Altria Group Inc (MO) Q4 2022 Earnings Call Transcript

Altria Group Inc (NYSE: MO) Q4 2022 earnings call dated Feb. 01, 2023

Corporate Participants:

Mac Livingston — Vice President of Investor Relations

Billy Gifford — Chief Executive Officer, Director

Sal Mancuso — Chief Financial Officer, Executive Vice President

Analysts:

Vivien Azer — Cowen and Company — Analyst

Pamela Kaufman — Morgan Stanley — Analyst

Bonnie Herzog — Goldman Sachs. — Analyst

Callum Elliott — Bernstein Research — Analyst

Gaurav Jain — Barclays — Analyst

Chris Growe — Stifel Financial Corp — Analyst

Andrei Condrea — UBS — Analyst

Priya Ohri-Gupta — Barclays — Analyst

Jennifer Maloney — Wall Street Journal. — Analyst

Presentation:

Operator

Good day and welcome to the Altria Group 2022 Fourth Quarter and Full-Year Earnings Conference Call. Today’s call is scheduled to last about one hour, including remarks by Altria’s management and a question-and-answer session. Representatives of the investment community and media on the call would 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.

Mac Livingston — Vice President of Investor Relations

Thanks, Todd. Good morning, and thank you for joining us. This morning. Billy Gifford, Altria’s CEO; and Sal Mancuso, our CFO, will discuss Altria’s fourth quarter and full-year 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 2021. Our remarks contain forward-looking and cautionary statements and projections of future results. Please review the forward-looking and cautionary statements section at the end of today’s earnings release for various factors that could cause actual results to differ materially from projections.

Future dividend payments and share repurchases remain subject to the discretion of Altria’s Board. Altria reports its financial results in accordance with U.S. generally accepted accounting principles. Today’s call will contain various operating results on both a reported and adjusted basis. Adjusted results exclude special items that affect comparisons with reported results. Descriptions of these non-GAAP financial measures and reconciliations are included in today’s earnings release and on our website at altria.com.

Finally, all references in today’s remarks to tobacco consumers or consumers within its 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.

Billy Gifford — Chief Executive Officer, Director

Thanks, Mac. Good morning, and thank you for joining us. It was an exciting year for Altria as our businesses delivered strong financial performance, and we continued to strategically invest toward our vision. We grew our adjusted diluted earnings per share by 5% and our tobacco businesses remained resilient and successfully executed their strategies.

We also returned significant cash to shareholders through dividends and share repurchases. Last year, we returned more than $8.4 billion to shareholders, outpacing our record returns from 2021, and representing the largest single year cash return since 2002. Our vision guided our actions and we believe we made meaningful progress on our journey toward moving beyond smoking. Our teams took several steps forward during the year including accelerating the growth of on! nicotine pouches, creating long-term optionality for our inhalable smoke-free product portfolio, enhancing our digital consumer engagement, and continuing to advocate for tobacco harm reduction. Helix grew on! reported shipment volume to 82.5 million cans during its first full-year of unconstrained manufacturing capacity, an increase of more than 70% versus the prior year.

At retail, on! share momentum continued in the fourth quarter as the brand reached 5.9% of the total oral tobacco category and 24% on the nicotine pouch category. This impressive performance was driven by continued increases in brand awareness and adoption by smokers and dippers. Additionally, we believe Helix effectively managed on! promotional spend as the year progressed and reduced on! promotional spend per can by approximately 15% during the second half of the year compared to the first half.

In oral tobacco product development, we are excited to announce we have finalized the new product design, which will provide tobacco consumers more smoke-free options within our portfolio. We also began regulatory preparations for the product and we are encouraged by the initial research results and the response we have received from dippers and nicotine pouch users. We look forward to sharing more details and unveiling this innovative product at our Investor Day next month.

Turning to our inhalable smoke-free portfolio. We created long-term optionality in the heated tobacco and E-Vapor spaces. Internally, we have not yet finalized the design of our heated tobacco capsule product. But our teams continue to make progress. The consumer remains the focal point of our innovation system and our change of tailoring the product to appeal to smokers who have not yet found a satisfying alternative to cigarettes. We also look forward to unveiling this exciting new product at our Investor Day next month as well. And in October, we announced a strategic partnership with JT Group including a joint venture for the U.S. commercialization of heated tobacco stick product. We are encouraged by the initial collaboration between our teams and the pace at which they are operating.

Horizon is optimizing chain for the U.S. market and plans to begin regulatory preparations later this year. We’re excited about the opportunity and are working diligently to bring Ploom to smokers in the U.S. In E-Vapor, we previously announced, we elected to be released from the non-compete obligations related to our JUUL investment. We retain our economic stake in JUUL. E-Vapor remains the largest smoke-free category in the U.S. and the most successful category in transitioning U.S. smokers away from cigarettes. We believe the category can play an important role in harm reduction and we’re continuing to evaluate all options to best compete in the category.

Next, let’s discuss the progress we made to enhance our digital consumer engagement. We launched a new digital trade program last spring and we believe this program [Technical Issue] our ongoing commitment to responsible retail. The program includes multiple participation options for retailers. For those participating at the highest level, we introduced incentives for retailers to include age and identity verification solutions in their digital platforms, and once the consumer is verified, retailers can then provide offers and messaging from our brands within the retailers app. I’m excited to share that we implemented these solutions in more than 33,000 stores exceeding the goal we outlined last year at CAGNY.

Currently, consumers can view offers from our smokable and more smokeless tobacco brands. But going forward, we expect to expand the program to include on! and other smoke-free brands. As we continue to broaden our digital reach, data will help us better understand each smoker’s journey and help them successfully transition to other smoke-free alternatives in our portfolio.

Moving to the regulatory environment, we remain optimistic about the future harm reduction in the U.S. We believe we have an unprecedented opportunity to lead the way in shifting millions of smokers to smoke-free alternatives, if we follow the science and foster innovation, with the support of reasonable regulation. In December the Reagan Udall Foundation published its operational evaluation of the FDA’s Center for Tobacco Products. We were among the stakeholders who provided input into this evaluation. Among its recommendation, the report urges the FDA to clearly define product pathways and accelerate PMTA [Phonetic] decision-making. Take enforcement actions against manufacturers and products in violation of the law and address the need for risk communications to tobacco consumers. We agree these are important opportunities and believe that the FDA should direct its focus for implementing a framework to advance harm reduction rather than focusing on prohibition policies that we believe will further expand the illicit market and create other unintended consequences.

Let’s now move to the operating environment. We estimate that total equivalized tobacco volumes declined 6% for the year and 1.7% over the past five years on a compounded annual basis. Combustible volumes declined by an estimated 7.8% last year as smokers faced increasing economic challenges. We are encouraged that smoke-free volumes were stable compared to the prior year at 3.8 billion equivalized units and now represent an estimated 26% of the total tobacco space. E-Vapor has been a major contributor to the growth of smoke-free products over the five-year period. Although volumes declined by an estimated 1% year-over-year amid considerable regulatory uncertainty, such as the FDA’s marketing denial order and subsequent temporary stay on JUUL products, which caused market disruptions for both consumers and retailers. In oral tobacco, volumes grew by an estimated 1.5% driven by the continued adoption of oral nicotine pouches.

Turning to our financial outlook, our plans for 2023 include a continuation of our strategy to balance earnings growth and shareholder returns with strategic investments towards our vision. For 2023, our planned investment areas include continued smoke-free product research, development and regulatory preparations, digital consumer engagement, and marketplace activities in support of our smoke-free products. We believe the external environment will remain dynamic in 2023. We will continue to monitor the economy, including the impact of high inflation, tobacco consumer dynamics and regulatory and legislative developments. Considering these factors, we expect to deliver 2023 full-year adjusted diluted EPS in a range of USD4.98 to USD5.13. This range represents an adjusted diluted EPS growth rate of 3% to 6% from a $4.84 base in 2022.

Before I turn it over to Sal, I would like to send a sincere thank you to our employees. I continue to be impressed by the talent within our companies and our ability to adapt and overcome challenges in a dynamic operating environment. The passion and dedication of our employee base is evident and I am confident in our ability to execute our vision because of you.

Also, I’d like to honor the memory of Leo Kiely, the longstanding member of our Board, who recently passed away. Leo served on our Board since 2011 and made many contributions to Altria including as Chair of the Compensation and Talent Development Committee and as a member of the Innovation Committee. We will miss his leadership, guidance and friendship. I’ll now turn it over to Sal.

Sal Mancuso — Chief Financial Officer, Executive Vice President

Thanks, Billy. We were very fortunate to have Leo 12 years of service at Altria and our thoughts remain with the Kiely family.

Moving to our results, our tobacco businesses generated strong financial performance again this year and we’re responsive to changes in a dynamic external environment. In the fourth quarter, the smokable products segment grew its adjusted operating company’s income by 4% and expanded its adjusted OCI margins to 58.4%. The segment also reported robust net price realization of 13.5%. As a reminder, manufacturer price realization does not reflect retail price changes for smokers, for example, Marlboro net retail pack price increased 6.4% in the fourth quarter compared to last year.

We continued to successfully execute against our strategy in the smokable segment, maximizing profitability while balancing investments in Marlboro with funding the growth of smoke-free products. For the full year, smokable segment adjusted OCI grew 2.9% to $10.7 billion and adjusted OCI margins expanded by 1.4 percentage points to 59% and smokable segment net price realization for the year was 11.1%. In addition, over the past five years, the smokable segment has grown adjusted OCI by $2.2 billion, representing a compounded annual growth rate of 4.7%. Over the same time period, adjusted OCI margins have expanded from 51% to 59%, an impressive increase of 8 percentage points.

Turning to volumes. Our smokable products segment reported domestic cigarette volumes declined 12.1% in the fourth quarter and 9.7% for the full year. When adjusted for calendar differences and trade inventory movements, domestic cigarette volumes for the fourth quarter and full year declined by an estimated 11% and 9.5% respectively. At the industry level, when adjusted for trade inventory movements, calendar differences and other factors, we estimate that adjusted domestic cigarette volumes declined by 9% in the fourth quarter and by 8% for the full year.

Next, let’s discuss retail share performance. Full-year retail share for the industry discount segment increased 1.4 share points. We believe these results were driven by increased pressure on smokers’ disposable income and increased competitive activity, including multiple branded discount offerings price at deep discount levels. Marlboro retail share declined by four-tenths for the full-year. Most of the full-year share losses were attributable to the value options within the Marlboro brand family, such as Special Select and Marlboro 72s as some price-sensitive consumers continue to seek additional price relief.

Meanwhile, the brand’s mainline non-menthol offerings including the iconic red and gold pack varieties were resilient and performed well for the year. Marlboro share of the premium segment grew to 58.2% for the full year. Marlboro has performed better than many other premium brands over the last several years. In fact, over the past three years, Marlboro grew its share of premium by one full share point. We are encouraged by Marlboro’s resilient performance as the brand celebrates 50 years of leadership in the cigarette category. In cigars, reported cigar shipment volume decreased 4% for the full year, while Black and Mild continued to maintain its leadership in the profitable machine-made tipped cigar segment.

Next, we will move to the oral tobacco products segment. Full-year segment adjusted OCI and adjusted OCI margins contracted as we continue to invest behind on!. Total segment reported shipment volume declined 2.4% for the year as growth in on! volume was more than offset by lower reported MST volumes. When adjusted for trade inventory movements and calendar differences, we estimate the full-year total oral tobacco segment volumes declined by an estimated 2%.

Full-year oral tobacco product segment retail share declined 1.3 percentage points, as declines in MST were partially offset by the continued growth of on!. Within the traditional smokeless category of MST and Snus products, Copenhagen share performance has been stable over the last three years, declining only three-tenths from 2019 whereas the second largest traditional smokeless brand has ceded 1.6 share points.

Overall, We continue to be encouraged by the performance of our oral tobacco products as on! grew volume and share in a competitive category. And Copenhagen remained the category leader.

Turning to our investment in ABI. We recorded $571 million of adjusted equity earnings for the full year, down 10.6% versus 2021. We continue to view the ABI stake as a financial investment and our goal remains to maximize the long-term value of the investment for our shareholders.

In our all other operating category, we have completed our wind-down of Philip Morris Capital Corporation and no finance assets remain. I would like to thank the many PMCC employees who contributed to its success over the years and to the other Altria employees who helped complete a successful wind-down.

Finally, we continue to effectively manage our balance sheet while generating strong financial performance and returning significant cash to shareholders. These results were driven by our tobacco businesses that continue to be highly cash generative.

Our year end credit metrics remained strong. Our debt to EBITDA ratio was 2.1 times, down four-tenths over the past three years and our weighted average coupon was 4%, a decrease of two-tenths over the past three years. We also expect to retire approximately $1.3 billion of notes coming due later this month with available cash.

In addition, we returned more than $8.4 billion in cash to shareholders last year through dividends and share repurchases. These record cash returns included paying $6.6 billion in dividends and raising the dividend for the 57th time in 53 years. We also repurchased more than 38 million shares during the year totaling $1.8 billion, which completed our previously authorized program. Earlier this week, our Board authorized a new $1 billion share repurchase program, which we expect to complete by the end of 2023.

I’ll now turn it back to Billy to conclude our remarks.

Billy Gifford — Chief Executive Officer, Director

Thanks, Sal. While the calls are being compiled, I’ll remind you that today’s earnings release and our non-GAAP reconciliations are available in altria.com. We’ve also posted our usual quarterly metrics which include pricing, inventory and other items. As we mentioned during the call, we have exciting topics to discuss at our Investor Day next month. We look forward to have any fulsome conversation about our smoke-free future and we are excited to share more about our journey toward moving beyond smoking.

Todd will now transition to the Q&A period.

Questions and Answers:

Operator

Thank you. [Operator Instructions]. Our first question comes from Vivien Azer with Cowen.

Vivien Azer — Cowen and Company — Analyst

Hi, good morning.

Billy Gifford — Chief Executive Officer, Director

Good morning, Vivien.

Vivien Azer — Cowen and Company — Analyst

So I just wanted to start with the industry volume backdrop, I recognize you guys have kind of suspended the historical practice of offering industry guidance and that makes good sense to me. But just hoping to get some color on how you’re thinking about the potential impact of the menthol ban in California. If you think that’s an incremental headwind for the year? Thanks.

Billy Gifford — Chief Executive Officer, Director

Sure. Yeah I think it’s a little early to say exactly what that headwind will be Vivien, certainly it will be a headwind from the State of California having banned it, it went into effect you remember in December. So we’ll see how that proceeds, but yeah, I would say that would be a headwind as we enter 2023.

Vivien Azer — Cowen and Company — Analyst

Fantastic. Thanks for that. And then just pivoting to the oral tobacco segment, encouraging to hear some rationalization on the on! promo having fallen 15% in two halves ’22, can you offer a little color on where that positions on relative to the competitive set?

Billy Gifford — Chief Executive Officer, Director

Yeah, we think — it actually — we were very pleased with the results, as you mentioned, we reduced it 15%, first half to second half and continued its momentum and grew share. We think it’s a growing category, Vivien, and that the entire segment is growing and we want to participate in that growth. So we continue to invest behind it and as we move forward, I think you see the benefit of data analytics and then in the future, the application of what most people refer to as revenue growth management that we’re seeing success in traditional smokeless as well as cigarettes. So that’s what you can expect from us as we move forward.

Vivien Azer — Cowen and Company — Analyst

Perfect, thanks for that, Billy. And just one last one for you. Sal, please, I recognize it’s premature for us to start modeling royalties from the IP litigation with British American Tobacco, because there’s certainly an appeals process. But if you could just kind of contextualize how we should be thinking about that incremental revenue stream as litigation draws to a conclusion, please. Thank you.

Sal Mancuso — Chief Financial Officer, Executive Vice President

Yeah, sure. Vivien, you’re right, there is an appeals process. We developed our guidance, we have not considered the royalty — any potential royalties in that guidance, but as you know with any year, you put plans in place and there are always puts and takes, so I think it’s early to really think about how you might model that, let’s see how the appeals process plays out.

Vivien Azer — Cowen and Company — Analyst

Fair enough. Thank you so much. Looking forward to the Analyst Day.

Billy Gifford — Chief Executive Officer, Director

Thank you.

Operator

Thank you. Our next question comes from Pamela Kaufman with Morgan Stanley.

Pamela Kaufman — Morgan Stanley — Analyst

Good morning.

Billy Gifford — Chief Executive Officer, Director

Good morning, Pamela.

Pamela Kaufman — Morgan Stanley — Analyst

How would you characterize the current state of your consumer and this builds on Vivien’s question, but just wanted to hear how you’re thinking about the puts and takes to cigarette volumes in ’23, volume declines were clearly very elevated in ’22, so do you expect a more normalized year of mid single digit volume declines given easier comparisons and moderating gas prices?

Billy Gifford — Chief Executive Officer, Director

Yeah, Vivien. I know you’re looking for — I’m sorry, Pamela, you’re looking for guidance on upcoming volume. Let’s talk about the headwinds and tailwinds as we progress through the year. I’ll talk about the consumer first, because that’s the most important thing, when you think about volumes. I think the consumer remains under pressure, we tried to highlight that, it was the compounding of the inflation impact as we progress through 2022. I think you’ve heard as many predictions as I had, soft landing, no deep recession, so I think even the experts — from an economist standpoint are all over the board. We feel good about the guidance that we put out. We feel-good about where the consumer is. But we want the adaptability and flexibility to be able to move with the consumer need, so I think the consumer will remain under pressure until we see some relief, if you will, from inflationary pressures in the marketplace.

Gas prices is just one aspect, that’s — we certainly have seen a decline, but nowhere near the lows we were seeing as we were pre-pandemic levels. So gas prices can move around depending on China reopening and things of that nature. So we’ll see where that goes.

I think when you think about volumes, it’s specifically combustible volume. It’s important to remember that what we’re looking at is how the consumer is impacted. Tobacco, the industry is not immune to macroeconomic environment, it’s just less impacted than other industry categories and so from that standpoint, historically what we’ve seen. Pamela, is that as the consumer is experiencing this rapid change in their economic conditions whether up or down, they make changes in their purchasing behavior and then it becomes more comfortable to them through time and they adjust various factors in their purchasing basket.

So it remains to be seen. We’ll see how the macroeconomic it shapes up, but. I would say that’s the biggest thing and how that macroeconomic impacts purchasing behavior.

Pamela Kaufman — Morgan Stanley — Analyst

Thanks, that’s helpful. And my other question is just on your 2023 earnings guidance, which reflects a slightly lower growth rate compared to your 4% to 7% guidance over the last several years. So can you talk about the puts and takes influencing the outlook for ’23 and how much incremental investment does this reflect behind reduced risk and are there any other discrete factors contributing to the slight shift in the growth rate?

Billy Gifford — Chief Executive Officer, Director

Yeah. I think the last comment you made it. I would say there is a slight shift. We’re very excited about the guidance we put out. I think when you think about it, it’s really the uncertainty around the macroeconomic environment was the biggest impact to the overall guidance and you mentioned that and you asked about that earlier. It’s where does the macroeconomic environment go through as we progress through 2023 and how does that specifically impact our tobacco consumer across all categories.

Pamela Kaufman — Morgan Stanley — Analyst

Great, thank you.

Billy Gifford — Chief Executive Officer, Director

Thank you.

Operator

Thank you. Our next question comes from Bonnie Herzog with Goldman Sachs.

Bonnie Herzog — Goldman Sachs. — Analyst

All right, thanks, good morning, everyone.

Billy Gifford — Chief Executive Officer, Director

Good morning, Bonnie.

Bonnie Herzog — Goldman Sachs. — Analyst

I had a question about your pricing, just thinking about the strength in your net price realization in [indecipherable] over the past several quarters. So darn robust. So I just wanted to hear from you, how sustainable you think this is especially considering. I guess, the pressure on the consumer and some of the other things you called out.

Billy Gifford — Chief Executive Officer, Director

Sure, Bonnie, and I’ll be careful not to talk about future price increases, but the way we think about pricing, as you know, it’s an important part of the algorithm. When you’re in a declining category, remember our strategy in that category is maximize profitability over the long-term, while making appropriate investments in Marlboro and the growth areas. So we see that as the engine that does that. When you think about pricing, I think it’s important to really focus in on what Sal mentioned in his remarks. You see high-price realization but at retail to the consumer from a consumer-facing Marlboro on an average went up about 6% — just shy of 6.5%, 6.4%, so the price increase to the consumer is much lower than what you see in the price realization, and you know, we mentioned before price realization is really two components for us. It’s list price as you would expect across the industry, but it’s also the implementation of RGM and so with that price realization and usually, Bonnie, you or one of the other analysts will ask us about price gap and it’s at 41%. I think it’s important to remember, as we get the data and really that data is — that’s somewhat impersonal, it’s consumer purchasing behaviors through time, as we analyze that, what we’re able to do is the price gap varies locality to locality, It can vary store to store and it can vary within what’s even within the mobile franchise. You heard Sal talk about, if you think about that overall price gap of 41%, you have the packing, so take Red and Gold in the Marlboro franchise, if you look at total year 2022 to total year 2021, you can see it was very stable. Where we’re seeing it is in those packings or SKUs we have within Marlboro that are there for price-sensitive consumers to have a safe landing point. And so we’ll continue to implement those tools. As far as how do we think about pricing going forward, we’ve shared with you, whether it’s percentage discretionary income a minute’s work and when you benchmark the U.S. against other countries around the world, we’re still at the very low end to that.

Bonnie Herzog — Goldman Sachs. — Analyst

Yeah, that actually, super helpful. That was going to be a question myself. I’m pleased you kind of walked through the gap, that’s useful context. Just switching gears, if I may, a question on your oral tobacco business. You highlighted how strong on! volume growth has been and — but in the context of that, your total oral tobacco revenue and profit growth have been under pressure with a fair amount of margin contraction, so you did sort of touched on this, but hoping maybe you could talk a little bit further about maybe your strategy for turning around the entire oral tobacco business, any key initiatives that you could highlight for us, maybe you’ll talk about this more in March.

Billy Gifford — Chief Executive Officer, Director

Yeah, we will — we’re certainly excited to be able to talk about it in March, you’re exactly right. Within the oral tobacco space, if you think about that subtle space, you have traditional, moist smokeless tobacco and you have novel oral pouches. Some of the margin contraction you’re seeing is just through mix, right, as consumers are moving from traditional moist smokeless tobacco and novel oral is growing, you’re going to have some mix impacts in that overall margin.

We highlighted for you the reductions we made in promotional spend per can, but still had momentum in share. I think the biggest thing that we’re excited is to be able to unveil the product that we have designed and have locked down and be able to show at Investor Day, what that product is and some of the research related to that. So more to come at Investor Day.

Bonnie Herzog — Goldman Sachs. — Analyst

Okay, final one for me, just speaking about, any more color you could provide your smoke-free vision today and maybe not just how confident you are that you are going to be able to deliver on your long-term strategy. I’m sure you’re going to talk through this at an Investor meeting and I’m excited to hear about it, but any sneak preview as you’re most excited about.

Billy Gifford — Chief Executive Officer, Director

I won’t necessarily give you a sneak preview because I don’t want to get ahead of myself for Investor Day. We’d like to unveil it in total context and paint the total picture for investors. So I appreciate the question. I look forward to be able to unveil that for you at Investor Day.

Bonnie Herzog — Goldman Sachs. — Analyst

All right. I’ll be patient. Thank you.

Billy Gifford — Chief Executive Officer, Director

Thanks, Bonnie.

Operator

Thank you. Our next question comes from Callum Elliott with Bernstein.

Callum Elliott — Bernstein Research — Analyst

Hi guys, thank you for the question, and Billy you spoke in the release and in your prepared remarks about making “meaningful” progress on the smoke-free portfolio, and you also mentioned strategic investments in the region. But at the same time, your capex guide is flat versus last year’s guidance. You’re continuing to deliver on algorithm EPS growth and I think as you said to Pam, that any slight reduction is more driven by the macro-environment, and which presumably also implies little or no incremental P&L investments in NGPs as well. So my question is what are the strategic investments that you’re talking about, how meaningful are they and where can we see them in the financial statements?

Billy Gifford — Chief Executive Officer, Director

Yeah, I think it’s a great question, I appreciate it. I think when you think about where those investments show up, it’s important to remember they’re not all incremental spend. There are always puts and takes, you’re going to shift some of the infrastructure that the combustible or traditional MST has bore the cost through history, and you’re going to shift that for the NGP space.

We do have incremental investments around NGP product development, the regulatory preparations associated with that and the research associated with that. Here’s an example for you Callum. If you think about like even the digital consumer engagement that we are implementing in traditional smokable or combustible and MST and we mentioned in the remarks, being able to transition that over. So you’ll see those costs will actually appear in the combustible and smokeless before it appears in the NGP categories.

So there’s a lot going underneath the surface, if you will, from an investment standpoint, but there are always puts and takes. We’re trying to be wise with the investment, but not restrict growing categories.

Callum Elliott — Bernstein Research — Analyst

So thanks a lot, Billy. I guess the natural follow-up is, if I benchmark relative to your big competitors, both in the U.S. and internationally, the two biggest amongst them are spending literally billions of dollars a year and my guess is instinctively, if you’re just talking about switching a portion of your cigarettes spend over in [indecipherable] you’re not going to get anywhere close to that billions of dollars a year, and so the question is, do you genuinely believe you can be successful if you’re spending so much less than those competitors and how?

Billy Gifford — Chief Executive Officer, Director

Yeah, we do believe it. We are trying to really be driven by the consumer, learning from the global marketplace of products in the marketplace and use those as, if you will, a launch point for products and really trying to meet what the desires and needs of the consumers on the marketplace that aren’t met by those existing products in the marketplace and so we feel like we can achieve the vision, we’ve highlighted for you guys that we really believe we can navigate strong returns to shareholders at the same time making the appropriate investments in these growing categories and we believe we can do that. I think you’ll continue to hear us talk about investments and we will provide a lot more detail of some of the progress we’ve made at Investor Day.

Callum Elliott — Bernstein Research — Analyst

Thank you.

Billy Gifford — Chief Executive Officer, Director

Thank you,.

Operator

Thank you. Our next question comes from Gaurav Jain with Barclays.

Gaurav Jain — Barclays — Analyst

Hi, good morning, Billy. Good morning, Sal.

Billy Gifford — Chief Executive Officer, Director

Good morning.

Gaurav Jain — Barclays — Analyst

I have three questions. So first one to you Billy. We will have a new competitor next year in the U.S. market with IQOS and when you were distributing IQOS, then the volumes were much lesser than any of us had expected. So what did you find were the challenges when U.S. consumer came to IQOS?

Billy Gifford — Chief Executive Officer, Director

Yeah, it’s a great question and I appreciate you asking that Gaurav. I think when you think about IQOS, it was really about the disciplined approach that we were taking introducing a brand-new category, the consumer in the U.S. was used to the E-Vapor space, they had understood that, when you’re introducing a new category that requires some education on how to use the product and how to maintain the product that there’s investment there that takes place and we talked about the learnings we had as long as we went along the way, But I would say the biggest challenge is educating the consumer on the product and then leading their desires, and I think there are still unmet needs in the marketplace.

Gaurav Jain — Barclays — Analyst

Sure. The next question, perhaps to you Sal is around MSA expense [Phonetic] next year and how we should factor in inflation, and if you could just help us understand because I think there is confusion that how does that 3% number of work versus inflation, or is it the change of inflation that we should be looking at?

Sal Mancuso — Chief Financial Officer, Executive Vice President

Gaurav, you are correct to point out that inflation is a factor when you think about MSA expense. A couple of points I’ll make. one is the high rate of inflation in 2022 has been accounted for and is already in the base, you are correct to point out that when you think about inflation related to MSA, there’s a 3% for, so even if inflation when measured below 3%, it’d be a 3% increase in the MSA expense.

And I’ll also remind you that inflation is measured at a point in time. December 31 current year to December 31 prior year. So we have considered that when you think about 2023, there will be an elevated level of inflation. We have seen some receding of the rate of inflation, but still expect it to be elevated.

So we have considered that when we put together our guidance and then finally, I’ll say, there are other factors besides inflation to consider when you think about MSA expense including volume, shipment share and other such factors.

Gaurav Jain — Barclays — Analyst

Sure, and my last question is on share repurchases for next year, which at $1 billion are below what we thought and I think where most people were and even though your EBITDA is growing, you’re generating free cash flow after dividends, so the leverage will anyway down, then you have the ABI stake. So what makes you buy $2 billion of stock and not $1 billion?

Billy Gifford — Chief Executive Officer, Director

Well, first, let me say, we’re very happy that the Board authorized $1 billion share repurchase. And if you think about capital allocation, I think we have a history of taking a balanced approach. So as you note — as I noted in our opening remarks, we plan on paying back about $1.3 billion in notes coming due with available cash. We continue to pay a strong dividend as well as the $1 billion share repurchase. Gaurav, I really have nothing to report on the ABI asset. We continue to do the analysis that we do with all capital allocations. And currently, we believe the best thing for the shareholder over the long-term is to hold the asset.

Gaurav Jain — Barclays — Analyst

Sure, thank you so much.

Billy Gifford — Chief Executive Officer, Director

You’re welcome.

Operator

Thank you. Our next question will come from Chris Growe with Stifel.

Chris Growe — Stifel Financial Corp — Analyst

Hi, good morning.

Billy Gifford — Chief Executive Officer, Director

Good morning, Chris.

Chris Growe — Stifel Financial Corp — Analyst

I just had a quick question for you on Marlboro. You have to be very happy with the resilient performance of Marlboro and obviously around though discount and discount share is accelerating, which has seen to provide some risk to the brand. I’m sure you’re not going to get your promotional program on this call, but I wonder if you could talk about how you see the brand performing in ’23 and maybe more pointedly have you increased promotions at a faster rate behind Marlboro to preserve that share where it’s doing so well there.

Billy Gifford — Chief Executive Officer, Director

That’s very great questions, Chris. I think when you think about the resiliency of Marlboro, we’re very pleased with it. We’re pleased with how it’s positioned with the consumer, we’re pleased with that is still the aspirational brand within the cigarette space. I think when you think about your question around promotions. I would point to you that the high price realization actually shows that we are able to be more effective and efficient on our mobile price promotion.

I think it may be useful that — I talked about Mobile Red and Gold versus some of the price-sensitives, but some of the tools that we have in place actually allow the precision. So I’ll just walk through a quick example with three consumers. We have one consumer that’s purchasing premium brands and occasionally pops out and buys a discount brand. The other consumer is continuing flip-flopping between premium and discount, and the third consumer is a discounts consumer that occasionally pops up and smokes a premium cigarette.

When you think about those consumers, you’re going to treat those differently to make them more of a continuous premium brand smoker. That discount smoker, you may never be able to get them to convert to a premium because of the condition — the economic condition that they’re in. So as we move to personal value deliveries, as close as we can get to the consumer, we can tailor that across those three. And so that’s why I refer to the price that being at the national level.

We’re doing this down at the local level and on our journey to move as close as we can get to the consumer. And so that allows us to have Marlboro to be resilient, address the consumers’ needs on a case-by-case basis, if we can get really close to the consumer. And spend those resources accordingly to have a more consistent premium consider — consumer through time.

Chris Growe — Stifel Financial Corp — Analyst

Thanks for that and the color there. I appreciate that. I had one other follow-up which should be, you do have two relatively unique profit drags this year with PMCC winding down obviously pensions moving around. Could you give us some more color around — in context around the run — how much that’s weighing on profitability this year?

Billy Gifford — Chief Executive Officer, Director

Yeah, Chris, I’ll be — so let’s talk about pensions for a moment. If you think about pensions, obviously, there is a P&L impact related to return on assets, changes in discount rate. But I would say the pension is really well funded. We have strong funding in that pension plan, it’s actually fully funded. So we feel really good about that, and I would say, the changes in pension expense, I’ll remind you are non-cash. We have successfully completed the wind-down of PMCC, so you are correct in that we had earnings and cash flow last year and this year we will not and it is a year — on a year-over-year basis is a slight lag, but remember PMCC was part of our all other category, it was so we consider it fairly immaterial to the total earnings of Altria.

Chris Growe — Stifel Financial Corp — Analyst

Okay, thank you very much.

Billy Gifford — Chief Executive Officer, Director

Well, thank you.

Operator

Thank you. Our next question comes from Andrei Condrea with UBS.

Andrei Condrea — UBS — Analyst

Hey, good morning Billy and Sal, thanks for taking my question. One for me, please, if you don’t mind. On your smokeless business especially on from what we’ve seen, the brand has been driven by strong discounting versus the main peer. Now, do you expect that to continue going forward or rather just closing the price gap between you and your main peer even if your product — your promo spend per can is decreasing? Thank you.

Billy Gifford — Chief Executive Officer, Director

All right. Thank you. I think when you think about it. And this is not an excuse, it’s just stocks, they had a first-mover advantage and when consumers — to get consumers to have new brands in their consideration set, you have to induce trial and that’s what we feel like we’re doing. I would say from a consumer standpoint, it’s still very small compared to the total nicotine space. So we’re going spend and invest While the overall category is growing, so we can participate in that growth. We mentioned previously, it was intuitive that the adult dipper would move to the product pretty quickly and that the adult cigarette consumer, you’re gonna have to induce trial and that’s what we’re in the process of doing and are excited about the results thus far.

I think through time, we did reduce the promotional spend per can. So when you think about the price gap, if you will, the way you referred to it to a competitive product in the marketplace, you’re going to invest while the category is growing. So you get these products in the consideration set, I talked about bringing in some of the data analytics like I think you saw the benefit of that in this past year, but we have more to do there and I think as we continue to progress and move forward, we feel good about it. I don’t want you to think that it’s all discount, it’s all price off, that’s to induce trial. We really see it as a complete marketing ecosystem, if you will, and I hate to use the business term but it’s surrounding the consumer and really meeting them where they’re at in their journey and then supporting them in that journey to fully transition over, if you will, from cigarettes to this novel oral pouch and so that’s where we’re at. We feel good about the progress we’ve made thus far, but we certainly have to continue to drive awareness and induce trial.

Andrei Condrea — UBS — Analyst

That’s very clear. Thank you. And you are completely right, there has been fantastic progress from one and if I could squeeze in just one more if you don’t mind is that Marlboro has indeed done very well and congratulations for that. But for the rest of your portfolio as small as it is versus Marlboro, what steps are you taking to defend your market share versus pressure both from peers on the very top-end of the price band and the bottom-end? Thank you.

Billy Gifford — Chief Executive Officer, Director

Yeah. I would say if you look at growth, I would say the growth If you look at competitors, is really hit the very, very bottom end. Sal highlighted in his comments, there are a number of major manufacturers that have what we would consider branded discount, price and deep discount space and so when we look at total portfolios for some of those, we don’t see the benefit of having gone down to that low price here, they may grow one brand to the detriment of another brand within the discount space.

So we want to participate in the discount category, we think it’s important, but we certainly don’t want to grow the discount category and I think being premium focused where we feel the profitability and high loyalty is in the cigarette space, is an important place to play, and that’s why we’re focused. Sal highlighted for you, our premium brands are growing. Total premium share of the premium space is growing through time on the back of Marlboro. So we’re pleased with that. We talked about the RGM tools, so I won’t repeat that. But being able to continue to get closer to on a consumer by consumer basis and meet them where they’re at, when they have needs is where we’re headed. And we’re excited about that progress.

Andrei Condrea — UBS — Analyst

Thank you. That’s very clear.

Billy Gifford — Chief Executive Officer, Director

Thank you.

Operator

Thank you. [Operator Instructions]. Our next question comes from Priya Ohri-Gupta with Barclays.

Priya Ohri-Gupta — Barclays — Analyst

Good morning, thank you so much for the question. So really appreciate your commentary Sal around the intent to pay-down your upcoming euro maturity later this month. I guess, as we take a step back, your euro-denominated has really come down partly driven by the Income that you’re receiving from the ABI stake, given that that was sort of a natural hedge. Given where your euro exposure stands now in terms of your debt portfolio, are you pretty comfortable with where that is? Or is there a need to continue to grow that euro exposure over time either synthetically or through outright issuance in that market? Thanks.

Billy Gifford — Chief Executive Officer, Director

Yeah, Priya, first, I’m going to start my answer by just reiterating, I really have nothing to report as it pertains to ABI. We continue to believe holding the asset is in the best interest — long-term interests of our stakeholders. Second, I would tell you that while we have flexibility, it’s really a market-by-market analysis and a transaction-by-transaction analysis related to what markets we may or may not enter as we think about managing our debt going forward.

So that’s kind of how I would answer your question.

Priya Ohri-Gupta — Barclays — Analyst

Okay, that’s helpful.

Billy Gifford — Chief Executive Officer, Director

Sure.

Operator

Thank you. At this time, we will open the Q&A to the members of the Media. [Operator Instrucions] We’ll take our next question from Jennifer Maloney with Wall Street Journal.

Jennifer Maloney — Wall Street Journal. — Analyst

Good morning.

Billy Gifford — Chief Executive Officer, Director

Good morning, Jennifer.

Jennifer Maloney — Wall Street Journal. — Analyst

My first question is about your Juul valuation. I saw that you lowered the value of your stake to your price. That values Juul at $714 million. I wondered if you could explain the reasoning behind that valuation decrease? I was a little surprised because in the fourth quarter Juul resolved a large part of the litigation that it faced, which eliminates some of the uncertainty around the company. So could you explain that valuation?

Billy Gifford — Chief Executive Officer, Director

Sure, good morning, Jennifer. First, I will remind you that we had taken an impairment related to litigation and we really captured within kind of our overall discount rate of the Juul assets. We had accounted for that, but you know, on a quarterly basis, the way we account for Juul is has us run an analysis of the fair market value of the investment, it’s not publicly traded. So we have to do an independent analysis and from quarter-to-quarter, there is going to be changes, and we’ve been pretty communicative about that. This quarter, it did — our investment was reduced to $100 million. And it’s really macro-driven, it’s really macroeconomics and other factors that are considered when doing that analysis.

Jennifer Maloney — Wall Street Journal. — Analyst

So things like inflation and possible recession?

Billy Gifford — Chief Executive Officer, Director

Yes, macro market conditions, inflation in place, discount rates, things like interest rates, consumer dynamics, all of that goes into the analysis.

Sal Mancuso — Chief Financial Officer, Executive Vice President

You’ll note, Jennifer, when you build a discount rate, it starts with the risk-free rate. And so, certainly the interest-rate increases we’re seeing from time continue to impact it as long as they’re still on upward trajectory.

Jennifer Maloney — Wall Street Journal. — Analyst

Got it. My second question is a little more color around the consumer purchasing patterns right now. Can you talk a little bit more about what you’re seeing consumer is doing. The volume has come down, so is it because people are making fewer trips to the store to purchase cigarettes or are they buying less each time. Can you sort of talk about what the actual pattern is?

Billy Gifford — Chief Executive Officer, Director

Yeah, it’s a great question. What we’re seeing is, as we see mobility increase, if you will, the U.S. is coming out-of-the COVID pandemic. We’re actually seeing a return to more frequent trips. Remember, our consumer pre-COVID would go either every day or every other day. I think what you’re seeing and what consumers tend to do when they get under economic pressure is they reduce their number of nicotine occasions in a day. So through time that factors into their purchasing behavior, you see a little bit and we highlighted that which was the consumers that are under dire economic conditions at times will either switch out or trade out to a cheaper brand, we try to give them a safe landing place within the Marlboro franchise, but as far as number of trips, we haven’t seen a reduction in the number of trips. It’s more about through time reducing their nicotine occasions.

Jennifer Maloney — Wall Street Journal. — Analyst

I think so they’re smoking fewer cigarettes per day.

Billy Gifford — Chief Executive Officer, Director

That’s correct. So remember, as we came into the — there is no change in the overall trend if you will, the long-term trend. As we went through COVID and there was less mobility, less societal pressures, we actually thought what we believe nicotine occasions go up. We see — when the economic conditions and the macroeconomic environment is directly impacting the consumer, though stricter nicotine occasions, as they become more comfortable with that, they tend to return to a normal trend.

Jennifer Maloney — Wall Street Journal. — Analyst

All right, thanks very much.

Billy Gifford — Chief Executive Officer, Director

Thank you.

Operator

Thank you. It appears at this time we have no further questions, I’ll turn the call-back over to Mac Livingston for any additional or closing remarks.

Mac Livingston — Vice President of Investor Relations

Thanks to everyone for joining us, please contact Investor Relations team if you have further questions. Thanks and have a great day.

Operator

[Operator Closing Remarks]