RICHMOND, Va. — Despite some challenges facing alternative tobacco products today, Altria Group Inc. remains committed to its harm reduction journey.
"We are in the midst of a remarkable transformation within the tobacco industry. Once predictable, the industry has become increasingly dynamic and complex and while this evolution may pose short-term challenges, we believe tobacco harm reduction is a significant opportunity for the industry and adult tobacco consumers," Altria Chairman and CEO Howard Willard said during the company's third-quarter earnings call on Oct. 31.
"We believe that in the next decade, non-combustible products can surpass combustibles as the preferred choice among adult tobacco consumers," he continued. "We intend to lead this historic transformation with our unmatched portfolio of non-combustible products and investments."
To that end, Altria made several investments in the alternative tobacco segment over the past year. It took a $12.8 billion stake in Juul Labs Inc., and entered the oral nicotine category with a definitive agreement to acquire 80 percent of certain companies of Burger Söhne Holding AG that will commercialize on! products worldwide, as Convenience Store News previously reported. It also took a $1.8 billion minority stake in Canadian cannabis company Cronos Group Inc.
"We assessed our portfolio and believe that we have addressed gaps with investments in e-vapor and oral nicotine pouches, as well as an adjacent investment in cannabis," Willard said. "Today, we believe we have the strongest portfolio across multiple tobacco platforms and are well positioned for future growth in a rapidly evolving U.S. tobacco industry."
Altria's stake in San Francisco-based Juul equals a 35 percent economic investment. As Willard explained, the tobacco company invested in Juul based on its belief that the vapor company's product development strength, early signs of brand equity and potential to convert adult smokers set it apart from all other e-vapor products in the market.
However, "dramatic shifts in the current e-vapor regulatory and marketplace environments" has led Altria to revise its transaction assumptions, the CEO said.
In preparing its financials for the quarter, Altria performed a valuation analysis on its Juul investment, which considered multiple regulatory and marketplace scenarios.
"In aggregate, we're now projecting lower e-vapor category volumes in the U.S. vs. our original estimates, which resulted in a third quarter non-cash impairment charge of $4.5 billion related to our Juul investment," Willard explained. "Also factoring into this determination were other changes to our original assumptions. For example, we expect it may take longer for Juul to realize the strong margin performance that we previously communicated."
Altria also revised its estimates of Juul's international business as the result of recent market development, he added.
"Despite this impairment charge, we remain committed to Juul's success. We are pleased with the recent decisions by Juul to change leadership, and we are optimistic about Juul's focus and prioritization in key areas such as establishing industry-leading responsible practices and pursuing regulatory authorization of their products," Willard said.
Oral Nicotine Segment
Altria closed on its investment in on! products during the latest quarter. With the transaction completed, Altria is now focused on retail and digital engagement with the adult tobacco consumer. For example, the company launched a branded website for on! where age restricted adult tobacco consumers can explore the brand and will soon be able to purchase the product online.
"We expect to begin production of on! in our Richmond manufacturing center capacity of 50 million cans by mid-year and 75 million cans by year-end with additional capacity available if necessary," the chief executive reported.
Altria is also is preparing Premarket Tobacco Applications (PMTA) for the on! portfolio in time for the Food and Drug Administration's May 2020 deadline for deeming products.
"Ultimately, the adult tobacco consumer and the regulatory framework will dictate which categories grow and at what pace," Willard said. "We believe our broad portfolio, investments and leading capabilities position us to win in multiple future scenarios."
Based in Richmond, Altria's wholly owned subsidiaries include Philip Morris USA, U.S. Smokeless Tobacco Co. LLC, John Middleton Co., Sherman Group Holdings LLC and its subsidiaries, Ste. Michelle Wine Estates Ltd., and Philip Morris Capital Corp. The company holds equity investments in Anheuser-Busch InBev SA/NV, Juul Labs Inc. and Cronos Group Inc.