Altria Group Inc
NYSE:MO
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
39.73
56.73
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Altria Group Inc
You don't have any saved screeners yet
Good day, and welcome to the Altria Group 2019 Second 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. [Operator Instructions]
I would now like to turn the call over to Ms. Paige Magness, Vice President of Investor Relations and Communications for Altria Client Services. Please go ahead ma'am.
Good morning, and thank you for joining us. We're here this morning with Howard Willard, Altria's CEO; and Billy Gifford, our CFO to discuss Altria's 2019 second quarter and first half business results.
Earlier today, we issued a press release providing these results. We're also including slides to accompany our remarks. And all of this information is 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 2018. Our remarks contain forward-looking and cautionary statements and projections of future results. Please review the forward-looking and cautionary statement section at the end of today's earnings release for various factors that could cause actual results to differ materially from our projections. Future dividend payments and share repurchases remain subject to the discretion of Altria's board. Share repurchases depends on marketplace conditions and other factors.
Altria reports its financial results in accordance with U.S., Generally Accepted Accounting Principles. Today's call will contain various operating results on both the 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.
With that, I'll turn the call over to Howard.
Thanks, Paige, and good morning everyone. Altria delivered excellent second quarter results driven by the performance of our core tobacco businesses. We grew adjusted diluted earnings per share nearly 9% in the second quarter, with each of our core tobacco segments delivering double-digit adjusted operating companies income growth, expanding their already impressive adjusted operating companies income margins, and maintaining momentum on their leading premium brands.
The strong second quarter was a big step-up from the first as the negative smokable inventory impact in the first quarter reversed to a benefit in the second. The second quarter also saw the benefits of our cost-reduction program ramp-up and we expect these will continue to build through the year.
In the second quarter, we made important progress further enhancing our business platform in non-combustible product offerings for adult tobacco consumers. In April, FDA authorized PMI's IQOS product for U.S. commercialization in the heated tobacco category. And in June, we signed an agreement to acquire 80% ownership of the companies that will globally commercialize on!, a leading product in the rapidly growing oral nicotine pouch category.
We also saw an acceleration of consumer trends that we believe further validate the strategic actions that we've taken over the years. We believe that with our leading premium brands – with our leading premium tobacco brands U.S. commercialization rights to IQOS the leading global heated tobacco product our investment in Juul and pending transaction for on!. We're best positioned with a strong and resilient combustible business and the best noncombustible portfolio in the U.S. tobacco market.
Let's turn first to our smokeable products segment. The smokeable products segment generated strong adjusted operating companies’ income growth of 11% in the second quarter, primarily driven by the benefit of higher pricing and the impact of our cost-reduction efforts.
For the first half, the smokable segment delivered 5.7% adjusted operating company's income growth. PM USA is pleased with the Marlboro's continued stability with retail share of 43.3% unchanged versus the year-ago quarter and up 0.2 sequentially. Marlboro's performance continues to be supported by its leading brand equity bolstered by investments in product expansions, packaging innovation, and digital loyalty, and trade programs.
In discount, L&M is performing in line with expectations and we are pleased with its increased profitability over time. We believe discount category dynamics continue to primarily reflect a churn between branded discount and deep discount offerings. The overall discount category grew 0.1 sequentially in the quarter to 24.2% and the discount category remains essentially line with historical share.
Turning to cigarette volumes. The first half of 2019 saw large inventory fluctuations. Wholesalers depleted PM USA inventories by 400 million units in the first quarter and rebuilt inventories by 500 million units in the second quarter. The net result being a 100 million-unit benefit to reported volumes in the first half compared to a 400 million-unit depletion in the first half of 2018. We estimate that the adjusted industry decline rate in the second quarter was 6% up from 5% in the fourth quarter of 2018 and first quarter of 2019. Over the first half the adjusted cigarette industry decline rate was an estimated 5.5%.
Let me provide you with some perspective on the factors driving category volume declines. Over the past 12 months, U.S. cigarette industry volumes declined by an estimated 5%. This represents a 0.5% increase versus the 12 months ended in the first quarter of 2019, which we estimate as primarily due to increased adult smoker movement to the e-vapor category. We believe this reflects both increased availability of satisfying e-vapor products that began midyear 2018 and higher levels of exclusive e-vapor use.
After considering the latest information, we are revising our 2019 estimate of U.S. cigarette industry volume decline rate to 5% to 6% from a range of 4% to 5%. We have also considered the combined effects of the current acceleration in adult smoker movement across categories and the recent strong national momentum behind raising the legal age to purchase all tobacco products to 21, and our estimated cigarette declines through 2023. Specifically, we expand our five-year compounded annual average rate of category decline estimate to 4% to 6% from our previous range of 4% to 5%.
It's informative to compare smokable business results versus historic category volume declines. In the first half, adjusted category volumes were down 5.5% and the smokable segment grew adjusted operating companies income 5.7%. By comparison over the past four years, adjusted category volumes declined approximately 3% on a compounded annual basis and the smokable segment grew adjusted operating companies income 5.2%. We believe this demonstrates how our strong and resilient smokable platform can deliver profit growth in the current volume decline environment.
Solid profit growth is also demonstrated in our smokeless product segment results. USSTC is successfully executing against its strategy of maximizing income while maintaining momentum on Copenhagen over time. USSTC is one of the most profitable non-combustible tobacco businesses in the world and offers a portfolio of satisfying products with the potential for harm reduction.
USSTC grew its adjusted operating companies income by 10.8% in the second quarter and 9.4% for the first half reflecting consistently strong results so far this year. And Copenhagen's category-leading retail share grew by 0.3 to 34.6% in the second quarter. USSTC's smokeless volume decreased an estimated 2% in the first half when adjusted for calendar differences and trade inventory movement.
USSTC estimates that smokeless industry volume decreased 1.5% in the last six months. We believe these declines reflect increasing adult tobacco consumer interest in both e-vapor and oral nicotine pouches. In June, we announced an agreement to acquire 80% ownership of the companies that will commercialize On! oral nicotine pouches through Helix innovations, a newly-formed operating company.
On! offers a total of 35 SKUs representing the broadest oral nicotine pouch portfolio in the U.S. market today. We expect the transaction to close in the second half of this year. In advance of closing Altria Group Distribution Company began expanding availability of the On! portfolio to select retailers this month.
Upon closing our focus for On! will include further expanding retail distribution and visibility, building U.S. production capacity, building the On! brand through adult tobacco consumer engagement and preparing PMTAs for the On! portfolio. We're excited about adding On! to our business platform and pursuing a leadership position in this new and rapidly growing category.
Also in non-combustibles IQOS has shown to be a leading product internationally. We're pleased to have access to an inhalable alternative that represents to the first next-generation tobacco product to receive FDA premarket authorization. We're ready to begin commercializing IQOS in the U.S. and are committed to its success. We expect the first IQOS store to open in Atlanta in September along with the other retail touch points including mobile retail units and retail kiosks all restricted to adult smokers.
We plan to have the IQOS website live in August where adult smokers will be able to preorder their IQOS devices for pickup at the IQOS Atlanta store. Initially, we expect HeatStick distribution to be in approximately 500 Atlanta area stores. We are very excited to bring IQOS to adult smokers in the U.S. and intend to capitalize on this first-mover advantage.
Turning the e-vapor. The category continues to grow as adult smokers increasingly find satisfying options in the category. We of course participate in the e-vapor category through our investment in Juul. After initial trial and experimentation with e-vapor adult vapor participation in the category declined from 2014 to 2016. The number of adult vapors reaccelerated upon the availability of more satisfying pod-based products.
Based on our 12-month moving data, we estimate there are now 13.8 million adult vapors as of June 2019 up from 12.2 million at the end of 2018. Importantly that growth trend coincides with a trend towards more exclusive use in the category. According to our adult consumer tracking data, we estimate more than 7 million adults vape and do not smoke as of June 2019.
In the first half of 2019, we estimate that e-vapor category volume grew by approximately 40% year-over-year across open and closed systems at all trade classes. Since 2017 and even considering more recent competitive product expansions, our data indicates that Juul has driven nearly all of the category growth.
Juul share of the category across both open and closed systems grew to 48% in Q2 up from 44% in the first quarter and its full year 2018 share of 33%. Juul continues to be the category leader despite the removal of certain flavors at retail that caused the first quarter sequential volume slowdown. While competitors have responded by increasing the availability of non-traditional flavors we believe their tactics will ultimately be addressed with full implementation of FDA's ENDS guidance later this year.
Internationally Juul continues to make progress expanding to additional markets. Since April Juul launched in several new markets which include Ireland, South Korea, Austria and the Philippines. Juul plans to launch additional markets by the end of this year, it's still early days for Juul international distribution. However, we are working to establish a measurement system that appropriately captures trade channels in overseas markets and provides a more complete view on consumer takeaway.
Providing thoughtful solutions to address youth e-vapor use is a top priority. We know that the future viability of these products is at risk unless more is done to reverse the underage e-vapor use trend. We strongly believe that raising the legal age nationwide to purchase all tobacco products to 21 is one important step toward addressing this issue.
So far our advocacy has helped drive significant progress at both the federal and state levels. Earlier this month, Ohio became the 18th state to make 21 the legal age of purchase. And now over half of the U.S. population is covered by legislation requiring 21 as the minimum age.
Bipartisan federal legislation has also been introduced with broad support so the effort has strong momentum. We believe it is critical to preserve e-vapor products as an option for the more than 13 million adults who use them and the millions more adult smokers who are interested in non-combustible alternatives.
Earlier this month in the case pending against FDA and federal court in Maryland, the court revised PMTA deadlines for new tobacco products on the market as of August 8, 2016 to be May 2020. According to the court order, new products for which applications have not been filed within this period will be subject to FDA enforcement discretion. We expect the new time lines to present a challenge for all companies impacted by the court's ruling. Juul has invested significant resources in preparing their applications and we are offering regulatory consulting services.
In summary, our 2019 plans remain on track. We're operating at a rapidly changing industry. We've long anticipated consumer adoption of new types of products with potentially lower risk. This is one of the main reasons we supported FDA regulation many years ago to facilitate this change and it's why we've invested in the leading noncombustible products. The dynamics during the first half of the year further validate our strategy.
With increasing success migrating adult smokers to noncombustible products, we're pleased that our strong core businesses are well positioned to provide profit growth through this transition. We continue to believe that we're building a business platform that enhances our ability to deliver solid performance and returns to shareholders over time and across a variety of scenarios. We reaffirm our guidance to deliver full year 2019 adjusted diluted earnings per share of $4.15 to $4.27. This range represents a growth rate of 4% to 7% from a 2018 adjusted diluted EPS base of $3.99.
I'll now turn it over to Billy to provide more detail on our performance and other investments.
Thanks, Howard, and good morning everyone. We'll begin with additional color on our smokeable products segment. Reported domestic cigarette volume increased 0.3% in the second quarter as trade inventory dynamics more than offset the industry rate of decline and year-over-year retail share declines. And adjusted for inventory movements and other factors, smokeable products segment cigarette volume declined by an estimated 7% for both the second quarter and first half.
In the second quarter, the smokable products segment expanded OCI margins by 1.8 percentage points to 54.4%, driven by higher pricing and lower controllable cost, partially offset by higher resolution cost. In the smokeable products, segment strong price realization reflects both pricing actions and greater efficiency and use of promotional resources, thanks to investments made in trade programs, data analytics and consumer data.
Net price realization was 7% in the second quarter and 7.7% for the first half. The mobile rewards program, continue to resonate with adult smokers and drive visits to mobile.com. In July, PM USA hit a terrific milestone with over two million enrollees and more than 100 million pack codes entered since the program launched in January.
Beginning in April, PM USA expanded Marlboro Smooth Ice in the resale pack nationally which is now distributed in over 113,000 retail stores. Marlboro Smooth Ice continues to receive positive feedback from adult smokers and the trade. Between July and September, adult smokers can earn up to three times their rewards points for every pack of Marlboro Smooth Ice entered. We expect this offer to encourage trial of Marlboro Smooth Ice and drive repeat purchase among adult smokers.
Building on its early success in the Western U.S., Nat Sherman expanded Nat's to all 50 states in the second quarter. Nat's competes in the super-premium segment and offers adult smokers a unique cigarette proposition of simply tobacco and water. And in cigars, volume grew 2.6% in the second quarter and Black & Mild continued its strength in the premium tip cigar segment.
On the legislative front, we continue to monitor cigarette state excise tax increases. On July 1, SET increases in two states. Illinois and New Mexico went into effect, bringing the weighted average SET as of July 1 to $1.82 per pack, up $0.03 from $1.79 per pack when compared to both year-end 2018 and the first half of 2019.
In smokeless, USSTC expanded adjusted OCI margins by 4.1 percentage points to a remarkable 74% in the second quarter, driven by higher pricing and lower costs. USSTC's retail share declined 0.2 in the second quarter to 53.9%. Copenhagen's retail share grew 0.3 share point to 34.6% and Skoal's retail share declined 0.6 share point to 15.8%. In May, USSTC opened the Original Snuff Shop in downtown Nashville. The Original Snuff Shop allows adult dippers to immerse themselves in Copenhagen's rich 200-year heritage and reinforces the brand's already strong equity among adult dippers.
Turning to our alcohol assets. In wine, the premium segment continues to be highly competitive. Ste. Michelle delivered adjusted operated companies income of $19 million down 29.6% in the second quarter, primarily due to higher costs and unfavorable premium mix. To help reinvigorate its portfolio, Ste. Michelle is making investments to modernize its marketing approach through digital and packaging innovation, including the first quarter launch of 14 Hands and aluminum cans.
In beer, adjusted earnings from our equity investment in ABI were $212 million in the second quarter, up more than 35% year-over-year, reflecting Altria's share of ABI's first quarter results.
I'll turn briefly to our investment in cannabis. With its well-capitalized balance sheet, we believe Cronos is making good progress in executing against its growth strategy. Cronos continues to focus on augmenting its management with top talent and investing in intellectual property and differentiated brands.
Cronos also recently announced its agreement to purchase a state-of-the-art production facility in Canada to advance its partnership with Ginkgo Bioworks and ultimately support large-scale cannabinoid production and efficiency. We continue to be excited about the global potential of the rapidly growing cannabis category and believe that U.S. federal legalization is inevitable. We also believe Altria's capabilities will help Cronos establish a leadership position in such scenario.
Moving to our capital allocation. We continue to return a significant amount of cash to shareholders in the form of dividends and share buybacks. In the second quarter, we paid $1.5 billion in dividends and have a highly attractive dividend yield. Altria's current annualized dividend rate of $3.20 per share represents an annual dividend yield of 6.4% as of July 26, 2019.
In the second quarter, we also repurchased 3.7 million shares for a total cost of $195 million, which concluded our $2 billion share repurchase program. Yesterday, the Board authorized a new $1 billion share repurchase program, which we expect to complete by the end of 2020. Our previously announced cost-reduction program remains on track and we still expect to realize $575 million in annualized cost savings by the end of 2019. The program includes savings from workforce reductions, third-party spending reductions and closure of our Nu Mark operations. Workforce reductions were largely completed in the first quarter, so our second quarter results reflect cost savings offsetting more of the incremental interest expense we incurred related to our transactions in the fourth quarter of last year.
With that, we'll wrap up and Howard 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 in altria.com. We've also posted our usual quarterly metrics, which include pricing inventory and other housekeeping items.
With that, I'll open up the question-and-answer period. Operator, do we have any questions?
Thank you. [Operator Instructions] Our first question comes from Judy Hong of Goldman Sachs.
Thank you. Good morning. So Howard, I guess I had a question around the cost category movement that seems to be accelerating which is driving your reduced volume forecast for the cigarette industry. If you look at, I guess a lot of the movement last year, a lot of that came at the back half of the year. So I guess comparisons are probably getting a little bit easier just from that perspective. So are you expecting kind of that run rate 1.3% negative category cost movement on the cigarette volume to stay constant? Why do you think that that number doesn't necessarily fade, if you're kind of comping against a tougher comparison in the back half of the year?
Yes. I think you make a good point. When you look at the growth that's occurred in the e-vapor category, it really started to grow strongly at the beginning of 2018. And certainly, you had a much larger base in the second half of 2018 that will compare against in the second half of 2019. So it certainly could result in a slowdown in the percentage growth of the category. And frankly, that's why when we look at our annual estimate for the decline rate of the cigarette category, it's a range, because I think it would take that into account.
And then can you just provide a bit more color just in terms of taking down kind of the medium-term guidance down 4% to 6%, and your level of confidence that that range is comfortable enough just given that that projection has come down in the last two quarters?
Sure. I think that we originally had a five-year compound annual decline rate of the cigarette category of 4% to 5% and we provided that at the end of last year. And our thinking was that we knew that there was an acceleration in the growth rate of the e-vapor category, but we also knew from experience both overseas and in the U.S. that typically an acceleration of the growth rate of a category driven by newly available or more broadly available products tends to run its course in a year or two, and so we felt fairly good at that point given the activity in the marketplace at 4% to 5%.
In the second quarter of this year, a couple of things have happened that caused us to increase the top end of that decline range. First of all, IQOS was approved. And I think that IQOS is going to be on a nice growth trajectory as it expands nationwide over the next couple of years. So that's an additional influence on the cigarette category decline rate. And we also made our investment in on!. We think it's got a very strong portfolio of nicotine-containing pouches and of course you will have access to our infrastructure.
And then on top of that, we've also had increased momentum behind increasing the minimum age to purchase to 21. We've now got 50% of U.S. population in jurisdictions where the minimum age to purchase to 21. So we thought given that range of changes that it made sense to broaden the decline range for the cigarette category over the next five years.
Okay. And then my last question Howard just on Juul. So in December -- or I guess in February, you laid out your key transaction assumptions around Juul both U.S. and internationally. So now that you obviously have invested in the business for seven months or so, can you provide us with some color on how those assumptions have changed if at all and whether the PMTA deadline being pulled forward impact some of those assumptions going forward?
Sure. I think if you looked at our assumptions, I think we expected that Juul would have a quite strong revenue growth following our investment. And I think we also had a belief that there was quite an attractive opportunity at the gross margin line as well. I have to say in the first half of this year Juul has performed quite strongly against both of those assumptions and we feel very good about their performance there.
With regard to developing operating companies income both domestically and overseas, I think it's -- we're not yet at a stage where we've got the information necessary to judge that. There's still a bit investment spending mode both domestically and overseas. And I think it's simply too soon to make a judgment on the progress they're making overseas that's more of early days there.
With regard to your question about the change in the filing date for their PMTA, there is no question that the due date for filing a PMTA and all the e-vapor products being moved to May of next year represents a significant challenge for all the companies that are impacted by it. And certainly, Juul is very focused on continuing to work on that, continuing to ramp up their resource investment and we're providing them with consulting resources in the regulatory space as well. But that certainly raised the pressure on I think all the companies in the e-vapor space.
With that said, I think the way that Juul's performance has evolved here over the last several months they should have a very strong case to make in their PMTA. If you look at their response to the increase in youth usage, Juul took very aggressive action in the third quarter of last year by removing their nontraditional flavored products from retail. They are really the only major player to have done that and I think that was a big step forward in demonstrating their responsibility and their concern for the issue.
In addition they have also been very supportive of raising the minimum age to purchase to 21. And a lot of those laws kicked in July 1st and so we're going to start to see the impact of that going forward. And so I think that when you compare them to other players in the e-vapor category, they've been more aggressive in addressing the youth issue.
Secondly, I think they are also the primary driver of increased switching of adult cigarette smokers to the e-vapor category. And of course that's something that the FDA is going to consider in looking into PMTA as whether or not the company who's filing for the PMTA is having a significant impact on moving people down the continuum of harm.
So, I think they have a very good science and evidence to support their application, but there is no doubt that the shortened timeline represents an increased challenge for everybody.
Got it. Okay. Thank you very much
Thank you. Your next question comes from Vivien Azer of Cowen and Co.
Hi, good morning.
Good morning Vivien.
So, my first question is on the cigarette volume outlook as well. I just wanted to be entirely clear Howard. As you guys have revised to down 5% to 6%, what does that assume in terms of the evolution of cross-category conversion?
Well, I think given that the range is 5% to 6% and for the first half we are at a 5.5% decline rate, it actually covers quite a broad range of scenarios in the back half of the year. It would still be supportive even if the volume in the back half of the year for the cigarette category declined at a lower rate. And certainly that could happen it was raised earlier on the call that there is certainly a tougher comp for the e-vapor category in the back half of last year. So, it certainly allows for a slowdown in the decline rate of the cigarette category.
And it also allows for a continuation of the strong growth in e-vapor. I have to say that I don't believe we're going to have a significant impact in the second half of this year from iQOS because it's going to be in a limited geography that's probably more of a future year impact. But the benefit of having a 5% to 6% range covers quite a broad set of scenarios for the second half of the year.
Okay, that's helpful. But suffice it to say then if the first half is down 5.5% at the midpoint of your now revised full year guidance, it does not contemplate a meaningful step function or in terms of the cross-category movement like you're not expecting cross-category movement to become an even bigger headwind in the back half is that fair?
Yes, I think that's largely fair. And I think that given the much larger second half last year number of e-vapors and the larger volume of e-vapor in the back half of last year, I think we thought that was prudent.
Okay. Yes. I agree with that for sure. That's helpful. Thank you. And then just my other question is on the moist smokeless tobacco category. So, we've seen category volumes decline for six consecutive quarters now. You called out the impact of both e-vapor as well as other oral tobacco products. So, can you just offer some color on how you're thinking about that category through the rest of the year? And perhaps on a five-year basis could seemingly the outlook for moist smokeless tobacco has changed in line with cigarettes? Thanks.
Yes. I mean I think the change in growth trajectory of the smokeless tobacco category has largely occurred over the last four or five years. We'll remember back four or five years ago the smokeless tobacco category was growing 4% to 5% a year. And I think the reason for that was that it was the primary recipient of adult cigarette smokers that were looking for an alternative and they were moving to moist smokeless tobacco.
I think with the increased availability and attractiveness of e-vapor products and certainly also now most recently these nicotine-containing pouches I think that folks that used to go to the moist smokeless tobacco category and drive nice growth there are primarily going to the e-vapor category and I think in the future will have an additional option in nicotine-containing pouches.
And so I think that we expect that the category is going to remain kind of at a small decline rate going forward although we haven't made a precise projection.
I would point out that even given the slowdown in the growth rate of the category, it's still generating quite nice profit growth.
Absolutely, that's helpful. Thank you very much.
Thank you. Your next question is from Bonnie Herzog of Wells Fargo.
Hi, thank you. Good morning. I actually wanted to ask about your model again in the context of your weaker outlook for the industry cig volumes. Just trying to think about this if anything has changed with your model in terms of your ability to deliver profit growth over the long-term? And maybe you could touch further on the different levers you have to pull to offset the ongoing cig volume pressure such as pricing.
And Howard also I'm not sure, but I don't think you mentioned price increases negatively impacting your outlook for industry volume, but I imagine that's a factor too?
Sure. I think as we look at the opportunity to deliver against our long-term aspiration of 7% to 9% EPS growth, we continue to feel good about the tools we have at our disposal to deliver that over the long-term. And I think it starts off with we think quite a healthy and resilient combustible business.
I think you saw in the first half of this year how the profit growth was quite strong in that business despite the fact that there was a stepped-up decline in the overall industry volume.
And of course the two contributors of that -- to that nice profit growth were price increases coming from both list price and improved promotional efficiency and cost reduction in the category.
And I think we have long believed that that business is quite resilient and can deliver nice profit growth even in an environment where the industry volume declines step up a bit.
Now of course in addition to the profit growth opportunity we have with our core businesses, we also expect once we get HSR approval to have equity income from Juul. And given Juul's strong revenue and volume growth this year, we would expect that going forward in addition to having now the profit growth from our core tobacco businesses, we'd get an equity income contribution from Juul. And we think that the sum of the growth from our combustible tobacco business plus the 35% contribution to our equity income from Juul, we think that that sets us up very well to deliver in the future.
And then of course, as their international business develops, that is a further incremental opportunity for profit growth as a 35% economic interest brings that to our equity income line as well. So I don't know that we feel that our model has really changed on how we would deliver, although, I have to acknowledge we've widened the range a bit, but we still feel very comfortable about our long-term 7% to 9% EPS aspiration.
Okay. That's helpful. And then speaking of Juul, is there anything you can share with us in terms of the improvements maybe you've been seeing in Juul's business either sequentially or year-over-year? And you touched on their expansion internationally and that seems to be going quite well, but they have been investing quite a bit to build that growth. So just how should we think about Juul's model, I guess over the long-term? Obviously, we don't have a lot of visibility yet, but maybe you could shed a little bit of light on that for us, please?
Sure. I think there's been quite a bit of change in the marketplace in the e-vapor space in the U.S. for the first half of the year. So Juul withdrew their flavors. There was a slowdown in their volume growth in the first quarter, although, they went back to strong volume growth in the second quarter. So I think that's the first thing I would say is that despite their withdrawal of non-traditional flavors from retail, they still seem to have a healthy growth profile, which I think it's a positive.
And that's occurring despite the fact that the other major pod-based manufacturers have not decided to withdraw their flavors from retail. As a matter of fact, they've increased availability and they've been growing the flavored volume that they have at retail. So certainly that has an impact on Juul, but they still had a nice healthy growth rate in the first half of the year despite that.
And I would expect that Juul will have a benefit when the FDA finalizes their ENDS guidance and those other players have to join Juul in restricting the availability of flavors at retail. So I think that's another a positive that’s likely to come in the second half of the year.
So I think overall in the U.S. market, I think it's been a strong performance for vapor overall and certainly for Juul. I think overseas, it's still early days. And I think, it's probably going to take another year to really get the same kind of positive assessment that we're able to get for the U.S. market today, but certainly, their expansion is going well and I think with the passage of time, we'll see how they do overseas.
All right. Thank you.
Thank you.
Thank you. Your next question is from Michael Lavery of Piper Jaffray.
Good morning.
Hi, Michael.
Can you just touch on what if anything you have included for on! in guidance in the second half?
Yeah, I think it's important to remember Michael that we expected to close in the second half. So from a standpoint of anything material, we don't expect anything material this year from on!.
And any more specific on the timing? Is that imminent later in the second half? Do you have a sense of when that might happen?
No. We're working with the other side, but we expect to close in the second half.
Okay.
I would put down Michael though that we have agreed in advance of closing that AGDC is going to provide distribution services to expand the product availability at retail that started this month. So we are getting the benefit of starting to expand its availability in the marketplace in advance of closing, which I think is a real plus.
And does that have service revenues related to it, or is it just position the brand to be in -- does it just set up the brand to be in a better position once it closes?
Yeah. I wouldn't think the service revenues is being at all material, it's really -- the real benefit is that the business is going to get a chance to ramp up, so that it is much better positioned to compete with other players post closing.
And then just looking at Cronos, do you have any involvement in helping partner to shape their plans, or as far as that contribution to your equity income, is it just sort of you're left with whatever you get?
No, I think we have quite a bit of influence on their strategy going forward. We have the majority of the seats on the Board and we work very closely through our Board representatives at helping Cronos think through their plans going forward. And I think we invested in them, because we thought they had an excellent management team and a good strategy to begin with. And I have to say we work very well together and I think we're making real progress. Although, we acknowledge in the cannabis space overall it's early days.
No. It sounds like good line of thought. That's nice. And then just on your medium term now 4% to 6% decline outlook for the cigarette category. You mentioned the revision having some consideration for things like IQOS being approved and your expansion of distribution for on! and of course, the vapor momentum we're seeing. Is it fair to assume that if IQOS had stronger momentum than in some markets more something like Japan perhaps clearly that would be a very different number? At the moment you have -- it seems like a pretty modest -- conservative expectation for that will do. How are you thinking about the five-year view for that?
Yeah. I think I would say that that provides an opportunity for kind of a midrange performance on IQOS. I can tell you if we had a Japan like performance we would be delighted. And at some point we might be considering whether or not to step up the decline rate again.
We feel like there's a fair amount of opportunity for IQOS to grow even within that 4% to 6% decline range, because our assumption is that given the rapid growth rate we've seen in e-vapor in 2018 and in the first half of 2019, we think that the e-vapor products are broadly available throughout retail and have been for over a year.
And at some point, we think that you're going to reach a saturation point on e-vapor. And you might even see an impact from the shakeout of many of the e-vapor products coming out of the market next year. So, I wouldn't necessarily draw a straight line for growth on the e-vapor category, and I think that leaves plenty of opportunity for a strong growth on iQOS.
And I think oral nicotine pouches their overall impact is likely to be smaller than either e-vapor or heat-not-burn. But we do believe that these clean white oral nicotine pouches are likely to appeal first and foremost to MST users, but I think are also a good alternative for adult cigarette smokers. And they are much more approachable than traditional moist smokeless tobacco pouches or even snus pouches.
That’s helpful. Thank you very much.
Thank you.
Thank you. Your next question is from Paula Kaufman of Morgan Stanley.
Hi. Good morning. It's Pam Kaufman. I just wanted to follow-up on the questions about your updated long-term rate of decline of 4% to 6%. If we assume that your volumes will decline at 5% annually, which is the midpoint of your outlook for the industry through 2023, your volumes would be about 20% to 25% below where they are today. What gives you confidence that you can sustain your long-term growth algorithm and generate -- continue to generate pricing growth in excess of those volume declines? And I guess based on the frequent rate of downward revisions, recently for the industry for this year, what should give investors confidence that your outlook for the mid-term won't go lower?
Sure. I think, the confidence we have that we can continue to generate nice profit growth out of our combustible segment is driven by the experience we've had in driving profit growth in that business through both pricing and cost management. And certainly, when we've seen in prior periods a step-up in the decline rate of the volume, typically we've had the opportunity to continue to drive similar profit growth by utilizing those tools slightly differently going forward.
But, certainly in the event that we see a modest slowdown in our ability to grow profit in the combustible segment because of a higher rate of volume decline, we would have a further offset to that to further accelerate profit growth of our EPS coming from the equity income contribution from Juul. And we feel strongly that the sum of our combustible profit growth add it to the equity income we get from Juul that, that ought to compare favorably to our ability to grow profit in the past.
With regard to your question about how comfortable are we with 4% to 6% as a five-year compound annual growth rate of cigarette volume declines, we feel like that's a wide range that covers a whole variety of scenarios, and at this point we feel quite comfortable giving conditions in the marketplace.
But I would point out that one of the reasons that we've worked so hard to build the leading portfolio of non-combustible tobacco products is that our belief is that it's hard to predict with precision, the pace at which adult cigarette smokers may switch to non-combustible tobacco products in the future.
And so, what we've done is we've essentially built the product portfolio of non-combustible tobacco products such that if the movement of adult cigarette smokers out of cigarettes into these other product categories accelerates, we have the opportunity to benefit from that movement with profitable products that lead their categories.
And essentially, if there's a step-down in our ability to grow profitability in the combustible business, we would expect to make it up either in -- with iQOS and heat-not-burn with on, and oral nicotine pouches or through our equity income from Juul.
So, we think we've hedged that opportunity. Although, I have no reason to believe that that 4% to 6% range is inadequate based on the current market conditions and our understanding of what the future is going to bring.
Thanks. Also it seems like there maybe a number of regulatory developments coming up this fall. What do you expect from the next wave of the National Youth Tobacco Survey? And would you expect this to impact Juul's PMTA approval prospects?
And then separately the FDA indicated that it plans to publish a proposed nicotine rule later this year. Do you believe that they'll all stick to this target?
Sure. You're right, we do expect probably in the third quarter to get another update on youth usage of e-vapor products. I think it's hard to determine what exactly those figures will show, but it would not surprise me, if you saw youth use of e-vapor products continue at the prior year level or even take a step-up, because there's been a number of actions taken to drive down youth use of e-vapor products. But I don't know that we've had the time that is passed to get the impact of that.
Even the FDA's ENDS guidance on restricting flavors to -- at retail, hasn't been finalized yet. And while there's been a benefit from Juul withdrawing their flavors, the other manufacturers have expanded the availability of flavors. So, I think you're going to have to wait until FDA finalizes that guidance and enforces against the other players to get the impact.
There's been good progress on raising the minimum age to purchase to 21, but I would say the bulk of that impact is at July 1 and moving forward kind of impact, so that's going to take a while. So, I think the expectation is that a lot of the actions that -- and frankly the FDA has expanded their advertising campaign to discourage youth from using e-vapor products.
So there's a lot going on. I just think that the expectation would be that it's going to have a significant impact going forward. I just don't know that I would expect that it's been a long enough period of time for those actions to see it in the September numbers.
With regard to FDA issuing further guidance on their nicotine regulation, they had indicated that they may publish something later this year. Given the past track record, I think that means that it may or may not come out.
But I think we've communicated before, we think that ultimately any implementation of a nicotine ceiling on cigarette products we think is a very long-term action and it would take quite some time for FDA to finalize that regulation and implement it. And of course, we don't think that what they have proposed in the past is feasible today and we don't think it's supported by the science. So we may expect to see some short-term progress there, but we think it's a long-term impact.
Thank you.
Your next question is from Chris Growe of Stifel.
Hi good morning.
Hi Chris.
Hi. I just had two sort of follow-up questions. I guess first, have you given any kind of update on receiving FTC approval for your Juul investment? And I know that your guidance incorporates, you said some modest profit contribution from your investments this year. It would seem like you have some profit built in for the year. Is that presumably in the fourth quarter because we don't have an update yet from -- on this FTC approval?
Yes. Chris on the FTC, we still expect the approval latter part of this year beginning of next. And I think what we had said previously about both Cronos and Juul is we had no material impact in our guidance.
Okay. And then in relation to iQOS, it launched in September. I just want to get a sense of the -- is there is a step-up of investment that occurs in the quarter to accommodate the launch of the product because we're thinking about the phasing of earnings, or are is -- a lot of those expenses already been sort of realized or undertaken as part of the P&L?
Yes. When we issued guidance we said we incorporated the iQOS lead market. Certainly there are always puts and takes, but we run various scenarios when we have that range of guidance and that's all incorporated.
Okay. Just one final question which is in relation to the June price increase that occurred in combustible, are there -- do you believe inventories are the right level today, or was there any kind of build, given that came a bit of a surprise that occurred around that pricing they might have to work through in the third quarter?
Yes. I think it's informative to look at where the inventories ended the second quarter. Compare that to historical levels and they're essentially in line with historical levels of inventory.
I agree, okay. Thanks so much.
Thank you. Your next question is from Owen Bennett of Jefferies.
Good morning guys. Hope all well. Just one question from me, I just -- if I saw that right on the slide, you said that Juul is basically driving all the additional adult and vapor use.
I mean that seems kind of very impressive, but I was just wondering in the context, I mean those competition that haven't removed all their flavors competition as well spending a lot of money, doing TV adverts et-cetera. What do you think is actually just driving that success of Juul and actually being a contributor to a lot of additional growth?
You're right. I think Juul has had an impressive first half and they've had some challenges that they've taken on that the other participants haven't. And frankly, I think it's further evidence of the fact that amongst adult tobacco consumers, I think Juul has real brand equity and I think it has a superior product.
And I think that as more and more adult tobacco consumers are exposed to the product I think increasingly folks are adding Juul to their tobacco product use. And as you saw from the numbers that they're setting down their cigarettes and moving over exclusively to e-vapor, I think in increasing numbers as well.
So I've been very pleased by it. Certainly there's a high level of competitive activity in the marketplace, but I think that Juul has performed quite admirably in the first half of this year despite all that activity.
Okay. And just one more follow-up in terms of you said there's a likely continued increase in youth usage and I'd imagine obviously that's going to be a key focus over PMTA.
So all the players will need to go grasp it potentially how much of their volumes are coming from youth? So I mean obviously Juul driving all the additional adult use if youth usage is going to increase, I mean have you got any sort of idea of how much share of that Juul is taken or whether that's dropping off now?
Yes. I really don't and I don't know that I'm in a position to be able to forecast what the youth numbers are going to show in the third quarter, when they come out. I just know from experience back in the late '90s, when you had a step-up in youth use of cigarettes, a similar very comprehensive effort was put in place to drive down youth usage of cigarettes.
It was ultimately quite successful. But the impact of all that activity, it didn't happen in a quarter or two, it happened over the following one to three or four years. And so I think I just steeled myself to the fact that despite all the progress that's been made including raising the minimum age to purchase to 21 and jurisdictions with over half the population in progress at the federal level, I sort of just looked at the past. And I've steeled myself to the fact that even if we're winning that battle it may take a bit of time for the results to materialize.
Okay. And has that been a risk even kind of, we need to see in part by or May next year when the PMTAs got in? So three to four years is not really kind of what's needed in this instance?
Yes. Certainly really all the e-vapor companies that are now going to be filing in May of next year they're going to have less time will have passed to allow youth e-vapor rates to decline. So I think that's a risk really across the category for people to file.
But I would point out that FDA, I think, has indicated that they appreciate the impact that the e-vapor category is having on converting adult cigarette smokers down the continuum of harm. Clearly that switching, and particularly the switching to e-vapor use without continuing to use cigarettes is accelerating.
So I think ultimately FDA is going to have to balance that favorable adult movement down the continuum of harm which is quite strong and quite favorable against the fact that youth e-vapor rates have not yet stepped down.
But I think FDA certainly has access to a lot of expertise and I think they can certainly assess whether or not the step-down is coming and consider that as they review those PMTAs.
Thank you very much. Much appreciate it.
Thank you.
Thank you. Your next question comes from Adam Spielman of Citi.
Thank you very much. I've got two questions, if I can. The first one concerns down trading in the existing cigarette business. So one of the things that clearly you're doing is you're taking prices up and price gaps are widening.
But at the same time, you presented data and it's not the first time. But so, it's really there's very little down trading. That's mainly churn at the bottom end.
And I'm really intrigued by that. Because, I don't think, it's the historic pattern. I sort of wonder why it is. Is it maybe that actually within, let's say Marlboro, there are more people buying cheaper variants, or is there somewhat of an explanation about why there isn't down trading? So that's the first question.
Sure. I think you are right that the, the strength of the premium category in the U.S. has been persistently strong really since 2011, when we launched the new Marlboro architecture. And as a matter of fact since 2011, the overall discount category is down, more than a share point.
So, the U.S. market has been quite strong in that regard. In the premium category, it's much larger in the U.S. market than it is in many markets overseas. So I wouldn't say that this phenomenon that is occurring today is unusual, compared to the last six or seven years, I think it's actually more the pattern.
The price gap over the last year or two has gone from 29% to 31%. So it's had a small increase. But I would say that's not a material increase. And I think that, I think that the strong equity of the premium brands in the category, I think has an impact on consumers deciding. They'd rather pay a bit more to get their brand of choice rather than move down into discount.
So I think it's a sign of a very healthy premium category. Now with regard to whether or not there's movement within the Marlboro portfolio. Certainly, in the period during the great recession and shortly thereafter, there was an increased movement between both premium price part of the Marlboro portfolio and the special blend.
But given the strength of the economy today, there's really not an appreciable movement into that part of the portfolio. And of course the pricing that we share each year, takes into account the change in the weighted average price across the Marlboro portfolio. So that's factored into the numbers.
Okay. Thank you very much. And I just wanted to follow-up briefly on, an answer you gave to other in the call. So you said that in 2Q, this is a question about Juul. That you said in 2Q, that Juul was growing very, very nicely.
But I was wondering, I know you're not going to quantify that to the last decimal place. But I was wondering is it relative to the run rates in the second half of last year?
Are we sort of talking volumes up 20%, up 50%, up 100%? Any sort of ballpark in that direction, or 10%? Are you able to give some sort of ballpark figure for that sort of growth?
Sure. In the first half of 2019, the category growth was 40% for the overall e-vapor category. And it was 195% for Juul. And that's on Slide 18. And of course, we also referenced Juul's share growth on the second quarter compared to the first quarter and the full year 2018. Their share growth was 48% in Q2, up from 44% in Q1, and up from 33% in full year 2018.
Thank you.
Thank you.
That’s very helpful.
Thank you. Your next question is from Steve Powers of Deutsche Bank.
Hey, great thanks…
Hi, Steve.
Hey, hey. So following up on, your comments related to the PMTA process and the need for filers and the FDA to balance youth usage against the efficacy of e-vapor to convert adult smokers.
I guess, I'm looking for a little bit more color on how that factors in, to how you may consult Juul specifically in its PMTA application process. Because on the one hand it's leading that adult conversion, so that's a positive.
Yet on the other hand, it's -- their current product is clearly associated with underage usage. And the potential lack of data on the efficacy of their steps to reduce that usage.
Just being in hand by the time approval needs to be granted, it just seems a potential liability. So what's your perspective on those dynamics as it relates to Juul? And how that might impact? How they apply or their application in general?
Yeah. I don't know that I have more to say on that topic. I think the youth usage of e-vapor products is a challenge that every filer is going to have to deal with. And I think ultimately FDA is going to have to take all of that onboard.
I think we have the benefit though, that the FDA can approve a product through the PMTA process. And then, require the filer to do post-market surveillance. And if they find that, the favorable outcomes they expected to come from that product, don't materialize in the years that follow. They can withdraw their approval.
So I think that, in a situation like we're faced here with e-vapor, where there's very strong conversion of adult cigarette smokers. But we don't yet know whether or not youth rates are going to go down quite rapidly and what the timing will be.
That might very well be a situation where post-market surveillance was frankly designed for that situation. And FDA can approve certain products, require post-market surveillance to essentially change their view based on what happens in the years that follow.
Okay. That's very helpful. Yeah. That's clear. Thank you very much. I guess the second question, I have is just another follow-up on Juul and your comments earlier. I know you said, that Juul has been performing impressively and quite strongly against your going-in expectations year-to-date.
But just to be clear, is it fair to say it's running above expectations, at least as it relates with the U.S. because I'm just trying to triangulate between, the lowering of your smokable volume outlook. And the primary role that e-vapor is playing in that. And presumably the role that Juul is playing in that conversion.
So you just either -- it either suggested Juul is trending above expectations your own expectations. Or that you've seen better-than-expected performance from some of the other e-vapor brands? So just maybe can you clarify those dynamics please?
Yeah. I would say that, in the first half of the year Juul is generally performing in line with our expectations. I know we had a range of expectations. So I don't know that it's substantially exceeding those expectations.
I would say that, one factor that did occur particularly in the first half of this year, that I think probably has an impact on the cigarette category decline rate, is that not only did we see the number of adult vapers increase, as we expected it to going to 13.8 million compared to 12.2 million from June to the end of last year.
We also saw a pretty good step-up in the number of adult vapors that are no longer smoking. And certainly if somebody goes from smoking to dual using cigarettes and e-vapor then moves all the way to exclusive e-vapor use that could have a modest step-up on the cigarette decline rate. So certainly that happened in the first half. I don't know that we had a hardened past view on what would happen there, but certainly it stepped up. And compared to history it's at a higher level than it's been since 2014.
Okay. So just to clarify so it sounds like Juul and the industry performing at the higher end of your going-in expectations plus maybe a bit more full conversion full cessation of smoking than was implied in the baseline is that a good summary?
Yes, I think that's right.
Okay. Thanks a lot.
All right. Thank you.
Thank you. Your next question comes from Gaurav Jain of Barclays.
Thank you. Good morning. So I have a question on your smokeless tobacco business where margins are 74%, EBITDA north of $2. So could just expand on there is a risk that you cannibalize your own smokeless business unless the margins are on the scale out similar to your current smokeless business? So how do we think about that dichotomy?
Yes. You're exactly right. We're very pleased with the high margins that we're able to achieve in the smokeless category. From a standpoint of On! we think through time they will achieve tobacco-like margins.
So by tobacco you mean smokeless-like margins?
That is correct.
Sure. Now coming to cigars I'm aware that it's a very small part of your business. But in a FDA clearly as three-pronged approach here to flavored cigars. They will finalize the draft guidance by October 2019. There will be a PMTA by May 2020. And then there's a rule-making process as well. So how should we think about the cigar business long-term?
Sure. I think, we feel good about our cigar business. You are right that the FDA has said they're going to finalize some guidance on flavors in cigars later this year. I think we along with others in industry have stated that we don't think they have very good signs and evidence base to restrict the availability of flavored cigars. So we think ultimately that is going to be challenged and we feel that there's a very strong case to challenge that. Secondly, you're right that for products that don't already have a market order because they are grandfathered or have received an SE they're going to have to file PMTAs on this new accelerated deadline of May of next year.
So for some cigar companies that could pose a significant issue for them and they may lose the ability to sell some of their cigar products. By and large that doesn't apply to us. The vast majority of our cigar products have market orders either because they're grandfathered or have received FDA notices. And then of course with regard to any rule-making they might make in the longer term relating to flavors or other things again they're going to have the obligation to support that with science and evidence. And we feel good about our ability to make case that our cigar products in any case are responsibly participating in the marketplace.
Sure. Thank you. And if I can ask one last question. So on cigarettes -- what we have seen this year is that pricing has gone up above expectations and volumes have come in below expectations and that substitute product which is e-cigarettes they aren't really taking any pricing and they haven't taken any pricing for two years. So as we look out does the e-cigarette cannibalization increase over time as price gaps keep widening? And what has been your experience over the last two years?
Yes. I'm not going to speculate on future pricing. I think that consumers are moving into e-vapor because of significant benefits that those products have unrelated to price and I'm not going to speculate on future pricing. Thank you.
Sure. Thanks a lot.
Thank you. Your next question comes from Petros Voulgaris of Goldman Sachs.
Good morning, everybody.
Good morning.
We've discussed IQOS's inclusion in MSA before and how that operates as a tax. But I'm wondering with respect to how IQOS is counted towards the MSA will one HeatStick be equivalent to one cigarette or will there be some other measurement? And as a follow-up are there ways through different product iterations or some other modification for IQOS not to be included in the MSA?
Yes. I think when you think about it one HeatStick would be the equivalent of one cigarette because the definition incorporates it that way. And I'm not going to speculate on what future product iterations could be inside or outside of the MSA.
Thanks, guys.
Thank you. [Operator Instructions] And your first question comes from Jennifer Maloney of Wall Street Journal.
Hi good morning.
Hi Jennifer
I wonder if you can give us an update on direct mailings to your cigarette consumers and onserts or inserts in cigarette packs on behalf of Juul. How many have you sent out? And what are the redemption rates looking like?
Yes. We don't share level of that detail. Both direct mailings and onserts to date have occurred. And I know that there is further activity that's planned between now and the end of the year communicating about the benefits of Juul, but we haven't shared numbers or fine details on that.
Broadly speaking, have the results of those changed your estimates for sort of what cannibalization you expect to see specifically on your brands from Juul?
No it hasn't.
Okay.
I don't think we've seen anything that caused us to change our views on Juul's growth rate or the cannibalization of our products.
Okay. Thanks.
Thank you.
Thank you. Your next question is from Robert Rampton of UBS.
Hi, thanks for taking my question. Just to follow up on that cannibalization question. So, could you give us some more color on what is the cannibalization rate of e-cigarettes? Say for every 100 puffs, how many are coming from cigarettes? One of your peers put that number at 25%. Would you be -- would you disagree with that?
Yes, I don't know that I've got a precise point of view on that. I think, we think about it more along the lines of how the category growth rate in e-vapor is developing and then we take into account all the impacts on the overall cigarette category. I don't know that we've kind of looked at it that way and I don't know that I have any greater precision to share with you.
Okay. Fair enough. So second question, just on IQOS, your earlier comments seem to further -- your expected range is between zero and Japan at 20 and you're at the midpoint, so I'm guessing around 10%. Can you give us some color on what your expectations for IQOS in the U.S. are based off?
Yes. I don't know that we've firmed up an expectation for IQOS. I think our belief -- certainly, we know the experience in a variety of markets overseas. I think our belief is that that's one of the key things we're going to learn in going into the Atlanta test market. And I think, we'll know probably in the next six to nine months kind of what the U.S. experience is with IQOS. And of course, we're going to put significant resources and significant activity behind it in order to drive it towards the high end of what it can do in the U.S. But I don't know that we've got a precise answer as to how we think it's going to compare in the U.S. to overseas, but we do know that we're going to put the resources behind it to make sure that it does as well in the U.S. as is humanly possible.
Fair enough. Thank you, very much.
Thank you.
Thank you. At this time, I would like to turn the call back to management for closing remarks.
Thank you, Christie. To close, we're on track to deliver against our 2019 earnings guidance. We believe Altria is well positioned through the combination of excellent profit growth from our core tobacco businesses and strategic positions in key noncombustible product categories to lead our industry through a period of evolution just as we have in the past. Thanks again for joining us and please contact our Investor Relations team, if you have further questions.
Thank you. This does conclude today's conference call. You may now disconnect.