Good day, and welcome to the Altria Group 2022 Second Quarter and First Half Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by Altria's management and a question-and-answer session.

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

Thanks, Ashley. Good morning, and thank you for joining us. This morning, Billy Gifford, Altria's CEO; and Sal Mancuso, our CFO, will discuss Altria's second quarter and first half business results. Earlier today, we issued a press release providing our results.

The release, presentation, quarterly metrics and our latest corporate responsibility reports are all available at altria.com. During our call today, unless otherwise stated, we're comparing results to the same period in 2021. Our remarks contain forward-looking and cautionary statements and projections of future results.

Please review the Forward-Looking and Cautionary Statements section at the end of today's earnings release for various factors that could cause actual results to differ materially from projections. Future dividend payments and share repurchases remain subject to the discretion of Altria's Board.

Altria reports its financial results in accordance with U.S. generally accepted accounting principles. Today's call will contain various operating results on both a reported and adjusted basis. Adjusted results exclude special items that affect comparisons with reported results.

Descriptions of these non-GAAP financial measures and reconciliations are included in today's earnings release and on our website at altria.com. Finally, all references in today's remarks to tobacco consumers or consumers within a specific tobacco category or segment refer to existing adult tobacco consumers 21 years of age or older.

With that, I'll turn the call over to Billy..

oral tobacco, e-vapor and heated tobacco. In oral tobacco, we're encouraged by the growth of the novel oral products, which comprise more than 1/5 of total industry oral tobacco volume in the second quarter. The category grew 6.8 share points year-over-year, with on! representing more than 40% of this growth.

In the second quarter, on! reported shipment volume increased nearly 60% versus the year ago period. And on! retail share of oral tobacco increased 8/10 sequentially, reaching 4.9 share points in the second quarter. This represents a growth rate of almost 150% year-over-year.

These strong results were driven by increased adoption of on!, increased brand awareness and higher levels of investment. Helix achieved unconstrained on! manufacturing for the current U.S. market in the second quarter of 2021.

Over the 4 quarters since then, Helix enhanced the retail visibility and awareness of on!, leading to an over 70% increase in consumer awareness, tripled on! repurchases and continue to increase trial using transition marketing and data-driven strategies. And grew on! retail share to be a top 5 U.S.

oral tobacco brand and solidified its position as the second largest oral nicotine pouch brand in each region of the U.S. More recently, Helix launched the new Carry On Equity campaign, which encourages smokers to make progress in their transition journey.

The campaign highlights that by converting to on!, smokers can have nicotine satisfaction without having to step away from their daily routines, which addresses the social friction they experience with smoking.

Looking ahead, Helix expects to use its understanding of the smoker journey, the smoke-free products to drive repeat purchases and adoption among smokers. We are excited about the performance of on and the opportunity for future growth.

I'll now move to the e-vapor category, which we continue to believe will be significantly influenced by regulatory actions. In the second quarter, total estimated e-vapor volumes declined 2% versus a year ago and 7% sequentially as a result of decreased volume in the vape store channel, a reversal of the trend we observed in the first quarter.

Currently, slightly over half of the category's volume is comprised of pod-based products such as JUUL and Vuse Alto. Within e-vapor, disposables represent the fastest growth segment since January 2020, which corresponds to when the FDA issued in its guidance banning flavors only in pod-based e-vapor products.

Many of these disposable brands, including Puff Bar contain synthetic nicotine. Recent legislation, which we strongly supported, clarified the FDA's authority to regulate tobacco products containing nicotine from any source.

Manufacturers of synthetic nicotine products were required to obtain FDA authorization by July 13 to continue legally marketing their products. So far, no synthetic nicotine product has been granted authorization.

And the FDA has committed to pursuing compliance and enforcement action against companies found to be marketing, selling or distributing illegal synthetic nicotine products. Thus far, the FDA has authorized only 23 total e-vapor applications, accounting for only 8 products and approximately 1% of estimated e-vapor category volume.

Further, the FDA has only authorized tobacco-flavored e-vapor products, most of which were for cigalike-style products, which we believe generally do not meet smoker expectations or deliver a satisfying product experience. Given the limited number of authorizations today, we believe that the e-vapor category is still in its early phases.

But with the support of reasonable regulations, we believe it could play in important role in harm-reduction. Moving forward, we hope to see timely science and evidence-based determinations from pending PMTA application and further enforcement or noncompliant manufacturers.

In the second quarter, JUUL products received marketing denial orders, or MDOs. Earlier this month, the FDA administratively stayed the JUUL MDOs citing unique scientific issues that warrant additional FDA review. The administrative stay temporarily suspend the MDOs during the additional review, but does not rescind them.

Regarding our investment in JULL, we recorded for the second quarter a noncash pretax unrealized loss of $1.2 billion as a result of a decrease in the estimated fair value of our investment.

The decrease in fair value was driven by several factors including uncertainty created by the FDA's action related to JUUL and uncertainty relating to JUUL's ability to maintain adequate liquidity. As of June 30, our estimated valuation is $450 million, which reflects a range of regulatory, liquidity and market outcomes.

Under the terms of our relationship agreement with JUUL, we have the option to be released from our non-compete obligation under several conditions including the fair value of our investments, if the fair value of our investment is not more than 10% of the initial carrying value of $12.8 billion.

However, if we elect to be released from our noncompete obligations, we would lose many of our investment rights, including our consent rights, our preemptive rights, and most of our Board designation rights. At this time, we continue to believe that these investment rights are beneficial to us.

Therefore, we have not opted to be released from our non-compete obligations at this time, but retain the option to do so in the future in accordance with our agreement with JUUL. We continue to believe that e-vapor products, including JUUL, can play an important role in tobacco harm-reduction.

In heated tobacco, our teams remain in discussions with PMI related to IQOS. We continue to believe in the potential of the heated tobacco category in the U.S. Our plans remain on track to finalize designs by year-end for 2 product platforms within heated and oral tobacco and then begin regulatory preparations.

Our journey towards responsibly transition adult smokers to a smoke-free future continues. And while we may face near-term challenges, we believe that the tobacco harm-reduction opportunity remains in front of us. As the leader in the U.S.

tobacco industry, we have continued confidence in our ability to achieve our vision for several reasons, including our robust manufacturing, sales and distribution system and understanding of U.S. tobacco consumers. Our science-based approach to tobacco harm reduction, which we believe is aligned with tobacco consumers, society and the FDA.

Our portfolio of products and investments across the most promising smoke-free categories and our significant cash flows and flexible balance sheet, which support our investments and shareholder returns. With these in mind and the resiliency of our organization, we believe we can lead the U.S. in moving beyond smoking.

I'll now turn it over to Sal to provide more detail on the business environment and our results..

Thanks, Billy. Altria grew adjusted diluted earnings per share by 2.4% in the second quarter and by 3.5% in the first half across the challenging macroeconomic environment that Billy described.

The smokeable product segment continue to deliver on its strategy of maximizing profitability in combustibles while appropriately balancing investments in Marlboro with funding the growth of smoke-free products. The segment grew its adjusted operating company's income by 0.6% in the second quarter, and 2.9% first half.

Adjusted OCI margins expanded by 0.7 percentage points to 59.1% for the second quarter and by 1.33 percentage points to 59.3% for the first half. This performance was supported by robust net price realization of 11.5% in the second quarter and 10.4% for the first half.

I'll remind you that manufacturer price realization does not reflect retail price change for smokers. For example, Marlboro net retail pack price increased 5.6% in the second quarter compared to last year.

Smokeable products segment reported domestic cigarette volumes declined by 11.1% in the second quarter and 8.9% in the first half, primarily due to changes in consumer purchasing behavior as a result of increased gas prices and inflation.

When adjusted for trade inventory movements and factors, second quarter and first half domestic cigarette volumes declined by an estimated 10% and 9%, respectively. At the industry level, we estimate that adjusted domestic cigarette volumes declined by 8.5% in the second quarter and 7.5% in the first half.

As Billy mentioned Marlboro displayed resiliency during a period of continued uncertainty for consumers. In the second quarter, Marlboro's retail share of the cigarette category grew 1/10 sequentially to 42.7% while declining 4/10 versus the year ago period.

Additionally, Marlboro grew its share within the premium segment to 58.1%, an increase of 3/10 sequentially and 5/10 versus a year ago. Moving to the total discount segment. Total share was flat sequentially even as gas prices rose significantly from the first to second quarter.

Discount increased 1.3 percentage points year-over-year to 26.4% as we lapped the period when the discount segment contracted from smokers having higher disposable income. Additionally, we observed increased churn between the branded and deep discount segments as a result of a deep discount manufacturer's exit from the marketplace earlier this year.

In cigars, reported cigar shipment volume decreased by 5% in the second quarter due to macroeconomic pressures on consumer, disposable income, trade inventory movements and other factors. However Middleton continue to provide a strong contribution to smokeable segment financial results.

In the oral tobacco product segment, adjusted OCI and adjusted OCI margins contracted in the second quarter and first half due to several factors, including declines in MST volumes, increased investments behind on! and unfavorable mix.

We remain pleased with the strong overall margins for the segment as we made progress with on! At the industry level, tobacco oral tobacco volume declined 0.5% over the past 6 months.

We continue to observe steady growth from the oral nicotine pouch category, but this has been offset by declining MST volumes due to the challenging macroeconomic environment and its effect on consumer behavior, consumer movement to oral nicotine pouches and other factors.

Total segment reported shipment volume decreased by 4.4% for the second quarter and by 3.2% for the first half.

The segment's volume was -- volume decline was driven by declines in MST volumes, partially offset by the growth of on!. When adjusted for trade inventory movements, segment volume declined by an estimated 2.5% for the second quarter and 1% for the first half.

The total oral tobacco product segment's retail share for the second quarter contracted 2/10 sequentially and 1 share point versus the prior year to 46.7%. Copenhagen is celebrating its 200th anniversary this year. We're extremely proud of Copenhagen's long history and the fantastic employees who have supported the brand over the years.

To them, we say thank you. After 200 years, Copenhagen remains the number one dip brand because of your hard work, dedication and passion. To honor this impressive milestone, the team introduced Cop Rewards, the first and only national rewards program for an MST brand.

Under the program, dippers can earn points by entering codes from their Copenhagen cans and can redeem them for coupons or rewards. We're excited about Cop Rewards and its potential contributions to Copenhagen's sustained leadership in MST. Turning to our investment in ABI. We recorded $124 million of adjusted equity earnings in the second quarter.

This was an increase of approximately 9.7% from the year ago period and represent Altria's share of ABI's first quarter 2022 results. We committed to creating long-term shareholder value through the pursuit of our vision and our focus on significant capital returns.

We demonstrated this commitment in the first half by acquiring intellectual property and other assets for a multi substrate heated capsule technology from Poda Paying approximately $3.3 billion in dividends and repurchasing 21.4 million shares, totaling $1.1 billion.

We have approximately $750 million remaining under the currently authorized $3.5 billion share repurchase program, which we expect to complete by the end of this year. Our balance sheet remains strong. And as of the end of the second quarter, our debt-to-EBITDA ratio was 2.3x.

In August, we expect to retire $1.1 billion of notes coming due with available cash. And lastly, our financial plans for the year remain on track and we reaffirm our guidance to deliver 2022 full year adjusted diluted EPS in the range of $4.79 to $4.93. This range represents an adjusted diluted EPS growth rate of 4% to 7% from a $4.61 base in 2021.

With that, we'll wrap up and Billy and I will be happy to take your questions. While the calls are being compiled, I'll remind you that today's earnings release and our non-GAAP reconciliations are available all on altria.com We've also posted our usual quarterly metrics, which include pricing, inventory and other items.

Let's open the question-and-answer period.

Operator, do we have any questions?.

[Operator Instructions] Our first question comes from Chris Growe with Stifel..

Billy, I have a question for you, and you made a good point about -- it's clear we're at a very pivotal moment for this category. I was hoping to get just a better perspective from you and how you're investing today to be able to internally develop RRP, reduced risk products.

You've got some uncertainty around your positions in JUUL and IQOS, and there's risk. Those are no longer in your portfolio, certainly just a risk at this point. But I guess I just want to get a sense of what you're doing internally. And you talked about having a product already this -- at the end of this year.

And then to what degree maybe M&A could play a bigger role in giving you a better position in RRPs going forward?.

Yes. Thanks for the question, Chris. I think when you think about where we're investing, certainly, we invested in our innovation process. We have the internal development going on. And I've spoken previously about changing that innovation process so that it's laser-focused on the consumer. It monitors the marketplace.

But I think before we were -- I would characterize it as almost chasing the market versus sitting side-by-side with the consumer. And so there's a lot of consumer interaction, almost to the point of co-developing with the consumer in those categories that we can develop in.

To your point, we can't develop, per agreement with JUUL, in the e-vapor category. But it's something -- we continue to monitor the marketplace and understand consumer satisfaction with the various products in the marketplace.

We monitor the entire globe as far as alternative products to both influence -- how we think about internal development, but looking for products that could be emerging in the other markets as well..

And so would M&A be an important contributor, do you think, going forward for Altria's position in this category?.

It certainly won't be off the table, Chris. But I think for the investments we're making in our internal development, we feel good about the pipeline of products that we have..

Okay. And just one other question in relation to pricing in the cigarette category. It's been larger than expected, and it's occurred sooner than I expected, at least this year.

And I guess in this environment where there's obviously a more burdensome kind of macroeconomic factor that's weighing on your volume, are you seeing a greater shift to some of the lower-priced or more highly promoted Marlboro varieties? And do you see a need to have to increase promotional investments in light of the heavy pricing coming through in this environment?.

Yes. Chris, it’s a good question and it's something we monitor. But I think when you look at the sequential performance of Marlboro, and even the discount category, you saw sequential stability. Marlboro actually grew 1/10 and the discount category stayed flat. So that were experienced first quarter to the second quarter.

From a standpoint of the tools that we put in place with advanced analytics, we feel good about the position. Sal raised an important point. When you think about the impact to the consumer and you think about industry-wide, call it a 5% to 6% price increase, that's well below the inflation they're experiencing in other categories.

And you saw the results and their remarks of the -- where we went to the consumer and talked about how they think about the tobacco categories and other categories, and you see they continue to prioritize the tobacco category at the top of their list. And I think that's telling.

And you it -- we get a lot of questions about the -- I think you have to step back and think longer term on this.

If you think about Marlboro's share, we're right where we were prepandemic, certainly during the pandemic as they received additional funds, whether that be from government or unemployment or things of that nature, it reinforced that Marlboro's the aspirational brand. So Marlboro benefited during that period.

Certainly, we've given a little bit of that share back and feel satisfied with where Marlboro is. We've really -- the teams in advanced analytics as well as the Marlboro team putting those into the marketplace, the stability of Marlboro is incredible..

And we will take our next question from Pamela Kaufman with Morgan Stanley..

So industry cigarette volumes have weakened considerably during the second quarter. You highlighted the headwinds facing smokers and how they're adjusting their purchasing behavior.

I guess how are you thinking about the outlook for cigarette volumes over the remainder of the year? And then related to that, how much more pricing do you think that consumers can tolerate just given so far, we really haven't seen a meaningful acceleration in trade down to the discount segment, it's been consistent over the last couple of quarters.

Do you see an accelerated risk of trade down within the category?.

Yes. Let me see if I can unpack that a little bit, Pamela, if I miss anything, please follow up. I think when you think about the cigarette volume declines that we saw to the first half, you look historically and when you see the environment, the macroeconomic environment changed for our consumer.

You see that they make short-term adjustments and then they adopt to it through time.

I think, certainly through the first half, and we saw a little bit of a downshift in gas prices as we entered the third quarter, I think we've seen a correlation in gas prices just because our consumer is usually filling up their vehicle and then going in and making those purchases.

But again, I think the research that we did is telling that the consumer is adjusting those behaviors to be able to prioritize their tobacco choices in the -- mostly in the C-store or gas stores. I think from a standpoint of pricing, and Pamela, we've shared with you this before. If you look at minutes worked in the U.S.

and benchmark that around -- with other countries around the world that have mature tobacco categories. When you look at that, you still see that the U.S. is at the low end of that scale. So certainly, we feel like there's room to price, but that's something that we monitor.

You remember that the factors that we think about when pricing is the strength of the brand. Certainly, corporate objectives play a part in that. But then we think about the economic health of the consumer and what those competitive activities do. And I think it's important to mention here again, the tools that we put in place.

We put out the price gap, we put out kind of national metrics. But with the advanced analytics, we're able to use those tools and be very specific. So it to be different in Cleveland, Ohio than in Dallas/Texas.

Because these tools allow us to adapt the retail promotions we put in the marketplace depending on what the individual consumers are feeling in that local area..

That's helpful.

Definitely, I just wanted to ask about how you're thinking about the implications to your relationship with Philip Morris in the heat-not-burn category, given their planned acquisition of Swedish Match? And how are you preparing for changes in the competitive in the U.S.?.

Well, Pamela, you know this as well as I do that it's always been a competitive marketplace. We always had major players. Certainly, this brings a new major player to the marketplace, but we feel like we have the tools in place.

So we're going to evaluate everything, make sure that we understand or at least game plan how, Pam, I would approach, the marketplace using the products of Swedish Match and adapt accordingly. I don't want to go much further than that for competitive reasons.

I think from a standpoint of heat-not-burn, I shared in my remarks that we're continuing discussions with them about IQOS..

And we'll take our next question from Azer, Vivien with Cowen..

I wanted to touch on -- Billy, so your commentary around the improved trial through the expanded Helix manufacturing capacity was interesting. I was curious if you could just expand and touch on repeat and how you're measuring that, given the promotional and the category..

Yes. Vivien, it's a great question. I think when you think about on! our research teams are really looking repeat purchases versus a trial offers. And we want to have increases in both. If you think about repeat purchases, we're very pleased with where we're at.

Certainly, to your point, as we're investing, you have those repeat purchases that take place and you want to see the concreteness of that. And we feel very pleased and enjoy the repeat purchases that we have. But we felt like there was still opportunity to drive awareness and you've seen the increase in awareness we've been able to drive.

And it's specific to the adult consumer that the product is product is very satisfying to the adult cigarette consumer, and we feel like there's still opportunity for trial there..

Understood. And then my other question is just on the industry outlook. I know you guys have shied away from offering industry volume guidance for a while now, and I fully appreciate why.

But if we look at the supplemental disclosures, estimated industry volume declines have nearly doubled over the course of the last 12 months, against a very challenging macrobackdrop. And that does account for it in the table that you've disclosed.

I'm just curious so, has your thinking around the underlying macrodrivers changed at all?.

It has not, Vivien. When you think about it -- and can take those quarters that we provide and stretch them back, and you thought -- and you saw macroeconomic was a benefit not that many quarters ago. So you certainly see the swing. It's no different than the swings we see through history.

You have the -- macroeconomic economic can be a benefit at times. We saw gas prices in 2015 were a huge benefit. And so I think the only thing I would point out is we're seeing a higher correlation with gas prices and purchasing behavior. That would be the only -- because historically, we tried to correlate gas prices to it.

And they were moving nickels and dimes at a time. I think you're seeing faster swings in gas prices so there's a correlation the consumer behavior as they adapt to the short-term nature of those changes..

And we'll take next question from Bonnie Herzog with Goldman Sachs..

I just have a question on your guidance.

You maintained your full year mid-single digit EPS growth guidance, but that does imply the second half EPS growth will need to accelerate versus the first half to hit the midpoint of your full year guide? So I just want to hear from you, what gives you the confidence this is going to happen, especially during an economic slowdown.

I mean are your expectations that this will be driven from greater net price realization, assuming volumes remain pretty pressured or decelerate further? Are there any expected cost savings that you're hoping to realize in the second half that you could share with us? And then just finally, how do we think about stepped up investments that you might be making towards your smoke-free vision.

Is that something that's factored into your guidance?.

Yes. So Bonnie, first, thank you for the question, I'll take you through how we think about guidance. So throughout the year, we have communicated that we expected the second half to really drive the growth of our EPS on a year-over-year basis. And just to remind you of a couple of factors that we are seeing in the back half of the year.

One is, we begin to lap quarters where we had unconstrained manufacturing in the nicotine pouch category. Also, in the fourth quarter we're, for the first time, going to be lapping a quarter without line income, right? That will happen in the fourth quarter.

And then in the back half of the year, as inflation accelerated and we adjusted our MSA inflation assumptions, you start to lap that in the back half of the year as well. So there's some comparative factors that are part of the first half versus second half EPS growth.

As far as investments, spending isn't linear necessarily throughout the year, especially when you were making investments in infrastructure and things like that. So I definitely wouldn't look at 1 quarter spending when it comes to that and read into it. It is something that ebbs and flows throughout the year..

All right. And then I did just want to ask about the -- I guess the uncertainty around your smoke-free future, given everything going on from JUUL to Philip Morris entering in the U.S. via Swedish Match, I guess, the dispute you have with Philip Morris as it relates to IQOS. This continues to be one of the key concern from investors.

I know you've touched on this, but any more color you can provide or share with us as to your goal to kind of hit the smoke-free future or transform your business in the next, I guess, decade would be helpful.

I mean I know with your agreement with JUUL now that the fair value is below the agreement, I think you have the ability to compete in the e-vapor market. So is that an option you're exploring? And then just maybe color -- a little more color on the timing as it relates to your heat-not-burn.

You mentioned it's in final design by the end of the year, and then you're going to begin regulatory preparations.

But how long before you have a product that you can bring to the market, do you think? Is that 2 years out, 3 years out? Just trying to get a sense of some parameters as to how you're going to achieve your goal?.

Yes. Thanks for the question, Bonnie. I think it's really important to step back, and I said it in my remarks, but let me add some color to it. The entire harm-reduction opportunity is in front of us in the U.S., and let me explain why I say that. You remember in my remarks, I talked about the authorizations that have taken place in e-vapor thus far.

And they represent 1% of the e-vapor category volume. So there's still 99% of authorizations that could go either way. And so that category will be in a bit of transition while we're waiting for the FDA to make those authorizations, and then the outcome of those authorizations.

If you think about novel oral, yes, we're making progress and competitors are making progress, but we're still waiting for FDA authorizations in that category. And so while we're making progress, there will be physicians from the FDA regarding that category.

And then heat-not-burn, while it's been gaining momentum internationally, it's non-existent in the U.S. And so that's non-existent. So those are the 3 major growth categories. That's why I keep saying, I just wanted to add some color that the entire harm-reduction opportunity's in front of us.

You're right to mention that we have development underway in 2 of those categories. We feel good about the pipeline. I know you would love to see those products, and I would love to show them to you, and we will at the appropriate time. But we feel good about that. As I mentioned earlier, the co-development with the consumer in that space.

I think with e-vapor, the color I would add there is -- and I mentioned it earlier, we've always monitored the marketplace to understand consumer satisfaction with the various products in the marketplace, both in the U.S. and outside of the U.S.

Additionally, with this quarter with us going below, you're right, we have the option to get out of the noncompete. If we so elect to do so.

And we really feel like in the process with the stay from the FDA, and that decision's still looming as well as the rights that I mentioned in my remarks, we believe are beneficial to us at this point in the process, but we'll continue to really gauge what our options are there and make decisions accordingly..

And we'll take our next question from Priya Ohri-Gupta with Barclays..

This is Puja [ph] on behalf of Priya. And my question is, so based on your comments indicating that you plan to repay your upcoming maturity with available cash. How are you thinking about any subsequent need to access the market for refinancing? And I also have a follow-up after that..

Sure. And thank you for the question. I'm really not going to signal future capital allocation decisions. I'm happy to share how we think about capital allocation, which, of course, considers a number of factors in those decisions including marketplace dynamics. We manage our balance sheet very carefully. We want to have a strong balance sheet.

We want to continue to have investment-grade credit rating. So when we think about capital allocation, we take a balanced approach, and we've made the decision in August to use available cash to retire that debt, but future debt maturity towers, we'll analyze the marketplace at the time and make the appropriate decision..

Okay. That makes sense.

And as a quick follow-up, where should we sort of expect you to manage your cash balance over the near term as this will likely bring it more in line with your prepandemic type ranges?.

Yes. Look, we are very fortunate in that we have operating companies that generate a significant amount of growth in cash. In a typical year, after paying our dividend and making the necessary investments, we traditionally have had, let's call it $1 billion in excess cash. And at the time, we make various decisions.

There are times where we've gone to the Board and ask for a share buyback program. There are times where we've done some liability management to manage our maturity towers going forward, and strengthen the balance sheet. And there are times where we've made some investments such as the investment we made for the Poda technology recently.

So that's how we think about cash going forward. But again, our operating companies do a tremendous job of generating cash flow for the shareholder and other stakeholders..

And our next question will come from Gaurav Jain with Barclays..

A couple of questions from my side. So look, we have had some discussion around the harm-reduction opportunity in front of us, and how it is very early. But if we really look where harm-reduction is really developing, it is all international because it's very hard to introduce new products in the U.S. market because of the PMTA process.

But do you think that really to explore the harm-reduction opportunity, you need to go international, much like Philip Morris is entering U.S.?.

Yes. To your point, and I appreciate you recognizing that the PMTA process and the entire harm-reduction opportunities in front of us in the U.S. It's something that we consider on a regular basis of how to get early consumer feedback outside of research in a live marketplace.

And thus far, we've opted to go the route we are, which is with consumer research, but it's something that we consider on a regular basis..

Sure. And just also , a follow up on the questions around JUUL and potential end of exclusivity, and you also met -- referenced the synthetic nicotine market. And some of these companies have applied for PMTAs, and can potentially get PMTAs.

So how do you think of synthetic nicotine as an ingredient? Like is that a market you would like to explore? And if some of the companies get PMTAs, that's an area you would like to enter?.

Yes. Certainly, we were pleased that with the support that took place, that synthetic nicotine is now under FDA authority. We believe in the process as far as the FDA being able to assess the science and evidence. Again, we watch all products that are in the marketplace, both in the U.S.

and internationally, to understand how the consumer is interacting with them, what benefits they receive from them as far as satisfaction, enjoyment, the brand itself. And so it's something that stays on our radar..

[Operator Instructions] We'll open it for the media. We'll go next to Jennifer Maloney with Wall Street Journal..

I wanted to follow up on your statement, Billy, that M&A is not off the table for reduced risk products. And I wanted to ask specifically about the e-vapor category.

Would you be open to the possibility of acquiring an e-cigarette brand, for example, that already has FDA authorization?.

Yes. While I don't speak to M&A in any regards. As I mentioned, look, we've always been monitoring the marketplace in the e-vapor space. We want to make sure we understand consumers' interactions with the various brands in the marketplace, whether they like those brands, whether they like the product -- satisfaction that those products give them.

Now that we've written down this quarter below 10%, it affords us the opportunity to really explore those opportunities and make different decisions if we so choose. At this point in the process, we chose not to make any different decisions.

We believe that where it's at in the process, as I mentioned earlier, with the FDA today and relooking through the review process of the applications as well as for -- some of our rights that we have as part of the agreement, we think those are beneficial. And we think, as we stated, the right decision currently is to stay under the non-compete..

For your smoke-free future goals, do you expect or plan to focus on 1 particular category, like is modern oral going to be the focus of your efforts there? Or do you hope to play in all of the reduced-risk categories?.

Yes. We highlight that we see 3 categories right now as the growth potential in the U.S. That's the heat-not-burn category, the e-vapor category and the novel oral. Certainly, they will be shaped by regulatory decisions, Federal Legislative decisions on excise taxes and future innovation in those categories from the various manufacturers.

So that will shape how large they are, but we see those as the 3 potential growth areas, and we look to participate in those. I would remind you that's why we work with the portfolio approach because we see consumers going from cigarettes to those various categories, and we want to be there for the consumer, depending on what category they choose..

And there appears to be no further questions at this time. I would like to turn the call back over to Mac Livingston, for any closing comments..

Thanks, Ashley, and thanks, everybody, for joining us. Please contact the Investor Relations team if you have any further question. Thanks a lot..

Thank you, and this does conclude today's call. Thank you for your participation. You may disconnect at any time..