Good day, everyone, and welcome to the Altria Group 2024 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 representative of the investment community and media on the call will be able to ask questions following the conclusion of the prepared remarks. I would now like to turn the call over to Mac Livingston, Vice President of Investor Relations for Altria Client Services. Please go ahead, sir.

Thanks, Savanna. Good morning, and thank you for joining us. This morning, Billy Gifford, Altria's CEO; and Sal Mancuso, our CFO, will discuss Altria's second quarter and first half business results. Earlier today, we issued a press release providing our results. The release, presentation, quarterly metrics and our latest corporate responsibility reports are all available at altria.com.

During our call today, unless otherwise stated, we're comparing results to the same period in 2023.

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 our Board of Directors. We report our financial results in accordance with U.S. generally accepted accounting principles. Today's call will contain various operating results on both a reported and adjusted basis. Adjusted results exclude special items that affect comparisons with reported results. Descriptions of these non-GAAP financial measures and reconciliations are included in today's earnings release and on our website at altria.com.

Finally, all references in today's remarks to tobacco consumers or consumers within a specific tobacco category or segment refer to existing adult tobacco consumers 21 years of age or older. With that, I'll turn the call over to Billy.

Thanks, Mac. Good morning, and thank you for joining us. Altria's momentum continues to build as we pursue our vision to responsibly lead the transition of adult smokers to a smoke-free future. In the second quarter, our company's innovative smoke-free products delivered strong share and volume performance. And we hit meaningful milestones that we believe set us up for future success. NJOY received the first and only marketing granted orders from the FDA for menthol e-vapor products. And we submitted PMTA applications to the FDA for next-generation NJOY and on! products.

Our traditional tobacco businesses remained resilient despite a challenging operating environment.

Our [ highly ] cash-generative businesses supported continued investments in our innovative product efforts, and we returned significant value to shareholders during the first half of the year, with more than $5.8 billion delivered to shareholders through share repurchases and dividends. And we believe our dedicated teams have us on track to deliver against full year financial guidance. This morning, my remarks will focus on NJOY's encouraging second quarter results, the state of the e-vapor category, illicit market activity and enforcement actions and strong second quarter results from on! I'll then turn it over to Sal, who will provide further detail on our financial results, including our outlook, the performance of our traditional tobacco businesses and capital allocation.

Let's begin with the e-vapor category. In June, we celebrated the 1-year anniversary of welcoming NJOY into the Altria family of companies. Since that time, we've combined our industry-leading capabilities with enjoys competitive product offering and are thrilled with the progress we've made.

Let me briefly recap some of our accomplishments. We strengthened NJOY's supply chain to enable our expansion plans. Tripled NJOY's retail footprint to over 100,000 stores, secured premium positioning at retail and more than 80% of contracted stores through NJOY's first trade program. Launched a variety of trial-generating activities with compelling results and introduced a new brand equity campaign with impactful consumer messaging.

As a result of these efforts, NJOY saw continued traction at retail during the second quarter and first half as evidenced by volume momentum and share growth. NJOY consumables shipment volume was approximately 12.5 million units for the second quarter and 23.4 million units for the first half. NJOY's device shipment volume was approximately 1.8 million units for the second quarter and 2.8 million units for the first half. Both consumables and device shipment volumes increased sequentially with consumables increasing by 14.7% and devices by 80%. To generate trial in the second quarter, NJOY paired equity messaging how about its attractive product proposition with promotional support and saw compelling results at retail.

For the second quarter, NJOY's retail share of consumables was 5.5 share points, up 1.3 share points sequentially. NJOY's retail share of consumables grew in each of the past 9 months. We're also encouraged by NJOY's device share which we believe is an important indicator of trial and a potential leading indicator of longer-term adoption.

As a result of trial focused investments in the second quarter, NJOY expanded its share of devices in the multi-outlet and convenience channel to 25.4 share points, more than doubling its share of devices sequentially. We plan to continue investing behind NJOY's value proposition and equity to build awareness and generate trial. At retail, approximately 2/3 of fixture resets are now complete, and we've amplified NJOY's visibility and secured premium positioning through its trade program. NJOY is also reaching increased numbers of adult consumers through its [ events ] infrastructure and digital marketing programs. Through these engagements and NJOY's equity campaign, we can continue to position NJOY as a competitive alternative for adult smokers and vapors to responsibly grow NJOY over the long term.

On the regulatory front, in June, NJOY received marketing granted orders from the FDA for four menthol e-vapor products. NJOY has the first and only menthol e-vapor products authorized by the FDA, a significant accomplishment for the NJOY team and a testament to the quality of NJOY's robust science and evidence-based applications. Under the terms of our acquisition of NJOY, on receiving these authorizations, we made cash payments totaling $250 million in July.

Now all end market NJOY products are covered by marketing granted orders from the FDA.

In addition, NJOY submitted a supplemental PMTA to the FDA to commercialize and market the NJOY ACE 2.0 device, which incorporates access restriction technology designed to prevent underage use. NJOY also resubmitted PMTAs for blueberry and Watermelon pod products that work exclusively with the 2.0 device. These submissions mark further milestones in pursuit of our vision. And NJOY looks forward to responsibly providing flavored e-vapor options for adult smokers and vapers once authorized. NJOY's momentum, and the results are even more encouraging in the context of the broader e-vapor category, which continues to be overrun by illicit disposable products due to a lack of effective regulation and enforcement. At the end of the second quarter, we estimate the e-vapor category included approximately 19 million vapors, up over 3 million vapors versus a year ago.

During the same period, disposable vapors increased by $4 million to approximately 12 million vapors. Through the first half of 2024, we estimate the category grew by approximately 40%, driven by illicit flavored disposable products which we believe now represent more than 60% of the category. We estimate pod-based volumes declined by approximately 15% in the first half of 2024. And now represents approximately 15% of category volumes.

We are beginning to see the robust supply chains and lack of enforcement that supports the illicit e-vapor market, enable increased illicit activity across multiple tobacco categories, including nicotine pouches and cigarettes that are available to U.S. consumers.

In fact, we've identified more than 350 illicit nicotine [ pouch ] SKUs across both retail and e-commerce, with new brands launching every month. This illicit market echoes the beginning of their illicit e-vapor market several years ago.

In addition, we believe illicit cigarettes are becoming more prevalent in the U.S. and are evading regulation and taxation. We periodically conduct discarded [ PAC ] studies in select geographic markets. One such study in California found more than 25% of discarded cigarette packs were nondomestic products, originating primarily from duty-free channels and China. The FDA's inaction, lack of enforcement and slow pace of smoke-free authorizations continues to enable bad actors who are lately disregarding regulations.

For our part, we continue to actively engage with regulators, federal and state lawmakers, our trade partners and other stakeholders to build awareness of these issues and drive marketplace enforcement. This month, we sent the FDA data that supports our increasing concern that illicit market actors are expanding into the nicotine pouch category.

Our hope is that this information demonstrates the need for the FDA to direct enforcement actions against illicit nicotine pouch products in addition to illicit e-vapor products. We believe it is critical that the FDA acts decisively to regain control over the oral nicotine pouch category to prevent another widespread illicit market from taking hold. At the federal level, we saw some positive actions in the second quarter.

For example, in June, the Justice Department and the FDA announced the creation of a federal multi-agency task force, which is expected to coordinate and streamline efforts to bring all available criminal and civil tools to bear against the illegal distribution and sale of e-vapor products.

We have been advocating for multi-agency collaboration and view this announcement as a much-needed course correction for enforcement efforts.

In addition, we continue to see other actions at the federal level, including e-vapor related import refusals, civil monetary penalties and warning letters issued to manufacturers, retailers and wholesalers of illicit products. In the absence of effective FDA enforcement to date, many states are stepping up to address this issue.

As of today, 11 states have passed legislation requiring manufacturers to certify that they are compliant with FDA requirements and 4 states are considering similar legislation. Enforcement has started in 4 states with the balance set to begin in the second half of 2024 and 2025. When properly implemented and comprehensively enforced, we believe state registry bills can be effective.

We continue to believe in the promise of a responsible and fully regulated tobacco industry.

As we stated in the past, regulation without enforcement is indistinguishable from no regulation at all. We're hopeful to see more meaningful action and enforcement activity over the next year.

Let's turn back to the oral tobacco category where all nicotine pouches grew 12.3 share points year-over-year and now represent nearly 42% of the category. All nicotine pouches were the primary contributor of the estimated 9% increase in oral tobacco industry volume over the past 6 months. Helix participated in the category growth, growing on reported shipment volume by 37% to 41 million cans during the second quarter. Helix continues to invest strategically and responsibly behind on! This spring, Helix launched a new trade program that secured the #1 retail fixture position for nearly 80% of on!'s volume, creating broader visibility of the on! brand. And in June, Helix introduced a fresh new look for on! packaging and a new equity campaign, it's to further differentiate the brand. Encouragingly, we saw consistent on! share momentum throughout the quarter. on!'s retail share grew in each of the past three months to 8.1% for the quarter, an increase of 1.2 share points versus the prior year and a 1 share point sequentially. Helix remains focused on long-term profitability and delivered these impressive results while reducing on! promotional spending year-over-year.

We are very excited about the prospects and potential for on! PLUS, an innovative pouch product made using our proprietary "soft-feel" material, which is designed for adults to dip and dual users with cigarettes. Early international results continue to show that on! PLUS is a growing competitive player in the nicotine pouch space in Sweden and the United Kingdom. In both markets, on! PLUS has been incremental to our photo portfolio, sourcing mainly from competitive brands with minimal cannibalization. In Sweden, levels of trial are increasing, and e-commerce repurchase rates are strong, above 30%. Supported by these results, we expanded on! PLUS distribution beyond e-commerce into 2,000 key retail accounts in Sweden, including [indiscernible] and [ ICA ]. In the U.K., following the launch of on! PLUS, the on! portfolio is the #2 brand in e-commerce. And Helix recently secured on! PLUS distribution in 1,000 retail stores. Consumer feedback indicates that consumers enjoy the innovative on! PLUS pouch and view it as a unique point of differentiation in the category.

Turning back to the U.S. market. Helix submitted PMTAs to the FDA for on! PLUS in June. These PMTAs were submitted for three varieties: Tobacco, Mint and Wintergreen, each in three different nicotine strength options. We believe our innovation in the nicotine pouch space can be a meaningful contributor to our smoke-free goals once authorized in the U.S. In summary, it was an exciting quarter for Altria. We made significant progress towards our vision with in-market products and achieved important milestones to prepare for future success. We're confident in the long-term outlook for our smoke-free portfolio and we have a significant opportunity to responsibly lead the transition of adult smokers to a smoke-free future. I believe we have the appropriate strategies in place to execute our growth plans, and I want to thank all of our employees who continue to work tirelessly to make our vision become a reality. I'll now turn it over to Sal to provide more detail on the business environment and our results.

Thanks, Billy. Adjusted diluted earnings per share was unchanged in the second quarter and declined by 1.6% for the first half.

Our first half results were consistent with our expectations.

For 2024, adjusted diluted EPS growth weighted to the second half due to the timing of the NJOY acquisition in June 2023 and the impact of two additional shipping days in the second half of the year. Therefore, we are narrowing our full year 2024 guidance range and now expect to deliver adjusted diluted EPS in a range of $5.07 to $5.15, representing a growth rate of 2.5% to 4% from a base of $4.95 in 2023.

Let's turn to an update on consumer and industry dynamics. Cigarette industry shipment volumes remained pressured during the second quarter and first half, due primarily to macroeconomic factors and the growth of illegal disposable e-vapor products.

While the rate of inflation has stabilized in recent months, we believe adult smokers remain under economic pressure as the cumulative impacts from prolonged inflation persists and constrained discretionary spending. Late last year, we share our estimate that the growth of illegal disposable e-vapor products contributed to cigarette industry declines in a range of 1.5% to 2.5% and committed to continue evaluating this dynamic trend.

As we've continued to see elevated growth of illicit e-vapor due to lack of enforcement, we believe that cross-category movement has been higher in recent quarters than our previously estimated range. We estimate that cross-category movement from cigarettes primarily to illicit disposable e-vapor products contributed an estimated 2% to 3% of the cigarette industry decline over the last 12 months and have reflected these updates in our decomposition of cigarette industry decline rates.

We will continue to monitor the illicit e-vapor market and provide updates as we enhance our estimates in this space. In the smokeable products segment, our strategy continues to maximize profitability over the long term while appropriately balancing investments in Marlboro with funding the growth of smoke-free products. Segment adjusted operating companies income declined by 2% to $2.8 billion in the second quarter and by 2.3% to $5.3 billion in the first half.

As we look to the second half of the year, in addition to the two additional shipping days, I'll remind you of the expiration of legal fund payments related to the master settlement agreement in the fourth quarter, which we previously disclosed in our 2023 10-K. Adjusted OCI margins expanded to 61.6% for the second quarter and 61% for the first half. This performance was supported by strong net price realization of 9.9% for the quarter and 9.3% for the first half. Marlboro continued to be the undisputed category leader with a retail share of 42% in the second quarter, down 110 versus the prior year and unchanged sequentially.

Within the premium segment, Marlboro expanded its share to 59.4%, an increase of 0.7 share points versus the prior year and 110 sequentially. The Smokeable Products segment reported domestic cigarette volumes declined by 13% in the second quarter and 11.5% for the first half. When adjusted for trade inventory movements, smokeable products segment domestic cigarette volumes for the second quarter and the first half declined by an estimated 11% and 10.5%, respectively. At the industry level, when adjusted for trade inventory movements, second quarter domestic cigarette volumes declined by an estimated 9.5%.

For the first half, when adjusted for trade inventory movements and other factors, we estimate that adjusted domestic cigarette industry volumes declined by 9%. The discount segment grew one share point year-over-year and 210 sequentially in the second quarter. We believe these results were driven in part by macroeconomic pressures on adult smokers and competitive activity. In cigars, reported shipment volume decreased 0.9% in the second quarter. Middleton continued to contribute to smokable products segment financial results and Black & Mild remained the leader in the highly profitable, machine-made large cigar segment.

Moving to the oral tobacco products segment. Adjusted OCI grew by 1.8% in the second quarter and 3.1% for the first half. Adjusted OCI margins decreased by 2.4 percentage points for the second quarter and 1.2 percentage points for the first half, as Helix continued to invest in the growing oral nicotine pouch category. Reported shipment volume decreased 1.8% for the second quarter and 2.5% for the first half as [indiscernible] growth was more than offset by lower MST volumes. When adjusted for calendar differences and trade inventory movements, we estimate that second quarter and first half oral tobacco products segment volumes declined by approximately 3% and 3.5%, respectively. Oral Tobacco Products segment retail share was 37.9% for both the second quarter and first half as declines in our MST brands were partially offset by the growth of on! Evolving consumer preferences and the accelerated growth of oral nicotine pouches have continued to impact MST products.

As a result, we determined that the estimated fair value of the [ school ] trademark at June 30, 2024, was below its carrying value and recorded a noncash pretax impairment of $354 million. Despite this, we remain encouraged by the resilience of Copenhagen, the long-standing #1 brand in MST, and the continued growth of on! in nicotine pouches, which surpassed [ goal ] to become our second largest oral tobacco brand at retail.

Turning to ABI's financial results. We recorded $145 million of adjusted equity earnings for the second quarter, up 9.8% versus the prior year.

As a reminder, we used the equity method of accounting for our investment in ABI and report our share of ABI's results using a one quarter lag. Accordingly, our second quarter adjusted equity earnings represent our share of ABI's first quarter earnings reduced by our lower ownership percentage following the partial sale of our ABI investment, which occurred late in the first quarter.

Lastly, on capital allocation. We returned significant value to shareholders during the first half of the year, supported by the partial sale of our investment in ABI, we returned $2.4 billion to shareholders through an accelerated share repurchase program, which was completed during the second quarter. At the end of the quarter, we had approximately $1 billion remaining under our currently authorized share repurchase program, which we expect to complete by the end of this year.

We also paid $3.4 billion in dividends, resulting in total cash return to shareholders of $5.8 billion for the first half.

Our balance sheet remains strong.

Our debt-to-EBITDA ratio as of June 30 was 2.1x, in line with our capital structure goal of approximately 2x.

As we continue to execute on our vision, we remain committed to creating long-term value for our shareholders and maintaining a strong balance sheet. With that, we'll wrap up. and Billy and I will be happy to take your questions.

While the calls are being compiled, I'll remind you that today's earnings release and our non-GAAP reconciliations are available on altria.com. We've also posted our usual quarterly metrics, which include pricing, inventory and other items.

Let's open the question-and-answer period. Operator, do we have any questions?

[Operator Instructions] And our first question will come from the line of Bonnie Herzog with Goldman Sachs.

I had a question on your guidance this morning.

You narrowed your EPS guidance that implies the midpoint stays the same. And it does suggest a decent step up of growth in the back half.

So I guess I'm wondering what some of the drivers of that growth will be. And ultimately, how much visibility do you have on this given really has been a challenging environment? And then how should we think about the implied back half EPS growth, especially given the investments you have been making behind smoke-free and will those ramp? Or are they going to slow down in the back half?

Sure. Bonnie, as you said, we were able to narrow guidance.

Our EPS for the first half was in line with our expectations.

As far as the second half, let me point to a few factors. Remember, we're lapping the acquisition of NJOY, which occurred in June of last year.

We also have two extra shipping days, and there are a couple of other items I'll point out. The benefit of our accelerated share repurchase program is back half weighted. And then as I mentioned earlier, there'll be the expiration of the legal fund which is part of our MSA costs, and that expires in the fourth quarter of this year.

And then I guess my second question would be on your smokeable segment. Despite expanding op margins, which have been quite impressive, your dollar profits didn't increase again in the quarter. And really, this has been a concern. Obviously, the Sharp Sig volume declines continue to weigh on your top line despite what I would characterize as robust net price realization. But what about the controllable costs in the quarter, which were up high single digits. Could you talk a little bit more about maybe the drivers behind these costs? And then ultimately, going back to your EPS guidance, does that imply that your smokable profits are expected to grow this year? Or are you just assuming flat profitability and you can still hit your EPS guidance without smokable profits growing?

Yes. There's a lot to unpack.

So I want to make sure I get to all your questions, Bonnie, if I don't, please follow up. I'm going to work a little bit backwards.

So let's talk about smokable for a minute. Remember, we are managing that business to maximize profitability and balance investments behind Marlboro in our smoke-free products. And we're really pleased with the strong net price realization. We're pleased with the strong margin performance. But during economic difficult times for our consumers.

We are going to support them, and we're doing that, I think, pretty effectively through our RGM strategies, which include investments in Marlboro Black. In the second half of the year, there are some tailwinds that we expect to see.

Some have already mentioned, right, the two extra shipping days that occured in the back half of the year, the expiration of the legal fund in the fourth quarter. We'll also be lapping the investments we began to make in Marlboro Black last year, which really is an important tool to engage with consumers who are facing difficult economic times and maybe more price sensitive.

So we feel really good about the progress in the smokeable segment and the progress going forward with that as well.

So that's the smokable segment.

As far as the back half of the year, I think I've talked to you about and talked about the individual items that were that will be tailwinds to our EPS growth in the back half of the year. But we don't manage the business quarter-to-quarter.

We are managing it for the long term. and we're really pleased with the financial progress. But volumes are down, and that will drive controllable costs up on a per pack basis. And part of margin growth is both pricing and effective cost management. There are a couple of items that we've mentioned.

So we have a base inflation rate for MSA of at least 3%. And then I talked about this last quarter and it disproportionately hit the first quarter, but industry profits from a leading competitor are lower than expected.

So that is driving some of our MSA costs. But again, our folks do a great job of using technology thinking about better ways of continuing to execute our strategy. And then having flexibility where we could manage cost between smokeable and then use that infrastructure in our newer products.

I think you've seen the strong results in our innovative smoke-free products.

Our next question will come from Matt Smith with Stifel.

I want to tie together a few comments from the prepared remarks. The impact of cross-category movement on the cigarette industry decline rate is now higher. That's -- you talked about that being largely driven by the growth in illicit vapor products.

So as enforcement steps up, albeit with a limited impact of the broader market today, can you talk about how adult consumers are reacting in terms of switching to compliant products in vapor or the impact to the cross-category headwind where you are seeing some progress on those enforcement efforts?

Yes. And that is the key point that you point out, Matt.

I think when you think about it, when we talk about continued momentum building, that momentum is really around awareness. And I think we have their attention. We need to translate that momentum and awareness to momentum in action.

And so yes, there are some limited actions that have been taking place, but they need to step up significantly. What you saw in that increase in category movement to illicit vape is the prevalence of the illicit vape in the marketplace.

Just to give you an example, you heard a store mentioned at the hearing on Capitol Hill with the FDA and DOJ, we sent a representative in this week, and those [indiscernible] are still available and they were able to purchase it.

So then we send them to stores around the FDA headquarters and within the shadow of the FDA headquarters, we found at least 5 stores where illicit vapes are prevalent and readily available.

So it's one thing to drive momentum and awareness, we need momentum in action.

And maybe just as a follow-up, specifically in Louisiana, which I believe is a state where you have a longer period of time where there's been enforcement, did you see adult tobacco users stay within their existing categories, meaning e-vapor? Or did you see consumer shift between categories as enforcement stepped up?

Yes. We've seen some enforcement there. Remember, they started enforcing right away in Louisiana, and then there was a TRO, restraining order that put it on hold. What we did see as far as early trends. And again, I'll call them early because we need to see continued enforcement is that in the multi-outlet convenience channel, we did see authorized products go up as far as that, the illicit products went virtually to zero and that we did see a slight difference in cigarette volume declines. But what we see is because of the lack of enforcement across the U.S. is that once entrench those supply chains, and you heard in the remarks, we're seeing that now that the supply chains have been established, the bad actors are putting more products through that same supply chain.

So we need a concerted effort across the U.S. But those were the early trends we saw in Louisiana.

Our next question will come from Callum Elliott with Bernstein.

Maybe I can start by building on Matt's question.

Just wondering if you could give us an idea, I think you had mentioned in the prepared remarks, 11 states have passed measures, but only 4 have actually sort of enforced those measures or enacted the measures so far. Of the 7 where we're still waiting for enactment in the back half of this year in 2025, what proportion of U.S. cigarette volumes roughly below 7 states represent [indiscernible].

Yes, I don't have that number off the top of my head, Callum. I'll make sure IR follows up as far as percent of cigarette volume and e-vapor volume. The point you highlight is that I think they're trying to be disciplined and think about a total enforcement approach in these states, and that's why we see a bit of delay in the implementation of it. But I think it's an important step. Once they get the enforcement in place and really hold manufacturers accountable to it, we think they can have an impact. We would like to see this happen across the U.S. and at the federal level.

And maybe this segues nicely there then. Obviously, we've got a U.S. election later this year and whatever happens, we're going to have a new President now.

So my question is, are there legislative measures that could help with this problem and that we could maybe expect to see accelerate after the election? Or do you think this has [ does ] remain in the hands of the FDA?

Yes.

I think to your point, regardless of the outcome of the election, we'll certainly have a new administration. We really engage on both sides of the aisle and intend to work with either administration that comes in place.

I think the focus will be that the right approach is harm reduction. But to have a fruitful harm reduction, you need both authorizations for legitimate smoke-free products and enforcement for illicit products. And that prohibition is not the proper framework.

And so they really need to focus on restoring. We think the FDA has all the tools necessary and partnering with the other federal agencies, they just need to take action. But certainly, we will never turn down a legislative approach and we'll continue to propose approaches that we think could be effective, but we think the tools are there already.

And maybe final one, shifting gears a little bit. incredibly encouraging NJOY device share that you shared in the slides up at 25%, so a very big sequential step-up.

You spoke in your remarks, William, about how you think that could maybe be a leading indicator of consumable share? I guess my question is, can you talk about any recent data that you have on the conversion? Like what do the rates of conversion look like for [indiscernible]? And what proportion of people trialing the product actually you can experience?

Yes. It's early on yet, Callum, as we've repositioned to NJOY at retail given a greater visibility and really have both equity a new equity campaign highlighting the benefits of NJOY over other products and the advantages the consumer can have. I understand your question, and we'll be sure to share those when we feel like we have enough data on hand to be able to project those.

Our next question will come from [ Faham Baig ] with UBS.

A couple from me as well.

Firstly, I wanted to get your thoughts on the ABI stake and the credit rating given [ fish ratings recent ] comments. I guess there are two questions within this.

Firstly, how important is the current investment-grade credit rating to you? And secondly, could this mean a further stake sell is unlikely in the net? And then the second question given it is proving quite a challenge to control these new alternative nicotine products and as you suggested, prohibition isn't valid. It shouldn't be valid. A large part of this expansion of illicit products has probably been due to the rapid evolution of these categories. And there are many factors that clearly weren't considered at the time these regulations were formed.

For example, synthetic nicotine, non-nicotine products, [ WSI ], et cetera. which has probably created an equal playing field. I wanted to get your view on what options do you believe authorities have to evolve regulation? And do you believe it is feasible to reset the deeming regulation date to permit new products as the industry seeks greater adoption of smoke-free products.

Let me start with your question on the credit rating in ABI, and then I'll turn it over to Billy.

So first, look, we believe it's in the best interest of our shareholders to manage a strong balance sheet and investment-grade credit rating is important because from time to time, we do enter the commercial paper market as our cash outflows vary over the course of the year, you pay MSA in April and things like that. But if you look at our history, in our allocation of resources and capital, we've taken a very balanced approach.

We have really strong cash-generative operating companies. After paying the dividend to our shareholders, we generally have over $1 billion in excess cash, and we're able to deploy that in a number of ways. In the past, we've deployed it through share repurchase, we have managed our maturity towers. We've paid off debt that is coming due.

So -- and we were able to provide in our corporate goals some -- a little bit of transparency related to our leverage goal of 2:1.

So obviously, managing the strength of our balance sheet remains strong.

As far as the ABI asset, there's really no change to how we view that asset. It's a financial asset. We think about it through the lens of voucher shareholder and long-term shareholder value.

So really no change to that at all.

Yes. And following up on your question about potential enforcement actions, we do believe they can bring the market back to order.

Some of the things that we've mentioned to the FDA and letters to them, just to give you a flavor of what we think they can do. The FDA really hasn't taken any action again, either in the form of litigation or civil monetary penalties against the largest illicit vapor manufacturers or the U.S.-based distributors.

If you think about U.S.-based distributors, the litigation, the distributors have assets that can be seized.

If you think about holding these illicit actors either civilly or criminally accountable for the activities they have in the marketplace. They can put all [indiscernible] on a list of products on a list that custom should prevent from entering the borders, impose the civil monetary penalties that they have at the maximum levels, not just warning leathers. And like I mentioned earlier to Matt, following up on warning letters, here, there was a store pointed out to them in a congressional hearing and the illicit vapor products are still available there at the store.

So there are some simple things, and then there are some that require this multi-agency collaboration but we believe could be effective.

You mentioned synthetic nicotine.

Just take the prevalence we're starting to see in nicotine pouch. When that statute was passed to give the FDA authorization over synthetic nicotine, it said any product that did not receive authorization and it gave a bid line that wasn't authorized, that should be legally available on the market. But we're seeing -- I mentioned 350 SKUs and more each month. It's just a matter of enforcement and holding people accountable to the regulation.

Our next question will come from [ Rob Bank ] with Barclays.

Three questions from me.

So the first is on the industry volume declines, which remain weak, but they are weak at a constant level. Well, we are seeing other parts of consumer weaken sequentially.

So is it fair to say that you are maybe seeing some green shoots and your key competitor was highlighting that they are beginning to see industry volume trends improve. Is that something you are seeing?

I think you could highlight some green shoots.

I think when you think about it, is certainly we've seen, like, let's just use inflation as one. We've seen inflation lessening, but it's not a matter of a quarter-to-quarter inflation. It's really a matter of the cumulative inflation that takes place.

And so the green shoots from a standpoint is you need some time of a steady marketplace for the consumer to adapt to their new conditions. And we try to highlight that for a couple of quarters.

So we're seeing some green shoots.

You highlighted the kind of a more steady decline. But then we highlighted just the opposite with illicit [ Bay ], where we're seeing increased consumers moving over because of the plethora of those products in the marketplace and being readily available.

So yes, there are some green shoots that we're seeing in the economics.

Sure. My second question is on this MSA legal bill, which the industry pays $500 million max cap, which will, I guess, run out by the end of this year.

So can you just help us think about the benefit to you in Q4 this year and then further in 2025?

Yes, sure.

You are correct. The total legal fund is about $500 million. We pay our fair share of that based on shipments and you'll get a 1/4 of that this year in the remaining three quarters in 2025.

And my last question is on leaf costs.

So your key competitor was highlighting that leaf cost inflation, which was almost low double digit in 1H is going to be lower in 2H and then unwind completely in FY '25.

So is that something you are also seeing? And will that also be a benefit as we look ahead for the next [ 18 ] months?

Yes. Well, look, we engage with domestic growers, primarily they're fantastic business partners. They work really hard to provide us with high-quality leaf you are seeing some inflation in the lead cost, their labor costs are up, fuel costs were up, obviously. We're blending multiple years of leaf in our product and as some of those economic factors move, it could influence our leaf cost. We're very fortunate in our businesses is that our cost of goods are fairly low for our products.

We have high margins in the cigarette category as an example, it's really MSA, FET, fees like that, that are the primary cost drivers in the cigarette business. But we have a terrific department that engages with our growers, and they do a fantastic job of getting high-quality lead at a competitive price, and they'll continue to do that work.

Our next question will come from Owen Bennett with Jefferies.

A couple of questions from me. And the first one, relates to industry wholesale shipments.

So there appears to be a sizable inventory headwind in the first half such that we've got cigarette industry shipments down close to 12% versus the adjusted decline of around 9%. There also seems to be a similar dynamic at play in traditional [ smokeless ].

So my question is, as we continue to see the shift over the new RRPs and more shelf space allocated to these products, do we expect this inventory dynamic to be an ongoing trend? So where shipment trends are worse than in market trends? Or do you think this will start to unwind at some point?

Yes. Thanks for the question, Owen.

I think you highlight inventories, and when you think about inventories, I would just encourage you to look at them a bit more longer term in the quarter. Certainly, from a standpoint of overall inventories, they tend to balance through time. But as we see volume declines, certainly, through time, you would expect some decrease in inventories commensurate with the decrease in volume, but that's more of a kind of a trend to trend basis, they're very similar.

I think also I would highlight you highlighted wholesale inventory included in there is some retail inventory I do think, as we've seen the plethora of illicit vapes as we see some capital allocated by retailers into the illicit [indiscernible] category.

And then just my second question is on RRP internationally. Well, two questions here. Do you have market share estimates for on! in Sweden and in the U.K.? And then the second question is, any plans for NJOY or even [ Swick ] internationally at any point over the next 12 months? As this could clearly be a way to offset some of the U.S. pressures.

So at least on the top line is obviously that the additional spend involved with [ us ].

Yes.

As far as on! in Sweden and the U.K., we haven't disclosed market share. We're still in the early stages of that. We tried to highlight some of the repeat purchases and some of the increased distribution.

So we'll get a little traction there, and then we'll be able to share those.

I think as far as NJOY, you see the activity in the U.S. with illicit vape.

I think as you look at least in the European community, it's a very similar type of situation taking place with a plethora of illicit vapes there as well.

Some countries are looking to try to garner and take control of that illicit vape market.

So we'll see how that plays out.

Our focus for NJOY right now is we feel like there's a huge opportunity here in the U.S., and that's where our focus is. And then as far as [ Swick ], we mentioned some learning that we would have as we approach year-end.

And so we'll share more about that as we get closer.

And there appear to be no further questions at this time. I would like to turn the call back to Mac Livingston for any closing remarks.

Thanks, everyone, for joining us. Have a great day. Talk to you soon. Bye.

And this concludes today's call. Thank you for your participation, and you may disconnect at any time.