Good day, and welcome to the Altria Group 2020 Second Quarter and First Half Earnings Conference Call. Today's call is scheduled to last about one hour including remarks by Altria's management and a question-and-answer session. Representatives of the investment community and media on the call will be able to ask questions following the conclusion of the prepared remarks. I would now like to turn the call over to Mr. Mac Livingston, Vice President of Investor Relations for Altria Client Services. Please go ahead, sir.

Thanks, Adrian. Good morning and thank you for joining us. This morning Billy Gifford, Altria's CEO and Sal Mancuso our CFO will discuss Altria's second quarter business results. Earlier today, we issued a press release providing our results. The release, presentation, and quarterly metrics are all available on our website at altria.com and through the Altria Investor app. During our call today, unless otherwise stated, we're comparing results to the same period in 2019. Our remarks contain forward-looking and cautionary statements and projections of future results. Please review the forward-looking and cautionary statements section at the end of today's earnings release for various factors that could cause actual results to differ materially from projections. Future dividend payments and share repurchases remain subject to the discretion of Altria's Board. Altria reports its financial results in accordance with U.S. Generally Accepted Accounting Principles. Today's call will contain various operating results on both a reported and adjusted basis. Adjusted results exclude special items that affect comparisons with reported results. Descriptions of these non-GAAP financial measures and reconciliations are included in today's earnings release and on our website at altria.com. With that, I'll turn the call over to Billy.

Thanks Max. Good morning everyone and thank you for joining us. Despite the challenges of the COVID-19 pandemic in the U.S., our employees continue to execute against our 10 year vision with strong focus and commitment. Over the first half of 2020 we believe Altria showed resilience in volatile conditions, growing adjusted diluted earnings per share by 8.5%, driven by the outstanding financial performance of our core tobacco businesses. Combined the smokeable and all tobacco products segments grew adjusted OCI by nearly 11% and expanded adjusted OCI margins by nearly 2.5 percentage points. We've also hit key milestones and made steady progress behind our non-combustible product portfolio. Specifically FDA's recent authorization will permit PM USA to market IQOS and HeatSticks as modified risk tobacco products with a reduced exposure claim. PM USA launched IQOS in Charlotte, it's third league market. Helix submitted PMTAs with the FDA for all 35 all in products which are now in scientific review. And Helix continues to expand manufacturing capacity and distribution for all. We're excited to reaccelerate our engagement with adult smokers looking for alternatives to their traditional cigarettes in pursuit of our vision to responsibly lead the transition of adult smokers to a non-combustible future. Before diving deeper into our business results I'd like to take a moment to address the social change underway in the United States and globally. Like many other companies we are operating in the context of important and long overdue societal change. The recent senseless death of black Americans show that systemic racism and social injustice still widely exist today. Our black and brown colleagues have faced these injustices for far too long. Black Lives Matter and we must take meaningful actions to drive long lasting change. We understand the significant work ahead of us and we have…

Thanks, Billy. Let me first provide some additional detail on the smokeable products segment. Segment adjusted OCI margins expanded 3.4 percentage points to 57.8% for the second quarter and 2.6 percentage points to 56.5% for the first half. We believe our strong top line performance has been aided by our revenue growth management framework, which allows us to more efficiently and effectively employ promotional resources. We achieved strong net price realization of 6.4% in the second quarter and 7.7% for the first half. We're continuing to enhance our RTM toolkit and recently introduced manufacturer supported of invoice promotions for Marlboro in select states. This enhancement allows us to more efficiently support Marlboro in key geographies. In cigars, Middleton’s reported volume increased 5.4% in the first half. Black & Mild continues to be the leader in the profitable cigar segment. Middleton is successfully navigating the FDA regulatory process with market orders covering over 90% of its current volume and plans to address the remaining volume with the submissions prior to the September 9th deadline. In oral tobacco products segment Copenhagen continues to be the leading MST brand. And Copenhagen Packs is contributing to the brand's continued relevance with adult dippers through its satisfying combination of the two fastest growing MST segments of Wintergreen and Pouch. U.S. STC has expanded Copenhagen Packs into 20,000 stores across 36 states. Oral tobacco products segment adjusted OCI margins decreased 1.2 percentage points to 72.8% in the second quarter. Investments behind on impacted adjusted OCI margins, which we expect to continue as we seek to expand its retail footprint in our manufacturing capacity. We remain pleased with the oral tobacco segments, strong adjusted OCI margin performance. Turning to alcohol assets, the COVID-19 pandemic negatively impacted our second quarter results. In wine, Ste. Michelle continues to operate…

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

Hi, good morning.

Good morning, Chris.

Good morning, thank you for the time. I want to ask you first of all, as we think about your outlook for the cigarette category, which is obviously showing a marked improvement in relation to previous expectations. I'm just curious how we associate that outlook with your outlook for the consumer. So do you expect a weaker consumer picture in the second half and did that inform your second half outlook? And then as I think about what happened in the quarter where Marlboro’s share was flat sequentially and even discount share was down a little bit sequentially, do you expect those to reverse a bit or change a bit in the second half based on your outlook for volume?

Yeah, thanks for the questions Chris. First on volume, I think it's important to remember how fluid the environment is out there. In the second quarter, we didn't see a lot of pressure for the consumer to experience the need to down trade because we saw government stimulus and the unemployment benefits being paid by the government. Now, we know that's in front of the government right now and they're considering it, but it's still somewhat of an unknown until they are able to pass something. And we certainly think if they do, it will benefit the adult tobacco consumer. From a standpoint of as we progress through the year, I think it's important to remember the comparisons for the first half were a bit easier comps than they will be in the second half. Remember last year the cigarette category peaked its decline at 6%, then it receded to 5.5% in the third, and then down to 4.5% in the fourth. So a little bit tougher comparisons were also included in that forecast. But it's a fluid environment and it's something that we'll continue to monitor. As far as Marlboro share, your second question, we're very pleased with the way Marlboro performed in the marketplace in the second quarter. You mentioned sequentially it was flat. I think what you saw is that manufacturers responded to the COVID-19 pandemic differently. We saw some of our competitive manufacturers discount across the entire brand portfolio of certain brands but without RGM tools we felt like we could provide for the Marlboro consumer that was facing any economic hardship, a pretty safe landing by really discounting a portion of our Marlboro brand. And so with the RGM tools and with the sequential shift, we're very pleased with how Marlboro performed from first to second quarter.

That's great, thank you. And I had just one quick follow-up on IQOS and a question there on your marketing strategy, and I'm thinking about sort of as you ended of the quarter, do you expect to expand the product as you get more -- once you have the approved marketing claims from the FDA, I know you're trying to get a new device, a device approved, and you expect this reduced exposure more prominently featured going forward in the marketing again, once it's approved by the FDA?

Yeah, I think you touched on the two key points, Chris. One was the MRTP approval and as I mentioned, we have to produce those assets and then get them approved or send them to the FDA 30 days ahead of using them in the marketplace. I think the other that you mentioned was version three, and that application has been filed with the FDA. And so we'll see how that progresses. I don't want to lead you to believe that we will slow down and wait for that. But certainly you can imagine putting your best foot forward in any new lead markets by having both the MRTP claim as well as the version three with the enhancements that are there on version three. And I think as we move forward, we'll just have to balance that and that's why for competitive reasons we didn't mention the four markets, but we're also balancing how COVID is progressing in various states around the U.S. And so all of that will factor in as we make additional expansion decisions.

Okay, thank you very much. I appreciate your time.

Thank you.

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

Thank you and good morning. Thank you so much for that incremental detail on your consumer demographic with on!. Clearly very compelling in terms of the attractiveness of the proposition, both to cigarette smokers as well as to women. I'm curious, Billy, as you kind of reflect on this early success, any takeaways if you juxtapose some of those consumer demographics relative to what you saw early days in the snus category or even in the e-cigarette category? Thanks.

Yeah, thanks for the question, Vivien. I think you're exactly right. Look, we're very excited. Now the caveat that with this early on and we're expanding as fast as we can, but we're very excited about the attraction it has to both smokers and dippers and we want to make sure that we capitalize on that. As well as the attraction to the female consumer. I mentioned that in my remarks, but we believe the rectangular packaging has something to do with it, to distinguish it from if you will, traditional MST in the consumers minds as they're making decisions, as well as the variety of strengths and flavors that we have. And we think all of that plays into the consumer and our ability to disrupt them as they're making purchases in the marketplace. So we're moving as fast as we can on manufacturing capacity. So that's no longer a constraint as we progress into 2021 and remove that constraint in 2021 and then get it to the stores where we want it to be. And so we're extremely excited about what we've got in place with plans for on!.

That's really helpful, thank you. Just to follow up on that, is it fair to assume that with snus that category over indexed to dippers relative to what you're seeing with on!?

That is correct Vivien. I think when you looked at it in the consumer's mind, at least what we heard qualitatively is that they saw that as in the traditional MST category, both for the packaging as well as having tobacco that you're putting in your mouth. I think the distinction with on! is that it's white, it's very discrete, variety of strengths and flavors, and it's more intriguing from what we're hearing from consumers in the marketplace.

Got it. Thanks for that. And I will just squeeze one last one in. In terms of your investment in Cronos, there's certainly some growing chatter around potential regulatory change depending on the outcome of the election, of course. But to the extent that the Democrats are able to take control of the Senate and the White House, it does set up for a pretty -- potential for a pretty meaningful change in terms of U.S. candidates regulation. So I'd love to hear your thoughts on how the election as a potential catalyst would change your thinking on the Cronos investment? Thanks.

Yes, so to be clear we support federal legalization and regulation of cannabis. And to your point, we could see, look, we've been successful under both Republicans and Democrats. We support both their G&A efforts. And so it remains to be seen how the election will turn out. But we certainly support appropriate regulation because we believe it prevents underage use, it implements consistent regulatory controls and quality standards across the entire industry, and we really believe it advances the science and addresses social justice issues. So that's why we are -- we think it's important under either a Republican or Democratic administration to have the legalization so that the right regulatory framework is put in place in the U.S.

Understood, thanks very much.

Thank you.

The next question comes from the line of Pamela Kaufman with Morgan Stanley.

Hi, good morning.

Good morning.

Can you talk about your full year guidance, it implies a relatively wide range for back half earnings and I guess can you touch on some of the drivers influencing that range and what do you see as some of the factors needed to reinstate your mid-term earnings growth algorithm?

Yeah, I'll take them in reverse order, Pamela. I think on the midterm look, we're in unprecedented times, as you see on the news, it changes daily with where hot spots are across the U.S. And so we monitor that. But there's a lot of uncertainty around how things will stay open or shut down and how the consumer will be impacted. As well as the economic stimulus, whether there will be another version of that that passes through Congress and gets enacted. So there's a lot of uncertainty. That's why you see a bit of the broader range and then I highlighted in the remarks our equity investment in ABI, they have a global exposure to the COVID-19 pandemic. They're doing a very good job of monitoring that and making changes as necessary. But again, on a much broader scale on a global basis having to respond to that, those would be the major factors in the wider range and what we see as we go through the remainder of this year.

Great. And can you discuss how you're thinking about the relative contribution to improved industry cigarette volumes from higher stimulus and unemployment benefits versus more opportunity to smoke and the shift back from e-cigs and does the performance this year influence your outlook for a long-term industry volume declines?

Yeah, I think you touched on the two major factors, Pamela. I think the first was the stimulus certainly benefited, as I mentioned, both the lower and middle income Americans. And included in that, of course, is our adult tobacco consumers. So they certainly benefited from that, as well as the lower discretionary output for non-tobacco items, less commuting, so less gas, less entertainment. So they had more discretionary income from not spending as much in that non-tobacco discretionary space. I think the other factor that you mentioned was really related to the movement of consumers back to cigarettes from e-vapor, as we saw the FDA regulation of banning flavors outside of tobacco and menthol in the marketplace. And that consumer was faced with choices. Now, that tentative SKU as I said older adult smokers and we know older adult smokers tend to see discount. It benefited the entire cigarette category, but certainly it's skewed to the discount side. And so when you think about that, it's a bit early on to tease out the exact impact from both of those but that's something that we'll continue to monitor as we move forward.

Great. And just one last question. I guess, how are you thinking about the implications to the industry from the upcoming presidential election and the likelihood of a potential federal excise tax increase obviously, that's something that's on investor’s minds and maybe you can just touch on how you managed the prior excise tax increase?

Sure. I think if you look at it, certainly both the federal government and state governments have racked up significant bills in their response to the COVID-19 pandemic. I think certainly they will look for or turn to at the appropriate time on how to pay for those bills. And certainly excise taxes could be part of that. We have an extremely strong government affairs team that regularly engages on that. As far as whether it's Democratic or Republican, I think if you look back in our history, we've shown we know how to successfully navigate both of those administrations. And so we feel like we have the right tools in place, we have a strong government affairs team, we support both sides of the aisle, and so we feel like we have the right tools in place and the right employee base to navigate that successfully.

Thank you.

Thank you.

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

Thank you. Good morning, everyone. I have a question on your guidance. First, could you tell us what is factored into your guidance this year in terms of the future stimulus packages that assumed, basically did your guidance assume the worst, I'm just trying to understand that? And then second, I'd be curious to hear from you why you're not comfortable in reinstating your three year guidance. I guess I am, a bit surprised since it feels like you guys have enough visibility to re-establish your EPS guidance and industry volume guidance this year. But as you look out of the long term, is there something changing, with the resilience of this category that makes you unsure, so if you could just touch on that, I would appreciate it?

Sure, I would agree with you wholeheartedly, Bonnie, that the category is resilient. I think, and again, I'll take them in reverse order, the three year guidance it is just because the external environment is so fluid. I mentioned earlier the stimulus and whether the stimulus continues or doesn't continue. I mentioned various hot spots popping up around the U.S. and how that could impact the consumer's ability to go out and get products and then how it impacts their overall outlook on their economic situation will be a factor of both of those. I think from the stimulus standpoint and its impact on guidance, look, we were on a range of scenarios when we provide guidance. And so we factor in, if you will, worst case and best case and we try to really provide guidance based on what we think is the right combination of those scenarios. And so that's why you see a bit wider guidance based on those as well as, as I mentioned, the ABI. And so that's why we felt like we reestablished the appropriate guidance range.

Okay, that's helpful. And then I also wanted to ask about your share, I do get a lot of questions from investors and so I'd be curious to hear from you how you guys are thinking about really your total cigarette retail share, is 49% this quarter, which I think has been the lowest it's been for almost 10 years. So, I'm curious to hear from your perspective if this is worrisome to you and then, what do you think have been some of the key drivers of this share loss? And then, as we think about your guidance, does that imply, year-over-year share losses will continue in the second half or is there something that you're implementing and I'm thinking about the recent pricing actions that may start to minimize some of the share losses?

Yeah, I think it's important to remember Bonnie that the overall strategy we employ in the cigarette category is to maximize profitability over the long-term while balancing investments in Marlboro and funding the future growth of our noncombustible portfolio. So that's the overall strategy we have in cigarettes. As far as share, I mentioned earlier, we're very pleased with what we saw from first quarter to second quarter with Marlboro. We're pleased with the increased profitability in the category as you saw from the OCI, as well as the increase of gross margin if you will in both Marlboro as well as our brands discount offerings. We will compete in the brands discount, but profitability will be a major factor in the way we compete in that branded discount category. You'll remember we're a premium focused company, we participate in branded discount, but it has to be at the right profitability. We're very pleased with where we were at with from a share standpoint and especially on Marlboro. It's something that we monitor. Remember, when we look at the health of a brand, we really look across four factors; profitability is one, share is one, it's the equity score, the equity strength of the brand, which is both remaining popular and is it remaining relevant, meaning is it keeping pace with the consumer as they evolve. And then the final one of the four is demographics. And we look at that at age cohorts of 10 years, starting at 21 and going up. And we're really looking to see if we're engaging appropriately across those age cohorts based on the overall share of the brand. So we feel good about Marlboro, but it's certainly something we'll monitor. As we you know, I mentioned the economic pressures that consumers could face potentially in the second half. However, we have the right tools in place. And I think we've shown we know how to navigate that type of environment in these uncertain times.

That was really helpful, Billy, and I think it is important, I think it's quite impressive to the margin expansion that you've been showing, as you mentioned. And so it's really that balance. If I may just squeeze one last question on IQOS and your agreement with Philip Morris. You know, curious why you felt it was important to share two of the milestones at this point. I guess I'm asking because historically you've been quite guarded with providing a lot of details about your business so for me, it raised, maybe a bit of a question? And then second, the bar to achieve the milestone seems relatively low given the time frame even with COVID, everything going on this year, so wondering, really what the incentives are to achieve greater market share from your perspective and how much you're willing to invest, especially of IQOS it is margin dilutive for you guys relative to your core cig business, just trying to understand how you're going to manage that? Thank you.

Sure, sure. I appreciate the additional question Bonnie. I think when you think about the disclosure, we thought it was good disclosure with where we're at and making progress against the expansion plans for IQOS. So we really felt it was important for the investor to know that term and so we disclosed that. As you mentioned we've been fairly quiet because we have crossed confidentiality in place with PMI on the detailed terms of the agreement. But we did feel like it was good disclosure as we continue to make progress against expanding IQOS in the lead markets. From a standpoint of how we're thinking about balancing, we're going to invest the appropriate dollars behind IQOS. We think it can be very successful in the U.S. If you look at the total length of time of the agreement that's currently in place, 10 years. 10 years is a long time and so we're going to make the appropriate investments. Certainly we feel like we can meet the performance objectives and then thinking about that total 10 year runway based on the current agreement. So we feel excited about IQOS and the success it can have in the U.S.

Thank you.

Thank you.

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

Good morning, thank you.

Good morning, Michael.

On ABI, you mentioned how the fair value is below carrying value, but that you view that as temporary. And obviously there's hopefully one time transitory environment with the pandemic. But can you just give a sense of how temporary is defined and does it depend on a specific amount of time, is it the nature of the issue that's weighing on that stock, and what if anything should we look for that might consider you to change your view on how to think about assessing that asset?

Good morning, Michael, this is Sal. You are correct, we have deemed the ABI impairment as a temporary item. Look, we perform a detailed analysis as part of our closing process every quarter. You have seen recent recovery in evaluation of ABI. So we're going to continue to monitor it going forward. But under SEC guidance, we believe that this impairment is temporary and it will recover to our book value for ABI asset.

Okay, thanks, that's helpful and welcome Sal. Just on the margins in smokeable specifically, just would love a little sense of maybe some of the cost piece there, your price mix was very strong, but at a little bit less than the roughly 8% pace of the previous five quarters but your margin expansion was comparable to the five quarter previously average of around 350 basis points. And so I guess the question is just if costs were a bigger driver, is there an acceleration of some of your cost savings initiatives and should we expect those to continue into the second half or with some of that more one time in nature for some of those?

Yeah, Michael, I would just caution you to look at this short period of time and try to make comparisons. You have differences in timing of cost that occurred through the year or any given quarter on a year-over-year basis. You're right the cadence of pricing can affect the margin expansion in any short-term period. I think if you step back from that and look at how we've been able to improve margins through time, it has been the leverage you're referring to. It has been very disciplined and very focused on reducing costs through the time as well as pricing. And pricing is really two components, its manufacturer list price and the implementation of revenue growth management. And we really believe the revenue growth management has afforded us the opportunity to really look at the retail promotions we have in the marketplace, be much more efficient and much more precise in where we put those promotions in the marketplace. So when you step back and get out of a short-term period and really look at the three factors, it's really cost, its pricing but pricing is two different pieces, its manufacturer list price as well as the revenue growth management we put in place.

And Michael I will add the restructured program that we implemented last year, the savings happened over the course of the year, more towards the back-end of the year. So you are lapping that. But cost management is part of our ongoing management of the business. We take a very strategic approach and it is an important leverage that we just said as we think about margins in our tobacco businesses.

Okay, thank you, that's helpful. And then just one last one on the IQOS rollout, thank you for the color on the kind of 18 month road map and your thinking there. Can you give us a sense of what, if anything, might accelerate that or how flexible are those plans, could you move faster into more markets or is this pretty well set?

No, I think that's what we wanted to mention to investors and analysts today, certainly we always look at what would allow us to move faster if we so desire based on the experience we're having in the marketplace. So we're prepared. We are also balancing that, as I mentioned earlier, with the COVID-19 pandemic that is in different areas in the U.S. at different rates of increase. And so all of that will factor into the speed with what we continue our expansion of IQOS.

Okay, that's great, thank you very much.

Thank you.

The next question comes from the line of Steve Powers with Deutsche Bank.

Yes, hey guys, good morning. Two quick ones for me. Good morning. So Billy, the first one is with respect to on! The confirmation of your ability to hit that 50 million can capacity at the end of the year I think is a good thing just given the delays that we are percolating. But apologies if I missed it but could you talk about the timing of getting to 75 million, which I think originally was the end of year target and should we think about that level as a ceiling for 2021 capacity or are there plans to increase further beyond that level?

Yes, so certainly the 50 million is what we stated for year-end. We also mentioned that we will remove capacity constraints in 2021. I from a personal standpoint, Steve, I'm tired of being behind the curve. So we're going to expand to stay ahead of that demand curve as we move forward. Remember, it's important and I think sometimes it gets overlooked. We closed on this transaction 11 months ago. And when you look at what the employee base here has been able to achieve, it's quite remarkable. We're in 40,000 stores, we've expanded manufacturing capacity, we now produce it out of their N.C. campus here in Richmond, we filed 35 PMTAs with the FDA, we're starting the foundational work. So we're moving very rapidly. But I'm with you. I don't like being behind the curve. I want to get ahead of it.

Okay, okay, and then Sal, maybe Billy's desire to get ahead of the curve plays into this a bit, but as I think about that higher cash balance that you're carrying through this COVID period, can you frame your capital allocation priorities, looking out once things, hopefully normalize?

Yeah look, we think having a higher than normal cash balance during these unprecedented times is prudent and the right thing to do. But we are going to make the investments we need to make in our business obviously. On! is an important product for our future and we're going to make the necessary capital investments. But we are a company that fortunately has a low level of capital expenditures overall, especially for a company of our size. And our capital expenditures tend to be at about the same level of depreciation for the year. When we think about that capital allocation, if you remember, and we've talked about this in the past, after paying dividends and after investing in our business through capital expenditures, we generally have about $1 billion in excess cash. And we run through a very detailed analysis and we think about the best capital allocation for our shareholders and the long-term health of our businesses.

Understood. Thank you very much.

Thank you.

The next question comes from the line of Adam Spielman with Citi.

Thank you very much. Good morning, everyone.

Good morning Adam.

Can I just -- I'd like to ask two follow-up questions and then another one on the IQOS contract. So the first follow-up question is, is really on the on! capacity. And you said that clearly that you don't want to be behind the curve in terms of capacity in 2021. And I just wonder if you can be a little bit more specific about that and particularly, as I think about it you're going to start 2021 with capacity of 50 million cans a year, which in my mind is clearly not behind the curve, and yet by the end of the year you're presumably going to have massively more capacity. So I was wondering if you can be a little bit specific in terms of the sort of capacity, let's say, the run rate you hope to have at the end of 2021 and when the next big tranche of capacity is going to come on because 50, evidently isn't enough, which is why you'll be at the beginning of 2021?

Yeah, I appreciate the follow-up, Adam. What I really meant is I no longer let capacity to be a constraint of what we would like to do in the marketplace. And so I want to remove capacity from being a constraint and that's specifically manufacturing capacity so that we have the ability to produce the product we desire to have in the marketplace, in the stores where we want it, and to be ahead of if you will, of that curve of wanting to have the product in more stores and not the ability to produce it. And so that's what I meant by being ahead of the curve.

And so let's say in mid 2021, what sort of -- you talked about 100 million capacity, 200 million, what sort of capacity will be required to remove that?

The question on what your desires are, Adam, I'm going to refrain from going too far. I think the 50 million with the environment we're in is about as far as we want to go. And just knowing that we're going to remove capacity constraints in 2021.

Okay, thank you. Okay, can I turn now to the question about margin, so obviously and I just really want to understand the detail, you obviously had a huge margin increase in 2Q. Now, my understanding is there was some in America at this moment, there is some expenses you just couldn't make because of the situation with the pandemic. And so as we go forward, I guess, should we think of this as being a bit of a high watermark in the second half and the beginning of 2021, you'll be back to more regular markets and more regular activities, or should we think this is a new level and you're going to build from this new level?

Yeah, again Adam, I do appreciate the follow-up, but I'm not going to get into specifics about where this margin is and where we'll go. I think overall you can consider us to think of we like increase in margins through time. We really do that through, and as I mentioned earlier to Michael, we do that through cost reductions. And you're right, there are some expenses certainly in the second quarter related to COVID that be able to be spent. But there are also additional expenses and we highlighted those in our earnings release. From a standpoint of the other levers it's pricing and around pricing there's manufacturer list price and the cadence of that year-over-year can affect margins in any given quarter, but as well as the implementation of revenue growth management. And that's a piece, even though it shows up in pricing, is more like a reduction in expense through time, because what you're doing is you're being more precise, more efficient with the promotional resources you're putting in the marketplace, with the ability to achieve like or better results. And so with the implementation of that, you can continue to expect us to get better with that modeling. We're extremely pleased with where we're at, but we're never satisfied. And so the more data that goes to that model and the experience it gets, the sharper it becomes.

Okay, that’s actually very helpful and I think meaningful answer. So can I ask my third question and this is about the new -- or the new details with the contracts you gave about IQOS and you talk about you have to get 50 basis point value share and I think this refers to specific geographic areas. And I was wondering that maybe, I'm just not familiar enough with the way you talk internally. But what does that mean, is that -- would that be a specific state or would it be a specific metro area or would it be let's say a quarter of metro Atlanta so how should we think about that, that just not very specific geographic area?

Yeah, we thought it was important to disclose that term, as I mentioned earlier. With this cross-confidentiality we have in place, I'm going to refrain from going much deeper and describing each of those items. Without mentioning whether we've met it or haven't met it, just to share a data point with you, Adam, in the Atlanta market we have a 0.6 share of the cigarette category in stores selling IQOS and so that's where we were at the end of the second quarter. But that's just a data point as a point of reference. And again, we'll be sure to disclose as we move forward our progress against meeting the financial objectives.

But if you think about it from my point of view, I mean, just to be clear, it's not really possible to tell whether that phrase specific geographic area is a state, a metro area or something smaller, that’s a county?

I agree with that and I understand the question you're asking. I'm just going to refrain from going deeper. I think that was good disclosure for investors.

Okay, thank you very much.

Thank you, Adam.

Your next question comes from the line of Gaurav Jain with Barclays.

Hi, good morning. I have three questions, so the first question is on the Bill SB-793 in California. So there is a flavor ban that happens in California. Could you just talk about how it will impact the different categories that you have, cigarettes, cigars, smokeless, or nicotine pouches and what might be [multiple speakers]?

Yeah, I think it is important. Look, we think that the FDA is the entity best situated to make decisions on flavors. All of the products that you mentioned will either go through the FDA or have been through the FDA from a scientific basis, and they'll make those decisions based on science and evidence. Specific to that Bill, I think it's important to remember in the cigarette category, menthol overall tends to under index in California. And of course, we tend to under index into menthol in the cigarette category. I think when you get to the other categories, you can think about in California in the traditional MST space, somewhere around equal share, nothing really to mention as far as over indexing or under indexing. And then in the alternative space, as I mentioned, all of those products will be in front of the FDA here shortly.

Sure, my second question is on the oral tobacco category. So thanks for sharing that slide where you mentioned that 37% of on! users are smokers. Of the other 63% is it possible to disaggregating to users coming from snus, e-cigarettes, and what are the new consumers coming into the product?

It is possible. We wanted to share what we saw from exclusive smokers just because of the opportunity that presents. We'll consider whether we go into the other detail with the other categories in the future. But we haven’t thus far.

Sure, that's very helpful. And my last question is on the e-cigarette category, so we will have the first indications from the youth tobacco survey over the next three months of prior years at a guide that might be delayed because of COVID. But what do you think you will see with respect to youth access trends and do you think that will impact JUUL [ph] PMTA or will it be the 2021 Youth Tobacco Survey that will be more relevant?

Yeah, I think it remains to be seen what we'll see. Certainly if you consider what's taking place in the external environment remember, JUUL voluntarily started pulling flavors well before the actual FDA panel came in place. And so we actually saw their share go down slightly. Now that there's more of an even playing field, if you will, across all manufacturers we've seen share of JUUL recapture some of that share. I think that as well as even the COVID-19 pandemic with underage use being out of school, remember, social access was where we saw the biggest access for underage use to have access to these types of products. And what I mean by that is if I'm 18 in high school and you're 17, there would be more chance for me to buy it for you. And so that's why we and JUUL also independent of us, supported the minimum age to purchase at 21 across the U.S. And so that was passed federally at the end of last year and has made steady progress in being passed at the state. The government affairs team is really engaged in those states that haven't passed it yet. So I think all of those factors should certainly have an impact on underage use. There's always more to be done and we believe no underage consumers should have access or use any type of nicotine.

That's very helpful. Thank you.

Thank you.

The next question comes from the line of Owen Bennett with Jefferies.

Good morning, [indiscernible]

Good morning Owen.

Yeah, just the one for me. Coming back to the north of 25% IQOS share, and so obviously it doesn't seem not challenging, especially you talk about the excitement around possible success and you gave those Atlanta data points there. Could you perhaps be a bit more specific in terms of what you think is a realistic ambition for dollar share in those specific geographies over the next 18 months to two years? And if he can't answer that, I have been guessing you may not be able to, and your main competitor continues to say he could, tobacco won't be successful in the U.S. I was just curious to see kind of what makes you guys so confident that it will be a success? Thank you.

Yeah, I appreciate the questions Owen and you're right on the first one, I'm going to refrain from going into detail where we were projected to be. I think why we think heated tobacco will be a success in the U.S. is really related to if you go back to the cigarette consumers. So somewhere roughly half to slightly over half of those consumers have shown an expressed desire to move to a potentially reduced harm products. And a lot of those consumers went over and tried the various forms of e-vapor and rejected it. And so we believe heated tobacco really fits if you allow me to put combustible or conventional cigarettes on one end of a scale and e-vapor on the other. With the IQOS experience, I would put it closer to cigarettes from a consumer experience base. They get satisfaction. The HeatSticks, as you're well aware is what goes in the mouth, even though you have a device so the mouth feel is very similar. You're inhaling the product. So we think because a large group of those conventional cigarette consumers tried e-vapor and rejected it, that is a great category for IQOS to satisfy what they are looking for.

Well, thank you very much, appreciate it.

Thank you.

We have a question from Robert Rampton with UBS.

Good morning. Three questions for me, the first as you probably previously mentioned, that you secured state excise tax breaks if IQOS were to receive MRTP status, does that still hold for the reduced exposure specification you have received, and what's your outlook for further state tax breaks?

Yeah, you're exactly right. Some of those were secured. Now it differs by state. So some states have one rate for reduced risk and a different rate for reduced exposure. Some incorporate both at a similar rate. So it differs by state. As far as outlook, our government affairs team and I mentioned the strength of the government affairs team, they were able to secure most of those without that type of product having approval from the FDA in the marketplace. So now that you see that we have some I think as far as the conversation goes with the various state legislatures, it'll be a very fruitful conversation. And we believe excise taxes should not be a deterrent for consumers desire to move down the continuum of that risk. And so I think we'll see more conversations take place and I will put a prediction on the outcome.

And just to follow up on that, you mentioned at one point I think it was four states, is that still the number or has any been added since?

Yeah, I will actually ask IR because it does change period to period. I don't have handy off the top of my head how many states it is, either four or five. But I will make sure IR follows up with you.

Great, thank you very much. And then my next question is looking at 2019 pricing increases in net revenue and retail price respect, it was elevated but in hindsight should we see that year as kind of a one-off elevated level and things should be more historic normal going forward?

Yeah, I'll be careful not to talk about future pricing or price realization. I wouldn't read any anything into any one particular year of exactly how we're going to think about it going forward. I think when you step back from the specifics and think about pricing in general, we know pricing is an important part of our algorithm. We balance that with the, if you will, the overall strategy of maximizing profitability through time, cost reductions that we're able to achieve, as well as how we feel the consumers economic outlook is and what they're facing. And so we balance all of that on a year-to-year basis and throughout any given year. And that's how we make pricing decisions.

Alright, very clear, thank you very much.

And Robert, it was five states, Sal was able to look that up, it was five states.

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

Well, thanks very much for joining us. Look, the tobacco category continues to evolve, but Altria’s quarterback of businesses, have a track record of delivering strong and consistent financial performance in challenging environments. We continue to reward our shareholders by returning a significant amount of cash in the form of dividends. We believe our non-combustible platform has the winning brand and is unmatched. And we're excited to continue to make progress in achieving our vision of responsibly transitioning adult smokers to a non-combustible future. Thank you again for joining us and stay healthy.