MO held their investor day this morning. Frankly, it was a bit bizarre to me, as most of it was staged sales presentations, rather than honest discussions of where MO currently is. I have much preferred PM's investor day presentations in the past.
The various news announced during the presentations:
1) The new heat-not-burn capsule product will be called "Swic". They showed prototypes which are close to finalized, but there are still some small items to finalize over the next year. They presented it as somewhere between a vape product and a stick-based HNB product. However, given it doesn't actually use sticks, it will be taxed the same as a vape product (read very low excise taxes currently), and not like a cigarette (high excise taxes) as IQOS currently is. Swic won't be introduced until 2025 at the earliest, probably 2026 given time to get FDA approval. The technology behind this product is NOT based on the Poda technology, but R&D they acquired from a different acquisition prior to that. The Poda technology is not in any currently announced products, but might be the basis of new products in the future.
2) MO announced that cigarette price elasticity in the US has changed. For over two decades it has been -0.3, which means that for every 1% increase in cigarette prices, the volume of cigarettes sold would decline by 0.3%. They now see the price elasticity at -0.35, which obviously means that cigarette volumes are expected to drop somewhat more with any price increases. MO sees this as a modest change, and it obviously is still very low versus most other consumer products, but it is a change for the worse, and a sign that pricing power in cigarettes is not absolute.
3) Their modern oral nicotine brand "on!", despite its strong growth, is still not profitable due to the heavy discounting they still offer compared to market leader Zyn. They still expect it to lose money this year and 2024, but be break-even in 2025. They expect to further expand the brand with a new product called "On!-Plus" which is oral nicotine pouch that is moist and uses some kind of proprietary very soft cloth fiber technology that is used in the pouch.
4) MO's announced a 5 year plan (through 2028) with various financial goals in those years. Frankly, none of their goals were really unique, or a change from current trends. Specifically, they expect to average mid single digit annual EPS growth (I read around 5%) for the 5 year period. They say some years it might be less and other years more, primarily due to the new product spending, but overall it should average that mid-single digit growth over the 5 years. Given that some years might be lower, they stated that they still expect to raise their dividend at that mid single digit rate annually, even when the EPS growth is somewhat lower or higher.
5) They provided additional info about the tax impacts from the approximately $12.5 billion loss on JUUL. Interestingly, they intend to claim $6.4 billion of the loss is an ordinary loss (not a capital loss) and will deduct it against taxes this year in 2023. However, it is unclear that the IRS will accept that, so they will simultaneously reserve against that until a decision is finalized. My guess is that they are arguing that 35% of the losses that JUUL actually incurred while MO owned their 35% stake are ordinary. They might prevail on that argument which would let them deduct that sooner rather than later. The remainder of the JUUL loss in the amount of $6.1 billion, will be a capital losse regardless. However, MO will be able to use some of that up to offset the gain on the $2.7 billion they are getting from PM for the cancellation of the IQOS agreement. The remainder after that will obviously be carried forward for up to 5 years, and could be used against future capital gains (i.e. if they ever sold BUD).
6) There was some presentation of MO's plan (copying PM's strategy) in moving into adjacent non-nicotine businesses. In addition, plans for eventually going international with their non-cigarette products. However, all of that stuff is still in the early planning stages.
Overall, nothing really changed in my opinion of MO. While the Swic product is interesting, I don't see it as revolutionary and is still years away. They are still obviously largely milking Marlboro cigarettes, and they expect they can still do so for at least the next five years delivering mid single digit returns. They further believe that they will be able to fend off RRP challengers (like IQOS) with a mixture of FDA regulation & enforcement, unfavorable excise tax laws for products like IQOS, and a strong database of knowledge of US smokers that they can use to directly market to. Frankly, they might be right, as I've never doubted their legal and regulatory strength, however, I believe that eventually they have to out innovate competitors, and I have strong doubts that they can or will.
