Billy Gifford
Chief Executive Officer at Altria Group
Thanks, Mac. Good morning, and thank you for joining us. Altria's tobacco businesses performed well in a challenging macroeconomic environment for the first half of the year. The smokeable products segment delivered solid operating company's income growth behind the resilience of Marlboro, and our moist smokeless tobacco brands continued to drive profitability. We also continue to make progress toward our vision through the investments we laid out in January, which included supporting the expansion of on!. We are encouraged by on!'s retail momentum and significant share growth since achieving unconstrained capacity last summer. We believe this is a pivotal point in the U.S. tobacco industry. The FDA has the opportunity to create a mature, regulated marketplace of smoke-free products that can successfully realize tobacco harm-reduction and improve the lives of millions of smokers. We share the FDA's goal, to transition smokers away from cigarettes, but we continue to believe that harm-reduction, not prohibition is the best path forward.
My remarks this morning will focus on three topics: our core tobacco businesses, including the macroeconomic backdrop and potential combustible tobacco product regulation; the smoke-free opportunity in the U.S. and our smoke-free product portfolio; and our continued confidence in our vision. I'll then turn it over to Sal, who will provide further detail on our business and financial results. Let's begin with a review of the macroeconomic backdrop and its impact on U.S. tobacco consumers. In the second quarter, rising gas prices and inflation continue to pressure tobacco consumers' disposable income, resulting in volume declines across the tobacco space. However, we believe that tobacco consumers adapted their purchasing patterns across a variety of goods and services to compensate for the increases in prices. Some of the tactics used by consumers to manage their spending included only partially filling the gas tank and shifting their tobacco purchases from multipack towards single-pack purchases particularly among discount smokers. We also saw signs of continued brand loyalty in the tobacco space.
In May, we conducted research to understand how tobacco consumers were managing their spending in several categories, including tobacco, alcohol, groceries and household items. Our research indicates that tobacco consumers are more likely to stick to their preferred brand regardless of price in the tobacco category compared to other categories. Additionally, tobacco consumers saw price relief in other categories before doing so within the tobacco category. We believe that this prioritization is reflected in the sequential stability of Marlboro retail share despite greater economic pressures on consumers. We believe inflation and the rising gas prices was partially offset for some consumers by a strong job market and wage growth. Overall, average wages increased 5.2% in the second quarter compared to an average of 8.6% increase in CPI. And for some occupations including the service industry, wage growth outpaced inflation. We continue to monitor tobacco consumer behaviors and changes in marketplace conditions, such as the declining gas price that we have observed in recent weeks, and we will continue to provide our insights as the year progresses.
These macroeconomic factors contributed to accelerated cigarette volume declines in the second quarter and first half, which Sal will discuss in his remarks. In combustible regulatory news, the FDA proposed rules that would ban menthol in cigarettes and characterizing flavors in cigars. The FDA has already received over 200,000 comments on the proposals, and we expect to submit our comments by the August two deadline. The FDA will need to address all of these comments before advancing to the next step in the rule-making process. As our comments will make clear, we believe that there are compelling reasons for the FDA to reconsider its proposed rules relating to menthol and cigars. Additionally, the Biden administration announced plans for future FDA rule-making to develop a product standard that would set a maximum nicotine level for cigarettes. If and when the FDA proceeds with rule-making, we expect to be fully engaged in the multiyear process. We believe harm-reduction is the best approach toward reducing smoking and improving public health. And according to a nationwide survey, others agree.
Based on our research, a majority of the survey public policy professionals, smokers and general population adults support the concept of tobacco harm-reduction and prefer this policy approach over tobacco prohibition. But to achieve harm-reduction, we believe manufacturers must develop and the FDA must authorized an array of potentially reduced harm products that can appeal to and transition smokers. This brings me to my next topic, the smoke-free opportunity in the U.S. and our smoke-free product portfolio. Today, over 20 million U.S. smokers seek less harmful alternatives to cigarettes. Our strategy is to deliver a compelling portfolio of smoke-free products that offers a range of satisfying product choices for smokers and to responsibly lead them to these alternatives. Our approach spans three of the most promising smoke-free categories with the potential to reduce harm: oral tobacco, e-vapor and heated tobacco. In oral tobacco, we're encouraged by the growth of the novel oral products, which comprise more than 1/5 of total industry oral tobacco volume in the second quarter. The category grew 6.8 share points year-over-year, with on! representing more than 40% of this growth. In the second quarter, on! reported shipment volume increased nearly 60% versus the year ago period.
And on! retail share of oral tobacco increased 8/10 sequentially, reaching 4.9 share points in the second quarter. This represents a growth rate of almost 150% year-over-year. These strong results were driven by increased adoption of on!, increased brand awareness and higher levels of investment. Helix achieved unconstrained on! manufacturing for the current U.S. market in the second quarter of 2021. Over the four quarters since then, Helix enhanced the retail visibility and awareness of on!, leading to an over 70% increase in consumer awareness, tripled on! repurchases and continue to increase trial using transition marketing and data-driven strategies. And grew on! retail share to be a top five U.S. oral tobacco brand and solidified its position as the second largest oral nicotine pouch brand in each region of the U.S. More recently, Helix launched the new Carry On Equity campaign, which encourages smokers to make progress in their transition journey. The campaign highlights that by converting to on!, smokers can have nicotine satisfaction without having to step away from their daily routines, which addresses the social friction they experience with smoking.
Looking ahead, Helix expects to use its understanding of the smoker journey, the smoke-free products to drive repeat purchases and adoption among smokers. We are excited about the performance of on! and the opportunity for future growth. I'll now move to the e-vapor category, which we continue to believe will be significantly influenced by regulatory actions. In the second quarter, total estimated e-vapor volumes declined 2% versus a year ago and 7% sequentially as a result of decreased volume in the vape store channel, a reversal of the trend we observed in the first quarter. Currently, slightly over half of the category's volume is comprised of pod-based products such as JUUL and Vuse Alto. Within e-vapor, disposables represent the fastest growth segment since January 2020, which corresponds to when the FDA issued in its guidance banning flavors only in pod-based e-vapor products. Many of these disposable brands, including Puff Bar contain synthetic nicotine. Recent legislation, which we strongly supported, clarified the FDA's authority to regulate tobacco products containing nicotine from any source.
Manufacturers of synthetic nicotine products were required to obtain FDA authorization by July 13 to continue legally marketing their products. So far, no synthetic nicotine product has been granted authorization. And the FDA has committed to pursuing compliance and enforcement action against companies found to be marketing, selling or distributing illegal synthetic nicotine products. Thus far, the FDA has authorized only 23 total e-vapor applications, accounting for only eight products and approximately 1% of estimated e-vapor category volume. Further, the FDA has only authorized tobacco-flavored e-vapor products, most of which were for cigalike-style products, which we believe generally do not meet smoker expectations or deliver a satisfying product experience. Given the limited number of authorizations today, we believe that the e-vapor category is still in its early phases. But with the support of reasonable regulations, we believe it could play in important role in harm-reduction. Moving forward, we hope to see timely science and evidence-based determinations from pending PMTA application and further enforcement or noncompliant manufacturers.
In the second quarter, JUUL products received marketing denial orders, or MDOs. Earlier this month, the FDA administratively stayed the JUUL MDOs citing unique scientific issues that warrant additional FDA review. The administrative stay temporarily suspend the MDOs during the additional review, but does not rescind them. Regarding our investment in JULL, we recorded for the second quarter a noncash pretax unrealized loss of $1.2 billion as a result of a decrease in the estimated fair value of our investment. The decrease in fair value was driven by several factors including uncertainty created by the FDA's action related to JUUL and uncertainty relating to JUUL's ability to maintain adequate liquidity. As of June 30, our estimated valuation is $450 million, which reflects a range of regulatory, liquidity and market outcomes. Under the terms of our relationship agreement with JUUL, we have the option to be released from our non-compete obligation under several conditions including the fair value of our investments, if the fair value of our investment is not more than 10% of the initial carrying value of $12.8 billion.
However, if we elect to be released from our noncompete obligations, we would lose many of our investment rights, including our consent rights, our preemptive rights, and most of our Board designation rights. At this time, we continue to believe that these investment rights are beneficial to us. Therefore, we have not opted to be released from our non-compete obligations at this time, but retain the option to do so in the future in accordance with our agreement with JUUL. We continue to believe that e-vapor products, including JUUL, can play an important role in tobacco harm-reduction. In heated tobacco, our teams remain in discussions with PMI related to IQOS. We continue to believe in the potential of the heated tobacco category in the U.S. Our plans remain on track to finalize designs by year-end for two product platforms within heated and oral tobacco and then begin regulatory preparations. Our journey towards responsibly transition adult smokers to a smoke-free future continues. And while we may face near-term challenges, we believe that the tobacco harm-reduction opportunity remains in front of us.
As the leader in the U.S. tobacco industry, we have continued confidence in our ability to achieve our vision for several reasons, including our robust manufacturing, sales and distribution system and understanding of U.S. tobacco consumers. Our science-based approach to tobacco harm reduction, which we believe is aligned with tobacco consumers, society and the FDA. Our portfolio of products and investments across the most promising smoke-free categories and our significant cash flows and flexible balance sheet, which support our investments and shareholder returns. With these in mind and the resiliency of our organization, we believe we can lead the U.S. in moving beyond smoking. I'll now turn it over to Sal to provide more detail on the business environment and our results.
