Good day, and welcome to the Altria Group 2016 Second 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 session. I would now like to turn the call over to Ms. Sarah Nokmas, Vice President, Investor Relations for Altria Client Services. Please go ahead, ma'am.
Thank you. Good morning and thank you for joining us. We're here this morning with Marty Barrington, Altria's CEO and Billy Gifford, our CFO to discuss Altria's 2016 2nd quarter and first half business results. Earlier today, we issued a press release providing these results, which is available on our website at altria.com or through the Altria Investor app. During our call today, unless otherwise stated, we're comparing results to the same period in 2015.
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. 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, which excludes items that affect the comparability of reported results. Descriptions of these non GAAP financial measures and reconciliations are included in today's earnings release. Now, I'll turn the call over to Marty.
Thanks, Sarah. Good morning, everyone. Thanks for joining us. Altria Group delivered strong 2016 second quarter and first half results, growing adjusted diluted earnings per share by 9.5% in the 2nd quarter and by nearly 11% for the first half. Our core tobacco businesses continued to produce very strong results with yet another solid quarter of income and retail share performance.
Marlboro matched the record retail share it set in the first half last year and Copenhagen and Skol produced excellent share results on a combined basis. And we continue to reward our shareholders paying out more than $2,200,000,000 in dividends to shareholders thus far in 2016. So here are some of the operating highlights from the quarter and the first half. The smokeable product segment continued to produce excellent results. Despite difficult year over year comparisons, it grew adjusted operating company's income by 4.5% in the 2nd quarter and nearly 7% for the first half.
You'll recall that last year, the smokeable segment grew adjusted OCI by nearly 16% in the 2nd quarter and over 14% for the first half. This growth in 2015 benefited from higher reported volumes at PM USA driven by stable industry volume and a trade inventory build influenced by upcoming cigarette excise tax increases. In the Q2 of 2016, the trade depleted inventory levels. So when adjusted for these inventory movements, PM USA estimates its 2nd quarter cigarette volume declined 3%, in line with PM USA's estimate for the total industry decline rate. For the half, PM USA estimates that its adjusted cigarette volume declined 1.5% in line with the industry.
For the first half of twenty sixteen, Marlboro's retail share was unchanged at 44.1%, matching its record share level set a year ago. Marlboro's 2nd quarter retail share also was 44.1%, down 1 tenth of a point from the year ago period. We are extremely pleased with the smokeable segment's performance in both the second quarter and first half of twenty sixteen. Our smokeless product segment continued to deliver excellent income performance, robust volumes and strong share growth on Copenhagen and Skol combined. USSTC grew adjusted OCI by nearly 14% in the 2nd quarter and more than 15% for the first half.
USSTC estimates that its volume after adjusting for trade inventory movements and other factors grew approximately 5% in the second quarter and 4% for the first half, while estimated smokeless industry volume grew approximately 3% for the past 6 months. Copenhagen and Skol increased their combined retail share by 1.5 points in the 2nd quarter and by 0.9 of a share point for the first half. Copenhagen's retail share gained nearly 3 points in the quarter, benefiting from the 1st full quarter of Copenhagen Mints national expansion at retail. Copenhagen Mint has performed extremely well, bringing excitement to the brand for both adult dippers and for the trade. Skol's retail share declined 1.3 points in the 2nd quarter, reflecting in part USSTC's portfolio strategy to invest behind Copenhagen and expand Copenhagen Mint.
And as you know, part of USFTC strategy is to grow the combined share of Copenhagen and Skol. In innovative tobacco products, Newmark continues to invest with discipline in developing a portfolio of products to meet the evolving preferences of adult tobacco consumers. In e vapor, market results for Mark 10 XL remain encouraging as Newmark has now distributed the brand into stores representing approximately 50% of e vapor category volume in mainstream retail channels, including C Stores. On the heated tobacco platform, our work with Philip Morris International on its FDA applications for pre market authorization and a modified risk tobacco product destination remains on plan. And we're making excellent progress on commercialization strategies for the U.
S. Market. As you know, in May, the FDA published its final deeming regulations, extending its regulatory authority to all tobacco products, including cigars and e vapor. We believe we're well prepared for these regulations and Newmark and Middleton are working now to comply with them. Our companies also continue to engage with FDA and other stakeholders to advocate for changes to the regulations where we believe appropriate.
So in summary, we're very pleased with our first half performance. Based on these results and our expectation that our businesses will deliver solid results over the balance of 2016, we now expect to deliver 2016 adjusted diluted earnings per share in a range of $3.01 to $3.07 representing a growth rate of 7.5 percent to 9.5 percent from our 2015 adjusted diluted EPS base of $2.80 As a reminder, this guidance does not include any impact from the proposed AB InBev, SAB Miller Business Combination as the transaction remains subject to certain approvals and the closing date has not yet been determined. Speaking of our beer investment, we're pleased with the significant progress AV InBev has made securing regulatory clearances. AB InBev has announced that it has obtained approval in 22 jurisdictions, including approvals in the United States, North America, Asia Pacific, Africa, Europe and Latin America. And AB InBev continues to pursue the remaining regulatory clearances that are necessary to close the transaction.
In addition, as you know, on July 26, AB InBev announced its revised and final offer to SAB Miller. This offer among other things would increase the pre tax cash that Altria expects to receive to $3,000,000,000 from the previously estimated $2,500,000,000 The other material terms related to Altria remain the same. Internally, our teams are preparing to transition our investment from SABMiller to the new combined entity. One such area of preparation is coordinating how our accounting teams will share information. And through this preparation, we now expect a timing difference between how we currently report results for our SABMiller investment and how we'll report for our investment in the new combined company.
Once the proposed transaction closes, we expect to record our share of results from the new company on a 1 quarter lag. Billy will provide you with more detail in his remarks. We remain excited about the proposed transaction and look forward to supporting the combination of these 2 great companies. Now I'll turn things over to Billy for more detail on our performance.
Thanks Marty and good morning everyone. I'll start with some more color on the smokeable products segment. Adjusted OCI margins expanded by 2.6 percentage points in the Q2 to over 50%, primarily driven by higher net pricing and lower SG and A costs, partially offset by higher resolution expenses. For the first half, adjusted OCI margins in the segment expanded 2.2 points to 49.2%, primarily driven by the same factors. PM USA's reported domestic cigarette shipment volume declined 5% in the 2nd quarter, primarily driven by the industry's rate of decline and trade inventory movements.
In the Q2 last year, the trade built inventory ahead of excise tax increases in several states that went into effect in the next quarter. For the first half, PM USA's reported cigarette shipment volume declined 2.1%. At retail, PM USA's overall share was unchanged in the 2nd quarter and grew 1 tenth of a point for the first half. In cigars, higher shipment volume contributed to the smokeable products segments performance in both periods. Middleton grew black and mild volume by 7.5% in the quarter and nearly 8% for the first half by focusing on the brand strength in the more profitable tips segment.
In the smokeless product segment, adjusted OCI margins expanded in the 2nd quarter by nearly 3 percentage points to 69.3 percent and by 2.6 percentage points to 67.5% for the first half, primarily driven by higher net pricing, partially offset by mix due to higher popular price product volume. The smokeless segment's reported shipment volumes increased 4.3% in the 2nd quarter and 6% for the first half of twenty sixteen, primarily driven by the industry's rate of growth and retail share gains. In wine, Ste. Michelle continued to deliver strong income by growing volume of its premium wines. During the Q2 and first half, Ste.
Michelle grew adjusted OCI by nearly 6% and 5% respectively. Saint Michel's reported wine shipment volumes grew more than 3% in the 2nd quarter and 5.5% for the first half. Altria recorded equity earnings from its SABMiller investment of $199,000,000 in the 2nd quarter and $265,000,000 for the first half. So let me close with some more information on the accounting of our beer investment that Marty mentioned. For context, Altria currently records results for its SABMiller investment concurrent with Altria's reporting calendar.
Because Nucos results will not be available to us in time to record them in the concurrent period, we expect to report our share of NewCo's results using a 1 quarter lag. This means that after the transaction closes, there will be a one time 3 month transition when no earnings from our equity investment in NewCo are recorded in our income statement. For example, Altria's share of NewCo's results in the quarter in which the transaction closes will be recorded in the subsequent quarter. The precise periods affected will depend on when the transaction closes. It's important to understand that this lag will not affect our cash flows or quarterly dividends per share, that we do expect it to impact our year over year comparability of our reported and adjusted diluted EPS in the short term and could also affect 2016 adjusted diluted EPS guidance.
As noted in our earnings release, our guidance does not yet include the impact of the expected lag because the transaction remains subject to certain approvals and the closing date has not yet been determined. That wraps up our results. Marty and I will now take your questions. While the calls are being compiled, I'll direct your attention to altria.com. Along with today's earnings release, for your reference, we posted our usual list of quarterly metrics, including pricing, inventory and other housekeeping items.
Operator, do we have any questions?
Thank you. Our first question comes from Chris Growe with Stifel.
Hi, good morning.
Hey, Chris. How are you?
I'm doing very well. Thank you. Nice report here. I just had two questions for you, if I could. There was a comment in the release about higher promotional spending in both smokeable and smokeless.
And I know you've had certainly in smokeless a good number of some new productivity helping there. And I imagine that's the main item that's driving that. I was curious within the smokeable division, how you see the promotional environment and if there was an area you got more aggressive on and where that promotion spending was rising?
Sure. Maybe I'll start and then I'll ask Billy to comment on that, how it flowed through. I think that the environment remains relatively constant, Chris, is your short answer. It's competitive out there. It always has been, but we haven't seen any material changes.
Billy, do you want to say more about it?
No, I think the only thing I would add is, Chris, from a timing quarter to quarter in a short period, you'll have timing fluctuations. You'll recall as part of And then just a question overall on the category.
And then just a question overall on the category, down 3%, a little different from what Reynolds had indicated, but either way, we're moving back towards more of a normalized rate of decline. I know you like to give guidance on volume. So, in this quarter, with the gas price down, the consumer still in better shape, it looked like volumes did weaken a little bit sequentially more than I expected. Anything you'd offer in relation to that? And, if you could speak at all about the second half, that'd be great as
well. Sure Chris. Listen, I don't we don't see anything in the quarter that causes us to call it out for you. I do think it's consistent with what we've said and you and others I think have said over time that you would expect for the long term trends to revert back to their trend line. If you look at 2015, we ended the year up a half, the quarter before was down a half and now for the year, so far the first half we're down about 1.5.
So, 1.5 obviously is lower than the long term trend line, but it's higher than it was in 2015 when we had these interruptions because of the gas prices and all. So I think it's consistent with how we see it, Chris, which is just slowly reverting back to the long term trend line.
Okay. That's very helpful. Thanks for your time.
All right, Chris. Thanks for calling in. Thanks.
Our next question comes from Nik Modi with RBC Capital Markets.
Good morning.
This is Russ Miller on for Nick.
Hi, Russ.
Just a philosophical question for you guys. How does Altria think about innovation within the context of the new deeming regs and the FDA's more stringent view on substantial equivalents? And more specifically there, should we assume innovation will be delayed from hitting the market? And if so, how should we think about volumes in that context? Thank you.
Okay. Thanks for the question. For a thorough summary, I think of our views, I might refer you and others to the comments that we filed. I'm sure you've seen them in which we picked up this very point. We do think that innovation in the category is important.
We're working very hard on our innovation system and on innovative products for the adult tobacco consumer. And we believe that it would be good public policy for the FDA to encourage that. Our comments have pointed out to the FDA that some of what's in the deeming regulations does not seem to be particularly friendly to that concept. And so we continue I think we mentioned in our remarks this morning, we're both complying with the regs and we're trying to influence and advocate where we think the regs could be improved. And I think in the area of innovation, I think you picked up on an area where they could be improved.
I think it's too soon to tell what the effect will be on volumes. I hope that's helpful to you.
That's excellent. Thank you, Marty.
All right. Thanks for calling.
Our next question comes from Judy Hong with Goldman Sachs.
Thank you. Good morning.
Hi, Judy. Good morning.
So I just wanted to clarify the industry volume numbers and understand there may be some
differences in how you adjust for inventory adjustment, but it still seems
like a how you adjust for inventory adjustment, but it still seems like a pretty big gap in terms of what you're reporting as an adjusted industry volume decline versus rental. So, is the 3% decline just purely sort of industry is the 3% decline just purely sort of industry shipment that you estimate and then adjusted for your estimate of the inventory movement? And when you think about sort of the true consumption decline, whether you look at wholesale shipment to retail or retail takeaway, is that 3% you think is the more representative of the true consumption decline?
Let me make a comment and then I'll ask Billy maybe to talk about how we do the estimate so as to try to help you. Remember, it's a tough comp because the industry was stable for the Q2 of last year. So, in terms of the underlying, I think that's the way to understand it. I'm sure you heard the conversation we just had with Chris about the reversion to the trend over time. I know, Billy, we can't comment on how other people estimate that.
Maybe you could help Judy with how we estimate it.
Sure. Judy, basically the way we approach estimating that industry decline is we take total shipments that are reported and then we look at inventory movements and we adjust for those inventory movements so that we get towards a more true consumption off take to your point. And then the only other difference in this period is a calendar day difference. And so those are the major factors that we would adjust for to get to a more consumption offtake.
Got it. Okay. That's helpful. And then Billy, just I mean the press release talks about the accounting of SABMiller transaction and some of the quarterly lag. So maybe just help us frame kind of what we should expect and I know you're not necessarily talking about the updated guidance, but just broadly speaking, how does that impact potentially the full year guidance and just more from a timing standpoint?
Sure. I'll really kind of reference, I'll give you an example. So if this transaction were to close in the Q4, SAB would be recorded as we currently record it. All those results from NewCo would be picked up and recorded in the Q1 of 2017. So that's how that 1 quarter lag affects from a go forward basis.
So the accounting of the equity income based on the 27% still holds even if the transaction closes beginning of Q4 for your impact?
That is correct. It continues until NewCo comes into existence and then those results are on a quarter lag.
Got it. Okay. Thank you.
Thanks for calling, Judy.
Our next question comes from Matthew Granger with Morgan Stanley.
Good morning, everyone. Thanks for the question.
Good morning, Matt.
Thanks, Marty. I had I guess I just had 2 questions on follow-up questions on deeming. First, this may be pretty straightforward, but could you give us a reminder of where you stand on the challenge that you filed to the descriptor ban included in the cigar deeming portion? Do you have an injunction? Do you expect to have an injunction by August 8 or would you have additional flexibility to continue marketing your products beyond that date?
Yes.
Good question. And I'm pleased to tell you the matter has resolved. So, we had objected to that as you know in our comments and FDA put it in the deeming regulations. We filed suit and FDA has informed us that they do not at this time intend to enforce that against black and mild and in consideration for that we have withdrawn our lawsuit. The parties have reserved their rights, but we will continue to use black and mild unless something changes.
Okay. That's good to hear. Thanks.
Yes.
And just another one, even though the published regulations didn't make any immediate changes in your ability to market products with characterizing flavors. The red line draft that was made public afterward indicated that the FDA had initially voice some concerns around their impact on youth consumption. So the end outcome was favorable, but I'm just curious how you interpret the implications of the red line draft and what that might mean for their orientation toward menthol going forward?
Yes, we'll have to see going forward. I mean, I think menthol stands on its own merits and I won't repeat what we both know Matt on that. You know the science on that and when we put in our papers on that. So I'm not sure it has a big effect on menthol. I do think that there have been instances in which some in tobacco control have argued to take flavors away from adult tobacco consumers in the name of trying to prevent youth consumption.
Our view on that is that there is so much that can be done to prevent youth consumption, most of which we have worked on and the numbers are trending in the right direction that we want to defend the flavors for our adult tobacco consumers who have been joining the scar category is a perfect example where flavors have been in that category for gosh decades decades. So we'll have to see how the FDA approaches that. But we think that they're actually very separate issues about youth consumption and flavors.
Okay. Thank you, Marty. Appreciate it.
Thanks for the questions.
Our next question comes from Vivien Azer with Cowen and Company.
Good morning. It's Aaron Grey on for Vivien.
Hey Aaron, how are you?
Doing well. After benefiting from a benign excise tax environment over the last 2 years, I was hoping to get an update on the state excise taxes, given we saw 3 states pass tax increases in the first half of the year and have open legislation as well as notable proposed ballot initiatives. How should we think about the outlook for the weighted average SCT over the course of the year?
Yes, we have a little bit of information in that in the housekeeping, but you're right, we've had 3 increases so far in 2016, Louisiana, West Virginia, and most recently Pennsylvania. We also had the phase in effect of a few that were passed previously that came into effect, Connecticut, Minnesota and Oregon, if I recall correctly. The weighted average, I think, is $1.56 as we stand, but we will have Pennsylvania coming online obviously after August 1. So it has heated up a little bit. It's a good question.
We continue to resist these. We think they're unfair to adult tobacco consumers, but state budgets being what they are, we just have to go through this every year. The one that I would recommend that you be watchful of, of course, is California where the ballot has qualified. So that's proposed $2 which will be on the ballot in California in November.
Okay. All right, great. Thank you. All right. And with Marten XL distribution representing 50% of volume coverage in traditional retail, what can we expect as it relates to the cadence of XL's rollout going forward?
Well, we're trying to step into it with discipline. We're trying to go where the business is. The stores that we've chosen have good e vapor business. We had a very good marketplace response. We've had very good consumer response.
So you know our strategy there, which is we have aspirations to be the long term leader, but we want to proceed with financial discipline, always learning from the consumer. And I'm very pleased with the progress that Mark 10 XL is making in that regard. So, I would expect more of the same kind of an approach.
Okay. Thank you very much.
Thanks for calling in with your questions.
Our next question comes from Michael Lavery with CLSA.
Good morning.
Hi, Michael. Good morning.
Just curious if you could talk a little bit about how you think about some of the resource allocation. Just looking at margins in Smokeless now, they're a hair shy in the quarter at least of 70%. So do you give a disproportionate amount of R and D resources there? Or to some extent, I recognize you need to follow the consumer, but how much can you also try to maybe lead them a little bit or versus say vapor, that's a different margin profile certainly at least at the moment and some different competitive dynamics. How do you think about all that?
And of course, price is a lever as well, and we saw that in the quarter too. How do you think about balancing all those to take advantage of the opportunity in that segment?
Yes, we have a process to do that of course. Actually, I have 2 processes. We have a strategy process and it's tightly to our budget process. So our operating companies come in with their plans. We've talked about this previously.
We have 1 year plans and 3 year plans and longer term plans and they make the case for investment. And then Altria Group decides on how to allocate resources about where the best opportunities lie for our shareholders. And the good news is all of our operating companies have lots of good ideas. So it's always a good discussion about where best to go. But that's the process we use Michael.
We look at it then when we put our strategy and our budget together for both 1, 3 and longer plans, we try to put the resources where we think the greatest opportunities are including in margin enhancement.
Okay. Thank you. And then looking at the other segment and PMCC, your finance assets on the balance sheet certainly have been coming down. Obviously, you've been not investing in that business and essentially unwinding it. Can you give a look ahead at what the trajectory is on that?
Certainly, some of these leases have long lives, but you've been doing some sales opportunistically. What do we what should we expect for what that contributes near term and maybe medium term?
Sure. I think Billy can help you with Yes.
You're right, Michael. From a standpoint, the net finance receivable is down to $1,200,000,000 and we have been unwinding that business for quite some time now. We look at those leases and when it makes sense to sell those, we do. As you recall, at CAGNY, we talk about a 3 to 4 year wind down period that we would have before we're completely out of that.
And is there anything that might accelerate that? Or is that probably pretty likely to stick? What's the variance to that possibly?
Yes. The leverage leases is kind of complex, but in the life of a leverage lease for both the counterparty and us, there's a if you will, a nice period of time when those sales make sense to both parties. And so that's really what drives the unwinding of that business.
Okay. Thanks. And then just lastly on IQOS, obviously, there's a long process in terms of potentially commercializing that here. And needless to say, the FDA application is one of the near term and bigger pieces of that. What's the right way to think about some of the costs and investments?
And to what extent would that be offset by some of the reinvestments from your productivity savings from this year?
Yes, I think we talked about this when we announced the productivity initiative, which is that we do want to make some continuing investments of area of long term value to the shareholder and clearly an investment in innovative tobacco products particularly those with the potential to reduce harm are high on our list for investments. So we haven't given much detail below that, not to preempt your next question, Michael, but those are the areas. And I think when you think about vapor and IQOS and other innovative products for consumers, that's a good place to invest for the long term proposition of both the company and for our consumers.
Have you been able to get any have you had an ability to engage the FDA yet and have any sense on how receptive they might be to the Hina perm platform?
Well, I think we talked about this last time, right, which is that I didn't want to comment in too many particulars about an application that involves obviously PMI because it's their product that they're trying to get qualified. But we did talk about the process and the process is there is typically a high degree of engagement between the I think, which are lengthy and expensive without knowing that the FDA, I think, is thinking that you're asking the right questions. So I would also point to comments that Director Zeller has made publicly about understanding that there is continuum of harm among tobacco products and that the agency has to be thoughtful about how they encourage manufacturers and consumers to migrate to these kinds of products. So these things aren't done until they're done, but I continue to be optimistic that this is the way forward by bringing innovation to consumers, which may reduce harm. It's a good idea for everyone.
Okay. Thank you very much.
Thanks for calling, Michael.
Our next question comes from Bonnie Herzog with Wells Fargo.
Good morning.
Hi, Bonnie. Good morning.
Hi. I just had a quick follow on question from an earlier one on your level of spending behind brand building. Just hoping to get a sense of how much this might accelerate in the second half or should it be more evenly spread throughout this year? And then any thoughts on where your spending levels behind brand building will need to increase in the future. Just kind of want to get a sense of will levels stabilize?
Or do you think you need to keep increasing spending to maintain some of the share gains you've been getting?
Bill, you want to take that?
Sure. Bonnie, when you think about brand building, it will fluctuate from time period to time period, but I would not expect material fluctuations as we move forward. You always have fluctuations in a shorter time period compared to others. From a standpoint of on a go forward basis, you'll recall the strategy here is to maximize income and keep Marlboro healthy, the share momentum there. And so that's what we invest towards.
That's what the top line strategy is for that segment. And that's the way we think about that segment of the business.
Okay. That's helpful. And then I had a question on Marlboro. I was hoping to get a sense of what Marlboro volume was during the quarter, if you can adjust for the inventory fluctuations? And then could you drill down a little bit further on some of the different styles such as special blends and their performance that would be really helpful?
I can try to help you a little bit. I know that we've had this conversation before. There is a desire, I know, to get under that. We just don't break them out. I mean, we've had the tables in the earnings release, which shows as much as I think we're willing to disclose.
Look, the way to think about this, Bonnie, I think is that overall Marlboro continues to perform terrifically. Because most of our shipments in the cigarette segment are Marlboro and actually you would expect for the volume to track, but we don't report that level. But Marlboro is doing great. It continues to have, as we mentioned, record share if you measure it against the half, its equity is doing great. The Marlboro architecture continues to perform well.
You and I have spoken previously about the exciting digital marketing for adult tobacco consumers and we've improved the app even further and we've got exciting promotions on there. So I think the way to think about Marlboro is it's doing exactly what we want it to do and it's doing it well.
Yes. Speaking of that, I was going to ask you a little bit more on that because I do keep hearing positive feedback on your Marlboro app. So give us a sense for the rollout and where or how many stores that app is being used in and where that can be by say the end of this year?
Yes. Well, we're working at 2 levels. 1 is with directly with the consumer obviously because adult consumers once they're age verified can get the apps and participate that way. But another big area for us and we're very grateful for the partnership with our trade partners. Our trade partners are increasingly excited about the ability to use their loyalty programs with our digital marketing and our apps and the like.
And so many of our trade partners are working with us on that. So we're getting very good distribution on that. I would I'd like to say that I think that we're ahead on this and I think that our trade thinks we're ahead on this and our consumer reception has been nothing short of terrific. So it's very efficient and it's very responsible and we're reaching the people we want to reach in a responsible kind of a way and I think it's the way forward.
Okay. One final question, which I know you're probably not going to want to answer this, but I'm going to bring it up. Right. The pretax cash proceeds from the sale of SAB, certainly $3,000,000,000 is a lot of money. I'd love to hear a sense from you of where these proceeds will be used.
But if you can't say that, maybe just update us on your priorities for free cash flow.
All right. Out of courtesy to you, I'm going to hand it to Billy to see if he'll accommodate you, Bonnie. How about that?
All right.
Hey, Bonnie, thanks for the question. Yes, we have not made decisions around the $3,000,000,000 but I can walk you let's step back from that. So absent the $3,000,000,000 here's the way we think about allocating our capital, the excess cash. So we think about, of course, dividends first and that's that 80% dividend target payout ratio. Then when we have the excess cash, you've seen us do a multitude of things with that.
Certainly, we do share repurchases. You've seen us do debt tenders and you've seen us do debt tender refis. So this being excess cash, we would assess it based on market conditions at the time and make the appropriate decisions.
Our next question comes from Steve Powers with UBS.
Hey, good morning. Maybe another question on through ABI SCV that you probably won't want to answer, but I'll give it a shot. Right. From a different angle, and it's one the updated outlook, which aside from the 2.5% going to 3% is pretty much consistent outlook on that deal. It assumes a pretty high degree of confidence or implies a high degree of confidence in very limited, if any, kind of proration risk.
And given the value gap between the PSA and the cash offer for SAB shareholders, I'm just trying to get a sense for how confident you really are in that proration risk being minimal? What kind of insight you have to the SAB shareholder base? And how to assess that risk as you look forward?
Well, Steve, I appreciate the question and I know there's a lot of interest in this, but I think it's probably best this morning that we kind of limit our remarks to what's in the earnings release and in our prepared remarks. We tried to give you as much color as we thought was appropriate under the circumstances, but some of those questions I think are really best directed at the 2 principal parties to the transaction and I want to respect that. So I'm going to be careful about this as you can appreciate.
Okay. And Billy, anything you want to add?
No, I think Marty Carpenter.
All right. And then I guess from another angle fundamentally, everything seems to be pretty solid, up and down, the P and L across the business line. So I guess, is there anything sort of focusing on things within your control, are there areas where you're more focused, more risk that you see, whether it's implementing the productivity initiative or any of the go to market initiatives you've got in place? And anything that you're more focused on where the fundamentals, not to say they're weak, but just more where they're more in question?
No, I don't think so. Listen, we don't want to sound for a moment arrogant about it, but the business is really performing well. I think the strategies are the right ones and I have to commend the people at our operating companies and our service companies. They are executing with high fidelity to the strategies with high focus and high alignment and I think that's why the results are what they are. So look, there's always risks to the business.
You know what they are. I mean, you've got regulation and taxes and the like, but I wouldn't call out anything of the sort that you're asking about, Steve.
Great. Thank you very much.
All right. Thanks for the questions.
Our next question comes from Adam Spielman with Citi.
Question. If I can come back to deeming regs, and in particular, two questions. First of all, you said you're in conversation about trying to change aspects of them. And I wonder if you could just highlight what you are most keen to change that you think was a realistic chance that the FDA will listen to what you're saying and actually change how they're approaching deeming? And the second question is this.
Reynolds has said that they believe based on the Mitch Zeller's comments about continuum of risk, but actually in some ways they may take a more relaxed approach to premarket approvals for e vapor products than they have done, it would seem, with cigarettes. And I guess the related question to that is, do you agree with that? And do you think there will still be a difference in degree of, let's say, harshness of interpretation of cigars and e vapor products? Thank you.
All right. Thanks for the questions. I'll give you an example on your first question, which is predicate date. We had argued to the FDA and advocated to the FDA as did many others that it made little sense to go back and use a cigarette predicate date of 2,007 for products that basically came into the marketplace after 2,007. So there continues to be a lot of dialogue about that.
It's not limited to the FDA. You know that there are legislative proposals pending. And so I think a lot of people think that it would be wise to revisit that question. We certainly do. And you may have heard the conversation we had earlier about encouraging innovation using that predicate data to us does not seem to do that.
So that's one area. With respect to PMTAs, I'm not familiar with the conversation you referenced with someone else, but I can tell you that it would seem to make sense that for pre market approvals, you certainly, if you were the regulator, ought to be taking into account the degree of harm of the products. And so cigarettes, as we all know, bear a high degree of risk. And while the evidence is not completely in, it appears to be that because they don't burn, e vapor probably has a lower risk. That, of course, ought to be taken into account in approving whether they should come to market.
So that would seem to be a sensible approach. I think that's a development that would be good for consumers and for manufacturers and for public health.
Thank you very much. Can I just come back? I do understand that Congress may change the predicate date. But assuming they don't, do you think there's any realistic chance that a dialogue other than via Congress or maybe through litigation would actually alter that data?
I hope so. Listen, FDA has a job to do. We have found them to be open to listening to reasonable arguments. But at the end of the day Adam it's up to them. But we have not found them to be immune from listening points of view and hopefully coming to some recent judgment on it, particularly if other stakeholders besides us weigh in on it as I understand it's the case.
Okay. Thank you very much.
All right. Thanks for those questions.
With no further questions, I would like to turn the call back over to Ms. Sarah Nockmas for closing remarks.
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Thank you, ladies and gentlemen. This concludes today's conference call.