MO
#Well, thanks <UNK> (1:56) and good morning everyone
Based on strong tobacco operating company performance, Altria delivered solid results in the second quarter and first half of 2017. The smokeable products segment generated strong income growth despite a large cigarette excise tax increase in California, and the smokeless products segment has largely rebounded from its first quarter voluntary product recall
We grew adjusted diluted earnings per share 4.9% in the second quarter and 3.3% for the first half of 2017. The smokeable products segment delivered 6.4% adjusted operating companies income growth in the second quarter as strong pricing more than offset volume declines and higher promotional investments
For the first half, smokeable products segment adjusted operating companies income grew 7.2%
As I mentioned, the smokeable segment's results were negatively impacted by California's $2 per pack cigarette excise tax increase, which went into effect on April 1. California is a high-volume state, previously accounting for approximately 7% of total U.S
cigarette industry volume
Following the tax increase, California's volume contribution dropped to 5% which drove total U.S
industry volume down approximately 4.5% in the quarter
In addition, Marlboro has a strong share in California of over 50%
Thus Marlboro was disproportionally impacted by the tax increase contributing to its decline of 0.3 of a national retail share point in the second quarter to 43.5%
We expect these dynamics will continue to dampen Marlboro's share through the back half
Outside of California, Marlboro's second quarter share remains stable, sequentially
Past experience shows that tax increases of this magnitude are most disruptive immediately following implementation, after which the rate of decline moderates
We continue to anticipate an approximate 1% negative impact on industry volumes for the full year as a result of the excise tax increases in California on April 1, and Pennsylvania last August
Looking to the back half of the year, PM USA recently announced the national expansion of Marlboro Black Menthol 72's, a product PM USA expects will further enhance Marlboro's position in the growing menthol segment and among adult smokers age 21 to 29. Moving to the smokeless products segment
USSTC has largely rebounded from its first quarter product recall
It delivered 9.8% adjusted operating companies income growth in the second quarter
USSTC grew smokeless products volume 1.4% in the quarter and gained retail share sequentially, growing 0.6 of a share point over the first quarter
USSTC estimates that the recall had about a half of a share point impact on its total retail share in the second quarter
And Copenhagen continued to gain ground in the second quarter growing 0.7 of a retail share point to a record share of 34.1%
That was a particularly strong performance as it lapped the Copenhagen Mint national expansion in 2016. Through the first half, Copenhagen remains both the largest and the fastest-growing smokeless tobacco product in the U.S
On a combined basis, Copenhagen and Skoal retail share declined 0.7 of a share point in the second quarter, driven by Skoal's 1.4 share point decline
For the first half, combined Copenhagen and Skoal retail share declined 0.6 of a share point
The smokeless products segment delivered 1.6% adjusted operating companies income growth for the first half of 2017, as higher pricing was partially offset by the first quarter recall
Now that the product recall is complete and trade inventories are substantially replenished, USSTC is well-positioned moving into the second half of the year
Finally an update on our innovative tobacco products efforts
In e-vapor, Nu Mark's MarkTen brand continues to grow volume and retail share
It is currently the number two e-vapor brand nationally with a second quarter national retail market share of approximately 13% in mainstream channels
MarkTen is now present in stores representing nearly 65% of e-vapor volume in those channels
And among stores, with MarkTen distribution through the full second quarter, MarkTen's retail share was approximately 24%
We're pleased with MarkTen's progress and Nu Mark plans to continue growing the brand in the back half
In heated tobacco, the FDA began its substantive review of Philip Morris International's modified risk tobacco product application for IQOS in late May
The FDA published PMI's Executive Summary and research summaries to its website for public review and comment, and the agency plans to publish additional sections of the application on a rolling basis
We continue to work closely with PMI throughout the review process
As a reminder, PMI submitted its pre-market tobacco product application for IQOS to the FDA on March 31. Our team at PM USA continues to build its U.S
commercialization plans which we look forward to sharing with you in the future
I'll wrap up with guidance
Obviously, our business fundamentals remain strong
We continue to expect higher adjusted diluted EPS growth in the second half of the year as some first half headwinds moderate and because the fourth quarter will include equity earnings from our beer investment whereas the fourth quarter of 2016 did not
As a result, we are reaffirming our full year guidance of 7.5% to 9.5% adjusted diluted EPS growth
Here's <UNK>y for more details on our performance
Hi, <UNK>
Yes, we can – I'll get <UNK>y maybe to talk about the geography in a minute
But, when we look at it, it looks like churn in the discount category to us
The gain in deep discount, so for reference for people who – we're referring to the quarterly metrics report where we put these data in that <UNK>y referenced
And we show there that the discount category has not grown year-over-year
In fact, it's essentially flat down a tenth
But there is some difference between the branded discount which is down five tenths and deep discount which is up 4. So it looks to us like it's basically churn there
I mean importantly for us, there does not appear to have any significant effect on Marlboro or in L&M
Indeed, if you look at the share chart in the earnings release, you can see that the discount category for us was actually up a tenth over the half
<UNK>y can talk about the geographies, but there's no question that when you have a major excise tax increase in a state, some people do trade down
I don't know, <UNK>y, you want to talk about discount?
Yes, sure
Overall, <UNK>, I would say that we continue to have a largely constructed view of the economic situation of our consumer
Unemployment's down, housing is up, wage gains are starting to come through
All the stuff that we talk about all the time, so I won't repeat that
That looks to us to be pretty stable
Gas prices are up a little bit, but not remarkably so in a way that affects our business
I think what you may be getting at though that there is a segment of consumers in our category who will go into the store and ask the clerk for the lowest-priced brand, and they may be picking up some share there but again, it appears to be coming out of perhaps the branded discount segment without certainly no effect on our brands, so we don't see it in premium, generally
I hope that's helpful
Okay
Yes, thanks for calling
We do not see that
I think it's basically a function of price, <UNK>
I guess the honest answer is
Yes, I think I understand the question, thank you
That's why we do a range
And I think the range is sufficiently broad that, look, if you could predict your EPS with perfect prescience, you would put out a number, but you can't of course because of dynamics, again, you see it again this year as well
So we try to have the range to be broad enough to cover all that
We put our best thinking into what we can do within the range and that does include what we expect out of our beer investment
So the answer is yes, it's all in the guidance and we think the range is sufficiently broad to cover it
No, I don't think so
I think we were thoughtful about putting the guidance together at the first of the year and I think that we are comfortable with the guidance range we have at this point in time
Hi, <UNK>
Let me try to tackle those
I think that you know what the strategy is
We're trying to maximize income in the segment, and that's a balance between that and making sure we have momentum on the key brands including Marlboro
So the share on Marlboro is down primarily because of the California effect
But other metrics on Marlboro continue to be strong
Its equity is great
As you can see, we've got very good pricing through the first half, <UNK>
The demographics have stabilized since Marlboro architecture
We just have a massive increase in California
We over-index in California, and so I think that explains that
The competitive environment I think we would describe as, it's always competitive
It may be useful for a couple of comments on that
One is if you think of competitive activity as occurring within say a band, it looks to us like the competitive activity remains within the band although perhaps a bit on the high side of the band
We have some promotional launches and some promotional activity from other competitors but we monitor that carefully, as you know
And what we basically do is we adjust as we need to adjust
So I think it's pretty steady as she goes and we're very happy
When you look at the income performance in the smokeable segment at more than 7% for the first half, despite the California increase, I think that they're doing a great job over there in line with their strategy
Well, look, we're preparing to be ready on the nominal timelines that the FDA has said with respect to approving those applications
Your question correctly implies of course that's not completely within our control and it could take longer than that
That's why we're investing in with discipline
We're trying not to over-spend on the front end but we will certainly make the appropriate investments once we know we're go
So the way we look at it is we're going to be ready at the earliest moment to proceed expeditiously
If it turns out to be longer, we have contingency plans in place to do that
It's just not within our control, so we try not to fret too much about that, we just try to be ready when we can go
Hey, <UNK>
I'll take the second one first, and then I'll ask <UNK>y to comment on the elasticity question, <UNK>
We have not observed that in our category at c-store
We've been reading carefully the reports
We've seen others comment on that, but at least with respect to our category, we have not seen that yet
Well, you see that on almost all the metrics the business bounced back terrifically in the second quarter, it's just that when you're out of the market and you lose your share, it just takes longer to gain the share back
And so I think we said at the first quarter call that we expected to gain that back over the course of the year and we were trying to point out the gain that we made in the second quarter of I think 0.6 sequentially
So I think we'll get it back over the course of the year, but it doesn't bounce back immediately
Good morning, <UNK>
Well, I'll speak to the inventory movements
I won't speak to guidance on volume, particularly around numbers because you know we don't do that, but you're right to point out the factors
We do have some trade inventory as we point out in the metrics report that built in the second quarter
And as you know, <UNK>, it all kind of normalizes over the course of the year, and so in the back half, that'll pay itself back, I'm sure
I know you remember we have one fewer shipping day in the third quarter and then we have to work our way through this effect that <UNK>y was just discussing with <UNK> about the volume declines that are resulting from the cigarette excise tax increase
So those are all the dynamics, but we have not put out a number about third-quarter volume
Let me share with you some of the macro data that we have, just to get everybody oriented
In 2016 we estimated that the spend in the category was about $2.5 billion; that was flat to 2015. But we have seen a pick-up both in volume and in dollar sales in 2017. So I don't know, maybe 8% on volume year-over-year
And then there's been some price mix as you know
A lot of that is driven by MarkTen, which has really gotten traction with the consumer and we put out some share numbers on that today
The other phenomenon that's happening in the category as I know you know, is there's poly use
So adult tobacco consumers do shift between segments of the tobacco category, and I think that what you're seeing as vapor moves up and down, and maybe even MST, is you see people moving among and between those categories
I think those are all factors that go into the growth rate for vapor and then of course, when there's new technologies that are put in the market, we find high trial and that drives some of the growth
We have an engagement plan that we're talking to public policy officials, to state tax officials and others, and I am encouraged that there is, I think a more broad acknowledgement among public policy people these days that harm reduction is the way forward and that tax policy will be an important component of that
It makes good sense to try to encourage people to migrate to products that may hold out less harm
We are particularly pitching that in the states, but as you know, state excise tax structures are highly complex and idiosyncratic by state, so the reception varies from state to state
But we are out there sharing our views about that and trying as best we can to persuade people to be thoughtful about that
Welcome
Okay
We have noticed that some people have commented on that, so I'm glad to have a chance to talk about the replenishment
Actually, I think it's going pretty well
If we look at – I don't know, we went back and looked at some data through June and with a small exception of maybe, I don't know, call it two, three or four SKUs, all of the orders were being completely fulfilled
So that's a pretty quick snap back from a recall and a transition from a two-factory environment to a one-factory environment
I'd like to take the occasion to congratulate the UST team on such a good job
There was a brief hiatus during the July 4 holiday
Our people have been working very hard in the factory and we gave them an appropriate July 4 holiday
And there was a short period there where a few more SKUs were not available and we had to limit some orders
But on the whole, the vast majority of the SKUs are at full fulfillment, and as you can see from the numbers in the second quarter by the smokeless team, I think they've done a very good job
So our view is that we're pretty much back in business in the smokeless business
We have not seen any pantry loading that I'm aware of
Sure
Well, there's a group of people that are trying to take decisions away from other adults and we oppose that
And we thought that was very bad public policy
You know our position on menthol because we've articulated it extremely thoroughly at the FDA, and as a matter of first instance, if there's going to be anything done on menthol, it ought to be done by the agency that has the expertise to assess whether the science and the evidence supports it
In our view, and the view of many others who weighed in on the FDA, is that there is not
For San Francisco to try to create its own set of rules out there doesn't seem to be good public policy to us, but this happens
Local jurisdictions have views about tobacco issues and while we fight them, they go ahead and reimplement them
Obviously it's a tiny fraction of the volume
Thanks for calling in
Well, I don't want to talk about forward pricing as you can appreciate, and I think that the dynamics are well understood, <UNK>, about what we have out there
I tried to articulate them in terms of the inventory, but I'm not going to talk about forward pricing of course
Well, there are other jurisdictions that have implemented it
And my guess, what I would say is that while we continue to think we have strong arguments, it's fair to observe that we have not been able to block them in other jurisdictions
It always depends a bit on state law and other factors, but we'd like to have public policy defer to the experts but they often don't and sometimes the courts are reluctant to interfere with that
So it can be uphill
I hope so
It's in the ag bill as you know and I thought that the – we were happy to get it past the committee and that predicate date really needs to be changed
I think there is widespread understanding that the predicate date issue should be changed
It's a very, very complex environment in Washington, to state the obvious, and so we'll have to see where it goes in the budget
But I think that there is a lot of support for that amendment and we continue to work that very, very hard
<UNK>, thanks for calling
Well, thanks for your question
I appreciate you calling in
As you might expect, I've been spending my time this morning thinking about this call, so I didn't have a lot of time to review the BAT material
I did see the headline statement apparently that they're going to pursue an FDA application for glo
Our plans assume the following which is, because the application is in by PMI in the United States and we're working that we expect to have first mover advantage
But our plans also assume in our category that we will have competition, so I think both scenarios are covered
Welcome back
It's too small, and it's so idiosyncratic because it's an island that it's just hard to extrapolate from it
I think we had said previously when we studied California that we had not seen any significant effects there and obviously we'll be monitoring New Jersey very carefully
Welcome back
Yes, the integration is well underway
I think that we're doing very well against the plan we have
We're working on the branding strategies now
Obviously getting our arms around the factory and we'll have more news on Nat Sherman in the back half of the year, but we're very pleased with how it's gone so far, <UNK>
Thanks
