Altria Group - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 delivered an across-the-board beat vs Wall Street: adjusted diluted EPS of $1.44 vs $1.38 consensus, and revenues net of excise taxes of $5.29B vs $5.19B consensus; management raised the lower-end of FY25 EPS guidance to $5.35–$5.45 from $5.30–$5.45, maintaining the range top-end. Estimates from S&P Global; values marked with * are from S&P Global.
• Oral tobacco was the bright spot: on! shipment volume grew 26.5% YoY to 52.1M cans; segment adjusted OCI rose 10.9% and margins expanded to 68.7%.
• Smokeable products held margins despite double-digit volume declines; adjusted OCI rose 4.2% with adjusted OCI margins up 2.9pp to 64.5%, supported by strong net price realization and targeted discount brand expansion (Basic).
• Management emphasized accelerating enforcement against illicit e-vapor imports and NJOY IP workarounds; tone was confident on the oral portfolio and shareholder returns ($274M repurchases in Q2; $3.5B dividends YTD).

What Went Well and What Went Wrong

• What Went Well

  • Oral tobacco momentum: “on! delivered strong performance and was the substantial driver of the segment’s growth” with adjusted OCI +10.9% and margin +3.1pp to 68.7%.
  • Margin discipline in smokeable: adjusted OCI +4.2% and adjusted OCI margin +2.9pp to 64.5%, aided by pricing and lower settlement charges.
  • Shareholder returns and guidance: raised FY25 EPS guidance lower-end to $5.35–$5.45; Q2 repurchases of 4.7M shares ($274M) and $1.7B dividends paid in Q2.

• What Went Wrong

  • Combustible volumes fell: domestic cigarette shipments -10.2% YoY; industry volume -8.5% (adjusted), pressured by illicit flavored disposable e-vapor and consumer income constraints.
  • MST brand pressure: Copenhagen/Skoal cans -7.7%/-8.8% YoY and oral segment retail share down to 33.1% (from 37.7%); ON’s pouch share fell within the category (16.7%, -2.3pp YoY) despite total oral category shift to pouches at 52% (+10pp YoY).
  • NJOY disruption and special items: earlier ITC exclusion order drove non-cash goodwill impairment in Q1 and ongoing acquisition-related costs; management working on patent workarounds and supply-chain optionality.

Transcript

Operator (participant)

Good day and welcome to The Altria Group 2025 Second Quarter and First Half 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. In order to ask a question, please press star followed by the number one on your touchtone phone. At any time, representatives of the investment community and media on the call will be able to ask questions following the conclusion of the prepared remarks. I would now like to turn the call over to Mack Livingston, Vice President of Investor Relations for Altria Client Services. Please go ahead sir.

Mac Livingston (VP, Head of Investor Relations)

Thanks, Leo. Good morning and thank you for joining us. This morning Billy Gifford, Altria's CEO, and Sal Mancuso, our CFO, will discuss Altria's second quarter and first half 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 2024. Our remarks contain forward-looking statements including 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 our Board of Directors. We report our 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 to the most comparable GAAP financial measures 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 a 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 (CEO)

Thanks, Mac. Good morning and thank you for joining us. In the second quarter, we continued the pursuit of our vision while maintaining our strong and profitable core businesses in oral tobacco. ON delivered strong performance and was the substantial driver of the segment's growth in the quarter. We continue to press for actions that will shape a fully regulated industry and provide expanded product choices for adult nicotine consumers, and we returned significant value to our loyal shareholders during the first half of the year. With more than $4 billion delivered through dividends and share repurchases, our operating companies delivered strong financial results in a dynamic marketplace, allowing us to raise the lower end of our 2025 guidance range. My remarks this morning will focus on second quarter and first half results from ON, next steps for NJOY, and the state of the regulatory environment.

I'll then turn it over to Sal, who will provide further detail on our business results and 2025 outlook. Let's begin with ON and the nicotine pouch category. Oral nicotine pouches continued to be the primary growth driver of the estimated 11% increase in oral tobacco industry volume over the past six months. In the second quarter, oral nicotine pouches grew 10 share points year over year and now represent more than half of the category. Within this increasingly competitive environment, Helix continued to grow volume and share, with ON reported shipment volume increasing by 26.5% to 52.1 million cans versus the year-ago period. ON's retail share of the total oral tobacco category was 8.7%, an increase of 0.7 share points versus the prior year.

Last year, Helix launched its own campaign to differentiate the ON brand from competitive products, build emotional connections with its target audience, and drive greater brand awareness. As part of the campaign rollout, the team used in-person activations to engage directly with adult consumers at action-packed events such as music festivals, NASCAR races, and premier golf tournaments. These one-to-one interactions allow consumers to connect with brand representatives, gain deeper insights into the product, and experience the brand in a tangible, memorable way. In the first half of 2025, Helix reached over 170,000 adult tobacco consumers through these in-person activations. Helix's digital marketing channels amplified these experiences, reinforcing ON's unique brand positioning across multiple touch points. In the second quarter, digital impressions more than doubled to approximately 190 million.

As a result of these combined efforts and continued strong presence at retail, ON brand awareness among adult tobacco consumers increased seven percentage points in the first half of 2025 versus a year ago. Helix will continue to focus on driving trial, building long-term equity and increasing profitability. In fact, ON's improving financial performance drove the majority of the oral segment's substantial profit growth for the quarter. Moving to our e-vapor business and NJOY, in June, the Patent Trial and Appeal Board did not agree with our argument to invalidate Juul's patent. While this is not the outcome we hoped for, we are actively exploring all potential next steps, including an appeal. Meanwhile, we completed the product design of a modified NJOY solution that we believe addresses all four disputed patents.

Additionally, our product development teams are actively building a broader vapor portfolio of products that align with evolving expectations of today's consumers. Let's now turn to the state of regulation in the U.S. nicotine market where we continue to believe significant progress needs to be made to fulfill the promise of tobacco harm reduction. For some time, we have been advocating for enforcement against products that have completely evaded the regulatory process and for an acceleration of FDA market authorizations to create a responsible marketplace of smoke-free products for all adult consumers. As it relates to enforcement, the flavored disposable market continues to drive e-vapor category growth. At the end of the quarter, we estimate the e-vapor category included more than 20.5 million vapers, up over 1.9 million versus a year ago. During the same period, disposable vapers increased by an estimated 2.7 million to approximately 14.4 million.

We continue to estimate that flavored e-vapor disposable products, the majority of which we believe have evaded the regulatory process, represent more than 60% of the category. While this issue remains significant, we see signs that enforcement actions have picked up momentum. Key government officials at the Department of Health and Human Services and the FDA have publicly acknowledged the severity of the issue and there is bipartisan support in Congress for urgent action across government agencies. We're encouraged by recent actions by Customs and Border Protection, FDA, state legislatures, and state attorneys general to prevent the importation of illicit e-vapor products evading the regulatory system.

Key actions from these stakeholders this year include FDA strengthening its import policy, reducing the possibility of imported vapor products bypassing FDA review, tighter border controls, which have resulted in a higher percentage of rejections of properly declared e-vapor shipments from China than ever before, FDA issuing warning letters to 24 importers responsible for importing illicit products, and state attorneys general issuing warnings and bringing civil litigation addressing illicit Chinese vapor importers and distributors. The net effect of these recent actions is that it is becoming more difficult to import illicit e-vapor products. In fact, some wholesalers have recently reported supply shortages of some of the most popular disposable brands. Citing enforcement at the ports and tariffs, we believe these changes have prompted e-vapor importers to misdeclare their shipments, resulting in illicit products entering the country undetected.

While we're seeing some progress, more consistent action needs to be taken to deliver sustainable long-term results. We continue to advocate at the federal and state levels for more coordinated and decisive actions against illicit actors. Illicit e-vapor enforcement is only one area where the regulatory system is failing. The FDA must accelerate product authorizations across all tobacco categories. By law, the FDA is required to review and decide PMTAs within 180 days. We have waited over five years for a decision on some product applications. We continue to urge FDA to implement a workable process that results in timely decision making to meet their statutory requirements and promotes public health. We believe these steps are critical to establish a nicotine marketplace that offers adult smokers expanded choices in smoke-free products and gives consumers comfort in the oversight of the products available to them.

In summary, we remain encouraged by the strong performance of our operating companies in challenging marketplace conditions. Our highly cash-generative core businesses supported continued investments in our smoke-free products, and the increased focus by key stakeholders on cleaning up the illicit market reinforces our confidence in the long-term outlook for our smoke-free portfolio. I'll now turn it over to Sal to provide more detail on our business results.

Sal Mancuso (Executive VP & CFO)

Thanks Billy. As Billy described in his opening remarks, Altria delivered strong second quarter and first half financial performance. Adjusted diluted earnings per share increased 8.3% to $1.44 in the second quarter and increased by 7.2% for the first half, driven by robust adjusted OCI growth and the benefit of share repurchases over the past year. In the smokable products segment, adjusted operating companies income grew by 4.2% to $2.9 billion in the second quarter and by 3.5% to $5.5 billion in the first half. Adjusted OCI margins expanded to 64.5% for the second quarter and the first half. This performance was supported by strong net price realization of 10% for the quarter and 10.4% for the first half. Total smokable products segment reported domestic cigarette volumes declined by 10.2% in the second quarter and 11.9% for the first half.

When adjusted for calendar differences in trade inventory movements, the segment's domestic cigarette volumes for the second quarter and first half declined by an estimated 10.5% and 11% respectively. At the industry level, we estimate that domestic cigarette volumes declined by 8.5% in the second quarter and for the first half when adjusted for trade inventory movements, calendar differences and other factors. While our smokable business is focused on Marlboro and the premium segment, adult smokers continue to face macroeconomic pressures. The compounding effects of inflation exceeding overall wage growth, especially among low income consumers, contributed to the discount segment growing 1.9 percentage points year over year and 0.4 percentage points sequentially. To better compete in the discount segment and informed by our data analytics, PM USA strategically expanded Basic into approximately 30,000 targeted stores in the second quarter.

Basic's retail share grew 0.4 percentage points sequentially with limited impact on Marlboro. As a result, total PM USA cigarette retail share increased 0.2 percentage points sequentially to 45.2% in the second quarter. The targeted launch of Basic demonstrates how PM USA is using its broad toolkit of portfolio brands and sophisticated data analytics to provide the right value to the right consumer, while preserving the strength of the Marlboro brand within the highly profitable premium segment. Marlboro maintained its long standing leadership in the category. In the second quarter, Marlboro expanded its share of the premium segment by 0.2 percentage points to 59.5% in cigars. Reported shipment volume increased 3.7% as Middleton continued to outperform in the large mask cigar industry. Let's turn now to the oral tobacco products segment. Adjusted OCI grew by an impressive 10.9% in the second quarter and 5.5% in the first half.

Adjusted OCI margins increased by 3.1 percentage points for the second quarter and 1.4 percentage points for the first half. As Billy mentioned, these results were mainly driven by ON's strong performance in the second quarter. Total segment reported shipment volume decreased 1% for the second quarter and 2.9% for the first half as growth in ON was more than offset by lower MST volumes. When adjusted for calendar differences and trade inventory movements, we estimate that second quarter and first half oral tobacco product segment volumes declined by approximately 4% and 2.5% respectively. Oral tobacco products segment retail share was 33.1% for the second quarter and 33.9% for the first half as declines in our MST brands were not fully offset by share gains from ON. In the highly profitable moist smokeless tobacco segment, Copenhagen continued to maintain its long standing premium leadership.

Turning to ABI's financial results, we recorded $130 million of adjusted equity earnings in the second quarter, down 10.3% versus the prior year. This decline was driven by a lower ownership interest compared to the year ago period, reflecting the sale of a portion of our ABI investment last year. We continue to view our ABI stake as a financial investment and our goal remains to maximize the long term value of the investment for our shareholders. As Billy mentioned, our businesses performed well in a dynamic environment during the first half of the year. As a result, we raised the lower end of our 2025 guidance range. We now expect to deliver adjusted diluted EPS in a range of $5.35 to $5.45, representing a growth rate of 3% to 5% from a base of $5.19 in 2024.

We expect EPS growth to moderate as we lap the lower share count associated with the 2024 accelerated share repurchase program and the benefit of the MSA legal fund expiration. We are also mindful of the challenged state of tobacco consumers and will continue to closely monitor their purchasing behaviors. Before turning to Q and A, I'd like to highlight the significant value we returned to shareholders during the first half of the year, we paid approximately $3.5 billion in dividends and repurchased 10.4 million shares for $600 million. At the end of the second quarter, we had $400 million remaining under our current share repurchase program, which we expect to complete by the end of the year. In addition, our balance sheet remains strong. Our total debt-to-EBITDA ratio as of June 30th was 2.0 times, in line with our target of approximately 2 times.

With that, we'll wrap up and Billy and I will be 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 items. Let's open the question and answer period. Operator, do we have any questions?

Operator (participant)

Thank you. Once again, as a reminder, if you would like to ask a question, please press the star key followed by the number one on your touchtone phone at this time. Investors, analysts and media representatives are now invited to participate in the question and answer session. We will take questions from the investment community first. Our first question comes from Matthew Smith of Stifel Financial Corp. Please go ahead.

Matthew Smith (Director)

Good morning Billy and Sal and thank you for taking my question.

Billy Gifford (CEO)

Good morning.

Matthew Smith (Director)

I wanted to first talk about the raising of the lower end of the guidance range. You've had a really nice performance in the underlying OCI growth here in the second quarter, even when you strip out the lower legal settlement benefit. It looks like the second half does not require as strong of an underlying OCI performance, at least at the higher end of the range. You laid out the dynamics here in terms of EPS phasing when you lap the MSA and the MSA benefit and the share repo, but on an underlying basis. Can you talk about your expectations in the second half of the year and how you're thinking about what could be an even more uncertain consumer environment given some of the inflationary pressure which may pick up as we get further into the back half of the year? Thank you,

Sal Mancuso (Executive VP & CFO)

Sure. Good morning, Matt. Let me start by saying we're really pleased with our first half results and our updated EPS guidance range. I think you've summarized well the items we highlighted in our opening remarks, lapping of the 2024 accelerated share repurchase program, the expiration of the legal fund which occurred in the fourth quarter of last year. You rightly highlight that it's a dynamic market and we're going to continue to monitor the state of the adult tobacco consumer and their purchasing behaviors. Inflation is still an unknown variable going forward. There have been some green shoots, lower gas prices on a year-over-year basis even though they remain high. Most recently, we have seen an uptick in consumer confidence. The macroeconomic environment remains dynamic and somewhat unsettled.Trade deals are still being negotiated and what potential impact that could have on controllable spending for the consumer is something that we'll pay close attention to. Really happy with the first half results. Happy that we were able to narrow guidance by lowering the bottom end of that range.

Matthew Smith (Director)

Thank you Sal. And Billy, a question for you. As a follow up on NJOY e-vapor, you talked about working around or developing a new NJOY ACE device that seems to not seem to work around the patents that were in dispute with ITC. If I heard you correctly, that product is still or has finalized product development. Can you give an update on the path from here as to when you think you could have an application to FDA for that updated device and what kind of application that would be in terms of more streamlined authorization process relative to just a traditional PMTA? Thank you.

Billy Gifford (CEO)

Yeah. Do not forget, Matt, that we still have litigation routes that we can take and we are investigating those. From the standpoint of the patents, you are right. You will recall that we had already filed three of those patent workarounds or taken care of any disputed facts related to patent infringement from the ITC. We have already filed those. The fourth patent, we are at product lock and we will be proceeding down that path and we are actually encouraged by the fact that we are excited to be able to bring that to market. It was making great strides when it was in market. The consumer liked the device and the experience they had with NJOY. The brand team had built a great brand around it and we are excited to be able to bring that back. While I cannot satisfy you, we have given you an exact date. We will continue to update you as we make progress against that. In addition to that, we wanted to really focus on the consumer and as you heard in my remarks, really finding what the consumer likes in some of the devices that they are using even though they may be coming to the U.S. illicitly and have those, I guess, desirable traits in our pipeline of products and so more to share in the future on that as well.

Matthew Smith (Director)

Thank you, Billy. I will pass it on.

Sal Mancuso (Executive VP & CFO)

Thanks.

Operator (participant)

Our next question is from Bonnie Lee Herzog of Goldman Sachs. Please go ahead.

Bonnie Lee Herzog (Managing Director)

All right, thank you. Good morning everyone. I had a follow up question I guess on your guidance especially I guess given the lapping of the legal fee elimination in Q4. I guess how are you feeling about your ability to deliver on your long term EPS growth algo of mid single digits through FY2028? I mean it does imply that growth will need to step up quite a bit in the next few years. Hoping maybe Billy, to get your perspective on this and how confident you are that you're going to be able to deliver on that.

Billy Gifford (CEO)

Yeah, we still have that as a goal of the way we're managing our business, Bonnie. When you think about it, it's a mid single digits CAGR across that period. You saw the results from the first half of this year. We're very pleased with the results even in a challenging environment. Based on the, as Sal mentioned, the macroeconomics, our consumer is still under strain, economic strain. We feel like we made some very disciplined and smart moves in the marketplace to help the consumer with that. From a standpoint of the consumer themselves, you know, Sal mentioned gas prices. They stabilized and even slightly down, but they're, call it, around $3 a gallon across the U.S. That's still fairly high. What we're seeing is, what we've seen historically is if things are stagnant for a period of time, they don't necessarily always have to decrease.

Our consumer can start getting comfortable with their situation and because of the loyalty in the tobacco industry, they'll make different choices.

Bonnie Lee Herzog (Managing Director)

Okay, maybe another question a little bit along the lines of what you just mentioned about sort of your consumer and retaining them. I do want to ask about Basic. Could you talk a little bit more about your strategy with the brand and the changes you've made to your promotions on the brand? I guess love to hear from you what your ultimate strategy is for Basic and how are you thinking about possibly taking greater discount share versus trying to retain consumers in your total brand family? Thanks.

Billy Gifford (CEO)

Yeah, I appreciate the question, Bonnie. With Basic, it's not abnormal for us, if you go back in history, Basic was their discount play. We had priced it up and L&M was our discount play. Now we priced L&M up and repositioned Basic as their discount play. I think the difference being is that now with the amount of data we receive from retail and the RGM analytics, the revenue growth management analytics that we have, we can be very precise and targeted. You know, you saw the results on Basic in approximately 30,000 stores. A very targeted approach where the store itself skews heavy discount and be there for the consumers. To your point, we find it cheaper to keep the consumer in our portfolio as, then we can market to them individually as their economic situation changes through time. It's about keeping them in our portfolio of brands, being there for the consumer and having an open conversation with them through time.

Bonnie Lee Herzog (Managing Director)

Okay, that's helpful, Billy. And just to confirm, so you're, so far, because these changes are relatively new, have you been pleased sort of with the results? It's kind of, you know, working out the way you were expecting. And so you're going to continue some of these efforts behind Basic?

Billy Gifford (CEO)

Yeah. While I won't speak to the future because I don't want to give the competition a playbook to go by, we're very pleased with the results, and I think it shows that the quality of data analytics we have with our colleagues across Altria being able to have those results in a short period of time with a very targeted approach.

Bonnie Lee Herzog (Managing Director)

All right, thank you for that. I'll pass it on.

Billy Gifford (CEO)

Thanks.

Operator (participant)

Our next question is from Faham Beg of UBS. Your line is open.

Faham Baig (Executive Director)

Good morning, guys. Thank you for taking questions as well. Good morning. A couple from me as well, please. I'll start with you noticing crackdowns on illicit vapes and more restrictions at the border. I just want to understand whether the net impact of the import restrictions versus the product still coming through mislabeling is having a neutral impact or a positive impact, and whether that could be driving some of the improvement in cigarette volumes we've seen over the last couple of months. I want to try and understand that a bit better. The second question. I noticed the federal excise tax per pack was 3 cents lower than normal. I appreciate there has been some commentary on drawbacks and imports. Anything you would highlight on this and how we should think about this line item going forward. Thanks.

Billy Gifford (CEO)

Sure. I appreciate your questions and I'll try to take them in order, but if I missed anything, please follow up. I think when you think about enforcements, we certainly are encouraged by some of the momentum we're seeing. The new commissioner has been in place about 100 days, and we've seen significant momentum since he's taken over. As he stated, I believe publicly there's more to do there, and we look forward to him and the FDA and the other agencies doing more. I think it's too soon to call it a trend one way or the other. Certainly it's upstream, if you will, because that's part of the distribution, is that the distributor, wholesaler and import. It's hard to say whether that's taken place and whether the consumer has felt it yet in the marketplace at retail. Certainly with the mislabeling, that's just another step of illegality from a standpoint of mislabeling products to get them into the U.S. and circumventing, first evading the FDA and now trying to evade the customs and border patrols. I think it remains to be seen, as you heard in my remarks, we need consistent action. That's what we're looking forward and are hopeful with the new commissioner in place and the momentum we've seen pick up. As far as FET, it's an interesting one, I think, when you step back and look broadly. We're an American company with American manufacturing, and we believe that policy, especially tax policy, should support American manufacturing and that FET should be paid on cigarettes sold in the U.S. and this drawback policy actually goes against both of those. We've seen a number of competitors taking advantage of this, some pretty, pretty large advantage of that. We're going to look for partnerships because we're not going to be at a competitive disadvantage in the marketplace.

Faham Baig (Executive Director)

Thanks a lot.

Billy Gifford (CEO)

I'm sorry, I missed the last comment.

Faham Baig (Executive Director)

No, I just said thanks a lot.

Billy Gifford (CEO)

Oh, thank you.

Operator (participant)

Thank you. Our next question is from Eric Serotta of Morgan Stanley. Please go ahead.

Billy Gifford (CEO)

Great.

Eric Serotta (Analyst)

Just to follow up on the last question, around illicit vape, there have been several press stories about shortages for particular leading brands or products of illicit products over the past couple of months. Wondering if that's something that you've seen in the marketplace. Have you seen some of the illicit actors sort of adapting their brands or products. Or, you know, is it just too early to say overall?

Billy Gifford (CEO)

Yeah, it's a bit early. What I can remark on is because there's a plethora of these products in the marketplace. Shutting down one brand just allows the consumers to make different choices if they desire a certain flavor or a certain type of device. That is why we are calling for more consistent action through time to really clean up the marketplace and get the progress for harm reduction moving forward on the right foot. I think from a standpoint of have we seen diversions in the past, we've seen the same manufacturer change brand names and packaging, but it's exactly the same as what was before. As I mentioned earlier, we're certainly seeing now that the Customs and Border Patrol is investigating everything declared appropriately. We have seen instances of misdeclaration and calling it something else other than e-vapor.

Eric Serotta (Analyst)

Great.To follow up, coming back to NJOY the past couple of quarters, you seem to have had a little bit more of a cautious tone or comment of, you know, essentially we're not, we're not going to rush a product back to market when, you know, the market is totally in disarray. Maybe I didn't really, again, I'm paraphrasing. Maybe I didn't, I didn't catch it. I didn't quite, I didn't. I don't know if I heard a similar comment this time. This, you know, in this quarter's prepared remarks and you know, has your view in terms of the ability to compete in vape and sort of the timing of when you would be able to come back to market really changed at all?

Billy Gifford (CEO)

Yeah, I would not see it as change. If you took that from our remarks, let me just restate. We are certainly excited to be able to bring NJOY back to marketplace when it is appropriate. We were making great strides in capturing consumers, but the state of play in the E-vapor market has not changed. You see total E-vapor consumers, call it about 20.5 million consumers, and about 14.4 million of those are disposable vapors. We believe a large portion of that is making it to the marketplace illicitly. When you see that state of play, remember disposables are increasing. That means that pod-based products are decreasing. You can see that in takeaway and share at retail if you include the disposable marketplace or an estimate of it. Certainly, when we bring it back to market, we are going to be disciplined about it. We are excited, when it is appropriate, to be able to bring that back to market.

Eric Serotta (Analyst)

Great. Thanks for the clarification there.

Billy Gifford (CEO)

Thank you.

Operator (participant)

Our next question is from Gaurav Jain of Barclays. Please go ahead.

Gaurav Jain (Analyst)

Good morning, Billy. Good morning, Sal.

Billy Gifford (CEO)

A few questions from me. One is on this double duty drawback. You know the question which was asked earlier. If I look at the price at which you are selling Basic and if I assume full excise tax, full MSA, then it is hard to conclude that there will be any EBIT left unless you are claiming this double duty drawback on Basic. Could you talk about how this works and is it more focused on the discount cigarettes and deep discount cigarettes?

Sal Mancuso (Executive VP & CFO)

Yeah, I would not conflate those two, Gaurav. I would keep those two separate. Basic is being able to use and utilize our RGM analytics in the marketplace to continue to serve consumers and keep them in our portfolio of brands. This drawback is a totally separate issue. When you look at kind of the progress on the big beautiful bill you saw when it was proposed by the House, they were removing that because they saw it as bad policy. When it went to the Senate side, there were a number of senators that removed that from it. What you see is competition that has international manufacturing and domestic, they just flip flop production and that allows them to basically import product into the U.S. without any FET paid. Certainly, with us being a domestic manufacturer, which you would think tax policy would support, we are certainly going to look to not be at a competitive disadvantage now that it is apparent law.

Gaurav Jain (Analyst)

Thank you. My second question on this enforcement on e-cigarettes which you alluded to is happening. If you look at cigarette volumes over the last two months, they have improved a bit. They are like -7.5%, the number we haven't seen in two, three years. I should look at the pod-based system shipments and Nielsen data. It is still continuing its same trend of -8%, -9% declines. Is it that this reduction in disposable e-cigarettes is helping the cigarette industry more than it is helping the pod-based industry?

Billy Gifford (CEO)

I think when you look at it, I would say, you know, that when you look at the decomp you can see that the change in cigarette volume decline was really in that macroeconomic and cross category. I would say it's a bit of both that's benefiting the cigarette industry. That's why we're pushing the FDA to authorize more products because the consumers made a choice for smoke free. If they authorize products that have gone through the science review, then we'll have consumers moving to products that are appropriate for public health. Both from an enforcement standpoint and an authorization is where we need the FDA to move. When you step back and look at it, it's a proof of concept that consumers will move exactly as we've been saying, once they find products that satisfy them and we can really make progress on reduced harm.

Gaurav Jain (Analyst)

Sure. My last question is, you know, on NGP's, you are a U.S. manufacturer, you do not have an international business, but do you think there are some of these international markets now where you can have a NGP only business and make it profitable and you have, like, as you mentioned, you are pursuing multiple e-cigarette options. You clearly have ON, which is there internationally. Are there some international markets where you think you can now create a NGP only business?

Billy Gifford (CEO)

We do believe that, Gaurav. You recall as far as our corporate goals, that is one of them from a growth standpoint. You will recall that from a nicotine pouch. We actually have that in distribution and call it the Nordic region and in the U.K., and we are pleased with the progress we are making there, and we do believe that we can be successful in NGP internationally through time. I think the way you should think about that is we are going to be disciplined about it as we move forward.

Gaurav Jain (Analyst)

Thank you so much.

Billy Gifford (CEO)

Thank you.

Operator (participant)

We'll take our next question from Damian McNeela of Deutsche Bank. Please go ahead.

Damian Mcneela (Analyst)

Morning, everybody. Thank you for the questions. First question is just on, ON and whether you can sort of provide any color on what your plans are for the second half in terms of whether you're expecting to accelerate activation for the brand, and also whether you could quantify how well distributed the brand is currently in the U.S., and then my second question is just on Middleton, can you sort of provide an explanation of what's behind that sort of pretty decent performance, please?

Bonnie Lee Herzog (Managing Director)

Yeah. I think when you think about ON, I'll be careful not to lay out exactly what we're going to do in the second half. You see the success that we've had through the first half, we believe that is sustainable. We're excited about being able to bring our pipeline of products to the marketplace when appropriate because we feel like some of the pipeline of products are very competitive with existing products in the marketplace, as we've shared before. I think when you think about ON and the activations, certainly reinforcing the equity and what we feel like is a bit different than the rest of the industry, focusing on equity and building a sustainable brand through time for their own portfolio of products when we can bring others to market. I think as far as the—remind me the second part of your question.

Sal Mancuso (Executive VP & CFO)

Middleton.

Billy Gifford (CEO)

Middleton.

Sal Mancuso (Executive VP & CFO)

Yeah, Middleton volume was, you know, it's. It is the dominant cigar in the highly profitable large mass machine made cigar category. And it's, it's a dominant player. It's, it's very, it's a very strong premium brand. I think when you look at volume and you look within a quarter, there's always movement within the distribution channel in terms of inventory movements and things like that. Overall, Middleton continues to be a strong performer in the smokable segment.

Damian Mcneela (Analyst)

Okay, thank you.

Operator (participant)

Our next question is from Gerald Pascarelli of Needham & Company. Please go ahead.

Gerald Pascarelli (Analyst)

Great, thanks very much. I just wanted to go back to ON, maybe ask it another way but you know your volume growth of 26.5% was definitely higher than what we were expecting on a tougher comp. You did lose share of the category. As the category continues to expand, becomes increasingly competitive, just maybe some of the initiatives you know you have in place to protect your share position. In terms of the revised EPS guidance, does that in any way contemplate maybe increased investment spending behind ON in the back half of the year? Thank you.

Billy Gifford (CEO)

Thank you. I'll take the first half and Sal, you can pick up on the EPS. I think when you think about ON, it's really about reinforcing the equity and I think the team has gotten very good about using RGM that we've perfected in some of our other categories of continuing to induce trial but not having to over subsidize loyal consumers of the ON brand. It is about going out and reaching them where the consumer is. You heard some of the comments, whether that's music festivals or NASCAR races or things of that nature and reinforcing the brand to the consumer so that they feel good not only about the product but about the brand itself. From that standpoint, you're right, competition is picking up as far as quarter shipment share and that nature, I would ask you to look over a longer period of time. Certainly, you're going to have shipments that are going through the distribution channel and things of that nature that can distort a quarter. I would look at both volume and share over a longer period.

Sal Mancuso (Executive VP & CFO)

Gerald, as far as guidance, you know I'm not going to provide any information about promotional activity in the second half. What I will say is that the guidance does contemplate our continued support of our vision and the development of product pipeline within the smoke-free innovative tobacco categories or nicotine categories and of course the continued support of the ON brand as it continues to. We continue to drive trial and awareness and conversion for that brand.

Gerald Pascarelli (Analyst)

Perfect.Thanks very much, guys.

Billy Gifford (CEO)

Thank you.

Operator (participant)

To ask a question, please press the star and the number one on your touchtone telephone at this time. Our next question is from Emma Rumney of Reuters. Your line is open.

Emma Rumney (Analyst)

Hi guys. Thanks very much for taking my question. I wanted to ask about tariffs because the guidance statement said it accounts for increased tariff costs given that NJOY isn't actually on the market at the moment and isn't expected to return this year. Could you talk me through specifically what parts of your business are affected by increased tariffs and on which countries? Thank you.

Sal Mancuso (Executive VP & CFO)

Yeah, sure. First, what I would tell you is that while tariffs have had an impact on our costs, we do not view them as material to our overall business and they have been contemplated in the guidance that we have provided you. As far as where they do impact, we do sometimes see the impact of tariffs in our supply chain, our direct materials, as an example, in some of the packaging material we use because some of our supply chain is overseas or international based. Again, I think what is more important for us is to monitor the impact of tariffs on the adult tobacco consumer and the potential impact on costs of everyday items that they are purchasing and how that could impact purchasing behaviors of the consumer. Again, it is something we monitor closely and we will be watching as the year plays out.

Emma Rumney (Analyst)

Got it. Is that packaging for your cigarettes, oral tobacco, or all of the above?

Sal Mancuso (Executive VP & CFO)

Yeah, it's metal for foil liners, it's tin cans, things like that. You can see it there and you see it in some other areas. Again, it's something that's been contemplated and unlike many other CPG companies, it really has not had a material impact on our overall cost.

Emma Rumney (Analyst)

Yeah. Not significant enough to sort of spark price increases or changes to the supply chain or.

Sal Mancuso (Executive VP & CFO)

I'm not going to talk about price increases, but no, nothing material on a cost basis.

Emma Rumney (Analyst)

Okay. Changes to the supply chain, would you look at those or again, is it not material enough to?

Sal Mancuso (Executive VP & CFO)

No, we always look at, we're always looking at changes to supply chain. What I mean by that is having optionality across the supply chain with different vendors, different geographies. Our ability to manage inventory levels as an example, our leaf is a multiple year crops that we're managing. So we do have flexibility and our supply chain folks, our procurement folks do a terrific job of managing the different variables that they face. Maintaining a strong supply chain is important to us, of course, in high margin business. They do a terrific job. We feel very comfortable with it.

Emma Rumney (Analyst)

Cool. I think there are some tariffs on markets like Malaysia, for example, that were not in place last time you updated the market, which would affect NJOY when you did want to start importing it again. Are you thinking about that and how you might be able to mitigate the impact once you are ready to start importing the device?

Sal Mancuso (Executive VP & CFO)

Yeah, look, we're always thinking about it. I'm not going to get into details of the supply chain, but we do have flexibility in the supply chain related to NJOY. As you know, there are tariffs across the international market that are part of our consideration set right now. NJOY, as you said, is not in the market. We continue to work to bring it back into the market with some of the IP work that Billy talked about earlier. We feel very comfortable with the optionality we have in our e-vapor category.

Emma Rumney (Analyst)

Cool. Thanks very much. Appreciate you taking my question.

Sal Mancuso (Executive VP & CFO)

Absolutely.

Operator (participant)

There appears to be no further questions at this time. I would like to turn the call back over to Mac Livingston for any closing remarks.

Mac Livingston (VP, Head of Investor Relations)

Thank you for joining us today. Everyone have a great day.

Operator (participant)

This does conclude today's conference. You may now disconnect your lines. Everyone have a great day.