Altria Group, Inc. (MO) CEO Howard Willard on Q3 2019 Results - Earnings Call Transcript

Oct. 31, 2019 2:51 PM ET

CFO: Billy Gifford

In e-vapor, we participate in the category through our 35% economic investment in JUUL. We made the investment based on our belief that JUUL's product development strength, early signs of brand equity and potential to convert adult smokers set it apart from all other e-vapor products in the market. We also believe that the investment would enhance Altria's growing portfolio of noncombustible product offering.

Given the dramatic shifts in the current e-vapor regulatory and marketplace environments, we have revised our transaction assumptions. In preparing our financials this quarter, we performed a valuation analysis on our JUUL investment, which considered multiple regulatory and marketplace scenarios. In aggregate, we're now projecting lower e-vapor category volumes in the U.S. versus our original estimates, which resulted in a third quarter non-cash impairment charge of $4.5 billion related to our JUUL investment. Also factoring into this determination where other changes to our original assumptions. For example, we expect it may take longer for JUUL to realize the strong margin performance that we previously communicated.

We've also revised our estimates of JUUL's international business due to recent market development. Despite this impairment charge, we remain committed to JUUL's success. We are pleased with the recent decisions by JUUL to change leadership and we are optimistic about JUUL's focus and prioritization in key areas such as establishing industry-leading responsible practices and pursuing regulatory authorization of their products. Finally, regarding antitrust clearance, we've certified substantial compliance with the FTC's second request and we expect a resolution in the first quarter of next year.

Operator

Next question is from the line of Pam Kaufman with Morgan Stanley.

Pam Kaufman

Hi, good morning.

Howard Willard

Good morning Pam.

..

Pam Kaufman

And how do you feel about having to so materially reduce your estimate of such a large investment so quickly after being completed, and how will this experience impact your future approach to M&A versus internal investment?

Howard Willard

Sure of course, we're not pleased to have to take an impairment charge on JUUL investment. And certainly while we had a range of scenarios when we made our investment in JUUL, we did not anticipate this dramatic a change in the e-vapor category. Certainly the lung injury I think was something we had not predicted, and in the pretty dramatic potential regulatory change that may occur next year, I think it was on the extreme end of what we might have expected.

However, all that said, in the third quarter JUUL had a 48% share of the e-vapor category in the U.S., the category, at least through the nine months to this year was growing quite dramatically with JUUL as the primary driver of that growth. And so we continue to believe, first of all, that bold action to address usage of e-vapor products is appropriate. And we encouraged bold action by FDA. But we also believe that JUUL is set up in the longer term to continue to be the winner in e-vapor.

And because of that we continue to be supportive of JUUL's business and look forward to them working through the changes in the e-vapor category and being a contributor to our equity income line going forward.

Pam Kaufman

Thanks.

Operator

Ladies and gentleman, we will now invite the media to participate in questions. [Operator Instructions] Your first question is from the line of Angelica LaVito with CNBC.

Angelica LaVito

Good morning, thanks for taking the question. I just wanted to ask have you considered the possibility that the FDA does not authorize JUUL's PMTA?

Howard Willard

Sure. I think that with the filing date for the PMTAs moved from 2022 to May of next year, I think that creates a more challenging situation on both filing and -- filing approvable applications for all the e-vapor companies. However, I believe that JUUL is highly likely to end up filing a successful application and ultimately having their products authorized because they have a significant amount of resources applied against that task.

And I think that one of the benefits they have going for them is that within the e-vapor category the JUUL product, I think, is distinguished itself compared to other e-vapor products as having quite a significant success at convincing adult cigarette smokers to convert ultimately to exclusive use of e-vapor. And I think that's one of the things that the FDA is going to consider in debating whether or not to approve an application.

Operator

And your final question is from the line of Jennifer Maloney with Wall Street Journal.

Jennifer Maloney

Good morning. I wonder if you could share your understanding of JUUL consumers' willingness to switch flavors. The company did get to observe on how consumers reacted when they pulled many of their flavors out of retail stores last year, a lot of people switched from Mango to mint. So, based on those observations and others, what is your best projection of what may happen if their flavors are limited to tobacco only?

Howard Willard

Jennifer, thanks for the question. I have to tell you that I'm probably the wrong person to answer that question. I'm aware of the same trends that you referenced when some of their flavors, other than tobacco, menthol and mint were restricted in the marketplace. But given that we don't operate the JUUL business, I don't really have access to that kind of research. That's probably best directed toward JUUL management.

Operator

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

Howard Willard

Thank you. To close, we believe we are the best positioned company to successfully navigate through the current tobacco environment. We have excellent profit growth and cash generation from our core tobacco businesses and we have built a diversified business platform of noncombustible products that can satisfy adult tobacco consumers and provide future profitability under many different future marketplace scenarios. Thanks again for joining us and please contact our Investor Relations team, if you have further questions.

Operator

Thank you for participating in today's conference call. You may now disconnect your lines.

Questions

1) What is PMTA? What should Altria do if PMTA is not successful?

2) Using the Condensed Consolidated Statements of Cash Flows in the 10-Q recently filed by Altria, identify the largest three line items in the CFO, CFI, and CFF, and briefly explain them. In other words, fill in the related table on the next page.

3) If you were to predict Altrias CFO in the first nine months of 2020, would you predict a number close to $516,000,000 or $5,274,000,000? Why?

4) In your library, on the Internet, or from another source, locate the article Cash Flow Patterns as a Proxy for Firm Life Cycle by Dickinson in The Accounting Review 86 (6) 2011. Out of the life cycle stages on page 1974, which life cycle stage is Altria in? Which life cycle stage do you think JUUL is in?

Altria Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2019

(in millions of dollars)

(Unaudited)

Cash Provided by (Used in) Operating Activities		Explanation
Net earnings (losses)	516
Adjustments to reconcile net earnings (losses) to operating cash flows:
1) Earnings from equity investments	(866)	These profits from equity investments are non-cash. Thus they are subtracted.
2)
3)
Net cash provided by (used in) operating activities	5,274
Cash Provided by (Used in) Investing Activities
1)
2)
3)
Net cash provided by (used in) investing activities	(2,412)
Cash Provided by (Used in) Financing Activities
1)
2)
3)
Net cash provided by (used in) financing activities	(2,650)
Cash, cash equivalents and restricted cash:
Increase (decrease)	212
Balance at beginning of period	1,433
Balance at end of period	1,645