Altria Group, Inc.

Good day and welcome to the Altria Group 2022 second quarter and first half earnings conference call. Today's call is scheduled to last about one hour, including remarks by Altria's management and a question and answer session. 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.

Thanks, Ashley. Good morning, and thank you for joining us. This morning, Billy Gifford, Altria's CEO, and Sal Mancuso, our CFO, will discuss Altria's second quarter and first half business results. Earlier today, we issued a press release providing our results. The release, presentation, quarterly metrics, and our latest corporate responsibility reports are all available at altria.com. During our call today, unless otherwise stated, we're comparing results to the same period in 2021. Our remarks contain forward-looking and cautionary statements and projections of future results. Please review the forward-looking and cautionary statements section at the end of today's earnings release for various factors that could cause actual results to differ materially from projections. Future dividend payments and share repurchases remain subject to the discretion of 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. 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's tobacco businesses performed well in a challenging macroeconomic environment for the first half of the year. The smokable product segment delivered solid operating company's income growth behind the resilience of Marlboro, and our moist smokeless tobacco brands continued to drive profitability. We also continued to make progress toward our vision through the investments we laid out in January, which included supporting the expansion of ONN. We are encouraged by ONN's retail momentum and significant share growth since achieving unconstrained capacity last summer. We believe this is a pivotal point in the US tobacco industry. The FDA has the opportunity to create a mature, regulated marketplace of smoke-free products that can successfully realize tobacco harm reduction and improve the lives of millions of smokers. We share the FDA's goal to transition smokers away from cigarettes, but we continue to believe that harm reduction not prohibition, is the best path forward. My remarks this morning will focus on three topics. Our core tobacco businesses, including the macroeconomic backdrop and potential combustible tobacco product regulation, the smoke-free opportunity in the U.S. and our smoke-free product portfolio, and our continued confidence in our vision. I'll then turn it over to Sal, who will provide further detail on our business, and financial results. Let's begin with a review of the macroeconomic backdrop and its impact on US tobacco consumers. In the second quarter, rising gas prices and inflation continued to pressure tobacco consumers' disposable income, resulting in volume declines across the tobacco space. However, we believe that tobacco consumers adapted their purchasing patterns across a variety of goods and services to compensate for the increases in prices. Some of the tactics used by consumers to manage their spending included only partially filling their gas tank and shifting their tobacco purchases from multi-pack towards single-pack purchases, particularly among discount smokers. We also saw signs of continued brand loyalty in the tobacco space. In May, we conducted research to understand how tobacco consumers were managing their spending in several categories, including tobacco, alcohol, groceries, and household items. Our research indicates that tobacco consumers were more likely to stick to their preferred brand regardless of price in the tobacco category compared to other categories. Additionally, tobacco consumers sought price relief in other categories before doing so within the tobacco category. We believe that this prioritization is reflected in the sequential stability of marble retail share despite greater economic pressures on consumers. We believe inflation and the rise in gas prices was partially offset for some consumers by a strong job market and wage growth. Overall, average wages increased 5.2% in the second quarter, compared to an average of 8.6% increase in CPI. And for some occupations, including the service industry, wage growth outpaced inflation. We continue to monitor tobacco consumer behaviors and changes in marketplace conditions, such as the declining gas price that we have observed in recent weeks. and we will continue to provide our insights as the year progresses. These macroeconomic factors contributed to accelerated cigarette volume declines in the second quarter and first half, which Sal will discuss in his remarks. In combustible regulatory news, the FDA proposed rules that would ban menthol cigarettes and characterizing flavors in cigars. The FDA has already received over 200,000 comments on the proposals, and we expect to submit our comments by the August 2nd deadline. The FDA will need to address all of these comments before advancing to the next step in the rulemaking process. As our comments will make clear, we believe that there are compelling reasons for the FDA to reconsider its proposed rules relating to menthol and cigars. Additionally, the Biden administration announced plans for future FDA rulemaking to develop a product standard that would set a maximum nicotine level for cigarettes. If and when the FDA proceeds with rulemaking, we expect to be fully engaged in the multi-year process. We believe harm reduction is the best approach toward reducing smoking and improving public health, and according to a nationwide survey, others agree. Based on our research, a majority of the surveyed public policy professionals, smokers, and general population adults support the concept of tobacco harm reduction and prefer this policy approach over tobacco prohibition. But to achieve harm reduction, we believe manufacturers must develop and the FDA must authorize an array of potentially reduced harm products that can appeal to and transition smokers. This brings me to my next topic, the smoke-free opportunity in the US and our smoke-free product portfolio. Today, over 20 million US smokers seek less harmful alternatives to cigarettes. Our strategy is to deliver a compelling portfolio of smoke-free products that offers a range of satisfying product choices for smokers and to responsibly lead them to these alternatives. Our approach spans three of the most promising smoke-free categories with the potential to reduce harm, oral tobacco, evapor, and heated tobacco. In oral tobacco, we're encouraged by the growth of the novel oral products, which comprise more than a fifth of total industry oral tobacco volume in the second quarter. The category grew 6.8 share points year-over-year, with ON representing more than 40% of this growth. In the second quarter, ON reported shipment volume increased nearly 60% versus the year-ago period, and ON retail share of oral tobacco increased eight-tenths sequentially, reaching 4.9 share points in the second quarter. This represents a growth rate of almost 150% year-over-year. These strong results were driven by increased adoption of oil, increased brand awareness, and higher levels of investment. Helix achieved unconstrained oil manufacturing for the current US market in the second quarter of 2021. Over the four quarters since then, Helix Enhanced the retail visibility and awareness of O.R.N., leading to an over 70% increase in consumer awareness. Tripled O.R.N. repurchases and continued to increase trial using transition marketing and data-driven strategies. And grew O.R.N. retail share to be a top five U.S. oral tobacco brand and solidified its position as the second largest oral nicotine pouch brand in each region of the U.S. More recently, Helix launched the new Carry On Equity Campaign, which encourages smokers to make progress in their transition journey. The campaign highlights that by converting to ON, smokers can have nicotine satisfaction without having to step away from their daily routines, which addresses the social friction they experience with smoking. Looking ahead, Helix expects to use its understanding of the smoker journey to smoke-free products to drive repeat purchases and adoption among smokers. We're excited about the performance of OWN and the opportunity for future growth. I'll now move to the eVapor category, which we continue to believe will be significantly influenced by regulatory actions. In the second quarter, Total estimated e-vapor volumes declined 2% versus a year ago and 7% sequentially as a result of decreased volume in the vape store channel, a reversal of the trend we observed in the first quarter. Currently, slightly over half of the category's volume is comprised of pod-based products such as Juul and Vuzalto. Within eVapor, disposables represent the fastest growth segment since January 2020, which corresponds to when the FDA issued ENDS guidance banning flavors only in pod-based eVapor products. Many of these disposable brands, including Puff Bar, contain synthetic nicotine. Recent legislation, which we strongly supported, clarified the FDA's authority to regulate tobacco products containing nicotine from any source. Manufacturers of synthetic nicotine products were required to obtain FDA authorization by July 13th to continue legally marketing their products. So far, no synthetic nicotine product has been granted authorization, and the FDA has committed to pursuing compliance and enforcement action against companies found to be marketing, selling, or distributing illegal synthetic nicotine products. Thus far, the FDA has authorized only 23 total eVapor applications, accounting for only eight products and approximately 1% of estimated eVapor category volume. Further, the FDA has only authorized tobacco flavored eVapor products, most of which were for sigilite-style products, which we believe generally do not meet smoker expectations or deliver a satisfying product experience. Given the limited number of authorizations today, we believe that the e-vapor category is still in its early phases. But with the support of reasonable regulations, we believe it could play an important role in harm reduction. Moving forward, we hope to see timely science and evidence-based determinations on pending PMTA applications and further enforcement on non-compliant manufacturers. In the second quarter, Juul products received marketing denial orders, or MDOs. Earlier this month, the FDA administratively stayed the Juul MDOs, citing unique scientific issues that warrant additional FDA review. The administrative stay temporarily suspends the MDOs during the additional review, but does not rescind them. Regarding our investment in JUUL, we recorded for the second quarter a non-cash pre-tax unrealized loss of $1.2 billion as a result of a decrease in the estimated fair value of our investment. The decrease in fair value was driven by several factors, including uncertainty, created by the FDA's action related to JUUL, and uncertainty relating to JUUL's ability to maintain adequate liquidity. As of June 30th, our estimated valuation is $450 million, which reflects a range of regulatory, liquidity, and market outcomes. Under the terms of our relationship agreement with JUUL, we have the option to be released from our non-compete obligations under several conditions. including the fair value of our investments, if the fair value of our investment is not more than 10% of the initial carrying value of $12.8 billion. However, if we elect to be released from our non-compete obligations, we would lose many of our investment rights, including our consent rights, our preemptive rights, and most of our board designation rights. At this time, we continue to believe that these investment rights are beneficial to us. Therefore, we have not opted to be released from our non-compete obligations at this time, but retain the option to do so in the future in accordance with our agreement with JUUL. We continue to believe that e-vapor products, including JUUL, can play an important role in tobacco harm reduction. In heated tobacco, our teams remain in discussions with PMI related to ICOS. We continue to believe in the potential of the heated tobacco category in the US. Our plans remain on track to finalize designs by year end for two product platforms within heated and old tobacco, and then begin regulatory preparations. Our journey towards responsibly transition adult smokers to a smoke-free future continues. And while we may face near-term challenges We believe that the tobacco harm reduction opportunity remains in front of us. As the leader in the U.S. tobacco industry, we have continued confidence in our ability to achieve our vision for several reasons, including a robust manufacturing, sales, and distribution system, and understanding of U.S. tobacco consumers. Our science-based approach to tobacco harm reduction, which we believe is aligned with tobacco consumers, society, and the FDA, our portfolio of products and investments across the most promising smoke-free categories, and our significant cash flows and flexible balance sheet, which support our investments and shareholder returns. With these in mind and the resiliency of our organization, we believe we can lead the U.S. in moving beyond smoking. I'll now turn it over to Sal to provide more detail on the business environment and our results.

Thanks, Billy. Altria grew with just the diluted earnings per share by 2.4% in the second quarter and by 3.5% in the first half across the challenging macroeconomic environment that Billy described. 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. The segment grew its adjusted operating company's income by 0.6% in the second quarter and by 2.9% in the first half. Adjusted OCI margins expanded by 0.7 percentage points to 59.1% for the second quarter and by 1.3 percentage points to 59.3% for the first half. This performance was supported by robust net price realization of 11.5% in the second quarter and 10.4% for the first half. I'll remind you that manufacturer price realization does not reflect retail price change for smokers. For example, Marlboro net retail pack price increased 5.6% in the second quarter compared to last year. Smokable products segment reported domestic cigarette volumes declined by 11.1% in the second quarter and 8.9% in the first half, primarily due to changes in consumer purchasing behavior as a result of increased gas prices and inflation. When adjusted for trade inventory movements and other factors, second quarter and first half domestic cigarette volumes declined by an estimated 10% and 9% respectively. At the industry level, we estimate that adjusted domestic cigarette volumes declined by 8.5% in the second quarter and by 7.5% in the first half. As Billy mentioned, Marvell displayed resiliency during a period of continued uncertainty for consumers. In the second quarter, Marlboro's retail share of the cigarette category grew a tenth sequentially to 42.7%, while declining four-tenths versus the year-ago period. Additionally, Marlboro grew its share within the premium segment to 58.1%, an increase of three-tenths sequentially and five-tenths versus a year ago. Moving to the total discount segment, total share was flat sequentially, even as gas prices rose significantly from the first to second quarter. Discount increased 1.3 percentage points year over year to 26.4% as we lapped a period when the discount segment contracted from smokers having higher disposable income. Additionally, We observed increased churn between the branded and deep discount segments as a result of a deep discount manufacturer's exit from the marketplace earlier this year. In cigars, reported cigar shipment volume decreased by 5% in the second quarter due to macroeconomic pressures on consumer disposable income, trade inventory movements, and other factors. However, Middleton continued to provide a strong contribution to smokable segment financial results. In the oral tobacco product segment, adjusted OCI and adjusted OCI margins contracted in the second quarter and first half due to several factors, including declines in MST volumes, increased investments behind on, and unfavorable mix. We remain pleased with the strong overall margins for the segment as we made progress with ON. At the industry level, total oral tobacco volume declined 0.5% over the past six months. We continue to observe steady growth from the oral nicotine pouch category, but this has been offset by declining MST volumes due to the challenging macroeconomic environment and its effect on consumer behavior, consumer movement to oral nicotine pouches, and other factors. Total segment reported shipment volume decreased by 4.4% for the second quarter and by 3.2% for the first half. The segment's volume decline was driven by declines in MST volumes, partially offset by the growth of ON. When adjusted for trade inventory movements, Segment volume declined by an estimated 2.5% for the second quarter and 1% for the first half. The total oral tobacco product segments retail share for the second quarter contracted two-tenths sequentially and one share point versus the prior year to 46.7%. Copenhagen is celebrating its 200th anniversary this year. We're extremely proud of Copenhagen's long history and the fantastic employees who have supported the brand over the years. To them, we say thank you. After 200 years, Copenhagen remains the number one dip brand because of your hard work, dedication, and passion. To honor this impressive milestone, the team introduced Coke Rewards, the first and only national rewards program for an MST brand. Under the program, dippers can earn points by entering codes from their Copenhagen cans and can redeem them for coupons or rewards. We're excited about Coat Rewards and its potential contributions to Copenhagen's sustained leadership in MST. Turning to our investment in ABI, We recorded $124 million of adjusted equity earnings in the second quarter. This was an increase of approximately 9.7% from the year-ago period and represent Altria's share of ABI's first quarter 2022 results. We remain committed to creating long-term shareholder value through the pursuit of our vision and our focus on significant capital returns. We demonstrated this commitment in the first half by acquiring intellectual property and other assets for a multi-substrate heated capsule technology from POTA, paying approximately $3.3 billion in dividends and repurchasing 21.4 million shares, totaling $1.1 billion. We have approximately $750 million remaining under the currently authorized $3.5 billion share repurchase program, which we expect to complete by the end of this year. Our balance sheet remains strong, and as of the end of the second quarter, our debt-to-EBITDA ratio was 2.3 times. In August, we expect to retire $1.1 billion of notes coming due with available cash. And lastly, Our financial plans for the year remain on track, and we reaffirm our guidance to deliver 2022 full year adjusted diluted EPS in the range of $4.79 to $4.93. This range represents an adjusted diluted EPS growth rate of 4% to 7% from a $4.61 base in 2021. 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?

Thank you. And once again, as a reminder, if you would like to ask a question, please press star key followed by the number one on your stone phone. At this time, investors, analysts, and media representatives are now invited to participate in the question and answer session. We will take questions from our investment community first. Our first question comes from Chris Groh with Seafold. Please go ahead. Your line is open.

Thank you. Good morning.

Good morning, Chris.

Good morning. Billy, I have a question for you, and you made a good point about it's clear we're at a very pivotal moment for this category. And I was hoping to get just some better perspective from you on how you're investing today to be able to internally develop RRP, reduced-risk products. You've got some uncertainty around your positions in Juul and Icos, and there's risk those are no longer in your portfolio, certainly just a risk at this point. But I guess I just want to get a sense of what you're doing internally, and you talked about having a product ready at the end of this year. And then to what degree maybe M&A could play a bigger role in giving you a better position in RRPs going forward?

Thanks for the question, Chris. I think when you think about where we're investing, certainly we invested in our innovation process. We have the internal development going on, and I've spoken previously about changing that innovation process so that it's laser-focused on the consumer and It monitors the marketplace, but I think before we were, I would characterize it as almost chasing the market versus sitting side by side with the consumer. And so there's a lot of consumer interaction, almost to the point of co-developing with the consumer in those categories that we can develop in. To your point, we can't develop prior agreement with Juul in the eVapor category, but it's something we continue to monitor that marketplace and understand consumer satisfactions with the various products in the marketplace. We monitor the entire globe as far as alternative products to both influence how we think about internal development, but looking for products that could be emerging in the other markets as well.

And so would M&A be an important contributor, you think, going forward for Altria's position in this category?

It certainly won't be off the table, Chris, but I think for the investments we're making in our internal development, we feel good about the pipe water products that we have.

Okay. And I just have one other question in relation to pricing in the cigarette category. It's been larger than I expected, and it's occurred sooner than I expected, at least this year. And I guess in this environment where there's, you know, obviously a more burdensome kind of macroeconomic factor that's weighing on your volume, are you seeing a greater shift to some of the lower-priced or more heavily promoted marble varieties that And do you see a need to have to increase promotional investments in light of the heavy pricing coming through in this environment?

Yeah, Chris, it's a good question, and it's something we monitor. But I think when you look at the sequential performance of Marlboro and even the discount category, you saw sequential stability. Marlboro actually grew a tenth, and the discount category stayed flat. So when you think about that, the changes that were experienced first quarter to second quarter, from a standpoint of the tools that we put in place with Advanced Analytics and We feel good about the position. You know, Sal raised an important point. When you think about the impact to the consumer and you think about industry-wide, call it a 5% to 6% price increase, that's well below the inflation they're experiencing in other categories. And you saw the results in their remarks where we went to the consumer and talked about how they think about the tobacco categories and other categories, and you see they continue to prioritize the tobacco category at the top of their list. And I think that's telling. And you saw it. You know, we get a lot of questions about, I think you have to step back and think longer term on this. If you think about Marlboro Share, we're right where we were pre-pandemic. Certainly during the pandemic, as they received additional funds, whether that be from government or unemployment or things of that nature, it reinforced that Marlboro's the aspirational branch. So Marlboro benefited during that period. Certainly, we've given a little bit of that share back and feel satisfied with where Marble is. The teams in Advanced Analytics, as well as the Marble team, putting those into the marketplace, the stability of Marble is incredible.

Okay. Thank you for all the color. I appreciate it.

Thank you, Chris.

We'll take our next question from Pamela Kaufman with Morgan Stanley. Please go ahead. Your line is open. Hi. Good morning.

Hi, Pamela. So industry cigarette volumes have weakened considerably during the second quarter. You highlighted the headwinds facing smokers and how they're adjusting their purchasing behavior. I guess, how are you thinking about the outlook for cigarette volumes over the remainder of the year? And then related to that, how much more pricing do you think that consumers can tolerate just given the So far, we really haven't seen a meaningful acceleration in trade down to the discount segment. It's been consistent over the last couple of quarters. Do you see an accelerated risk of trade down within the category?

Yeah, let me see if I can unpack that a little bit, Pamela, and if I miss anything, please follow up. I think when you think about the cigarette volume declines that we saw through the first half, you look historically, and when you see the The environment, the macroeconomic environment change for our consumer, you see that they make short-term adjustments and then they adapt to it through time. I think certainly through the first half, and we saw a little bit of a downshift in gas prices as we entered the third quarter, I think we've seen a high correlation in gas prices just because our consumer is usually filling up their vehicle and then going in and making those purchases. But again, I think the research that we did is telling that the consumer is adjusting those behaviors to be able to prioritize their tobacco choices mostly in the C-store or gas stores. I think from a standpoint of pricing, and Pamela, we've shared this with you before, if you look at minutes worked in the U.S. and benchmark that around with other countries around the world that have mature tobacco categories, when you look at that, you still see that the U.S. is at the low end of that scale So certainly we feel like there's room to price, but that's something that we monitor. You remember that the factors that we think about when pricing is the strength of the brand. Certainly corporate objectives play a part in that. But then we think about the economic health of the consumer and what those competitive activities do. And I think it's important to mention here, again, the tools that we put in place. You know, we put out The price gap, we put out kind of national metrics. But with the advanced analytics, we're able to use those tools and be very specific. So it could be different in Cleveland, Ohio, than in Dallas, Texas, because those tools allow us to adapt the retail promotions we put in the marketplace, depending on what the individual consumers are feeling in that local area.

Thanks. That's helpful. And definitely, I just wanted to ask about how you're thinking about the implications to your relationship with Philip Morris in the heat, not burn category, given their planned acquisition of Swedish Match. And how are you preparing for changes in the competitive landscape in the U.S.? ?

Well, Pamela, you know this as well as I do, that it's always been a competitive marketplace. We've always had major players. Certainly, this brings a new major player to the marketplace, but we feel like we have the tools in place. Certainly, we're going to evaluate everything, make sure that we understand or at least game plan how PMI would approach the marketplace using the products of Soudish Match and adapt accordingly. I don't want to go much further than that for competitive reasons. I think from a standpoint of Heat Not Burn, I shared in my remarks that we're continuing discussions with them about ICOAST.

Thank you.

Thank you.

We'll take our next question from Acer Vivian with Cohen. Please go ahead. Your line is open.

Hi. Good morning.

Good morning, Vivian.

I wanted to touch on Billy, so your commentary around The improved trial through the expanded Helix manufacturing capacity was interesting. I was curious if you could just expand and touch on repeat and how you're measuring that given the promotional intensity in the category. Thank you.

Yeah, Vivian, it's a great question. I think when you think about, Owen, our research teams are really looking at repeat purchases versus trial offers, and we want to have increases in both. If you think about repeat purchases, we're very pleased with where we're at. Certainly to your point, as we're investing, you have those purchases that take place, and you want to see the concreteness of that. And we feel very pleased and enjoy the repeat purchases that we have. But we felt like there was still opportunity to drive awareness, and you've seen the increase in awareness we've been able to drive. And it's specific to the adult cigarette consumer. The product is very satisfying to the adult cigarette consumer, and we feel like there's still opportunity for trial there.

Understood. Thank you. And then my other question is just on the industry outlook. I know you guys have shied away from offering industry volume guidance for a while now, and I fully appreciate why. But if we look at the supplemental disclosures, estimated industry volume declines have nearly doubled over the course of the last 12 months against a very challenging macro backdrop, and that does account for it. in the table that you've disclosed. I'm just curious, though, has your thinking around the underlying macro drivers changed at all?

It has not, Vivian. When you think about it, and you can take those quarters that we provide and stretch them back, and you saw macroeconomic was a benefit not that many quarters ago. So you certainly see the swing. It's no different than the swings we see through history. You have the macroeconomic can be a benefit at times. We saw gas prices in 2015 were a huge benefit. And so I think the only thing I would point out is we're seeing a higher correlation with gas prices and purchasing behavior. That would be the only – because historically we tried to correlate gas prices to it, and they were moving nickels and dimes at a time. I think you're seeing faster swings in gas prices, so there's a higher correlation to consumer behavior as they adapt to the short-term nature of those changes.

Understood. That's helpful. Thank you so much.

Thank you.

And we'll take our next question from Bonnie Herzog with Goldman Sachs. Please go ahead. Your line is open.

All right. Thank you. Good morning, everyone. Good morning, Bonnie. I just have a question on your guidance. You maintain your full year mid-single-digit EPS growth guidance, but that does imply the second half EPS growth will need to accelerate significantly. versus the first half to hit the midpoint of your full year guide. So just want to hear from you, what gives you the confidence this is going to happen, especially during an economic slowdown? I mean, are your expectations that this will be driven from greater net price realization, assuming volumes remain pretty pressured or decelerate further? Are there any expected cost savings that you're hoping to realize in the second half that you could you know, share with us? And then just finally, how do we think about stepped-up investments that you might be making towards your smoke-free vision? Is that, you know, something that's factored into your guidance?

Yeah, so, Bonnie, first, thank you for the question, and good morning. I'll take you through how we think about guidance. So, throughout the year, we have communicated that we expected the second half to really drive the growth of of our EPS on a year-over-year basis. And just to remind you of a couple of factors that we are seeing in the back half of the year. One is, you know, we begin to lap quarters where we had unconstrained manufacturing in the nicotine pouch category. Also, in the fourth quarter, we're, for the first time, going to be lapping a quarter without wine income, right? That'll happen in the fourth quarter. In the back half of the year, as inflation accelerated and we adjusted our MSA inflation assumptions, you start to lap that in the back half of the year as well. So there's some comparative factors that are part of the first half versus second half EPS growth. As far as investments, you know, Spending isn't linear necessarily throughout the year, especially when you are making investments in infrastructure and things like that. So I definitely wouldn't look at one-quarter spending when it comes to that and read into it. It is something that ebbs and flows throughout the year.

All right. Thank you. And then... I did just want to ask about, you know, the, I guess the uncertainty around your smoke-free future, you know, given everything going on from Juul to, you know, Philip Morris entering in the U.S. via Swedish Match. I guess the dispute you have with Philip Morris as it relates to ICOs. You know, this continues to be, you know, one of the key concerns for investors. I know you've touched on this, but, you know, any more color you can provide or share with us as to, you know, your goal to kind of hit this smoke-free future, transform your business, you know, in the next, I guess, decade, you know, would be helpful. I mean, I know with your agreement with Jewel, now that the fair value is below the agreement, I think you have the ability to compete, you know, in the e-vapor market. So is that an option you're exploring? And then just maybe color, a little more color on the timing as it relates to your heat not burn. You mentioned it's you know, and final designs by the end of the year, and then you're going to begin regulatory preparations. But, you know, how long before, you know, you will have a product that you can bring to the market, do you think? Is that two years out, three years out? Just trying to get a sense of, you know, some parameters as to how you're going to achieve your goal. Thank you.

Yeah, thanks for the question, Bonnie. I think it's really important to step back, and I said it in my remarks, but let me add some color to it. the entire harm reduction opportunities in front of us in the U.S. And let me explain why I say that. You remember in my remarks I talked about the authorizations that have taken place in eVapor thus far. And they represent 1% of the eVapor category volume. So there's still 99% of authorizations that could go either way. And so that category will be in a bit of transition while we're waiting for the FDA to make those authorizations and then the outcome of those authorizations. If you think about novel oil, yeah, we're making progress and competitors are making progress, but we're still waiting for FDA authorizations in that category. And so while we're making progress, there will be decisions from the FDA regarding that category. And then heat not burn. While it's been gaining momentum internationally, it's nonexistent in the U.S., And so that non-existence. So those are the three major growth categories. That's why I keep saying I just wanted to add some color to that, the entire harm reduction opportunities in front of us. You're right to mention that we have development underway in two of those categories. We feel good about the pipeline. I know you would love to see those products, and I would love to show them to you, and we will at the appropriate time. But we feel good about that, as I mentioned earlier, the co-development with the consumer in that space. I think with eVapor, the color I would add there is, and I mentioned it earlier, we've always monitored the marketplace to understand consumer satisfaction with the various products in the marketplace, both in the U.S. and outside of the U.S. Additionally, with this quarter with us going below, you're right, we have the option to get out of the non-compete if we so elect to do so. And we really feel like in the process with the stay from the FDA, and that decision's still looming, as well as the rights that I mentioned in my remarks, we believe are beneficial to us at this point in the process, but we'll continue to really gauge what our options are there and make decisions accordingly.

All right, thank you.

Thank you, Bob.

And we'll take our next question from Priya Raghupta with Barclays. Please go ahead, your line is open.

Hi, this is Pooja on behalf of Priya. And my question is, so based on your comments indicating that you plan to repay your upcoming maturity with available cash, how are you thinking about any subsequent need to access the market for refinancing? And I also have a follow-up after that.

Sure, and thank you for the question. You know, I'm really not going to signal anything future capital allocation decisions. I'm happy to share how we think about capital allocation, which of course considers a number of factors in those decisions, including marketplace dynamics. We manage our balance sheet very carefully. We wanna have a strong balance sheet. We wanna continue to have investment grade credit rating. So when we think about capital allocation, We take a balanced approach, and we've made the decision in August to use available cash to retire that debt. But future debt maturity towers, we will analyze the marketplace at the time and make the appropriate decision.

Okay, that makes sense. Thank you. And as a quick follow-up, where should we sort of expect you to manage your cash balance over the near term as this will likely bring it more in line with your pre-pandemic type ranges?

Yeah, look, we are very fortunate in that we have operating companies that generate a significant amount of growth in cash. In a typical year, after paying our dividend and making the necessary investments, we traditionally have had a let's call it a billion dollars in excess cash. And at the time, we make various decisions. There are times where we've gone to the board and asked for a share buyback program. There are times where we've done some liability management to manage our maturity towers going forward and strengthen the balance sheet. And there are times where we've made some investments, such as the investment we made for the POTA technology recently. So that's how we think about cash going forward. But again, Our operating companies do a tremendous job of generating cash flow for the shareholder and other stakeholders.

All right. Thank you so much.

And our next question will come from Gaurav Jain with Barclays. Please go ahead. Your line is open.

Billy, good morning, Sal. A couple of questions from my side. So, look, we have had, you know, some discussion around, you know, the harm reduction opportunity in front of us and how it is very early. But if, you know, if we really look where harm reduction is really developing, it is all international because it's very hard to introduce new products in the U.S. market because of the PMTA process. But do you think that to really explore the harm reduction opportunity, you need to go international, much like Philip Morris is entering U.S.? ?

Yeah, to your point, and I appreciate you recognizing that the PMTA process and the entire harm reduction opportunities in front of us in the U.S., it's something that we consider on a regular basis of how to get early consumer feedback outside of research in a live marketplace. And thus far, we've opted to go the route we are, which is with consumer research. But it's something that we consider on a regular basis.

Sure. And just also a follow-up on the questions around Juul and potential end of exclusivity. And you also referenced the synthetic nicotine market. And some of these companies have applied for PMTAs and can potentially get PMTAs. So how do you think of synthetic nicotine as an ingredient? Is that a market you would like to explore? And if some of the companies get PMTAs, that's an area you would like to enter?

Yes, certainly we were pleased that with the support that took place that synthetic nicotine is now under FDA authority. We believe in the process as far as the FDA being able to assess the science and evidence. Again, we watch all products that are in the marketplace, both in the U.S. and internationally, to understand how the consumer is interacting with them, what benefits they receive from them as far as satisfaction, enjoyment, the brand itself. And so it's something that stays on our radar.

Okay. Thanks a lot.

And once again, as a reminder, that is star and one for your questions. We'll open it for the media. We'll go next to Jennifer Maloney with Wall Street Journal. Please go ahead. Your line is open. Good morning.

I wanted to follow up on your statement, Billy, that M&A is not off the table for reduced risk products, and I wanted to ask specifically about the e-vapor category. Would you be open to the possibility of acquiring an e-cigarette brand, for example, that already has FDA authorization?

Yeah, while I don't speak to M&A in any regards, as I mentioned, look, we've always been monitoring the marketplace in the e-vapor space. We want to make sure we understand consumers' interactions with the various brands in the marketplace, whether they like those brands, whether they like the product satisfaction that those products give them. Now that we've written down this quarter below 10%, it affords us the opportunity to really explore those opportunities and make different decisions if we so choose. At this point in the process, we've chosen not to make any different decisions. We believe that where it's at in the process, as I mentioned earlier, with the FDA stay and re-looking through the review process at the applications, as well as forfeiting some of our rights that we have as part of the agreement. We think those are beneficial, and we think, as we stated, the right decision currently is to stay under the non-compete.

For your smoke-free future goals, Do you expect or plan to focus on one particular category? Like, is modern oral going to be the focus of your efforts there? Or do you hope to play in all of the reduced risk categories?

You know, we highlight that we see three categories right now as the growth potential in the U.S. That's the heat, not burn category, the e-vapor category, and the novel oral. Certainly, they will be shaped by regulatory decisions. federal legislative decisions on excise taxes, and future innovation in those categories from the various manufacturers. So that will shape how large they are, but we see those as the three potential growth areas, and we look to participate in those. You know, I would remind you, that's why we went with the portfolio approach, because we see consumers going from cigarettes to those various categories, and we want to be there for the consumer depending on what category they choose.

Thank you.

Thank you.

And there appears to be no further questions at this time. I would like to turn the call back over to Mack Livingston for any closing comments.

Thanks, Ashley. And thanks, everybody, for joining us. Please contact the Investor Relations team if you have any further questions. Thanks a lot.

Thank you. And this does conclude today's call. Thank you for your participation. You may disconnect at any time.