Altria Group Inc (MO) Q2 2019 Earnings Call Transcript

PM USA is pleased with Marlboro’s continued stability with retail share of 43.3%, unchanged versus the year ago quarter and up two-tenth [Phonetic] 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 the churn between branded discount and deep discount offerings. The overall discount category grew at 10 [Phonetic] sequentially in the quarter to 24.2% and the discount category remains essentially in line with historical share.

Turning to the 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 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, US cigarette industry volumes declined by an estimated 5%. This represents 0.5% increase versus the 12 months ended in the first quarter of 2019, which we estimate is 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 mid-year 2018 and higher levels of exclusive e-vapor use. After considering the latest information, we are revising our 2019 estimate of US cigarette industry volume decline rate to 5% to 6% from a range of 4% to 5%. We’ve 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 in our estimate of 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 smokeable business results versus historic category volume declines. In the first half, adjusted category volumes were down 5.5% and the smokeable segment grew adjusted operating company’s income 5.7%.

By comparison, over the past four years, adjusted category volumes declined approximately 3% on a compounded annual basis and the smokeable segment grew adjusted operating company’s income 5.2%. We believe this demonstrates how our strong and resilient smokeable 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 company’s 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 smokeless volumes 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 US 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 US 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 is shown to be a leading product internationally. We’re pleased to have access to an inhalable alternative that represents the first next generation tobacco product to receive FDA pre-market authorization. We’re ready to begin commercializing IQOS in the US and are committed to its success.

We expect the first IQOS store to open in Atlanta in September, along with 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 pre-order 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 US and tend to capitalize on this first mover advantage.

Turning to 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 the trend toward 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 close systems and 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’s share of the category across both open and close 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 in 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 statewide 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 US 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 in 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 timelines to present a challenge for all companies impacted by the court’s ruling. JUUL is investing significant resources in preparing their applications and we are offering regulatory consulting services.

In summary, our 2019 plans remain on track. We’re operating in 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 non-combustible products.

The dynamics during the first half of the year further validate our strategy. With increasing success migrating adult smokers to non-combustible 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.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Billy Gifford — Vice Chairman and Chief Financial Officer” data-reactid=”78″>Billy Gifford — Vice Chairman and Chief Financial Officer

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. When 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 smokeable product segment expanded OCI margins by 1.8 percentage points to 54.4%, driven by higher pricing and lower controllable costs partially offset by higher resolution costs. In the smokeable product 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 Marlboro Rewards program continues to resonate with adult smokers and drive visits to marlboro.com. In July PM USA hit a terrific milestone with over 2 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 and 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 the 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 US, 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 tipped 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 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 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 operating company’s 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, but 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 US 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 on 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?

Questions and Answers:

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”97″>Operator

Thank you [Operator Instructions] Our first question comes from Judy Hong of Goldman Sachs.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Judy Hong — Goldman Sachs — Analyst” data-reactid=”99″>Judy Hong — Goldman Sachs — Analyst

Thank you. Good morning. So, Howard, I guess I had a question around this cross 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 in the back half of the year. So I guess the 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 cross movement on the cigarette volume to stay constant? Why do you think that number doesn’t necessarily fade, if you’re kind of comping against the tougher comparison in the back half of the year?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”102″>Howard Willard — Chairman and Chief Executive Officer

Yeah, 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 — 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.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Judy Hong — Goldman Sachs — Analyst” data-reactid=”104″>Judy Hong — Goldman Sachs — Analyst

And 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 range is comfortable enough just given that projection has come down in the last two quarters?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”106″>Howard Willard — Chairman and Chief Executive Officer

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 — 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 US 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 it 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 US population in jurisdictions where the minimum age to purchase is 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.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Judy Hong — Goldman Sachs — Analyst” data-reactid=”110″>Judy Hong — Goldman Sachs — Analyst

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 US and internationally. So, now that you’ve 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?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”112″>Howard Willard — Chairman and Chief Executive Officer

Sure. I think if you looked at our assumptions, I think we expected that the JUUL would have quite strong revenue growth, following our investment and I think we also had a belief that there was quite 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 company’s 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 is 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 investments 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 usage, JUUL took very aggressive action in the third quarter of last year by removing their non-traditional 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 kick in July 1, 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 use 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 and looking at the PMTA is 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 shorten timeline represents an increased challenge for everybody.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Judy Hong — Goldman Sachs — Analyst” data-reactid=”120″>Judy Hong — Goldman Sachs — Analyst

Got it. Okay, thank you very much.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”122″>Operator

Thank you. Your next question comes from Vivien Azer of Cowen and Company.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Vivien Azer — Cowen and Company — Analyst” data-reactid=”124″>Vivien Azer — Cowen and Company — Analyst

Hi, good morning.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”126″>Howard Willard — Chairman and Chief Executive Officer

Good morning, Vivien.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Vivien Azer — Cowen and Company — Analyst” data-reactid=”128″>Vivien Azer — Cowen and Company — Analyst

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 downside to 6% what does that assume in terms of the evolution of cross category conversion?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”130″>Howard Willard — Chairman and Chief Executive Officer

Well, I think, given that the range is 5% to 6% and for the first half, we are — we’re 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’s 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 — 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.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Vivien Azer — Cowen and Company — Analyst” data-reactid=”133″>Vivien Azer — Cowen and Company — Analyst

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 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?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”135″>Howard Willard — Chairman and Chief Executive Officer

Yeah, 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.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Vivien Azer — Cowen and Company — Analyst” data-reactid=”137″>Vivien Azer — Cowen and Company — Analyst

Okay, yeah. 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’ve 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 because seemingly the outlook for moist smokeless tobacco is changed in line with cigarette? Thanks.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”140″>Howard Willard — Chairman and Chief Executive Officer

Yeah, I think the change in the 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 we’re 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 the 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, we’ll 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.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Vivien Azer — Cowen and Company — Analyst” data-reactid=”144″>Vivien Azer — Cowen and Company — Analyst

Absolutely. That’s helpful. Thank you very much.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”146″>Operator

Thank you. Your next question is from Bonnie Herzog of Wells Fargo.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Bonnie Herzog — Wells Fargo Securities — Analyst” data-reactid=”148″>Bonnie Herzog — Wells Fargo Securities — Analyst

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 pressures such as pricing and Howard, also I’m not sure, but I don’t think you’ve mentioned price increases negatively impacting your outlook for industry volume, but I imagine that’s a factor too.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”150″>Howard Willard — Chairman and Chief Executive Officer

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 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 the profit growth from our core tobacco businesses.

We get an equity income contribution from JUUL and we think that the some of the growth from our combustible tobacco business, plus the 35% contribution to our equity income from JUUL, we think 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 we don’t have to acknowledge we widened the range a bit, but we still feel very comfortable about our long-term 7% to 9% EPS aspiration.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Bonnie Herzog — Wells Fargo Securities — Analyst” data-reactid=”155″>Bonnie Herzog — Wells Fargo Securities — Analyst

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?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”157″>Howard Willard — Chairman and Chief Executive Officer

Sure. I think there has been quite a bit of change in the marketplace in the e-vapor space in the US 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 it, despite their withdrawal of non-traditional flavors from retail, they still seem to have a healthy growth profile, which I think is 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 there ENDS guidance and those other players have to join JUUL in restricting the availability of flavors at retail. So I think that’s another positive that is likely to come in the second half of the year.

So I think overall in the US 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 US market today, but certainly their expansion is going well and I think with the passage of time, we’ll see how they do overseas.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Bonnie Herzog — Wells Fargo Securities — Analyst” data-reactid=”162″>Bonnie Herzog — Wells Fargo Securities — Analyst

All right. Thank you.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”164″>Howard Willard — Chairman and Chief Executive Officer

Thank you.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”166″>Operator

Thank you. Your next question is from Michael Lavery of Piper Jaffray.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Michael Lavery — Piper Jaffray &amp; Co. — Analyst” data-reactid=”168″>Michael Lavery — Piper Jaffray & Co. — Analyst

Good morning.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”170″>Howard Willard — Chairman and Chief Executive Officer

Hi, Michael.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Michael Lavery — Piper Jaffray &amp; Co. — Analyst” data-reactid=”172″>Michael Lavery — Piper Jaffray & Co. — Analyst

Can you just touch on what if anything you have included for on! in guidance in the second half?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Billy Gifford — Vice Chairman and Chief Financial Officer” data-reactid=”174″>Billy Gifford — Vice Chairman and Chief Financial Officer

I think it’s important to remember, Michael, that we expect that to close in the second half. So from a standpoint of anything material, we don’t expect anything material this year from on!.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Michael Lavery — Piper Jaffray &amp; Co. — Analyst” data-reactid=”176″>Michael Lavery — Piper Jaffray & Co. — Analyst

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?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Billy Gifford — Vice Chairman and Chief Financial Officer” data-reactid=”178″>Billy Gifford — Vice Chairman and Chief Financial Officer

No. We’re working with the other side, but we expect to close in the second half.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”180″>Howard Willard — Chairman and Chief Executive Officer

I would [Speech Overlap] out Michael though that, we have agreed in advance of closing that AGDC is going to provide distribution services to expand the product availability and at retail that started this month. So we are getting the benefit of the starting to expand its availability in the marketplace in advance of closing, which I think is a real plus.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Michael Lavery — Piper Jaffray &amp; Co. — Analyst” data-reactid=”182″>Michael Lavery — Piper Jaffray & Co. — Analyst

And does that have service revenues related to it or is it disposition the brand to be in — does it just set up the brand to be in a better position once that closes?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”184″>Howard Willard — Chairman and Chief Executive Officer

Yeah, I wouldn’t think 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 in a much better position to compete with the other players, post closing.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Michael Lavery — Piper Jaffray &amp; Co. — Analyst” data-reactid=”186″>Michael Lavery — Piper Jaffray & Co. — Analyst

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?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”188″>Howard Willard — Chairman and Chief Executive Officer

No, I think we have — 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.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Michael Lavery — Piper Jaffray &amp; Co. — Analyst” data-reactid=”190″>Michael Lavery — Piper Jaffray & Co. — Analyst

Now, it sounds like good alignment though. 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 a Japan perhaps clearly that would be a very different number. At the moment you have — it seems like a pretty modest like a conservative expectation for what that will do. How are you thinking about the five-year view for that?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”193″>Howard Willard — Chairman and Chief Executive Officer

Yeah, I think I would say that provides an opportunity for kind of a mid range performance on IQOS. I can tell you if we had a Japan-like performance, we would be delighted and at some point, we might being considering whether or not to step up the decline rate again. We feel like there is a fair amount of opportunity for IQOS to grow even within that, 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 the 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 wide [Phonetic] oral nicotine pouches are likely to appeal first and foremost to 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.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Michael Lavery — Piper Jaffray &amp; Co. — Analyst” data-reactid=”197″>Michael Lavery — Piper Jaffray & Co. — Analyst

That’s helpful. Thank you very much.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”199″>Howard Willard — Chairman and Chief Executive Officer

Thank you.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”201″>Operator

Thank you. Your next question is from Paula Kaufman of Morgan Stanley.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Pam Kaufman — Morgan Stanley — Analyst” data-reactid=”203″>Pam Kaufman — Morgan Stanley — Analyst

Hi, good morning. It’s Pam Kaufman. And 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 revisit — 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?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”206″>Howard Willard — Chairman and Chief Executive Officer

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 added to the equity income we get from JUUL that aren’t compared 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 given 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 made switched to non-combustible tobacco products in the future.

And so what we’ve done is, we’ve essentially built a 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 leave their categories and essentially if there is 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 4% to 6% range is inadequate based on the current market conditions and our understanding of what the future is going to bring.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Pam Kaufman — Morgan Stanley — Analyst” data-reactid=”213″>Pam Kaufman — Morgan Stanley — Analyst

Thanks. Also, it seems like there may be 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’s 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 will stick to this target?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”215″>Howard Willard — Chairman and Chief Executive Officer

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 retail, it hasn’t been finalized yet. And while there has 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 has been good progress on raising the minimum age to purchase to 21, but I would say that the bulk of that impact is a July 1st 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 ends and frankly the FDA has expanded their advertising campaign to discourage you 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 have 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 sailing 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’ve proposed in the past is feasible today. 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.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Pam Kaufman — Morgan Stanley — Analyst” data-reactid=”222″>Pam Kaufman — Morgan Stanley — Analyst

Thank you.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”224″>Operator

Thank you. Your next question is from Chris Growe of Stifel.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Chris Growe — Stifel Nicolaus — Analyst” data-reactid=”226″>Chris Growe — Stifel Nicolaus — Analyst

Hi, good morning.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”228″>Howard Willard — Chairman and Chief Executive Officer

Hi, Chris.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Chris Growe — Stifel Nicolaus — Analyst” data-reactid=”230″>Chris Growe — Stifel Nicolaus — Analyst

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? Can we don’t have an update yet from — on this FTC approval?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Billy Gifford — Vice Chairman and Chief Financial Officer” data-reactid=”232″>Billy Gifford — Vice Chairman and Chief Financial Officer

Yeah, Chris, on the FTC, we still expect approval latter part of this year, beginning of next. And I think what we had said previously about both Cronos and JUUL as we had no material impact in our guidance.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Chris Growe — Stifel Nicolaus — Analyst” data-reactid=”234″>Chris Growe — Stifel Nicolaus — Analyst

Okay and then in relation to IQOS launching in September, I just want to get a sense of the — is there a step-up of investment that occurs in the third quarter to accommodate the launch of the products. We’re thinking about the phasing of earnings or is — are a lot of those expenses already been sort of realized or undertaking as part of the P&L?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Billy Gifford — Vice Chairman and Chief Financial Officer” data-reactid=”236″>Billy Gifford — Vice Chairman and Chief Financial Officer

Yeah. 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.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Chris Growe — Stifel Nicolaus — Analyst” data-reactid=”238″>Chris Growe — Stifel Nicolaus — Analyst

Okay and I have just one final question, which is in relation to the June price increase that occurred in combustible, are there — do you believe inventories are at the right level today or was there any kind of build given that came a bit of a surprise that occurred around that pricing that might have to work through in the third quarter?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”240″>Howard Willard — Chairman and Chief Executive Officer

Yeah, 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.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Chris Growe — Stifel Nicolaus — Analyst” data-reactid=”242″>Chris Growe — Stifel Nicolaus — Analyst

I agree. Okay. Thanks so much.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”244″>Operator

Thank you. Your next question is from Owen Bennett of Jefferies.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Owen Bennett — Jefferies — Analyst” data-reactid=”246″>Owen Bennett — Jefferies — Analyst

Good morning, guys. Hope you’re all well. And, yeah, just one question from me. I’d understand that if I saw that right from the slide, you said that JUUL is basically driving all the additional adult and baby use. It may not seem kind of very impressive. I was just wondering in the context, I mean there is competition that haven’t removed all their flavors, competition as well spending a lot of money doing TV adverts etc, and what do you think is actually just driving that successive JUUL naturally and being the contributor to all additional growth?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”248″>Howard Willard — Chairman and Chief Executive Officer

You’re right. I think JUUL’s 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 among 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 is 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 of that — all that activity.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Owen Bennett — Jefferies — Analyst” data-reactid=”252″>Owen Bennett — Jefferies — Analyst

Okay. Actually just one more follow-up in terms is you said there is a likely continued increase in youth usage and other margin obviously that’s going to be a key focus of PMTA. So all the players will need a good grasp [Phonetic] of potentially, how much is the volumes are coming from you. So I mean obviously JUUL driving all the additional adult use. If youth usage is still increasing, I mean have you got any sort of idea of how much you’ve share of that JUUL is taken or whether that’s dropping off now?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”254″>Howard Willard — Chairman and Chief Executive Officer

Yeah, I really don’t, and I don’t know that I am 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 add 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, three or four years. And so I think I’ve 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 other half the population in progress at the federal level, I’ve sort of just looked at the past and I’m 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.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Owen Bennett — Jefferies — Analyst” data-reactid=”257″>Owen Bennett — Jefferies — Analyst

Okay and is that then a risk given kind of we need to see impact by May next year when the PMTA is got in and so three to four years is not really kind of, I mean what’s needed in this instance?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”259″>Howard Willard — Chairman and Chief Executive Officer

Yeah, certainly really to 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 it pass allow e-vapor rates to decline. So I think that’s a risk really across the category for people that 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 moving 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 stepdown is coming and consider that as they review those PMTAs.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Owen Bennett — Jefferies — Analyst” data-reactid=”262″>Owen Bennett — Jefferies — Analyst

Thank you very much. Much appreciated.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”264″>Howard Willard — Chairman and Chief Executive Officer

Thank you.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”266″>Operator

Thank you. Your next question comes from Adam Spielman of Citi.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Adam Spielman — Citigroup — Analyst” data-reactid=”268″>Adam Spielman — Citigroup — Analyst

Thank you. 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 where at the same time, you presented data. And it’s not the first time. This says really there very little downtrading of this many churn at the bottom end.

And I’m really intrigued by that because I don’t think it’s a historic passion. I still wonder why it is. Is it may be that actually within let’s say Marlboro that are more people buying cheaper variance or is it some other explanation about why there isn’t downtrading? So that’s the first question.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”271″>Howard Willard — Chairman and Chief Executive Officer

Sure. I think you are right that the strength of the premium category in the US 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 1 share point. So, the US market has been quite strong in that regard. And the premium category is much larger in the US 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 of 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 the — their branded 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 is movement within the Marlboro portfolio, certainly at — in the period during the Great Recession and shortly thereafter, there was an increased movement between the both premium price part of the Marlboro portfolio and the special blend. But given the strength of the economy today, there is 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.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Adam Spielman — Citigroup — Analyst” data-reactid=”275″>Adam Spielman — Citigroup — Analyst

Okay, thank you very much. And I just wanted to follow up briefly on announce you gave to earlier in the call. So you said that in 2Q, I mean this question is about JUUL that you said in 2Q, the JUUL is — was growing very, very nicely. But I was wondering, I know you’re not going to quantify that of the last decimal place, but I was wondering say relative to the run rate in the second half of last year, are we sort of talking volumes up 20%, up 50%, up 100% and is there a ballpark in that direction or 10%? [Indecipherable] give some sort of ballpark figure for that sort of growth?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”277″>Howard Willard — Chairman and Chief Executive Officer

Sure. In the first half of 2019, the category growth was 40% for the overall vapor category. And it was 195% for JUUL. And that’s on Slide 18. And of course, we also referenced JUUL’s share growth in 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.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Adam Spielman — Citigroup — Analyst” data-reactid=”279″>Adam Spielman — Citigroup — Analyst

Thank you. That’s very helpful.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”281″>Howard Willard — Chairman and Chief Executive Officer

Thank you.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”283″>Operator

Thank you. Your next question is from Steve Powers of Deutsche Bank.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Steve Powers — Deutsche Bank Securities Inc. — Analyst” data-reactid=”285″>Steve Powers — Deutsche Bank Securities Inc. — Analyst

Hey, great, thanks.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”287″>Howard Willard — Chairman and Chief Executive Officer

Hi, Steve.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Steve Powers — Deutsche Bank Securities Inc. — Analyst” data-reactid=”289″>Steve Powers — Deutsche Bank Securities Inc. — Analyst

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?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”292″>Howard Willard — Chairman and Chief Executive Officer

Yeah, I don’t know that I have more to say on that — 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 on board. 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 is 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 our post-market surveillance was frankly designed for that situation and FDA can approve. Certain products require post-market surveillance and essentially changed their view based on what happens in the years that follow.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Steve Powers — Deutsche Bank Securities Inc. — Analyst” data-reactid=”295″>Steve Powers — Deutsche Bank Securities Inc. — Analyst

Okay, that’s very helpful. I think, yeah, that’s clear. Thank you. 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 the JUUL has been performing impressively and quite strongly against you’re going-in expectations year-to-date. But just to be clear, is it fair to say it’s trending above expectations at least with the US because I’m just trying to triangulate between the lowering of your smokeable volume outlook and the primary role that e-vapor is playing in that and presumably the role the JUUL is playing in that conversion.

So it just either — it either suggests that 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?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”298″>Howard Willard — Chairman and Chief Executive Officer

Yeah. I would say that in the first half of the year, JUUL is generally performing in line with our expectations. I don’t 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 vapors increase as we expect 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 it 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 hard and fast view on what would happen there, but certainly it stepped up and compared to history, it’s at a higher level than that it’s been since 2014.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Steve Powers — Deutsche Bank Securities Inc. — Analyst” data-reactid=”302″>Steve Powers — Deutsche Bank Securities Inc. — Analyst

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 then was implied in the baseline. Is that a good summary?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”304″>Howard Willard — Chairman and Chief Executive Officer

Yeah, I think that’s right.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Steve Powers — Deutsche Bank Securities Inc. — Analyst” data-reactid=”306″>Steve Powers — Deutsche Bank Securities Inc. — Analyst

Okay. Thanks a lot.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”308″>Howard Willard — Chairman and Chief Executive Officer

All right. Thank you.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”310″>Operator

Thank you. Your next question comes from Gaurav Jain of Barclays.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Gaurav Jain — Barclays — Analyst” data-reactid=”312″>Gaurav Jain — Barclays — Analyst

Thank you. Good morning. So I have a question on your smokeless tobacco business where margins are 74%, e-vapor [Indecipherable] north of $2. So just expand on there is a risk that you cannibalize your own smokeless business, unless the margins of on! to scale-out similar to your current smokeless business. So how do we think about that dichotomy?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Billy Gifford — Vice Chairman and Chief Financial Officer” data-reactid=”314″>Billy Gifford — Vice Chairman and Chief Financial Officer

Yeah, we’re — you’re exactly right, we are 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.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Gaurav Jain — Barclays — Analyst” data-reactid=”316″>Gaurav Jain — Barclays — Analyst

So by tobacco you mean smokeless like margins?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Billy Gifford — Vice Chairman and Chief Financial Officer” data-reactid=”318″>Billy Gifford — Vice Chairman and Chief Financial Officer

That is correct.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Gaurav Jain — Barclays — Analyst” data-reactid=”320″>Gaurav Jain — Barclays — Analyst

Sure. Now coming to cigars, now I’m aware that it is a very small part of your business, but FDA clearly has a three-pronged approach here to flavored cigars. They will finalize the draft guidance by October 19. 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?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”322″>Howard Willard — Chairman and Chief Executive Officer

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 the industry have stated that we don’t think they have a very good science 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 is a very strong case to challenge that.

Secondly, you are right that for products that don’t already have a market order because they are grandfathered or have received an FC, 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 had market orders, either because they grandfathered or have received FC 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 the case that our cigar products in any case are responsibly participating in the marketplace.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Gaurav Jain — Barclays — Analyst” data-reactid=”327″>Gaurav Jain — Barclays — Analyst

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 the 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 finding and what has been your experience over the last two years?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”329″>Howard Willard — Chairman and Chief Executive Officer

Yeah, I’m not going to speculate on future pricing. I think — 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.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Gaurav Jain — Barclays — Analyst” data-reactid=”331″>Gaurav Jain — Barclays — Analyst

Sure. Thanks a lot.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”333″>Operator

Thank you. Your next question comes from Petros Voulgaris of Goldman Sachs.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Petros Voulgaris — Goldman Sachs — Analyst” data-reactid=”335″>Petros Voulgaris — Goldman Sachs — Analyst

Good morning, everybody.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”337″>Howard Willard — Chairman and Chief Executive Officer

Good morning.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Petros Voulgaris — Goldman Sachs — Analyst” data-reactid=”339″>Petros Voulgaris — Goldman Sachs — Analyst

We’ve discussed IQOS’ inclusion in the MSA before and how that operates as a tax, but I’m wondering with respect to how IQOS is counted toward the MSA will one HeatStick be equivalent to one cigarette or will there be some other measurement and as a follow-up, other ways through different product iterations or some other modification for IQOS not to be included in the MSA?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Billy Gifford — Vice Chairman and Chief Financial Officer” data-reactid=”341″>Billy Gifford — Vice Chairman and Chief Financial Officer

Yeah 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.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Petros Voulgaris — Goldman Sachs — Analyst” data-reactid=”343″>Petros Voulgaris — Goldman Sachs — Analyst

Thanks, guys.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”345″>Operator

Thank you. The floor is now open to questions from the media and your first question comes from Jennifer Maloney of Wall Street Journal.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Jennifer Maloney — Wall Street Journal — Analyst” data-reactid=”347″>Jennifer Maloney — Wall Street Journal — Analyst

Hi, good morning.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”349″>Howard Willard — Chairman and Chief Executive Officer

Hi, Jennifer.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Jennifer Maloney — Wall Street Journal — Analyst” data-reactid=”351″>Jennifer Maloney — Wall Street Journal — Analyst

I’m wondering 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?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”353″>Howard Willard — Chairman and Chief Executive Officer

Yeah, 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.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Jennifer Maloney — Wall Street Journal — Analyst” data-reactid=”355″>Jennifer Maloney — Wall Street Journal — Analyst

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?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”357″>Howard Willard — Chairman and Chief Executive Officer

No, it hasn’t.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Jennifer Maloney — Wall Street Journal — Analyst” data-reactid=”359″>Jennifer Maloney — Wall Street Journal — Analyst

Okay.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”361″>Howard Willard — Chairman and Chief Executive Officer

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.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Jennifer Maloney — Wall Street Journal — Analyst” data-reactid=”363″>Jennifer Maloney — Wall Street Journal — Analyst

Okay, thanks.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”365″>Howard Willard — Chairman and Chief Executive Officer

Thank you.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”367″>Operator

Thank you. Your next question is from Robert Rampton of UBS.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Robert Rampton — UBS — Analyst” data-reactid=”369″>Robert Rampton — UBS — Analyst

Hi, thanks for taking my question. Just a follow-up on that cannibalization question. So could you give us more color on what is the cannibalization rate of e-cigarettes? Every 100 puffs, how many are coming from cigarettes, one of your peers put that number at 25% and would you be — would you disagree with that?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”371″>Howard Willard — Chairman and Chief Executive Officer

Yeah, 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.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Robert Rampton — UBS — Analyst” data-reactid=”373″>Robert Rampton — UBS — Analyst

Okay, fair enough. Sorry. Second question, just on IQOS, your earlier comments seem to further — your expected range is between zero and Japan at 20% and you are at the midpoint, so I’m guessing around 10% and can you give us some color on what your expectations for IQOS in the US are based of?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”375″>Howard Willard — Chairman and Chief Executive Officer

Yeah, I don’t know that — I don’t know that we’ve firmed up an expectation for IQOS. I think our belief certainly, we know the experience in the variety of markets overseas. I think our belief is that’s one of the key things we’re going to learn and going into the Atlanta test market.

And I think we’ll know probably in the next six to nine months kind of what the US experiences with IQOS and of course we’re going to put significant resources and significant activity behind it in order to drive it toward the high end of what it can do in the US, but I don’t know that we’ve — that we’ve got a precise answer as to how we think it’s going to compare in the US 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 US as is humanly possible.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Robert Rampton — UBS — Analyst” data-reactid=”378″>Robert Rampton — UBS — Analyst

Fair enough. Thank you very much.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”380″>Howard Willard — Chairman and Chief Executive Officer

Thank you.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”382″>Operator

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

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”384″>Howard Willard — Chairman and Chief Executive Officer

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 non-combustible 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.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”387″>Operator

[Operator Closing Remarks]

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Duration: 90 minutes” data-reactid=”389″>Duration: 90 minutes

Call participants:

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Paige Magness — Vice President, Investor Relations and Communications, Altria Client Services LLC” data-reactid=”391″>Paige Magness — Vice President, Investor Relations and Communications, Altria Client Services LLC

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Howard Willard — Chairman and Chief Executive Officer” data-reactid=”392″>Howard Willard — Chairman and Chief Executive Officer

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Billy Gifford — Vice Chairman and Chief Financial Officer” data-reactid=”393″>Billy Gifford — Vice Chairman and Chief Financial Officer

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Judy Hong — Goldman Sachs — Analyst” data-reactid=”394″>Judy Hong — Goldman Sachs — Analyst

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Vivien Azer — Cowen and Company — Analyst” data-reactid=”395″>Vivien Azer — Cowen and Company — Analyst

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Bonnie Herzog — Wells Fargo Securities — Analyst” data-reactid=”396″>Bonnie Herzog — Wells Fargo Securities — Analyst

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Michael Lavery — Piper Jaffray &amp; Co. — Analyst” data-reactid=”397″>Michael Lavery — Piper Jaffray & Co. — Analyst

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Pam Kaufman — Morgan Stanley — Analyst” data-reactid=”398″>Pam Kaufman — Morgan Stanley — Analyst

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Chris Growe — Stifel Nicolaus — Analyst” data-reactid=”399″>Chris Growe — Stifel Nicolaus — Analyst

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Owen Bennett — Jefferies — Analyst” data-reactid=”400″>Owen Bennett — Jefferies — Analyst

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Adam Spielman — Citigroup — Analyst” data-reactid=”401″>Adam Spielman — Citigroup — Analyst

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Steve Powers — Deutsche Bank Securities Inc. — Analyst” data-reactid=”402″>Steve Powers — Deutsche Bank Securities Inc. — Analyst

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Gaurav Jain — Barclays — Analyst” data-reactid=”403″>Gaurav Jain — Barclays — Analyst

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Petros Voulgaris — Goldman Sachs — Analyst” data-reactid=”404″>Petros Voulgaris — Goldman Sachs — Analyst

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Jennifer Maloney — Wall Street Journal — Analyst” data-reactid=”405″>Jennifer Maloney — Wall Street Journal — Analyst

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Robert Rampton — UBS — Analyst” data-reactid=”406″>Robert Rampton — UBS — Analyst

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="More MO analysis” data-reactid=”407″>More MO analysis

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="All earnings call transcripts” data-reactid=”408″>All earnings call transcripts

More

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content=" More From The Motley Fool ” data-reactid=”421″> More From The Motley Fool

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company’s SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.” data-reactid=”429″>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company’s SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.” data-reactid=”430″>Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.