What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-07-31 compared with 2024-04-25 · 393 added, 216 removed, 794 unchanged (43% of the section changed)

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In smoke-free products, we own U.S.

Smokeless Tobacco Company LLC (“USSTC”), the leading global moist smokeless tobacco (“MST”) manufacturer, Helix Innovations LLC (“Helix”), a leading manufacturer of oral nicotine pouches, and NJOY, LLC (“NJOY”), currently the only e-vapor manufacturer with market authorizations from the U.S.

Food and Drug Administration (“FDA”) for a pod-based e-vapor product.

Additionally, we have a majority-owned joint venture, Horizon Innovations LLC (“Horizon”), for the U.S.

marketing and commercialization of heated tobacco stick products (“HTS”).

Smokeless Tobacco Company LLC (“USSTC”), the leading global moist smokeless tobacco (“MST”) manufacturer, Helix Innovations LLC (“Helix”), a leading manufacturer of oral nicotine pouches, and NJOY, LLC (“NJOY”), an e-vapor manufacturer with a commercialized product portfolio fully covered by marketing granted orders (“MGO”) from the U.S.

Food and Drug Administration (“FDA”).

Additionally, we have a majority-owned joint venture, Horizon Innovations LLC, for the U.S.

marketing and commercialization of heated tobacco stick products.

As of this filing, there are no products in the U.S.

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We focus in this Trends and Developments section on the cumulative effects of inflation, geopolitical events, recent regulatory actions, supply chain disruptions and illegal disposable e-vapor products and their effects or potential effects on our business, including impacts on adult tobacco consumers and their purchasing behaviors.

We continue to monitor the evolving macroeconomic and geopolitical landscapes.

We continue to monitor the evolving macroeconomic landscape.

The annual rate of inflation remains above the Federal Reserve’s target of 2%, which is a key benchmark for the Federal Reserve in determining the timing and magnitude of changes to the Federal Funds Rate.

We continue to observe discretionary income pressures on adult tobacco consumers as a result of the cumulative effects of inflation and higher consumer debt levels.

During 2023 and the first quarter of 2024, cigarette retail share for the industry discount segment increased year-over-year and compared to the fourth quarter of 2023.

We continue to observe discretionary income pressures on adult tobacco consumers as a result of the cumulative effects of inflation and other factors.

During the first half of 2024, cigarette retail share for the industry discount segment increased year-over-year.

We will continue to monitor the effect of these dynamics on adult tobacco consumer purchasing behaviors, including overall tobacco product expenditures, mix between premium and discount brand purchases and adoption of smoke-free products.

We expect discretionary income pressures to continue to influence adult tobacco consumers’ purchase behaviors in 2024.

We expect discretionary income pressures will continue to influence adult tobacco consumers’ purchase behaviors in 2024.

Inflation also has a direct and adverse impact on our direct and indirect costs.

In the e-vapor category, illegal disposable product usage increased in 2023 and comprised over 50% of the e-vapor category.

We believe usage of these products continued to increase in the first quarter of 2024.

Product assortment, regulation and enforcement continue to evolve in the e-vapor category.

In June 2024, the FDA issued MGOs to NJOY for four of its menthol e-vapor products.

Through the first half of 2024, we estimate the e-vapor category grew by approximately 40%, driven by illicit flavored disposable products, which we believe now represent more than 60% of the e-vapor category as of June 30, 2024.

The primary impacts of this trend have been an increase in the rate of cross-category movement among adult cigarette smokers, contributing to higher than expected domestic cigarette industry volume declines as well as declines in pod-based product volume within the e-vapor category.

In response to the proliferation of illegal disposable e-vapor products, states and the federal government took various regulatory and enforcement actions in the first half of 2024.

Select states have established e-vapor product registries based on pre-market tobacco product application (“PMTA”) submissions or approvals.

In June 2024, the federal government created a multi-agency task force in an effort to combat the marketing and sale of illegal e-vapor products in the United States.

We have also noted the emergence of products using nicotine analogues designed to imitate the effects of nicotine and evade the FDA regulatory framework for nicotine products.

Additionally, we are beginning to see increased illicit activity across multiple tobacco categories, including nicotine pouch products and cigarettes that are available to U.S.

Tobacco companies are subject to broad and evolving regulatory and legislative frameworks that could have a material impact on our business.

For example, the FDA has submitted for final review proposed product standards regarding menthol in cigarettes and characterizing flavors in cigars, and the Biden Administration published plans for future potential regulatory actions that include the FDA’s plans to develop a proposed product standard that would establish a maximum nicotine level for cigarettes and certain other combustible tobacco products.

For example, the FDA has submitted for final review proposed product standards regarding menthol in

cigarettes and characterizing flavors in cigars, which were indefinitely delayed in April 2024.

In addition, the Biden Administration published plans for future potential regulatory actions that include the FDA’s plans to develop a proposed product standard that would establish a maximum nicotine level for cigarettes and certain other combustible tobacco products.

In California, where a ban on flavored nicotine products went into effect in late 2022, we continue to observe indications of negative unintended consequences of the ban, such as adult tobacco consumer adoption of unregulated products and the development of illicit markets.

We expect volatility in domestic and global economies and disruptions in the supply and distribution chains to continue in 2024, resulting from several factors, including supply and demand imbalances across many commodity sectors, raw materials availability and geopolitical events.

Volatility in domestic and global economies and disruptions in the supply and distribution chains have continued in 2024, although these factors have shown some improvement during the year.

This volatility and disruption is the result of several factors, including supply and demand imbalances across many commodity sectors, raw materials availability and geopolitical events.

We continue to work to mitigate the potential negative impacts of these macroeconomic and geopolitical dynamics on our businesses through, among other actions, proactive engagement with current and potential suppliers and distributors, the development of alternative sourcing strategies, entry into long-term supply contracts and prudent oversight of our liquidity.

See Operating Results by Business Segment - Business Environment for additional information on the trends and developments discussed above.

ABI’s business has been and continues to be impacted by foreign exchange rate fluctuations, inflation and commodity cost headwinds.

We will continue to monitor these conditions and other factors as they could affect our equity earnings, the dividends that we receive from ABI and the fair value of our investment in ABI.

ABI’s business is exposed to foreign exchange rate fluctuations, inflation and commodity price movements which may impact financial performance from time to time.

We will continue to monitor these conditions and other factors as they could affect our equity earnings, our other comprehensive earnings/losses and the dividends that we receive from ABI, and the fair value of our investment in ABI.

See Note 6 for additional information on our investments in equity securities.

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As the trends and developments discussed above evolve and new ones emerge, we will continue to evaluate the potential impacts on our business, investments and Vision.

Consolidated Results of Operations for the Three Months Ended March 31, 2024

The changes in net earnings and diluted EPS for the three months ended March 31, 2024, from the three months ended March 31, 2023, were due primarily to the following:

Consolidated Results of Operations for the Six Months Ended June 30, 2024

The changes in net earnings and diluted EPS for the six months ended June 30, 2024, from the six months ended June 30, 2023, were due primarily to the following:

(in millions, except per share data) Net Earnings Diluted EPS

For the three months ended March 31, 2023

For the six months ended June 30, 2023

$ 3,904 $ 2.18

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2023 Cronos-related special items

2023 Income tax items

Subtotal 2023 special items

2024 NPM Adjustment Items

2024 Acquisition and disposition-related items

2024 Asset impairment

2024 Tobacco and health and certain other litigation items

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Operations (201) (0.11)

For the three months ended March 31, 2024

For the six months ended June 30, 2024

$ 5,932 $ 3.41

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For further details, see the Consolidated Operating Results and Operating Results by Business Segment sections below.

Consolidated Results of Operations for the three months ended June 30, 2024

The changes in net earnings and diluted EPS for the three months ended June 30, 2024, from the three months ended June 30, 2023, were due primarily to the following:

(in millions, except per share data) Net Earnings Diluted EPS

For the three months ended June 30, 2023

$ 2,117 $ 1.19

2023 Acquisition and disposition-related items

2023 Tobacco and health and certain other litigation items

2023 ABI-related special items

2023 Cronos-related special items

2023 Income tax items

Subtotal 2023 special items

2024 Acquisition and disposition-related items

2024 Asset impairment

2024 Tobacco and health and certain other litigation items

2024 ABI-related special items

2024 Cronos-related special items

2024 Income tax items

Subtotal 2024 special items

Fewer shares outstanding — 0.05

Change in tax rate 11 —

Operations (99) (0.05)

For the three months ended June 30, 2024

$ 3,803 $ 2.21

2024 Reported Net Earnings

$ 3,803 $ 2.21

2023 Reported Net Earnings

$ 2,117 $ 1.19

% Change 79.6 % 85.7 %

2024 Adjusted Net Earnings and Adjusted Diluted EPS

$ 2,258 $ 1.31

2023 Adjusted Net Earnings and Adjusted Diluted EPS

$ 2,346 $ 1.31

% Change (3.8) % — %

For a discussion of special items and other business drivers affecting the comparability of statements of earnings amounts and reconciliations of adjusted earnings and adjusted diluted EPS, see the Consolidated Operating Results section below.

▪ Fewer Shares Outstanding:

Fewer shares outstanding were due to shares we repurchased under our share repurchase programs.

▪ Operations:

The decrease of $99 million in operations (which excludes the impact of special items shown in the table above) was due primarily to lower OCI.

For further details, see the Consolidated Operating Results and Operating Results by Business Segment sections below.

Non-GAAP Financial Measures

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However, our management also reviews certain financial results, including OCI, OCI margins, net earnings and diluted EPS, on an adjusted basis, which excludes certain income and expense items that our management believes are not part of underlying operations.

These items may include, for example, loss on early extinguishment of debt, restructuring charges, asset impairment charges, acquisition, disposition and integration-related items, equity investment-related special items, certain income tax items, charges associated with tobacco and health and certain other litigation items, and resolutions of certain non-participating manufacturer (“NPM”) adjustment disputes under the MSA (“NPM Adjustment Items”).

In addition, our management reviews the ratio of debt-to-Consolidated EBITDA, which we use as a factor to determine our ability to access the capital markets and make investments in pursuit of our Vision.

Consolidated EBITDA is calculated in accordance with our Credit Agreement (defined below in Liquidity and Capital Resources ) and includes certain adjustments.

Our management does not view any of these special items to be part of our underlying results as they may be highly variable, may be unusual or infrequent, are difficult to predict and can distort underlying business trends and results.

Our management does not view any of these special items to be part of our underlying results as they may be highly variable, may be unusual or infrequent, are difficult to predict and can distort

underlying business trends and results.

Our management also reviews income tax rates on an adjusted basis, which may exclude certain income tax items from our reported effective tax rate.

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Depreciation, Amortization, Impairment Testing and Asset Valuation

We conduct a required annual review of goodwill and indefinite-lived intangible assets for potential impairment, and more frequently if an event occurs or circumstances change that would require an interim review.

When performing a quantitative assessment of our reporting units and indefinite-lived intangible assets, we use an income approach to estimate fair values.

The income approach reflects the discounting of expected future cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of those funds, the expected rate of inflation and the risks associated with realizing expected future cash flows.

This calculation may be affected by several factors, including general macroeconomic conditions;

governmental actions, including FDA regulatory actions and inaction;

changes in category growth (decline) rates as a result of changing adult tobacco consumer preferences;

success of planned new product expansions;

competitive activity;

unfavorable outcomes with respect to litigation proceedings, including actions brought against us alleging patent infringement;

and income and excise taxes.

Apart from the factors leading us to perform a quantitative assessment for the Skoal intangible asset as discussed below, there have been no events or changes in circumstances that indicate an interim quantitative impairment assessment was required as of June 30, 2024.

We will perform our annual impairment testing during the fourth quarter of 2024.

At December 31, 2023, the estimated fair value of the Skoal trademark exceeded its carrying value of $3.9 billion by approximately 6% ($0.2 billion).

MST products, including Skoal , have continued to be negatively impacted due in part to evolving adult tobacco consumer preferences, which has resulted in consumers increasingly moving across tobacco categories.

The accelerated growth of innovative tobacco products, including oral nicotine pouches, and the related increase in competitive activity among tobacco categories in 2023 continued to contribute to reductions in sales volumes for MST products, including Skoal .

We believe if there is further acceleration in the decline in sales volume for Skoal that results in material revenue declines, there may be a material adverse effect on the significant assumptions used in performing our valuation, including volume, revenue, income, perpetual growth rate and discount rate.

A hypothetical 1% increase to the discount rate used in our quantitative assessment as of December 31, 2023, which was our most sensitive assumption, would have resulted in an impairment charge to the Skoal intangible asset of approximately $150 million during 2023.

Although the above referenced conditions indicate there has been a shift in adult consumer preferences, specifically related to MST products and oral nicotine pouches, considering the approximately 6% headroom as of December 31, 2023 and the current quarter operating results for Skoal , these conditions did not indicate an impairment was more likely than not as of March 31, 2024.

However, if Skoal ’s actual revenue and income or long-term outlook are significantly different from forecasted performance used to estimate the fair value or if the discount rate used to estimate the fair value increases, we could have a material non-cash impairment of our Skoal trademark in future periods.

Sales volumes of MST products, including Skoal , have continued to be negatively impacted due in part to evolving adult tobacco consumer preferences, which has resulted in consumers increasingly moving across tobacco categories.

In connection with the preparation of our financial statements for the period ended June 30, 2024, we evaluated the accelerated growth of innovative tobacco products, including oral nicotine pouches, and the related increase in competitive activity among tobacco categories, which have continued to contribute to reductions in sales volumes for MST products, including Skoal .

We concluded that the expected impact from the sales volume declines on the Skoal trademark represented a triggering event, and as a result of this conclusion, we performed an interim impairment assessment.

As a result of (i) lower projected revenue and income due to lower volume assumptions, (ii) a decrease in the perpetual growth rate to 0% (1% at October 1, 2023 valuation) and (iii) an increase in the discount rate to 11.5% (11.0% at October 1, 2023 valuation), we determined the estimated fair value of the Skoal trademark was below its carrying value and recorded a non-cash, pre-tax impairment of $354 million for the six and three months ended June 30, 2024 in our condensed consolidated statements of earnings.

Our estimate of the fair value and carrying value of the Skoal trademark at June 30, 2024 was $3.6 billion, after recording the impairment.

At June 30, 2024, we used an income approach to estimate the fair value of the Skoal trademark.

In performing the discounted cash flow analysis, we made various judgments, estimates and assumptions, the most significant of which were volume, revenue, income, operating margins, perpetual growth rate and discount rate.

For example, a hypothetical 1% increase to the discount rate or a 1% decrease in the perpetual growth rate used in our quantitative assessment as of June 30, 2024, would have resulted in an additional pre-tax impairment to the Skoal trademark of approximately $300 million and $120 million, respectively, in the second quarter of 2024.

While our management believes that the estimated fair value of the Skoal trademark at June 30, 2024 is reasonable, if Skoal ’s actual revenue and income or long-term outlook are significantly different from forecasted performance used to estimate the fair value or if the discount rate used to estimate the fair value increases, we could have an additional non-cash impairment, which could be material, to the Skoal trademark in future periods.

For further discussion of goodwill and other intangible assets, see Note 5.

G oodwill and Other Intangible Assets, net to our condensed consolidated financial statements in Item 1 (“Note 5”).

Consolidated Operating Results

For the Three Months Ended March 31,

For the Six Months Ended June 30, For the Three Months Ended June 30,

(in millions) 2024 2023 2024 2023

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Our management believes it is appropriate to disclose this measure to help investors analyze our business performance and trends.

The following table provides a reconciliation of adjusted net earnings and adjusted diluted EPS for the three months ended March 31:

The following table provides a reconciliation of adjusted net earnings and adjusted diluted EPS for the six months ended June 30:

(in millions of dollars, except per share data) Earnings before Income Taxes Provision for Income Taxes Net Earnings Diluted

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NPM Adjustment Items (6) (1) (5) —

Acquisition and disposition-related items (2,557) (675) (1,882) (1.09)

Asset impairment 354 90 264 0.15

Tobacco and health and certain other litigation items

68 16 52 0.03

ABI-related special items (62) (14) (48) (0.02)

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Cronos-related special items 30 — 30 0.02

2023 Adjusted for Special Items

$ 5,939 $ 1,475 $ 4,464 $ 2.50

The following table provides a reconciliation of adjusted net earnings and adjusted diluted EPS for the three months ended June 30:

(in millions of dollars, except per share data) Earnings before Income Taxes Provision for Income Taxes Net Earnings Diluted

2024 Reported

$ 5,116 $ 1,313 $ 3,803 $ 2.21

Acquisition and disposition-related items (2,557) (675) (1,882) (1.09)

Asset impairment 354 90 264 0.15

Tobacco and health and certain other litigation items

44 11 33 0.02

ABI-related special items 24 5 19 0.01

Cronos-related special items 3 1 2 —

Income tax items — (19) 19 0.01

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$ 2,984 $ 726 $ 2,258 $ 1.31

The following special items affected the comparability of statements of earnings amounts for the three months ended March 31, 2024 and 2023:

2023 Reported

$ 2,806 $ 689 $ 2,117 $ 1.19

Acquisition and disposition-related items 18 5 13 —

Tobacco and health and certain other litigation items 290 73 217 0.12

ABI-related special items (3) (1) (2) —

Cronos-related special items 4 — 4 —

Income tax items — 3 (3) —

2023 Adjusted for Special Items

$ 3,115 $ 769 $ 2,346 $ 1.31

The following special items affected the comparability of statements of earnings amounts for the six and three months ended June 30, 2024 and 2023:

▪ Acquisition and disposition-related items:

We recorded a pre-tax gain of $2.7 billion upon the assignment of the IQOS Tobacco Heating System (“ IQOS System”) commercialization rights to Philip Morris International Inc.

(“PMI”) in April 2024, for the six and three months ended June 30, 2024.

For a discussion of the sale of the IQOS System commercialization rights, see Note 5.

Also, in connection with the June 2024 issuance by the FDA of MGOs for four NJOY menthol e-vapor products, we recorded a pre-tax charge of approximately $140 million for the six and three months ended June 30, 2024 for the change in the fair value of the contingent payments associated with the acquisition of NJOY Holdings (“NJOY Transaction”).

This charge was recorded as general corporate expenses and included in marketing, administration and research costs in our condensed consolidated statement of earnings.

For a discussion of the MGOs, see Note 2.

Acquisition of NJOY to our condensed consolidated financial statements in Item 1 (“Note 2”) .

▪ Asset Impairment:

We recorded a non-cash, pre-tax impairment of the Skoal trademark of $354 million for the six and three months ended June 30, 2024 in our oral tobacco products segment.

For further discussion, see Note 5.

▪ Tobacco and Health and Certain Other Litigation Items:

For a discussion of tobacco and health and certain other litigation items and a breakdown of these costs by segment, see Note 14.

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▪ Loss on Disposition of JUUL Equity Securities:

We recorded a non-cash, pre-tax loss of $250 million related to the disposition of our JUUL equity securities for the three months ended March 31, 2023 as (income) losses from investments in equity securities in our condensed consolidated statement of earnings.

We recorded a corresponding adjustment to the JUUL tax valuation allowance.

We recorded a non-cash, pre-tax loss of $250 million related to the disposition of our JUUL equity securities for the six months ended June 30, 2023 as (income) losses from investments in equity securities in our condensed consolidated statement of earnings.

We recorded a corresponding adjustment to the JUUL tax valuation allowance in 2023.

▪ ABI-Related Special Items:

We recorded net pre-tax income of $86 million from our equity investment in ABI for the three months ended March 31, 2024, which consists primarily of a gain related to the ABI Transaction.

We recorded net pre-tax income of $62 million from our investment in ABI for the six months ended June 30, 2024, which consists primarily of a gain related to the ABI Transaction.

For further information on the gain related to the ABI Transaction, see Note 6.

The ABI-related special items include our respective share of the amounts recorded by ABI and additional adjustments related to (i) the conversion of ABI-related special items from international financial reporting standards to GAAP and (ii) adjustments to our investment required under the equity method of accounting.

▪ Cronos-Related Special Items:

We recorded pre-tax losses of $30 million, substantially all of which related to our share of special items recorded by Cronos for the six months ended June 30, 2023.

We recorded a corresponding adjustment to the Cronos tax valuation allowance.

▪ Income Tax Items:

We recorded income tax items of $71 million, for the three months ended March 31, 2024, due primarily to an income tax benefit from the partial release of a valuation allowance on JUUL-related losses.

We recorded income tax items of $52 million for the six months ended June 30, 2024, due primarily to an income tax benefit from the partial release of a valuation allowance on JUUL-related losses, partially offset by interest expense on tax reserves recorded in prior years.

The valuation allowance release was due to our capital gain on the ABI Transaction.

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Income Taxes to our condensed consolidated financial statements in Item 1 (“Note 13”).

Three Months Ended March 31, 2024 Compared with Three Months Ended March 31, 2023

Net revenues, which include excise taxes billed to customers, decreased $143 million (2.5%), due primarily to lower net revenues in the smokeable products segment, partially offset by higher net revenues in the oral tobacco products segment and the all other category.

Cost of sales was essentially unchanged, as higher per unit settlement charges and higher manufacturing costs in our smokeable products segment were mostly offset by lower shipment volume in our smokeable products segment.

Six Months Ended June 30, 2024 Compared with Six Months Ended June 30, 2023

Net revenues, which include excise taxes billed to customers, decreased $442 million (3.6%), due to lower net revenues in our smokeable products segment, partially offset by higher net revenues in our oral tobacco products segment and our all other category.

Cost of sales decreased $76 million (2.4%), due primarily to lower shipment volume in our smokeable products segment, partially offset by higher per unit settlement charges and higher manufacturing costs in our smokeable products segment and higher NJOY shipment volume.

Excise taxes on products decreased $235 million (11.6%), due to lower shipment volume in our smokeable products segment.

Marketing, administration and research costs increased $34 million (5.9%), due primarily to transaction costs from our ABI Transaction, inflation impacts and higher project spending, partially offset by lower tobacco and health and certain other litigation charges (including an agreement in 2023 to resolve shareholder derivative lawsuits).

Operating income decreased $83 million (3.0%), due primarily to lower operating results in our smokeable products segment and all other category, partially offset by lower general corporate expenses and higher operating results in our oral tobacco products segment.

Interest and other debt expense, net increased $25 million (10.9%), due primarily to 2023 interest income associated with the sale of the IQOS Tobacco Heating System (“ IQOS System”) commercialization rights.

For further discussion regarding the sale of the IQOS System, see Operating Results by Business Segment - Business Environment - FSPTCA and FDA Regulation below.

(Income) losses from investments in equity securities, which were favorable $375 million (100+%), were positively impacted by the 2023 loss on the disposition of our JUUL equity securities and favorable results from our equity investment in ABI (due primarily to our gain on the ABI Transaction.)

Provision for income taxes decreased $82 million (11.8%), due primarily to an income tax benefit from the partial release of a valuation allowance on JUUL-related losses.

The valuation allowance release was due to our capital gain on the ABI Transaction.

For further discussion, see Note 12.

Reported net earnings of $2,129 million increased $342 million (19.1%), due primarily to favorable results from our investments in equity securities and favorable income tax items, partially offset by lower operating income.

Marketing, administration and research costs decreased $30 million (2.1%), due primarily to lower general corporate expenses, partially offset by inflation impacts and higher investment spending in support of our Vision (including 2024 NJOY costs).

The lower general corporate expenses were due primarily to lower charges to resolve certain JUUL-related litigation and the 2023 settlement of the shareholder derivative lawsuits, partially offset by higher acquisition-related costs primarily associated with the NJOY Transaction and transaction costs from the ABI Transaction.

See Note 14 for a discussion of litigation items.

Operating income decreased $455 million (8.0%), due primarily to lower OCI (which includes a non-cash impairment of the Skoal trademark in our oral tobacco product segment), partially offset by lower general corporate expenses.

Interest and other debt expense, net increased $29 million (6.0%), due primarily to 2023 interest income associated with the sale of the IQOS System commercialization rights, partially offset by 2023 interest expense and fees for the term loan facility associated with the NJOY Transaction.

For further discussion regarding the sale of the IQOS System commercialization rights, see Note 5.

(Income) losses from investments in equity securities, which were favorable $367 million (100.0+%), were positively impacted by the 2023 loss on the disposition of our JUUL equity securities and favorable results from our investment in ABI (due primarily to our gain on the ABI Transaction.)

Provision for income taxes increased $542 million (39.2%), due primarily to higher earnings before income taxes, partially offset by favorable tax items as discussed above.

Reported net earnings of $5,932 million increased $2,028 million (51.9%), due primarily to the gain on the sale of the IQOS System commercialization rights, favorable results from our investments in equity securities and favorable income tax items, partially offset by lower operating income.

Reported basic and diluted EPS of $3.41, each increased by 56.4% due to higher reported net earnings and fewer shares outstanding.

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Adjusted diluted EPS of $2.46 decreased by 1.6%, due to lower adjusted net earnings, partially offset by fewer shares outstanding.

Three Months Ended June 30, 2024 Compared with Three Months Ended June 30, 2023

Net revenues, which include excise taxes billed to customers, decreased $299 million (4.6%), due primarily to lower net revenues in our smokeable products segment, partially offset by higher net revenues in our oral tobacco products segment.

Cost of sales decreased $79 million (4.7%), due primarily to lower shipment volume in our smokeable products segment, partially offset by higher per unit settlement charges and higher manufacturing costs in our smokeable products segment and higher NJOY shipment volume.

Excise taxes on products decreased $138 million (12.9%), due to lower shipment volume in our smokeable products segment.

Marketing, administration and research costs decreased $64 million (7.5%), due primarily to lower general corporate expenses, partially offset by inflation impacts and higher investment spending in support of our Vision (including 2024 NJOY costs).

The lower general corporate expenses include lower charges to resolve certain JUUL-related litigation, partially offset by higher acquisition-related costs primarily associated with the NJOY Transaction.

Operating income decreased $372 million (12.8%), due primarily to lower OCI (which includes a non-cash impairment of the Skoal trademark in our oral tobacco product segment), partially offset by lower general corporate expenses.

Provision for income taxes increased $624 million (90.6%), due primarily to higher earnings before income taxes.

Reported net earnings of $3,803 million increased $1,686 million (79.6%), due primarily to the gain on the sale of the IQOS System commercialization rights, partially offset by lower operating income.

Reported basic and diluted EPS of $2.21, each increased by 85.7% due to higher reported net earnings and fewer shares outstanding.

Adjusted net earnings of $2,258 million decreased $88 million (3.8%), due primarily to lower OCI.

Adjusted diluted EPS of $1.31 remained unchanged as lower adjusted net earnings were offset by fewer shares outstanding.

Operating Results by Business Segment

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▪ pending and threatened litigation and bonding requirements;

▪ restrictions and requirements imposed by the FSPTCA, and restrictions and requirements (and related enforcement actions) that have been, and in the future will be, imposed by the FDA;

▪ restrictions and requirements imposed by the Family Smoking Prevention and Tobacco Control Act (“FSPTCA”) and restrictions and requirements (and related enforcement actions) that have been, and in the future will be, imposed by the FDA;

▪ the FDA’s failure to effectively address illegal e-vapor products on the market;

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▪ the highly competitive nature of all tobacco categories, including competitive disadvantages related to the impact on cigarette prices due to the settlement of certain healthcare cost recovery litigation and the proliferation of innovative tobacco products, such as e-vapor and oral nicotine pouch products;

▪ illicit trade in tobacco products, including illegal e-vapor products;

▪ potential adverse changes in prices, availability and quality of tobacco, other raw materials and component parts, including as a result of changes in macroeconomic and geopolitical conditions.

▪ the proliferation of products using nicotine analogues that are designed to imitate the effects of nicotine but are not subject to the FDA regulatory framework for tobacco products;

▪ illicit trade in tobacco products, including illicit e-vapor and oral nicotine pouch products;

▪ potential adverse changes in prices, availability and quality of tobacco, other raw materials and component parts, including as a result of changes in macroeconomic, geopolitical and climate and environmental conditions.

In addition to and in connection with the foregoing, evolving adult tobacco consumer preferences continue to impact the tobacco industry, including negatively impacting cigarette and MST shipment volumes.

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We work to meet these evolving adult tobacco consumer preferences over time by developing, manufacturing, marketing and distributing products both within and outside the United States through innovation and other growth strategies (including, where appropriate, arrangements with, or investments in, third parties and acquisitions).

For the first quarter of 2024, we estimate that, when adjusted for trade inventory movements, calendar differences and other factors, domestic cigarette industry volume declined by 9% versus the first quarter of 2023.

We believe these declines primarily are attributable to the historic secular rate of decline, the growth of illegal disposable e-vapor products and continued macroeconomic pressures on adult tobacco consumer discretionary income.

We continue to estimate that the growth of illegal disposable e-vapor products, which we discuss in more detail below, contributed to cigarette industry volume declines in a range of 1.5% to 2.5% over the last 12 months.

By design, these illegal disposable e-vapor products are largely distributed through non-traditional, untracked retail channels, and this is a trend we will continue to carefully monitor.

For the second quarter of 2024, we estimate that, when adjusted for trade inventory movements, calendar differences and other factors, domestic cigarette industry volume declined by 9.5% versus the second quarter of 2023.

We expect cigarette industry volume trends for the remainder of 2024 to be most influenced by (i) continued macroeconomic and discretionary income pressures on adult tobacco consumers (including inflation, interest rates, gasoline prices and unemployment levels), (ii) cross-category movement, including to illegal e-vapor products, and (iii) regulatory and legislative (including excise tax) developments.

The macroeconomic and discretionary income pressures on adult tobacco consumers, as well as seasonal trends in the discount segment influenced discount share performance.

For the first quarter of 2024, the discount share of the cigarette category was 29.1%, an increase of 0.4 share points sequentially and an increase of 0.8 share points versus the first quarter of 2023.

Marlboro share was 42.0% in the first quarter of 2024, a decrease of 0.3 share points sequentially and unchanged versus the first quarter of 2023.

Marlboro share in the premium segment of the industry remained stable sequentially at 59.3% and increased 0.7 share points versus the first quarter of 2023.

nicotine pouch category continued to grow significantly throughout the first quarter of 2024 to 40.1% of the U.S.

oral tobacco category, an increase of 13.8 share points versus the first quarter of 2023.

maintained year over year share momentum through the first quarter of 2024 to achieve 7.1% of the total oral tobacco category, an increase of 0.2 share points versus the fourth quarter of 2023 and an increase of 0.2 share points sequentially.

Oral nicotine pouch growth primarily has sourced from adult smokeless tobacco and cigarette consumers, negatively impacting smokeless and cigarette product volumes.

For the first quarter 2024, the traditional smokeless category (including MST and Snus) share of the total oral tobacco category declined to 59.9%, down 13.8 share points versus the first quarter of 2023.

Copenhagen had an oral tobacco category share of 20.1% for the first quarter of 2024, a decrease of 5.2 share points when compared to the first quarter of 2023.

Through the first quarter of 2024, NJOY distribution grew to over 80,000 stores.

We estimate that cross-category movement to illicit disposable e-vapor products, which we discuss in more detail below, contributed to cigarette industry volume declines in a range of 2% to 3% over the last 12 months.

These illicit disposable e-vapor products are largely distributed through non-traditional retail channels (including e-commerce and vape retail channels), making them more difficult to track.

In addition, we believe illicit cigarettes are becoming more prevalent in the United States, based on the results of discarded pack studies we have conducted in select geographies.

We believe the FDA’s inaction, lack of enforcement and slow pace of smoke-free product authorizations enables bad actors to disregard regulation.

For example, we believe the lack of effective enforcement against illicit disposable e-vapor products has allowed for the introduction of illicit products in other categories, such as oral nicotine, where we have seen a rise in illegal nicotine pouch products.

These products are distributed primarily through e-commerce channels that are more difficult to track than traditional retail.

As of June 2024, we have identified more than 350 illicit nicotine pouch products across retail and e-commerce channels.

We have also noted the emergence of products using nicotine analogues, which are designed to imitate the effects of nicotine and are not subject to the regulatory framework for tobacco products.

While illicit oral nicotine products and nicotine analogues have not had a material impact on our business to date, a lack of effective enforcement could lead to an increase in the introduction and volume activity of these products, which could have a material impact on our innovative tobacco products businesses.

Despite some improvements in macroeconomic conditions, discretionary income pressures persisted for adult tobacco consumers through the second quarter of 2024 due to the cumulative effects of inflation.

The June 2024 Consumer Price Index was 3.0%, exceeding the Federal Reserve’s target of 2%.

Although inflation rates remained lower than prior years, increased prices on certain expenditures, such as groceries and gas, continued to pressure adult tobacco consumer discretionary income.

Furthermore, adult tobacco consumer wage increases have failed to keep up with the rising prices of everyday expenses over the past several years, and we have observed increases in consumer debt and credit card delinquencies.

Gas prices throughout the second quarter of 2024 experienced seasonal increases, reaching an average price of $3.46 per gallon for the month of June 2024.

While gas prices were lower than in the second quarter of 2023, they remained consistently above $3.00 month-over-month in the second quarter of 2024.

In addition, the Federal Funds Rate, although stable, remained above historical levels at 5.33% through the second quarter of 2024.

The macroeconomic and discretionary income pressures on adult tobacco consumers influenced discount share performance.

For the second quarter of 2024, the discount share of the cigarette category was 29.3%, an increase of 0.2 share points sequentially and an increase of 1.0 share point versus the second quarter of 2023.

Marlboro share was 42.0% in the second quarter of 2024, which is unchanged sequentially and a decrease of 0.1 share points versus the second quarter of 2023.

Marlboro share in the premium segment of the industry grew to 59.4%, an increase of 0.1 share points sequentially and an increase of 0.7 share points versus the second quarter of 2023.

Through the second quarter of 2024, NJOY distribution grew to over 100,000 stores.

During the same period, reported shipment volume of NJOY consumables (including NJOY ACE and NJOY DAILY ) was approximately 12.5 million units, and NJOY device shipment volume was approximately 1.8 million units.

The NJOY share of the e-vapor category reached 4.3% in the first quarter of 2024, an increase of 0.6 share points sequentially.

Despite overall improvements in macroeconomic conditions (stabilizing inflation, low unemployment and stable wage inflation), discretionary income pressures persisted for adult tobacco consumers through the first quarter of 2024 due to the cumulative effects of inflation.

The March 2024 Consumer Price Index (CPI) was 3.5%, exceeding the Federal Reserve’s target of 2%.

Although inflation rates remained lower than prior years, increased prices on certain expenditures, such as groceries and gas, continued to put pressure on adult tobacco consumer discretionary income.

Gas prices throughout the first quarter of 2024 were lower overall than prior years but remained consistently above $3.00 month-over-month and began to increase through March 2024.

The average gas price for the month of March 2024 was $3.43 per gallon.

In addition to rising costs of certain expenses, the Federal Funds Rate has remained above historical levels, although stable at 5.33% through the first quarter of 2024.

We continue to monitor changing conditions within the tobacco business environment and impacts on our business.

For example, we monitor changes in macroeconomic conditions that increase discretionary income pressures on adult tobacco consumers, which can impact domestic cigarette industry volume decline and discount segment share growth and reduce purchases at retail.

We are also monitoring growth of illegal disposable e-vapor products and the related negative impact on domestic cigarette and e-vapor industry volumes.

In addition, the growth of the nicotine pouch category has reduced the size of the MST category and could impact the carrying value of our assets such as our tobacco product trademarks.

The NJOY share of the e-vapor category reached 5.5% in the second quarter of 2024, an increase of 1.3 share points sequentially.

nicotine pouch category continued to grow significantly throughout the second quarter of 2024 to 41.6% of the U.S.

oral tobacco category, an increase of 12.3 share points versus the second quarter of 2023.

maintained year-over-year share momentum through the second quarter of 2024 to achieve 8.1% of the total oral tobacco category, an increase of 1.2 share points versus the second quarter of 2023 and an increase of 1.0 share point sequentially.

For the second quarter 2024, the traditional smokeless category (including MST and Snus) share of the total oral tobacco category declined to 58.4%, down 12.3 share points versus the second quarter of 2023.

Copenhagen had an oral tobacco category share of 19.5% for the second quarter of 2024, a decrease of 4.7 share points when compared to the second quarter of 2023.

We continue to track the growth of nicotine pouch volumes and the related impact on the size of the MST category.

Decreases in the size of the MST category could impact the carrying value of our assets, such as our smokeless tobacco product trademarks.

For example, in the second quarter of 2024, we recorded a non-cash, pre-tax impairment on the value of the Skoal trademark.

For more information on this impairment, see Note 5.

We continue to monitor changing conditions within our

business environment and impacts on our businesses.

Changes in these and other conditions could have a material adverse effect on our business, results of operations, cash flows or financial position.

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See Pre-Market Review Pathways for Tobacco Products and Market Authorization Enforcement below for additional information on the effects of the statutory change.

Currently, however, the statutory definition of tobacco products does not cover products containing nicotine analogues, which are designed to imitate the effects of nicotine.

As a result, products containing nicotine analogues are not subject to the FDA regulatory framework for tobacco products, including the requirements that manufacturers submit a PMTA to, and receive a MGO from, the FDA before marketing such products in the United States.

▪ Final Tobacco Marketing Rule:

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Subject to certain limitations arising from legal challenges, the Final Tobacco Marketing Rule took effect in June 2010 for cigarettes and smokeless tobacco products, in August 2016 for all other tobacco products, including e-vapor and oral nicotine pouch products containing tobacco-derived nicotine, and in April 2022 for tobacco products, including e-vapor and oral nicotine pouch products, that contain nicotine from any source other than tobacco, such as synthetic nicotine.

The Final Tobacco Marketing Rule currently does not apply to products containing nicotine analogues.

(1) “Smokeless tobacco,” as used in this section of this Form 10-Q, refers to smokeless tobacco products first regulated by the FDA in 2009, including MST.

It excludes oral nicotine pouches, which were first regulated by the FDA in 2016.

▪ Rulemaking and Guidance:

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▪ advance operational excellence.

Although the FDA, in conjunction with other federal entities, has engaged in some enforcement activity, insufficient actions against certain product categories that violate the law, including disposable and flavored e-vapor products and products targeted to minors, have allowed such products to proliferate on the market.

Although the FDA, in conjunction with other federal entities, has increased enforcement activity, insufficient actions against certain product categories that violate the law, including disposable and flavored e-vapor products and products targeted to minors, have allowed such products to proliferate on the market.

In addition, the FDA’s failure to clearly define product pathways and accelerate PMTA decision making has resulted in a market with few authorized smoke-free products available to adult tobacco consumers.

(1) “Smokeless tobacco,” as used in this section of this Form 10-Q, refers to smokeless tobacco products first regulated by the FDA in 2009, including MST.

It excludes oral nicotine pouches, which were first regulated by the FDA in 2016.

▪ Pre-Market Review Pathways for Tobacco Products and Market Authorization Enforcement:

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Additionally, a manufacturer may be unable to maintain consistency in manufacturing processes as it increases the scale of its manufacturing operations in response to market expansion or product introduction.

These circumstances could cause a manufacturer to receive (i) a “not substantially equivalent” determination or (ii) a denial or withdrawal of a PMTA, either of which could result in a product being removed from the market.

These circumstances could cause a manufacturer to receive (i) a “not substantially equivalent” determination or (ii) a denial or

withdrawal of a PMTA, either of which could result in a product being removed from the market.

In addition, new scientific data continues to be developed relating to innovative tobacco products, which could impact the FDA’s determination as to whether a product is, or continues to be, appropriate for the protection of public health and could, therefore, result in the removal of one or more products from the market.

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Helix submitted PMTAs for on!

oral nicotine pouches in May 2020.

As of April 22, 2024, the FDA has not issued marketing order decisions for any on!

In addition, as of April 22, 2024, Middleton has received market orders or exemptions that cover over 99% of its cigar product volume.

In April 2019, the FDA authorized the PMTA for the IQOS System, and in July 2020, the FDA authorized the marketing of this system as a modified risk tobacco product (“MRTP”) with a reduced exposure claim.

In December 2020, the FDA authorized the PMTA for IQOS 3, an updated version of the IQOS devices, and in March 2022 authorized the marketing of the IQOS 3 device as an MRTP with the same reduced exposure claim.

In January 2023, the FDA authorized PMTAs for three new tobacco-flavored varieties of Marlboro HeatSticks .

In September 2021, in connection with a patent dispute, the ITC issued a cease and desist order, effective as of November 29, 2021, banning (i) the importation of the IQOS devices, Marlboro HeatSticks and infringing components into the United States and (ii) the sale, marketing and distribution of such imported products in the United States.

As a result, PM USA removed the products from the marketplace.

For a further discussion of the ITC decision, see Note 13.

oral nicotine pouches in May 2020 and PMTAs for on!

PLUS oral nicotine pouches in tobacco, mint and wintergreen flavors in June 2024.

As of July 29, 2024, the FDA has not issued marketing order decisions for any on!

PLUS products.

As of July 29, 2024, Middleton has received market orders or exemptions that cover over 99% of its cigar product volume.

In October 2022, we agreed to assign the exclusive U.S.

commercialization rights to the IQOS System to PMI effective April 2024 in exchange for a total cash payment of approximately $2.7 billion (plus interest).

government has asserted that the agreement to assign those rights required district court approval and was subject to PMI becoming bound by a court-ordered injunction against engaging in certain conduct and requiring the communication of corrective statements.

The issue has yet to be litigated before the district court.

commercialization rights to the IQOS System to PMI in exchange for a total cash payment of approximately $2.7 billion (plus interest).

The assignment became effective in April 2024.

government asserted that the agreement to assign those rights required district court approval and was subject to PMI becoming bound by a court-ordered injunction against engaging in certain conduct and requiring the communication of corrective statements.

In May 2024, we signed an agreement with the U.S.

government resolving its concerns regarding our assignment of the exclusive U.S.

commercialization rights to the IQOS System to PMI.

For further discussion of the agreement with the U.S government, see Note 14.

In October 2021, the FDA authorized the marketing and sale of four of USSTC’s Verve oral nicotine products, including Green Mint and Blue Mint varieties, representing the first flavored product authorizations issued by the FDA for newly deemed innovative products.

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In June 2023, we completed our acquisition of NJOY Holdings, the parent of NJOY.

As a result of the acquisition, NJOY became a wholly owned subsidiary of Altria, and we gained full global ownership of NJOY’s e-vapor product portfolio, including NJOY ACE , currently the only pod-based e-vapor product with market authorizations from the FDA, and NJOY DAILY , which also has a market authorization.

In March 2020, NJOY submitted PMTAs to the FDA with respect to two NJOY ACE menthol products and two NJOY DAILY menthol products, all four of which remain pending.

The FDA issued marketing denial orders (“MDOs”) for four NJOY ACE and four NJOY DAILY flavored products.

NJOY filed for a supervisory review by the FDA of the marketing denial orders for the NJOY ACE and NJOY DAILY flavored products, all of which are pending.

As a result of the acquisition, NJOY became a wholly owned subsidiary of Altria, and we gained full global ownership of NJOY’s e-vapor product portfolio, including NJOY ACE , a pod-based e-vapor product with an MGO from the FDA, and NJOY DAILY , which also has an MGO.

In June 2024, NJOY received MGOs with respect to two NJOY ACE menthol products and two NJOY DAILY menthol products.

In May 2024, NJOY submitted a supplemental PMTA to the FDA to commercialize and market the NJOY ACE 2.0 device, which leverages Bluetooth ® connectivity to incorporate access restriction technology designed to prevent underage use by authenticating the user before unlocking the device.

Also in May 2024, NJOY re-submitted PMTAs for blueberry and watermelon flavored pod-based e-vapor products that work exclusively with the Bluetooth ® -enabled NJOY ACE 2.0 device.

These products previously received marketing denial orders (“MDOs”) on the basis of FDA concerns regarding underage use.

Post-Market Surveillance :

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A “not substantially equivalent” determination, a denial of a PMTA or a marketing order withdrawal by the FDA on one or more products (which would require the removal of the product or products from the market) could have a material adverse impact on our business, results of operations, cash flows or financial position.

Also, adverse FDA determinations on innovative tobacco products could have a material adverse effect on our ability to achieve our Vision.

Also, adverse FDA determinations on innovative tobacco products could have a material adverse effect on our innovative tobacco businesses and our ability to achieve our Vision.

▪ FDA Regulatory Actions

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▪ Electronic Nicotine Delivery System Products :

As of April 22, 2024, many manufacturers of menthol and other flavored e-vapor products have received MDOs for failure to provide sufficiently strong product-specific scientific evidence to demonstrate that the benefit of their products to adult smokers overcomes the risk that their products pose to youth.

As of July 29, 2024, many manufacturers of menthol and other flavored e-vapor products have received MDOs for failure to provide sufficiently strong product-specific scientific evidence to demonstrate that the benefit of their products to adult smokers overcomes the risk that their products pose to youth.

The FDA has communicated in these MDOs that vapor products with non-tobacco flavors present unique questions relevant to the FDA’s “Appropriate for the Protection of Public Health” standard and that successful applications require strong, product-specific evidence.

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The court decided the case en banc , with all judges on the court hearing the case.

Courts of Appeal have upheld adverse FDA determinations, and there are pending requests that the U.S.

In July 2024, the U.S.

Supreme Court agreed to review the U.S.

Court of Appeals for the Fifth Circuit’s decision.

Courts of Appeals have upheld adverse FDA determinations, and there are pending requests that the U.S.

Supreme Court review these decisions.

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The FDA also sought comments on whether a nicotine product standard should apply to other combustible tobacco products, including cigars.

In December 2023, the Biden Administration published its Fall 2023 Unified Regulatory Agenda, which includes the FDA’s plans to propose, by April 2024, a product standard that would establish a maximum nicotine level in cigarettes and other combustible tobacco products.

As of April 22, 2024, the FDA has not proposed this product standard.

In July 2024, the Biden Administration published its Spring 2024 Unified Regulatory Agenda, which indicates that the date for any final action on this proposed product standard is to be determined.

Any proposed product standard would proceed through the rulemaking process, which we believe will take multiple years to complete.

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(i) banning menthol in cigarettes and (ii) banning all characterizing flavors (including menthol) in cigars.

The Biden Administration’s Fall 2023 Unified Regulatory Agenda includes the FDA’s plans to have completed rulemaking with respect to these proposed product standards by March 2024.

As of April 22, 2024, the FDA has not completed rulemaking with respect to either proposed product standard, but in October 2023 submitted the two proposed product standards to the White House Office of Management and Budget for review.

We submitted comments during the notice-and-comment period and plan to continue engaging with the FDA through the rulemaking process.

In October 2023, the FDA submitted the two proposed product standards to the White House Office of Management and Budget for review.

As of July 29, 2024, the FDA has not completed rulemaking with respect to either proposed product standard.

In April 2024, the FDA announced that it would delay a decision on the menthol ban indefinitely, citing the high volume of feedback received during the notice-and-comment period, and the Biden Administration’s Spring 2024 Unified Regulatory Agenda indicates that the date for any final action on these proposed product standards is to be determined.

The FDA could propose an additional product standard for flavors in innovative tobacco products, including e-vapor products and oral nicotine products.

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We engaged with the FDA through the rulemaking process, including during the notice-and-comment period, which closed in October 2023.

The Biden Administration’s Fall 2023 Unified Regulatory Agenda includes the FDA’s plans to have completed rulemaking with respect to this proposed rule by October 2024.

The Biden Administration’s Spring 2024 Unified Regulatory Agenda includes the FDA’s plans to complete rulemaking with respect to this proposed rule by April 2025.

If the proposed rule were to take effect, compliance with these requirements could result in increased costs.

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The FSPTCA imposes user fees on cigarette, cigarette tobacco, smokeless tobacco, cigar and pipe tobacco manufacturers and importers to pay for the cost of regulation and other matters.

The FSPTCA does not impose user fees on e-vapor or oral nicotine pouch manufacturers.

The FSPTCA does not impose user fees on e-vapor products or oral nicotine pouch manufacturers.

The cost of the FDA user fee is allocated first among tobacco product categories subject to FDA user fees and then among manufacturers and importers within each respective category based on their relative market shares, all as prescribed by the FSPTCA and FDA regulations.

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Federal, state and local cigarette excise taxes have increased substantially over the past two decades, far outpacing the rate of inflation.

Between the end of 1998 and April 22, 2024, the weighted-average state cigarette excise tax increased from $0.36 to $1.90 per pack.

Only one state, New York, enacted new legislation increasing excise taxes in 2023.

As of April 22, 2024, no states have enacted excise tax increases in 2024.

However, various increases are under consideration or have been proposed.

Between the end of 1998 and July 29, 2024, the weighted-average state cigarette excise tax increased from $0.36 to $1.93 per pack.

As of July 29, 2024, three states (Maryland (effective in July 2024), Colorado (effective in July 2024) and Rhode Island (effective in September 2024)) have enacted excise tax increases in 2024.

In addition, various increases are under consideration or have been proposed.

A majority of states currently tax MST using an ad valorem method, which is calculated as a percentage of the price of the product, typically the wholesale price.

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We support legislation to convert ad valorem taxes on MST to a weight-based methodology because, unlike the ad valorem tax, a weight-based tax subjects cans of equal weight to the same tax.

As of April 22, 2024, the federal government, 23 states, Puerto Rico, Philadelphia, Pennsylvania and Cook County, Illinois have adopted a weight-based tax methodology for MST.

As of July 29, 2024, the federal government, 23 states, Puerto Rico, Philadelphia, Pennsylvania and Cook County, Illinois have adopted a weight-based tax methodology for MST.

North Carolina has passed legislation that will cause the state to adopt a weight-based tax methodology for MST in July 2025.

An increasing number of states and localities also are imposing excise taxes on e-vapor products and oral nicotine pouches.

As of April 22, 2024, 32 states, the District of Columbia, Puerto Rico and a number of cities and counties have enacted legislation to tax e-vapor products.

As of July 29, 2024, 33 states, the District of Columbia, Puerto Rico and a number of cities and counties have enacted legislation to tax e-vapor products.

These taxes are calculated in varying ways and may differ based on the e-vapor product form.

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Lower sales volume and reported share performance of our operating companies’ products could have a material adverse effect on our business, results of operations, cash flows or financial position.

In addition, substantial excise tax increases on e-vapor and oral nicotine products may negatively impact adult smokers’ transition to these products, which could materially adversely affect our ability to achieve our Vision.

International Treaty on Tobacco Control

The World Health Organization’s Framework Convention on Tobacco Control (the “FCTC”) entered into force in February 2005.

As of April 22, 2024, 182 countries, as well as the European Union, have become parties to the FCTC.

As of July 29, 2024, 182 countries, as well as the European Union, have become parties to the FCTC.

While the United States is a signatory of the FCTC, it is not currently a party to the agreement, as the agreement has not been submitted to, or ratified by, the U.S.

The FCTC is the first international public health treaty and its objective is to establish a global agenda for tobacco regulation with the purpose of reducing initiation of tobacco use and encouraging cessation.

The treaty recommends (and in certain instances, requires) signatory nations to enact legislation that would address various tobacco-related issues.

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As of December 2023, the inflation calculation was approximately 3.4% based on the latest CPI-U data.

however, the increase in the annual payments did not have a material impact on our financial position.

While this calculation resulted in an increase in our annual payments under the State Settlement Agreements, the increase did not have a material impact on our financial position.

We believe that inflation will continue at increased levels in 2024, but do not expect the corresponding increase in annual payments to result in a material financial impact.

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For a discussion of the impact of the State Settlement Agreements on us, see Liquidity and Capital Resources - Payments Under State Settlement Agreements and FDA Regulation below and Note 14.

The State Settlement Agreements also place numerous requirements and restrictions on participating manufacturers’ business operations, including prohibitions and

restrictions on the advertising and marketing of cigarettes and smokeless tobacco products.

The State Settlement Agreements also place numerous requirements and restrictions on participating manufacturers’ business operations, including prohibitions and restrictions on the advertising and marketing of cigarettes and smokeless tobacco products.

Among these are prohibitions of outdoor and transit brand advertising, payments for product placement and free sampling (except in adult-only facilities).

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For example, a number of proposals involving characterizing flavors would prohibit smokeless tobacco products with characterizing flavors without providing an exception for mint- or wintergreen-flavored products.

As of April 22, 2024, multiple states and localities are considering legislation to ban flavors in one or more tobacco products, and six states (California, Massachusetts, New Jersey, New York, Rhode Island and Utah) and the District of Columbia have passed such legislation.

As of July 29, 2024, multiple states and localities are considering legislation to ban flavors in one or more tobacco products, and six states (California, Massachusetts, New Jersey, New York, Rhode Island and Utah) and the District of Columbia have passed such legislation.

Some of these states, such as New York, Utah and Illinois, exempt certain products that have received FDA market authorization through the PMTA pathway.

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Massachusetts and Utah passed legislation capping the amount of nicotine in e-vapor products.

Legislation relating to this issue is pending in two other states.

Legislation relating to this issue is pending in one other state.

Similar restrictions to those enacted or proposed in various U.S.

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It is possible, however, that legislation, regulation or other governmental action could be enacted or implemented that could have a material adverse impact on our business, results of operations, cash flows or financial position.

Such action also could negatively impact adult smokers’ transition to smoke-free products, which could materially adversely affect our ability to achieve our Vision.

Such action also could negatively impact adult smokers’ transition to smoke-free products, which could materially adversely affect our innovative tobacco businesses and our ability to achieve our Vision.

▪ Federal, State and Local Legislation to Increase the Legal Age to Purchase Tobacco Products:

After a number of states and localities proposed and enacted legislation to increase the minimum age to purchase all tobacco products, including e-vapor products, in December 2019, the federal government passed legislation increasing the minimum age to purchase all tobacco products, including e-vapor products, to 21 nationwide.

As of April 22, 2024, 43 states, the District of Columbia and Puerto Rico have enacted laws increasing the legal age to purchase tobacco products to 21.

As of July 29, 2024, 43 states, the District of Columbia and Puerto Rico have enacted laws increasing the legal age to purchase tobacco products to 21.

Although an increase in the minimum age to purchase tobacco products may have a negative impact on our operating companies’ sales volumes, we support raising the minimum legal age to purchase all tobacco products to 21 at the federal and state levels, as discussed above under Underage Access and Use of Certain Tobacco Products , reflecting our longstanding commitment to combat underage tobacco use.

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Surgeon General and public health authorities worldwide in making decisions concerning the use of tobacco products, including e-vapor products.

Along with the scientific and public health communities, we continue to study and gather scientific evidence concerning the health effects of e-vapor and other innovative tobacco products.

It is not possible to predict the results of ongoing scientific research or the types of future scientific research into the health risks of tobacco exposure and the impact of such research on legislation and regulation.

Scientific determinations as to any health risks or negative health consequences associated with the use of e-vapor and other innovative tobacco products could materially adversely affect our innovative tobacco products businesses and our ability to achieve our Vision.

Most jurisdictions within the United States have restricted smoking in public places and some have restricted vaping in public places.

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For example, we currently are, or recently have been, subject to a number of governmental investigations with respect to our former investment in JUUL, which we divested in March 2023, including the following:

(i) the FTC issued a Civil Investigative Demand to us while conducting its antitrust review of our former investment in JUUL seeking information regarding, among other things, our role in the resignation of JUUL’s former chief executive officer and the hiring by JUUL of any current or former Altria director, executive or employee (see Note 13 for a description of the FTC’s administrative complaint against us and JUUL);

Federal Trade Commission (“FTC”) issued a Civil Investigative Demand to us while conducting its antitrust review of our former investment

in JUUL seeking information regarding, among other things, our role in the resignation of JUUL’s former chief executive officer and the hiring by JUUL of any current or former Altria director, executive or employee (see Note 14 for a description of the FTC’s administrative complaint against us and JUUL);

(ii) the SEC commenced an investigation relating to our acquisition, disclosures and accounting controls in connection with the JUUL investment;

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the sale of untaxed tobacco products over the Internet and by other means designed to avoid the collection of applicable taxes;

the sale of unregulated products;

and diversion into one taxing jurisdiction of tobacco products intended for sale in another.

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Counterfeit versions of our products can negatively affect adult tobacco consumer experiences with and opinions of those brands.

Illegal disposable e-vapor products may be designed to appeal to youth and are manufactured without scientific standards, exposing consumers to undocumented risks.

Illegal disposable e-vapor and oral pouch products may be designed to appeal to youth and are manufactured without scientific standards, exposing consumers to undocumented risks.

Illicit trade in tobacco products also harms law-abiding wholesalers and retailers by depriving them of lawful sales and undermines the significant investment we have made in legitimate distribution channels.

Moreover, illicit trade in tobacco products results in federal, state and local governments losing tax revenues.

Losses in tax revenues can cause such governments to take various actions, including increasing excise

taxes, imposing legislative or regulatory requirements, or asserting claims against manufacturers of tobacco products or members of the trade channels through which such tobacco products are distributed and sold, each of which may have an adverse effect on our business, results of operations, cash flows or financial position.

Losses in tax revenues can cause such governments to take various actions, including increasing excise taxes, imposing legislative or regulatory requirements, or asserting claims against manufacturers of tobacco products or members of the trade channels through which such tobacco products are distributed and sold, each of which could have an adverse effect on our business, results of operations, cash flows or financial position.

We communicate with wholesale and retail trade members regarding illicit trade in tobacco products and how we can help prevent such activities, enforce wholesale and retail trade programs and policies that address illicit trade in tobacco products and, when necessary, litigate to protect our trademarks.

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We filed a new lawsuit against five manufacturers, four brick-and-mortar retailers and three online retailers of illicit “Elf Bar” e-vapor products in February 2024 in federal court in California.

In June 2024, the U.S.

Department of Justice (“DOJ”) and the FDA announced the creation of a federal multi-agency task force to combat the illegal marketing and sale of e-vapor products in the United States.

The announcement noted that, in addition to the DOJ and the FDA, the task force will leverage the criminal and civil law enforcement capabilities of the U.S.

Bureau of Alcohol, Tobacco, Firearms and Explosives, U.S.

Customs and Border Protection, the U.S.

Marshals Service, the U.S.

Postal Inspection Service and the FTC and that additional agencies may join the task force in the future.

The DOJ and the FDA stated that the task force will focus on many topics, such as investigating and prosecuting new criminal, civil, seizure and forfeiture actions under various U.S.

laws, including the FSPTCA.

Price, Availability and Quality of Tobacco, Other Raw Materials, Ingredients and Component Parts

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We work to mitigate these risks by maintaining inventory levels of certain tobacco varieties that cover several years, purchasing raw materials, ingredients and component parts from disperse geographic regions throughout the world and entering into long-term contracts with some of our tobacco growers and direct material suppliers.

To date, the impact on us of changes in the

price, availability and quality of tobacco, other raw materials, ingredients and component parts has not been material.

To date, the impact on us of changes in the price, availability and quality of tobacco, other raw materials, ingredients and component parts has not been material.

However, the effects of the current macroeconomic and geopolitical conditions on prices, availability and quality of such items may continue, which could have a material adverse effect on our business, results of operations, cash flows or financial position.

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The following table provides reconciliations of reported OCI to adjusted OCI for our reportable segments, all other category and total OCI and provides the related OCI margins:

For the Three Months Ended March 31, 2024

For the Six Months Ended June 30, 2024

(in millions) Smokeable Products Oral Tobacco Products All Other Total

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NPM Adjustment Items (6) — — (6)

Asset impairment — 354 — 354

Tobacco and health and certain other litigation items 38 — — 38

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Operating Results

For the Three Months Ended March 31,

(in millions) 2024 2023 Change

For the Six Months Ended June 30, For the Three Months Ended June 30,

(in millions) 2024 2023 Change 2024 2023 Change

Net revenues $ 10,401 $ 10,910 (4.7) % $ 5,495 $ 5,820 (5.6) %

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Reported OCI margins (1)

59.9 % 60.1 % (0.2) pp

60.6 % 59.8 % 0.8 pp 61.2 % 59.6 % 1.6 pp

Adjusted OCI margins (1)

60.2 % 60.4 % (0.2) pp

61.0 % 60.4 % 0.6 pp 61.6 % 60.4 % 1.2 pp

(1) Reported and adjusted OCI margins are calculated as reported and adjusted OCI, respectively, divided by revenues net of excise taxes.

Three Months Ended March 31, 2024 Compared with Three Months Ended March 31, 2023

Six Months Ended June 30, 2024 Compared with Six Months Ended June 30, 2023

Net revenues, which include excise taxes billed to customers, decreased $509 million (4.7%), due primarily to lower shipment volume ($1,435 million), partially offset by higher pricing ($927 million), which includes higher promotional investments.

Reported and adjusted OCI decreased $64 million (2.6%) and (2.5%), respectively, due primarily to lower shipment volume ($380 million) and higher per unit settlement charges and manufacturing costs ($105 million), partially offset by higher pricing, which includes higher promotional investments, and lower marketing, administration and research costs ($15 million).

Reported OCI decreased $103 million (1.9%), due primarily to lower shipment volume ($930 million) and higher per unit settlement charges and manufacturing costs ($155 million), partially offset by higher pricing, which includes higher promotional investments, and lower marketing, administration and research costs ($47 million), which include lower tobacco and health and certain other litigation items .

Adjusted OCI decreased $123 million (2.3%), due primarily to lower shipment volume and higher per unit settlement charges and manufacturing costs, partially offset by higher pricing, which includes higher promotional investments, and lower marketing, administration and research costs ($33 million).

Three Months Ended June 30, 2024 Compared with Three Months Ended June 30, 2023

Net revenues, which include excise taxes billed to customers, decreased $325 million (5.6%), due primarily to lower shipment volume ($846 million), partially offset by higher pricing ($524 million), which includes higher promotional investments.

Reported OCI decreased $39 million (1.4%), due primarily to lower shipment volume ($550 million) and higher per unit settlement charges and manufacturing costs ($50 million), partially offset by higher pricing, which includes higher promotional investments, and lower marketing, administration and research costs ($38 million), which include lower tobacco and health and certain other litigation items.

Adjusted OCI decreased $59 million (2.0%), due primarily to lower shipment volume and higher per unit settlement charges and manufacturing costs, partially offset by higher pricing, which includes higher promotional investments, and lower marketing, administration and research costs ($18 million).

Shipment Volume and Retail Share Results

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Shipment Volume

For the Three Months Ended March 31,

(sticks in millions) 2024 2023 Change

For the Six Months Ended June 30, For the Three Months Ended June 30,

(sticks in millions) 2024 2023 Change 2024 2023 Change

Marlboro 31,289 34,902 (10.4) % 16,316 18,506 (11.8) %

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The following table summarizes our cigarettes retail share performance:

For the Three Months Ended March 31,

2024 2023 Percentage Point Change

For the Six Months Ended June 30, For the Three Months Ended June 30,

2024 2023 Percentage Point Change 2024 2023 Percentage Point Change

Marlboro 42.0 % 42.1 % (0.1) 42.0 % 42.1 % (0.1)

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Circana maintains a blended retail service that uses a sample of stores and certain wholesale shipments to project market share and depict share trends.

Similar to prior reporting, this service tracks sales in the food, drug, mass merchandisers, convenience, military, dollar store and club trade classes.

This service tracks sales in the food, drug, mass merchandisers, convenience, military, dollar store and club trade classes.

For other trade classes selling cigarettes, retail share is based on shipments from wholesalers to retailers through the Store Tracking Analytical Reporting System (“STARS”), as provided by Management Science Associates, Inc.

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For a discussion of volume trends and factors that impact volume and retail share performance, see Operating Results by Business Segment - Business Environment - Summary above.

Three Months Ended March 31, 2024 Compared with the Three Months Ended March 31, 2023

Our smokeable products segment’s reported and estimated adjusted domestic cigarettes shipment volume decreased 10%, driven primarily by the industry’s decline rate (impacted by macroeconomic pressures on adult tobacco consumers’ discretionary income and the growth of illicit e-vapor products) and retail share losses.

Six Months Ended June 30, 2024 Compared with the Six Months Ended June 30, 2023

Our smokeable products segment’s reported and estimated adjusted domestic cigarettes shipment volume decreased 11.5%, driven primarily by the industry’s decline rate (impacted by macroeconomic pressures on adult tobacco consumers’ discretionary income and the growth of illicit e-vapor products), retail share losses and trade inventory movements.

When adjusted for trade inventory movements, our smokeable products segment domestic cigarette shipment volume decreased by an estimated 10.5%.

When adjusted for trade inventory movements and other factors, total estimated domestic cigarette industry volume decreased by an estimated 9%.

Shipments of premium cigarettes accounted for 95.6% and 94.3% of our smokeable products segment’s reported domestic cigarettes shipment volume for the three months ended March 31, 2024 and 2023, respectively.

Marlboro retail share decreased 0.3 share points sequentially.

Additionally, Marlboro share of the premium segment was 59.3%, an increase of 0.7 share points versus the prior year and unchanged sequentially.

Total cigarettes industry discount category retail share was 29.1%, an increase of 0.8 share points versus the prior year and 0.4 share points sequentially, primarily due to increased macroeconomic pressures on adult tobacco consumers’ discretionary income.

Shipments of premium cigarettes accounted for 95.7% and 94.5% of our smokeable products segment’s reported domestic cigarettes shipment volume for the six months ended June 30, 2024 and 2023, respectively.

Marlboro share of the premium segment was 59.3%, an increase of 0.7 share points.

Total cigarettes industry discount category retail share was 29.2%, an increase of 0.9 share points, primarily due to increased macroeconomic pressures on adult tobacco consumers’ discretionary income.

For a discussion regarding discount category dynamics in 2024 and the economic conditions, including a high inflationary environment, that impact adult tobacco consumer purchasing behavior, see Operating Results by Business Segment - Business Environment - Summary above.

Three Months Ended June 30, 2024 Compared with the Three Months Ended June 30, 2023

Our smokeable products segment’s reported and estimated adjusted domestic cigarettes shipment volume decreased 13.0%, driven primarily by the industry’s decline rate (impacted by macroeconomic pressures on adult tobacco consumers’ discretionary income and the growth of illicit e-vapor products), trade inventory movements and retail share losses.

When adjusted for trade inventory movements, our smokeable products segment domestic cigarette shipment volume decreased by an estimated 11%.

When adjusted for trade inventory movements, total estimated domestic cigarette industry volume decreased by an estimated 9.5%.

Shipments of premium cigarettes accounted for 95.8% and 94.6% of our smokeable products segment’s reported domestic cigarettes shipment volume for the three months ended June 30, 2024 and 2023, respectively.

Marlboro retail share of the total cigarette category was 42.0%, a decrease of 0.1 share point versus the prior year and unchanged sequentially.

Additionally, Marlboro share of the premium segment was 59.4%, an increase of 0.7 share points versus the prior year and 0.1 share point sequentially.

Total cigarettes industry discount category retail share was 29.3%, an increase of 1.0 share point versus the prior year and 0.2 share points sequentially, primarily due to increased macroeconomic pressures on adult tobacco consumers’ discretionary income.

Pricing Actions

PM USA and Middleton executed the following pricing actions during 2024 and 2023:

▪ Effective April 21, 2024, Middleton increased various list prices across substantially all of its cigar brands resulting in a weighted-average increase of approximately $0.16 per five-pack.

▪ Effective April 14, 2024, PM USA increased the list price of Marlboro (excluding Mainline Menthol and 72s Menthol) , L&M and Basic by $0.20 per pack.

PM USA also increased the list price of all its other cigarette brands by $0.25 per pack.

▪ Effective January 14, 2024, PM USA increased the list price of Marlboro (excluding Mainline Menthol and 72s Menthol) , L&M and Basic by $0.15 per pack.

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PM USA also increased the list price of all its other cigarette brands by $0.20 per pack.

▪ Effective April 14, 2024, PM USA increased the list price of Marlboro (excluding Mainline Menthol and 72s Menthol) , L&M and Basic by $0.20 per pack.

▪ Effective July 14, 2024, PM USA increased the list price of Marlboro (excluding Mainline Menthol and 72s Menthol) , L&M and Basic by $0.17 per pack.

PM USA also increased the list price of all its other cigarette brands by $0.22 per pack.

▪ Effective April 21, 2024, Middleton increased various list prices across substantially all of its cigar brands resulting in a weighted-average increase of approximately $0.16 per five-pack.

Oral Tobacco Products Segment

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Operating Results

For the Three Months Ended March 31,

(in millions) 2024 2023 Change

For the Six Months Ended June 30, For the Three Months Ended June 30,

(in millions) 2024 2023 Change 2024 2023 Change

Net revenues $ 1,362 $ 1,308 4.1 % $ 711 $ 680 4.6 %

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Revenues net of excise taxes $ 1,313 $ 1,251 $ 687 $ 651

Reported and Adjusted OCI $ 435 $ 416 4.6 %

Reported and Adjusted OCI margins (1)

69.5 % 69.3 % 0.2 pp

Reported OCI $ 532 $ 859 (38.1) % $ 97 $ 443 (78.1) %

Asset impairment 354 — 354 —

Adjusted OCI $ 886 $ 859 3.1 % $ 451 $ 443 1.8 %

Reported OCI margins (1)

40.5 % 68.7 % (28.2) pp 14.1 % 68.0 % (53.9) pp

Adjusted OCI margins (1)

67.5 % 68.7 % (1.2) pp 65.6 % 68.0 % (2.4) pp

(1) Reported and adjusted OCI margins are calculated as reported and adjusted OCI, respectively, divided by revenues net of excise taxes.

Three Months Ended March 31, 2024 Compared with Three Months Ended March 31, 2023

Net revenues, which include excise taxes billed to customers, increased $23 million (3.7%), due primarily to higher pricing ($60 million), which includes lower promotional investments, partially offset by lower shipment volume and a higher percentage of on!

Six Months Ended June 30, 2024 Compared with Six Months Ended June 30, 2023

Net revenues, which include excise taxes billed to customers, increased $54 million (4.1%), due primarily to higher pricing ($119 million), which includes lower promotional investments, partially offset by lower MST shipment volume and a higher percentage of on!

shipment volume relative to MST (“volume/mix”) ($64 million).

Reported and adjusted OCI increased $19 million (4.6%), due primarily to higher pricing, which includes lower promotional investments, partially offset by lower volume/mix ($39 million).

Reported OCI decreased $327 million (38.1%), due primarily to a non-cash impairment of the Skoal trademark ($354 million), lower volume/mix ($69 million) and higher costs ($22 million), partially offset by higher pricing, which includes lower promotional investments.

Adjusted OCI increased $27 million (3.1%), due primarily to higher pricing, which includes lower promotional investments, partially offset by lower volume/mix and higher costs.

Three Months Ended June 30, 2024 Compared with Three Months Ended June 30, 2023

Net revenues, which include excise taxes billed to customers, increased $31 million (4.6%), due primarily to higher pricing ($59 million), which includes lower promotional investments, partially offset by lower volume/mix ($29 million).

Reported OCI decreased $346 million (78.1%), due primarily to a non-cash impairment of the Skoal trademark ($354 million), lower volume/mix ($30 million) and higher costs ($22 million), partially offset by higher pricing, which includes lower promotional investments.

Adjusted OCI increased $8 million (1.8%), due primarily to higher pricing, which includes lower promotional investments, partially offset by lower volume/mix and higher costs.

Shipment Volume and Retail Share Results

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Shipment Volume

For the Three Months Ended March 31,

(cans and packs in millions) 2024 2023 Change

For the Six Months Ended June 30, For the Three Months Ended June 30,

(cans and packs in millions) 2024 2023 Change 2024 2023 Change

Copenhagen 203.0 223.9 (9.3) % 103.9 114.9 (9.6) %

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The following table summarizes our oral tobacco products segment’s retail share performance (excluding international volume):

For the Three Months Ended March 31,

2024 2023 Percentage Point Change

For the Six Months Ended June 30, For the Three Months Ended June 30,

2024 2023 Percentage Point Change 2024 2023 Percentage Point Change

Copenhagen 19.8 % 24.7 % (4.9) 19.5 % 24.2 % (4.7)

Skoal 7.9 9.9 (2.0) 7.7 9.6 (1.9)

7.6 6.7 0.9 8.1 6.9 1.2

Other 2.6 3.0 (0.4) 2.6 3.0 (0.4)

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This service tracks sales in the food, drug, mass merchandisers, convenience, military, dollar store and club trade classes on the number of cans and packs sold.

Oral tobacco products are defined by Circana as MST, snus and oral nicotine pouches.

Oral tobacco products are defined by Circana as domestic tobacco derived oral products, in the form of MST, snus and oral nicotine pouches.

New types of oral tobacco products, as well as new packaging configurations of existing oral tobacco products, may or may not be equivalent to existing MST products on a can-for-can basis.

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For a discussion of volume trends and factors that impact volume and retail share performance, see Operating Results by Business Segment - Business Environment - Summary above.

Three Months Ended March 31, 2024 Compared with Three Months Ended March 31, 2023

Our oral tobacco products segment’s reported domestic shipment volume decreased 3.1%, driven primarily by retail share losses and trade inventory movements, partially offset by the industry’s growth rate, calendar differences and other factors.

Six Months Ended June 30, 2024 Compared with Six Months Ended June 30, 2023

Our oral tobacco products segment’s reported domestic shipment volume decreased 2.5%, driven primarily by retail share losses, partially offset by the industry’s growth rate, calendar differences and other factors.

When adjusted for calendar differences and trade inventory movements, our oral tobacco products segment’s reported domestic shipment volume decreased by an estimated 3.5%.

Total oral tobacco products category industry volume increased by an estimated 9.5% for the six months ended March 31, 2024, primarily driven by growth in oral nicotine pouches, partially offset by declines in MST volumes.

Total oral tobacco products category industry volume increased by an estimated 9% for the six months ended June 30, 2024, primarily driven by growth in oral nicotine pouches, partially offset by declines in MST volumes.

Our oral tobacco products segment’s retail share was 37.9%, as share declines for MST products were primarily driven by oral nicotine pouch segment share growth.

oral tobacco category share for on!

nicotine pouches was 7.1%, an increase of 0.7 share points versus the prior year and 0.2 share points sequentially,

nicotine pouch category grew to 40.9% of the U.S.

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’s share of the nicotine pouch category was 18.5%, a decrease of 5.4 share points versus the prior year.

Three Months Ended June 30, 2024 Compared with Three Months Ended June 30, 2023

Our oral tobacco products segment’s reported domestic shipment volume decreased 1.8%, driven primarily by retail share losses, partially offset by the industry’s growth rate, trade inventory movements, calendar differences and other factors.

When adjusted for trade inventory movements and calendar differences, our oral tobacco products segment’s reported domestic shipment volume decreased by an estimated 3%.

Our oral tobacco products segment’s retail share was 37.9%, as share declines for MST products were primarily driven by oral nicotine pouch segment share growth.

oral tobacco category share for on!

nicotine pouches was 8.1%, an increase of 1.2 share points versus the prior year and 1.0 share point sequentially.

nicotine pouch category grew to 41.6% of the U.S.

oral tobacco category, an increase of 12.3 share points versus the prior year.

In addition, on!

’s share of the nicotine pouch category was 19.4%, a decrease of 4.2 share points versus the prior year and an increase of 1.8 share points sequentially.

Pricing Actions

USSTC executed the following pricing actions during 2024 and 2023:

▪ Effective April 23, 2024, USSTC increased the list price on its Copenhagen , Skoal and Red Seal brands by $0.10 per can.

▪ Effective January 23, 2024, USSTC increased the list price on its Copenhagen , Skoal and Red Seal brands by $0.11 per can.

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▪ Effective January 24, 2023, USSTC increased the list price on its Copenhagen, Skoal, Red Seal and Husky brands by $0.09 per can.

▪ Effective April 23, 2024, USSTC increased the list price on its Copenhagen , Skoal and Red Seal brands by $0.10 per can.

▪ Effective July 23, 2024, USSTC increased the list price on its Copenhagen , Skoal and Red Seal brands by $0.10 per can.

Our NJOY e-vapor business is reported in our all other category.

Reported domestic shipment volumes for the three months ended March 31, 2024 for NJOY consumables (1) and devices were approximately 10.9 million units and 1.0 million units, respectively.

In the first quarter of 2024, retail share of NJOY in the U.S.

multi-outlet and convenience channel was 4.3%, an increase of 0.6 share points sequentially.

Six Months Ended June 30, 2024

Reported domestic shipment volumes for the six months ended June 30, 2024 for NJOY consumables (1) and devices were 23.4 million units and 2.8 million units, respectively.

For the six months ended June 30, 2024 NJOY retail share in the U.S.

multi-outlet and convenience channel was 4.8%.

Three Months Ended June 30, 2024

Reported domestic shipment volumes for the three months ended June 30, 2024 for NJOY consumables (1) increased 14.7% sequentially to 12.5 million units.

Reported domestic shipment volume for the three months ended June 30, 2024 for NJOY devices increased 80.0% sequentially to 1.8 million units.

In the second quarter of 2024, NJOY retail share in the U.S.

multi-outlet and convenience channel increased 1.3 share points sequentially to 5.5%.

(1) E-vapor shipment volume includes NJOY ACE pods and DAILY disposables.

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Our access to the operating cash flows of our subsidiaries consists of cash received from the payment of dividends and distributions and the payment of interest on intercompany loans.

At March 31, 2024, our significant subsidiaries were not limited by contractual obligations in their ability to pay cash dividends or make other distributions with respect to their equity interests.

At June 30, 2024, our significant subsidiaries were not limited by contractual obligations in their ability to pay cash dividends or make other distributions with respect to their equity interests.

In addition, we receive cash dividends on our interest in ABI and will continue to do so as long as we hold shares in ABI and ABI pays dividends.

At March 31, 2024, we had $3.6 billion of cash and cash equivalents.

At June 30, 2024, we had $1.8 billion of cash and cash equivalents.

In addition to having access to the operating cash flows of our subsidiaries, our capital resources include access to credit markets in the form of commercial paper, availability under our $3.0 billion senior unsecured 5-year revolving credit agreement (“Credit Agreement”), which we use for general corporate purposes, and access to credit markets through the issuance of long-term senior unsecured notes.

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Debt to our condensed consolidated financial statements in Item 1 (“Note 12”).

At March 31, 2024, the credit ratings and outlook for our indebtedness by major credit rating agencies were:

At June 30, 2024, the credit ratings and outlook for our indebtedness by major credit rating agencies were:

Short-term Debt Long-term Debt Outlook

Moody’s Investors Service, Inc.

(“Moody’s”) P-2 A3 Stable

(“Moody’s”) P-2 A3 Negative (1)

Standard & Poor’s Financial Services LLC (“S&P”) A-2 BBB Positive

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F2 BBB Stable

Credit Lines - From time to time, we have short-term borrowing needs to meet our working capital requirements arising from the timing of annual MSA payments, quarterly income tax payments and quarterly dividend payments, and generally use our commercial paper program to meet those needs.

At March 31, 2024, we had availability under our Credit Agreement for borrowings of up to an aggregate principal amount of $3.0 billion, and we were in compliance with the covenants in our Credit Agreement.

We expect to continue to meet the covenants in our Credit Agreement.

(1) On May 6, 2024, Moody’s changed its outlook for our indebtedness to Negative from Stable.

Credit Lines - From time to time, we have short-term borrowing needs to meet our working capital requirements arising from the timing of payments under State Settlement Agreements, quarterly income tax payments and quarterly dividend payments, and generally use our commercial paper program to meet those needs.

At June 30, 2024, we had availability under our Credit Agreement for borrowings of up to an aggregate principal amount of $3.0 billion, and we were in compliance with the covenants in our Credit Agreement.

We monitor the credit quality of our bank group and do not know of any potential non-performing credit provider in that group.

For further discussion on short-term borrowings, see Note 12.

Long-Term Debt - At March 31, 2024 and December 31, 2023, our total long-term debt was $25.0 billion and $26.2 billion, respectively.

In January and February 2024, we repaid in full at maturity our 4.000% and 3.800% senior unsecured notes, respectively, in the aggregate principal amounts of $776 million and $345 million, respectively.

Long-Term Debt - At June 30, 2024 and December 31, 2023, our total long-term debt was $25.0 billion and $26.2 billion, respectively.

During the first quarter of 2024, we repaid in full at maturity our 4.000% and 3.800% senior unsecured notes in the aggregate principal amounts of $776 million and $345 million, respectively.

For further details on long-term debt, see Note 12.

At March 31, 2024, our debt-to-Consolidated net earnings and debt-to-Consolidated EBITDA ratios were calculated as follows:

For the Twelve Months Ended March 31, 2024 (1)

At June 30, 2024, our debt-to-Consolidated net earnings and debt-to-Consolidated EBITDA ratios were calculated as follows:

For the Twelve Months Ended June 30, 2024 (1)

(in millions)

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Dividends from less than 50% owned affiliates 139

Gain on the sale of IQOS System commercialization rights

Asset impairment 354

Fair value adjustment for NJOY Transaction contingent payments 140

Consolidated EBITDA $ 12,136

Current portion of long-term debt (2)

Long-term debt (2 )

Total Debt $ 25,023

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(1) Calculated as of the end of the applicable quarter on a rolling four quarters basis.

(2) Balance at March 31, 2024, which is classified as long-term debt on the condensed consolidated balance sheet.

(2) Balance at June 30, 2024.

ABI Transaction - As discussed in Note 6, in March 2024, we received pre-tax cash proceeds from the ABI Transaction of approximately $2.4 billion and paid transaction costs of approximately $62 million.

We used the proceeds from the ABI Transaction to fund the ASR transactions discussed below.

Guarantees and Other Similar Matters - As discussed in Note 13, we had unused letters of credit obtained in the ordinary course of business and guarantees (including third-party guarantees) outstanding at March 31, 2024.

NJOY Contingent Payments - On June 21, 2024, the FDA issued MGOs for four NJOY e-vapor menthol products.

As a result, we became obligated to make cash payments totaling $250 million under the acquisition agreement, which payments occurred in July 2024.

For further discussion on the NJOY contingent payments, see Note 2.

Guarantees and Other Similar Matters - As discussed in Note 14, we had unused letters of credit obtained in the ordinary course of business and guarantees (including third-party guarantees) outstanding at June 30, 2024.

From time to time, we also issue lines of credit to affiliated entities.

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In addition, PM USA, Middleton and USSTC are subject to quarterly user fees imposed by the FDA as a result of the FSPTCA.

For further discussion of the resolutions of certain disputes with states and territories related to the NPM adjustment provision under the MSA, see Health Care Cost Recovery Litigation - NPM Adjustment Disputes in Note 13.

For further discussion of State Settlement Agreements, see Health Care Cost Recovery Litigation in Note 14.

Based on current agreements, estimated market share, estimated annual industry volume decline rates and inflation rates, the estimated amounts that we may charge to cost of sales for payments related to State Settlement Agreements and FDA user fees are $3.6 billion on average for the next three years.

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The amounts charged to cost of sales for FDA user fees are generally paid in the quarter in which the fees are incurred.

We paid approximately $2.9 billion in April 2024 for amounts accrued in 2023 under the State Settlement Agreements.

We recorded $0.9 billion and $1.0 billion of charges to cost of sales for the three months ended March 31, 2024 and 2023, respectively, in connection with the State Settlement Agreements and FDA user fees.

We paid approximately $3.1 billion and $3.4 billion for the six months ended June 30, 2024 and 2023, respectively, in connection with the State Settlement Agreements and FDA user fees, primarily all of which was paid in the

second quarter of each period.

We recorded $1.9 billion and $2.0 billion of charges to cost of sales for the six months ended June 30, 2024 and 2023, respectively, and $1.0 billion of charges to cost of sales for both the three months ended June 30, 2024 and 2023, in connection with the State Settlement Agreements and FDA user fees.

As previously stated, the payments due under the terms of the State Settlement Agreements and FDA user fees are subject to adjustment for several factors, including volume, operating income, inflation and certain contingent events and, in general, are allocated based on each manufacturer’s market share.

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For further discussion on the potential impact of inflation on future payments, see Operating Results by Business Segment - Business Environment - State Settlement Agreements above.

Litigation-Related Deposits and Payments - With respect to certain adverse verdicts currently on appeal, to obtain stays of judgments pending appeals, as of March 31, 2024, PM USA had posted appeal bonds totaling $38 million, which have been collateralized with restricted cash that is included in assets on our condensed consolidated balance sheet.

Litigation-Related Deposits and Payments - With respect to certain adverse verdicts currently on appeal, to obtain stays of judgments pending appeals, as of June 30, 2024, PM USA had posted appeal bonds totaling $37 million, which have been collateralized with restricted cash that is included in assets on our condensed consolidated balance sheet.

Litigation is subject to uncertainty, and an adverse outcome or settlement of litigation could have a material adverse effect on our results of operations, cash flows or financial position in a particular fiscal quarter or fiscal year, as more fully disclosed in Note 14.

Equity and Dividends

During the first three months of 2024 and 2023, we paid dividends of $1,733 million and $1,683 million, respectively, an increase of 3.0%, reflecting a higher dividend rate, partially offset by fewer shares outstanding as a result of shares we repurchased under our share repurchase programs.

During the first six months of 2024 and 2023, we paid dividends of $3,420 million and $3,365 million, respectively, an increase of 1.6%, reflecting a higher dividend rate, partially offset by fewer shares outstanding as a result of shares we repurchased under our share repurchase programs.

Our current annualized dividend rate is $3.92 per share.

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Future dividend payments remain subject to the discretion of our Board of Directors (“Board of Directors” or “Board”).

ASR - In March 2024, we increased our $1.0 billion share repurchase program to $3.4 billion.

The increase was funded with proceeds from the ABI Transaction.

As of March 31, 2024, we paid $2.4 billion for the repurchase of our common stock in the ASR transactions, and we expect final settlement to occur by June 30, 2024.

ASR - In March 2024, we increased our $1.0 billion share repurchase program to $3.4 billion and entered into the ASR transactions.

We paid $2.4 billion for the repurchase of our common stock in the ASR transactions in the first quarter of 2024, and the final settlement of the ASR transactions occurred in the second quarter of 2024.

We funded the ASR transactions with proceeds from the ABI Transaction.

For further discussion of our share repurchase programs, see Note 1 and Part II, Item 2.

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Cash Provided by/Used in Operating Activities

During the first three months of 2024, net cash provided by operating activities was $2,877 million compared with $2,984 million during the first three months of 2023.

This decrease was due primarily to lower net revenues, partially offset by lower federal excise tax payments.

We had a working capital deficit at March 31, 2024 and December 31, 2023, and believe we have the ability to fund working capital deficits with cash provided by operating activities, borrowings under our Credit Agreement and access to the credit and capital markets.

During the first six months of 2024, net cash provided by operating activities was $2,802 million compared with $3,108 million during the first six months of 2023.

This decrease was due primarily to lower net revenues and higher litigation payments, partially offset by lower State Settlement Agreements and federal excise tax payments.

We had a working capital deficit at June 30, 2024 and December 31, 2023, and believe we have the ability to fund working capital deficits with cash provided by operating activities, borrowings under our Credit Agreement and access to the credit and capital markets.

Cash Provided by/Used in Investing Activities

During the first three months of 2024, net cash provided by investing activities was $2,316 million compared with net cash used in investing activities of $56 million during the first three months of 2023.

This change was due primarily to proceeds from the ABI Transaction.

During the first six months of 2024, net cash provided by investing activities was $2,279 million compared with net cash used in investing activities of $2,858 million during the first six months of 2023.

This change was due primarily to proceeds from the ABI Transaction in 2024 and the NJOY Transaction in 2023.

Cash Provided by/Used in Financing Activities

During the first three months of 2024, net cash used in financing activities was $5,268 million compared with $3,045 million during the first three months of 2023.

This increase was due to the ASR transactions and higher dividends paid in 2024, partially offset by lower repayments of long-term debt.

During the first six months of 2024, net cash used in financing activities was $6,966 million compared with $3,418 million during the first six months of 2023.

This increase was due to proceeds from short-term borrowings in 2023 and higher share repurchases and dividends paid in 2024, partially offset by lower repayments of long-term debt in 2024.

New Accounting Guidance Not Yet Adopted

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Parent Guarantor

March 31, 2024 December 31, 2023 March 31, 2024 December 31, 2023

June 30, 2024 December 31, 2023 June 30, 2024 December 31, 2023

Due from Non-Guarantor Subsidiaries

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(in millions of dollars)

For the Three Months Ended March 31, 2024

For the Six Months Ended June 30, 2024

Guarantor (2)

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Net earnings (losses) (207) 3,720

(1) For the three months ended March 31, 2024, net earnings (losses) include $92 million of intercompany interest income from non-guarantor subsidiaries and $122 million of interest expense from non-guarantor subsidiaries.

(2) For the three months ended March 31, 2024, net earnings (losses) include $83 million of intercompany interest income from non-guarantor subsidiaries.

(1) For the six months ended June 30, 2024, net earnings (losses) include $184 million of intercompany interest income from non-guarantor subsidiaries and $232 million of interest expense from non-guarantor subsidiaries.

(2) For the six months ended June 30, 2024, net earnings (losses) include $154 million of intercompany interest income from non-guarantor subsidiaries.

Cautionary Factors That May Affect Future Results

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Achievement of future results is subject to risks, uncertainties and assumptions that may prove to be inaccurate.

Should known or unknown risks or uncertainties materialize, or should underlying estimates or assumptions prove inaccurate, actual results could differ materially from those anticipated, estimated or projected.

Should known or unknown risks or uncertainties materialize, or should underlying estimates or

assumptions prove inaccurate, actual results could differ materially from those anticipated, estimated or projected.

You should bear this in mind as you consider our forward-looking statements and whether to invest in or remain invested in our securities.

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▪ our inability to compete effectively;

▪ the growth of the e-vapor category, including illegal disposable e-vapor products, and other innovative tobacco products, including oral nicotine pouches, contributing to reductions in cigarette and MST consumption levels and shipment volume;

▪ the growth of the e-vapor category, including illegal disposable e-vapor products, which contributes to reductions in domestic cigarette consumption levels and shipment volume;

▪ the risks associated with illicit trade in tobacco products, including counterfeit products, illegally imported products, illegal disposable e-vapor products, illicit oral nicotine products, and products designed to avoid the regulatory framework for tobacco products, such as products using nicotine analogues, each of which contribute to reductions in the consumption levels and shipment volumes of our businesses’ products;

▪ our failure to commercialize innovative products, including tobacco products that may reduce health risks relative to other tobacco products and appeal to adult tobacco consumers;

▪ changes, including in macroeconomic and geopolitical conditions (including inflation), that result in shifts in adult tobacco consumer disposable income and purchasing behavior, including choosing lower-priced and discount brands or products, and reductions in shipment volumes;

▪ unfavorable outcomes with respect to litigation proceedings or any governmental investigations;

▪ unfavorable outcomes with respect to litigation proceedings or any governmental investigations, including significant monetary and non-monetary remedies and importation bans ;

▪ the risks associated with significant federal, state and local government actions, including FDA regulatory actions and inaction, and various private sector actions;

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▪ a downgrade or potential downgrade of our credit ratings;

▪ our inability to attract investors due to increasing investor expectations of our performance relating to corporate responsibility, including environmental, social and governance, factors;

▪ our inability to attract investors due to increasing investor expectations of our performance relating to corporate responsibility factors, including environmental, social and governance matters;

▪ the failure of our, or our key service providers’ or key suppliers’, information systems to function as intended, or cyber-attacks or security breaches affecting us or our key service providers or key suppliers;

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our incurrence of additional tax liabilities related to our investment in ABI;

and potential reductions in the number of directors that we can have appointed to the ABI board of directors;

and reductions in the number of directors that we can have appointed to the ABI board of directors;

▪ the risks associated with our investment in Cronos, including legal, regulatory and reputational risks and the risk that the expected benefits of the transaction may not materialize in the expected timeframe or at all.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis