奧馳亞 (MO) 2017 Q3 法說會逐字稿

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  • Operator

  • Good day, and welcome to the Altria Group 2017 Third Quarter Earnings Conference Call.

  • Today's call is scheduled to last about 1 hour, including remarks by Altria's management and a question-and-answer session.

  • (Operator Instructions).

  • I would now like to turn the call over to Mr. Bill Marshall, Vice President, Investor Relations for Altria Client Services.

  • Please go ahead, sir.

  • Bill Marshall

  • Thank you, Lori.

  • Good morning, and thank you for joining us.

  • We're here this morning with Marty Barrington, Altria's CEO; and Billy Gifford, Altria's CFO, to discuss Altria's 2017 third quarter and first 9-month business results.

  • Earlier today, we issued a press release providing these results, which is available on our website at altria.com and through the Altria Investor app.

  • During our call today, unless otherwise stated, we're comparing results to the same period in 2016.

  • Our remarks contain forward-looking and cautionary statements and projections of future results.

  • Please review the forward-looking and cautionary statement 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.

  • Adjusted results exclude special items that affect the comparability of reported results.

  • Descriptions of these non-GAAP financial measures and reconciliations are included in today's earnings release.

  • Now I'll turn the call over to Marty.

  • Martin J. Barrington - Chairman, CEO & President

  • Thanks, Bill.

  • Good morning, everybody.

  • Altria delivered outstanding financial performance in the third quarter contributing to a strong first 9 months of 2017.

  • We grew adjusted diluted earnings per share of 9.8% in the third quarter and 5.5% for the first 9 months.

  • As we expected, our earnings growth is accelerating as we move through the second half of the year.

  • We continue to return a significant amount of cash to shareholders through both dividends and share repurchase as Billy will describe in more detail.

  • And in August, our Board of Directors voted to increase our quarterly dividend by 8.2% and that's the 51st increase in the past 48 years.

  • Our core tobacco businesses were the primary drivers of our earnings growth.

  • In the quarter, the smokeable products segment delivered 7.7% adjusted operating company's income growth, as strong pricing and lower cost more than offset volume declines.

  • For the first 9 months, smokeable products segment adjusted operating company's income grew 7.4%.

  • Reported cigarette volumes were challenged in the quarter due to the industry's rate of decline, trade inventory movements, retail share declines and one fewer shipping day.

  • We're very pleased with the financial performance in the smokeable segment.

  • Our strategy continues to be to maximize income while maintaining momentum on Marlboro and Black & Mild over the long term.

  • As you know, we view momentum as continued strength across various brand metrics including equity, demographics, profitability and retail share.

  • Marlboro continues to have category-leading equity, strong demographics and is, of course, highly profitable.

  • As for retail share, Marlboro declined by 0.5 share point to 43.2% in the quarter and 0.3 for the first 9 months to 43.4%.

  • So let's look at what's happening here beginning with California.

  • As we described in the second quarter call, we expected the dynamics related to the California $2 per pack SET increase to dampen Marlboro share through the back half and that's continuing to happen.

  • You are familiar with Marlboro's over-indexed share in California at over 50%, and Marlboro thus continues to experience disproportionate share impact during this period due to the SEC increase -- SET increase.

  • Second, there was elevated competitive activity in the quarter, including high levels of promotional spending and a competitive brand launch.

  • In fact, there have been 5 such launches by major competitors this year, many with multiple packings behind them.

  • Those launches and the promotional resources accompanying them have increased the short-term share pressure on Marlboro as the share leader.

  • Share performance is best measured over years, not quarters, of course, but it's important to understand that PM USA is addressing Marlboro's recent share declines.

  • First, it is reallocating certain marketing resources, including in California.

  • These have included changes to promotional resources and product expansions.

  • For example, PM USA has revised its retail trade programs to focus retailers on the profitability Marlboro brings to their stores.

  • In this process, PM USA has reallocated resources from underperforming retail program options to promotions that support maintaining Marlboro's leadership position.

  • Second, PM USA recently announced the expansion of Marlboro black label in California and Washington state.

  • Marlboro black label features the latest in Marlboro's packaging innovation, it's exclusive, soft-touch technology.

  • We expect these actions to help stabilize Marlboro share while staying on strategy to maximize income.

  • Look for more product news from PM USA at our Investor Day next week.

  • Moving to the smokeless product segment.

  • USSTC delivered outstanding adjusted operating company's income growth of 15.7% in the third quarter as higher net pricing and lower costs more than offset lower shipment volume.

  • The smokeless product segment delivered 6.3% adjusted operating company's income growth for the first 9 months of 2017.

  • Copenhagen's retail share grew 0.2 to 33.9% in the third quarter and by 0.6 for the first 9 months to 33.6%.

  • On a combined basis, Copenhagen and Skoal retail share declined 1.2 share points in the third quarter and 0.9 for the first 9 months, driven by Skoal declines.

  • These results reflect USSTC's continued focus on growing Copenhagen while refining its Skoal investments to enhance its profitability.

  • In e-vapor, Nu Mark grew MarkTen's third quarter volume by more than 50%, driven by expanded distribution and category growth.

  • MarkTen had a third quarter national retail share of approximately 13.5% in mainstream channels.

  • And Nu Mark recently announced plans to expand the distribution of MarkTen Bold to approximately 15,000 additional stores in the fourth quarter.

  • In heated tobacco, the team at PM USA has made significant progress on its commercialization plans for iQOS, which we're excited to share with you next week at our Investor Day.

  • Another focus of our Investor Day will be the regulatory environment.

  • As everyone knows, in July, FDA announced its comprehensive plan for U.S. tobacco in nicotine regulation.

  • FDA stated its belief that this approach will strike an appropriate balance between regulation and encouraging development of innovative tobacco products that may be less risky than cigarettes.

  • We're encouraged by this important evolution in the agency's stance on innovation, having long advocated for a comprehensive regulatory policy that acknowledges the continuum of risk.

  • We also support FDA's stated intention to issue regulations, outlining what information it expects to be included in product applications and in reports to demonstrate substantial equivalence.

  • Obviously, establishing the rules before any decisions are taken is simple regulatory fairness.

  • And we further support Commissioner Gotlieb's direction to the Center for Tobacco Products to reconsider its approach to substantial equivalence for provisional products, a process we previously have described as increasingly onerous and expensive.

  • Finally, FDA also stated its intention to explore a product standard relating to nicotine, a possibility since the act became law in 2009 and for which PM USA has been preparing.

  • As the FDA itself acknowledge, developing such a standard will be a long and complex process requiring significant stakeholder comment and engagement.

  • And again, we'll say more about all this next week.

  • In summary, we're very pleased with our performance through what's been a challenging 9 months.

  • Thus, we reaffirm our 2017 full year guidance of 7.5% to 9.5% adjusted diluted EPS growth.

  • And here's Billy for more detail on our performance.

  • William F. Gifford - CFO

  • Thanks, Marty, and good morning, everyone.

  • I'll start with some further color on the smokeable products segment.

  • Cigarette industry volumes declined an estimated 3.5% in the third quarter.

  • The smokeable products segments reported cigarette shipment volume declined by 6.2%, primarily driven by the industry's rate of decline, trade inventory movements, retail share declines and one fewer shipping day.

  • When adjusted for inventory movements and calendar differences, PM USA's cigarettes shipment volume declined by an estimated 4.5%.

  • The better look is probably the first 9 months where industry cigarette volumes declined by an estimated 3.5% and PM USA's cigarettes shipment volume decreased 4% on both a reported and adjusted basis.

  • The cigar business continues to perform extremely well, delivering volume growth of 6.6% in the third quarter and 10.6% for the first 9 months.

  • Smokeable segment adjusted OCI margins expanded by 4.5 percentage points to 52.2% in the third quarter, driven by higher pricing and lower SG&A and resolution expense.

  • The favorable cost comparison is driven in part by California ballot spending in the year-ago period and NPM-related credits booked in this quarter.

  • For the first 9 months, adjusted OCI margins expanded by 3 percentage points to 51.6%.

  • In the smokeless products segment, industry volume grew by an estimated 0.5% over the past 6 months.

  • After adjusting for trade inventory movements and other factors, USSTC estimates that its adjusted smokeless products shipment volume declined by 3% in the third quarter and 1.5% for the first 9 months.

  • Smokeless products segment adjusted OCI margins increased by 6.8 percentage points in the quarter to 70.3%, driven primarily by higher net pricing and lower cost, partially offset by unfavorable mix.

  • For the first 9 months, smokeless products segment adjusted OCI margins expanded by 1.6 percentage points to 67.7%, primarily due to higher pricing, partially offset by unfavorable mix.

  • Turning to our alcohol assets.

  • Wine segment adjusted OCI declined 5.3% in the quarter due primarily to higher cost.

  • Ste.

  • Michelle's volume trends improved in the third quarter relative to the first half and were essentially unchanged compared to the year-ago level.

  • In beer, third quarter adjusted equity earnings from our investment in Anheuser-Busch InBev were $203 million, reflecting AB InBev second quarter results, which it reported in July.

  • I'll wrap up by highlighting our cash returns to shareholders.

  • Through the first 9 months of 2017, we paid shareholders more than $3.5 billion in dividends and increased the dividend in August.

  • We repurchased nearly $2.4 billion in shares, leaving $576 million in the program as of September 30.

  • We expect to complete the program by the end of the second quarter of 2018.

  • That concludes our prepared remarks.

  • And Marty and I are now happy to take your questions.

  • While the calls are being compiled, I'll remind you that today's earnings release and our non-GAAP reconciliations are available on altria.com.

  • We've also posted our usual quarterly metrics, which include pricing, inventory and other housekeeping items.

  • With that, operator, do we have any questions?

  • Operator

  • (Operator Instructions) Your first question comes from the line of Chris Growe of Stifel.

  • Christopher Robert Growe - MD and Analyst

  • So I'm going to start with a question for you on California, really on the smokeable business and some of the challenges you've had there around elasticity.

  • So I just wanted to understand, did you see an improvement in the quarter?

  • Do you expect kind of the consumer to adjust to these prices a little more, you'll see less and less elasticity going forward?

  • And I think if I could ask related to that, does the new product pipeline from Marlboro, is there more -- it sounds like there's more to come in here next week.

  • But just to understand how the new products have been contributing to potential market share improvements for that brand?

  • Martin J. Barrington - Chairman, CEO & President

  • Sure.

  • Good questions both.

  • So we've discussed previously, Chris, the elasticities with respect to cigarettes, and we've had big jolts before like the one that we've experienced in California.

  • And what happens is, as you know, there's an immediate disruption and you get a deep decline.

  • And then it comes back to the curve that we've observed over the years, which is about negative 0.3.

  • So a lot of it depends on how big the shock is.

  • California, $2 a pack after not having had an increase for decades really.

  • So it's coming back.

  • We expect it'll come back to where it is on the curve, and we see some improvement there.

  • But it's going to take some time.

  • It was a big shock to the system, and you see that in the numbers, I think.

  • So on Marlboro, we're very pleased actually with Marlboro's product pipeline.

  • You see that what we try to do is we try to bring out SKUs to the market, where we think that there's a niche where Marlboro can gain some business from competitive smokers.

  • We're also, frankly, trying to create news in the marketplace about Marlboro to keep its momentum moving forward.

  • And so we're going to talk about this next week.

  • And I've mentioned, I think, black label already in the remarks.

  • Christopher Robert Growe - MD and Analyst

  • Okay.

  • And just a follow-up for you then on -- you have a larger than expected product margin and actually the price increase you put through recently.

  • So I suspect there's some areas you want to invest in, having more pricing coming through.

  • And can you talk about that broadly, or perhaps just specifically where you want to invest and some areas that you can fund, perhaps, in advance on ROPs and that kind of thing before that may become an opportunity for a launch next year?

  • Martin J. Barrington - Chairman, CEO & President

  • Yes.

  • I won't comment too specifically, Chris.

  • But I think we've called out several areas before.

  • We are building a very, very strong competitive advantage in digital marketing and we continue to invest there.

  • We continue to invest in the equity behind our brands.

  • And obviously, as the FDA has now set the new direction with respect to reduced risk products, you have to make investments there in order to compete effectively.

  • And those are some areas that we, obviously, have been investing in and expect to invest further.

  • Operator

  • Your next question comes from the line of Vivien Azer of Cowen & Company.

  • Vivien Nicole Azer - MD and Senior Research Analyst

  • I was hoping you can touch on, please, the evolution that your inventories as well as wholesaler inventories.

  • I recognize that it ebbs and flows quarter-to-quarter for a variety of reasons, taxes, price increases, new product launches.

  • But as I look at the absolute levels of inventory in the system, both for you and for the industry as a whole, I don't think I've ever seen numbers these high before.

  • And for your inventories, it's going to be the third quarter of a sequential build.

  • So any color on that would be really helpful.

  • William F. Gifford - CFO

  • Yes, thanks, Vivien.

  • This is Billy.

  • You're right, the third quarter ended a bit higher than if you look at it on a historical basis.

  • But as you mentioned, when we look at this over a longer period of time, they tend to ebb and flow.

  • It's really when the wholesalers decide to take inventory.

  • At times, it can be when the holiday occurs in a quarter.

  • But again, we expect that to balance out as we move through the rest of the year.

  • Vivien Nicole Azer - MD and Senior Research Analyst

  • But anything else that you could offer really because it doesn't seem like it's just a 1-quarter phenomenon if it's 3 quarters of sequential increases.

  • I mean, it's not quite close to a doubling versus where you were second quarter of '16.

  • Martin J. Barrington - Chairman, CEO & President

  • I guess the only thing I'd add to that, Vivien, has been that the wholesalers have strategies around when they build their inventory and when they decide to take their inventory down, which they are free, of course, to do.

  • Vivien Nicole Azer - MD and Senior Research Analyst

  • Okay, that's fair.

  • Then just in terms of Marlboro and, perhaps, we'll hear more about this when we see you at the Analyst Day.

  • But any incremental color just in terms of the composition of some of the share evolution either by price segment within the Marlboro brand family or by geography, anything outside of California to call out, perhaps, reflecting back on some of the commentary from last quarter's call around some softness in the rust belt and the southeast.

  • Martin J. Barrington - Chairman, CEO & President

  • Yes, sure.

  • So glad we're going to see you next week, we are going to talk about Marlboro in some detail there.

  • I think what we would say is you have to assess it in the context of the strategy, which is to maximize income.

  • And so when we look at back at Marlboro shares, we don't decompose it down to the SKU level despite I know there's quite a lot of interest in that, we don't do it for competitive reasons.

  • But if we go back to Marlboro share gains, for example, during the period 2011 through 2016, we actually gained ahead of what the historical rate had been.

  • It was about 1.7 percentage points of share gain.

  • And you can see in the first 9 months, we've given back about 0.3.

  • So I think the reasons are pretty straightforward.

  • It is California for the reasons we just finished discussing.

  • There were all these competitive launches.

  • And then I think there is a market dynamic change, which is -- because of the industry consolidation, there are very few brands left, frankly, that don't have marketing support on them.

  • So Marlboro used to gain share by picking up some of the share from those unprotected brands as did other competitive brands, that's the market dynamic change.

  • But overall, I think we're on strategy, particularly when you see the income performance.

  • So we'll talk more about the Marlboro brand family next week.

  • We just don't break it down, sort of, at a level that you're asking.

  • I hope you can appreciate that.

  • Operator

  • Your next question comes from the line of Adam Spielman of Citi.

  • Adam Justin Spielman - MD and European Tobacco and Beverage Analyst

  • My first question, I hope you can answer.

  • So if you look at Marlboro-- move outside California, so the other 49 states, my guess is you've lost market share in the first 9 months but to a lesser extent.

  • I was wondering if you could help quantify that.

  • So it's just trying to get rid of the California effect.

  • Martin J. Barrington - Chairman, CEO & President

  • 0.3.

  • Adam Justin Spielman - MD and European Tobacco and Beverage Analyst

  • Secondly, turning to smokeless.

  • You obviously gained margin very strongly.

  • And one of the things you said is, in the 9 months, it was mainly driven by price increases.

  • But in the final quarter, we're talking about the third quarter, there was also some cost saves.

  • I was wondering if you could decell that.

  • And also you've given some color around competition in smokeable.

  • I was just wondering if you can gave some color about the competition in the brand dynamics and what's really happening in smokeless because you haven't so far I'd really appreciate that.

  • Martin J. Barrington - Chairman, CEO & President

  • Sure.

  • Let's try both.

  • So I think one of the principal contributors at the cost line was, remember, in the year-ago comp, we had California ballot spending out and that came out, obviously, in the comp and that was a significant delta in the year-over-year comp.

  • I would say that the competition in the smokeless side of the business is competitive.

  • We obviously are doing great with Copenhagen.

  • You know our strategy on Copenhagen and Skoal, but we have a competitor that's got a brand there and there were significant promotions in the quarter.

  • I think that accounts for it as well.

  • Operator

  • Your next question comes from the line of the Judy Hong of Goldman Sachs.

  • Freda Zhuo - Analyst

  • It's Freda Zhuo in for Judy.

  • So I had a question on the competitive activity that you're seeing in combustibles.

  • I greatly appreciate the color on the call thus far, but digging a little bit deeper in terms of the increased competitor spending.

  • Has it primarily been related to these new launches or is it behind the core flagship brands?

  • And how do you expect some of those competitive dynamics to persist over the next few quarters?

  • Martin J. Barrington - Chairman, CEO & President

  • Sure, let me see if I can help you.

  • I think the answer is, there was quite a lot of activity around new product launches.

  • So we mentioned in our remarks, we've got, I think 5 of them over the course of the year, which is higher than we typically see.

  • It's also worth mentioning that it's just not 5, there are multiple SKUs with the 5. So we actually have a lot of SKUs coming into the marketplace.

  • And as you know, in our category, because of the way we have marketing restrictions -- is the battle is at retail.

  • People put promotional resources on them, including us when we do this to try to promote trial.

  • And when you have smokers who are trying a new product, it puts pressure on the share leader on Marlboro.

  • So that's our diagnosis of what's been happening, that and California, obviously.

  • Freda Zhuo - Analyst

  • Great.

  • And then a follow-up on MarkTen.

  • So the results were pretty positive this quarter with volume growing more than 50%.

  • So what are your expectations this year for e-vapor category growth?

  • Clearly, it's accelerated a little bit this year versus what we've seen over the past couple of years.

  • And what are the plans behind further investment behind the MarkTen franchise?

  • Martin J. Barrington - Chairman, CEO & President

  • Yes.

  • So on your last question, I'd invite you either -- Judy will let you to come to the Investor Day or you can certainly dial in.

  • We're going to have a lot to say about our vapor business on the Investor Day.

  • And we've got exciting plans there.

  • Look, the category has picked back up as you say.

  • The last number I saw, I think it looks like it picked up maybe about 8% on a volume basis, higher on a dollar basis because you've got devices, obviously, which contribute to the dollar sales there.

  • So as the technology gets better in vapor and those products become more acceptable to the consumer, we continue to see high trial and there is some stickiness as the products get better.

  • So I think that's one of our key platforms for our innovative products, and we're excited about the chance to continue to grow that business.

  • Operator

  • Your next question comes from the line of Michael Lavery of Piper Jaffray.

  • Michael Scott Lavery - Principal & Senior Research Analyst

  • I'm wondering if you could help us just get a sense for some of the timing on any potential iQOS approval.

  • I know that the FDA accepted your PMTA application in August, I believe, and the targeted time from them is I think usually 6 months, I don't think they're bound to that.

  • And from -- correct, I also think that the clock sort of stops, so to speak, if they come back with questions and there's dialogue back and forth, which, obviously, we wouldn't have visibility on.

  • But have you had a lot of interaction like that?

  • Or what do you think -- could you give color why as thus far as what we should anticipate?

  • Martin J. Barrington - Chairman, CEO & President

  • Sure.

  • First of all, I think your -- the timelines that you called out are correct and those haven't changed since our last discussion on that.

  • And as you point out, they are nominal, to use that word, I guess, at the FDA.

  • But I think that they're working hard on it.

  • Those are PMI applications, of course, assisted by us.

  • So you may want to speak to them as well about it.

  • But we've been encouraged by the degree of interchange on those applications.

  • And I think maybe another milestone to be watching for is if there were to be a TPSAC hearing on the applications, Michael, which, as you know, is part of the process.

  • And so PMI, with our assistance, is getting ready for all those things and we are working really hard to be ready so that when that authorization comes, as we hope it does, that we can get to market quickly.

  • But I think your understanding of the process is correct, and I don't really have anything new to add except, perhaps, the possibility of a TPSAC hearing should they announce one.

  • Michael Scott Lavery - Principal & Senior Research Analyst

  • Okay, great.

  • And then just on the buybacks, you've got a little over I think $750 million in this quarter.

  • You've got an average close to that for the year and you've got about $570 million something, I think, left in the authorization.

  • Your cash balance relative to the third quarter is above average in the recent history.

  • Would it be reasonable to assume you might considerably finish ahead of the 2Q '18 schedule?

  • And what would we relatively expect to be on that?

  • I know it's at the discretion of the board, but is that something you think you have some upside to perhaps?

  • William F. Gifford - CFO

  • Michael, this is Billy.

  • I won't forecast out what we're going to do in the future on share repurchase.

  • To your point, we still have the 560 -- $576 million left.

  • We'll see how we progress with that before we take any action.

  • But if we're going to take any, of course, we've got our board and we'll be sure to tell you when we do.

  • Michael Scott Lavery - Principal & Senior Research Analyst

  • Okay, great.

  • And then just one last one.

  • For the corrective statement ad that you're going to be starting running next month, that's I believe around the $31 million cost.

  • Can you just help us understand how to think about modeling that?

  • And is that an incremental expense and would it be spread evenly over the next year or so?

  • Or how do we factor that into our numbers?

  • William F. Gifford - CFO

  • Yes.

  • So you remember when we actually proceeded with that case, that $31 million has already been accrued.

  • And so those expenses, as we go through time, would be charged against the accrual.

  • Operator

  • Your next question comes from the line of Matthew Grainger of Morgan Stanley.

  • Matthew Cameron Grainger - Executive Director

  • Just had 2 quick questions.

  • One, I guess, with respect to some of the competitive dynamics in the smokeless business.

  • You called out unfavorable mix as being one of the drivers of net revenue in the quarter and it's -- I think that may be a factor that you don't typically call out in the release.

  • Just wondering if you could elaborate on whether that's a byproduct of some of the competitive promotion that's going on or whether there are other factors driving that.

  • William F. Gifford - CFO

  • Yes, Matt.

  • Basically, if you look at the smokeless market, it has a couple of different price points that occur in the marketplace.

  • And so it's just a mix of the volume that occurs of those 2 price points related to Copenhagen and Skoal.

  • Matthew Cameron Grainger - Executive Director

  • Okay, understood.

  • So is that something that there was an outside impact from in the quarter?

  • Or is that a dynamic that you view as being maybe a bit stickier as you've observed it over this year and going forward?

  • William F. Gifford - CFO

  • I think if I recall correctly, Matt, we've called it out a couple of times in the past.

  • I wouldn't say anything was abnormal about this quarter than other quarters.

  • Matthew Cameron Grainger - Executive Director

  • Okay.

  • And then just from a category standpoint, a variety of peers across the CPG landscape have talked about C store trends, some more cautiously than others.

  • So I'm just curious if you're seeing any perceptible change or slow down in C store activity within the tobacco category specifically.

  • Martin J. Barrington - Chairman, CEO & President

  • No, we haven't.

  • Although we're following it closely because, obviously, we've been following other people's reporting on that.

  • And we've been following the C store dynamics, it just hasn't shown up in our category, Matt.

  • Operator

  • Your next question comes from the line of Bonnie Herzog of Wells Fargo.

  • Bonnie Lee Herzog - MD and Senior Beverage and Tobacco Analyst

  • A question on the FDA's plan to reduce the levels of nicotine in combustible space.

  • You touched on this and how you're thinking about it.

  • But I guess, any more color on this would be really helpful, given the pressure that's been on your stock.

  • And then I know it's still very early to talk about, but could you touch on your capabilities to reduce nicotine level in your tobacco leaves and the expected costs involved?

  • I guess I'm trying to understand how complicated this might be and if you really have the capability to do this.

  • Martin J. Barrington - Chairman, CEO & President

  • Sure.

  • So this is another topic that we're going to cover in some detail next week.

  • So I don't want to put you off on your question, but I'll give you a high level sort of a lead-in, if you will.

  • There's quite a lot to do, obviously, as you know of any nicotine standard or any other standard, for that matter, wherever to be implemented, there has to be science and evidence-based.

  • And in the nicotine area, there's a lot of science that would have to be answered, so let me just call out a few for instance.

  • So I think folks are going to have to understand how consumers might react to a nicotine standard, including the question of whether compensation would occur because you, obviously, from the public health point of view, wouldn't want people smoking more cigarettes to get their nicotine.

  • There is no standard that is currently developed with respect to what the level should be or where it should be measured.

  • Is it in the aerosol or is in the filler?

  • How would it be implemented, would it be phased in time or would it be done more immediate basis?

  • So those are the questions which have to be answered that are not answered yet.

  • The government has research going on in that regard.

  • As you might expect, we -- our scientists are fully engaged in all the scientific questions, both tracking government research as well as doing our own research so that we're fully informed on those.

  • There are big questions around technical achievability, which is an area that you're asking about.

  • Now the possibility of a standard about nicotine has been in the statute since 2009, so it won't surprise anyone to know that we have been looking at ways that we might need any potential standard.

  • You can look at product design, you can look at tobacco leaf treatments, you can look at tobacco seed technologies, most of which are proprietary, so I won't comment beyond them.

  • But I think people should be assured that we have been looking at this.

  • And then, finally, I think another area that's going to have to be wrestled with is what about unintended consequences if a standard comes in.

  • We have got to make sure that the market still works.

  • So as you can tell, just from that high-level description, there's quite a lot that has to be wrestled around and, again, we'll talk more about that next week.

  • Bonnie Lee Herzog - MD and Senior Beverage and Tobacco Analyst

  • Okay.

  • That was really helpful.

  • I have another quick question, if I could, on Marlboro.

  • You touched on this a lot.

  • You mentioned that the Marlboro's equity is quite strong.

  • So is there any more color you can give us on that or any metrics?

  • I'm just trying to understand how you measure that and what you're looking at that.

  • We are not able to see.

  • Martin J. Barrington - Chairman, CEO & President

  • We tried to share that with you on a yearly basis.

  • I think you remember, typically, at CAGNY, we put up the equity scores.

  • We do an equity study every year.

  • I believe the last chart we put up, we called out the Marlboro's equity is at least 14 points higher than the next closest competitor, off of an already high base, and that Marlboro's equity has been improving over time.

  • So we're -- that work is underway, again, and as soon as we have an updated equity study, I assume that we'll be updating you in due course.

  • But its equity remain strong, there's no question about it.

  • And you see it in the premium price it's able to command.

  • Bonnie Lee Herzog - MD and Senior Beverage and Tobacco Analyst

  • And then 1 final quick question on your debt levels.

  • Your net debt to EBITDA is pretty low right now, at around 1.5x, and I know you guys don't have targets for this, but could you give us a sense of how you're thinking about current levels and your possible appetites for taking on more leverage?

  • William F. Gifford - CFO

  • Yes, it's a good question.

  • We'll end the quarter, Bonnie, at 1.3:1.

  • From a standpoint of taking on additional debt, I think if we see the opportunity to do that based on what the business needs are, we will.

  • As you know, we generate after dividends about $1 billion in excess cash just from the normal operations of the business.

  • So it's a really cash-generative machine that we have here in the operating companies.

  • And so at this point, we're very happy with where we're at.

  • You're right, we don't have a specific target number that we're looking at, but we definitely want to make sure we maintain investment grade.

  • Bonnie Lee Herzog - MD and Senior Beverage and Tobacco Analyst

  • I'm just thinking, again, comment on the stock pressure, it could be a way to create values for shareholders just even more aggressively buying back your stock at these lower levels.

  • William F. Gifford - CFO

  • I understand but you're...

  • Martin J. Barrington - Chairman, CEO & President

  • AAll right Bonnie, thanks.

  • Operator

  • (Operator Instructions) Your next question comes from the line of Nik Modi of RBC Capital Market.

  • Nik Modi - Analyst

  • So some of the stuff you might cover next week, so I look forward to seeing you guys then.

  • But maybe if you can just give some thoughts on Nat Sherman, how it's doing?

  • I guess it's been over a year now since it's been in the portfolio, so just was curious on how that's doing.

  • The second question is, would it be a fair assumption to say that if iQOS is rolled rolled out into the U.S. more broadly after the testing and all that kind of stuff, would be a lower margin than your overall portfolio just given the -- it will have the same SET, the same MSA, but perhaps, you'll have to spend a little more to kind of build brand awareness.

  • That was the second question.

  • And then I have a third question after -- I don't want to ask too many at once.

  • Martin J. Barrington - Chairman, CEO & President

  • All right.

  • Yes, we're going to talk about Nat Sherman next week.

  • Just for precision, we acquired it in January of this year.

  • So it hasn't been quite a year.

  • I think we just talked about before what we've been doing is getting the product ready, getting the package ready.

  • It's a huge whitespace opportunity for us as you know, Nik, and we've got plans to get that in distribution, and I think it's going to -- I think you'd be interested to see what we have on Nat Sherman.

  • For iQOS, well, for sure, when we launch iQOS, it's going to have a lower margin because we're going to be investing in it.

  • But the idea over time is that when you get to scale, obviously, that you can have a nice margin business in iQOS.

  • So we're working through all that.

  • We're going to talk about iQOS in some significant detail as well next week.

  • Nik Modi - Analyst

  • And then, I guess the last question is kind of more of a broader question from looking across CPG.

  • It seems like a big trend as kind of local assortment even in the U.S. And I'm wondering, Marty, given all of your very sophisticated relationships with distributors, with retailers, all of your trade contracts, if there's a way for the company to optimize its assortment in different regions to kind of get the best out of the portfolio.

  • Martin J. Barrington - Chairman, CEO & President

  • The answer is yes, Nik.

  • I think it's a very insightful question.

  • And in fact, our sales team has been working on that project and others.

  • I think as personalization becomes more important to the consumer and particularly with the analytical tools and the data sets that we now have that allows revenue growth management tools, for example, which we've deployed already in the smokeless business and are rolling it out across the rest of the businesses, it allows you the precision to do just that.

  • It's an excellent question and we're working on it.

  • Operator

  • At this time, I'd like to turn the call back over to Mr. Bill Marshall for closing comments.

  • Bill Marshall

  • Thank you all for joining our call this morning.

  • If you have any follow-up questions, please contact us at Investor Relations.

  • Operator

  • Thank you.

  • This concludes today's conference call.

  • You may now disconnect.