Altria Group, Inc.

Q1 2024 Earnings Conference Call

4/25/2024

spk00: Good day and welcome to the Altria Group 2024 First 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. In order to ask a question, please press star followed by the number one on your touchtone phone at any time. 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.
spk02: Thanks, Savannah. Good morning, and thank you for joining us. This morning, Billy Gifford, Altria's CEO, and Sal Mancuso, our CFO, will discuss Altria's first quarter 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 2023. 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.
spk03: Thanks, Matt. Good morning, and thank you for joining us. We made meaningful progress in pursuit of our vision, and our highly profitable traditional tobacco businesses continue to perform well in a challenging environment. In spite of the absence of an effective regulatory environment, we saw continued early momentum from ENJOY and believe our businesses are on track to deliver against full-year plans. We also demonstrated our continued commitment to maximizing the return on our investments and delivering strong shareholder returns with the sale of a portion of our investment in ABI and the subsequent expansion of our share repurchase program in March. My remarks this morning will focus on The continued early momentum behind Enjoy's commercialization. The State of the eVapor category and enforcement progress. Encouraging first quarter results from ON and our financial outlook. I'll then turn it over to Sal, who will provide further detail on our financial results and additional information on the partial sale of our ABI investment. Let's begin with our eVapor business. After three full quarters of ownership, we remain excited about Enjoy and its potential in the legal U.S. e-vapor market. In the first quarter, we broadened Enjoy's distribution to over 80,000 stores, and we expect to expand to approximately 100,000 stores by year-end. We also continued the rollout of Enjoy's first retail trade program, which we believe will help Enjoy achieve optimal visibility and product fixture space at retail. Today, more than 70% of contracted stores have chosen options that secure premium positioning in the eVapor fixture for Enjoy. And we expect the majority of fixture resets to be completed in the first half of this year. To generate trial of Enjoy, we expanded promotional offers at retail in the first quarter and saw promising results. Enjoy's retail share of consumables grew in each of the past six months and was 4.3 share points in the quarter, up 0.6 share points sequentially. And we have seen early signs of longer-term adoptions from smokers and vapers that have tried Enjoy. Late last year, we tested a variety of promotional offers in a limited number of retail accounts. Diving into one retail account example, share grew by over nine percentage points versus the pre-promotional period. In the first quarter, we reduced promotions in the account, and Enjoy retained over 50% of the share gain during the trial period, steadily five percentage points higher than the pre-promotion period. We believe these results speak to Enjoy's appeal once consumers try the product. We are also inspecting a variety of other metrics to better evaluate trial and adoption of Enjoy in the early stages of its expansion. One such metric that we believe is an important indicator of trial in the eVapor category is retail share of devices. as we believe it's a measure of vapor and smoker trial and a potential leading indicator of longer-term adoption. In the first quarter, enjoy share of devices in the multi-outlet and convenience channel was 11.5 share points, an increase of 2.4 share points sequentially and 6.4 share points since the third quarter of 2023 our first full quarter of ownership. Turning to shipments, Enjoy Consumables' shipment volume was approximately 10.9 million units, and Enjoy's device shipment volume was approximately 1 million units. While shipment volume was essentially flat sequentially, Recall that 2023 fourth quarter ENJOY ship volume included building pipeline inventory at wholesale and retail to support the increased demand we anticipated in the first quarter. Moving forward, our plan aims to broaden the awareness of ENJOY and grow brand affinity. Through ENJOY's improved positioning at retail, a new equity campaign that emphasizes ENJOY's unique attributes and exceptional vaping experience. A new adult-only event marketing infrastructure, which ENJOY expects to activate this summer. And our adult tobacco consumer database, which allows us to communicate to millions of age-verified U.S. adult tobacco consumers through various marketing channels. We also continue to expect that ENJOY will submit PMTA filings for flavored ENJOY ACE products with age-gated Bluetooth technology by the end of the second quarter. ENJOY's early success is encouraging in the context of broader trends in the eVapor marketplace, where a lack of FDA-authorized products and the continued proliferation of illicit disposal products threatened the harm reduction opportunity in the United States. As it relates to enforcement, we believe that a comprehensive approach is needed to address this issue, and we continue to actively engage with regulators, state and federal lawmakers, our trade partners, and other stakeholders to build awareness and drive marketplace enforcement. There is still significant work ahead, but we saw some encouraging actions in the first quarter. In the first quarter alone, the FDA, in collaboration with the U.S. Customs and Border Protection, issued over 450 evapor-related import refusals, up from 348 during all of last year. The agency also continued to levy civil monetary penalties and send warning letters to manufacturers, retailers, and wholesalers of illicit products. While these actions represent signs of progress, we believe they are wholly inadequate. Illicit markets are a threat to public health, and we believe the FDA's enforcement approach is not of the scale or scope needed to bring about fundamental change in the marketplace. As a result, we identified to the agency specific steps we believe they can take to build a more effective compliance and enforcement program to address the illicit market, including imposing direct liability on the large manufacturers, importers, and distributors of illicit products, focusing on import prevention and clearing up widespread confusion in the marketplace about the FDA's enforcement priorities. Earlier this month, we sent a letter to the FDA highlighting these recommendations and reinforcing their commitment to work collaboratively on solutions that can restore order in the e-vapor marketplace. We also continue to work with state legislatures that have passed or are considering legislation requiring manufacturers to certify that they are compliant with FDA requirements. As of April 19th, eight states have passed such legislation and 12 states are considering it. And we've seen increased legal action against entities that are enabling the illicit market. As we've previously disclosed, We initiated litigation in the United States District Court in California relating to the sale of unlawful products. Due to some procedural challenges, we voluntarily dismissed this litigation earlier this year. We subsequently filed a new lawsuit against five manufacturers, four brick and mortar retailers, and three online retailers of illicit health bar evaper products in February in federal court in California. And earlier this month, the city of New York filed a lawsuit against 11 wholesalers for their part in the sale of illegal disposable evaper products. We continue to believe in the promise of a responsible evaper category. But a strong course correction is needed to protect the tobacco harm reduction opportunity for the millions of adult smokers in the U.S. We've learned from past experience that complex issues like this require the work of many stakeholders. And while we are starting to see some early signs of action, more impactful progress needs to be made. Let's now turn to the oil tobacco category. Oil nicotine pouches grew 13.8 share points year over year and now represent over 40% of the oil tobacco category. Oil nicotine pouches were the primary contributor of the estimated 9.5% increase in oil tobacco industry volume over the past six months. Helix grew Oren's reported shipment volume to approximately 33 million cans during the first quarter, an increase of 32%. Oren continued its momentum at retail, growing its share of the oil tobacco category by 0.7 share points to 7.1%. Helix delivered these impressive results as Oren's retail price increased by 26%. This spring, Helix introduced a new trade program that secures premium positioning for ORN in over 80% of contracted stores, creating broader visibility of the brand. Helix is continuing its focus on strategically investing behind the brand as the category growth accelerates. Helix is also making final preparations for following its PMPA for ORN+, which we expect to submit in the first half of this year. Upon FDA authorization, we believe it will contribute meaningfully to Helix's growth. We continue to aggressively pursue efforts to create the conditions for tobacco harm reduction success in the U.S. to benefit tobacco consumers, society, and our shareholders. I am confident in Altria's ability to lead the way in harm reduction. with our exciting portfolio of smoke-free products and our talented and dedicated employees. With our smoke-free progress and the strength of our traditional tobacco businesses in mind, we reaffirm our guidance to deliver 2024 four-year adjusted diluted EPS in the range of $5.05 to $5.17 representing a growth rate of 2% to 4.5% from a base of $4.95 in 2023. I'll now turn it over to Sal to provide more details on the business environment and our results.
spk01: Thanks, Billy. First quarter adjusted diluted earnings per share declined by 2.5%. As we previously noted, we expect that 2024 adjusted diluted EPS growth will be weighted to the second half of the year, resulting from two main factors. The first relates to the timing of the Enjoy acquisition in 2023. Since we closed the transaction on June 1st of last year, we are lapping quarters in the first half of the year that do not include the impact of amortization or investments behind the brand. The second factor is the impact of two additional shipping days in the smokable segment, each of which occur in the second half of the year. Turning now to our first quarter business results. The smokable product segment delivered over $2.4 billion in adjusted operating companies' income, with robust net price realization of 8.5%, and Marlboro maintained its longstanding leadership in the cigarette category. Adjusted OCI margins were 60.2% for the quarter, down slightly from a year ago. Year-over-year margin comparisons were impacted by higher per unit settlement charges and some elevated manufacturing costs. Year-over-year MSA and manufacturing cost per pack increases were higher in the first quarter than we expect for the remainder of the year. These higher costs were partially offset by lower SG&A costs in the quarter. We also expect the segment to benefit from lower SG&A costs as the year progresses. Total smokable product segment reported and adjusted cigarette volumes declined by 10% in the first quarter. When adjusted for trade inventory movement and other factors, we estimate that industry volumes declined by 9% over the same period. We believe that industry volume trends have been negatively impacted by the proliferation of illicit disposable e-vapor products and continued pressures on tobacco consumer discretionary income. At retail, the discount segment grew 0.8 share points in the first quarter. We believe these results were driven, in part, by macroeconomic pressures on the adult smokers. We continue to see increased competitive activity in the discount segment, including multiple branded discount offerings priced at deep discount levels. Meanwhile, Marlboro continues to show its resilience, retaining its retail share of 42% in a challenging environment. Marlboro also grew its share of the highly profitable premium segment to 59.3%, an increase of 0.7 share points. We believe Marlboro's strong consumer loyalty and position as the aspirational brand in the category is driving its continued outperformance in the premium segment. In cigars, reported cigar shipment volume decreased by 6.1% in the first quarter. Middleton continued to contribute to smokable products segment financial results, and Black & Mild remains the leader in the highly profitable machine-made large cigar segment. Moving to the oral tobacco product segment, adjusted OCI grew 4.6% in the first quarter, and adjusted OCI margins expanded by 0.2 percentage points to 69.5%. Total segment reported shipment volume decreased 3.1% as growth in ON was more than offset by lower MST volumes. When adjusted for calendar differences and trade inventory movements, We estimate that first quarter oral tobacco product segment volumes declined by approximately 4%. Oral tobacco product segment retail share declined 7.1 percentage points as declines in our MST brands were partially offset by the growth of ON. We remain encouraged by the performance of our oral tobacco products as ON continued to grow share and Copenhagen remain the leading moist smokeless tobacco brand. Moving to capital allocation. In March, we sold a portion of our investment in ABI and expanded our share repurchase program to $3.4 billion. In expanding our repurchase program, we implemented a $2.4 billion accelerated share repurchase program under which we received 46.5 million shares in March, representing 85% of the ASR program.
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