filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the other sections in this Quarterly Report on Form 10-Q (“Form 10-Q”), including our condensed consolidated financial statements and related notes contained in Item 1. Financial Statements of this Form 10-Q (“Item 1”). When used in this Form 10-Q, the terms “Altria,” “we,” “us” and “our” refer to either (i) Altria Group, Inc. and its consolidated subsidiaries or (ii) Altria Group, Inc. only and not its consolidated subsidiaries, as appropriate in the context.
In this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) section, we refer to the following “adjusted” financial measures: adjusted operating companies income (loss) (“OCI”); adjusted OCI margins; adjusted net earnings; adjusted diluted earnings per share (“EPS”); and adjusted effective tax rates. We also refer to the ratio of debt-to-Consolidated EBITDA (earnings before interest, taxes, depreciation and amortization, as defined in our credit agreement, which includes certain adjustments). These financial measures are not required by, or calculated in accordance with, United States generally accepted accounting principles (“GAAP”) and may not be calculated the same as similarly titled measures used by other companies. These financial measures should thus be considered as supplemental in nature and not considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. For a further description of these non-GAAP financial measures, see the Non-GAAP Financial Measures section below.
Executive Summary
Our Business
We have a leading portfolio of tobacco products for U.S. tobacco consumers age 21+. Our Vision is to responsibly lead the transition of adult smokers to a smoke-free future (“Vision”). We are Moving Beyond Smoking™, leading the way in moving adult smokers away from cigarettes by taking action to transition millions to potentially less harmful choices - believing it is a substantial opportunity for adult tobacco consumers, our businesses and society.
As we execute on our Vision, we established our 2028 Enterprise Goals (“2028 Goals”) to provide our investors with specific metrics to measure our progress. Our 2028 Goals are:
Corporate
**▪**Deliver a mid-single digits adjusted diluted EPS compounded annual growth rate in 2028 from our base in 2022;
**▪**A progressive dividend goal targeting mid-single digits dividend per share growth annually through 2028;
**▪**Target a debt-to-Consolidated EBITDA ratio of approximately 2.0x;
**▪**Maintain our leadership position in the U.S. tobacco space; and
**▪**Maintain a total adjusted OCI margin of at least 60% in each year through 2028 while investing behind innovative smoke-free products.
U.S. Smoke-Free Portfolio
**▪**Grow U.S. smoke-free volumes by at least 35% from our 2022 base of 800 million units by 2028; and
**▪**Approximately double our U.S. smoke-free net revenues to $5 billion by 2028 from our 2022 base, with $2 billion sourced from innovative smoke-free products.
Long-Term Growth
**▪**Compete internationally in the top innovative oral tobacco markets and develop a pathway to participate in heated tobacco and e-vapor markets; and
**▪**Enter non-nicotine categories with broad commercial distribution of at least five products by 2028.
See Operating Results by Business Segment and Liquidity and Capital Resources for additional information on total adjusted OCI margin and debt-to-Consolidated EBITDA, respectively.
Our wholly owned subsidiaries include leading manufacturers of both combustible and smoke-free products. In combustibles, we own Philip Morris USA Inc. (“PM USA”), the most profitable U.S. cigarette manufacturer, and John Middleton Co. (“Middleton”), a leading U.S. cigar manufacturer.
In smoke-free products, we own U.S. Smokeless Tobacco Company LLC (“USSTC”), the leading global moist smokeless tobacco (“MST”) manufacturer, Helix Innovations LLC (“Helix”), a leading manufacturer of oral nicotine pouches, and NJOY, LLC (“NJOY”), currently the only e-vapor manufacturer with market authorizations from the U.S. Food and Drug Administration (“FDA”) for a pod-based e-vapor product. Additionally, we have a majority-owned joint venture, Horizon Innovations LLC (“Horizon”), for the U.S. marketing and commercialization of heated tobacco stick products (“HTS”). As of this filing, there are no products in the U.S. marketplace from the joint venture.
The brand portfolios of our operating companies include Marlboro, Black & Mild, Copenhagen, Skoal, on! and NJOY. Trademarks related to Altria referenced in this Form 10-Q are the property of Altria or our subsidiaries or are used with permission.
Our investments in equity securities include Anheuser-Busch InBev SA/NV (“ABI”), the world’s largest brewer, and Cronos Group Inc. (“Cronos”), a leading Canadian cannabinoid company. In March 2024, we sold a portion of our ABI shares (“ABI Transaction”). We used the proceeds from the sale to fund accelerated share repurchase (“ASR”) transactions for our common stock. For further information on the ABI Transaction and the ASR transactions, see Note 5. Investments in Equity Securities to our condensed consolidated financial statements in Item 1 (“Note 5”) and Note 1. Background and Basis of Presentation to our condensed consolidated financial statements in Item 1 (“Note 1”), respectively.
Trends and Developments
In this MD&A section, we discuss factors that have impacted our business as of the date of this Form 10-Q. In addition, we are aware of and address certain trends and developments that could, individually or in the aggregate, have a material impact on our business, including the value of our investments in equity securities, in the future. We focus in this Trends and Developments section on the cumulative effects of inflation, geopolitical events, recent regulatory actions, supply chain disruptions and illegal disposable e-vapor products and their effects or potential effects on our business, including impacts on adult tobacco consumers and their purchasing behaviors.
We continue to monitor the evolving macroeconomic and geopolitical landscapes. The annual rate of inflation remains above the Federal Reserve’s target of 2%, which is a key benchmark for the Federal Reserve in determining the timing and magnitude of changes to the Federal Funds Rate. We continue to observe discretionary income pressures on adult tobacco consumers as a result of the cumulative effects of inflation and higher consumer debt levels. During 2023 and the first quarter of 2024, cigarette retail share for the industry discount segment increased year-over-year and compared to the fourth quarter of 2023. We will continue to monitor the effect of these dynamics on adult tobacco consumer purchasing behaviors, including overall tobacco product expenditures, mix between premium and discount brand purchases and adoption of smoke-free products. We expect discretionary income pressures to continue to influence adult tobacco consumers’ purchase behaviors in 2024. Inflation also has a direct and adverse impact on our direct and indirect costs.
In the e-vapor category, illegal disposable product usage increased in 2023 and comprised over 50% of the e-vapor category. We believe usage of these products continued to increase in the first quarter of 2024. The primary impacts of this trend have been an increase in the rate of cross-category movement among adult cigarette smokers, contributing to higher than expected domestic cigarette industry volume declines as well as declines in pod-based product volume within the e-vapor category.
Tobacco companies are subject to broad and evolving regulatory and legislative frameworks that could have a material impact on our business. For example, the FDA has submitted for final review proposed product standards regarding menthol in cigarettes and characterizing flavors in cigars, and the Biden Administration published plans for future potential regulatory actions that include the FDA’s plans to develop a proposed product standard that would establish a maximum nicotine level for cigarettes and certain other combustible tobacco products. In California, where a ban on flavored nicotine products went into effect in late 2022, we continue to observe indications of negative unintended consequences of the ban, such as adult tobacco consumer adoption of unregulated products and the development of illicit markets.
We expect volatility in domestic and global economies and disruptions in the supply and distribution chains to continue in 2024, resulting from several factors, including supply and demand imbalances across many commodity sectors, raw materials availability and geopolitical events. We continue to work to mitigate the potential negative impacts of these macroeconomic and geopolitical dynamics on our businesses through, among other actions, proactive engagement with current and potential suppliers and distributors, the development of alternative sourcing strategies, entry into long-term supply contracts and prudent oversight of our liquidity.
See Operating Results by Business Segment - Business Environment for additional information on the trends and developments discussed above.
ABI’s business has been and continues to be impacted by foreign exchange rate fluctuations, inflation and commodity cost headwinds. We will continue to monitor these conditions and other factors as they could affect our equity earnings, the dividends that we receive from ABI and the fair value of our investment in ABI.
See Note 5 for additional information on our investments in equity securities.
The trends and developments discussed above have not had a material adverse impact on our condensed consolidated financial statements, but we continue to monitor these trends and developments and potential financial impacts. Additionally, we do not believe that these trends and developments have materially impacted our ability to achieve our Vision. As the trends and developments discussed above evolve and new ones emerge, we will continue to evaluate the potential impacts on our business, investments and Vision.
Consolidated Results of Operations for the Three Months Ended March 31, 2024
The changes in net earnings and diluted EPS for the three months ended March 31, 2024, from the three months ended March 31, 2023, were due primarily to the following:
| (in millions, except per share data) | Net Earnings | Diluted EPS | |||||||||
| For the three months ended March 31, 2023 | $ | 1,787 | $ | 1.00 | |||||||
| 2023 Acquisition and disposition-related items | (12) | — | |||||||||
| 2023 Tobacco and health and certain other litigation items | 84 | 0.04 | |||||||||
| 2023 Loss on disposition of JUUL equity securities | 250 | 0.14 | |||||||||
| 2023 ABI-related special items | (20) | (0.01) | |||||||||
| 2023 Cronos-related special items | 26 | 0.01 | |||||||||
| 2023 Income tax items | 3 | — | |||||||||
| Subtotal 2023 special items | 331 | 0.18 | |||||||||
| 2024 NPM Adjustment Items | 5 | — | |||||||||
| 2024 Tobacco and health and certain other litigation items | (19) | (0.01) | |||||||||
| 2024 ABI-related special items | 67 | 0.04 | |||||||||
| 2024 Cronos-related special items | (17) | (0.01) | |||||||||
| 2024 Income tax items | 71 | 0.04 | |||||||||
| Subtotal 2024 special items | 107 | 0.06 | |||||||||
| Fewer shares outstanding | — | 0.02 | |||||||||
| Change in tax rate | 6 | — | |||||||||
| Operations | (102) | (0.05) | |||||||||
| For the three months ended March 31, 2024 | $ | 2,129 | $ | 1.21 | |||||||
| 2024 Reported Net Earnings | $ | 2,129 | $ | 1.21 | |||||||
| 2023 Reported Net Earnings | $ | 1,787 | $ | 1.00 | |||||||
| % Change | 19.1 | % | 21.0 | % | |||||||
| 2024 Adjusted Net Earnings and Adjusted Diluted EPS | $ | 2,022 | $ | 1.15 | |||||||
| 2023 Adjusted Net Earnings and Adjusted Diluted EPS | $ | 2,118 | $ | 1.18 | |||||||
| % Change | (4.5) | % | (2.5) | % | |||||||
For a discussion of special items and other business drivers affecting the comparability of statements of earnings amounts and reconciliations of adjusted earnings and adjusted diluted EPS, see the Consolidated Operating Results section below.
**▪**Fewer Shares Outstanding: Fewer shares outstanding were due to shares we repurchased under our share repurchase programs.
**▪**Operations: The decrease of $102 million in operations (which excludes the impact of special items shown in the table above) was due primarily to lower OCI.
For further details, see the Consolidated Operating Results and Operating Results by Business Segment sections below.
Non-GAAP Financial Measures
We report our financial results in accordance with GAAP. However, our management also reviews certain financial results, including OCI, OCI margins, net earnings and diluted EPS, on an adjusted basis, which excludes certain income and expense items that our management believes are not part of underlying operations. These items may include, for example, loss on early extinguishment of debt, restructuring charges, asset impairment charges, acquisition, disposition and integration-related items, equity investment-related special items, certain income tax items, charges associated with tobacco and health and certain other litigation items, and resolutions of certain non-participating manufacturer (“NPM”) adjustment disputes under the MSA (“NPM Adjustment Items”). In addition, our management reviews the ratio of debt-to-Consolidated EBITDA, which we use as a factor to determine our ability to access the capital markets and make investments in pursuit of our Vision. Consolidated EBITDA is calculated in accordance with our Credit Agreement (defined below in Liquidity and Capital Resources) and includes certain adjustments. Our management does not view any of these special items to be part of our underlying results as they may be highly variable, may be unusual or infrequent, are difficult to predict and can distort underlying business trends and results.
Our management also reviews income tax rates on an adjusted basis, which may exclude certain income tax items from our reported effective tax rate.
Our management believes that the foregoing financial measures provide useful additional insight into underlying business trends and results, and provide a more meaningful comparison of year-over-year results. Our management uses these financial measures and regularly provides these to our chief operating decision maker (“CODM”) for planning, forecasting and evaluating business and financial performance, including allocating capital and other resources and evaluating results relative to employee compensation targets. The foregoing financial measures are not required by, or calculated in accordance with GAAP and may not be calculated the same as similarly titled measures used by other companies. The foregoing financial measures should thus be considered as supplemental in nature and not considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. When we provide a non-GAAP measure in this Form 10-Q, we also provide a reconciliation of that non-GAAP financial measure to the most directly comparable GAAP financial measure.
Discussion and Analysis
Our critical accounting policies and estimates are discussed in our Annual Report on Form 10-K for the year ended December 31, 2023 (“2023 Form 10-K”); there have been no updates to these critical accounting estimates, except as noted below.
Critical Accounting Estimates
Depreciation, Amortization, Impairment Testing and Asset Valuation
We conduct a required annual review of goodwill and indefinite-lived intangible assets for potential impairment, and more frequently if an event occurs or circumstances change that would require an interim review. When performing a quantitative assessment of our reporting units and indefinite-lived intangible assets, we use an income approach to estimate fair values. The income approach reflects the discounting of expected future cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of those funds, the expected rate of inflation and the risks associated with realizing expected future cash flows. This calculation may be affected by several factors, including general macroeconomic conditions; governmental actions, including FDA regulatory actions and inaction; changes in category growth (decline) rates as a result of changing adult tobacco consumer preferences; success of planned new product expansions; competitive activity; unfavorable outcomes with respect to litigation proceedings, including actions brought against us alleging patent infringement; and income and excise taxes.
At December 31, 2023, the estimated fair value of the Skoal trademark exceeded its carrying value of $3.9 billion by approximately 6% ($0.2 billion).
MST products, including Skoal, have continued to be negatively impacted due in part to evolving adult tobacco consumer preferences, which has resulted in consumers increasingly moving across tobacco categories. The accelerated growth of innovative tobacco products, including oral nicotine pouches, and the related increase in competitive activity among tobacco categories in 2023 continued to contribute to reductions in sales volumes for MST products, including Skoal.
We believe if there is further acceleration in the decline in sales volume for Skoal that results in material revenue declines, there may be a material adverse effect on the significant assumptions used in performing our valuation, including volume, revenue, income, perpetual growth rate and discount rate. A hypothetical 1% increase to the discount rate used in our quantitative assessment as of December 31, 2023, which was our most sensitive assumption, would have resulted in an impairment charge to the Skoal intangible asset of approximately $150 million during 2023.
Although the above referenced conditions indicate there has been a shift in adult consumer preferences, specifically related to MST products and oral nicotine pouches, considering the approximately 6% headroom as of December 31, 2023 and the current quarter operating results for Skoal, these conditions did not indicate an impairment was more likely than not as of March 31, 2024. However, if Skoal’s actual revenue and income or long-term outlook are significantly different from forecasted performance used to estimate the fair value or if the discount rate used to estimate the fair value increases, we could have a material non-cash impairment of our Skoal trademark in future periods.
Consolidated Operating Results
| For the Three Months Ended March 31, | |||||||||||||||||||||||
| (in millions) | 2024 | 2023 | |||||||||||||||||||||
| Net Revenues: | |||||||||||||||||||||||
| Smokeable products | $ | 4,906 | $ | 5,090 | |||||||||||||||||||
| Oral tobacco products | 651 | 628 | |||||||||||||||||||||
| All other | 19 | 1 | |||||||||||||||||||||
| Net revenues | $ | 5,576 | $ | 5,719 | |||||||||||||||||||
| Excise Taxes on Products: | |||||||||||||||||||||||
| Smokeable products | $ | 834 | $ | 928 | |||||||||||||||||||
| Oral tobacco products | 25 | 28 | |||||||||||||||||||||
| Excise taxes on products | $ | 859 | $ | 956 | |||||||||||||||||||
| Operating Income: | |||||||||||||||||||||||
| OCI: | |||||||||||||||||||||||
| Smokeable products | $ | 2,439 | $ | 2,503 | |||||||||||||||||||
| Oral tobacco products | 435 | 416 | |||||||||||||||||||||
| All other | (61) | (9) | |||||||||||||||||||||
| Amortization of intangibles | (27) | (18) | |||||||||||||||||||||
| General corporate expenses | (112) | (135) | |||||||||||||||||||||
| Operating income | $ | 2,674 | $ | 2,757 |
As discussed further in Note 10. Segment Reporting to our condensed consolidated financial statements in Item 1 (“Note 10”), our CODM reviews OCI, which is defined as operating income before general corporate expenses and amortization of intangibles, to evaluate the performance of, and allocate resources to, our segments. Our management believes it is appropriate to disclose this measure to help investors analyze our business performance and trends.
The following table provides a reconciliation of adjusted net earnings and adjusted diluted EPS for the three months ended March 31:
| (in millions of dollars, except per share data) | Earnings before Income Taxes | Provision for Income Taxes | Net Earnings | Diluted EPS | ||||||||||||||||
| 2024 Reported | $ | 2,739 | $ | 610 | $ | 2,129 | $ | 1.21 | ||||||||||||
| NPM Adjustment Items | (6) | (1) | (5) | — | ||||||||||||||||
| Tobacco and health and certain other litigation items | 24 | 5 | 19 | 0.01 | ||||||||||||||||
| ABI-related special items | (86) | (19) | (67) | (0.04) | ||||||||||||||||
| Cronos-related special items | 17 | — | 17 | 0.01 | ||||||||||||||||
| Income tax items | — | 71 | (71) | (0.04) | ||||||||||||||||
| 2024 Adjusted for Special Items | $ | 2,688 | $ | 666 | $ | 2,022 | $ | 1.15 | ||||||||||||
| 2023 Reported | $ | 2,479 | $ | 692 | $ | 1,787 | $ | 1.00 | ||||||||||||
| Acquisition and disposition-related items | (17) | (5) | (12) | — | ||||||||||||||||
| Tobacco and health and certain other litigation items | 111 | 27 | 84 | 0.04 | ||||||||||||||||
| Loss on disposition of JUUL equity securities | 250 | — | 250 | 0.14 | ||||||||||||||||
| ABI-related special items | (25) | (5) | (20) | (0.01) | ||||||||||||||||
| Cronos-related special items | 26 | — | 26 | 0.01 | ||||||||||||||||
| Income tax items | — | (3) | 3 | — | ||||||||||||||||
| 2023 Adjusted for Special Items | $ | 2,824 | $ | 706 | $ | 2,118 | $ | 1.18 |
The following special items affected the comparability of statements of earnings amounts for the three months ended March 31, 2024 and 2023:
**▪**Tobacco and Health and Certain Other Litigation Items: For a discussion of tobacco and health and certain other litigation items and a breakdown of these costs by segment, see Note 13. Contingencies to our condensed consolidated financial statements in Item 1 (“Note 13”) and Tobacco and Health and Certain Other Litigation Items in Note 10, respectively.
**▪**Loss on Disposition of JUUL Equity Securities: We recorded a non-cash, pre-tax loss of $250 million related to the disposition of our JUUL equity securities for the three months ended March 31, 2023 as (income) losses from investments in equity securities in our condensed consolidated statement of earnings. We recorded a corresponding adjustment to the JUUL tax valuation allowance.
**▪**ABI-Related Special Items: We recorded net pre-tax income of $86 million from our equity investment in ABI for the three months ended March 31, 2024, which consists primarily of a gain related to the ABI Transaction. For further information on the gain related to the ABI Transaction, see Note 5.
The ABI-related special items include our respective share of the amounts recorded by ABI and additional adjustments related to (i) the conversion of ABI-related special items from international financial reporting standards to GAAP and (ii) adjustments to our investment required under the equity method of accounting.
**▪**Income Tax Items: We recorded income tax items of $71 million, for the three months ended March 31, 2024, due primarily to an income tax benefit from the partial release of a valuation allowance on JUUL-related losses. The valuation allowance release was due to our capital gain on the ABI Transaction. For further discussion, see Note 12. Income Taxes to our condensed consolidated financial statements in Item 1 (“Note 12”).
Three Months Ended March 31, 2024 Compared with Three Months Ended March 31, 2023
Net revenues, which include excise taxes billed to customers, decreased $143 million (2.5%), due primarily to lower net revenues in the smokeable products segment, partially offset by higher net revenues in the oral tobacco products segment and the all other category.
Cost of sales was essentially unchanged, as higher per unit settlement charges and higher manufacturing costs in our smokeable products segment were mostly offset by lower shipment volume in our smokeable products segment.
Excise taxes on products decreased $97 million (10.1%), due to lower shipment volume in our smokeable products segment.
Marketing, administration and research costs increased $34 million (5.9%), due primarily to transaction costs from our ABI Transaction, inflation impacts and higher project spending, partially offset by lower tobacco and health and certain other litigation charges (including an agreement in 2023 to resolve shareholder derivative lawsuits).
Operating income decreased $83 million (3.0%), due primarily to lower operating results in our smokeable products segment and all other category, partially offset by lower general corporate expenses and higher operating results in our oral tobacco products segment.
Interest and other debt expense, net increased $25 million (10.9%), due primarily to 2023 interest income associated with the sale of the IQOS Tobacco Heating System (“IQOS System”) commercialization rights. For further discussion regarding the sale of the IQOS System, see Operating Results by Business Segment - Business Environment - FSPTCA and FDA Regulation below.
(Income) losses from investments in equity securities, which were favorable $375 million (100+%), were positively impacted by the 2023 loss on the disposition of our JUUL equity securities and favorable results from our equity investment in ABI (due primarily to our gain on the ABI Transaction.)
Provision for income taxes decreased $82 million (11.8%), due primarily to an income tax benefit from the partial release of a valuation allowance on JUUL-related losses. The valuation allowance release was due to our capital gain on the ABI Transaction. For further discussion, see Note 12.
Reported net earnings of $2,129 million increased $342 million (19.1%), due primarily to favorable results from our investments in equity securities and favorable income tax items, partially offset by lower operating income. Reported basic and diluted EPS of $1.21, each increased by 21.0% due to higher reported net earnings and fewer shares outstanding.
Adjusted net earnings of $2,022 million decreased $96 million (4.5%), due primarily to lower OCI. Adjusted diluted EPS of $1.15 decreased by 2.5%, due to lower adjusted net earnings, partially offset by fewer shares outstanding.
Operating Results by Business Segment
Business Environment
Summary
The U.S. tobacco industry faces a number of business and legal challenges that have materially adversely affected and may continue to materially adversely affect our business, results of operations, cash flows or financial position or our ability to achieve our Vision. These challenges, some of which are discussed in more detail in Note 13, and in Part I, Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2023 (“2023 Form 10-K”), include:
▪pending and threatened litigation and bonding requirements;
▪restrictions and requirements imposed by the FSPTCA, and restrictions and requirements (and related enforcement actions) that have been, and in the future will be, imposed by the FDA;
▪the FDA’s failure to effectively address illegal e-vapor products on the market;
▪actual and proposed excise tax increases, as well as changes in tax structures and tax stamping requirements;
▪bans and restrictions on tobacco use imposed by governmental entities and private establishments and employers;
▪other federal, state and local government actions, including:
▪restrictions on the sale of certain tobacco products, the sale of tobacco products by certain retail establishments, the sale of tobacco products with characterizing flavors and the sale of tobacco products in certain package sizes;
▪additional restrictions on the advertising and promotion of tobacco products;
▪other actual and proposed tobacco-related legislation and regulation; and
▪governmental investigations;
▪reductions in consumption levels of cigarettes and MST products;
▪increased efforts by tobacco control advocates and other private sector entities (including retail establishments) to further restrict the availability and use of tobacco products or the ability to communicate with consumers through third-party digital platforms;
▪changes in adult tobacco consumer purchase behavior, which is influenced by various factors such as macroeconomic conditions (including inflation), excise taxes and price gap relationships, each of which may result in adult tobacco consumers switching to lower-priced tobacco products and lower shipment volumes;
▪the highly competitive nature of all tobacco categories, including competitive disadvantages related to the impact on cigarette prices due to the settlement of certain healthcare cost recovery litigation and the proliferation of innovative tobacco products, such as e-vapor and oral nicotine pouch products;
▪illicit trade in tobacco products, including illegal e-vapor products; and
▪potential adverse changes in prices, availability and quality of tobacco, other raw materials and component parts, including as a result of changes in macroeconomic and geopolitical conditions.
In addition to and in connection with the foregoing, evolving adult tobacco consumer preferences continue to impact the tobacco industry, including negatively impacting cigarette and MST shipment volumes. We believe that a significant number of adult tobacco consumers switch among tobacco categories, use multiple forms of tobacco products and try innovative tobacco products, such as e-vapor products and oral nicotine pouches. Adult tobacco consumers continue to transition from cigarettes and MST to exclusive use of smoke-free tobacco product alternatives, which aligns with our Vision.
We work to meet these evolving adult tobacco consumer preferences over time by developing, manufacturing, marketing and distributing products both within and outside the United States through innovation and other growth strategies (including, where appropriate, arrangements with, or investments in, third parties and acquisitions).
For the first quarter of 2024, we estimate that, when adjusted for trade inventory movements, calendar differences and other factors, domestic cigarette industry volume declined by 9% versus the first quarter of 2023. We believe these declines primarily are attributable to the historic secular rate of decline, the growth of illegal disposable e-vapor products and continued macroeconomic pressures on adult tobacco consumer discretionary income. We continue to estimate that the growth of illegal disposable e-vapor products, which we discuss in more detail below, contributed to cigarette industry volume declines in a range of 1.5% to 2.5% over the last 12 months. By design, these illegal disposable e-vapor products are largely distributed through non-traditional, untracked retail channels, and this is a trend we will continue to carefully monitor. We expect cigarette industry volume trends for the remainder of 2024 to be most influenced by (i) continued macroeconomic and discretionary income pressures on adult tobacco consumers (including inflation, interest rates, gasoline prices and unemployment levels), (ii) cross-category movement, including to illegal e-vapor products, and (iii) regulatory and legislative (including excise tax) developments.
The macroeconomic and discretionary income pressures on adult tobacco consumers, as well as seasonal trends in the discount segment influenced discount share performance. For the first quarter of 2024, the discount share of the cigarette category was 29.1%, an increase of 0.4 share points sequentially and an increase of 0.8 share points versus the first quarter of 2023.
Marlboro share was 42.0% in the first quarter of 2024, a decrease of 0.3 share points sequentially and unchanged versus the first quarter of 2023. Marlboro share in the premium segment of the industry remained stable sequentially at 59.3% and increased 0.7 share points versus the first quarter of 2023.
The U.S. nicotine pouch category continued to grow significantly throughout the first quarter of 2024 to 40.1% of the U.S. oral tobacco category, an increase of 13.8 share points versus the first quarter of 2023. on! maintained year over year share momentum through the first quarter of 2024 to achieve 7.1% of the total oral tobacco category, an increase of 0.2 share points versus the fourth quarter of 2023 and an increase of 0.2 share points sequentially. Oral nicotine pouch growth primarily has sourced from adult smokeless tobacco and cigarette consumers, negatively impacting smokeless and cigarette product volumes. For the first quarter 2024, the traditional smokeless category (including MST and Snus) share of the total oral tobacco category declined to 59.9%, down 13.8 share points versus the first quarter of 2023. Copenhagen had an oral tobacco category share of 20.1% for the first quarter of 2024, a decrease of 5.2 share points when compared to the first quarter of 2023.
Through the first quarter of 2024, NJOY distribution grew to over 80,000 stores. During the same period, reported shipment volume of NJOY consumables (including NJOY ACE and NJOY DAILY) was approximately 10.9 million units, and NJOY device shipment volume was approximately 1 million units. The NJOY share of the e-vapor category reached 4.3% in the first quarter of 2024, an increase of 0.6 share points sequentially.
Despite overall improvements in macroeconomic conditions (stabilizing inflation, low unemployment and stable wage inflation), discretionary income pressures persisted for adult tobacco consumers through the first quarter of 2024 due to the cumulative effects of inflation. The March 2024 Consumer Price Index (CPI) was 3.5%, exceeding the Federal Reserve’s target of 2%. Although inflation rates remained lower than prior years, increased prices on certain expenditures, such as groceries and gas, continued to put pressure on adult tobacco consumer discretionary income. Gas prices throughout the first quarter of 2024 were lower overall than prior years but remained consistently above $3.00 month-over-month and began to increase through March 2024. The average gas price for the month of March 2024 was $3.43 per gallon. In addition to rising costs of certain expenses, the Federal Funds Rate has remained above historical levels, although stable at 5.33% through the first quarter of 2024.
We continue to monitor changing conditions within the tobacco business environment and impacts on our business. For example, we monitor changes in macroeconomic conditions that increase discretionary income pressures on adult tobacco consumers, which can impact domestic cigarette industry volume decline and discount segment share growth and reduce purchases at retail. We are also monitoring growth of illegal disposable e-vapor products and the related negative impact on domestic cigarette and e-vapor industry volumes. In addition, the growth of the nicotine pouch category has reduced the size of the MST category and could impact the carrying value of our assets such as our tobacco product trademarks. Changes in these and other conditions could have a material adverse effect on our business, results of operations, cash flows or financial position.
FSPTCA and FDA Regulation
**▪**The Regulatory Framework: The FSPTCA and its related regulations establish broad FDA regulatory authority over all tobacco products and, among other provisions:
▪impose restrictions on the advertising, promotion, sale and distribution of tobacco products (see Final Tobacco Marketing Rule below);
▪establish pre-market review pathways for new and modified tobacco products (see Pre-Market Review Pathways for Tobacco Products and Market Authorization Enforcement below);
▪prohibit any express or implied claims that a tobacco product is or may be less harmful than other tobacco products without FDA authorization;
▪authorize the FDA to impose tobacco product standards that are appropriate for the protection of the public health (see Potential Product Standards below); and
▪equip the FDA with a variety of investigatory and enforcement tools, including the authority to inspect product manufacturing and other facilities (see Investigation and Enforcement below).
The FSPTCA also bans descriptors such as “light,” “low” or “mild” when used as descriptors of modified risk, unless expressly authorized by the FDA. In connection with a 2016 lawsuit initiated by Middleton, the U.S. Department of Justice, on behalf of the FDA, informed Middleton that the FDA does not intend to bring an enforcement action against Middleton for the use of the term “mild” in the trademark “Black & Mild.” Consequently, Middleton dismissed its lawsuit without prejudice. If the FDA were to change its position at some later date, Middleton would have the opportunity to bring another lawsuit.
Effective April 2022, the U.S. Congress expanded the statutory definition of tobacco products to include products containing nicotine derived from any source, including synthetic nicotine. See Pre-Market Review Pathways for Tobacco Products and Market Authorization Enforcement below for additional information on the effects of the statutory change.
**▪**Final Tobacco Marketing Rule: As required by the FSPTCA, in March 2010, the FDA promulgated a wide range of advertising and promotion restrictions for cigarettes and smokeless tobacco(1) products (the “Final Tobacco Marketing Rule”). The May 2016 deeming regulations amended the Final Tobacco Marketing Rule to expand specific provisions to all tobacco products, including cigars, pipe tobacco and e-vapor and oral nicotine products containing tobacco-derived nicotine or other tobacco derivatives.
The Final Tobacco Marketing Rule, as amended, among other things:
▪restricts the use of non-tobacco trade and brand names on cigarettes and smokeless tobacco products;
▪prohibits sampling of all tobacco products except that sampling of smokeless tobacco products is permitted in qualified adult-only facilities;
▪prohibits the sale or distribution of items such as hats and tee shirts with cigarette or smokeless tobacco brands or logos;
▪prohibits cigarettes and smokeless tobacco brand name sponsorship of any athletic, musical, artistic or other social or cultural event, or any entry or team in any event; and
▪requires the development by the FDA of graphic warnings for cigarettes, establishes warning requirements for other tobacco products, and gives the FDA the authority to require new warnings for any type of tobacco product (see FDA Regulatory Actions - Graphic Warnings below).
Subject to certain limitations arising from legal challenges, the Final Tobacco Marketing Rule took effect in June 2010 for cigarettes and smokeless tobacco products, in August 2016 for all other tobacco products, including e-vapor and oral nicotine pouch products containing tobacco-derived nicotine, and in April 2022 for tobacco products, including e-vapor and oral nicotine pouch products, that contain nicotine from any source other than tobacco, such as synthetic nicotine.
**▪**Rulemaking and Guidance: From time to time, the FDA issues proposed regulations and guidance, which may be issued in draft or final form, that generally involve public comment and may include scientific review. The FDA also may request comments on broad topics through an Advanced Notice of Proposed Rulemaking (“ANPRM”). We actively engage with the FDA to develop and implement the FSPTCA’s regulatory framework, including submission of comments to various FDA policies and proposals and participation in public hearings and engagement sessions.
The FDA’s implementation of the FSPTCA and related regulations and guidance also may have an impact on enforcement efforts by states, territories and localities of their laws and regulations as well as of the State Settlement Agreements (see State Settlement Agreements below). Such enforcement efforts may adversely affect our operating companies’ ability to market and sell tobacco products in those states, territories and localities.
▪FDA’s Five-Year Strategic Plan for Tobacco and Nicotine Regulation: In December 2023, in response to the Reagan-Udall Foundation’s report of its operational evaluation of the FDA’s Center for Tobacco Products, the FDA released its five-year strategic plan to address concerns raised by the report. The Reagan-Udall Report urged the FDA to clearly define product pathways, accelerate PMTA decision-making, address the need for health risk communications to tobacco consumers and take enforcement actions against manufacturers and products that violate the law.
The FDA’s five-year strategic plan lists five goals:
▪develop, advance and communicate comprehensive and impactful tobacco regulations and guidance;
▪ensure timely, clear and consistent product application review;
▪strengthen compliance of regulated industry using all available tools, including robust enforcement actions;
▪enhance knowledge and understanding of the risks associated with tobacco product use; and
▪advance operational excellence.
Although the FDA, in conjunction with other federal entities, has engaged in some enforcement activity, insufficient actions against certain product categories that violate the law, including disposable and flavored e-vapor products and products targeted to minors, have allowed such products to proliferate on the market. In addition, the FDA’s failure to clearly define product pathways and accelerate PMTA decision making has resulted in a market with few authorized smoke-free products available to adult tobacco consumers.
(1) “Smokeless tobacco,” as used in this section of this Form 10-Q, refers to smokeless tobacco products first regulated by the FDA in 2009, including MST. It excludes oral nicotine pouches, which were first regulated by the FDA in 2016.
**▪**Pre-Market Review Pathways for Tobacco Products and Market Authorization Enforcement: The FSPTCA permits the sale of tobacco products on the market as of February 15, 2007 and not subsequently modified (“Pre-existing Tobacco Products”) and new or modified products authorized through the PMTA, Substantial Equivalence (“SE”) or SE Exemption pathways. Subsequent FDA rules also provide a Supplemental PMTA pathway designed to increase the efficiency of submission and review for modified versions of previously authorized products.
The FDA pre-market authorization enforcement policy varies based on product type and date of availability on the market, specifically:
▪Pre-existing Tobacco Products are exempt from the pre-market authorization requirement;
▪cigarette and smokeless tobacco products that were modified or first introduced into the market between February 15, 2007 and March 22, 2011 are generally considered “Provisional Products” for which SE reports were required to be filed by March 22, 2011. These reports must demonstrate that the product has the same characteristics as a product on the market as of February 15, 2007 or to a product previously determined to be substantially equivalent, or has different characteristics but does not raise different questions of public health;
▪tobacco products that were first regulated by the FDA in 2016, including cigars, e-vapor products and oral nicotine pouches that are not Pre-existing Tobacco Products, are generally products for which either an SE report or PMTA needed to be filed by September 9, 2020; and
▪tobacco products containing nicotine from any source other than tobacco (e.g., synthetic nicotine) that were on the market between March 15, 2022 and April 14, 2022 and are not Pre-existing Tobacco Products are generally products for which a manufacturer must have filed a PMTA by May 14, 2022. A manufacturer was permitted to keep such a product on the market until July 13, 2022 provided that a PMTA was filed by May 14, 2022. Thereafter, unless the FDA granted the product a marketing order, the product is unlawful and subject to possible FDA enforcement.
Modifications to currently marketed products, including modifications that result from, for example, changes to the quantity of tobacco product(s) in a package, a manufacturer being unable to acquire ingredients or a supplier or contract manufacturer being unable to maintain the consistency required in ingredients or manufacturing processes, could trigger the FDA’s pre-market review processes. Additionally, a manufacturer may be unable to maintain consistency in manufacturing processes as it increases the scale of its manufacturing operations in response to market expansion or product introduction. These circumstances could cause a manufacturer to receive (i) a “not substantially equivalent” determination or (ii) a denial or withdrawal of a PMTA, either of which could result in a product being removed from the market. In addition, new scientific data continues to be developed relating to innovative tobacco products, which could impact the FDA’s determination as to whether a product is, or continues to be, appropriate for the protection of public health and could, therefore, result in the removal of one or more products from the market. Any such actions affecting our operating companies’ products could have a material adverse impact on our business, results of operations, cash flows or financial position.
Products Regulated in 2009: Most cigarette and smokeless tobacco products currently marketed by PM USA and USSTC are “Provisional Products.” PM USA and USSTC timely submitted SE reports for these Provisional Products and have received SE determinations on certain Provisional Products. Those products that were found by the FDA to be not substantially equivalent (certain smokeless tobacco products) had been discontinued for business reasons prior to the FDA’s determinations; therefore, those determinations did not impact business results. PM USA and USSTC have other Provisional Products that continue to be subject to the FDA’s pre-market review process. In the meantime, they can continue marketing these products unless the FDA determines that a specific Provisional Product is not substantially equivalent.
In addition, the FDA has communicated that it will not review a certain subset of Provisional Product SE reports and that the products that are the subject of those reports can continue to be legally marketed without further FDA review. PM USA and USSTC have Provisional Products included in this subset of products.
While we believe PM USA’s and USSTC’s current Provisional Products meet the statutory requirements of the FSPTCA, we cannot predict how the FDA will ultimately apply law, regulation and guidance to their various SE reports. Should PM USA or USSTC receive unfavorable determinations on any SE reports currently pending with the FDA, we believe PM USA and USSTC can replace the vast majority of these product volumes with other FDA authorized products or with Pre-existing Tobacco Products.
Cigarette and smokeless tobacco products introduced into the market or modified after March 22, 2011 are “Non-Provisional Products” and must receive a marketing order from the FDA prior to being offered for sale. Marketing orders for Non-Provisional Products may be obtained by filing an SE report, PMTA or using another pre-market pathway established by the FDA. PM USA and USSTC may not be able to obtain a marketing order for non-provisional products because the FDA may determine that any such product does not meet the statutory requirements for approval.
Products Regulated in 2016: Manufacturers of products first regulated by the FDA in 2016, including cigars, oral nicotine pouches and e-vapor products, that were on the market as of August 8, 2016 and not subsequently modified must have filed an SE report or PMTA by the filing deadline of September 9, 2020 in order for their products to remain on the market. These products can remain on the market during FDA review through court-allowed, case-by-case discretion, so long as the report or application was timely filed with the FDA. In September 2022, the FDA represented that it had resolved more than 99% of the timely applications it had received, the vast majority of which were for e-vapor products and resulted in denials. A number of the denials are subject to challenges initiated by the affected manufacturers. For those products still under FDA review, it is uncertain when and for how long the FDA may permit continued marketing and sale of those products pursuant to its case-by-case discretion. For products (new or modified) not on the market as of August 8, 2016, manufacturers must file an SE report or PMTA and receive FDA authorization prior to marketing and selling the product.
Helix submitted PMTAs for on! oral nicotine pouches in May 2020. As of April 22, 2024, the FDA has not issued marketing order decisions for any on! products. In addition, as of April 22, 2024, Middleton has received market orders or exemptions that cover over 99% of its cigar product volume.
In April 2019, the FDA authorized the PMTA for the IQOS System, and in July 2020, the FDA authorized the marketing of this system as a modified risk tobacco product (“MRTP”) with a reduced exposure claim. In December 2020, the FDA authorized the PMTA for IQOS 3, an updated version of the IQOS devices, and in March 2022 authorized the marketing of the IQOS 3 device as an MRTP with the same reduced exposure claim. In January 2023, the FDA authorized PMTAs for three new tobacco-flavored varieties of Marlboro HeatSticks.
In September 2021, in connection with a patent dispute, the ITC issued a cease and desist order, effective as of November 29, 2021, banning (i) the importation of the IQOS devices, Marlboro HeatSticks and infringing components into the United States and (ii) the sale, marketing and distribution of such imported products in the United States. As a result, PM USA removed the products from the marketplace. For a further discussion of the ITC decision, see Note 13.
In October 2022, we agreed to assign the exclusive U.S. commercialization rights to the IQOS System to PMI effective April 2024 in exchange for a total cash payment of approximately $2.7 billion (plus interest). The U.S. government has asserted that the agreement to assign those rights required district court approval and was subject to PMI becoming bound by a court-ordered injunction against engaging in certain conduct and requiring the communication of corrective statements. The issue has yet to be litigated before the district court.
In October 2021, the FDA authorized the marketing and sale of four of USSTC’s Verve oral nicotine products, including Green Mint and Blue Mint varieties, representing the first flavored product authorizations issued by the FDA for newly deemed innovative products. These products are not currently marketed or sold.
In March 2023, the FDA authorized USSTC to communicate a modified risk claim about its Copenhagen Classic Snuff MST product. This product is not currently marketed or sold. The authorized claim for Copenhagen Classic Snuff is “IF YOU SMOKE, CONSIDER THIS: Switching completely to this product from cigarettes reduces risk of lung cancer.” USSTC’s authorization to use this claim is subject to the FDA’s post-market surveillance requirements described below.
In June 2023, we completed our acquisition of NJOY Holdings, the parent of NJOY. As a result of the acquisition, NJOY became a wholly owned subsidiary of Altria, and we gained full global ownership of NJOY’s e-vapor product portfolio, including NJOY ACE, currently the only pod-based e-vapor product with market authorizations from the FDA, and NJOY DAILY, which also has a market authorization. In March 2020, NJOY submitted PMTAs to the FDA with respect to two NJOY ACE menthol products and two NJOY DAILY menthol products, all four of which remain pending. The FDA issued marketing denial orders (“MDOs”) for four NJOY ACE and four NJOY DAILY flavored products. NJOY filed for a supervisory review by the FDA of the marketing denial orders for the NJOY ACE and NJOY DAILY flavored products, all of which are pending.
Post-Market Surveillance: Manufacturers that receive product authorizations through the PMTA process must adhere to the FDA post-market record keeping and reporting requirements, as detailed in market orders and in the final PMTA rule. The requirements include prior notification of marketing activities. The FDA may amend requirements of a market order or withdraw the market order based on this information if, among other reasons, it determines that the continued marketing of the products is no longer appropriate for the protection of the public health.
Effect of Adverse FDA Determinations: FDA review time frames have varied. It is therefore difficult to predict the duration of FDA reviews of SE reports or PMTAs. An unfavorable determination on an application, the withdrawal by the FDA of a prior marketing order or other changes in FDA regulatory requirements could result in the removal of products from the market. A “not substantially equivalent” determination, a denial of a PMTA or a marketing order withdrawal by the FDA on one or more products (which would require the removal of the product or products from the market) could have a material adverse impact on our business, results of operations, cash flows or financial position. Also, adverse FDA determinations on innovative tobacco products could have a material adverse effect on our ability to achieve our Vision.
**▪**FDA Regulatory Actions
▪Graphic Warnings: In March 2020, the FDA issued a final rule requiring 11 textual warnings accompanied by color graphics depicting certain negative health consequences of smoking on cigarette packaging and advertising. PM USA and other cigarette manufacturers filed lawsuits challenging the final rule on substantive and procedural grounds. In December 2022, the U.S. District Court for the Eastern District of Texas found in favor of cigarette manufacturers in one such suit and blocked the rule, finding it unconstitutional on the basis that it compelled speech in violation of the First Amendment. The FDA appealed the decision, and, in March 2024, the U.S. Court of Appeals for the Fifth Circuit reversed the trial court and remanded the case for further proceedings.
▪Underage Access and Use of Certain Tobacco Products: The FDA announced regulatory actions in September 2018 to address underage access and use of e-vapor products. We have engaged with the FDA on this topic and have reaffirmed to the FDA our ongoing and long-standing commitment to preventing underage use. For example, we advocated raising the minimum legal age to purchase all tobacco products to 21 at the federal and state levels to further address underage use, which is now federal law. We continue to advocate in states that have not yet raised the minimum legal age to purchase all tobacco products to 21. See Federal, State and Local Legislation to Increase the Legal Age to Purchase Tobacco Products below for further discussion.
Additionally, the FDA issued final guidance in April 2020, stating that it intended to prioritize enforcement action against certain product categories, including pod-based, flavored e-vapor products and products targeted to minors. More recently, the FDA has taken limited enforcement action aimed at manufacturers and retailers of certain disposable flavored electronic nicotine delivery system products. However, despite some enforcement activity, insufficient actions against certain product categories that violate the law, including disposable and flavored e-vapor products and products targeted to minors, have allowed such products to proliferate on the market.
▪Electronic Nicotine Delivery System Products: As of April 22, 2024, many manufacturers of menthol and other flavored e-vapor products have received MDOs for failure to provide sufficiently strong product-specific scientific evidence to demonstrate that the benefit of their products to adult smokers overcomes the risk that their products pose to youth. The FDA has communicated in these MDOs that vapor products with non-tobacco flavors present unique questions relevant to the FDA’s “Appropriate for the Protection of Public Health” standard and that successful applications require strong, product-specific evidence. A number of these manufacturers are challenging the MDOs for their products. In January 2024, the U.S. Court of Appeals for the Fifth Circuit ruled that the FDA process and procedure for addressing an e-vapor PMTA violated federal law and that, among other things, the FDA failed to give the manufacturer plaintiff fair notice of, and repeatedly changed positions with respect to, the information required to obtain a PMTA. The court decided the case en banc, with all judges on the court hearing the case. Other U.S. Courts of Appeal have upheld adverse FDA determinations, and there are pending requests that the U.S. Supreme Court review these decisions.
**▪**Potential Product Standards
▪Nicotine in Cigarettes and Other Combustible Tobacco Products: In March 2018, the FDA issued an ANPRM seeking comments on the potential public health benefits and any possible adverse effects of lowering nicotine in combustible cigarettes to non-addictive or minimally addictive levels. Among other issues, the FDA sought comments on (i) whether smokers would compensate by smoking more cigarettes to obtain the same level of nicotine as with their current product and (ii) whether the proposed rule would create an illicit trade of cigarettes containing nicotine at levels higher than a non-addictive threshold that may be established by the FDA. The FDA also sought comments on whether a nicotine product standard should apply to other combustible tobacco products, including cigars. In December 2023, the Biden Administration published its Fall 2023 Unified Regulatory Agenda, which includes the FDA’s plans to propose, by April 2024, a product standard that would establish a maximum nicotine level in cigarettes and other combustible tobacco products. As of April 22, 2024, the FDA has not proposed this product standard. Any proposed product standard would proceed through the rulemaking process, which we believe will take multiple years to complete.
▪Flavors in Tobacco Products: In April 2022, the FDA issued two proposed product standards: (i) banning menthol in cigarettes and (ii) banning all characterizing flavors (including menthol) in cigars. The Biden Administration’s Fall 2023 Unified Regulatory Agenda includes the FDA’s plans to have completed rulemaking with respect to these proposed product standards by March 2024. As of April 22, 2024, the FDA has not completed rulemaking with respect to either proposed product standard, but in October 2023 submitted the two proposed product standards to the White House Office of Management and Budget for review. We submitted comments during the notice-and-comment period and plan to continue engaging with the FDA through the rulemaking process. The FDA could propose an additional product standard for flavors in innovative tobacco products, including e-vapor products and oral nicotine products.
▪N-nitrosonornicotine (“NNN”) in Smokeless Tobacco: In January 2017, the FDA proposed a product standard for NNN levels in finished smokeless tobacco products.
If any one or more of the foregoing potential product standards were to become final and was appealed and upheld in the courts, it could have a material adverse effect on our business, results of operations, cash flows or financial position, including a material adverse effect on the carrying value of certain of our assets such as our cigar trademarks.
**▪**Good Manufacturing Practices: In March 2023, the FDA, pursuant to the requirements of the FSPTCA, issued a proposed rule setting forth requirements for tobacco product manufacturers regarding the manufacture, design, packing and storage of their products. This proposed rule establishes a framework of good manufacturing practices, including by:
▪establishing tobacco product design and development controls;
▪ensuring that finished and bulk tobacco products are manufactured according to established specifications;
▪minimizing the manufacture and distribution of tobacco products that do not meet specifications;
▪requiring manufacturers to take appropriate measures to prevent contamination of tobacco products;
▪requiring investigation and identification of products that do not meet specifications and requiring manufacturers to institute appropriate corrective actions, such as a recall; and
▪establishing the ability to trace all components or parts, ingredients, additives and materials, as well as each batch of finished or bulk tobacco products, to aid in investigations of those that do not meet specifications.
We engaged with the FDA through the rulemaking process, including during the notice-and-comment period, which closed in October 2023. The Biden Administration’s Fall 2023 Unified Regulatory Agenda includes the FDA’s plans to have completed rulemaking with respect to this proposed rule by October 2024. If the proposed rule were to take effect, compliance with these requirements could result in increased costs.
**▪**Impact on Our Business; Compliance Costs and User Fees: Additional FDA regulatory actions under the FSPTCA could have a material adverse effect on our business, results of operations, cash flows or financial position in various ways. For example, actions by the FDA could:
▪impact the consumer acceptability of tobacco products;
▪discontinue, delay or prevent the sale or distribution of existing, new or modified tobacco products;
▪limit adult tobacco consumer choices;
▪impose restrictions on communications with adult tobacco consumers;
▪create a competitive advantage or disadvantage for certain tobacco companies;
▪impose additional manufacturing, labeling or packaging requirements;
▪impose additional restrictions at retail;
▪result in increased illicit trade in tobacco products; and
▪otherwise significantly increase the cost of doing business.
The FSPTCA imposes user fees on cigarette, cigarette tobacco, smokeless tobacco, cigar and pipe tobacco manufacturers and importers to pay for the cost of regulation and other matters. The FSPTCA does not impose user fees on e-vapor or oral nicotine pouch manufacturers. The cost of the FDA user fee is allocated first among tobacco product categories subject to FDA user fees and then among manufacturers and importers within each respective category based on their relative market shares, all as prescribed by the FSPTCA and FDA regulations. Payments for user fees are adjusted for several factors, including market share and industry volume. See Liquidity and Capital Resources - Payments Under State Settlement Agreements and FDA Regulation below for a discussion of our FDA user fee payments. In addition, compliance with the FSPTCA’s regulatory requirements has resulted, and will continue to result, in additional costs. The amount of additional compliance and related costs has not been material in any given quarter or year-to-date period but could become material, either individually or in the aggregate. The failure to comply with FDA regulatory requirements, even inadvertently, and FDA enforcement actions also could have a material adverse effect on our business, results of operations, cash flows or financial position.
**▪**Investigation and Enforcement: The FDA has a number of investigatory and enforcement tools available to it, including document requests and other required information submissions, facility inspections, facility closures, examinations and investigations, injunction proceedings, monetary penalties, product withdrawal and recall orders, and product seizures. Investigations or enforcement actions could result in significant costs or otherwise have a material adverse effect on our business, results of operations, cash flows or financial position.
Excise Taxes
Tobacco products are subject to substantial excise taxes in the United States. Significant increases in tobacco-related taxes or fees have been proposed or enacted (including with respect to e-vapor products) and are likely to continue to be proposed or enacted at the federal, state and local levels within the United States. The frequency and magnitude of excise tax increases can be influenced by various factors, including the composition of executive and legislative bodies.
Federal, state and local cigarette excise taxes have increased substantially over the past two decades, far outpacing the rate of inflation. Between the end of 1998 and April 22, 2024, the weighted-average state cigarette excise tax increased from $0.36 to $1.90 per pack. Only one state, New York, enacted new legislation increasing excise taxes in 2023. As of April 22, 2024, no states have enacted excise tax increases in 2024. However, various increases are under consideration or have been proposed.
A majority of states currently tax MST using an ad valorem method, which is calculated as a percentage of the price of the product, typically the wholesale price. This ad valorem method results in more tax being paid on premium products than is paid on lower-priced products of equal weight. We support legislation to convert ad valorem taxes on MST to a weight-based methodology because, unlike the ad valorem tax, a weight-based tax subjects cans of equal weight to the same tax. As of April 22, 2024, the federal government, 23 states, Puerto Rico, Philadelphia, Pennsylvania and Cook County, Illinois have adopted a weight-based tax methodology for MST. North Carolina has passed legislation that will cause the state to adopt a weight-based tax methodology for MST in July 2025.
An increasing number of states and localities also are imposing excise taxes on e-vapor products and oral nicotine pouches. As of April 22, 2024, 32 states, the District of Columbia, Puerto Rico and a number of cities and counties have enacted legislation to tax e-vapor products. These taxes are calculated in varying ways and may differ based on the e-vapor product form. Similarly, 12 states and the District of Columbia have enacted legislation to tax oral nicotine pouches.
Tax increases are expected to continue to have an adverse impact on sales of our operating companies’ products through lower consumption levels and the potential shift in adult tobacco consumer purchases from premium to non-premium or discount cigarettes, to lower taxed tobacco products or to counterfeit and contraband products. Lower sales volume and reported share performance of our operating companies’ products could have a material adverse effect on our business, results of operations, cash flows or financial position. In addition, substantial excise tax increases on e-vapor and oral nicotine products may negatively impact adult smokers’ transition to these products, which could materially adversely affect our ability to achieve our Vision.
International Treaty on Tobacco Control
The World Health Organization’s Framework Convention on Tobacco Control (the “FCTC”) entered into force in February 2005. As of April 22, 2024, 182 countries, as well as the European Union, have become parties to the FCTC. While the United States is a signatory of the FCTC, it is not currently a party to the agreement, as the agreement has not been submitted to, or ratified by, the U.S. Senate. The FCTC is the first international public health treaty and its objective is to establish a global agenda for tobacco regulation with the purpose of reducing initiation of tobacco use and encouraging cessation. The treaty recommends (and in certain instances, requires) signatory nations to enact legislation that would address various tobacco-related issues.
There are a number of proposals currently under consideration by the governing body of the FCTC, some of which call for substantial restrictions on the manufacture, marketing, distribution and sale of tobacco products. It is not possible to predict the outcome of these proposals or the impact of any FCTC actions on legislation or regulation in the United States, either indirectly or as a result of the United States becoming a party to the FCTC, or whether or how these actions might indirectly influence FDA regulation and enforcement.
State Settlement Agreements
As discussed in Note 13, during 1997 and 1998, PM USA and other major domestic cigarette manufacturers entered into the State Settlement Agreements. These settlements require participating manufacturers to make substantial annual payments, which are adjusted for several factors, including inflation, operating income, market share and industry volume. Increases in inflation can increase our financial liability under the State Settlement Agreements. The State Settlement Agreements’ inflation calculations require us to apply the higher of 3% or the U.S. Bureau of Labor Statistics’ Consumer Price Index for All Urban Consumers (“CPI-U”) percentage rate as published in January of each year. As of December 2023, the inflation calculation was approximately 3.4% based on the latest CPI-U data; however, the increase in the annual payments did not have a material impact on our financial position. We believe that inflation will continue at increased levels in 2024, but do not expect the corresponding increase in annual payments to result in a material financial impact. However, we will continue to monitor the impact of increased inflation on the macroeconomic environment and our businesses.
For a discussion of the impact of the State Settlement Agreements on us, see Liquidity and Capital Resources - Payments Under State Settlement Agreements and FDA Regulation below and Note 13. The State Settlement Agreements also place numerous requirements and restrictions on participating manufacturers’ business operations, including prohibitions and
restrictions on the advertising and marketing of cigarettes and smokeless tobacco products. Among these are prohibitions of outdoor and transit brand advertising, payments for product placement and free sampling (except in adult-only facilities). The State Settlement Agreements also place restrictions on the use of brand name sponsorships and brand name non-tobacco products and prohibitions on targeting youth and the use of cartoon characters. In addition, the State Settlement Agreements require companies to affirm corporate principles directed at reducing underage use of cigarettes; impose requirements regarding lobbying activities; limit the industry’s ability to challenge certain tobacco control and underage use laws; and provide for the dissolution of certain tobacco-related organizations and place restrictions on the establishment of any replacement organizations.
In November 1998, USSTC entered into the Smokeless Tobacco Master Settlement Agreement (the “STMSA”) with the attorneys general of various states and United States territories to resolve the remaining health care cost reimbursement cases initiated against USSTC. The STMSA required USSTC to adopt various marketing and advertising restrictions. USSTC is the only smokeless tobacco manufacturer to sign the STMSA.
Other International, Federal, State and Local Regulation and Governmental and Private Activity
**▪**International, Federal, State and Local Regulation: Various states and localities have enacted or proposed legislation that imposes restrictions on tobacco products (including cigarettes, smokeless tobacco, cigars, e-vapor products and oral nicotine pouches), such as legislation that (i) prohibits the sale of all tobacco products or certain tobacco categories, such as e-vapor, (ii) prohibits the sale of tobacco products with characterizing flavors, such as menthol cigarettes and flavored e-vapor products, (iii) requires the disclosure of health information separate from or in addition to federally mandated health warnings, (iv) restricts commercial speech or imposes additional restrictions on the marketing or sale of tobacco products and (v) requires manufacturers of e-vapor products to certify that they are in compliance with FDA requirements to be allowed to sell in the state. The legislation varies in terms of the type of tobacco products, the conditions under which such products are or would be restricted or prohibited, and exceptions to the restrictions or prohibitions. For example, a number of proposals involving characterizing flavors would prohibit smokeless tobacco products with characterizing flavors without providing an exception for mint- or wintergreen-flavored products. As of April 22, 2024, multiple states and localities are considering legislation to ban flavors in one or more tobacco products, and six states (California, Massachusetts, New Jersey, New York, Rhode Island and Utah) and the District of Columbia have passed such legislation. Some of these states, such as New York, Utah and Illinois, exempt certain products that have received FDA market authorization through the PMTA pathway. The legislation in California, which became effective in December 2022, bans the sale of most tobacco products with characterizing flavors, including menthol, mint and wintergreen.
Massachusetts and Utah passed legislation capping the amount of nicotine in e-vapor products. Legislation relating to this issue is pending in two other states.
Similar restrictions to those enacted or proposed in various U.S. states and localities on e-vapor and oral nicotine pouch products have been enacted or proposed internationally.
We have challenged and will continue to challenge certain federal, state and local legislation and other governmental action, including through litigation. Certain legislation imposing restrictions on tobacco products, such as state laws requiring manufacturers of e-vapor products to certify that they are in compliance with federal law in order to sell products in the state, aligns with our Vision, and we actively engage with lawmakers in support of such legislation. It is possible, however, that legislation, regulation or other governmental action could be enacted or implemented that could have a material adverse impact on our business, results of operations, cash flows or financial position. Such action also could negatively impact adult smokers’ transition to smoke-free products, which could materially adversely affect our ability to achieve our Vision.
**▪**Federal, State and Local Legislation to Increase the Legal Age to Purchase Tobacco Products: After a number of states and localities proposed and enacted legislation to increase the minimum age to purchase all tobacco products, including e-vapor products, in December 2019, the federal government passed legislation increasing the minimum age to purchase all tobacco products, including e-vapor products, to 21 nationwide. As of April 22, 2024, 43 states, the District of Columbia and Puerto Rico have enacted laws increasing the legal age to purchase tobacco products to 21. Although an increase in the minimum age to purchase tobacco products may have a negative impact on our operating companies’ sales volumes, we support raising the minimum legal age to purchase all tobacco products to 21 at the federal and state levels, as discussed above under Underage Access and Use of Certain Tobacco Products, reflecting our longstanding commitment to combat underage tobacco use.
**▪**Health Effects of Tobacco Products, Including E-vapor Products: Reports with respect to the health effects of smoking have been publicized for many years, including various reports by the U.S. Surgeon General. We believe that the public should be guided by the messages of the U.S. Surgeon General and public health authorities worldwide in making decisions concerning the use of tobacco products, including e-vapor products. It is not possible to predict the results of ongoing scientific research or the types of future scientific research into the health risks of tobacco exposure and the impact of such research on legislation and regulation.
Most jurisdictions within the United States have restricted smoking in public places and some have restricted vaping in public places. Some public health groups have called for, and various jurisdictions have adopted or proposed, bans on smoking and vaping in outdoor places, in private apartments and in cars transporting children.
**▪**Other Legislation or Governmental Initiatives: In addition to the actions discussed above, other regulatory initiatives affecting the tobacco industry have been adopted or are being considered at the federal level and in a number of state and local jurisdictions. For example, in recent years, legislation has been introduced or enacted at the state or local level to subject tobacco products to various reporting requirements and performance standards; establish educational campaigns relating to tobacco consumption or tobacco control programs or provide additional funding for governmental tobacco control activities; restrict the sale of tobacco products in certain retail establishments and the sale of tobacco products in certain package sizes; prohibit the sale of tobacco products based on environmental concerns; impose responsibility on manufacturers for the disposal, recycling or other treatment of post-consumer goods such as plastic packaging; require tax stamping of smokeless tobacco products; require the use of state tax stamps using data encryption technology; and further restrict the sale, marketing and advertising of cigarettes and other tobacco products. Such legislation may be subject to constitutional or other challenges on various grounds, which may or may not be successful. In addition, if a pandemic or similar health emergency occurs, state and local governments may reimpose additional health and safety requirements for all businesses, which could result in the potential temporary closure of certain businesses and facilities. It is possible that tobacco manufacturing and other facilities and the facilities of our suppliers, our suppliers’ suppliers and our trade partners could be subject to additional government-mandated temporary closures and restrictions.
It is not possible to predict what, if any, additional legislation, regulation or other governmental action will be enacted or implemented (and, if challenged, upheld) relating to the manufacturing, design, packaging, marketing, advertising, sale or use of tobacco products, or the tobacco industry generally. Any such legislation, regulation or other governmental action could have a material adverse impact on our business, results of operations, cash flows or financial position.
**▪**Governmental Investigations: From time to time, we are subject to governmental investigations on a range of matters. For example, we currently are, or recently have been, subject to a number of governmental investigations with respect to our former investment in JUUL, which we divested in March 2023, including the following: (i) the FTC issued a Civil Investigative Demand to us while conducting its antitrust review of our former investment in JUUL seeking information regarding, among other things, our role in the resignation of JUUL’s former chief executive officer and the hiring by JUUL of any current or former Altria director, executive or employee (see Note 13 for a description of the FTC’s administrative complaint against us and JUUL); (ii) the SEC commenced an investigation relating to our acquisition, disclosures and accounting controls in connection with the JUUL investment; and (iii) the New York State Office of the Attorney General and the Commonwealth of Massachusetts Office of the Attorney General, separately, issued independent subpoenas to us seeking documents relating to our former investment in and provision of services to JUUL. For a discussion of our disposition of our former interest in JUUL, see Note 5.
In April 2023, January 2024, February 2024 and April 2024, we agreed to settle the lawsuits relating to our former investment in JUUL initiated by the attorneys general of Minnesota, Alaska, Hawaii and New Mexico, respectively.
Private Sector Activity on Tobacco Products
A number of retailers, including national chains, have discontinued the sale of all tobacco products, and others have discontinued the sale of e-vapor products. Reasons for the discontinuation include change in corporate policy and, with respect to e-vapor products, reported illnesses and the uncertain regulatory environment. Furthermore, third-party digital platforms, such as app stores, have restricted, and in some cases prohibited, communications with adult tobacco consumers concerning tobacco products. It is possible that if this private sector activity becomes more widespread it could have an adverse effect on our business, results of operations, cash flows or financial position.
Illicit Trade in Tobacco Products
Illicit trade in tobacco products can have an adverse impact on our businesses, including the sales volumes and market shares of our companies’ innovative and smoke-free products and traditional tobacco products. Illicit trade can take many forms, including the sale of counterfeit tobacco products; the sale of tobacco products in the United States that are intended for sale outside the country; the sale of untaxed tobacco products over the Internet and by other means designed to avoid the collection of applicable taxes; the sale of unregulated products; and diversion into one taxing jurisdiction of tobacco products intended for sale in another. Counterfeit tobacco products, for example, are manufactured by unknown third parties in unregulated environments. Counterfeit versions of our products can negatively affect adult tobacco consumer experiences with and opinions of those brands. Illegal disposable e-vapor products may be designed to appeal to youth and are manufactured without scientific standards, exposing consumers to undocumented risks. Illicit trade in tobacco products also harms law-abiding wholesalers and retailers by depriving them of lawful sales and undermines the significant investment we have made in legitimate distribution channels. Moreover, illicit trade in tobacco products results in federal, state and local governments losing tax revenues. Losses in tax revenues can cause such governments to take various actions, including increasing excise
taxes, imposing legislative or regulatory requirements, or asserting claims against manufacturers of tobacco products or members of the trade channels through which such tobacco products are distributed and sold, each of which may have an adverse effect on our business, results of operations, cash flows or financial position.
We communicate with wholesale and retail trade members regarding illicit trade in tobacco products and how we can help prevent such activities, enforce wholesale and retail trade programs and policies that address illicit trade in tobacco products and, when necessary, litigate to protect our trademarks. We also engage with the FDA and other government agencies to advocate for a well-regulated U.S. tobacco industry that embraces harm reduction and the enforcement of existing regulatory frameworks.
Prohibitory policies, such as California’s ban on the sale of flavored tobacco products, which went into effect in 2022, can have unintended negative consequences, including the proliferation of counterfeit and unregulated products. We actively engage with regulators, state and federal lawmakers, our trade partners and other stakeholders to bring awareness to these issues. When appropriate, we also take legal action to protect our lawful e-vapor product business, such as the lawsuit we filed in federal court in California against manufacturers of illegal e-vapor products in October 2023. All but one defendant was dismissed from this suit without prejudice on procedural grounds in January 2024, and we voluntarily dismissed the remaining defendant in February 2024. We filed a new lawsuit against five manufacturers, four brick-and-mortar retailers and three online retailers of illicit “Elf Bar” e-vapor products in February 2024 in federal court in California.
Price, Availability and Quality of Tobacco, Other Raw Materials, Ingredients and Component Parts
Shifts in crops (such as those driven by economic conditions and adverse weather patterns), government restrictions and mandated prices, production control programs, economic trade sanctions, import duties and tariffs, international trade disruptions, inflation, geopolitical instability, climate and environmental changes and disruptions due to man-made or natural disasters may increase the cost or reduce the supply or quality of tobacco, other raw materials, ingredients or component parts used to manufacture our operating companies’ products. Any significant change in such factors could negatively impact our ability to continue manufacturing and marketing existing products, increase our costs or negatively impact adult tobacco consumer product acceptability and have a material adverse effect on our business and profitability.
As with other agricultural commodities, tobacco price, quality and availability can be influenced by variations in weather patterns, including those caused by climate change, and macroeconomic conditions and imbalances in supply and demand, among other factors. For varieties of tobacco only available in limited geographies, government-mandated prices and production control programs, political instability or government prohibitions on the import or export of tobacco in certain countries pose additional risks to price, availability and quality. In addition, as consumer demand increases for innovative smoke-free products and decreases for combustible and MST products, the volume of tobacco leaf required for production of these products has decreased, resulting in reduced tobacco leaf demand. Reduced demand for tobacco leaf may result in the reduced supply and availability of domestic tobacco, as growers divert resources to other crops or cease farming, and increased costs. The unavailability or unacceptability of any one or more particular varieties of tobacco leaf or the unavailability of nicotine extract necessary to manufacture our operating companies’ products could negatively impact our ability to continue marketing existing products or impact adult tobacco consumer product acceptability, which could have a material adverse effect on our business and profitability. In addition, the nicotine used in our operating companies’ innovative smoke-free products is extracted from tobacco produced in one country. If we are unable to identify alternate sources of nicotine for our companies’ innovative products, we could be exposed to supply risk.
Current macroeconomic conditions and geopolitical instability (including inflation, high interest rates, labor shortages, supply and demand imbalances and geopolitical instability and international armed conflict) have caused and continue to cause worldwide disruptions and delays to supply chains and commercial markets, which limit access to, and increase the cost of, raw materials, ingredients and component parts (for example, tobacco leaf and resins and aluminum used in our packaging). We have implemented and continue to implement various strategies to help secure sufficient supplies of raw materials, ingredients and component parts for production.
In addition, government taxes, restrictions and prohibitions on the sale and use of certain products may limit access to, and increase the costs of, raw materials and component parts and, potentially, impede our ability to sell certain of our products. For example, certain states have passed extended producer responsibility legislation concerning packaging. Because certain of our products’ packaging consists of single-use plastics, single-use plastic bans and extended producer responsibility mandates could result in bans on some of our product packaging or our products and adversely impact our costs and revenues. Additional taxes and limitations on the use of certain single-use plastics have been proposed by the U.S. Congress and various state and local governments. These existing and potential future laws and regulations could increase the costs of, and impair our ability to, source certain materials used in the packaging for our products.
We work to mitigate these risks by maintaining inventory levels of certain tobacco varieties that cover several years, purchasing raw materials, ingredients and component parts from disperse geographic regions throughout the world and entering into long-term contracts with some of our tobacco growers and direct material suppliers. To date, the impact on us of changes in the
price, availability and quality of tobacco, other raw materials, ingredients and component parts has not been material. However, the effects of the current macroeconomic and geopolitical conditions on prices, availability and quality of such items may continue, which could have a material adverse effect on our business, results of operations, cash flows or financial position.
Timing of Sales
In the ordinary course of business, we are subject to many influences that can impact the timing of sales to customers, including the timing of holidays and other annual or special events, the timing of promotions, customer incentive programs and customer inventory programs, as well as the actual or speculated timing of pricing actions and tax-driven price increases.
Operating Results
The following table provides reconciliations of reported OCI to adjusted OCI for our reportable segments, all other category and total OCI and provides the related OCI margins:
| For the Three Months Ended March 31, 2024 | ||||||||||||||||||||||||||||||||
| (in millions) | Smokeable Products | Oral Tobacco Products | All Other | Total | ||||||||||||||||||||||||||||
| Net revenues | $ | 4,906 | $ | 651 | $ | 19 | $ | 5,576 | ||||||||||||||||||||||||
| Excise taxes | (834) | (25) | — | (859) | ||||||||||||||||||||||||||||
| Revenues net of excise taxes | $ | 4,072 | $ | 626 | $ | 19 | $ | 4,717 | ||||||||||||||||||||||||
| Reported OCI | $ | 2,439 | $ | 435 | $ | (61) | $ | 2,813 | ||||||||||||||||||||||||
| NPM Adjustment Items | (6) | — | — | (6) | ||||||||||||||||||||||||||||
| Tobacco and health and certain other litigation items | 18 | — | — | 18 | ||||||||||||||||||||||||||||
| Adjusted OCI | $ | 2,451 | $ | 435 | $ | (61) | $ | 2,825 | ||||||||||||||||||||||||
| Reported OCI margin (1) | 59.9 | % | 69.5 | % | (100.0+)% | 59.6 | % | |||||||||||||||||||||||||
| Adjusted OCI margin (1) | 60.2 | % | 69.5 | % | (100.0+)% | 59.9 | % |
(1) Reported and adjusted OCI margins are calculated as reported and adjusted OCI, respectively, divided by revenues net of excise taxes.
For further information on our reportable segments, see Note 10.
Smokeable Products Segment
Financial Results
The following table summarizes operating results, includes reported and adjusted OCI margins and provides a reconciliation of reported OCI to adjusted OCI for our smokeable products segment:
| Operating Results | |||||||||||||||||||||||||||||||||||
| For the Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||
| (in millions) | 2024 | 2023 | Change | ||||||||||||||||||||||||||||||||
| Net revenues | $ | 4,906 | $ | 5,090 | (3.6) | % | |||||||||||||||||||||||||||||
| Excise taxes | (834) | (928) | |||||||||||||||||||||||||||||||||
| Revenues net of excise taxes | $ | 4,072 | $ | 4,162 | |||||||||||||||||||||||||||||||
| Reported OCI | $ | 2,439 | $ | 2,503 | (2.6) | % | |||||||||||||||||||||||||||||
| NPM Adjustment Items | (6) | — | |||||||||||||||||||||||||||||||||
| Tobacco and health and certain other litigation items | 18 | 12 | |||||||||||||||||||||||||||||||||
| Adjusted OCI | $ | 2,451 | $ | 2,515 | (2.5) | % | |||||||||||||||||||||||||||||
| Reported OCI margins (1) | 59.9 | % | 60.1 | % | (0.2) pp | ||||||||||||||||||||||||||||||
| Adjusted OCI margins (1) | 60.2 | % | 60.4 | % | (0.2) pp |
(1) Reported and adjusted OCI margins are calculated as reported and adjusted OCI, respectively, divided by revenues net of excise taxes.
Three Months Ended March 31, 2024 Compared with Three Months Ended March 31, 2023
Net revenues, which include excise taxes billed to customers, decreased $184 million (3.6%), due primarily to lower shipment volume ($589 million), partially offset by higher pricing ($403 million), which includes higher promotional investments.
Reported and adjusted OCI decreased $64 million (2.6%) and (2.5%), respectively, due primarily to lower shipment volume ($380 million) and higher per unit settlement charges and manufacturing costs ($105 million), partially offset by higher pricing, which includes higher promotional investments, and lower marketing, administration and research costs ($15 million).
Shipment Volume and Retail Share Results
The following table summarizes our smokeable products segment’s shipment volume performance:
| Shipment Volume | |||||||||||||||||||||||||||||||||||
| For the Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||
| (sticks in millions) | 2024 | 2023 | Change | ||||||||||||||||||||||||||||||||
| Cigarettes: | |||||||||||||||||||||||||||||||||||
| Marlboro | 14,973 | 16,396 | (8.7) | % | |||||||||||||||||||||||||||||||
| Other premium | 747 | 825 | (9.5) | % | |||||||||||||||||||||||||||||||
| Discount | 730 | 1,048 | (30.3) | % | |||||||||||||||||||||||||||||||
| Total cigarettes | 16,450 | 18,269 | (10.0) | % | |||||||||||||||||||||||||||||||
| Cigars: | |||||||||||||||||||||||||||||||||||
| Black & Mild | 417 | 443 | (5.9) | % | |||||||||||||||||||||||||||||||
| Other | — | 1 | (100.0) | % | |||||||||||||||||||||||||||||||
| Total cigars | 417 | 444 | (6.1) | % | |||||||||||||||||||||||||||||||
| Total smokeable products | 16,867 | 18,713 | (9.9) | % |
Note: Cigarettes shipment volume includes Marlboro; Other premium brands, such as Virginia Slims, Parliament and Benson & Hedges; and Discount brands, which include L&M and Basic. Cigarettes volume includes units sold as well as promotional units but excludes units sold for distribution to Puerto Rico, U.S. Territories to overseas military and by Philip Morris Duty Free Inc., none of which, individually or in the aggregate, is material to our smokeable products segment.
The following table summarizes our cigarettes retail share performance:
| Retail Share | |||||||||||||||||||||||||||||||||||
| For the Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Percentage Point Change | |||||||||||||||||||||||||||||||||
| Cigarettes: | |||||||||||||||||||||||||||||||||||
| Marlboro | 42.0 | % | 42.0 | % | — | ||||||||||||||||||||||||||||||
| Other premium | 2.3 | 2.3 | — | ||||||||||||||||||||||||||||||||
| Discount | 2.1 | 2.7 | (0.6) | ||||||||||||||||||||||||||||||||
| Total cigarettes | 46.4 | % | 47.0 | % | (0.6) | ||||||||||||||||||||||||||||||
Note: Retail share results for cigarettes are based on data from Circana, LLC (“Circana”), as well as, Management Science Associates, Inc. Circana maintains a blended retail service that uses a sample of stores and certain wholesale shipments to project market share and depict share trends. Similar to prior reporting, this service tracks sales in the food, drug, mass merchandisers, convenience, military, dollar store and club trade classes. For other trade classes selling cigarettes, retail share is based on shipments from wholesalers to retailers through the Store Tracking Analytical Reporting System (“STARS”), as provided by Management Science Associates, Inc. This service is not designed to capture sales through other channels, including the internet, direct mail and some illicitly tax-advantaged outlets. It is the standard practice of retail services to periodically refresh their retail scan services, which could restate retail share results that were previously released in these services.
For a discussion of volume trends and factors that impact volume and retail share performance, see Operating Results by Business Segment - Business Environment - Summary above.
Three Months Ended March 31, 2024 Compared with the Three Months Ended March 31, 2023
Our smokeable products segment’s reported and estimated adjusted domestic cigarettes shipment volume decreased 10%, driven primarily by the industry’s decline rate (impacted by macroeconomic pressures on adult tobacco consumers’ discretionary income and the growth of illicit e-vapor products) and retail share losses. When adjusted for trade inventory movements and other factors, total estimated domestic cigarette industry volume decreased by an estimated 9%.
Shipments of premium cigarettes accounted for 95.6% and 94.3% of our smokeable products segment’s reported domestic cigarettes shipment volume for the three months ended March 31, 2024 and 2023, respectively.
Marlboro retail share decreased 0.3 share points sequentially. Additionally, Marlboro share of the premium segment was 59.3%, an increase of 0.7 share points versus the prior year and unchanged sequentially.
Total cigarettes industry discount category retail share was 29.1%, an increase of 0.8 share points versus the prior year and 0.4 share points sequentially, primarily due to increased macroeconomic pressures on adult tobacco consumers’ discretionary income.
For a discussion regarding discount category dynamics in 2024 and the economic conditions, including a high inflationary environment, that impact adult tobacco consumer purchasing behavior, see Operating Results by Business Segment - Business Environment - Summary above.
Pricing Actions
PM USA and Middleton executed the following pricing actions during 2024 and 2023:
▪Effective January 14, 2024, PM USA increased the list price of Marlboro (excluding Mainline Menthol and 72s Menthol), L&M and Basic by $0.15 per pack. PM USA also increased the list price of all its other cigarette brands by $0.20 per pack.
▪Effective October 15, 2023, PM USA increased the list price of Marlboro, L&M and Basic by $0.17 per pack. PM USA also increased the list price of all its other cigarette brands by $0.22 per pack.
▪Effective July 23, 2023, PM USA increased the list price of Marlboro, L&M and Basic by $0.16 per pack. PM USA also increased the list price of all its other cigarette brands by $0.21 per pack.
▪Effective June 11, 2023, Middleton increased various list prices across substantially all of its cigar brands resulting in a weighted-average increase of approximately $0.15 per five-pack.
▪Effective April 23, 2023, PM USA increased the list price of Marlboro, L&M and Basic by $0.15 per pack. PM USA also increased the list price of all its other cigarette brands by $0.20 per pack.
▪Effective January 22, 2023, PM USA increased the list price of Marlboro, L&M, Basic and Chesterfield by $0.15 per pack. PM USA also increased the list price of all its other cigarette brands by $0.20 per pack.
In addition:
▪Effective April 14, 2024, PM USA increased the list price of Marlboro (excluding Mainline Menthol and 72s Menthol), L&M and Basic by $0.20 per pack. PM USA also increased the list price of all its other cigarette brands by $0.25 per pack.
▪Effective April 21, 2024, Middleton increased various list prices across substantially all of its cigar brands resulting in a weighted-average increase of approximately $0.16 per five-pack.
Oral Tobacco Products Segment
Financial Results
The following table summarizes operating results, includes reported and adjusted OCI margins, and provides a reconciliation of reported OCI to adjusted OCI for our oral tobacco products segment:
| Operating Results | |||||||||||||||||||||||||||||||||||
| For the Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||
| (in millions) | 2024 | 2023 | Change | ||||||||||||||||||||||||||||||||
| Net revenues | $ | 651 | $ | 628 | 3.7 | % | |||||||||||||||||||||||||||||
| Excise taxes | (25) | (28) | |||||||||||||||||||||||||||||||||
| Revenues net of excise taxes | $ | 626 | $ | 600 | |||||||||||||||||||||||||||||||
| Reported and Adjusted OCI | $ | 435 | $ | 416 | 4.6 | % | |||||||||||||||||||||||||||||
| Reported and Adjusted OCI margins (1) | 69.5 | % | 69.3 | % | 0.2 pp | ||||||||||||||||||||||||||||||
(1) Reported and adjusted OCI margins are calculated as reported and adjusted OCI, respectively, divided by revenues net of excise taxes.
Three Months Ended March 31, 2024 Compared with Three Months Ended March 31, 2023
Net revenues, which include excise taxes billed to customers, increased $23 million (3.7%), due primarily to higher pricing ($60 million), which includes lower promotional investments, partially offset by lower shipment volume and a higher percentage of on! shipment volume relative to MST (“volume/mix”) ($35 million).
Reported and adjusted OCI increased $19 million (4.6%), due primarily to higher pricing, which includes lower promotional investments, partially offset by lower volume/mix ($39 million).
Shipment Volume and Retail Share Results
The following table summarizes our oral tobacco products segment’s shipment volume performance:
| Shipment Volume | |||||||||||||||||||||||||||||||||||
| For the Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||
| (cans and packs in millions) | 2024 | 2023 | Change | ||||||||||||||||||||||||||||||||
| Copenhagen | 99.1 | 109.0 | (9.1) | % | |||||||||||||||||||||||||||||||
| Skoal | 36.7 | 40.3 | (8.9) | % | |||||||||||||||||||||||||||||||
| on! | 33.3 | 25.2 | 32.1 | % | |||||||||||||||||||||||||||||||
| Other | 15.5 | 16.1 | (3.7) | % | |||||||||||||||||||||||||||||||
| Total oral tobacco products | 184.6 | 190.6 | (3.1) | % |
Note: Other primarily includes Red Seal and Husky. Oral tobacco products shipment volume includes cans and packs sold, as well as promotional units, but excludes international volume, which is currently not material to our oral tobacco products segment. New types of oral tobacco products, as well as new packaging configurations of existing oral tobacco products, may or may not be equivalent to existing MST products on a can-for-can basis. To calculate volumes of cans and packs shipped, one pack of snus or one can of oral nicotine pouches, irrespective of the number of pouches in the pack or can, is assumed to be equivalent to one can of MST.
The following table summarizes our oral tobacco products segment’s retail share performance (excluding international volume):
| Retail Share | |||||||||||||||||||||||||||||||||||
| For the Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Percentage Point Change | |||||||||||||||||||||||||||||||||
| Copenhagen | 20.1 | % | 25.3 | % | (5.2) | ||||||||||||||||||||||||||||||
| Skoal | 8.0 | 10.1 | (2.1) | ||||||||||||||||||||||||||||||||
| on! | 7.1 | 6.4 | 0.7 | ||||||||||||||||||||||||||||||||
| Other | 2.6 | 3.1 | (0.5) | ||||||||||||||||||||||||||||||||
| Total oral tobacco products | 37.8 | % | 44.9 | % | (7.1) |
Note: Our oral tobacco products segment’s retail share results exclude international volume, which is currently not material to our oral tobacco products segment. Retail share results for oral tobacco products are based on data from Circana, a tracking service that uses a sample of stores to project market share and depict share trends. This service tracks sales in the food, drug, mass merchandisers, convenience, military, dollar store and club trade classes on the number of cans and packs sold. Oral tobacco products are defined by Circana as MST, snus and oral nicotine pouches. New types of oral tobacco products, as well as new packaging configurations of existing oral tobacco products, may or may not be equivalent to existing MST products on a can-for-can basis. For example, one pack of snus or one can of oral nicotine pouches, irrespective of the number of pouches in the pack or can, is assumed to be equivalent to one can of MST. Because this service represents retail share performance only in key trade channels, it should not be considered a precise measurement of actual retail share. It is the standard practice of retail services to periodically refresh their retail scan services, which could restate retail share results that were previously released in these services.
For a discussion of volume trends and factors that impact volume and retail share performance, see Operating Results by Business Segment - Business Environment - Summary above.
Three Months Ended March 31, 2024 Compared with Three Months Ended March 31, 2023
Our oral tobacco products segment’s reported domestic shipment volume decreased 3.1%, driven primarily by retail share losses and trade inventory movements, partially offset by the industry’s growth rate, calendar differences and other factors. When adjusted for calendar differences and trade inventory movements, our oral tobacco products segment’s reported domestic shipment volume decreased by an estimated 4%.
Total oral tobacco products category industry volume increased by an estimated 9.5% for the six months ended March 31, 2024, primarily driven by growth in oral nicotine pouches, partially offset by declines in MST volumes.
Our oral tobacco products segment’s retail share was 37.8%, as share declines for MST products were primarily driven by oral nicotine pouch segment share growth.
Total U.S. oral tobacco category share for on! nicotine pouches was 7.1%, an increase of 0.7 share points versus the prior year and 0.2 share points sequentially,
The U.S. nicotine pouch category grew to 40.1% of the U.S. oral tobacco category, an increase of 13.8 share points versus the prior year. In addition, on!’s share of the nicotine pouch category was 17.6%, a decrease of 6.8 share points versus the prior year.
Pricing Actions
USSTC executed the following pricing actions during 2024 and 2023:
▪Effective January 23, 2024, USSTC increased the list price on its Copenhagen, Skoal and Red Seal brands by $0.11 per can.
▪Effective August 22, 2023, USSTC increased the list price on its Copenhagen, Red Seal and Skoal brands by $0.09 per can. In addition, USSTC decreased the list price on select Husky brands by $0.18 per can.
▪Effective July 23, 2023, Helix increased the list price on its on! brand by $0.09 per can.
▪Effective April 25, 2023, USSTC increased the list price on its Copenhagen popular price products*, Red Seal* and Husky brands by $0.09 per can. In addition, USSTC increased the list price on its Skoal brands and on the balance of its Copenhagen brands by $0.10 per can.
▪Effective January 24, 2023, USSTC increased the list price on its Copenhagen, Skoal, Red Seal and Husky brands by $0.09 per can.
In addition:
▪Effective April 23, 2024, USSTC increased the list price on its Copenhagen, Skoal and Red Seal brands by $0.10 per can.
E-Vapor
Our NJOY e-vapor business is reported in our all other category. Reported domestic shipment volumes for the three months ended March 31, 2024 for NJOY consumables(1) and devices were approximately 10.9 million units and 1.0 million units, respectively.
In the first quarter of 2024, retail share of NJOY in the U.S. multi-outlet and convenience channel was 4.3%, an increase of 0.6 share points sequentially.
(1) E-vapor shipment volume includes NJOY ACE pods and DAILY disposables.
Liquidity and Capital Resources
We are a holding company that is primarily dependent on the capital resources of our subsidiaries to satisfy our liquidity requirements. Our access to the operating cash flows of our subsidiaries consists of cash received from the payment of dividends and distributions and the payment of interest on intercompany loans. At March 31, 2024, our significant subsidiaries were not limited by contractual obligations in their ability to pay cash dividends or make other distributions with respect to their equity interests. In addition, we receive cash dividends on our interest in ABI and will continue to do so as long as we hold shares in ABI and ABI pays dividends.
At March 31, 2024, we had $3.6 billion of cash and cash equivalents. In addition to having access to the operating cash flows of our subsidiaries, our capital resources include access to credit markets in the form of commercial paper, availability under our $3.0 billion senior unsecured 5-year revolving credit agreement (“Credit Agreement”), which we use for general corporate purposes, and access to credit markets through the issuance of long-term senior unsecured notes. For additional information, see Capital Markets and Other Matters below.
In addition to funding current operations, we primarily use our net cash from operating activities for payment of dividends, share repurchases under our share repurchase programs, repayment of debt, acquisitions of or investments in businesses and assets and capital expenditures.
We believe our cash and cash equivalents balance, along with our future cash flows from operations, capacity for borrowings under our Credit Agreement and access to credit and capital markets, provide sufficient liquidity to meet the needs of our business operations and to satisfy our projected cash requirements for the next 12 months and the foreseeable future.
Capital Markets and Other Matters
Credit Ratings - Our cost and terms of financing and our access to commercial paper markets may be impacted by applicable credit ratings. The impact of credit ratings on the cost of borrowings under our Credit Agreement is discussed in Note 11. Debt to our condensed consolidated financial statements in Item 1 (“Note 11”).
At March 31, 2024, the credit ratings and outlook for our indebtedness by major credit rating agencies were:
| Short-term Debt | Long-term Debt | Outlook | |||||||||||||||
| Moody’s Investors Service, Inc. (“Moody’s”) | P-2 | A3 | Stable | ||||||||||||||
| Standard & Poor’s Financial Services LLC (“S&P”) | A-2 | BBB | Positive | ||||||||||||||
| Fitch Ratings Inc. | F2 | BBB | Stable |
Credit Lines - From time to time, we have short-term borrowing needs to meet our working capital requirements arising from the timing of annual MSA payments, quarterly income tax payments and quarterly dividend payments, and generally use our commercial paper program to meet those needs.
At March 31, 2024, we had availability under our Credit Agreement for borrowings of up to an aggregate principal amount of $3.0 billion, and we were in compliance with the covenants in our Credit Agreement. We expect to continue to meet the covenants in our Credit Agreement. We monitor the credit quality of our bank group and do not know of any potential non-performing credit provider in that group. For further discussion on short-term borrowings, see Note 11.
Long-Term Debt - At March 31, 2024 and December 31, 2023, our total long-term debt was $25.0 billion and $26.2 billion, respectively. In January and February 2024, we repaid in full at maturity our 4.000% and 3.800% senior unsecured notes, respectively, in the aggregate principal amounts of $776 million and $345 million, respectively. For further details on long-term debt, see Note 11.
At March 31, 2024, our debt-to-Consolidated net earnings and debt-to-Consolidated EBITDA ratios were calculated as follows:
| For the Twelve Months Ended March 31, 2024 (1) | |||||||||||
| (in millions) | |||||||||||
| Consolidated net earnings | $ | 8,472 | |||||||||
| Interest and other debt expense, net | 1,014 | ||||||||||
| Provision for income taxes | 2,716 | ||||||||||
| Depreciation and amortization | 285 | ||||||||||
| EBITDA | 12,487 | ||||||||||
| (Income) loss from investments in equity securities and noncontrolling interests, net | (618) | ||||||||||
| Dividends from less than 50% owned affiliates | 163 | ||||||||||
| Consolidated EBITDA | $ | 12,032 | |||||||||
| Total Debt (2) | $ | 25,042 | |||||||||
| Total Debt / Consolidated net earnings | 3.0 | ||||||||||
| Total Debt / Consolidated EBITDA | 2.1 |
(1) Calculated as of the end of the applicable quarter on a rolling four quarters basis.
(2) Balance at March 31, 2024, which is classified as long-term debt on the condensed consolidated balance sheet.
ABI Transaction - As discussed in Note 5, in March 2024, we received pre-tax cash proceeds from the ABI Transaction of approximately $2.4 billion and paid transaction costs of approximately $62 million. We used the proceeds from the ABI Transaction to fund the ASR transactions discussed below.
Guarantees and Other Similar Matters - As discussed in Note 13, we had unused letters of credit obtained in the ordinary course of business and guarantees (including third-party guarantees) outstanding at March 31, 2024. From time to time, we also issue lines of credit to affiliated entities. As further discussed in Note 4. Supplier Financing to our condensed consolidated financial statements in Item 1 and Note 13, as part of the supplier financing program, Altria guarantees the financial obligations of Altria Client Services LLC under the financing program agreement. In addition, as discussed below in Supplemental Guarantor Financial Information and in Note 11, PM USA guarantees our obligations under our outstanding debt securities, any borrowings under our Credit Agreement and any amounts outstanding under our commercial paper program. These items have not had, and are not expected to have, a significant impact on our liquidity.
Payments Under State Settlement Agreements and FDA Regulation - PM USA has entered into State Settlement Agreements with the states, the District of Columbia and certain U.S. territories that call for certain payments. In addition, PM USA, Middleton and USSTC are subject to quarterly user fees imposed by the FDA as a result of the FSPTCA. For further discussion of the resolutions of certain disputes with states and territories related to the NPM adjustment provision under the MSA, see Health Care Cost Recovery Litigation - NPM Adjustment Disputes in Note 13.
Based on current agreements, estimated market share, estimated annual industry volume decline rates and inflation rates, the estimated amounts that we may charge to cost of sales for payments related to State Settlement Agreements and FDA user fees are $3.5 billion on average for the next three years. The estimated amount for 2024 includes PM USA’s obligations under the State Settlement Agreements to pay settling plaintiffs’ attorneys’ fees. We expect PM USA’s obligation to pay these fees will terminate in the fourth quarter of 2024. In addition, the amount excludes the potential impact of any NPM Adjustment Items.
The estimated amounts due under the State Settlement Agreements charged to cost of sales in each year are generally paid in April of the following year. The amounts charged to cost of sales for FDA user fees are generally paid in the quarter in which the fees are incurred. We paid approximately $2.9 billion in April 2024 for amounts accrued in 2023 under the State Settlement Agreements. We recorded $0.9 billion and $1.0 billion of charges to cost of sales for the three months ended March 31, 2024 and 2023, respectively, in connection with the State Settlement Agreements and FDA user fees. As previously stated, the payments due under the terms of the State Settlement Agreements and FDA user fees are subject to adjustment for several factors, including volume, operating income, inflation and certain contingent events and, in general, are allocated based on each manufacturer’s market share. The future payment amounts discussed above are estimates, and actual payment amounts will differ to the extent underlying assumptions differ from actual future results. For further discussion on the potential impact of inflation on future payments, see Operating Results by Business Segment -Business Environment - State Settlement Agreements above.
Litigation-Related Deposits and Payments - With respect to certain adverse verdicts currently on appeal, to obtain stays of judgments pending appeals, as of March 31, 2024, PM USA had posted appeal bonds totaling $38 million, which have been collateralized with restricted cash that is included in assets on our condensed consolidated balance sheet.
Litigation is subject to uncertainty, and an adverse outcome or settlement of litigation could have a material adverse effect on our results of operations, cash flows or financial position in a particular fiscal quarter or fiscal year, as more fully disclosed in Note 13.
Equity and Dividends
During the first three months of 2024 and 2023, we paid dividends of $1,733 million and $1,683 million, respectively, an increase of 3.0%, reflecting a higher dividend rate, partially offset by fewer shares outstanding as a result of shares we repurchased under our share repurchase programs. Our current annualized dividend rate is $3.92 per share. We have a progressive dividend goal targeting mid-single digits dividend growth annually. Future dividend payments remain subject to the discretion of our Board of Directors (“Board of Directors” or “Board”).
ASR - In March 2024, we increased our $1.0 billion share repurchase program to $3.4 billion. The increase was funded with proceeds from the ABI Transaction. As of March 31, 2024, we paid $2.4 billion for the repurchase of our common stock in the ASR transactions, and we expect final settlement to occur by June 30, 2024.
For further discussion of our share repurchase programs, see Note 1 and Part II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds of this Form 10-Q.
Financial Review
Cash Provided by/Used in Operating Activities
During the first three months of 2024, net cash provided by operating activities was $2,877 million compared with $2,984 million during the first three months of 2023. This decrease was due primarily to lower net revenues, partially offset by lower federal excise tax payments.
We had a working capital deficit at March 31, 2024 and December 31, 2023, and believe we have the ability to fund working capital deficits with cash provided by operating activities, borrowings under our Credit Agreement and access to the credit and capital markets.
Cash Provided by/Used in Investing Activities
During the first three months of 2024, net cash provided by investing activities was $2,316 million compared with net cash used in investing activities of $56 million during the first three months of 2023. This change was due primarily to proceeds from the ABI Transaction.
Cash Provided by/Used in Financing Activities
During the first three months of 2024, net cash used in financing activities was $5,268 million compared with $3,045 million during the first three months of 2023. This increase was due to the ASR transactions and higher dividends paid in 2024, partially offset by lower repayments of long-term debt.
New Accounting Guidance Not Yet Adopted
See Note 14. New Accounting Guidance Not Yet Adopted to our condensed consolidated financial statements in Item 1 for a discussion of issued accounting guidance applicable to, but not yet adopted by, us.
Contingencies
See Note 13 for a discussion of contingencies.
Supplemental Guarantor Financial Information
PM USA (“Guarantor”), which is a 100% owned subsidiary of Altria Group, Inc. (“Parent”), has guaranteed the Parent’s obligations under its outstanding debt securities, borrowings under its Credit Agreement and amounts outstanding under its commercial paper program (“Guarantees”). Pursuant to the Guarantees, the Guarantor fully and unconditionally guarantees, as primary obligor, the payment and performance of the Parent’s obligations under the guaranteed debt instruments (“Obligations”), subject to release under certain customary circumstances as noted below.
The Guarantees provide that the Guarantor guarantees the punctual payment when due, whether at stated maturity, by acceleration or otherwise, of the Obligations. The liability of the Guarantor under the Guarantees is absolute and unconditional irrespective of: any lack of validity, enforceability or genuineness of any provision of any agreement or instrument relating thereto; any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to departure from any agreement or instrument relating thereto; any exchange, release or non-perfection of any collateral, or any release or amendment or waiver of or consent to departure from any other guarantee, for all or any of the Obligations; or any other circumstance that might otherwise constitute a defense available to, or a discharge of, the Parent or the Guarantor.
Under applicable provisions of federal bankruptcy law or comparable provisions of state fraudulent transfer law, the Guarantees could be voided, or claims in respect of the Guarantees could be subordinated to the debts of the Guarantor, if, among other things, the Guarantor, at the time it incurred the Obligations evidenced by the Guarantees:
▪received less than reasonably equivalent value or fair consideration therefor; and
▪either:
▪was insolvent or rendered insolvent by reason of such occurrence;
▪was engaged in a business or transaction for which the assets of the Guarantor constituted unreasonably small capital; or
▪intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature.
In addition, under such circumstances, the payment of amounts by the Guarantor pursuant to the Guarantees could be voided and required to be returned to the Guarantor, or to a fund for the benefit of the Guarantor, as the case may be.
The measures of insolvency for purposes of the foregoing considerations will vary depending upon the law applied in any proceeding with respect to the foregoing. Generally, however, the Guarantor would be considered insolvent if:
▪the sum of its debts, including contingent liabilities, was greater than the saleable value of its assets, all at a fair valuation;
▪the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or
▪it could not pay its debts as they become due.
To the extent the Guarantees are voided as a fraudulent conveyance or held unenforceable for any other reason, the holders of the guaranteed debt obligations would not have any claim against the Guarantor and would be creditors solely of the Parent.
The obligations of the Guarantor under the Guarantees are limited to the maximum amount as will not result in the Guarantor’s obligations under the Guarantees constituting a fraudulent transfer or conveyance, after giving effect to such maximum amount and all other contingent and fixed liabilities of the Guarantor that are relevant under Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law to the extent applicable to the Guarantees. For this purpose, “Bankruptcy Law” means Title 11, U.S. Code, or any similar federal or state law for the relief of debtors.
The Guarantor will be unconditionally released and discharged from the Obligations upon the earliest to occur of:
▪the date, if any, on which the Guarantor consolidates with or merges into the Parent or any successor;
▪the date, if any, on which the Parent or any successor consolidates with or merges into the Guarantor;
▪the payment in full of the Obligations pertaining to such Guarantees; and
▪the rating of the Parent’s long-term senior unsecured debt by S&P of A or higher.
The Parent is a holding company; therefore, its access to the operating cash flows of its wholly owned subsidiaries consists of cash received from the payment of dividends and distributions, and the payment of interest on intercompany loans by its subsidiaries. Neither the Guarantor nor other 100% owned subsidiaries of the Parent that are not guarantors of the debt (“Non-Guarantor Subsidiaries”) are limited by contractual obligations on their ability to pay cash dividends or make other distributions with respect to their equity interests.
The following tables include summarized financial information for the Parent and the Guarantor. Transactions between the Parent and the Guarantor (including investment and intercompany balances as well as equity earnings) have been eliminated. The Parent’s and the Guarantor’s intercompany balances with Non-Guarantor Subsidiaries have been presented separately. This summarized financial information is not intended to present the financial position or results of operations of the Parent or the Guarantor in accordance with GAAP.
Summarized Balance Sheets
(in millions of dollars)
| Parent | Guarantor | |||||||||||||||||||||||||
| March 31, 2024 | December 31, 2023 | March 31, 2024 | December 31, 2023 | |||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||
| Due from Non-Guarantor Subsidiaries | $ | — | $ | — | $ | 316 | $ | 316 | ||||||||||||||||||
| Other current assets | 3,964 | 4,052 | 630 | 678 | ||||||||||||||||||||||
| Total current assets | $ | 3,964 | $ | 4,052 | $ | 946 | $ | 994 | ||||||||||||||||||
| Due from Non-Guarantor Subsidiaries | $ | 6,561 | $ | 6,561 | $ | — | $ | — | ||||||||||||||||||
| Other assets | 8,193 | 9,797 | 1,330 | 1,334 | ||||||||||||||||||||||
| Total non-current assets | $ | 14,754 | $ | 16,358 | $ | 1,330 | $ | 1,334 | ||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||
| Due to Non-Guarantor Subsidiaries | $ | 2,716 | $ | 2,548 | $ | 1,140 | $ | 1,081 | ||||||||||||||||||
| Other current liabilities | 2,397 | 3,708 | 4,980 | 3,665 | ||||||||||||||||||||||
| Total current liabilities | $ | 5,113 | $ | 6,256 | $ | 6,120 | $ | 4,746 | ||||||||||||||||||
| Total non-current liabilities | $ | 27,910 | $ | 27,876 | $ | 587 | $ | 590 |
Summarized Statements of Earnings (Losses)
(in millions of dollars)
| For the Three Months Ended March 31, 2024 | ||||||||||||||||||||
| Parent (1) | Guarantor (2) | |||||||||||||||||||
| Net revenues | $ | — | $ | 4,632 | ||||||||||||||||
| Gross profit | — | 2,589 | ||||||||||||||||||
| Net earnings (losses) | (66) | 1,736 | ||||||||||||||||||
(1) For the three months ended March 31, 2024, net earnings (losses) include $92 million of intercompany interest income from non-guarantor subsidiaries and $122 million of interest expense from non-guarantor subsidiaries.
(2) For the three months ended March 31, 2024, net earnings (losses) include $83 million of intercompany interest income from non-guarantor subsidiaries.
Cautionary Factors That May Affect Future Results
Forward-Looking and Cautionary Statements
This Form 10-Q contains statements concerning our expectations, plans, objectives, future financial performance and other statements that are not historical facts. You can identify these forward-looking statements by use of words such as “strategy,” “expects,” “continues,” “plans,” “anticipates,” “believes,” “will,” “estimates,” “forecasts,” “intends,” “projects,” “goals,” “objectives,” “guidance,” “targets” and other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts.
We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans, estimates and assumptions. Achievement of future results is subject to risks, uncertainties and assumptions that may prove to be inaccurate. Should known or unknown risks or uncertainties materialize, or should underlying estimates or assumptions prove inaccurate, actual results could differ materially from those anticipated, estimated or projected. You should bear this in mind as you consider our forward-looking statements and whether to invest in or remain invested in our securities. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we are identifying important factors that, individually or in the aggregate, could cause actual results and outcomes, including with respect to our ability to achieve our Vision, to differ materially from those contained in, or implied by, any forward-looking statements we make. Any such statement is qualified by reference to the following cautionary statements. We elaborate on these important factors and the risks we face throughout this Form 10-Q, particularly in the “Executive Summary” and “Business Environment” sections preceding our discussion of the operating results of our segments above, and in our other publicly filed reports, including our 2023 Form 10-K. These factors and risks include the following:
▪our inability to anticipate and respond to changes in adult tobacco consumer preferences and purchase behavior;
▪our inability to compete effectively;
▪the growth of the e-vapor category, including illegal disposable e-vapor products, and other innovative tobacco products, including oral nicotine pouches, contributing to reductions in cigarette and MST consumption levels and shipment volume;
▪our failure to commercialize innovative products, including tobacco products that may reduce health risks relative to other tobacco products and appeal to adult tobacco consumers;
▪changes, including in macroeconomic and geopolitical conditions (including inflation), that result in shifts in adult tobacco consumer disposable income and purchasing behavior, including choosing lower-priced and discount brands or products, and reductions in shipment volumes;
▪unfavorable outcomes with respect to litigation proceedings or any governmental investigations;
▪the risks associated with significant federal, state and local government actions, including FDA regulatory actions and inaction, and various private sector actions;
▪increases in tobacco product-related taxes;
▪our failure to complete or manage successfully strategic transactions, including the NJOY Transaction and other acquisitions, dispositions, joint ventures and investments in third parties, or realize the anticipated benefits of such transactions;
▪significant changes in price, availability or quality of tobacco, other raw materials or component parts, including as a result of changes in macroeconomic, climate and geopolitical conditions;
▪our reliance on a few significant facilities and a small number of key suppliers, distributors and distribution chain service providers and the risks associated with an extended disruption at a facility or in service by a supplier, distributor or distribution chain service provider;
▪the risk that we may be required to write down intangible assets, including trademarks and goodwill, due to impairment;
▪the risk that we could decide, or be required to, recall products;
▪the various risks related to health epidemics and pandemics and the measures that international, federal, state and local governments, agencies, law enforcement and health authorities implement to address them;
▪our inability to attract and retain a highly skilled and diverse workforce due to the decreasing social acceptance of tobacco usage, tobacco control actions and other factors;
▪the risks associated with the various U.S. and foreign laws and regulations to which we are subject due to our international business operations;
▪the risks concerning a challenge to our tax positions, an increase in the income tax rate or other changes to federal or state tax laws;
▪the risks associated with legal and regulatory requirements related to climate change and other environmental sustainability matters;
▪disruption and uncertainty in the credit and capital markets, including risk of losing access to these markets;
▪a downgrade or potential downgrade of our credit ratings;
▪our inability to attract investors due to increasing investor expectations of our performance relating to corporate responsibility, including environmental, social and governance, factors;
▪the failure of our, or our key service providers’ or key suppliers’, information systems to function as intended, or cyber-attacks or security breaches affecting us or our key service providers or key suppliers;
▪our failure, or the failure of our key service providers or key suppliers, to comply with laws related to personal data protection, privacy, artificial intelligence and information security;
▪the risk that the expected benefits of our investment in ABI may not materialize in the expected manner or timeframe or at all, including due to macroeconomic and geopolitical conditions; foreign currency exchange rates; ABI’s business results; ABI’s share price; impairment losses on the value of our investment; our incurrence of additional tax liabilities related to our investment in ABI; and potential reductions in the number of directors that we can have appointed to the ABI board of directors; and
▪the risks associated with our investment in Cronos, including legal, regulatory and reputational risks and the risk that the expected benefits of the transaction may not materialize in the expected timeframe or at all.
You should understand that it is not possible to predict or identify all factors and risks. Consequently, you should not consider the foregoing list to be complete. We do not undertake to update any forward-looking statement that we may make from time to time except as required by applicable law.
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