Good day, and welcome to Altria Group 2021 Second Quarter Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by Altria's management and a question-and-answer session. Representatives of the investment community and media on the call will be able to ask questions following the conclusion of the prepared remarks. I would now like to turn the call over to Mr. Mac Livingston, Vice President of Investor Relations for Altria Client Services. Please go ahead, sir.

Thanks, Christelle. 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, and quarterly metrics are all available on our website at Altria.com. During our call today, unless otherwise stated, we're comparing results to the same period in 2020. 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.

Thanks, Mac. Good morning and thank you for joining us. Altria delivered outstanding results in the second quarter, thanks to the continued strength of our tobacco businesses and the hard work of our highly talented employees. Our teams have continued their commitment to moving beyond smoking by deepening their understanding of tobacco consumer preferences, expanding the awareness and availability of our smoke-free product portfolio, and amplifying our voice on harm reduction within the scientific and public health communities. Their passion in pursuit of our vision gives me even greater confidence that we can responsibly lead the transition of adult smokers to a smoke-free future. Let's now turn to our business results. Altria grew its second quarter adjusted diluted earnings per share of 12.8% to $1.23, primarily through the strength of our tobacco businesses. The Smokeable Products segment continued to deliver on its strategy of maximizing profitability and combustibles while appropriately balancing investments in Marlboro with funding the growth of smoke-free products. Marlboro continued to lead the cigarette category, while second quarter adjusted operating company's income grew 11%. For the first half, the segment generated adjusted OCI growth of 5.3%. In the oral tobacco product segment, Copenhagen continued to lead the MST category and delivered strong profit performance. The oral tobacco product segment grew adjusted OCI by 3.5% in the second quarter and by 3.3% for the first half as strength in MST more than offset investments in support of our new products. The oral nicotine pouch category continued to grow and Helix remained focused on expanding capacity, broadening distribution, and driving awareness and trial. The team has successfully achieved unconstrained manufacturing capacity for the current U.S. market and as the category grows, Helix plans to further increase manufacturing capacity ahead of expected demand. Additionally, Helix and AGDC broadened retail distribution to 105,000 retail stores, which represents approximately 80% of U.S. oral tobacco volume and 70% of U.S. cigarette volume. In the second quarter, retail share of oral tobacco was two percentage points, up three-tenths sequentially. In a heightened competitive environment, we believe Helix has made consistent progress against its 2021 goals, having achieved unconstrained manufacturing capacity, increased distribution, and nearly doubling retail share over the first half. Helix employs a broad suite of marketing tools to continue to build brand equity and transition smokers. At retail, Helix uses disruptive point-of-sale and trial awareness-generating promotions. Retail initiatives are complemented by one-to-one communications and digital marketing channels, which we believe provide a more immersive and educational experience. These communications are tailored based on consumer preferences and insights to better resonate with individual smokers and dippers. Turning to heated tobacco, PM USA expanded IQOS and Marlboro HeatSticks to retail stores across Georgia, Virginia, North Carolina, and South Carolina. This four-state expansion is helping PM USA garner key learnings about scaling new innovative products. Over two-thirds of U.S. cigarette volume is sold through the convenience store channel, so we believe educating smokers about the IQOS system in these stores is critical to the long-term success of the product. Although early, we're encouraged that nearly half of second quarter IQOS device sales came from convenience stores. This highlights the impact of our salesforce and their strong relationships with key retail partners. In line with our strategy to build IQOS in large metro markets, PM USA expanded IQOS and Marlboro HeatSticks to Northern Virginia, its fourth Metro market. We believe our commercialization team continues to improve its execution as we move into new metro markets. In early Northern Virginia metro market results, device penetration as a percent of the smoker population has surpassed the performance of the Atlanta and Charlotte rollouts. We've discussed for some time the importance of bringing a strong commercialization package to smokers to help them on their journey. In the Northern Virginia market, we have deployed our full range of flexible marketing tools, such as kiosks, mobile units, and experts. We also opened an IQOS boutique in the Tyson's Corner Mall, which is the center point for the area. We believe that favorable results in Northern Virginia reflect the strategic locations and enhanced execution within these marketing channels, along with the availability of the IQOS 3 device and built-up awareness from the Richmond market. We previously stated the importance of responsibility and discipline in our IQOS expansion approach. PM USA has been mindful of the pending International Trade Commission case, which may result in a ban on the importation of IQOS and Marlboro HeatSticks into the United States. Due to this uncertainty, PM USA has delayed further expansion of IQOS and Marlboro HeatSticks. Each quarter, we make progress towards our vision. As we do so, we strengthen the capabilities that we believe are necessary to effectively transition smokers to our current and future innovative product portfolio. These capabilities include a flexible manufacturing system, which allows us to quickly redeploy our highly skilled employees and existing footprint in support of smoke-free products; a robust consumer engagement system that includes enhanced data collection, a portfolio of smoker engagement tools, and our trade partner relationships; and strong regulatory capabilities, including the talent to develop compelling PMTAs for smoke-free products and the establishment of the required post-market surveillance infrastructure. Tobacco harm reduction must be grounded in sound science, encouraged by reasonable regulation, and executed responsibly. We believe it's critical to have transparent and constructive dialogue about the science and evidence supporting tobacco harm reduction with all stakeholders. So far this year, we've published 10 articles in scientific journals, participated in four panels, and presented 24 posters at scientific and policy conferences. Unfortunately, not all stakeholders believe that industry participants should be part of these exchanges. Recently, a scientific organization decided to ban industry participation at its annual conference. We believe this is a mistake and that limiting the exchange of scientific research impedes tobacco harm reduction and hurts smokers looking for less harmful products. We will continue to advocate for open and inclusive dialogue among all stakeholders, which we believe is essential to addressing the significant public health opportunity in front of us. Let's now turn to guidance. With our strong financial performance in the first half, we've raised the lower end of our full year 2021 adjusted diluted EPS guidance to be in the range of $4.56 to $4.62. This range represents a growth rate of 4.5% to 6% from a $4.36 base in 2020. This updated guidance reflects continued confidence in our tobacco businesses, investment in smoke-free products, and the expected impact of the recently announced agreement to sell our Ste. Michelle Wine Estates business. I'll now turn it over to Sal to provide more detail on the business environment and results.

Thanks, Billy. In the second quarter, the consumer behaviors we've observed over the past few quarters largely continued. Although overall consumer mobility increased, workplace mobility appeared to be relatively unchanged, which we believe contributed to more tobacco usage occasions during the quarter as compared to pre-pandemic levels. Additionally, disposable income remained elevated, partially due to the residual effects of the third federal government stimulus package in March. At retail, we estimate that compared to pre-pandemic levels, the number of tobacco consumer trips to the store continued to be depressed, but tobacco expenditures per trip remained elevated. We are keeping a close eye on tobacco consumer behaviors, and we will continue to provide our insights on the factors impacting those behaviors as the year progresses. Moving to our businesses. The Smokeable Products segment expanded its adjusted OCI margins by 0.6 percentage points to 58.4% for the second quarter and by 1.5 percentage points to 58% for the first half. This performance was supported by PM USA's revenue growth management framework, which leverages advanced analytics to guide the strategic and efficient allocation of our promotional resources. As a result, PM USA achieved strong net price realization of 8.3% in the second quarter and 8.1% for the first half. Smokeable segment reported domestic cigarette volumes increased by 1.4% in the second quarter. For the first half, reported domestic cigarette volumes declined by 5.3%. When adjusted for calendar differences, trade inventory movements and other factors, second quarter and first half domestic cigarette volumes declined by an estimated 4.5% and 4%, respectively. At the industry level, we estimate that adjusted domestic cigarette volumes declined by 5% in the second quarter and by 4% in the first half. Marlboro sustained a strong retail performance demonstrated in recent quarters and benefited from the overall strength of the premium segment in the second quarter. Marlboro's second quarter retail share of the total cigarette category was up one-tenth sequentially to 43.2% and up five-tenth versus the year ago period. In discount, total segment retail share in the second quarter increased one-tenth year-over-year but declined three-tenth sequentially to 25%. Sequential share losses in both branded and deep discount products drove the contraction as consumers benefited from the federal government's third stimulus package and continued heightened promotional spending among competitive premium brands. We continue to observe some elevated promotional activity within the branded discount segment during the second quarter. And as a result, Marlboro's price gap to the lowest effective price cigarette remained elevated at 37%. In cigars, Middleton continues to perform well and Black & Mild maintained its leadership position within the profitable tipped cigar segment. Reported cigar shipment volume increased by 9.6% in the first half. Turning to the oral tobacco products segment. Segment adjusted OCI margins decreased to 71.7% for the second quarter and to 71.9% for the first half. We expect oral tobacco products margins to be impacted by increased investments behind our new products and shifting mix between MST and oral nicotine pouches. We remain extremely pleased with the strong overall margins for the segment. Total reported oral tobacco products segment volume increased by 1.8% and by 1.2% for the second quarter and first half, respectively. The segment's volume growth was driven by our new product, which more than offset a moderate decline in MST volumes. When adjusted for trade inventory movements and calendar differences, segment volume increased by an estimated 1% for the second quarter and 0.5% for the first half. Oral tobacco products segment retail share for the second quarter declined 2.2 percentage points versus the prior year and three-tenths sequentially to 47.8% due to the continued growth of the oral nicotine pouch category. As Billy stated, Copenhagen maintained its leadership position in the MST category. And we continue to work diligently to execute our plans to transition smokers to our new product. In e-vapor, total estimated volumes in the second quarter increased 15% versus a year ago and 2% sequentially as a result of heightened competitive activity. The category continues to undergo a transition period as FDA prepares to make market determinations on the millions of PMTAs filed by the September 2020 statutory deadline. We continue to believe that e-vapor products can play an important role in tobacco harm reduction and that a sustainable e-vapor category will be one that consists solely of FDA-authorized products. We expect the category's long-term trajectory to be determined by regulatory decisions, legislative and tax policy, and innovation that best addresses smoker and vapor preferences. In alcohol, we recorded $113 million of pretax adjusted equity earnings from ABI in the second quarter. This was an increase of approximately 15% from the year-ago period and represents Altria's share of ABI's first quarter 2021 results. In wine, Ste. Michelle's second quarter adjusted OCI increased approximately 80% to $27 million. Ste. Michelle's adjusted OCI growth was primarily due to higher volumes, including from the flagship Chateau Ste. Michelle brand and luxury brand Stag’s Leap, as wine consumer preferences trended to more premium products. Three weeks ago, we announced the definitive agreement to sell our Ste. Michelle Wine Estates business in an all-cash transaction for a purchase price of approximately $1.2 billion and the assumption of certain Ste. Michelle liabilities. We expect the transaction to close in the second half of this year, and we expect to use the net proceeds for additional share repurchases, subject to approval by our Board. We believe this transaction demonstrates Altria's continued commitment to value creation for shareholders and to our vision as it allows our management team to maintain its focus on responsibly transitioning adult smokers to a smoke-free future. Ste. Michelle and its talented employees have built an outstanding portfolio of premium wine brands, and we wish them future success. In our all other operating category, we continue to make progress on our wind-down of Philip Morris Capital Corporation. As of June 30th, the net finance assets balance was $261 million, down $59 million since the end of last year due to rents received and asset sales in the first and second quarters. We expect to continue reducing this balance in 2021 and expect to complete the PMCC wind-down by the end of 2022. Turning to our equity investment in Cronos. We recorded a pretax loss of $21 million, representing Altria's share of Cronos' first quarter results. In the second quarter, Cronos announced that it had purchased an option to acquire an ownership stake in PharmaCann of approximately 10.5% on a fully diluted basis. PharmaCann is one of the largest vertically integrated cannabis companies in the United States. The option exercise will be based upon various factors, including the status of U.S. federal cannabis legalization and regulatory approvals. In support of our investment in Cronos, we continue to advocate for a federally legal, regulated, and responsible U.S. cannabis market. And we're encouraged by the current momentum towards federal legalization. Next, let's discuss capital allocation. The highly cash-generative nature of our tobacco businesses contributes to our strong balance sheet. We believe this, in turn, allows us to invest in our vision while rewarding shareholders with cash returns. We were active in the capital markets during the second quarter as we repaid $1.5 billion of notes upon maturity, paid approximately $1.6 billion in dividends, and repurchased 6.6 million shares totaling $325 million. We have $1.35 billion remaining under the current authorized $2 billion share repurchase program, which we expect to complete by June 30, 2022. Because the current program is limited to $2 billion, additional share buybacks in connection with the sale of Ste. Michelle are subject to Board approval. Moving to corporate responsibility, we disclosed several updates in the ESG section of our release this morning. These updates included following through on our commitment to transparency around Altria's workforce data and publishing our ESG data tables and a report on value chain responsibility. As a reminder, additional corporate responsibility information can be found on altria.com. 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 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.

Thank you. Our first question comes from the line of Pamela Kaufman with Morgan Stanley.

Hi, good morning.

Good morning, Pamela.

I wanted to ask about your decision to postpone the IQOS expansion in the U.S. until you have more clarity from the ITC. While I understand that it's reasonable to delay the expansion until you gain more visibility, I would like to know your current strategies in existing markets since it appears that operations are continuing as normal there. Additionally, could you provide more information about your options in the event of an unfavorable ruling from the ITC?

Yes. Thanks for the question, Pamela. Yes, I want you to interpret the delay correctly. So the expansion markets that we are in. So the four states existing markets, including Northern Virginia, we're staying in, and we'll complete the state expansions. It was just beyond that where we had previously announced by the end of the year, we'd be in geographies representing 25% of cigarette volume. We wanted to let you guys know and our investors know that we're delaying that until we get some certainty around that. As far as plans if it should ultimately go against us, and you know the process, I'm sure you're well aware of the process that we will step through related to the actual case. But we're working closely with PMI on contingency plans. I think it's a bit too early to share the details of what those contingency plans are or could be. And so we'll share those when it's appropriate.

Great. And then I wanted to ask about how you're thinking about industry growth in the second half of the year and kind of discuss the puts and takes that might influence the category relative to the performance in the first half. And in relation to that, we're seeing an inflationary pricing environment with companies across the CPG space intending on raising prices. I guess what are the implications for cigarette volumes as you think about price elasticity relative to other categories? And separately, does that, in any way, influence the ability to raise cigarette prices when you see higher prices elsewhere?

Yes, there was a lot in that question, Pamela, so I'll try to break it down and address all the points. When discussing cigarette volume, which I believe is what you're referring to, I appreciate that you acknowledge our strong performance in the first half. Regarding factors affecting volume, we are particularly focused on consumer stay-at-home practices. Are employees being asked to return to the workplace, or are they still working from home? We've seen varying news on unemployment rates and stimulus measures, which will be important to monitor for the rest of the year. It’s also essential to observe trends across categories, especially with the FDA's pending applications for PMTAs and their potential impact. Most crucially, we need to understand consumer purchasing behavior. We believe people are adding more nicotine occasions to their routines. This will depend on factors like vaccination rates and the rollout of the vaccine, which will ultimately influence purchasing behavior. Regarding your question on pricing, starting with the input side, we haven't experienced significant inflation affecting our input costs. When we consider pricing decisions, we look at the economic health of our consumers. Currently, they still have higher discretionary income. We also take into account brand strength, as evidenced by Marlboro's strong performance, which we are pleased with. Lastly, we consider our company objectives and how we plan to invest in our innovative product portfolios, including previously mentioned investment areas. These are the main factors that influence our pricing decisions.

Great. Thank you.

Thank you.

Your next question comes from the line of Bonnie Herzog with Goldman Sachs.

Thank you. Good morning.

Good morning, Bonnie.

Hi Billy. I actually wanted to circle back on the decision to delay the expansion of IQOS and maybe come at it from a different angle. I guess, first, I assume your plan to step up spending this year will also be lowered. If so, I guess I'm surprised you weren't able to take up the high end of your EPS growth guidance range this year. So, could you maybe touch on that? And then finally, I'd like to understand how you think the delay in rolling out IQOS might impact your ability to deliver and execute on your 10-year vision to accelerate the transition of smokers to a noncombustible future.

Yes, Bonnie. Let's address the guidance first. As we've mentioned before, we consider a variety of scenarios when setting our guidance at the start of the year, and that approach continues as the year progresses. There are always factors that can positively or negatively impact any individual category, and all of that is taken into account in our guidance. Regarding the delay, I want to clarify that when discussing the 10-year vision, it's essential to remember that it's a long-term outlook. Looking back over the past decade, whether considering the industry or Altria specifically, there have been significant changes. We believe it's wise to complete the expansions we're currently undertaking but to also acknowledge the need for a delay, understanding that we have 10 years ahead of us and are aware that consumers are eager to shift, which requires us to have the right products available. While there may be challenges along the way, we are confident in our plan and optimistic about achieving our 10-year vision.

That's helpful and fair. Thinking about what you just mentioned in relation to the beginning of the year, as we look forward this year, there was going to be a level of increased spending to pivot your business. How do we reconcile that now? I would like to understand if I should assume that the planned spending has been reduced this year due to the delay in the rollout of IQOS, or are you still spending aggressively on it?

I apologize, Bonnie, I didn't mean to interrupt you. I appreciate that you recognize our ability to be flexible with our investments. We evaluate multiple scenarios and are ready to adjust and redeploy based on developments in any of our categories. We feel confident about this approach. While there was a certain level of investment in our base plan, we consider various scenarios at the start of the year to ensure we can adapt accordingly. There are specific areas of the business that we had previously identified for investment, and we are optimistic about the guidance we provided today, especially as we can increase the lower end of that guidance with greater certainty.

Okay, that makes sense. And then just wanted to clarify something else on IQOS. I know you have this agreement, of course, with Philip Morris and you shared some of those details. I think it was actually a year ago. So, I'm curious, can you share with us if you've reached 50 bps of dollar share in any of the markets where IQOS is sold, which was defined in the agreement with PM? And the reason I'm asking, because I think that was one of the areas that you needed to maintain or to get to, to maintain your exclusive distribution agreement for IQOS.

Yes, Bonnie. The answer is yes. We believe we have achieved it related to the exclusivity. We've shared that data with PMI, and that's why you saw us moving to other expansion areas.

Perfect. And then final question, if I may, just on switching gears to oral tobacco. Just any color you could share with us on your strategy with promos in your oral tobacco business. I'm asking as I look at your price realization, which has stepped down, I guess, a fair amount. So, I'm wondering how big of a concern this could be in terms of sustaining any future top line growth for this business. In other words, I guess I'm wondering, are you finding that you need to promote more than anticipated to possibly drive any volume growth and/or trial?

Yes, it's a great question, Bonnie. I think when you think about our approach in novel oral, we have been behind manufacturing capacity constraints and we've been somewhat limited. Now, that that's behind us and we'll keep it behind us as best we can, it allows us to turn our marketing and brand colleagues loose, and they can really be disruptive in the marketplace to disrupt the consumer as they're making their purchasing decisions. They can fully engage with consumers with one-to-one in digital channels. And so we look forward to being able to turn them loose, which they are now, and have them disrupting the marketplace. I think whenever you think about a new category, you have to think about there is going to be competitive activity, and we've seen it in this space. And so you're going to want to dislodge those consumers. But at some point in time, that typically settles down, even if you take it outside of tobacco. And so we feel very good about being able to achieve tobacco-like margins in the future. Right now, we're focused on consumer engagement and making them aware of our new product in the marketplace.

Okay. Thank you so much for that.

Thank you.

Your next question comes from the line of Vivien Azer with Cowen.

Hi.

Good morning, Vivien.

So, just one last housekeeping item on IQOS. Sorry to belabor the issue, but can you give us a sense of the anticipated timing of any kind of decision from the ITC, please?

Yes. To provide some clarity on the ITC process, in May, the administrative law judge ruled in favor of two of the plaintiff's patent challenges and recommended an importation ban on the IQOS system. However, this week the ITC accepted to review the ALJ's findings and recommendations on specific issues, including the patent infringement claims and the scope of remedies, and they will also assess the benefits to public health. The ITC's situation is unique because IQOS is the only inhalable, smoke-free product that has been authorized by the FDA, which determined that it would benefit public health. We anticipate a final decision from the ITC in September or October. Following that, there is a presidential review that may take up to 60 days after the ITC's final decision, and any ITC decision can be appealed in the U.S. Court of Appeals for the Federal Circuit. So this is how the process will unfold as we move forward.

That's really helpful. Thanks for that. Moving on to your Smokeable segment. You called out heightened competitive activity as being a contributor to the expanding Marlboro price gap. Seemingly, you should be fine with that given that Marlboro gained year-over-year share. But how are you thinking about kind of the durability of that to the extent that you see heightened competitive activity persist given that you do have some incremental resources at your disposal with pared-back investments on IQOS? Would you be willing to reinvest?

Yes, we think of those decisions somewhat independently, Vivien. But as far as your question specifically to Smokeable and Marlboro specifically, we're greatly pleased with the performance we've seen in Marlboro over the last four to five quarters. And when you look at the price realization that was realized in the Smokeable segment and then you look at the performance of Marlboro in that segment, we're very pleased with where we're at. And so it's something, to your point, we always monitor, but we feel good about how the strategy is playing out thus far.

Perfect. Thanks very much.

Thank you.

Your next question comes from the line of Chris Growe with Stifel.

Hi, good morning.

Good morning, Chris.

Good morning. I have a quick question regarding inventory, which was positive this quarter. I understand that you prefer not to discuss future inventory movements, but could you describe the state of inventories this quarter and how that compares historically?

Yes, that's a great question, Chris. At the end of the second quarter, looking back through history, inventory levels may be slightly elevated for this time, but they are certainly not as high as what we have seen wholesalers carry in the past. The pandemic has caused fluctuations, leading to more variability than usual, but typically we see inventory levels stabilize over time.

During the pandemic, inventory rates have been higher overall. Is that a fair assessment compared to where you would expect them to be?

I would say maybe slightly higher. I wouldn't call it out as something significant, but maybe slightly higher. I think also, wholesalers in the beginning of the pandemic as well as retailers maybe got caught short a bit on inventory because they were nervous about what the pandemic was going to do to them. I think they saw consumers, as Sal mentioned in his remarks, making larger purchases. So, I think they're taking a position to have a bit more inventory just to meet consumer demand.

I have a second question regarding your thoughts on IQOS. I noticed that in several initial markets, particularly Atlanta and North Carolina, sequential share dipped slightly. You mentioned reallocating resources to Northern Virginia, and I would like to understand that better. At this stage, I would have anticipated more overall investment rather than just redistributing existing resources. Could you elaborate on your approach to this and how you have redirected resources in Northern Virginia from some of the earlier markets?

Thank you for the question, Chris. I'd like to highlight a few key points in our consideration. Firstly, we had flexible marketing tools available, such as kiosks and mobile units, which we moved from one launch market to another. It's also important to remember that we always aim to present our best commercialization efforts. When we launched in Charlotte, we did so with the 2.4 device, which lacked MRTP authorization, and we did not have authorization for the 3.0 device either. As we enter a market, we strive to showcase the best possible package. We've learned valuable lessons from our successes in Northern Virginia with both the version three devices and MRTP authorization. This doesn't mean we won't revisit previous markets with these enhancements for consumer engagement; we believe that was a sensible decision. Finally, as we transition from densely populated areas to expanding across the state, we adapt our commercialization strategies. To launch successfully across the entire U.S., a strong convenience store experience is essential, and we're perfecting that approach. We're pleased with the sales figures from the convenience store channel. In the second quarter, consumer takeaway and overall volume increased by 40%, which I consider a significant accomplishment.

Yes. In that sense, Billy, the current market you are in best reflects your selling model, and we don't need to look back at previous markets because you are evolving as you enter these new markets. Is that a fair assessment?

I think that's accurate. I wouldn't necessarily describe it as definitive, but we believe that the commercialization package we have now is the best we've had so far. It's still early to make exact predictions about our future plans. We will continue to gather insights and adapt. However, the commercialization package we implemented in Northern Virginia is indeed our best to date.

Okay. I have one more quick follow-up regarding oral tobacco. At what point do you expect to have your products available in more stores that sell oral tobacco products, whether that's 90% or 100%? Should we anticipate continued growth through the second half of the year now that you have full manufacturing capacity?

Yes, I think right now, you can consider us focused on really disrupting the consumer and making them aware of the qualities of our product in the marketplace, engaging with them through the one-on-one digital channels. We feel good about where we're at, but we always assess the amount of stores we're in, and you'll see adjustments through time.

Hi, good morning, Billy.

Good morning.

I have a couple of questions. One is regarding the cigarette industry volume decomposition presented in your quarterly metrics. The additional cost category movement is only down 0.3% over the past year. We know that oral nicotine pouches have gained about one percentage point in share, and according to the data on slide 23 of your presentation, it looks like e-cigarettes have also gained one percentage point in share. This suggests that the cross-category movement has significantly declined compared to what we observed in 2018 and 2019. Is that an accurate interpretation of the data?

Yes. That is correct, Gaurav. When you think about it, remember, in secular decline, to your point, about 1% was cross category. And then anything above that 1% outside of secular decline of that cross category is what we call out in that decomposition. And so you can see in the chart that as of 6/30/21, on a 12-month ended, it was 0.3% above that. And so that is really what is the impact to the cigarette industry from cross-category movement and it includes novel oral, it includes e-vapor. I think when you think about e-vapor, if I understand the gist of your question, really what's going to impact how e-vapor progresses in the U.S., and we believe it can play a significant role in harm reduction, is really three things. It's regulatory decisions. And you'll recall, all of the products are with the FDA for their review. It's the legislative and tax policy, how will excise taxes evolve in that space. And to Sal's earlier remarks, innovation, how will companies think about innovating in the future and applying for authorization from the FDA. So those will be the three major factors that play. But yes, it is less than what we experienced in 2019.

But that raises the question of whether this is leading to increased nicotine consumption, whether new consumers are entering the market, and where these consumers are coming from, which raises many other questions as well.

Yes, when we examine the underlying factors in the total nicotine market, we see that over the past five years, consumption has declined by about 1%. This indicates that overall consumption is decreasing rather than increasing. During the pandemic, we noted that consumers incorporated more nicotine occasions into their daily routines due to stay-at-home practices and other influences. While there have been some temporary increases in nicotine use, the overall volume, when measured on an equivalent basis, continues to decline.

Sure. And if I could ask one quick follow-up on pricing. So, your key competitor is clearly pricing quite aggressively right now, which is helping you and everybody else. And your pricing realization is also quite strong, not as much as your key competitor. But I would have thought that you will be taking this benefit and investing more on the discount side of your business and stabilizing some of the volume share losses there. So, could you just help us understand how you're thinking on the discount side of things?

Yes, I appreciate the question. When we consider our strategy in that category, our goal is to maximize profitability over time while also making investments in Marlboro and supporting future growth categories. This is what guides our approach. Regarding competitive pricing and concerns about who initiated changes first, those aspects are not our primary focus. The main factors we consider, as I mentioned previously, are the economic health of our consumers, brand strength, and our company objectives. This is how we approach our pricing decisions in the market, with competitive actions not influencing our strategy. When we analyze our pricing, it’s worth noting that achieving over 8% growth in both the quarter and the first half is quite impressive given the results we've seen across the company. We're satisfied with that. It's important to remember that our price realization is influenced by two main factors: the list price, which you referred to, and our efforts in revenue growth management, which involves becoming more efficient with our retail promotional spending. These two elements contribute to our price realization.

Thanks a lot, Billy.

Thank you.

Your next question comes from the line of Michael Lavery with Piper Sandler.

Thank you. Good morning.

Good morning, Michael.

I have a question about IQOS as well. Can you confirm if the ITC decision pertains only to the device? Additionally, if it does, is there any possibility of production in the U.S., or is there insufficient infrastructure for that, making it effectively just an import ban?

That is correct. The ITC is focused on the importation of products, so you are accurate in your assessment. The administrative law judge's decision included both the device and HeatSticks, meaning it applies to both. Regarding contingency plans, as I mentioned earlier, it is a bit too early to discuss the specifics of those plans, but we will ensure to update you once they are ready to be revealed.

Okay. Sure. Regarding the device sales in convenience stores, there was a significant increase this quarter. Can you explain some of the factors contributing to that? I know that in the previous two quarters, these devices were available at least in limited areas. Given that these are typically not impulse purchases and have a relatively high price, is the increase primarily a result of digital engagement driving consumers, or is it more related to direct mail or other traditional marketing methods? How do you view the factors behind this increase?

Yes, it's a great question, Michael, and it's something that we are very proud about. I think it speaks to the strength of our AGDC, our sales force and the relationships they build at retail. So, when you think about it, it includes those other channels, one-to-one, digital, regular paper mail, it includes all of those. Our team is doing a great job of engaging with the adult smoker. But I think when you think about what AGDC has been able to do is really look at our retailers think about how to display the product at retail. To your point, our consumers are more of a 10 to 15-second decision. How do you disrupt them at retail where they're making that purchase decision and really give them the guided trial. For instance, they built relationships with retail clerks that were smokers previously and walked them through this transition from smoking cigarettes to using the heated tobacco product. And so I think when you think about that, now you have the retail clerk can speak from personal experience to smokers to also disrupt their purchasing decisions. And so it's really still about the guided trial. It is about engagement through those channels, but it's disrupting them right at the point of purchase.

Okay. Really interesting. Thanks. And just one more on on! Can you give a sense of usage rates? And specifically, what I'm curious about is how much a smoker who switches maintains a similar usage rate? Does it go up or down? And I assume, obviously, there's people who completely switch and some dual usage and sort of a progression there. But do you have a sense of some of the consumer dynamics around that?

It's certainly something that we're monitoring and we're trying to monitor it as close as we can on an individual-by-individual basis. Because to your point, people are at different places in their journey. And so I think it's too early to get into here is exactly the usage rate of somebody that comes from cigarette versus somebody that comes from dipping, but it's certainly something we're tracking and understanding because you've got to meet the consumer where they're at in their journey and help them to continue that transition over. And so again, I completely understand your question, but I think it's just too early to get into the details.

Okay, great. Thanks so much.

Thank you.

Thank you. And your last question comes from the line of Priya Ohri-Gupta with Barclays.

Hi, this is Tiffany Au for Priya. Thanks for taking our question. We're wondering, given the recent movement in the rate backdrop, how are you thinking about the opportunities to practically address and refinance some of your maturities over the next two to three years?

I'm sorry, I missed the end of that question. Could you repeat it? I apologize.

Definitely, yes. Given the recent movement in the rate backdrop, how are you guys thinking about opportunities to proactively address and refinance some of your maturities over the next two to three years?

Yes, I think I was able to hear it. I think when you think about it, we're going to assess those market conditions. We're certainly not going to give guidance exactly what we're going to do with any maturities. But we look at the market conditions when we see maturities. And Sal would tell you that with our cash-generative businesses, it gives us flexibility when we have maturities upcoming based on what the market conditions are and how we would assess those.

Thank you.

Yes, I agree with Billy and I would point out that we have taken a very balanced approach to capital allocation when you look at 2021, including we did execute an opportunistic liability management transaction earlier in the year that allowed us to extend maturities on low-interest debt while managing our maturity towers.

Thank you very much.

Thank you.

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