NJOY Holdings, Inc. (MO) Earnings Call Transcript & Summary

Good day, and welcome to the Altria Group Business Update 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] 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 Mac Livingston, Vice President of Investor Relations for Altria Client Services, please go ahead, sir.

Thanks, Todd. Good morning, and thank you for joining us. This morning, Billy Gifford, Altria's CEO; and Sal Mancuso, our CFO, will discuss our recent e-vapor announcement. Additional information related to these announcements can be found in our release, which are available at altria.com and in our SEC filings. 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 press release for various factors that could cause actual results to differ materially from projections. Today's press release also includes reconciliations and further explanations of the non-GAAP financial measures we discuss today. As noted in our press release issued earlier today, the transaction with NJOY is subject to customary closing conditions, including reporting requirements under the Hart-Scott-Rodino Act. All references in today's remarks to tobacco consumers or consumers within a specific tobacco category refer to existing adult tobacco consumers 21 years of age and older. With that, I'll turn the call over to Billy.

Thank you, Mac, and good morning, everyone. Earlier today, we made an exciting announcement regarding our plans to acquire NJOY and its portfolio of e-vapor products. We have also recently announced our decision to exit our minority investment in JUUL. Our remarks this morning will focus on why we believe these actions meaningfully accelerate our journey towards moving beyond smoking. I will discuss the strategic rationale of these transactions and how they enhance our compelling portfolio of smoke-free products. I will turn it over to Sal to discuss the financial details and then we will move to a question-and-answer session. E-vapor category is the largest smoke-free category in the U.S. Last year, the category included nearly 14 million tobacco consumers, including 9.5 million exclusive vapors, generated approximately $7 billion in retail sales and represented approximately 15% of total estimated equivalized U.S. tobacco volumes. We continue to believe that the e-vapor category can play an important role in harm reduction. But for this to occur, the category must provide an off-ramp for smokers and not an on-ramp for underage users. National government surveys indicate that progress has been made toward reducing underage vaping. And although current usage levels remain high, they are significantly lower than the 2019 peak. Since 2019, we and many other stakeholders have taken significant actions to address underage vaping. Our efforts have contributed to the enactment of Tobacco 21 laws at the federal level and in 41 states. The inclusion of synthetic mix team products in the U.S., Food, Drug and Cosmetic Act. A 137,000 retail stores with age validation technology installed at the registers and 33,000 stores with embedded age and identity verification solutions in their digital apps. We know that addressing underage use of tobacco products is critical for us to achieve our vision, and we will continue these efforts as we responsibly expand the availability of smoke-free products. Since the end of 2018, we have participated in the e-vapor category through our minority investment in JUUL. As many of you know, we elected late last year to be released from the non-compete obligations related to this investment, which allowed us to pursue other e-vapor opportunities. In the 5 months since this election, our teams have been diligently evaluating all options to best compete in this category. As part of this analysis, we decided that it would be in the best interest of our shareholders to exit the JUUL investment given the significant regulatory and legal challenges and uncertainties based in the company. And as we reported last week, which changed their JUUL shares for access to heated tobacco IP that we can add to our product development toolkit. During our e-vapor Act evaluation, we identified NJOY as an attractive business with talented employees. We believe that there are 5 key strategic pillars for this transaction, including that the e-vapor category can play an important role in harm reduction is supported by appropriate regulation. NJOY ACE is uniquely positioned relative to other pod-based products with marketing granted orders from the FDA. NJOY has taken a responsible approach to marketing its product and has limited usage. Our consumer research supports our belief that ACE is a satisfying product for smokers and competitive vapors. And finally, we believe that our commercial resources can responsibly accelerate U.S. smoker and vapor adoption of ACE and ways that NJOY could not as a stand-alone company. Let's now walk through each of these strategic pillars, begin first with their view of the category. We remain optimistic about the future of harm reduction in the U.S. and we continue to believe that the U.S. e-vapor category will undergo a multiyear transition period. Over the next few weeks -- few years, we expect that the FDA will issue marketing determinations on currently pending PMTA applications, including those filed for tobacco-derived and synthetic nicotine products and exercise appropriate enforcement actions against noncompliant manufacturers. Both of these expectations were highlighted in the recent Reagan-Udall Foundation report as recommendations for the FDA, and we believe the agency will respond accordingly. We expect the e-vapor category to remain in flux as the FDA continues its efforts to create a market consisting solely of authorized products through marketing determinations and enforcement actions. We estimate that over the next 10 years, total U.S. e-vapor volumes will grow at a low single-digit compounded annual growth rate. Our estimates, including a range of scenarios, including various regulatory outcomes for menthol and flavored e-vapor products. Moving to our second pillar. ACE is currently the only pod-based product with marketing authorization from the FDA. In fact, NJOY has received 6 of the 23 marketing orders granted by the FDA to date for the entire e-vapor category, including pods, disposables and open systems. NJOY's marketing orders include the ACE device, 3 ACE tobacco-flavored pods and 2 tobacco-flavored disposable products. Among competitors, it appears that PMTAs remain pending for VUSE Alto and JUUL awaits the results of the FDA's administrative state order. For our third pillar, we evaluated NJOY's marketing practices and national survey data regarding underage use of tobacco products. We believe NJOY has taken a responsible approach to marketing this product. According to the 2022 National Youth Tobacco survey, NJOY branded products are not included among the top usual brands among middle school and high school e-cigarette users. Additionally, NJOY is developing access restriction technology for its devices to further address underage use. This technology uses Bluetooth connectivity to authenticate the user before unlocking the device. Fourth, our consumer research indicates that once consumers try NJOY ACE, it is a competitive product for both smokers and vapors. After trying the authorized non-menthol ACE variants, 19% of survey smokers and 27% of survey vapors indicated that they would definitely buy the product. The ACE results were on par with the post-trial findings for VUSE Alto non-menthol and better than those for JUUL non-menthol. We observed similar post-trial results for the ACE menthol variants when compared to VUSE Alto and JUUL menthol products. This encouraging research supports our belief that ACE is a compelling proposition. Finally, the fifth strategic pillar of the transaction focuses on the fact that a large number of tobacco consumers are not currently aware of nor have access to ACE. At retail, ACE is currently available only in approximately 33,000 stores and is supported by a small sales force of fewer than 50 people. As a result, total U.S. retail share for ACE pods in 2022 was only 3%. Yet we know that ACE has performed better in stores where it's visibly merchandised and has consistent distribution. In the top 5 chain accounts where ACE competes with VUSE Alto and JUUL, the weighted average share for ACE is approximately 11%. Based on these factors, we believe we can responsibly accelerate U.S. smoker and competitive vapor adoption of ACE and ways that NJOY could not as a stand-alone company. We believe that tobacco consumers should have more and better choices available to them as they move down the risk continuum. We believe the strength of our commercial resources can benefit smokers and vapors and expand competition in stores where ACE has not been previously distributed or visible. We have an industry-leading sales force of 1,600 employees located across the country. Our sales force has significant retail coverage, servicing over 200,000 U.S. retail stores and decades of experience supporting the responsible retailing of tobacco products. We have dedicated personnel supporting the top 340 retail accounts and the top wholesalers in the country. Additionally, we collect and analyze tobacco transactions from approximately 125,000 stores. Our teams use this better and our extensive adult tobacco consumer database to responsibly connect with smokers in a variety of ways and help them along their transition towards smoke-free products. We believe adding NJOY's FDA-authorized products into this system will benefit consumers across the country. And of course, we will use our existing tools to limit the appeal of ACE to unintended audiences, especially youth. As a result of this transaction, Altria will have a compelling portfolio of products and technology across the 3 largest smoke-free categories. In e-vapor, we will fully own the only FDA-authorized pod-based e-vapor product today. In all tobacco, we own the largest brand, Copenhagen, own 100% global rights to own the fastest-growing nicotine pouch brand in the U.S. last year, and we have differentiated new products in development. And in heated tobacco, we have a majority-owned joint venture with JT Group for the U.S. commercialization of the next-generation [indiscernible] device and Marlboro heated tobacco stick. And we have full ownership of an exciting heated tobacco capsule technology, which we will discuss further at our Investor Day. We also have strong external relationships, including the potential global partnership with JT. We believe the smoke-free portfolio, combined with the significant cash flows from our leading U.S. combustible brands and substantial internal capabilities, positions us well to achieve our vision to responsibly lead the transition of adult smokers to a smoke-free future. We're excited about the path ahead and believe that our actions will benefit tobacco consumers, our businesses, our shareholders and society. I'll now turn it over to Sal to discuss the financial details of the transaction.

Thanks, Billy. We agreed to purchase NJOY for approximately $2.7 billion in cash payable at closing. We expect the transaction to be accretive to cash flow within 2 years of closing and accretive to adjusted diluted earnings per share within 3 years of closing. The difference in timing between cash and earnings accretion relates to estimated amortization charges. We also expect the return on invested capital for the transaction to exceed our weighted average cost of capital within 3 to 4 years of closing. The transaction terms also include additional $500 million in contingent cash payments related to nontobacco flavored PMTA filings. The payments are only triggered if a marketing authorization is issued by the FDA. These contingent payments and the estimated market performance associated with additional authorized products are not included in our accretion estimates. We are fortunate to have multiple sources of funding for this transaction. Our core businesses continue to be highly cash generative, and we have strong access to the credit markets and committed short-term bank financing. Additionally, we entered into a $2.7 billion transition agreement last year with Philip Morris International for the IQOS system. We received $1 billion from PMI in the fourth quarter of last year and we expect to receive a payment of $1.7 billion plus interest by July 2023. Finally, we reaffirm our guidance to deliver 2023 full year adjusted diluted EPS in a range of $4.98 to $5.13. This range represents an adjusted diluted EPS growth rate of 3% to 6% from a $4.84 base in 2022. This guidance range does not include the potential financial impacts of the transaction. We also reaffirm our expectation to complete our $1 billion share repurchase program by the end of this year. Additionally, following the exchange of our JUUL shares, all tax losses related to the investment are realizable. Let's now open the question-and-answer period. Joining Billy and me for Q&A this morning is Murray Garnick, our General Counsel and Head of Regulatory Affairs. While the calls are being compiled, I'll remind you that further details on the NJOY and JUUL announcements can be found in our releases and SEC filings. Operator, do we have any questions?

Yes, sir, at this time, we do have some questions. [Operator Instructions] Our first question comes from Vivien Azer with TD Cowen.

So the brand is clearly subscale, which drives kind of the 3-year outlook, I'm sure, for EPS accretion. But I was wondering, could you comment at all on the gross margin profile or the unit economics around the portfolio, if that's possible?

Yes. Thanks for the question, Vivien. I think when you think about it from a pricing perspective in the marketplace, it's similarly priced to other competitive brands in the marketplace. And you touched on -- it's a small company. And -- so they had just under -- right at 50 salesforce employees. And I think when you think about it, it's really a uniquely positioned asset. It's -- they took very careful and responsible approach to how they approach the marketplace. They were very thoughtful in making sure that the science that was necessary to get PMTA approval. So in a sense, you have certainty there from a standpoint of it speaks to the quality of employees at NJOY. It's very competitive. You saw the research results. Once you get a consumer to try it, even competitive vapors, it's a preferable product, especially related to the JUUL's devices. And with it being cash accretive over 2 years, that really shows you that we believe that we can really use our strengths of responsible distribution and visibility at retail to really drive the value enhancers as we move through time.

Okay. That's helpful. And just for my follow-up, I wanted to touch on the JUUL announcement from Friday, if that's okay. For the heated tobacco IP that you guys are getting access to, is that exclusive?

Yes. So there are 2 types of IP that are related in that transaction. One is, if you think about it specific to the Heat-not-Burn category, we get sold nonexclusive licensing to that. And then there were some IP included in that, that was, I would say, VUSE broader and more different types of devices. We have the nonexclusive rights to use that in the Heat-not-Burn space.

Our next question comes from Bonnie Herzog with Goldman Sachs.

I guess a key question for me this morning is what gives you guys the confidence that you're going to be successful with NJOY to, I guess, justify the investment you've made? I'm hoping just to hear a little bit more in terms of what is differentiated about NJOY other than the PMTA? And then you touched on this in the markets where NJOY has the distribution. You highlighted that it has done well. So where do you think it's sourced share from? And then just ultimately curious if you think you need to reposition the brand in any way?

Yes, that's a lot of questions packed into one, Bonnie. I'll try to unpack them. But if I miss one, feel free to follow up. I think when you think about it, you're right. Where it's visible -- and we believe we can improve the visibility even in those stores. But where it's visible, it competes very vigorously. I think from a sourcing standpoint, the source is exactly where you would anticipate it would. And that's from adult smokers who are looking for a smoke-free alternative as well as competitive vapors. As far as repositioning, we're pleased with the quality of the product. I think we saw some early comments where there was rumors in the marketplace where we don't think that the national share represents the quality of the product. And we believe that really plays, if you will, to the strengths that we can bring to it. We have extensive relationship with retailers that our sales force has built over decades, and we were able to bring that strength to the table and really have consumers that haven't had access to this product that has been FDA authorized now have access and have it in their consideration side.

Okay. And then just maybe a second question on the JUUL announcement from last week. You touched on this again, the opportunity with the heated tobacco IP. But just curious, do you guys have plans to distribute this internationally? Or is this primarily to leverage it in the U.S.? Just a little bit more color on that would be helpful.

I just want to clarify with you, Bonnie, are you referring to NJOY? Or the Heat-not-Burn IP?

Oh, sorry, the Heat-not-Burn IP, the JUUL.

Yes. So when you think about that, we saw it as a very interesting technology. It allows us to put it in the toolkit of our product developers. And so we would have the ability with that licensing to use it anywhere around the world. Our focus, of course, would be the U.S. because that's the biggest opportunity we see [indiscernible].

So just a quick clarification on that. So do you have plans at some point to start selling, distributing internationally? And if so, how do you plan to kind of tackle that?

Yes. I think when you think about the Heat-not-Burn space, just to remind you where we're at, but I know you know well, Bonnie, is that we have the JT for Ploom in the U.S. We have the capsule technology that we're excited to unveil at Investor Day. We would have global rights for that and then these licenses give us global rights to that IP.

Our next question comes from Pamela Kaufman with Morgan Stanley.

Congrats on the acquisition. I just wanted to dig into the assumptions that you're making behind your accretion expectations for NJOY. Can you share your outlook for market share? What are you assuming for volumes and profitability? And then does your accretion consider accelerated cigarette volume declines as you work to drive NJOY growth?

Yes. There's a lot of details you're asking further, Pamela. I think we tried to provide extensive details in the release. From an acquisition model where we quoted the cash accretion within 2 years, you can think about that as that was built on the tobacco-only scenario, even though we ran various scenarios on that. From a discount perspective, the discount rate we used was significantly higher than what we see as our weighted average cost of capital. So we built all those assumptions in. What I don't want to do is unveil every single detail from a competitive standpoint, if this would be our approach to market, and this is how we would approach the market. And we'll unveil that as we first have to get it to final close and then be able to launch in the marketplace.

Okay. Understood. And then just on the decision to exit the JUUL stake, was there a reason why you had to do this before acquiring NJOY? I guess, why not retain the JUUL upside optionality? Was that driven by potential antitrust concerns stemming from owning JUUL and buying NJOY? Or was it more about kind of locking in the capital loss on JUUL.

This is Murray. Look, as you know, we made the decision to compete in the e-vapor market when we terminated our noncompete with JUUL months ago. Exiting our minority interest in JUUL was simply the culmination of that process that we started months ago. And when we examined our options in the e-vapor market, we were incredibly impressed by NJOY and it's people, and it made no sense really to acquire NJOY while owning a 35% of its competitor, and so we exited that market. And we now think that this transaction with NJOY is virtually a textbook case of a transaction that is pro-competitive. So we look very much forward to that in closing this transaction.

[Operator Instructions] Our next question will come from Priya Ohri-Gupta with Barclays.

Congratulations on the transaction. I have one sort of administrative question around the short-term bank financing that you have in place. Is that term loan? Or is it a bridge? And I guess, would the expectation be to utilize that in order to have prepayable debt short term or something that you could potentially refinance? And then I have another follow-up.

Well, Priya, you're right to point out that we do have committed short-term financing in the form of a bridge loan. What I would tell you is that we have multiple sources of funding as we stated in our opening remarks, right? And they include our core businesses, which are highly cash generative, strong access to the credit markets, the committed short-term financing you and I just spoke about. And then, of course, we have the PMI transition agreement, which pays us $2.7 billion, $1 billion, which we've received already and $1.7 billion plus interest that we expect to receive in July of 2023. So we're excited to have that optionality. And of course, market conditions will determine the direction we go in at the time of closing.

Great. That's helpful. And then do you have any sort of guidance you could give us in terms of the expected closing? And then how quickly thereafter would you be able to utilize the sales force to start getting NJOY into more retail locations? Because it seems like that's sort of the big gap that you guys can fill through expanded distribution. So if you could give us some context around that and how that flows into your cash accretion guidance for 2 years, that would be helpful.

This is Murray. Let me address the first part of the question. We have to go and obtain HSR clearance before we can close. We plan to file for HSR clearance within the next 40 days, and then we'll be working with the FTC and hopefully close as soon as possible.

Yes. And then subsequent to that, certainly, prior to closing, we would have no services that we would give NJOY. But after closing, we would bring the full resources of Altria. So our sales force, our regulatory team, our government affairs team, all of that would be available subsequent to close.

Our next question comes from Pallav Mittal with Barclays.

This is Pallav Mittal from Barclays on behalf of Gaurav Jain. I have a few questions. Firstly, there have been issues around leaky pods with NJOY. So are you planning to use the same product? Or are there any plans to apply for a PMTA for a new product and go live with that in the market?

Yes. I appreciate the question. I think when you think about the consumer research we did, that didn't come up as an issue. I think all products in the marketplace have some slight leakage, but nothing of significance. And we didn't see that as a huge issue with the consumer feedback we had in the consumer research. I think when you think about the authorization that's been granted, we would certainly keep the product in place. But as you saw in the release, this -- now, we would be excited to have this new platform and the IP related to it in our product development and innovation system. And that would allow us to build off of that, if you will, based IP to future iterations as we progress into the future.

Sure. And also the e-cigarette market in Europe currently is dominated by disposables. So do you have plans to go international with NJOY?

Certainly, that's an opportunity. It's something that we're excited to be able to explore, but it's too early to get into those details now.

Our next question comes from Chris Growe with Stifel.

I just have 2 questions. And the first one, I've had a lot of questions from investors around, obviously, the loss that's created through the divestiture of the JUUL stake. And now that you have that loss available to you, just to what degree that changes or maybe accelerates your viewpoint on that ABI stake. If I could start there, Billy, and then I have one more question, a follow-up on that.

Chris, this is Sal. I'll take that. So the way to think about the loss on the JUUL investment is the loss -- the tax losses are about $12.5 billion. And the way I think about that is the original investment netted against the value of the Heat-not-Burn IP that we are receiving. Of course, the ability to use those tax losses depends on a variety of factors. I have nothing new to report on the ABI asset. As you know, it's an asset -- it's a financial investment that we hold on our balance sheet. So any future plans, of course, we will communicate those to you, but nothing new to report on that.

Okay. And then just one question, Billy, for you in relation to NJOY. I just -- if you look over the last 5 to 7 years in the development of E-Vapor category, there's been a number of brands that have been leaders and then seemingly lose that leadership position. I guess I just want to understand, and this goes a bit to Bonnie's earlier question, but just what makes this product unique? And just in a world where there's very limited loyalty among consumers, can you develop that with NJOY? Just thinking about it's [ faced ] or it's -- the characteristics of the product that make it appealing for consumers that would allow to sustain a leadership role in this category?

Yes. I think, Chris, through time, you're going to see lot in these new spaces that we experience in the tobacco category. I think when you see the consumers, they're trying various products, they're looking for products that satisfy their unmet needs and desires. And once they find the satisfying product, it's up to us to build the brand around that. And so I think when you look at NJOY and I'd reference you back to the consumer research. It was both smokers looking to transition and how they rank the products in the marketplace as well as existing e-vapors, people that have already converted and their preference there. And I think you see that -- we believe this is a strong asset because not only does it bring certainty around the authorization, but the consumer is telling us they have preference for this product over some of the other products in the marketplace. So that's the way we think about it and are extremely excited to, again, have that base IP, have a product ready in the marketplace but then be able to develop on it as we move forward.

We will now open the floor for members of media. Our next question will come from Jennifer Maloney with the Wall Street General.

I was wondering if you could share the lessons that you take away from the investment in JUUL?

Yes. I think when you think about it -- and a surprise, we haven't got the question previously, what's different -- I think when you think about it, I really differentiate it in 3 buckets. One is certainty. So this is an authorized product versus a pending product. There are no litigation challenges. The youth usage is at minimum. And so that brings a level of certainty. I would say the other is about control. This is about 100% ownership versus a minority investment. So I think when you think about that and you think about certainty and control, that brings us significant level of clarity and that clarity is really related to what we can do to bring value enhancements immediately to the table. And so that clarity is around our sales force and the relationships they've built over decades that NJOY would take decades to build, we can bring that strength to the table, a responsible approach to the marketplace and continuing what we've seen NJOY doing the marketplace is their responsible approach. So I think that's how I would differentiate the two.

So moving forward, you never want a minority [indiscernible] favor again?

I had a wise person tell me never to say never. But certainly, having control and certainty is significant in being able to set the future.

[Operator Instructions]. And it appears there are no further questions at this time. I would like to turn the call back over to Mac Livingston for any closing remarks.

Thanks, everybody, for joining us this morning. Please contact the Investor Relations team if you have further questions. Thanks, and have a great day.

This concludes today's call. Thank you for your participation. You may disconnect at any time.