Good day, and welcome to the Altria Group 2018 Third Quarter Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by Altria's management and a question and answer ask questions following the conclusion of the prepared remarks. I'd now like to turn the call over to Mr. Bill Marshall, Vice President, Investor Relations for Altria Client Services. Please go ahead, sir.
Thank you, Laurie. Good morning and thank you for joining us. We're here this morning Howard Willard, Altria's CEO and Billy Gifford, Altria's CFO to discuss Altria's 2018 Q3 and 1st 9 months business results. Earlier today, we issued a press release providing these results, which is 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 2017.
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 cause actual results to differ materially from projections. Future dividend payments and share repurchases remain subject to the discretion of Altria's Board. The timing of share repurchases depends on marketplace conditions and other factors. 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 the comparability of reported results. Descriptions of these non GAAP financial measures and reconciliations are included in today's earnings release.
With that, I'll turn the call over to Howard.
Thanks, Bill, and good morning, everyone. Altria delivered excellent third quarter adjusted diluted earnings per share growth of 20% and continued to return large amounts of cash to our shareholders. Our tobacco businesses are successfully executing against their strategies, while making strategic investments to drive long term success. Before moving to our Q3 results, I'd like to address recent FDA activity. In September, the FDA asked several companies, including Altria, to provide plans to address underage use of e vapor products.
We welcomed FDA's action and we agree that the reported rise in underage use of e vapor e vapor products is alarming and immediate action should be taken. We're also concerned that youth use of e vapor products may jeopardize the harm reduction opportunity for e vapor. We recently met with Commissioner Gottlieb to discuss steps that could be taken to address underage access and use. Consistent with our discussion with the FDA and because we believe in the long term promise of e vapor products and harm reduction, we're taking immediate action to address this complex situation. 1st, Newmark will remove from the market Mark 10 Elite and Apex by Mark 10 pod based products until these products receive a market order from the FDA where the youth issue is otherwise addressed.
2nd, for our remaining Mark 10 and Green Smoke Cigaleight products, Newmark will sell only tobacco, menthol and mint varieties. Newmark will discontinue the sale of all other flavor variants of our CIGA like products until these products receive a market order from the FDA where the youth issue is otherwise addressed. Although we don't believe we have a current issue with youth access or use of our e vapor products, we are taking this action because we don't want to risk contributing to the issue. Additionally, we will support federal legislation to establish 21 as the minimum age to purchase any tobacco product. We think it makes sense to accomplish this through a phased in approach.
For context, approximately 5% of adult tobacco consumers are legal age through 20 and that this age demographic represents approximately 2% of cigarette industry volumes, 4% of smokeless industry volumes and 15% of e vapor industry volumes. We of course recognize the impacts these decisions will have on our consumers, trade partners, suppliers and others. We believe these actions are essential to addressing the youth e vapor epidemic and preserving the long term harm reduction opportunity for e vapor and we fully intend to offer a compelling portfolio of e vapor products for adult smokers and vapers. Through the FDA's product review pathways or when underage use of e vapor is addressed. After removing Newmark's pod based products and Sigalite flavor variants, approximately 80% of Newmark's e vapor volume in the Q3 of 2018 will remain on the market.
These actions are outlined in our written response to the FDA, which was posted earlier this morning to altria. Com. With that, let's move now to our operating results. The Smokeable Products segment performed in line with our expectations. While adjusted operating companies income in the 3rd quarter was essentially flat from the prior year, PM USA continues to make progress stabilizing Marlboro share through investments in the brand's equity.
Marlboro's retail share decreased 1 tenth of a share point in the 3rd quarter to 43.1 percent, but is unchanged from its Q4 2017 share. Billy will provide additional detail on our brand equity investments in a minute. Next, the Smokeless Products segment delivered adjusted operating companies income growth of 7% in the 3rd quarter, largely driven by strong net price realization. USSTC's total smokeless share grew 0.1th of a share point in the 3rd quarter to 54.1%. On a combined basis, Copenhagen and Skol share was unchanged in the 3rd quarter at 50.7% and was up 0.3% from the Q4 of 2017.
In heated tobacco, PM USA's initial lead market plans for IQOS are ready, and we remain hopeful for FDA authorization by year end. So in summary, we remain confident in our ability to deliver long term value to shareholders by maximizing our core tobacco businesses, pursuing innovative reduced risk products and responsibly leading our industry forward through tobacco harm reduction. We believe our year to date performance positions us well to deliver on our full year plans. As a result, we are tightening our guidance, raising the lower end of our full year 2018 adjusted diluted EPS guidance to 3.95 for a revised range of $3.95 to $4.03 representing a growth rate of 16.5% to 19% from the 2017 base. I'll now turn it over to Billy to provide more detail on our quarterly performance.
Thanks, Howard, and good morning, everyone. Let me start with the Smokeable Products segment. In the Q3, Smokeable adjusted OCI was essentially unchanged from the prior year as higher resolution expenses, lower cigarette volume and higher costs, including strategic business investments, were offset by higher pricing. Smokeable adjusted OCI margins declined 1.4 percentage points to 50.4%. The Smokeable Products segment's reported cigarette shipment volume declined by 3.7% in the 3rd quarter, primarily driven by the industry's rate of decline and retail share losses, partially offset by trade inventory movements.
After adjusting for trade inventory movements, cigarette volumes declined an estimated 5% in the quarter and an estimated 5.5% in the 1st 9 months. We estimate that cigarette industry volumes declined approximately 4.5% in both the Q3 and for the 1st 9 months. While the economic environment remains positive for the adult tobacco consumer, we believe increased gas prices, continued movement by adult smokers among tobacco categories, including e vapor and state excise taxes affected cigarette volumes in the quarter. We estimate the state excise tax increases on July 1 in Kentucky and Oklahoma had an impact to cigarette industry volumes of just under 0.5%. As Howard mentioned earlier, PM USA's investments have helped stabilize share for Marlboro.
Marlboro's limited time rewards program in Texas, Points West, exceeded PM USA's expectations in creating excitement for the brand by increasing Marble's digital engagement with adult smokers. During the 9 month enrollment period, over 150,000 adult smokers 21 and older enrolled in the program and entered nearly 10,000,000 PAC codes. And the frequency of engagement on marble.com increased by over 45% in Texas. Building off the success of Points West in Texas, which ended in the Q3, PM USA plans to launch mobile rewards nationally in January of 2019. PM USA is excited to offer Marlboro Rewards to adult smokers 21 and older with the goal of increasing its digital leadership, brand engagement and Marlboro's already strong brand equity and loyalty.
On the product side, Marble Ice has performed well since its national expansion in the Q1, with adult consumers responding favorably to the innovative resale pack. In this quarter, PM USA is expanding this packaging technology to other offerings, including MarlSmooth, a unique menthol offering. PMUSA continues to pursue opportunities to use this innovative packaging in the future. In the super premium tobacco and water segment, Nat Sherman has delivered solid performance following the regional expansion of Nat's across the Western United States earlier this year. And the team is evaluating further expansion opportunities.
The cigar business continues to perform well, growing reported shipment volume nearly 7% in the 3rd quarter and more than 4% for the 1st 9 months. As a reminder, for the 4th quarter, the smokeable segment will have an extra shipping day compared to the prior year. Turning to our smokeless products segment. Adjusted OCI grew 7% in the 3rd quarter, primarily driven by higher pricing, partially offset by higher costs. Smokeless Products segment adjusted shipment volume declined an estimated 0.5% for the 1st 9 months.
Smokeless industry volume declined an estimated 1% over the past 6 months. We continue to believe that smokeless industry volume being affected by higher pricing in the category and adult tobacco consumer movement among tobacco products, including e vapor products. During the Q3, USSTC announced plans to expand Copenhagen Smooth Wintergreen to 22 states. This offering provides a balanced wintergreen flavor for adult dippers seeking a differentiated less intense wintergreen flavor. In September, the FDA accepted and filed for substantive scientific review USSTC's modified risk tobacco product application for Copenhagen snuff.
The FDA will now begin this review process, which includes opportunities for public comment. We're looking forward to engaging with the FDA on this application. Turning to our alcohol assets. St. Michel's adjusted OCI decreased $7,000,000 in the 3rd quarter, primarily driven by higher marketing and sales expenses and lower shipment volume, partially offset by favorable mix.
In beer, adjusted earnings from our equity investment in AB InBev were $224,000,000 in the 3rd quarter, which reflects Altria's share of AB InBev's 2nd quarter results. We continue to return cash to shareholders, paying out over $3,900,000,000 in dividends through the 1st 9 months of 2018. And in August, we increased our dividend by 14.3%, the 2nd increase this year, resulting in an overall quarterly dividend rate increase of 21.2% since the beginning of the year. Altria's current annualized dividend rate of $3.20 per share represents an annual dividend yield of 5.2% as of October 19, 2018. We also repurchased approximately $367,000,000 of shares in the Q3 and over $1,300,000,000 for the 1st 9 months.
As of the end of the third quarter, we had approximately $700,000,000 remaining in the current share repurchase program, which we expect to complete by the end of the Q2 of 2019. With that, we'll wrap up and Howard and I will be happy to take your questions. While the calls are being compiled, I remind you that today's earnings release and our non GAAP reconciliations are available on altru.com. We've posted our usual quarterly metrics, which include pricing, inventory and other housekeeping items. We've also included some historical data on the discount category dynamics we discussed last quarter, specifically the churn between deep discount and branded discount.
The chart shows that the overall discount category retail share has been relatively stable over time and that deep discount retail share, while experiencing recent growth, has been at even higher levels in the past than currently. With that, I'll open the question and answer period. Operator, do we have
Our first question comes from the line of Michael Lavery of Piper Jaffray.
Good morning. Hi, Michael.
Your stance with the FDA in this proactive approach, I think reinforces the leadership role you've had with regulatory stuff.
But can you
just elaborate a little bit on your thinking on the pods versus cigalikes and what some of the distinctions between the two might be that you're thinking about as you make this announcement?
Yes. I mean, I think the way we thought about this was that we believe evapour has a lot of opportunity to convert adult cigarette smokers in the short, medium and long term. But clearly, this significant increase in youth usage of the products puts that at risk. And we think rapid remarks from the FDA, I think we concluded that the driver of the recent increase we think is pod based products and flavored products. And so we thought that the two actions that we took addressed the drivers of the increased youth usage here in the short run.
And then of course, our decision to support going forward at the federal level of 21, we think also can help address this issue because the data we've seen from the PATH study shows that the primary source of youth access to these e vapor products is social access. And we think if the minimum age to purchase is raised to 21, should have a significant impact on that.
That's helpful. Thank you. And then just one more, as you look at some of the brand reinvestments you've been making this year. Could you just give a little more color, elaborate some? I know you touched on Points West and the expansion of Marbo Rewards.
Can you just give a
little more color on what those involve or just maybe bring that to life a little bit and help us understand some of what those programs look like?
Sure, Michael. I think if you would look at the overall brand equity that we've spin on as well as product launches. So from a standpoint of some of the SKU launches that we had in the beginning part of the year through Q3, when you want something like that, you want to make sure you have the support in the marketplace and the right call out to consumers. So we had Marlboro Ice, we had Copenhagen Smooth, we had the expansion of Nats. And so those are product launches that occurred through the first 9 months of the year.
And Michael, specifically on Points West, which I know was only available in Texas, so you might not have seen it. Essentially, it's a program that drives up engagement between Marlboro consumers and our digital resources where they can scan or enter unique codes on their pack in order to earn rewards. And we found that it significantly increased consumer engagement with marlboro.com. And of course, we're going to broaden that to national availability next year, which we think is a big step forward for the engagement with our digital assets.
And I know that branded merchandise isn't part of the rewards program the way I believe it had been long ago, but what's what are the kind of rewards that the program includes?
You're exactly right. It's not branded merchandise the way it might have been a couple of decades ago. It includes we'll make charitable contributions on the behalf of the consumer or they can get a variety of digital rewards, whether it's digital cards or movie passes or those kinds of things. It's a much lower cost way to do it if you use more of a digital approach. Okay, great.
Thank you very much.
Your next question comes from the line of Chris Growe of Stifel.
Hi, good morning. Hi, Chris.
Hi. Just had a question for you if I could. Just to understand as you entered the year and you had the tax savings you're spending quite aggressively behind the business this year, seeing some good success behind Marlboro. I had two questions related to that. One would be that part of your spending plans for the year did include IQOS that obviously has not occurred yet.
We're hoping it happens by year end obviously. Is that pushing any year spending in 2019? I guess, is question number 1. And then related to that, Marlboro is showing some progress and stabilizing its share. Are you satisfied with that performance or would you just spend more behind that to try and accelerate that rate of market share growth?
Yes, I'll take the first part of that, Chris. From the standpoint of the investment spending, you're right. We had tagged some money and investment related to IQOS. We have made some of that investment to be fully prepared for when that's approved by the FDA so that we're ready to launch. From a standpoint of IQOS, you're right, if we don't spend it this year, it certainly pushes into next year and we're excited to spend that money behind the brand and the launch of that.
From a standpoint of the impact to the year, I think we've incorporated that in the guidance. We always have a list of investments that we want to make. So you point out 1 in IQOS that's a favorable that allowed us to invest in other parts of the business.
And can I address your question on how we feel about Marlboro performance in the cigarette category? And I would tell you that we are very pleased with the performance across our portfolio in the cigarette category. And I think that we feel that our investments have generated quite nice outcomes this year. And I might refer you to kind of the long term performance in the PM USA portfolio and I'll take you back to 2011 before the launch of the Marlboro architecture and compare it to the 1st 9 months of 2018. Marlboro is up 0.4 share point.
The Altria Group share in the discount category is up a share point and a half and the total discount category is down 0.6 of a share point. And of course, both Marlboro and our discount brand L and M are at much higher margins in 2018 than they were in 2011. So even though there's a little bit of movement, a or 2 this year compared to last year, we tend to manage for the long term and feel very good about the performance of the cigarette business.
Okay, great.
Thank you.
And if I could just
ask one quick one in relation to your these pod based products. Is that something that you're prepared to seek approval for to go in through the PMTA process to the FDA or will you wait to do that? Just curious kind of where you stand in your ability to seek that approval?
Yes. I think you're right. What we announced is that we're going to withdraw those products either until we file a PMTA or until FDA takes other action to address youth usage. And that means that one path to get those products or new pod based products on the market for us is to file a PMTA. I don't know that we're in a position to announce when we expect to file that today, But we really feel like in light of this dramatic increase in youth usage, withdrawing those products until the PMTA is filed is one path forward.
Okay. Thanks so much.
Your next question comes from the line of Judy Hong of Goldman Sachs.
Hi, everyone. This is Jack on the line for Judy. So I have a couple questions just to start off. I was wondering if you could dig a little bit more into your underlying performance of minus 5 versus industry of minus 4.5. Is that slight share loss from down trading or maybe is that all we're seeing from Kentucky and Oklahoma?
So if you could just generally give some color there, that would be great.
Sure. You're right. The cigarette industry volume on a year over year basis was down 4.5% and our adjusted cigarette volumes were down 5. I think that is literally just a little bit further decline because on a year over year basis, our share was down a bit. But I would point out that our share has been stable since Q4 of this year, and we really feel now that we've lapped the impact of the California state excise tax increase that Marlboro's performance is stable and quite satisfying.
Okay. And then briefly, just on the ABI dividend cut, like given the volatility in their as
well
as what as well as what their payout policy based on net income might mean for your share of the dividend going forward?
Yes. I think when you look at that, we still think it's a great investment for the long term. From a standpoint of the actual dividend that they a rebase that they announced today, if you think about where we were last year and the dividends received 50% of that, it really has no significant impact to our liquidity, our earnings stream or our dividend policy.
Okay, got you. And then if I could just sneak one more in there. What are your thoughts on margin flow through this quarter? Is there anything you could call out in terms of where those expenses were going and what might we expect for the balance of the year on that?
Yes. I think when you look at that from a standpoint where those are going, it's the business investments we've been calling out all year. So you'll recall, we were investing around our R and D capabilities and applications that we filed. It's around the product launches and the reinvestment in the brands that have taken place through the 1st three quarters. As far as the 4th quarter, I can point you to the overall guidance, but we don't guide to margins going forward looking forward.
All right, great. Thank you so much.
Thank you.
Your next question comes from the line of Vivien Azer of Cowen.
Hi, Vivien. Hi, good morning. So I also wanted to talk about volumes. I fully appreciate the incremental headwinds from tax and from gas. But if I think back prior to 2010, because we've obviously been kind of in a benign state excise tax environment for much of the last decade and changing and reverting back to kind of normal course.
But prior to 2010, state excise taxes, if I recall correctly, on a weighted average basis used to go up like 8% to 12 percent a year. And the cigarette industry volume declines were down 3% to 4%. And so that was kind of embedded in the underlying price elasticity. So the thing I'm having a hard time reconciling is your commentary over the past year that price elasticities are generally holding up, but these incremental excise taxes are driving cigarette volume declines outside of the historical range. So any color you can offer would be helpful there.
Thanks.
Sure. I think that we continue to have ample evidence that price elasticities have not changed. And you are right that with the exception of the California excise tax increase, which was significant, even the more recent state excise tax increases have not been out of line with the excise tax increases we had in the deep history. So I think it is less, again setting aside California, it is less increased price elasticity action that is causing the 4.5% decline in the category. And I think it's really it's a bit of a tick up in the secular decline here over the last quarter.
And I think it's related partially to movement into the e vapor category.
Okay. That makes sense. Thank you for that. And have you gotten any color from the FDA on how your competitors are perhaps thinking about action in the e cigarette category?
We have not. We met with them last week and we really spent our time talking about our perspective on how to address the issue and we briefed them on the actions that at that time we were considering. And since then, we firmed them up and announced them this morning. We really don't have any visibility into competitor actions or frankly what the FDA will ultimately decide to do ultimately.
Terrific. Thanks very much.
Thank you.
Your next question comes from the line of Bonnie Herzog of Wells Fargo.
All right. Thank you. Good morning.
Hi, Bonnie.
Hi. My first question is on Marlboro. I guess I want to hear, in your opinion, would you characterize Marlboro as now stabilized as you set out to achieve? Or what more would you like to see with the brand?
Yes, I would characterize it as stable. I mean, if you look at it, it has been stabilizing since the Q3 of last year. And I wouldn't draw any alarm from the fact that it was down 0.10 on a sequential basis. I think that the share trend has stabilized, and we feel good about the investments we're going to make in the brand going forward.
And so given those investments, is it fair to assume that acceleration behind Marlboro is something that you're expecting to see. I guess, I would answer yes, given you're going to increase investments behind the brand. So we should see Marlboro accelerate in the future. Would that be correct?
Yes. I don't know that I'd agree with that. I think that we've been pretty happy with stable performance. And in a business where we're trying to maximize our profitability, I think we're pretty comfortable with stability and I don't think that we're trying to significantly grow Marlboro share going forward. And frankly, I think that we did have a bit of stepped up investment in Marlboro among many other things, particularly on the equity side.
But we don't feel like an increase in Marlboro investment going forward is necessary to retain that stability.
Okay. That's actually really helpful. And then I have a question on a completely different topic. On cannabis, You've recently commented that you guys might be exploring this category. So maybe first confirm this.
And then second, could you share for us why you see this as a potentially interesting opportunity and then how you might approach the category and what competitive advantages you might have?
Yes. I think I can confirm what we said at the Barclays conference, which is that we are exploring opportunities in the category. And we acknowledge that it is currently federally illegal in the U. S, but I think we think it's worth exploring the category because that might change in the future. And I'll hold back on explaining in more detail how we view the category because we're relatively early in our exploration.
Okay, that's fair. And then one final question from me, if I may, is on your wine business. Constellation has made some comments recently about the state of the industry and noted a lot of challenges, especially at the value end of the spectrum, and it's causing them to rethink their strategy and rationalize that end of their business. So I'd like to hear from you guys what trends you're seeing in wine broadly and then how you're positioning yourself to maybe take advantage of ongoing premiumization trends. And then just comment for us what your outlook is for this business and in terms of your or the potential for you to add brands to your portfolio?
Really essentially what's your long term strategy there? Thanks.
Sure. I think you are right that I would say over the last 2 years, the wine business has gone through some choppy water. First of all, what had been a nice long term growth rate slowed down. And then secondly, there had been very nice growth in the premium end of the wine business, which was $7 and above, which was where, Saint Michel had a strong position. And essentially, the strong growth rates actually moved from $7 and above to $10 and above.
And as a result of that, I think not only our business, but many of the other wine businesses are investing to reposition their portfolios to respond to that consumer activity. And that's part of what drove weaker performance this year than we've had in the long term past. We'll get the performance strengthened next year. But it is clearly not the same favorable category dynamics that we saw 2 or 3 years ago. I would also tell you that with regard to the wine business, it's a nice business for us.
Historically, it's been a nice contributor to our growth. But we do view it as a non core business where we're not going to make significant investments to add to that portfolio.
Okay. Thank you.
Your next question comes from the line of Nik Modi of RBC Capital Markets.
Yes. Good morning, everyone.
Good morning.
Just a quick question on on your commentary regarding ICOS that you made in your prepared remarks. You suggested that you're expecting to get approved by the end of the year. And I'm just curious on in your meetings with the FDA, was there something specifically said or because we've been waiting for quite some time for this approval to happen. So just wanted to get some more clarity around that.
Yes. I think what I said was I was hopeful that it would be approved by the end of the year. I have to tell you that as you know, I've been rather patient knowing that the FDA is reviewing this heated tobacco application in a category that's relatively new to them. But I really feel like given the strength of the PMI application and the passage of time that the answer should be due here in the near term. But of course, as you know, we're already beyond sort of the guidance the FDA gave on how quickly they respond.
So I think it's really hard to pin down exactly when that would come out. But it wouldn't surprise me at all if it came out between now and the end of the year. I think that the passage of time says that it's got to be getting ready to get an answer. We have not gotten any specific information from the FDA that something would come out in the near term. But I wouldn't necessarily expect that.
Normally, when FDA is getting ready to act, you hear about it because they tell you the definitive response.
And thanks. Very helpful, Howard. And then the other question, just on the category growth or decline rates, you have a situation where it's a little bit above the normalized trend, but the pricing realization that's been taken in the industry is also higher than what we've normally seen over the last, let's call it, 18 months. So I was wondering if maybe you can comment on that. Do you think there's some increasing kind of deceleration in the category just because of the pricing has been higher than normal?
Yes, that probably has a small impact given the price elasticity impact of pricing. But I think it's probably a short term elevation of the secular decline rate that's probably the bigger driver of it being 4.5% rather than the 3% to 4%. But I think you do point out something that I think is that I believe, which is that, I think we have a number of levers to pull in order to continue to drive nice business performance from PM USA, even if this elevated decline rate of the category persists for a few more quarters or into the future.
Great. Thanks Howard.
Thank you.
Next question comes from the line of Steve Powers of Deutsche Bank.
Hi, Steve. Thank you. Hello.
I guess as we think more about the voluntary actions that you took today, just based on your conversations, and I know you don't know, but do you see this conceivably as a kind of template that the FDA itself might follow in terms of incremental regulation on the e vapor market as we think about the next few months? And then secondarily related, do you see it at all as conceivable that the FDA might also consider pulling forward the revised product application deadline timeframe for e vapor products from now what is August 2022 to an earlier date? And if they did that, would you be in a position to comply?
Sure. I have to tell you, we had a good meeting with the FDA last week, and I think we spent quite a bit of time talking about the actions FDA is ultimately going to do than I think the rest of the community has in listening to the pretty significant comments that FDA has made. So I don't know that we know exactly what actions they're going to take. I would tell you that I am convinced that they are going to take action to address the increase in youth usage and drive it down. I'm not sure exactly how, but I think they're committed to doing that.
And frankly, the actions we took were the actions that we thought we could take that would have the biggest impact on addressing the increased use of e vapor products by you because we think that the long term opportunity that e vapor products present to converting adult cigarette smokers is potentially at risk if we don't address this youth issue. And we wanted to make a significant contribution to addressing the issue and I think FDA is going to help address it as well.
Okay. Thank you. I guess maybe following up a little bit, the incremental step up in the secular decline rate that you just called out earlier being driven by e vapor maybe around about a point or so, which is something we'd agree with. As you look forward, do you think this is more you consider this more of a one time step up, maybe even it sounded like perhaps even a temporary step up the way you're talking about it. But do you see that as more transient or fixed in nature?
Or do you see that as something that continues to accelerate negatively if e vapor penetration amongst adult tobacco consumers continues to grow?
Sure. I don't think I gave an estimate of the actual numerical contribution of increased growth of e vapor to the decline rate in cigarettes. But I would agree with you that I think that if you look at the decline rate of 4.5%, which is outside the 3% to 4% long term range, I do think that probably 2 of the drivers of that are cigarette smokers increasingly trying e vapor and then I think also probably the increase in gas prices most recently is probably another contributor. I think it's hard to tell how long it's going to persist. What we do know is that the stepped up growth in e vapor has been with us for the last at least 4 quarters.
And over those four quarters, the rate of decline has been about 4.5%. But we also know that both gas prices and growth in e vapor has been with us before and that it's significantly moderated. And I think that's had impact on the decline rate of the cigarette category. So I think we're going to have to wait and see what happens with both gas price gas prices on a relative basis and whether or not the growth rate of e vapor slows down.
Okay, great. If I could squeeze in one more. The incremental data you provided today and the earlier comments you made on the discount portion of the category was definitely useful. I guess my kind of question around that is do we take that data in your comments as glass half full or glass half empty? In other words, by noting that especially deep discount share of the category overall has been higher in the past.
Is that more to say that you think it's relatively stable and sort of the risk of discount proliferation is contained? Or is it more to be read that you're saying there's a precedent for it to go higher and it likely will? Just want to make sure I understand what you're trying to communicate.
We shared the data we did on the discount category because it's been the subject of a lot of discussion over the last 3 or 4 months. And I felt like some of our investors felt like there was something to be alarmed about. I have to tell you, we don't feel there's anything to be alarmed about and we provided this data to reinforce that belief. And I would just point out that over the last three periods, 'sixteen, 'seventeen and 'eighteen year to date, the overall discount category has been stable and it's much lower than it has been for the last 5 or 6 or 7 years. When you think about a consumer packaged goods category that has those kinds of discount fundamentals, that's a really good trend, in my opinion.
Now I know it's a little bit complicated because you've seen the deep discount portion of that up maybe a little more than a share point since 2011, twenty 12, and I think that was causing a bit of alarm from some folks. But I have to tell you, when you look at the fact that gas prices are back above year ago levels, and I don't think that given the strong economy that most adult cigarette consumers are at all in their brand choice because of that. But there is a relatively small group of consumers that when it costs them $10 more to gas up their car, they may very well be deciding to go in and save by buying deep discount rather than branded discount. And given the nice margin expansion we've had on branded discount and the fact that discount doesn't seem to be interacting with premium, we think that's a natural outcome of the environment and we don't find it alarming and we don't feel the need to invest to try and address it.
Okay, perfect. Thank you so much.
Your next question comes from the line of Pamela Kaufman of Morgan Stanley.
Hi, good morning. This is Rose on for Pam. Appreciate the detail you've given with regard to the volume levels even after removing the pod based products and then discontinuing some flavors. If you could just give us a sense for how much of an impact you anticipate on revenue and profitability from removing these products?
Yes, go ahead, Billy.
Yes, I think from a standpoint of the actual impact, I think it's clearly immaterial. I'm not going to quote numbers here. When you think about the standpoint of the pod base, we were in the launch of those products and Apex was available through e commerce. We think that the way taking the proactive approach allows us to sell through those products in the marketplace and have an orderly transition with withdrawal of those products from the
place. Okay. And just to clarify, is this a removal of all flavored products in e vapor? Or is it strictly the cig likes?
Yes. Our action results in us removing for our pod products. We're going to remove the whole branded pod business. With regard to our cigalike products, most of our volume is in tobacco flavored menthol or mint products, which we think are particularly appealing to adult cigarette smokers that are moving into our, cigalike e vapor products. Those will stay on the market.
And then we had other flavors that were not brown or green, I guess you would say, that we're going to remove pending a PMTA or other action that addresses the youth increase in e vapor.
That's really helpful. Thank you. And if I can just sneak one more in there. You talked about wanting to be proactive about addressing the youth issue. Just how much of this decision was driven by the FDA's request versus your actions to proactively volunteer to take these products off to market?
Yes. Our announcement is a set of actions that we came into the FDA contemplating. And I think when we met with FDA, when we emerged from the meeting, we were more certain that this was the right thing to do. But I think if there is any further action on the part of the FDA, we'll certainly take a look at whether or not there's more we should do. But we felt like this was a good first step.
Great. Thank you.
Your next question comes from the line of Adam Spielman of Citi.
Thank you very much. I have a couple of questions. First of all, in answer to Bonnie Herzog, you said on Marlborough, you didn't feel you needed to increase investments and maintain share. I suppose the other question is, if you actually cut your equity investment in Marlborough, do you think that would result in a decrease in market share? Or do you think the equity is sufficiently strong you could do that, I mean, within reason and still hold share?
So that's my first question.
Yes. I don't know that I think about it that way. I think we feel we make a variety of decisions around promotional investments, pricing and equity investments at any given year. And I think that our focus is on always maintaining 4 elements with regard to Marlboro. We want to make sure we have stable overall share.
We want to make sure we continue to have a strong equity. We want to make sure that we have good demographics and we want to grow the profitability. And we feel like we're having success against those four things next year and we think we're well equipped to do that in the future. I think the question about brand equity, I think you can always cut brand equity in the short run to save money. But in the long run, it catches up with you.
So we feel like the long term approach we've had with Marlboro makes sense and we feel like it's well positioned to be able to deliver against that in the future.
Okay. Thank you very much. And then I've got a question on your non Morbid portfolio. Now I noticed that sequentially quarter on quarter it was flat this quarter, which I was quite impressed by because it had been declining I think from the previous 3 quarters. And at the same time, it's interesting that deep discount also grew.
So on the one hand, you've got deep discount growing, 20 bps this quarter. But on the other hand, your portfolio was stable. And I was just wondering if you've taken any action to allow you to move from a declining trend to a flat trend.
Yes. I think it's tough to call it a trend, Adam, in the short term. When you're looking at sequential quarter to quarter, I think to call it a trend, we would look over a longer period of time. But certainly, we've become more effective and efficient with the way we allocate our resources across those other brands. And you recall as well that we launched Nats from us in the smokeable segment and expanded that to basically the western part of the U.
S. So we think we're seeing the benefit of that as well.
And can you just be a little bit more specific on the other actions? I get the Nats thing that you might have taken again in the said you were a little bit more efficient on your portfolio recently.
Yes. I think we're we've sharpened our tools from a standpoint of allocating resources to where they have the greatest impact and became more efficient with those resources around those other portfolio brands, including L and M. And so with those tools and the sharpening of the analytics around that, we're able to have a greater impact with either the same resources or less.
I would also tell you, Adam, that when you look at, for instance, some of our other premium brands like Virginia Slims or Parliament, I think we are at the stage where we have a very loyal core smoker base that chooses those brands. And I think that's part of the reason why you might see a moderation in the decline rate.
Okay. Thank you. And then my final question is coming back to this long term chart you gave us on deep discounts and branded discounts. And you said you were very comfortable where things are now. It's not causing you really much concern.
Is there any level of deep discount that would start to concern you? I mean, if we got to sort of back to 9%, would that be an issue for you, do you think?
Yes. I have to tell you that we are primarily focused on our premium portfolio. And I think that what would concern us would be a dramatic increase in growth of the overall discount category that would impact our premium brands. I think if the trend growth of deep discount continued to grow a bit more, I think as long as our Marlboro portfolio was performing well and we were getting the kind of profit growth we wanted, I don't think that would be particularly alarming. In the past, we have had quite nice business performance at PM USA with a discount share that's significantly lower than today.
So we know that formula works. Although I have to tell you that I am delighted, and this is a shout out to the L and M brand management team, I'm delighted with the success we've had with L&M over the last 5 or 6 years. It's got strong equity. But one of the reasons I'm delighted about it is not only has it grown its share and grown its margin, but it's done it, in my opinion, without taking share away from Marlboro.
Okay. Thank you very much.
Your next question is a follow-up from the line of Michael Lavery of Piper Jaffray.
Thanks. I have just two quick ones. I know the approval from the FDA hasn't come yet, but the HeatSticks would have Marlboro branding, if it is approved and gets into the market. How do you think about your Marlboro share objectives and heat sticks? Would that be considered a part of it?
I think the way we'll measure it is, is we will distinguish between our cigarette volume and cigarette share versus our Heat Stick volume and share. So we'll provide clarity as to what's which is heated tobacco products versus traditional cigarettes.
And again, I'm recognizing it's not approved yet. But looking ahead just a bit, if you got approval, it would be on an earlier generation of the device. Can you just speak to the FDA process and how you would have to what you would have to do to be able to get a newer device subsequently launched? Is the SE application process an option that's available there or does it need an entirely new PMTA?
No, I don't think it needs an entirely new PMTA. I think we believe that we can bridge the information in the original application to the new product, particularly given that some of the changes between the current device and heat sticks versus the one that we filed on. They don't tend to change the vapor. It's just a better piece of hardware. And we are working with PMI on doing that bridging work and we'll file that when we get that done.
Okay, great. Thank you very much.
Thank you.
Your next question comes from the line of Jennifer Maloney of The Wall Street Journal.
Hi, Jennifer.
Hi. How are you?
Good.
I'm wondering if you could clarify what you mean in your letter to the FDA when you say you support user fees for e vapor products?
Sure. The products in to make payments to fund the cost of FDA regulation. And I think because the initial set of products was on the mines when the legislation was passed, even though there are now significant numbers of e vapor products on the market, they do not pay into the FDA to support the cost of regulation. And we think as long as we're opening up the legislation, it's time to update that and have everybody pay their fair share.
Okay. Thanks. That's helpful. Also wonder what you think of Commissioner Gottlieb's indications over over the past couple of weeks that he may support restricting online sales of e cigarettes or restricting sales of e cigarettes to vape shops that in other words banning their sale in convenience stores and gas stations?
Yes, I would tell you that I know that whatever action the FDA takes is going to be based on science and evidence and data. And it was not intuitive to me when he talked about taking the products out of convenience stores. But I'm reserving judgment here until we understand what data he has. And I think there's been a lot said. And from that, I have concluded that the FDA is going to take action to address this youth epidemic.
But I think we're going to have to wait until they communicate their comprehensive plan to really understand exactly what they're going to do.
Okay. Thanks for your help.
Thank you. At this time, I'd like to turn the call back Thank you. This concludes today's conference call. You may now disconnect.