Altria Group, Inc.

Hey everyone and welcome to the Altria Group 2023 third quarter and nine months earning conference call. Today's call is scheduled to last about one hour including remarks by Altria's management and question and answer session. In order to ask a question, please press star 1 followed by star 2 to remove yourself from the queue. 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.

Mack Livingston 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 third quarter and first nine months' 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 2022. 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 our Board. We report our financial results in accordance with U.S. generally accepted accounting principles. Today's call will contain various operating results on both a reported and adjusted basis. Adjusted results exclude special items that affect comparisons with reported results. Descriptions of these non-GAAP financial measures and reconciliations are included in today's earnings release and on our website at Altria.com. Finally, all references in today's remarks to tobacco consumers or consumers within a specific tobacco category or segment refer to existing adult tobacco consumers 21 years of age or older. With that, I'll turn the call over to Billy.

Thanks, Mac. Good morning and thank you for joining us. Our highly profitable traditional tobacco businesses were resilient in a dynamic operating environment during the third quarter and first nine months, providing fuel for a business transformation and significant cash returns to our shareholders. We grew adjusted diluted earnings per share by 3.3% for the first nine months and returned more than $5.7 billion to shareholders through dividends and share repurchases. We continue to balance maximizing profitability from our smokable and moist smokeless tobacco businesses with investments to realize our vision of responsibly leading the transition of adult smokers to a smoke-free future. This morning, I will focus on our progress within Joy, the state of the eVapor category, and the encouraging third quarter results from ON. I'll then turn it over to Sal, who will provide an update on consumer and industry dynamics, further detail on our financial results, and outlook for the remainder of the year. Let's begin in the eVapor category. In our first full quarter of ownership, our teams executed ENJOY's business plans with speed and focus to lay the foundation for ENJOY's long-term success. Today, ENJOY ACE remains the only pod-based evapor product with a marketing authorization from the FDA. We're actively working to bring this compelling smoke-free alternative to more smokers and vapors across the United States. We believe that the long-term success in eVapor will be influenced by our actions in the near term, and we're executing in the marketplace to grow the business responsibly and sustainably. First, while already strong, strengthening Enjoy's supply chain was a necessary step to begin the initial phase of our expansion with ACE. Our teams worked diligently to solidify the entire supply chain, from sourcing direct materials through the shipment to retail. As a result, we do not anticipate capacity constraints as we execute our initial expansion plan. Next, during the third quarter, our teams prioritized closing inventory gaps at retail and expanding distribution of ACE. Prior to the acquisition, Enjoy had a small-scale sales force. which resulted in inventory volatility and significant distribution gaps at retail. Upon completion of the Enjoy transaction, we immediately unleashed our sales force to focus on closing the inventory gaps in stores that already had distribution. We improved inventory conditions in stores and are actively working to close remaining gaps at retail. For expansion, ACE distribution grew to approximately 42,000 stores during the third quarter and is now distributed in all of the top 25 convenience store chains by eBay per volume. In addition, we began to amplify visibility with new point of sale and fixture signage at retail. During the fourth quarter, we continue to expect ACE expansion to reach a total of 70,000 stores by year end. representing approximately 70% of e-vapor volume and 55% of cigarette volume sold in the U.S. multi-outlet and convenience channel. As we continue to expand distribution and close inventory gaps, we expect to further enhance visibility and product fixture space at retail. Last month, Enjoy unveiled its first retail trade program, Retail partners can sign up for the program at various levels with merchandising options designed to position Enjoy strategically and responsibly to tobacco consumers while creating further awareness of the brand. And as we move to our next phase of eVapor consumer engagement, we're beginning to test a variety of promotional plans and anticipate more disruptive execution at retail in the fourth quarter. Moving into 2024, we will continue to refine our promotional plans, implement ENJOY's retail trade program, further expand distribution, and evolve our consumer engagement strategy. Our strategies will focus on informing adult vapers and smokers of the attributes of ACE, such as battery capacity and pod size relative to other leading brands, generating trial and growing brand loyalty. In addition, plans for a new brand equity campaign are well underway. We expect the equity campaign to further amplify the brand's presence at retail and drive consumer engagement with the brand. We're excited to share more on this campaign and the next phases of our growth plans in the near future. Looking more broadly at the eVapor category, the current state of the market is intolerable. for both legitimate manufacturers and consumers. As we have noted repeatedly for months, the regulated market is being overrun by illegal flavored disposable e-vapor products made and distributed by companies violating virtually every rule and guidance FDA has issued since 2016. Regulation not enforced is indistinguishable from no regulation at all. Illegal evaper products circumvent the actions of regulators, responsible manufacturers, and retailers by evading scientific review, quality and manufacturing controls, marketing oversight, and legal aids or purchase restrictions. Despite recent actions by the FDA, enforcement has been inadequate and ineffective. We believe the FDA has the tools necessary to bring order to the markets. For our part, we're actively engaged with regulators, state and federal lawmakers, trade partners, and other stakeholders to build awareness of these serious issues and drive marketplace enforcement. We have also taken more targeted but necessary action and initiated litigation in the United States District Court in California against 34 organizations, including manufacturers, distributors, and online retailers, related to the sale of unlawful products. A strong course direction is needed to protect the tobacco harm reduction opportunity for the 30 million adult smokers in the U.S. Turning to oral tobacco, the nicotine pouch category experienced sizable growth once again, resulting in an estimated 5% increase in total U.S. oral tobacco volumes over the past six months. Oil nicotine pouches grew nearly 10 share points year-over-year and now represent more than 32% of the U.S. oil tobacco category. Oren participated in the category growth as third quarter reported shipment volumes increased nearly 37% versus the year-ago period. During the quarter, Helix focused on continued volume growth while improving profitability. Felix applied its evolving analytical resources to be more flexible with its promotions in the marketplace. As a result, Thorne's retail price increased 33% per can sequentially and 52% versus the prior year, closing the gap to Zen by over $1 year over year. Encouragingly, we continue to see increasing levels of both trial and adoption of the brand. with repeat purchases up more than 35% year-over-year, despite the substantial increase in retail price. In addition, Oren's retail share of the old tobacco category was 6.9%, up 1.7 share points versus the prior year, and stable sequentially. Internationally, Oren Plus began its test launch in Sweden, one of the largest modern old tobacco markets in the world. And consumers are engaging with the brand through both e-commerce and select retail locations. While still early days, we're encouraged by the feedback we've received from consumers. Initial consumer data show that ON PLUS performed well in the areas of comfort, flavor, and overall satisfaction. We believe that ON PLUS's long-lasting flavor system and proprietary soft food material are differentiators in the category. We're at an exciting period in our history. We have an unprecedented opportunity to responsibly lead the transition of adult smokers to our smoke-free future. Our smoke-free portfolio is compelling, and I am encouraged by our initial progress with Enjoy and On's strong performance. I believe we have the appropriate strategies and people in place to execute our growth plans. I continue to believe that we can achieve our vision and create long-term value for our shareholders. I'll now turn it over to Sal to provide more detail on the business environment and our results.

Thanks, Billy. Let's begin with an update on consumer and industry dynamics. During the third quarter, cigarette industry volume declines continued to be elevated from their historical levels. due in part to macroeconomic factors and the growth of illegal flavored disposable e-vapor products. By design, illicit products are largely distributed through non-traditional, untracked channels, requiring us to refine our ability to estimate their impacts on the industry. With the information we have today, we believe that there is more cross-category movement than previously assumed. And we now estimate that growth of illegal flavored disposable e-vapor products contributed to cigarette industry declines in a range of 1.5% to 2.5% over the last 12 months. These updated estimates have been reflected in our decomposition of cigarette industry decline rates. We will continue to monitor this dynamic trend and are actively pursuing better data sources to enhance our estimates in the space. Turning to results for the quarter, the smokable product segment continued to deliver on a strategy of maximizing profitability in combustibles over the long term, while appropriately balancing investments in Marlboro with funding the growth of smoke-free products. In fact, During the third quarter, the smokable product segment expanded adjusted OCI margins, while Marlboro grew its retail share sequentially in the cigarette category and within the premium segment. Adjusted operating companies' income declined by 2.5% in the third quarter, but grew by 0.2% for the first nine months. The adjusted OCI declined during the third quarter, was primarily driven by elevated industry volume declines due to the factors I mentioned and higher promotional investments. As a reminder, there was also one fewer shipping day in the third quarter of 2023 compared to the third quarter of 2022. Adjusted OCI margins expanded by 7 tenths and 9 tenths in the third quarter and the first nine months, respectively. Net pricing remained robust, and net price realization for the segment was 8.6% in the third quarter and 9.8% for the first nine months. Marble was resilient during the quarter, and its retail share of the cigarette category grew 3 tenths sequentially to 42.3%, while declining 3 tenths versus the year-ago period. Promotional investments across the Marlboro portfolio, such as investments in Marlboro Black, supported the strong share performance for the quarter. Additionally, Marlboro grew its share within the stable premium segment to 58.9%, an increase of three-tenths sequentially and four-tenths year-over-year, while other brands seeded share in the premium segment sequentially and year-over-year. Total discount segment share grew 1.1 percentage points year over year to 28.2%, but it's been flat since the first quarter of 2023. We believe the recent stability in discount is an encouraging sign, considering the adverse macroeconomic conditions impacting smokers in the premium position of our portfolio. Smokable product segment reported domestic cigarette volumes declined by 11.6% in the third quarter and 10.5% for the first nine months. When adjusted for calendar differences and trade inventory movements, third quarter domestic cigarette volumes declined by an estimated 10%. For the first nine months, adjusted domestic cigarette volumes declined by an estimated 10.5%. At the industry level, we estimate that adjusted domestic cigarette volumes declined by 8% in the third quarter and for the first nine months. In cigars, John Middleton reported exceptional performance through the first nine months, and cigar shipment volume increased 4.2%. The oral tobacco product segment reported strong results during the quarter. as adjusted OCI and OCI margins increased, while ON continued to grow its retail share of the oral tobacco category year over year. For the third quarter, adjusted OCI grew 7.1%, and the segment expanded adjusted OCI margins to 69.3%, an increase of nearly three percentage points versus the prior year. This performance was supported by robust net price realization due in part to the more efficient on promotional investments Billy described earlier. For the first nine months, the segment grew adjusted OCI by 4.1%, with adjusted OCI margins of 68.9%, up nearly one percentage point. Total segment reported shipment volume decreased by 3.3% and 2.3% for the third quarter and for the first nine months, respectively. The segment's volume decline was driven by declines in MST volumes, partially offset by the growth of odds. When adjusted for calendar differences and trade inventory movements, segment volumes declined by an estimated 2% and 2.5% for the third quarter and first nine months, respectively. Oral tobacco product segment retail share declined 4.2 percentage points in the third quarter, as declines in our MST brands were partially offset by the year-over-year growth of Onn. Turning to capital allocation, we continue to return significant cash to shareholders. In the third quarter, we paid approximately $1.6 billion in dividends and raised our dividend by 4.3% in August, in line with our new progressive dividend goal. This increase marked our 58th increase in the last 54 years. and repurchased 5.9 million shares for $260 million. As of the end of the quarter, we had $268 million remaining under our current share repurchase program, which we expect to complete by the end of the year. In addition, our balance sheet remained strong through the quarter. As of the end of the third quarter, our debt-to-EBITDA ratio was 2.1 times. Let's turn to our financial outlook for the remainder of the year. We are narrowing our full year 2023 guidance range and now expect to deliver adjusted diluted earnings per share in a range of $4.91 to $4.98. This range represents a growth rate of 1.5% to 3% from a base of $4.84 in 2022. Finally, at our investor day, we announced the creation of our Connect and Transform open innovation system, which is focused on partnering externally to leverage subject matter expertise, new technologies, and disruptive innovations to augment our internal capabilities and support our innovation strategies. As part of this system, today we are publishing 11 innovation briefs, More information is available 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?

Thank you. Once again, as a reminder, if you would like to ask a question, please press the star key followed by the number one on your touchtone phone at this time. Investors, analysts, and media representatives are now invited to participate in the question and answer session. We will take a question from the investment community first. Our first question comes from Pamela Kaufman with Morgan Stanley. Please go ahead.

Hi, good morning. Good morning, Pamela. Can you talk about the puts and takes influencing the outlook for the cigarette category as you look over the next few quarters? How are you thinking about the category, and do you view high single-digit industry volume declines as the new normal?

Pamela, first, good morning, and I'll start the answer. So, you know, this is very typical of us to narrow guidance as the year plays out, and we're through three quarters, and we were happy to provide more transparency in narrowing our guidance to 1.5% to 3% growth off of last year's adjusted EPS. We feel really good about the guidance we've been able to provide. You know, of course, across the plan, there's always puts and takes. We feel that we have enough levers to deal with any changes in the marketplace, but we feel good about the narrowing of the guidance. And, you know, I think that's, as I said, pretty typical of how we manage guidance as the year progresses.

Okay. I was also curious about how you're thinking about the outlook for the cigarette category and if you expect high single-digit industry volume declines to continue going forward. Okay.

Yeah, Pamela, as you know, we don't provide look-forward guidance. But I think when you think about volume, and it's important to look at the e-com, we try to highlight for you that, look, our consumer is still under macroeconomic pressure, both the cumulative impact of inflation, but even gas prices moving around. But more importantly, what we're seeing is an influence of the illicity vapor and the impact it's having on the cigarette industry. And you see that we're estimating that to be about 1.5 to 2.5. The reason that's such a broad range is the nature of the illicit product. It's going through distribution channels that we feel like we have some information gaps on, and we're going to be looking to fill those information gaps. But we wanted to highlight that to you, that as we discovered it, what we did is we used the data sources we had and were able to triangulate it. You know, I would point you to our quarterly metrics that we shared, and you see the significant jump up in adult vapors just over the nine months thus far in 2023. So, we think that's having an impact on cigarette volume, too. We talked about some of the enforcement activities, some of the things the FDA could do, some of the things we're doing, and we would look to get that enforcement active in the marketplace.

Thanks. And also one area that I was kind of surprised about in the quarter was just the limited amount of Enjoy investment spend that appeared to flow through the P&L. So can you elaborate on how you're thinking about Enjoy investment over the coming quarters? And do you think that the Enjoy brand can be successful and grow in an environment where illicit e-cigs are unregulated?

We believe we can grow the Enjoy brand. Remember, it competes, and our focus is in the pod-based. The FDA still needs to get through its authorizations, and we believe that is going to cause transition in the marketplace as well. I tried to step you through the plan with Enjoy as we progressed through what we did in the third quarter as we progressed through the fourth quarter, but I'll just highlight it. We really wanted to make sure we had the foundation built, and so the focus was on making sure that the supply chain would support the increased volume, and we feel good about that. We wanted to fill the inventory gaps and improve visibility in the stores that Injury was already present, and we made significant progress on that. Then we were going to expand to 70,000 stores by the end of the year. Really with some disruption at retail, we feel like the visibility will continue to improve. But we're in the midst of selling in our trade program, which we think is a sustainable position on the retail picture at retail. That'll take place as we progress into the new year. And I highlighted the equity campaign is really establishing the brand equity for Enjoy and being able to unveil that as we progress into the new year for the consumer.

Thank you. I'll pass it on. Thank you.

Thank you. And we will take our next question from Bonnie Herzog with Goldman Sachs. Please go ahead.

All right. Thank you. Good morning, everyone.

Good morning, Brian.

Good morning. I had a question on your guidance. You narrowed it but essentially lowered your EPS growth this year. And then, you know, your new EPS guidance this year is below your mid-single-digit algo. So I guess I'm trying to understand, you know, how much of this is due to, you know, planned investments as you build, you know, your smoke-free vision versus maybe greater-than-expected headwinds. If you could touch on that for us, it would help.

Yeah, I appreciate your question, Bonnie. I think this is very typical. As we progress through the year, we are able to narrow guidance. That's what we did. I think when you think about the enterprise goals of mid-single-digit growth, that's really on a compounded annual basis, and we suggested when we did that we were going to invest in the businesses as we feel like that we need to invest, and that's exactly what we're doing. So as we progress through the year, certainly the Enforcement I referred to earlier, as that steps up, that should affect multiple categories in our portfolio. And so I think it's very typical as we progress through the year to be able to narrow it. We brought up the bottom and brought down the top. So that's what we've provided to you.

Bonnie, I'll also remind you that when we restated guidance upon the ENJOY deal, there is amortization. It's a non-cash deal. expense drag on the year-over-year comparison.

Oh, okay. That's helpful. And then I guess just my next question would be on your smokable segment. You know, despite expanding margins in the quarter, your dollar profits didn't increase. And then, you know, your price realization, I guess, wasn't as robust as I would have thought, you know, given the three big price increases this year, and we've announced a fourth. And then your controllable costs per pack were up mid-teens. So, you know, in the context of all that, could you just talk about some of these drivers, you know, as well as your expectations for the rest of the year as it relates to those items? Thanks.

Yeah, certainly you saw the overall industry volume at an increased rate of decline, and we tried to highlight that in the decomposition and the impact that the illicit evade was having on the cigarette category. I think when you think about it, look, we're very pleased that margins overall were a step up. I wouldn't get hung up in a quarter's price realization. We really think about it through time. So, you know, we highlighted as we progressed into the year that there are a couple of pockets that we needed to invest in. And I think you see the benefit of those investments with mobile share. And so, but again, I wouldn't get hung up on a particular quarter. I would, we tend to look at it over a bit longer term than just quarter to quarter. And so that's the way we manage the business. I think when you think about the cost, as you have fluctuations, again, in a quarter, as you have fluctuations in volume, that's going to gyrate that controllable cost per pack.

All right. Thank you.

Thank you, Bonnie.

Thank you. And we will take our next question from Andrea Condrio with UBS. Please go ahead.

Hi. Thank you for taking my question. And good morning, Billy. Good morning, Sal. uh one from me please um when thinking just about your your price increases obviously the one you took in q4 was large appears to be larger than your previous increases over the past quality two years um should basically my question is should we kind of expect this higher and higher level of price taking from you and your peers as volumes come under pressure from market factors. Sorry, it was very long-winded. That's okay.

I think I followed it. Did you have any more there? I didn't want to cut you off.

Yeah, I got another one after that. Okay.

Yeah, I'll be careful not to talk about future pricing, but I think when you think about it, again, I would give the same advice that I gave to Bonnie, is I wouldn't get hung up on one price increase that took place. we really look at the factors that go into pricing and we've mentioned those before but i think you see with the stability of mobile share in the marketplace uh we feel good about the strength of the brand and uh we we have been able to take those price increases you know i would remind you that price elasticity for the industry is a negative 0.35 coefficient factor we haven't seen anything that would determine that that would need to move, and we feel good about that. So I think when you think about pricing, again, typically we look at it as price realization versus specific list price. And remember, price realization is made up of two pieces. One is list price that you saw us take, and the other is promotional spend in the marketplace, and that can drive it one way or the other on any given quarter and then through time.

Thank you. That makes sense. And secondly, I mean, we saw obviously you filed a lot of litigation versus illicit vape manufacturers. And well, BAT did the same, just by another avenue. Probably what we'd be looking for is any inkling on how long this would take to crystallize one way or the other?

Yeah, certainly the legal system will be the legal system, so it's hard to predict how that will transpire. I think there, what we're looking for is an injunction. These products are illegal. And with the lack of enforcement that's taken place by the FDA, we felt like we needed to take action. And so we did that with litigation, and we've done that in other ways, with communications to the FDA, meeting with government officials to really show the intolerable nature of what's taking place in the marketplace. Again, you heard it in my remarks, but regulation without enforcement is truly indistinguishable from having no regulation. If you don't enforce it, it's basically words on paper. So we want to protect harm reduction and the opportunity for the 30 million smokers in the U.S. So we really need to have enforcement where the smokers can make informed choices as they are moving across categories. I think if there's an underlying positive is that we see adult smokers moving over. So they're ready to have potentially reduced harm products. We just need them to be regulated and based on science to be in the marketplace.

Very clear. Thank you. I'll pass it on. Thank you very much. Thank you.

Thank you. We'll take our next question from Vivian Acer with TD Co. And please go ahead.

Hi. Thank you. Good morning.

Good morning, Vivian.

So I wanted to talk about your smokeless margins just to start very healthy margin improvement. I was wondering if you could just dimensionalize the magnitude of the benefits that you guys saw from the reduction in promo spend on-on versus kind of the normalized operating leverage that you get from pricing on MST. Thanks.

Good morning, Vivian, and thank you for the question. And yeah, we're really happy with the OTP margins. And I would say both Traditional smokeless and oral TDN are contributing to the strength of those margins. So you're right to point out the strength of, in particular, Copenhagen in the MST category. And then, as we discussed in our opening remarks, the net pricing increases for both on a year-over-year basis and a sequential basis.

Okay, understood. And then Marlboro Market Share healthy 30 basis point improvement sequentially is the premium segment held fair, which is certainly good to see given the continued macro pressures you guys have called out on the consumer. I was wondering if you could comment at all on kind of the impact that Marlboro Black Gold had on that sequential improvement. Thanks.

Yeah, we're certainly pleased with the Marble Black Gold launch. We're certainly pleased with the utilization that the PMUS18 has put on Marble Black and used it in the marketplace to give consumers that are under economic strain a place to stay with marble because that's what the consumer wants. I think when you think about overall Marble Black, it represents about 10% of the Marble franchise. It's very similar as far as being used as a tool. You'll recall this, Vivian, back when we used Special Blend in the other downturn that we saw in 08-09. And so when you think about it, it's being able to utilize a tool. We're very pleased with the rounding out of the portfolio in Marble Black with Marble Black Gold and very pleased with the results we're seeing in the marketplace.

That's great. Thanks for that. I'll just squeeze in one last one, if you don't mind. On the last slide of the presentation, you guys highlighted the Nevada menthol share, which did fall off sequentially in the third quarter. Can you offer any color on why you think that is? Thanks.

I think it really highlights the illicit activity that takes place in California. You'll recall previously, so some of it was cross-border, but as illicit activity takes place in California, whether that be menthol cards that we highlighted last time, or even menthol cigarettes running their way into the state of California. Again, it's another example where prohibition doesn't work. You don't have enforcement and that... illegal activities take place to get the consumer what they're desiring, and that's what we're seeing take place in California.

Perfect. That's really helpful. Thank you for that. Thank you.

Thank you. We'll take our next question from Owen Bennett with Jefferies. Please go ahead.

Morning, Jen. Topo. Well, I had a couple of questions around vape again. First one is coming back to disposable vape. enforcement so realistically ignoring the actions by yourselves and bat and looking at sba specifically do you actually see kind of any chance of meaningful measures in the next six to 12 months given obviously in the middle of last year the fba spoke that are now working with other government agencies to address this and then they also flag the possibility of possible federal statutory changes to address this? So just I'd love to get your thoughts around if we could see kind of any meaningful action from the statutory perspective or the FDA in the next six to 12 months.

Yeah, it's a good question, Owen. I'm very optimistic. I mean, if you think about it, I can think of four simple steps that the FDA could take to really rein and improve the enforcement. One, they could help the trade be able to identify products that are out of compliance. When you think about that, that's just providing a list that's clear, either the ones that are authorized or those that have been denied so that they're not in the marketplace. Once they do that, conduct a broad-based retail inspection program. They've done that. They did that in the cigarette category. They can do that in the eVapor space. And once they do that, issue maximum penalties and then bring injunction actions against manufacturers and distributors that are openly defying FDA regulations. And then I think adopting comprehensive border programs to prevent importation. A lot of these products are imported. They're imported illegally, and then they're sold illegally. So they seem to be very, very simple. That's why I'm optimistic that the FDA will take action and be able to work to bring order to the retail environment.

And then when they spoke about statutory changes, do you see any possibility of that happening?

They have the tools and the authority now for illegal products in the marketplace. So certainly we would be open to statutory changes, but, I mean, when you think about it, they have the ability to do that now, Owen. So it seems like, and I highlighted those four simple steps, they have the tools and they have the authority to do it today.

Okay, fine. And then just my second question, on the quarterly metrics, you show the slide highlighting the spike in the number of, adult vapors. This has replaced the slide you showed historically that actually showed estimated industry vape volumes. Can you maybe talk about what the volume number was for the quotes? I just want to get a better idea of what the vape impact would be on cigarettes from an absolute volume perspective. Thank you.

Yeah, what we tried to do, the reason we went with the vapors as we had previously but didn't show the volume is the nature of this listed marketplace. It's hard to track, and that's the nature of it being illicit. It's going through different distribution channels than what typical products go through because it's illegally getting to the marketplace. I think when you think about the impact to the cigarette volume, what we try to do on the decom page is show you that we estimate it to be between 1.5 to 2.5 over the last 12 months. So we try to provide you with that data. Again, as I mentioned earlier, I know that's a bit of a wide range. We're trying to fill what we feel like are some data gaps so that we have a better read of what's taking place in the marketplace through distribution channels that are different than typical products.

Okay. And then any broad guess of what? sequential volume increase was industry-wise in the second quarter, given kind of the coffee's big variance?

Yeah, again, it's tough just because of the nature. All of the growth, we feel like most of the growth that occurred in the e-vapor space, what we saw was pod industry was down slightly. Overall e-vapor was up, and that growth was coming from the illicit disposables that are in the marketplace.

And then how up overall was it, the overall e-vapor?

Yeah, again, with the inability to be able to estimate the total market space because of the illicit product in the marketplace, we didn't want to put an overall growth. We have an estimate, but we didn't want to put an overall growth.

Hey, Owen, this is Sal, and I would also point out, not only is it flavors in this illicit disposable category, the flavors are really not in line with regulations. They're flavors like Bubblicious. cotton candy. I mean, I agree with Billy. The need for enforcement is very important, and we need it to happen. We'd like it to happen as soon as possible.

Okay. Thanks, Jen. Very helpful. Appreciate it. Thank you.

And once again, as a reminder, that is star one for your questions. We will take our next question from Matt Smith with Steve. Well, please go ahead.

Thank you, Operator, and good morning, all. Good morning, Matt. I want to ask a follow-up question around the change in the impact of cross-category dynamics and now the 2% drag you're seeing on cigarette volumes. Can you talk about your expectations for how these consumers that are using the illicit products that are generating that higher drag, how do you expect them to behave once you do see enforcement in the category of And these products that they're using today are removed from the marketplace. Do you expect those current users to shift into lawful smoke-free products, including vapor? And then do you then expect the drag to be lessened going forward, given the removal of the flavor products? Or do you expect the vapor category to continue to grow through the enforcement of illicit products?

Yeah, it's a great question. I think when you think about it, certainly the youth that are using the eVapor, we want them completely out of the category, just to be clear on that. I think when you think about the adults that are moving over, we would want them to stay in reduced risk products. That's why we're excited about the Android product and being able to have the distribution and have it readily available for them. It's authorized and have it readily available for them to choose. I think if you look historically, you'll recall when the FDA eliminated flavors in pods, we did see some consumers go back to cigarettes. And so that's best estimate, but it's ultimately up to the consumer, and we'll do our best to keep them in the e-vapor space with the enjoyed product.

Thank you for that, Billy. And just as a quick follow-up, I wanted to ask about the distribution opportunity around Enjoy. And you understand that you laid out the priorities in your first quarter of ownership focusing on the supply chain. But I was curious if there is any prioritization of expanding distribution for –

if and when fda actually picks up its enforcement against illicit products do you need to see a more proactive fda before you expand the distribution of enjoy to take advantage of the disruption in the marketplace we do not uh we have the the target of 70 000 stores by the end of the year we feel good about getting it to those stores certainly we would appreciate fda enforcement more so for the the uh being able to protect the harm reduction opportunity in the U.S. But no, we'll move forward with our distribution plans as we lay it out.

Thank you, Billy. I'll pass it on.

Thanks.

Thank you. We'll take our next question from Gaurav Jain with Barclays. Please go ahead.

Hi. Good morning, Willie. Good morning, Sal. Good morning. A few questions from me. So first is on these, you know, the cannibalization impacts that you're sharing from e-cigarettes. So, you know, even on the modern oral front, it seems that the cannibalization has stepped up on cigarettes because the oral tobacco volumes are much better than what would have thought. So isn't it that modern oral is about a 1% cannibalizing impact on cigarette volumes and cigarettes? then the e-cigarette cannibalization impact is probably lesser than what you are highlighting.

Yeah, I understand your question, Gaurav. I think when we look at the information, certainly we're having some impact, and we try to highlight that from a sourcing perspective with novel oil products. What we highlighted for disposable is what we feel is what's taking place from the disposable. So that's separate and distinct from novel oils. So, no, we feel like what we've estimated, that 1.5 to 2.5, and I explained why it's a range, is really the impact of disposable e-cigarettes on cigarettes.

Sure, thank you. And then, you know, second question is, you know, clearly GLP-1 drugs, you know, big focus of investors right now across staples. Would you have any indication of what's the cigarette prevalence amongst consumers whose BMI is greater than 27 versus... prevalence amongst consumers with BMI less than 27. And that 27 number is where I believe vis-a-vis gets prescribed for consumers with comorbidities. So that's why I'm referencing that 27 number.

Yeah, I understand the theory that you have regarding that. I think when you look at the science, you look at the trends and you look at the facts of even what's taken place to date related to GLP-1 drugs, We see no indication of that. We'll certainly continue to monitor, but we don't see any indication.

Sure. And then our final question is around the menthol cigarette rulemaking process. You know, what should we expect from here on in terms of timelines?

Yeah, I think you saw that it went to the OMB, the Office of Management Budget, on October 13th. It sits with them. The FDA has announced publicly that they anticipate issuing that by the end of the year, but I think it remains to be seen when that will be issued. So from that standpoint, really, you've seen our comments on menthol. We don't think it's based on or supported by science and evidence. And so if it's issued, I think you could anticipate potential legal challenges from the industry. Sure. Thank you so much. Thank you.

Thank you. We'll take our next question from Priya Origutta with Barclays. Please go ahead.

Hi. Thank you for taking our questions. This is Augustin for Priya. We saw that you just filed your updated shelf. How are you thinking about addressing the January maturity in light of the current market backdrop? Thank you.

Yeah, you know, as you think about debt coming due and maturities, we've done a really nice job, I believe, the Treasury Department in managing our debt portfolio in the maturity towers. So they do a fantastic job of monitoring the market. I think we have flexibility on how we handle that. And so I really have nothing else to report at this time regarding our maturities early next year.

Thank you.

Thank you. We will take our next question from Jacob DeClercq with Redburn Atlantic. Please. Jacob, your line is open. Please check your mute function. All right. We will continue on with Steve Marcia with Capital Securities Management. Please go ahead.

Thank you. Good morning, gentlemen. Just a sort of follow-up. You know, looking at your consolidated statement of earnings, you guys, reported interest in debt expense about $272 million. Given the current ongoings in the Treasury Department, rise in rates, do you anticipate that number remaining level, or should we expect some type of bump up? And if so, any idea in terms of bump up towards what?

Yeah, you know, we provide a guidance or an estimate on our depreciation and amortization It's about $280 million for the year. You are right to point out that there are higher levels of interest rates in the debt market. But again, we believe we have appropriate flexibility as we think about refinancing or paying down debt in the future. We've also provided our debt to EBITDA corporate goals, if you will, our targets, and it could fluctuate a little bit. over time depending on corporate needs and things like that. So, you know, we've dealt with high-interest markets in the past. They are higher than we've seen in recent past, but again, we have strong cash generation by our operating companies, and we have really good flexibility as we think about managing our maturities.

Thank you.

Sure.

And once again, as a reminder, that is star one for your questions. We will take our next question from Jacob DeClercq with Fred Bernalini. Please go ahead.

Good morning, guys. Can you hear me now? Yes, we can hear you. Perfect. I have a quick question on ANEJOY. If all of the brands are not allowed in flavors, including menthol, do you think there's still enough demand for tobacco flavored vapes to have a profitable business in the U.S. going forward?

We believe there is. I think when you think about it, I wouldn't rule out menthol. We feel good about the application, the current application in front of the FDA from a menthol standpoint. I think if you look at some of the recent marketing denial orders, it was related to youth following. And as we pointed out when we made the Android transaction, there was virtually no youth following. As far as additional flavors, we're excited and currently looking forward to being able to file in the near future, and we'll come back to you when we are able to do that, of additional flavors with access control. We believe that allows for adult consumers to have it as an off-ramp but not an on-ramp for underage users. So we still see the potential for flavors, but to answer your question, we feel like the consumer wants

alternative products we've highlighted that previously and they'll continue to want that perfect and just a quick follow-up on your oral business um how do you kind of stop the flow of consumers moving to nicotine pouch category i know you've got the on-brand there um but is this is a structural shift you're seeing away from the traditional oral business to the nicotine pouches

That certainly is the biggest outflow or inflow into nicotine pouches is coming from traditional MST consumers. Our plan there, and we highlighted them, is participate with ON, and then we're excited to be able to follow the PMTA for ON+. And we highlighted while it's early some of the consumer engagement that we're having over in Sweden, and we feel like that's a great product, and we're looking forward to be able to bring that to market once we receive authorization. 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 remarks.

Thanks, Ashley. Thanks to all for joining us. Please contact the investor relations team if you have further questions. Thanks and have a great day.

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