialization package we've had to date. I think it's too early to read in to say, okay, this is exactly what we're going to do as we go forward. We're going to continue to get learnings and evolve. But, yes, the best commercialization package we've had to date is that that we put in Northern Virginia.
spk01: Okay. I did have one other quick follow-on, which is on oral tobacco. And just to think – At what point – or I think you've talked about before having on available in more stores that sell oral tobacco products, meaning whether it's 90% or 100%. So should we expect that just to continue to kind of build through the second half of the year now that you're unconstrained on manufacturing capacity? Yeah.
spk06: Yeah, I think right now you can consider us focused on really disrupting the consumer and making them aware of the qualities of one in the marketplace, engaging with them through the one-on-one and digital channels. We feel good about where we're at, but we always assess the amount of stores we're in, and you'll see adjustments through time.
spk11: Okay. Thanks so much for your time.
spk06: Thank you.
spk11: Your next question comes from the line of Gaurav Jain with Barclays.
spk07: Hi. Good morning, Billy. Good morning. Hi. So I have, you know, a couple of questions. So one is on the cigarette industry volume decomposition, you know, the table which is in your quarterly metrics. So, you know, the additional cross-category movement is only minus 0.3% over the last 12 months. And we know that oral nicotine pouches have gained about 1% point of share. And then, you know, based on the data you have on slide 23 of your presentation, it seems e-cigarettes have also gained one percentage point of share. So that would imply that the cross-category movement is like, it has significantly reduced versus what we saw in 2018, 2019. Is that a correct way of looking at this data?
spk06: Yeah, that is correct, Raghav. When you think about it, remember in secular decline, to your point, about 1% was cross-category. And then anything above that 1% outside of secular decline that's cross category is what we call out in that decomp. And so you can see in the chart that as of 6-32-21, When it 12 months ended, it was 0.3 above that. And so that is really what is the impact to the cigarette industry from cross-category movement. And it includes novel oral. It includes e-vapor. I think when you think about e-vapor, if I understand the gist of your question, really what's going to impact how e-vapor progresses in the U.S. And we believe it can play a significant role in harm reduction. It's really three things. It's regulatory decisions, and you'll recall all of the products are with the FDA for their review. It's the legislative and tax policy. You know, how will excise taxes evolve in that space? And to Sal's earlier remarks, innovation. How will companies think about innovating in the future and applying for authorization from the FDA? So those will be the three major factors that play. But yes, it is less than what we experienced in 2019.
spk07: But then I guess that leads to the question that is it leading to additional consumption of nicotine and are there additional consumers coming in and where are these consumers coming from, which leads to a lot of other questions as well.
spk06: Yeah, I think when you look at the factors underneath, whether you think about the total nicotine space, and you've seen us before volume equivalize and stack that up. Historically, if you look over the past five years, down about 1%. So that would say overall consumption is still coming down, not increasing. Certainly during the pandemic, and we've highlighted to you guys and investors, is that we saw consumers add nicotine occasions to their day. which we believe was stay-at-home practices and some of those factors. And so certainly there has been some short-term nicotine occasions added to the day, but overall total volume when you sack up nicotine on equivalent volume basis has still been declining.
spk07: Sure. And if I could ask one quick follow-up on pricing. So your key competitor is clearly pricing, you know, quite aggressively right now, which is helping you and everybody else. And, you know, your pricing realization is also quite strong. not as much as your key competitor. But I would have thought that you will be taking this benefit and investing more on the discount side of your business and stabilizing some of the volume share losses there. So could you just help us understand how you're thinking on the discount side of things?
spk06: yeah and i appreciate the question i think when you step back and think about the strategy we deploy in that category it's to maximize profitability through time while balancing investments on marble and funding the future growth categories and so that's what guides us as far as competitive pricing and worried about you know what they took or who went first those are not the factors i i really gave the factors earlier to pamela it's economic health of our consumer It's brand strength and company objectives. And so that's the way we think about our pricing decisions in the marketplace. Competitive actions don't factor into that. I think when you think about our pricing, and look, I would say over 8% both in the quarter and for the first half is pretty nice. based on the results we've seen across the entire company here. We're pleased with that. Remember, we have two factors that come into our price realization. One is list price, which you're referring to. The other is as we implement, and some people refer to it as revenue growth management. How do we become more efficient with the retail promotional dollars we have in the marketplace? And so I think you see those two factors play into our price realization. Well, thanks a lot, Billy. Thank you.
spk11: Your next question comes from the line of Michael Lavery with Pipal Sandler.
spk06: Thank you. Good morning.
spk04: Good morning, Michael. So I actually still have an ICOS question, too. Can you just start by confirming for the ITC decision, would that apply to the device only? And then related to that, if it does... Is there any potential for production in the U.S., or is that just really not – is there not the ecosystem for that? Because it would be just an import ban, correct?
spk06: That is correct. The ITC deals with importation of products, and so you're correct in that assessment. As far as if you read the details around the administrative law judge's decision – They made decisions on both the device and heat sticks, and so it would apply to both. As far as contingency plans, Michael, as I stated earlier, it's a bit too early to get into the details of the contingency plans, and we'll be sure to come back to you as those are ready to be unveiled. Thank you.
spk04: Okay, sure. And just on the device sales in C-Store, obviously just a huge jump this quarter. Can you just give a sense of some of the drivers there? Because I know for the other two quarters, they were available at least on a limited basis or at least in some areas. It's the kind of device you don't really impulse buy most likely, and it's a high price point, at least in isolation. Is it driven primarily by digital engagement that sends the consumer in? Is it direct mail, paper mail? How do you really see this boost taking shape?
spk06: Yeah, it's a great question, Michael, and it's something that we're very proud about. I think it speaks to the strength of our ADDC, our sales force, and the relationships they build at retail. So when you think about it, and it includes those other channels, one-to-one, digital, regular paper mail, it includes all of those. Our team is doing a great job of engaging with the adult smoker. But I think when you think about what AGDC has been able to do is really look at our retailers, think about how to display the product at retail. To your point, our consumers are more of a 10 to 15-second decision. How do you disrupt them at retail where they're making that purchase decision and really give them the guided trial? You know, for instance, they built relationships with retail clerks that were smokers previously and walked them through this transition from smoking cigarettes to to using the heated tobacco product. And so I think when you think about that, now you have the retail clerk can speak from personal experience to smokers to also disrupt their purchasing decisions. And so it's really still about the guided trial. It is about engagement through those channels, but it's disrupting them right at the point of purchase.
spk04: Okay, really interesting. Thanks. And just one more on, can you give a sense of usage rates? And specifically what I'm curious about is, you know, how much a smoker who switches maintains a similar usage rate? Does it go up or down? And I assume obviously there's people who completely switch and some dual usage and sort of a progression there. But do you have a sense of some of the consumer dynamics around that?
spk06: it's certainly something that we're monitoring and we're trying to monitor it as close as we can on a individual by individual basis because to your point people are at different places in their journey and so i think it's too early to get into here's exactly the usage rate of somebody that comes from cigarette versus somebody that comes from dipping but it's certainly something we're tracking and understanding because you've got to meet the consumer where they're at in their journey and help them to continue that transition over and so Again, I completely understand your question, but I think it's just too early to get into the details.
spk04: Okay, great. Thanks so much.
spk06: Thank you.
spk11: Thank you. And your last question comes from the line of Priya Origupta with Barclays.
spk09: Hi, this is Tiffany Al for Priya. Thanks for taking our question. We're wondering, given the recent movement in the rates backdrop, how are you thinking about the opportunities to collectively address and refinance some of your maturities over the next two to three years?
spk00: I'm sorry. I missed the end of that question. Could you repeat it? I apologize.
spk09: Definitely, yes. Given the recent movement in the rates backdrop, how are you guys thinking about opportunities to proactively address and refinance some of your maturities over the next two to three years.
spk06: Yeah, I think I was able to hear it. I think when you think about it, we're going to assess those market conditions. You know, we're certainly not going to give guidance exactly what we're going to do with any maturities. But we look at the market conditions when we see maturities. You know, Sal would tell you that with our cash-generated businesses, it gives us flexibility when we have maturities upcoming based on what the market conditions are and how we would assess those.
spk09: Thank you.
spk00: Yeah, I agree with Billy, and I would point out that, you know, we have taken a very balanced approach to capital allocation when you look at 2021, including we did execute an opportunistic liability management transaction earlier in the year that allowed us to extend maturities on low-interest debt while managing our maturity towers.
spk09: Thank you very much.
spk06: Thank you.
spk11: At this time, I would like to turn the call back to Mac Livingston for closing comments.
spk05: Thank you all for joining us. Please contact the investor relations team if you have further questions. Have a great day.
spk11: Thank you all for joining us. Please contact the investor relations team if you have further questions. You may now disconnect.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

Q2MO 2021

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