Altria Group, Inc. (MO) CEO Billy Gifford on Q3 2020 Results – Earnings Call Transcript


Altria Group, Inc. (NYSE:MO) Q3 2020 Results Earnings Conference Call October 30, 2020 9:00 AM ET

Company Participants

Mac Livingston – VP, IR

Billy Gifford – CEO

Sal Mancuso – EVP and CFO

Conference Call Participants

Pamela Kaufman – Morgan Stanley

Vivien Azer – Cowen

Bonnie Herzog – Goldman Sachs

Nik Modi – RBC Capital

Gaurav Jain – Barclays

Michael Lavery – Piper Sandler

Chris Growe – Stifel

Adam Spielman – Citi

Robert Rampton – UBS

Operator

Good day, and welcome to Altria Group 2020 Third Quarter Earnings Conference Call. Today’s call is scheduled to last about one hour, including remarks by Altria management and a question-and-answer session. Representatives of the investment community and media on the call will be able to ask questions following the conclusion of the prepared remarks.

I would now like to turn the call over to Mr. Mac Livingston, Vice President of Investor Relations for Altria Client Services. Please go ahead, sir.

Mac Livingston

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

Earlier today, we issued a press release providing our results. The release, presentation and quarterly metrics are all available on our website at Altria.com and through the Altria investor app.

During our call today, unless otherwise stated, we’re comparing results to the same period in 2019. Our remarks contain forward-looking and cautionary statements and projections of future results. Please review the Forward-Looking and Cautionary 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 US 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.

Billy Gifford

Thanks, Mac. Good morning and thank you for joining us. Altria continued to demonstrate its resilience during the third quarter, while navigating the challenges presented by the COVID-19 pandemic.

We’ve maintained our focus on employee well being to make sure they feel supported in these challenging times, and our people continue to move our organization forward. They are advancing Altria’s commitment to address systemic racism and social inequities, empowering each other and leading their efforts to build a more diverse organization. And they’re doing all of this while continuing to deliver the fantastic business results, as you saw in our earnings release this morning.

In the third quarter, our Tobacco businesses delivered strong financial performance once again, and we made steady progress against our 10-year vision. Combined, the smokeable and oral tobacco products segments grew third quarter adjusted operating company’s income by more than 9% and expanded adjusted OCI margins by 2 percentage points.

At the same time, we’re pursuing our vision to responsibly lead the transition of smokers to a non-combustible future. During the third quarter, Helix expanded the retail distribution of on! by an additional 16,000 stores.

Our talented regulatory affairs team completed its critical support services for JUUL’s PMTA submissions and PM USA began to market IQOS and HeatSticks as modified risk tobacco products, using the FDA authorized reduced exposure claim.

Altria’s third quarter adjusted diluted earnings per share was unchanged at $1.19. For the first nine months of the year, adjusted EPS grew 5.6% to $3.37, driven by the strong financial performance of our tobacco businesses.

Let’s discuss the third quarter in more detail, beginning with an update on US tobacco consumers. The external environment remains dynamic, and we believe a mix of macroeconomic and social factors influence consumer behavior and contributed to the sequential stability of tobacco industry volumes.

An increasing number of Americans, including many tobacco consumers, faced economic hardships. By the end of the third quarter, as unemployment rates remained high and the enhanced federal unemployment benefits expired at the end of July.

Executive orders temporarily re-established some of these benefits at lower amounts, but the length and timing of federal funding available to eligible consumers varied by state. However, we believe non-tobacco discretionary spending on items like gas and entertainment remain below pre-pandemic levels, helping offset some of the economic headwinds facing tobacco consumers.

At retail, we estimate the number of tobacco consumer trips to the store rebounded in the third quarter and that tobacco expenditures per trip remained elevated versus the year ago period. We also continue to believe that consumer stay-at-home practices allow for more tobacco usage occasions in the quarter.

Turning now to our businesses. The smokeable products segment delivered strong financial and marketplace results in the quarter. This segment delivered third quarter adjusted OCI of $2.8 billion, up nearly 10% from the same period last year. And for the first nine months, smokeable segment adjusted OCI increased 10.5% to $7.7 billion.

Smokable segment reported domestic cigarette volumes decreased by 0.4% in the third quarter. When adjusted for trade inventory movements, segment cigarette volumes declined by an estimated 1%. For the first nine months, we estimate that smokable cigarette volumes decreased by 2% on an adjusted basis.

At the industry level, we estimate that adjusted domestic cigarette volumes increased by 1% in the third quarter compared to the year ago period. And for the first nine months of 2020, we estimate that adjusted industry volumes were unchanged versus the prior year.

Based on year-to-date performance and expectations for continued category resiliency, we are revising our industry estimates and now project full year 2020 adjusted cigarette industry volumes to be in the range of flat versus the prior year to down 1.5%.

Marlboro’s third quarter retail share was 43.3% unchanged versus the prior year and up 0.5 sequentially. We believe Marlboro improved third quarter performance can be attributed to several factors.

As we described last quarter, we expect Marlboro 2020 retail share to be pressured by the cross-category movement back into cigarettes that we observed earlier this year. And while this dynamic continue to affect Marlboro’s year-over-year share in the third quarter, it was more than offset by favorable trends in the premium segment of the category, including increased smoker preference for premium products during these disruptive times. Marlboro also benefited in the quarter from lower promotional spending among competitive premium brands.

In discount, total segment retail share was 24.3% in the third quarter, up $0.02 versus the year ago period, driven by deep discount products. Sequentially, however, the discount segment contracted for the second consecutive quarter due to share losses in both branded and deep discount.

We’re continuing to monitor tobacco consumer behavior and believe that our smokeable businesses have the right tools in place to deliver against their strategy of maximizing probability in support of our vision.

Turning to our non-combustible portfolio. Our companies have made steady progress against their expansion plans for on! and IQOS. These products, together with USSTC’s leading moist smokeless business and our investment in JUUL, present significant opportunities for smoker conversion to non-combustible alternatives.

In oral tobacco, we believe we have an unmatched portfolio of MST and oral nicotine pouch products. Our company’s offerings with the Copenhagen, Skoal and own brands provide tobacco consumers with a wide range of satisfying formats, flavors and strengths.

We believe on! is a strong proposition and has been successful with both smokers and dippers. on! was sold in 56,000 stores at the end of the third quarter, up 40% from the second quarter and more than tripled the store count from the end of last year.

In stores with distribution, on! achieved a retail share of 2.1 percentage points of the oil tobacco category in the first nine months of 2020. Helix continues to test different trial generating promotions and has benefited from strong trade partnerships.

In the third quarter, Helix tested promotions using retailer platforms such as Circle K’s Lift System and the Murphy Drive Rewards program. We believe these tests were highly successful as they generated significant trial among smokers and dippers.

We’re very pleased with these results and our Helix team is continuing its efforts to retain these consumers and optimize future promotional activity. We’re encouraged by the early performance of on! and believe the breadth of its portfolio sets it apart in the marketplace.

Moving to e-vapor. The September 9th deadline for PMTA submissions represented an important milestone in the regulatory process for the e-vapor category. We believe it’s important that e-vapor remains an alternative for smokers and believe that a sustainable e-vapor category will be one that consists solely of FDA-authorized products.

We encouraged FDA enforcement against noncompliant manufacturers including those who continue to sell e-vapor products without a PMTA submission. We estimate the total e-vapor volumes decreased by 13% for both the third quarter and the first nine months of 2020.

We believe the e-vapor category will continue to undergo a transition period over the next few years, as FDA makes market determinations on the thousands of PMTAs fall before the September deadline.

In July, JUUL submitted PMTAs for its device and four JUULpod SKUs. As part of its application, JUUL also included its plans to address underage use of its products. The FDA reported that it has accepted JUUL’s application and moved it into scientific review. We believe JUUL submitted a thorough application due to the critical support services provided by our talented regulatory affairs team.

In September, JUUL announced a strategic update, which included its plans for a significant global workforce reduction, evaluation of resource allocation and the possibility of exiting various international markets.

In preparing our third quarter financial statements, we performed a valuation analysis of our investment in JUUL, which considered both its international prospects and current U.S. e-vapor category dynamics.

As a result of this analysis, we’ve recorded a $2.6 billion impairment to our JUUL investment, bringing its carrying value to $1.6 billion as of September 30. We’re now projecting lower JUUL revenues over time due to lower pricing assumptions and delays in JUUL achieving previously forecasted operating margin performance.

These changes are due to JUUL’s revised international expansion plans and the evolving U.S. e-vapor category and associated competitive dynamics. We continue to believe that e-vapor products including JUUL can play an important role in tobacco harm reduction.

In the heated tobacco category, PM USA continues to expand IQOS responsibly and in a disciplined manner. We believe that a relentless focus on the consumer journey from awareness to conversion is the key to success in this category.

Going back in history, one of the reasons we supported the Tobacco Control Act was that it provided a pathway to communicate with smokers about the relative risk of FDA-authorized non-combustible products compared to cigarettes.

And with the recent authorization of a reduced exposure claim on the IQOS system, PM USA is now marketing the IQOS device and HeatSticks as modified risk tobacco products. Today, PM USA has primarily used its robust digital assets and tobacco consumer database to communicate with smokers, included through websites, e-mail and direct mail.

We believe that the combination of these modified risk communications and PM USA’s more disruptive retail fixture will significantly enhance the quality of IQOS awareness among smokers.

As smokers move along the journey to engagement and trial, PM USA is providing flexible options to learn about IQOS and purchase devices. PM USA now offers a video chat option for age verified smokers to use their mobile phones and connect directly with IQOS experts for product education and support.

For online, the IQOS website offers smokers additional options including access to virtual tutorials and the ability with proper age verification to order devices for at-home delivery.

PM USA is also expanding the availability of devices into the convenience store channel. And beginning next month, PM USA expects IQOS devices to be available in select Charlotte convenience stores.

Turning now to guidance. We’re very pleased with the strong financial performance of our tobacco businesses. Based on our year-to-date results and insight into an additional quarter of ABI earnings contributions, we’re narrowing our full year 2020 adjusted diluted EPS guidance.

We now expect to deliver 2020 full year adjusted diluted EPS in a range of $4.30 and to $4.38. This range represents an adjusted diluted EPS growth rate of 2% to 4% from a $4.21 base in 2019.

Altria’s tobacco businesses have delivered excellent results in 2020, and credit for our success belongs to our talented employees. Through hard work and dedication, Altria’s employees have balanced multiple priorities, while making meaningful contributions to their communities and our company, and we greatly appreciate their efforts.

I’d also like to welcome Dr. Ellen Strahlman to our Board of Directors as announced this morning. Dr. Strahlman extensive medical and R&D experience will be a tremendous asset to company as we pursue our 10-year vision.

I’ll now turn it over to Sal to provide more detail on our financial performance and capital allocation.

Sal Mancuso

Thanks, Billy. Let me begin by providing some additional color on the smokeable products segment. The segment achieved strong net price realization of 5.9% for the third quarter and 7.1% for the first nine months.

The segment’s top line performance has been aided by PM USA’s revenue growth management framework, which enables the business to more efficiently and effectively deploy its promotional resources.

Segment adjusted OCI margins expanded over 2 percentage points in the third quarter to 57.5% as higher pricing and lower costs more than offset higher promotional investments and higher resolution expenses.

For the first nine months, adjusted OCI margins were 56.9%, a 2.5 percentage point increase over the same period in 2019.

In cigars, Middleton has performed exceptionally well this year, and has been a valuable contributor to smokeable segment adjusted OCI growth. Reported cigar shipment volumes increased 7% in the first nine months of the year and Black & Mild remains the leading tipped cigar brand.

Last month, Middleton expanded the Black & Mild Aroma Rewards program, which allows cigar smokers nationwide, the ability to earn points on specialty marked Black & Mild packs.

The points can be redeemed online for items such as mobile coupons and gift cards. Middleton is successfully navigating the regulatory environment and has received market orders or exemptions from the FDA covering over 97% of this volume.

Turning to non-combustibles. Our oral tobacco products segment continues to deliver excellent financial results. Segment adjusted OCI increased by 4.3% in the third quarter and by 8.3% for the first nine months, primarily driven by higher pricing, partially offset by investments in on!. Oral Tobacco segment reported volumes decreased by 1.1% in the third quarter.

When adjusted for calendar differences, trade inventory movements and other factors, estimated segment volumes increased by 4%; and for the first nine months, we estimate that oral tobacco segment volumes increased by 1.5% on an adjusted basis.

Adjusted OCI margins for the oral tobacco segment increased by 0.6 percentage points in the third quarter. For the first nine months, segment adjusted OCI margins were essentially unchanged versus the prior year, as investments in on! offset margin expansion in our traditional MST business.

We expect to continue our investments behind on! and we remain very pleased with the segment’s strong adjusted OCI margin performance. Third quarter retail share for the oral tobacco segment was 49.9%.

Copenhagen’s category-leading retail share declined two percentage points to 31.8% and its year-over-year performance continues to reflect increased tobacco consumer adoption of oral nicotine pouches.

Turning to our alcohol assets, 2020 has been a challenging year for both Ste. Michelle and ABI. Our thoughts and support are with Ste. Michelle’s employees and their families as they deal with the tragic impact of the West Coast wildfires.

We’ve made donations to several disaster recovery funds, including the American Red Cross and local foundations and started an employee giving campaign to support the relief efforts.

In beer, we recorded $95 million of adjusted equity earnings in the third quarter, representing Altria’s share of ABI’s second quarter 2020 results and a decrease of more than 58% from the same period last year. For the first nine months of the year, we’ve recorded $383 million in adjusted equity earnings, down more than 41% from the same period in 2019, due to the impact of COVID-19 on ABI’s underlying results.

Moving to capital allocation. Our balance sheet remains strong and our tobacco businesses are highly cash generative. Our Board of Directors declared a dividend increase during the third quarter, representing Altria’s 55th increase in the past 51 years.

Our current annualized dividend rate is $3.44 per share, a 2.4% increase versus our previous rate. Dividends remain our primary vehicle for returning cash to shareholders and our long-term objective is a dividend target payout ratio of approximately 80% of adjusted diluted earnings per share.

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.

Mac Livingston

Operator, do we have any questions?

Question-and-Answer Session

Operator

Thank you, once again. [Operator Instructions] Our first question comes from the line of Pamela Kaufman of Morgan Stanley.

Pamela Kaufman

Good morning. I wanted to ask about your guidance for 2020 industry volumes, which are flat year-to-date, your guidance for the industry to be flat to down for the full year, and it implies a very wide range for the fourth quarter.

So, I was hoping to understand, what is contributing to that given that we’re already a third of the way through the quarter. And then, looking towards next year, how are you thinking about the implications of this year’s strength in the industry on the outlook for next year?

Billy Gifford

Yes. Thanks for your question, Pamela. I’ll take them in turn. I’ll start with the industry guidance for this year. You’re right, through the first nine months; I think the tobacco category has certainly shown its resiliency. We have seen — and we tried to highlight for you the change in consumer behavior a bit.

Certainly, they benefited from government stimulus and of course, that has been absent and run out. We do believe that is offset by them having some extra discretionary spend as they’re spending less with whether it be gas or entertainment or going out and about.

And even their stay-at-home practices, have benefited with additional usage occasions. But we were on a range of scenarios, and so there is headwinds and tailwinds as we progress into the end of the year, depending on how the consumer behavior changes with the lack of government stimulus payments and the progression of the pandemic. And so, we run a range of scenarios, and we felt like that was the most appropriate range to put forward for the remainder of the year.

When you think about next year, I want to be careful not to get too far ahead of myself and provide guidance for next year. I think, if you think about some of the headwinds and tailwinds we have going kind of through the end of this year into the beginning of next, certainly unemployment remains very high from a headwind standpoint. I had already highlighted the government stimulus. So unless any action is taken, that would be absent in exacerbating, if you will, behind employment rates.

Some of the tailwinds that we see are discretionary spend. If COVID, and it certainly looks likely that it continues kind of on its path it’s been on, there will be stay-at-home practices, and certainly we’ve seen the consumer react to that from a standpoint of, we believe, adding additional nicotine occasions to their day. But we’ll be sure to come forward with what we think is the best estimate for industry as progressed to the end of the year.

Pamela Kaufman

Thank you. And I also wanted to ask about, how your outlook has changed since you last took your un-impairment charge on JUUL? And then, if you can explain the rationale behind the magnitude of the write-down, which implies about a total value for the company of $4.5 billion and seems to be a very significant difference relative to JUUL’s reported internal valuation of about $10 billion.

Billy Gifford

Yes. As you recall, Pamela, when we put together a valuation for the company, we do our best to make the best assumptions we can based on the future cash flows, how large the industry we would expect it to become both on the domestic side and the international side. We highlighted for you that we believe the category is going to go through a 2 to 3 year transition as all manufacturers in the e-vapor category navigate this FDA regulatory process.

Certainly, we’ve seen a number of manufacturers get fairly competitive and step up their competitive activities in the marketplace. And we believe it’s really due to as the FDA makes decisions and products can remain and some products leave the category that there will be consumers at play. And so all of those factors went into the valuation that we have and we came forward with our best estimate.

I think while we’re disappointed in the investment, we do believe that e-vapor will play an important role as we progress at harm reduction, especially in the U.S., but even worldwide.

And we encouraged the FDA to get through their process because really, if you think about where e-vapor is now, on the other side of the FDA regulatory process, the marketplace should consist of only FDA-authorized products that have been through the scientific evaluation.

Pamela Kaufman

Thank you.

Billy Gifford

Thank you, Pamela.

Operator

Our next question comes from the line of Vivien Azer of Cowen.

Vivien Azer

Hi. Good morning.

Billy Gifford

Good morning, Vivien.

Vivien Azer

I wanted to follow up on your commentary around the shift in consumer spending with the roll-off of the stimulus. Thank you for your transparency on that. I’m just curious, did you notice any differences across the nicotine categories? Was that a broad comment? Was that the cigarette specific? Thanks.

Billy Gifford

Yes, we made the comments specifically to cigarettes. But, I’d say, at large, I can’t think of anything to highlight differences in categories with the exception of what we highlighted early in the year with the e-vapor category.

We certainly saw consumers there as the FDA restricted flavors in the marketplace, we saw a number of consumers moving out of e-vapor, some back into cigarettes, and we highlighted the impact we thought that had on Marlboro.

But I would say, basically, in essence, Vivien, we talk about the same consumer moving around on categories, so their behavior has been fairly consistent.

Vivien Azer

Okay. That’s helpful. Thank you for that. Then my follow-up is on IQOS. Encouraging that you guys were continuing to expand retail distribution, in particular, in C-store. I was wondering if you could just offer any incremental color on what consumers would expect in terms of that experience relative to some of the initiatives early on in the IQOS rollout given that none of us have the capacity to actually go into the market and observe it ourselves? Thanks.

Billy Gifford

Yes, absolutely. Thank you for the question, Vivien. I think when you think about IQOS, look, we’re extremely excited to be able to come forward with the modified risk claim that the FDA authorized. And we really are looking at the IQOS team is looking at how do we meet the consumer where they’re at and putting it in select convenience stores, it really is meeting the consumer where they make their point of purchase. And you can think about the guided trial being very similar to what takes place even in our mobile units at times are outside of convenience stores.

It’s really an education process. But our IQOS team has done some excellent work. And as you mentioned, from the COVID pandemic standpoint of implementing digital tools, so that there’s tutorials that they can do digitally.

And we’re also testing at-home delivery once the consumer has gone through the tutorial and has been age verified that we could actually have at-home delivery of devices. And so we’re excited about the opportunity here and very excited about what has transpired in the three markets we’re in thus far.

Vivien Azer

Perfect. Thank you very much.

Billy Gifford

Thank you, Vivien.

Operator

Our next question comes from the line of Bonnie Herzog of Goldman Sachs.

Bonnie Herzog

All right. Thank you, good morning.

Billy Gifford

Good morning, Bonnie.

Bonnie Herzog

Good morning. Billy, I guess, I would love to hear any initial facts you may have on the potential outcomes from the election. I guess, I’m thinking about given the pandemic we’re in and the massive budget shortfalls that we have here in this country, I guess it seems logical to anticipate greater excise tax increases in the next year or two. So what are your thoughts on this? And then maybe remind us how you typically manage your business through this higher tax environment?

And then also any thoughts on the potential for greater regulation, depending on the outcome of the election. I think about in the context of maybe more state-level flavor bands or possible stepped up movement at the federal level on the potential for nicotine reduction on fixed? Thanks.

Billy Gifford

Sure. Thanks for the question, Bonnie. And I’ll try to remember I was taking notes to make sure I had them all. But I missed, please follow-up. I think from an overall election standpoint, certainly, it’s been a turbulent time across the US as we progress to election. But I think the best predictor is to step back and think about the success we’ve had under both pipe of administrations through our history.

I think we have the right tools in place and the talented employees that know how to navigate this type of environment. So whether you think about excise taxes, I think if you look through history, we’ve been very successful in the way you characterize is high excise tax environment, and we’ve been successful in those. Certainly, if you look over kind of a lower excise tax increase environment, we’ve shown the ability to navigate through those as well.

To address your regulation question, I think it’s important to remember that we’ve had both administrations through the regulatory process, both Democratic and Republican And we engage not at the presidential level, but certainly at the congressional level with both sides of the aisle, we don’t necessarily pick one or the other, we engage with both.

And so at the FDA, if you think about the makeup of the FDA, those employees — maybe with the exception of the commissioner who gets appointed politically are the same employees, and our team — regulatory affairs team has built an excellent relationship.

And I think both the FDA and us have learned how to interact with each other and anticipate what each other needs and wants as far as when an application takes place and be able to put those applications forward.

So we’ve had great success in that. It’s certainly something we’ll be engaged with, because you’re right, certainly at the state levels and at the federal levels, the governments have racked up significant bills related to their response to the COVID pandemic.

And they will have to turn to how do they pay for that. So it certainly could be a bit more challenging excise tax environment, but as I said earlier, I think we’ve shown the ability to navigate both sites.

Bonnie Herzog

Yes. That’s helpful perspective. Thanks, Billy. And then I did want to touch on something else as I guess I can’t help myself. I know it’s early, but as you look out over the next year or two, how are you thinking about spending levels and investments behind your reduced risk portfolio as you execute on your 10-year vision. For instance, assuming, we get the PMTA and IQOS 3.0, will you get more aggressive in marketing and rolling out this newer technology into more markets?

And then I’m thinking about it also for on!, I assume, you’d get more aggressive with that business as well as we look out over the next couple of years. So and thinking about it, I’m wondering if you are entering a period of maybe lower margin expansion, possible slower earnings growth.

Your historical 7% to 9% growth rates, as you really are, I think, trying to pivot your business. And I think about this on the backdrop of what we were just talking about possibly entering the period of – of higher excise taxes. So just trying to think about how you’re looking at your business over the next couple of years in that regard.

Billy Gifford

Yes, you’re right, Bonnie. I’ll be careful not to get too far ahead of myself. I think at the highest level, if you think about – it’s really balancing earnings growth and the associated cash that we return to shareholders. So having that and then balancing to your point, investments behind our non-combustible portfolio.

We know that a big group of our conventional cigarette consumers are looking for alternative products, and we want to make sure, and that’s exactly why we went into this a portfolio products approach to harm reduction.

Because consumers are going to make various decisions based on their individual choices, and so we want to make sure we have the best product in each of these categories. And certainly, as you’re introducing new categories, you have to invest behind them.

But at its essence, it’s balancing kind of continued growth and associated cash return to shareholders in conjunction with making investments in turn on combustible portfolio.

Bonnie Herzog

Okay. Thank you, Billy.

Billy Gifford

Thank you, Bonnie.

Operator

Our next question comes from the line of Nik Modi of RBC Capital.

Nik Modi

Good morning, everyone.

Billy Gifford

Good morning, Nik.

Nik Modi

Good morning, Billy. Billy, I understand you guys recently put out a new wholesale program. So I was just hoping you could provide some context on how you hope it will help your marketplace performance?

And then my kind of second question, unrelated, and forgive me for being so blunt, so I think it’s kind of stating the obvious that the stock has not done well over the last year and some change or two years.

And so just as being the CEO now in the seat for a few quarters, how do you think of – what do you tell your investors on how you expect to get this stock price back up and create some value? Thank you, Billy.

Billy Gifford

Absolutely. Nik, on the wholesale contract that whenever we partner, whether it be with wholesalers or retailers, we really try to listen to their feedback and really establish these contracts where they’re winning and we’re winning, both the wholesaler and us.

And so we feel good about what we’ve put in place with the new wholesale trade program. We think it meet some of the things that our wholesalers were asking for, but at the same time, positions us to do well as they do well. I think from the stock, you’re exactly right, Nik. We feel like it’s underperformed. We certainly feel like it’s undervalued for the unmatched portfolio we put together.

I really believe, we lost some trust with investors, and so we’ll be looking to build that back. And we really believe building that back is keeping our tobacco businesses, if you think about cigarettes and our traditional moist smokeless tobacco, keeping those businesses strong, which, we believe, they are in a great position, and you can see the results that they contributed year-to-date thus far.

But at the same time, focusing on, if you will, very quality flawless execution against making progress against our 10-year vision and posting those consistent results quarter-to-quarter.

So that is what we’re focused on. And we believe through time, the investor will hopefully, we can regarner the trust, and they will see the progress we make against achieving our 10-year vision.

Nik Modi

Good luck. Thank you.

Billy Gifford

Thank you.

Operator

Our next question comes from line of Gaurav Jain of Barclays.

Gaurav Jain

Good morning. How are you?

Billy Gifford

Good morning.

Gaurav Jain

So I have three good questions. So one is on the JUUL write-down, which now is almost $11 billion. And I think your capital gains on your ABI stake is about $7 billion. So when that AVI lockup expires next year and you’re making a decision of whether to sell or not, then capital gains considerations will not enter the picture. Is that a fair way to think?

Sal Mancuso

Good morning. This is Sal. Thank you for that question. In terms of the ABI shares, you are absolutely correct, the lockup on the shares do expire October of 2021. And the way I would articulate this is, as we did with the SAB transaction and really other capital allocation decisions, we’ll perform our analysis and determine if maintaining interest in ABI is the best use of capital.

While 2020 has been a challenging year, over time, our investment in both SAB and ABI has been beneficial. And you are correct in terms of capital gains offsetting capital losses. So I think your comment there is correct. That would be one of the factors as we do our capital allocation analysis.

Gaurav Jain

Sure. That’s very helpful. My second question is on the excise tax hike question. So if excise tax is to go up meaningfully, then what your earnings are implementation of minimal cigarette pricing?

Billy Gifford

Yes. I would see those as two different events. Really, from a high excise tax position, when you think of the position of the company, we oppose excise taxes. We think they’re aggressive in nature. Certainly, from a standpoint of taxing a small portion of the population to pay usually for programs that benefit the entire population. And so we think of those as separate events and that’s our positional high excise taxes.

Gaurav Jain

Sure. Thank you. Last question on that the scope of investments in next-generation products. So when we have rebased the EPS guidance down from 7% to 9%, then to 5% to 8% and then to 4% to 7%.

So there were two components of that one was extra investments and then one was 1% loss from JUUL’s equity income. So potentially, the scope of investments was about $200 million. So is that still the scope of investments as we look out next year?

Billy Gifford

Yes. I’ll be careful not to get too much until next year. I know you guys are interested and we’ll certainly provide it at the appropriate time. I go back to my answer I gave, if you think about what we’re looking to achieve, it is a balance between continued growth and the associated growth and cash returns to shareholders, and balancing that with investments in the non-combustible portfolio. So there are always puts and takes as you move through time, but that’s really what we’re going to be guided by as we move forward.

A – Billy Gifford

Thanks a lot.

Billy Gifford

Thank you.

Operator

Our next question comes from the line of Michael Lavery of Piper Sandler.

Michael Lavery

Good morning. Thank you.

Billy Gifford

Good morning.

Michael Lavery

I know CAGNY feels like a few years ago, but back then, you had laid out some of the purchaser profile for IQOS consumers in Atlanta. And even though, the retail boutiques are important, I’m sure; you had much lower cannibalization from consumers that came through connections through your experts as I think 38% Marlboro users. Can you just update us, if that’s still kind of roughly holding? And what amount of your consumers are coming from those expert connections versus the retail boutiques?

Billy Gifford

Yes, you’re right to highlight, Michael. That’s exactly what we brought forward at CAGNY. And you can see some of those learnings that we had in Atlanta; we’re incorporating as we move to Richmond and certainly learn from both of those as we go into Charlotte. And you heard to the moves that the IQOS team has put in place, introducing consumer interactions at the convenience store channel, at-home delivery.

From a standpoint of updating those specific numbers we’ve shown at CAGNY, we will certainly do that at the appropriate time. We want more time to elapse as we progress through. One number I can give you — remember, we talked about a 0.6 million share in Atlanta of store — IQOS and stores and distribution, that current number through the quarter was 0.9.

Michael Lavery

Okay. That’s helpful. And then just one other, you had mentioned some pretty encouraging initial awareness momentum in Atlanta as well, I think around 40% as of the second half of ’19, any sense of how that might look in a couple of other markets or how it’s progressed in Atlanta. Is that moving along pretty well?

Billy Gifford

Yes. I think it’s important to remember, Michael, we’ve just introduced the reduced exposure team. And those learnings we got in those — both Atlanta and Richmond, we have a much more disruptive retail look at Charlotte.

So I think those two coupled certainly should drive much higher awareness numbers. It’s just too early yet to get the good measure. From a standpoint of the — it the reduced exposure claims, it’s early yet, but it certainly has benefited in driving awareness. So, we’re very excited to be able to use that.

Michael Lavery

Okay. That’s very helpful. Thank you.

Billy Gifford

Thank you.

Operator

Our next question comes from the line of Chris Growe of Stifel.

Chris Growe

Hi, good morning.

Billy Gifford

Good morning.

Chris Growe

Hi. I just had a question for, if I could start on Marlboro. The market share was up strongly sequentially. You mentioned as more consumers move back into the cigarette category. There’s some risk to Marlboro share. But it performed well.

And I just — give a better sense of the incremental investments you’re making behind Marlboro? How are you aiding your share? And then those 27 states where you’re investing more heavily, are those the main driver of the market share gains, if you could fill some on that?

Billy Gifford

Yes. The only difference I would point out, Chris, is we think Marlboro performed very strong all year long. Certainly, as we tried to highlight that we were a panic, we saw consumers moving back from e-vapor into this cigarette category.

And we try to highlight, look, those consumers that move back to a bit older adult smoker who we know how, if you will, a preference to discount branded products. So, we feel like Marlboro performed very strong all year long.

From a standpoint of investment, I think we’ve gotten much more efficient and effective with their investments. We’ve highlighted for you the revenue growth management tool. And you highlighted the 29 states. It’s really being very — using the advanced analytics we’ve put in place to be very targeted.

And what we’re looking at is the health of the brand, the performance of the brand, the economic position of our consumers in various geographies and locales. And so, I think we’ve gotten much more precise and efficient with our resource deployment.

Chris Growe

And can you say those 29 states, sorry, would be the main driver of the share improvement? Or is it occurring kind of across the country?

Billy Gifford

Yes. I’m hesitant to get too many details around our revenue growth management. We feel like the Marlboro brand is very strong across the U.S. We highlighted that in this pandemic, we’ve seen the consumer really have a preference for premium branded products.

I can remember, through the last downturn, when I sat behind the glass with consumers and focused groups, they would talk about this being a moment in time in their day as they took these usage occasions that brought a bit of normalcy, and they wanted to have a brand that they trusted. So we think that has certainly impacted it some. And we did see some different competitive activity in the second quarter compared to the third.

Chris Growe

Okay. And I had just one follow-up question for on! it’s obviously growing very strongly. I just want to see, is capacity a limiting factor for the brand in your expansion plans. You’ve made good sequential progress expanding the brand. But is there a capacity limitation there that you would cite? And just curious, if we continue to expect distribution increases for the brand from here?

Billy Gifford

Yes. Certainly, you should expect distribution increases that we are still under a bit of manufacturing capacity constraints. That is on track to what we shared last time. We took the best engineers we had on kind of from the old tobacco space in our moist smokers business.

Our best engineers from a high-speed manufacturing in cigarette and I think they’re making great progress. Certainly, they had some disruptions around COVID, but we’re on track to what we shared last time.

Chris Growe

Okay. Great. And thank you so much.

Billy Gifford

Thank you, Chris.

Operator

Our next question comes from the line of Adam Spielman of Citi.

Adam Spielman

Hi. Thank you very much. I’d want to follow up some questions previously been given. So I think nic said in effect, your share price is very low. And your reply was we agree it’s undervalued. The obvious solution to that is buybacks. If our shares are undervalued buying back makes sense.

And I’m wondering what it would take for you to buy back in terms of your balance sheet? Because I look at your balance sheet, and I think it’s strong. So that’s my first question. Thank you.

Sal Mancuso

Good morning, Adam, this is Sal, and thank you. It’s a really good question. Here’s the way I’d like to answer it. If you think about capital allocation for Altria, dividends continue to be the primary vehicle for returning value to our shareholders. And we’re fortunate to have a strong balance sheet and operating companies that generate significant cash.

As we said, we do agree that the stock is undervalued. But we continue to be in the middle of a pandemic, and we believe that maintaining a higher-than-normal cash balance is really the most prudent strategy to support our operating companies and our strategies going forward.

But you’re right, we’ll continue to evaluate expectations of business performance, the impact on adult tobacco consumers of the pandemic, the general environment and really make our recommendations to the Board of Directors the best way we can and at the appropriate time, we will think about all aspects of capital allocation.

Adam Spielman

Is there a specific target you have for that EBITDA, for example, that would allow you to make a recommendation to the Board for buy backs?

Billy Gifford

Yes, Adam, I think I understand your question. There is a specific target in mind. Certainly, we want to always have debt management in mind when we think about that capital allocation process.

Certainly, we — dividend is a top priority for us. And when you think about share buybacks, that’s always top of mind as well. And so we look at that in the capital allocation process, but we don’t have any specific target in mind.

Adam Spielman

Okay. So moving on, on your — so thank you very much, always sort of look at your metrics. And in the second sheet, you gave the cigarette industry volume decomposition estimate, which is always very useful. So thank you for that. And in the last 12 months, you — this tells me that macroeconomic and other factors have increased the cigarettes industry by 2.1 percentage points.

Can I just understand what that means. I interpreted to say, if there was a normal year without any impact from COVID and the pandemic and state home orders, effectively, your volume — sorry, industry volumes would fall about two percentage points.

In other words, I think of this as saying, well, actually, the pandemic has caused a huge numbers of surpluses and minuses, but net-net, it’s clearly benefited tobacco consumption in the last 12 months. And in a normal year, cigarette volumes will be just two percentage points lower. And we know 2021 isn’t going to be an year, but it will. Is that the right way to read that, that 2.1 percentage points?

Billy Gifford

Yes, Adam, when you look at the sheet, those macroeconomics, we tried to highlight what we really felt like that was driving that. Certainly, government stimulus over the last 12 months has been a piece of it. Discretionary spend having more availability to our consumer base as they spend less in gas and entertainment and other types of discretionary spend. I hear your point on what you’re trying to make. I think it’s just tough because the situation is always different.

And you’re exactly right. That’s what we try to provide this because this is a snapshot of the last 12 months. But it’s hard to say, oh, if everything on this aspect of it was exactly the same, this would be the answer. So I just caution you from that. But we do try to provide this to say, look, when we call volume change over the last 12 months based on the circumstances of those last 12 months, here’s how it plays out.

Adam Spielman

And then okay. So that’s very helpful. Then a quick question on the PMTA process. How do you — obviously, you have said very clearly that you hope FDA basically cleans out some of the e-vapor companies that are not, let’s say, compliant. The question is, have you actually seen any of that yet?

Billy Gifford

Yes. From a standpoint, you may have seen — what I’ve seen, Adam, is that the FDA talked about publishing, if you will, a compliant product list to retailers and wholesalers, so that they are aware of those products that had submitted. I haven’t seen that published yet. I think when you boil it down to the essence is exactly what you said, Adam is enforcement is necessary.

And so the FDA just needs to find the right method that works for them to be able to enforce that only those products that — and manufacturers that are meeting the of the FDA are remaining in the marketplace. I think that’s appropriate from a manufacturer standpoint, and most importantly, appropriate from a consumer standpoint as they’re making their choices at retail.

Adam Spielman

Okay. And my final question, I’m sorry for asking so many. Clearly, with the new JUUL valuation, as you say yourself, you’ve done a cash flow analysis. I’m sure there are a range of scenarios you’ve considered.

But I wonder if you could just please tell us sort of what sort of scale of e-vapor do you expect to see in two or three years’ time? And to be precise, it is in your valuation, what sort of scale of e-vapor in the market do you see in two or three years?

Billy Gifford

Yes. I appreciate the question. I mean, you’re exactly right. We do run a range of scenarios, and that’s all been built into that valuation. I think when you think about the potential for e-vapor to contribute to harm reduction in the U.S., we think it’s extremely important for the FDA to continue to allow e-vapor in the marketplace. Here’s what will shape the size of the e-vapor category. It really is this regulatory process.

From a standpoint of how does the FDA think about the science, think about the conversion of cigarette consumers to e-vapor and what products they approve. I think another factor will be excise taxes, how do the states and the federal government think about excise taxes in e-vapor.

And then the final one and this may be longer than your two to three-year window is how products stay relevant to the consumer base? How do they improve through time? How do they satisfy? Certainly, we’ve seen some products in the marketplace satisfying consumers for conversion.

But then if the consumer continues to evolve, does the product base keep up with that? So those are the three main factors that will shape, if you will, how large the e-vapor category grows through time.

Adam Spielman

And when you’ve come up with that $1.6 billion valuation, I mean how those factors play out in your models?

Billy Gifford

Yes, Adam, I don’t want to go to that level. Just know that we run a range of scenarios. So I could pick the average, but that wouldn’t be very helpful to you, nor would try to give you the range. And so, those are the factors we considered in updating those ranges scenarios from the size of what e-vapor could be,

Adam Spielman

Okay. Well, thank you very much.

Billy Gifford

Thank you, Adam.

Operator

[Operator Instructions] Our next question comes of Robert Rampton of UBS.

Robert Rampton

Good morning. Thank you very much for taking my questions. First is, I’m interested in how menthol cigarettes have been banned in Massachusetts for some time now for over the quarter, interested to know what you’re seeing in terms of consumer behavior there?

Billy Gifford

Yes. It’s tough to tell and state the size of Massachusetts. From a standpoint, certainly no menthol cigarettes are being sold in Massachusetts through legal channels. We really believe when you step back from the action taken in Massachusetts, it’s really, we believe, the best decision-making body in the government is the FDA because they can look at the science and evidence and make appropriate decisions.

If you recall, when we submitted comments to the FDA, we talked about this type of action taken on menthol could really harm the future of reduced harm in the marketplace for consumers because it has the opportunity to open up illicit trade.

And I think, if you’ve been following Massachusetts closely, they had some instances with at the ages cracking down there on some of the illicit trade. And so, it’s tough to tell and state the size of Massachusetts and some of the activities that are taking place there.

Robert Rampton

Great. Thank you, very much. And sorry, my next question, just looking at the 3Q stand-alone, as it was previously flagged, you give that helpful 12-month rolling estimate of the drivers of volume decline. Just wondering if you can give us a bit more insight into in this quarter, what you’d attribute to the macro bucket you flagged?

And within that macro bucket, I know it’s difficult maybe don’t want to, but what is attributable to, say, lower gas prices versus fiscal transfers and so on. Any color you can give there, additional color would be helpful?

Billy Gifford

Sure. Certainly, the factors were present in the third quarter. The ones you mentioned certainly spending less on gas, spending less on some of the entertainment and other discretionary spend were certainly present. The only caution I would give you is when you look at a very short period of time, the dissecting of it, really to build a trend through time, and that’s why we go with the 12 months ended. We think that’s a better indicator of kind of how the consumer is behaving through time versus a very short period of time and a window there.

Robert Rampton

Great. Okay. Thank you very much. That’s it for me.

Billy Gifford

Thank you.

Operator

Thank you. At this time, I would like to turn the floor back over to management for closing remarks.

Billy Gifford

So thank you. Altria’s tobacco businesses have a track record of delivering strong and consistent financial performance in challenging environments. We continue to reward our shareholders by returning a significant amount of cash in the form of dividends. We believe our tobacco business platform has the winning brands and is unmatched. And we’re excited to make further progress in achieving our vision of responsibly transitioning smokers to a non-combustible future.

Thanks again for joining us, and please stay safe, and contact our Investor Relations team if you have further questions.

Operator

Thank you, ladies and gentlemen. This does conclude today’s conference call. You may now disconnect, and have a wonderful day.

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