Operator:

Good day, and welcome to the Altria Group 2024 First Quarter Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by Altria's management and a question-and-answer session. [Operator Instructions] Representatives of the investment community and media on the call will be able to ask questions following the conclusion of the prepared remarks.

Mac Livingston:

Thanks, Savannah. Good morning, and thank you for joining us. This morning, Billy Gifford, Altria's CEO; and Sal Mancuso, our CFO, will discuss Altria's first quarter business results. Earlier today, we issued a press release providing our results. The release, presentation, quarterly metrics and our latest corporate responsibility reports are all available at altria.com.

Operator:

[Operator Instructions] Our first question will come from Pamela Kaufman with Morgan Stanley. Please go ahead.

Salvatore Mancuso:

Thanks for the question. We were really happy to be able to revise our guidance and take up the bottom end of the guidance by a full percentage point. We took the top half -- the top end of the guidance up about 0.5 percentage point. I would read into that the confidence in our core businesses.

Pamela Kaufman:

Okay. And the second -- my second question is a bit more philosophical. Historically, your strategy has been to maximize operating profit by [ taking ] price in excess of cigarette volume declines. And given this is becoming increasingly difficult because of the magnitude of volume declines and the need to reinvest behind alternatives, do you think that this strategy is sustainable in the changing operating backdrop? And have you considered other approaches to maximizing profitability?

Bonnie Herzog:

Maybe a bit of a follow-up question to Pamela. Just one thing I certainly saw in the quarter was your controllable cost in smokable per pack were up quite a bit, I think up mid-teens. So hoping you could touch on the drivers of that, and how we should think about that moving forward? And then honestly, just ultimately, your expectations for improved dollar profit growth in smokable in the back half.

Salvatore Mancuso:

Bonnie, I'm going to unpack that question a little bit. Hopefully, I touch on all aspects of it. If I don't, please follow up.

Bonnie Herzog:

Okay. And I guess that's helpful. But I guess if I'm hearing you correctly, it's really maybe more of a timing like the one-off that you mentioned. So as we think about just honestly, the controllable cost, if those moderate, moving forward and especially in the back half, that's going to help to drive the dollar profit growth? Is that part of the confidence you have?

Bonnie Herzog:

No, that helps. And then maybe my next question or final question is on pricing. You guys have taken 2 increases so far this year, and I am talking about [ cig ] pricing. So that seems to follow your typical quarterly cadence, which sounds reasonable, given the unrelenting pressure on [ cig ] volumes, but your peers don't seem to be following in terms of frequency or strength.

Mirza Faham Baig:

A couple of questions from me, both on the smokables division. I just want to understand if the industry volume decline remains at minus 9% for the rest of the year, whether that still allows you to hit the bottom end of your EPS outlook? In other words, you still have some room to reduce SG&A costs further and raise pricing higher?

William Gifford:

Yes. I appreciate your question. I think from a standpoint of guidance, look, we run a range of scenarios of what could be the outcomes as we progress through the year. We reaffirmed that guidance and feel very good about the guidance that we have out in the marketplace.

Operator:

Our next question comes from Matt Smith with Stifel.

William Gifford:

Yes. I think from a standpoint, I would encourage you to look at price realization over the longer term. I think it's exactly what you referred to. We highlighted as we progressed through 2023, there are some investments we wanted to make, both on the menthol segment of Marlboro as well as some of the discount pressure we're seeing, in pockets.

Salvatore Mancuso:

Matt, we don't -- as you know, we don't guide at the segment level, but you are correct in that you are seeing a shift in R&D spending towards the innovative products, and that's part of the SG&A benefit I talked about within the smokable segment earlier with Bonnie. The smokeable segment will continue to benefit from those lower SG&A costs as the year progresses.

Gaurav Jain:

Two questions from me. So one is on retail pricing. I think you are saying in Q1, it is [ 347 ]. And in Q4, it was [ 377 ]. So have you stepped up promotions on on! to stem the share loss that you have seen in oral nicotine pouches?

Salvatore Mancuso:

I want to make sure I'm answering your question, Gaurav, if I don't, please follow up.

Callum Elliott:

Couple of slightly different questions from me. On NJOY, you called it the 60 basis points of share gain, which we can see in this candidate and sounds impressive and a nice improvement. But this kind of data do also show us that the retail sales for the brand are down double digits for the past few months.

William Gifford:

Yes. I think what you see is exactly what you pointed out, Callum, is that the overall disposable, specifically the illicit vapes in the marketplace, continue to grow, while pod, the segment that's pod are replaceable capsules, continue to shrink in the marketplace.

Operator:

[Operator Instructions] Our next question comes from Jennifer Maloney with Wall Street Journal.

William Gifford:

Yes, Jennifer, really, it's around promotions in the marketplace. When you think about the data analytics that we received, and I highlighted earlier, the price gap in a store can be different than a store across a city or town. And it's really mining that data and seeing the consumer economic pressure and being able to dial those resources appropriately for the situation that they're facing.

Jennifer Maloney:

And when you say promotional activity, would that apply to both the Marlboro brand and also some of your lower-priced brands?

Jennifer Maloney:

Looking out at the rest of 2024, do you expect pressures on lower-income consumers to continue or to moderate?

Jennifer Maloney:

One more question on modern oral tobacco. So looking at the share losses in Skoal and Copenhagen and also the share performance in on!, it seems like Zyn is taking significant share from traditional oral tobacco and on! isn't catching up to Zyn. So what's your strategy for that overall oral tobacco category and then specifically for the modern oral subcategory?

Jennifer Maloney:

So would it be fair to say that your goal would be to capture those folks who are moving from Skoal and Copenhagen to modern oral to capture as many of those folks as possible with on! rather than losing them to Zyn?

Operator:

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

Operator:

And this concludes today's call. Thank you for your participation, and you may disconnect at any time.

Operator:

Good day everyone, and welcome to the Altria Group 2023 Fourth Quarter and Full Year Earnings Conference Call. Today’s call is scheduled to last about one hour, including remarks by Altria’s management and a question-and-answer session. [Operator Instructions] Representatives of the investment community and media on the call will be able to ask questions following the conclusion of the prepared remarks. I would now like to turn the call over to Mac Livingston, Vice President of Investor Relations for Altria Client Services. Please go ahead, sir.

Billy Gifford:

Thanks, Mac. Good morning. And thank you for joining us. It was a pivotal year for Altria, as we made significant progress in pursuit of our vision, by enhancing our smoke-free product portfolio, while our businesses performed well in a challenging environment. We grew adjusted diluted earnings per share by 2.3% and continued our long history of rewarding shareholders by delivering nearly $7.8 billion in dividends and share repurchases. Throughout 2023, we took several transformative steps that we believe position us for sustained success in the U.S. nicotine space, including completing our acquisition of NJOY and fully integrating it into our family of companies, Making exciting progress on our promising smoke-free pipeline including launching on! PLUS internationally in Sweden, one of the world's largest modern old tobacco markets. Continuing preparations to bring heated tobacco products to market. This includes heated tobacco stick products through Horizon, our joint venture with JT, and our heated tobacco capsule product SWIC and advocating for a responsible and well regulated e-vapor market including stepped up enforcement against the listed disposable products. Our vision continues to guide our actions and we believe that our growing portfolio of smoke-free products positions us well to lead in the evolving nicotine space. My remarks this morning will focus on our view of the U.S. nicotine space and our progress in each of the smoke-free categories. I'll then hand it over to Sal, who will provide an update on consumer and industry dynamics and further detail on our business and financial results. Let's begin with the operating environment. We estimate that total industry equivalized nicotine volumes increased approximately 3% for the year, and approximately 1% over the past five years on a compounded annual basis, driven by the growth of illicit flavored disposable e-vapor products. This new estimate mark stayed changed from our previously provided estimates of low-single-digit decline in total nicotine over the past several years. Our new estimate reflects a deeper ongoing analysis of the impact of a list of products on the e-vapor category. We have previously acknowledged the challenges associated with reading illicit market activity that takes place in less traditional channels. And we believe, we have deepened our understanding of market dynamics through improved data sources, information gaps still remain. As a result, we're making some informed assumptions to better reflect the dynamics at play. For example, we account for differences in liquid volume across products, device attributes and usage patterns by equivalizing e-vapor volume across different form factors. We then equivalized e-vapor volume back to cigarettes, our base unit of equivalized volume. Because of the volatility that exists in reading the illicit market, our estimates may change over time and we plan to provide you with our latest and best thinking as it evolves. Of note, our estimate focuses only on usage among age 21 plus consumers. Looking now by category, industry cigarette volumes declined by an estimated 8% last year primarily due to the historical secular rate of decline, the growth of illicit vapor products and continued macroeconomic pressures on smokers. And while we're deeply concerned about growth in illicit product use, we are encouraged that adult smokers continue to transition to smoke-free alternatives, which now represent approximately 40% of total nicotine space. E-vapor continues to be the largest smoke-free category and we have observed an increase and the number of adult vapers driven primarily by those choosing illicit products. Based on our new estimate, we see e-vapor category grew approximately 35% in 2023. We believe the category growth was largely driven by illicit flavored disposable products, which we estimate represents over 50% of the category. We estimate that pod-based products declined approximately 50%, and represent between 15% to 20% of the category. We continue to believe the e-vapor category is in the beginning of a reset and the steps that we have taken since closing the NJOY transaction will allow us to responsibly participate in the category's growth. Let's briefly recap our 2023 actions with NJOY, following the completion of our acquisition on June 1st. First, we strengthened NJOY's supply chain to enable our expansion plans. Our teams work diligently to solidify the entire supply chain from sourcing direct materials through shipment to retail. We now expect to have capacity to support our expansion plans for NJOY moving forward. Next, we prioritize closing inventory gaps at retail and expanding distribution of ACE. For example, prior to closing, a number of stores had ACE pods in distributions, but no devices. While other stores were missing various pod varieties. Our teams have closed inventory gaps in stores that already had distribution, which has significantly improved in stock conditions at retail. During the fourth quarter, we expanded distribution of ACE to over 75,000 stores, surpassing our previously announced goal of 70,000 stores. These stores represent approximately 75% of e-vapor for volume, and 55% of cigarette volume sold in the U.S. multi-outlet and convenience channel. We also introduced NJOY's first retail trade program, which we will -- we believe will help NJOY achieve optimal visibility and product fixture space at retail. Retailers can sign up for the program at various levels with merchandising options designed to position, NJOY's strategically and responsibly to tobacco consumers while creating further awareness of the brand. We're encouraged by our trade partners response to the program with approximately 70% of stores having chosen options that secure premium positioning and the e-vapor fixture for NJOY. Fixture resets are well underway and we expect the majority will be completed in the first half of this year. We believe that achieving manufacturing capacity, supply chain security, and optimal product distribution and placement at retail were necessary precursors to engaging consumers with impactful marketing and promotional offers. Turning to NJOY's business results, NJOY consumer -- consumables shipment volume was approximately 11 million units for the quarter, and 23 million units since closing. NJOY's retail share and the multi-outlet and convenience channel was 3.7% in the fourth quarter. In November, we began testing trial generating bundle offers in a limited number of retail accounts, and the results were very encouraging. Despite the limited reach of these offers, NJOY retail share increased 0.3 of a percentage point nationally in November and another 0.3 in December. While still early, we are excited by NJOY's momentum and remain optimistic about its potential in the U.S. market. We expect to further expand, NJOY promotions and marketing activations in the first quarter, and we anticipate submitting a PMTA for NJOY's age restricted Bluetooth device with non-tobacco flavors in the first half of this year. We look forward to sharing more detail about our plans for the year at CAGNY. Looking more broadly at the e-vapor category, we continue to believe that the current state of the market is intolerable for both legitimate manufacturers and consumers. As I previously stated, the total nicotine space grew in 2023, largely because of illegal flavored disposable e-vapor products. These products are being distributed by companies violating virtually every rule and guidance the FDA has issued since 2016. We are actively engaging with regulators, state and federal lawmakers, air trade partners, and other stakeholders to build awareness of this serious issue and drive marketplace enforcement. While we believe there is still significant work ahead to eliminate these illicit products from the market, we have seen some encouraging actions. In December, the FDA in collaboration with U.S. Customs and Border Production announced the seizure of approximately 1.4 million unauthorized e-vapor products, including Elf Bar and other brands that are popular with underage users. We believe that adopting comprehensive border protection programs is an important step towards clearing the market of illicit products. Additionally, we have worked with legislatures in a number of states that have passed or are considering legislation requiring manufacturers to certify that they have either submitted a PMTA, which is pending or received a marketing order in compliance with FDA regulations. We also initiated litigation in the United States District Court in California relating to the sale of unlawful products. And although this litigation is facing some initial procedural challenges, we remain committed to explore and pursue all litigation opportunities against manufacturers, distributors and online retailers related to sale of unlawful products. A strong course correction is needed to protect the tobacco harm reduction for the millions of adult smokers in the U.S. We've learned from past experiences that complex issues like this require the work of many stakeholders. For our part, we're working with regulators, legislatures, law enforcement and others to address the illicit market. And while the FDA and other authorities are stepping up enforcement, more action is needed. Turning to oral tobacco, the nicotine pouch category experienced sizable growth once again resulting in an estimated 7.5% increased in total U.S. oral tobacco volumes over the past six months. In the fourth quarter, oral nicotine pouches grew 11.8 share points year-over-year and now represent more than 35% of the total U.S. oral tobacco category. On! continued to participate in the category growth as reported shipment volumes increased nearly 33% in the fourth quarter and 39% for the full year. In the fourth quarter, Helix continued its focus on volume growth while improving profitability. Helix applied its analytics and revenue growth management capabilities to be more flexible and efficient with its promotional investments in the marketplace. As a result, orange retail price increased over 47% versus the year ago period, while growing its retail share by 1.1 percentage points. Encouragingly, we continue to see increasing levels of both trial and adoption of the brand with repeat purchases up more than 30% year-over-year, despite the substantial increase in retail price. We remain excited about on! PLUS and its potential in the U.S. market. We believe its long lasting flavor system and proprietary softened material are differentiators in the category. We continue to see encouraging results from the on! PLUS test launch in Sweden. Consumer research from the fourth quarter indicates that on! PLUS is competitive with the market leading old nicotine pouch products in Sweden, and is seen as a unique offering with a strong repeat purchase rate of over 30% in the e-commerce channel. Given the success of on! PLUS net and smooth net in December, we introduced on! PLUS berry and citrus and 6 and 9 milligram strength variants in the e-commerce channel. We also plan to expand on! PLUS to additional retail accounts and suite. Our teams are on-track to submit the PMTA for on! PLUS in the first half of this year and upon FDA authorization, we expect it will contribute meaningfully to Helix's growth. In heated tobacco, we believe our compelling portfolio of products will appeal to the millions of adult smokers seeking innovative and scalable alternatives to e-vapor products. We are continuing regulatory preparations to bring heated tobacco stick products to the U.S. market through Horizon, our joint venture with JT. We remain on-track to follow-up PMTA for Ploom in the first half of 2025. And we are making continued progress on our heated tobacco capsule product SWIC. While we believe heated tobacco products can play an important role in achieving harm reduction, the category remains nonexistent in the United States. We're encouraged by the progress we made in 2023 and we are committed to achieving long-term leadership in each of the smoke-free categories while delivering strong shareholder returns. Last March, we introduced our 2028 enterprise goals. We provided updates on our progress in this morning's press release and we expect to provide progress updates annually moving forward. We look forward to discussing our exploration of non-nicotine and international mid-teen markets at CAGNY later this month. Turning to our 2024 financial outlook. Our plans include a continuation of our strategy to balance earnings growth and shareholder returns with strategic investments toward our vision. For 2024, our planned investment areas include marketplace activities in support of our smoke-free products and continued smoke-free product research, development and regulatory preparations. We believe the external environment will remain dynamic in 2024, and we will continue to monitor the economy, including the cumulative impact of inflation, tobacco consumer dynamics including purchasing patterns and adoption of smoke-free products, solicity vapor enforcement and regulatory litigation and legislative developments. Considering these factors, we expect to deliver 2024 full year adjusted diluted EPS in a range of $5 to $5.15. This range represents an adjusted diluted EPS growth rate of 1% to 4% from a $4.95 base in 2023. We expect 2024 adjusted diluted EPS growth to be weighted to the second half of the year. Our guidance includes the impact of two additional shipping days in 2024 and assumes limited impact from illicit e-vapor enforcement on combustible and e-vapor volumes. Before I turn it over to Sal, I'd like to take a moment to recognize Murray Garnick, who recently announced his decision to retire from Altria. During his remarkable career, Murray represented Altria and its subsidiaries for nearly 40 years, both as outside and in-house counsel including his last seven as General Counsel, leading the law and regulatory affairs departments. Under his guidance, we have successfully managed significant litigation challenges and established Altria as a leading advocate for tobacco harm-reduction policies in the U.S. We will continue to benefit from Murray's guidance through the first quarter. At which time, Bob McCarter will assume the role of General Counsel. Bob currently leads the management of tobacco health and other litigation. Bob has been with Altria since 2015, and spent 18 years before that representing the company as outside catching. Please join me in thanking, and congratulating Murray on an incredible career. And we look forward to introducing Bob to many of you at CAGNY, and in years to come. And I'll now turn it over to Sal to provide more detail on the business environment and our results.

Operator:

[Operator Instructions] Our first question will come from Matt Smith with Stifel.

Billy Gifford:

I think when you think about it being weighted to the second half of the year, I think there's two major components you should think. I'm the biggest being NJOY. You remember, we closed that on June 1. So we had amortization of that acquisition. And so you'll have the investments that we highlighted in our remarks of course, in the first half of the year where you didn't have that in the first half of last year. I think the other thing to note is, remember, the two extra shipping days, one of those will occur in the third quarter and one in the fourth quarter. So they're both back half of the year weighted. I think those are the two major things. And of course, there are always puts and takes, but those are the two major things I would highlight.

Billy Gifford:

Yes, it's a little bit of both. I think when you think about it, Matt, we tried to highlight that our consumer is under pressure. And we felt like we could use the normal Black franchise as well as rounding out that portfolio for -- with the normal gold pack. I think if you look back in history, you see we use these tools. It allows us to take a small segment of Marlboro and provide a place for consumers under pressure because Marlboro still the aspirational brand in the marketplace. Those that are facing economic pressures have a place to continue to interact with Marlboro and purchase Marlboro. You'll see historically, when economic pressures ease a bit for our consumers, we're able to lessen those promotional. But in essence, we kept them in the mobile franchise, the brand itself. And it's much more effective and efficient to do it that way, then try to win them back if they trade it down. I would encourage you to think about price realization over the long-term. When you look at it on a quarter basis, you have timing of pricing things of that nature. But even if I can encourage you to look at it over the long-term, at least look at it and look at costs year-over-year. And I think if you look last year, you'll see the fourth quarter was a high mark compared to the other quarters from a price realization. So comps will affect it to a certain degree as well.

Pamela Kaufman:

Congrats to Murray, and thanks to him for all of the help over the years.

Pamela Kaufman:

So question on the guidance for low-single-digit earnings growth in 2024. This follows a year of low-single-digit growth in '23, but your growth algorithm calls for mid-single-digit earnings growth. So do you think that your longer-term targets are still achievable? And what do you anticipate changing over the next few years that can put you on that path?

Pamela Kaufman:

And then in the smokeable segment, this was the second consecutive quarter of negative sales and OCI growth. Given several years of elevated cigarette volume declines and a heightened competitive backdrop, how do you get comfort that your financial model is sustainable and more near term, do you anticipate that smokeable segment operating profit can grow in 2024? .

Pamela Kaufman:

And just one last one. Can you talk about the current competitive backdrop and what you're observing from the premium and deep discount cigarette segments as well as from e-vapor and your strategy to compete against each of these segments?

Operator:

We'll hear next from Bonnie Herzog with Goldman Sachs.

Billy Gifford:

I'm sure he will appreciate that, Bonnie. Thanks.

Billy Gifford:

Yes. I appreciate your question, Bonnie. You'll recall we don't really offer guidance down to the level because we're balancing that. That's why we put forward the enterprise goals. Remember, one is the overall margin for the portfolio of products because, as I mentioned earlier, each of those categories have been being different points of investment. What we strive for in the combustible segment is to maximize profitability in the long-term and we're going to make appropriate investments in Marlboro and investments in the growth categories. And so we try to lay for you, if you will, the groundwork of how we're going to manage the business through time.

Billy Gifford:

Yes, there was a lot in that question, Bonnie, so I'll try to unpack it, but follow-up if I missed the piece. So I'll start in the reverse order. Yes, we do more like our core businesses are very strong when you look at the strength of Marlboro in the marketplace, you look at the aspiration of Copenhagen and MST and you look at the performance of those businesses through time, you see that they're very strong and continue to be strong. As far as investments, I'll speak -- you ask about Ploom. We shared in our remarks, we're continuing to work on the application there. We expect to file that in the first half of 2025. It's just the application process and compiling it and the studies that are involved with that. But we feel good about what we've seen with interactions with the consumer to this point. As far as the NJOY, certainly, you can expect more investment in 2024 than you did in 2023. Some of that's just the nature of we didn't close it until June 1, but now we're in 75,000 stores. And so we're really looking forward to having that in the stores where consumers are shopping, having it displayed much more prominently than it ever has been we secured, as I mentioned, the great spot on the fixture. But having that in the consideration set, we feel like once we get that in consumers' hands, consumer research would tell us that they will convert through time for the product because they enjoy it.

Callum Elliott:

Another one on price mix, but maybe from a slightly longer-term perspective. We've obviously seen a divergence. I think I would describe it this year between your pricing strategy and some of your big peers. And it seems like the peers are signaling that they're set to continue on their path. So I guess this is for Billy. My question is do you see a strategic imperative to react to some of that more competitive pricing? And maybe is that what we're seeing in the big step down in sequential price mix this quarter? Or are you content over the longer term to continue this divergence?

Sal Mancuso:

I touched on this in our opening remarks that the utilization of the breadth of Marlboro's brand family and utilizing SKUs to interact with consumers who are under economic pressure has occurred in the past. It's happened with special blend as an example, during difficult economic times. So you mentioned -- you called it a divergence, but I would say this is something that we've done in the past, and we've been able, as the economy improves to margin up those SKUs, but also see consumers return to mainline Marlboro.

Billy Gifford:

Yes, I think you have to think about it as headwinds tailwinds. Certainly, gas prices have declined, so you can take the gas prices being a bit of a tailwind. You also have to think about the debt load and the cumulative impact of inflation on the total basket that our consumer purchases. It's that cumulative impact that's affected the discretionary income. And then I mentioned that load, just because from a debt load standpoint, the increase in interest rate also affects the discretionary income. So I think overall, if you think about the discretionary income, its down.

Billy Gifford:

Yes, that is a lot based on efforts by ourselves and working with the legislatures in the state. And what you're referring to is Louisiana requires manufacturers to certify the individuals within the company to certify that they either have followed FDA guidance and they have a legitimate application on file and it's pending or that they have actually received authorization. It is early right now, Callum, in Louisiana, I would say the early signs are encouraging that we are seeing illicit base being removed from the marketplace. Hope that trend continues. And we are -- there have been a number of states that have passed similar legislation as well as a number of states that are considering it. But it's a bit early, but yes, the early signs are encouraging.

Pallav Mittal:

Can you please comment on the sell-through trends for NJOY? Or is the $11 million number the shipment similar to retail trends as well?

Pallav Mittal:

And one more. So the minus 8% decline in industry volumes, how much do you think is the cannibalization from e-cigarettes? And how much is the impact from the growth in modern oral?

Operator:

We'll go now to Jennifer Maloney with Wall Street Journal.

Billy Gifford:

Yes. It's a complex issue. So let me try to unpack it for you. When you look at that 15%, we would consider that legitimate shipments that went to California. What you're seeing is a lot of black market activity that takes place in California. So you see gray market consumers going across the border, and we've seen that, whether it be Nevada or other bordering states, some consumers go across to get them menthol cigarettes. We're seeing a lot of black market enter up from Mexico into the state of California. That would not be included in the 15%. So that is black market or a legal product that has made its way into California for the consumer to buy. Again, that wouldn't be in the 15%. We do believe some consumers have moved. Certainly, there's a huge market of a listed vape in California. That continues even though the flavor ban is in place. To answer your question on the adult cigarette consumer. What you see with the benefit of Marlboro is I think if you look at various studies, when there's a menthol ban, the consumer really doesn't leave the nicotine space and a lot of them don't even leave cigarettes. They look to non-menthol cigarettes as an alternative. And with our over-indexing and non-menthol, it makes sense that they would move to Marlboro. One of the other things I would highlight in moving to non-menthol, we've seen an influx of what we call menthol cards into the state of California. So again, they're illegal, but it allows the consumer to buy a non-menthol pack of cigarettes, insert the card and then if you will self-ventilate their cigarettes. So there, I think it points again to when you pass the law without an eye towards how you're going to enforce the law, you see a significant amount of illicit activity that takes place related to that.

Billy Gifford:

They did. They are commensurate with overall industry.

Billy Gifford:

It's hard to answer on the hypothetical Jennifer, and I apologize for without [indiscernible] the actual proposed rule and what's going to take place. It's tough to say what their enforcement activities will be. I think if you look at our comments related to the menthol ban, you'll see that we felt like the FDA needed to take into consideration all of the unintended consequences and that you're seeing them take place in California. Black market activity, illicit product getting into the marketplace, methylated cards. So there are a lot of unintended consequences. So it'd be tough to tell, if you will, what the overall how the consumer will be at play in that depending on what's available to them.

Billy Gifford:

That is correct.

Billy Gifford:

I think it's too early to tell. We certainly anticipate that there would be legal challenges, but it's too early to tell whether we would be involved. We would like to be able to understand the rule as it's published finally and then make that decision, and we'll share it with you when we have anything to share.

Billy Gifford:

Yes. I think there could be a risk for underage if not marketed and sold responsibly. So we actually sent a letter to the FDA many months ago, that they should encourage them to issue marketing guidelines for the category. So that regardless of authorizations or not, be able to have marketing guidelines for that category so that all industry members could follow so that we can protect the harm reduction for adults without exposing underage users to the category. We haven't seen any action by the FDA. But certainly, we, as our approach to the marketplace has very minimal under interaction with our brand.

Billy Gifford:

Well, I won't get into the details because we shared that with the FDA, and we haven't seen any action at this point. But certainly, what would be considered a responsible approach to the marketplace.

Unidentified Analyst:

My first one is around the successful challenges to the FDA's marketing denial orders for some vapes, which have started to put some pressure on the agency and also increased the likelihood of a case going to the Supreme Court. I wondered whether Altria would want to participate in any Supreme Court case. And if so, how it's preparing for that possibility?

Unidentified Analyst:

Just a follow-up to an earlier question around the sustainability of the financial model for the smokeable segment in particular. Obviously, the industry has for some time now effectively used pricing increases to offset volume declines. The last couple of quarters, it seems that that's been a bit more difficult, given the down trading and the promotional environment that you flagged. So I'm wondering whether the ability to offset declines with pricing in the smokeable segment is kind of disappearing or you feel that, that will return when the economic environment improves and promotions sort of fees a little bit.

Unidentified Analyst:

So you're kind of confident that the smokeable segment can return to revenue growth in the future?

Operator:

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

Operator:

This concludes today's call. Thank you for your participation. You may disconnect at any time.

Operator:

Good day everyone, and welcome to the Altria Group 2023 Third Quarter and Nine Months Earnings Conference Call. Today’s call is scheduled to last about one hour, including remarks by Altria’s management and a question-and-answer session. [Operator Instructions] Representatives of the investment community and media on the call will be able to ask questions following the conclusion of the prepared remarks. I would now like to turn the call over to Mac Livingston, Vice President of Investor Relations for Altria Client Services. Please go ahead.

Billy Gifford:

Thanks Mac. Good morning and thank you for joining us. Our highly profitable produced traditional tobacco businesses were resilient in a dynamic operating environment during the third quarter and first nine months, providing fuel for our business transformation and significant cash returns to our shareholders. We grew adjusted diluted earnings per share by 3.3% for the first nine months and returned more than $5.7 billion to shareholders through dividends and share repurchases. We continue to balance maximizing profitability from our smokeable and moist smokeless tobacco businesses with investments to realize their vision of responsibly leading the transition of adult smokers to a smoke-free future. This morning I will focus on our progress with NJOY, the state of the e-vapor category, and the encouraging third quarter results from on. I'll then turn it over to Sal, who will providing update on consumer and industry dynamics, further detail on our financial results and outlook for the remainder of the year. Let's begin in the e-vapor category. In our first full quarter of ownership, our teams executed NJOY's business plans with speed and focus to lay the foundation for NJOY’s long-term success. Today, NJOY ACE remains the only pod based e-vapor product with a marketing authorization from the FDA. We're actively working to bring this compelling smoke-free alternative for more smokers in vapors across the United States. We believe that the long-term success in e-vapor will be influenced by our actions in the near term, and we're executing in the marketplace to grow the business responsibly and sustainably. First, while already strong strengthening NJOY supply chain was a necessary step to begin the initial phase of our expansion with ACE. Our teams work diligently to solidify the entire supply chain from sourcing direct materials through the shipment to retail. As a result, we do not anticipate capacity constraints as we execute our initial expansion plan. Next, during the third quarter, our teams prioritize closing inventory gaps at retail and expanding distribution of ACE. Prior to the acquisition, NJOY had a small scale salesforce, which resulted in inventory volatility and significant distribution gaps at retail. Upon completion of the NJOY transaction, we immediately unleashed our salesforce to focus on closing the inventory gaps in stores that already had distribution. We improved inventory conditions in stores and are actively working to close remaining gaps at retail. For expansion based distribution grew to approximately 42,000 stores during the third quarter and is now distributed in all of the top 25 convenience store chains by e-vapor volume. In addition, we began to amplify visibility with new point of sale and fixture signage at retail. During the fourth quarter, we continue to expect ACE expansion to reach a total of 70,000 stores by year-end, representing approximately 70% of e-vapor volume and 55% of cigarette volume sold in the US multi outlet and convenience channel. As we continue to expand distribution and close inventory gaps, we expect to further enhance visibility and product fixture space at retail. Last month, NJOY unveil its first retail trade program. Retail partners can sign up for the program at various levels with merchandising options designed to position NJOY strategically and responsibly to tobacco consumers, while creating further awareness of the brand. And as we move to our next phase of e-vapor consumer engagement, we're beginning to test a variety of promotional plans and anticipate more disruptive execution at retail in the fourth quarter. Moving into 2024. We will continue to refine our promotional plans, implement, NJOY's retail trade program, further expand distribution and evolve our consumer engagement strategy. Our strategies will focus on informing adult vapors and smokers of the attributes of ACE, such as battery capacity and pods size relative to other leading brands, generating trial and growing brand loyalty. In addition, plans for a new brand equity campaign are well underway. We expect to equity campaign to further amplify the brand's presence at retail and drive consumer engagement with the brand. We're excited to share more on this campaign and the next phases of our growth plans in the near future. Looking more broadly at the e-vapor category, the current state of the market is intolerable for both legitimate manufacturers and consumers. As we have noted repeatedly four months, the regulated market is being overrun by illegal flavored disposable e-vapor products made and distributed by companies violating virtually every rule and guidance FDA has issued since 2016. Regulation not enforced is indistinguishable from no regulation at all. Illegal e-vapor products circumvent the actions of regulators, responsible manufacturers and retailers by evading scientific review, quality of manufacturing controls, marketing oversight, and legal aids or purchase restrictions. Despite recent actions by the FDA, enforcement has been inadequate and ineffective. We believe the FDA has the tools necessary to bring order to the market. For our part, we're actively engaged with regulators, state and federal lawmakers and trade partners and other stakeholders to build awareness of these serious issues and drive marketplace enforcement. We have also taken more targeted, but necessary action and initiated litigation in the United States District Court in California against 34 organizations, including manufacturers, distributors and online retailers related to the sale of unlawful products. A strong course correction is needed to protect the tobacco farm reduction opportunity for the 30 million adult smokers in the US. Turning to oral tobacco. The nicotine pouch category experienced sizable growth once again, resulting in an estimated 5% increase in total US oral tobacco volumes over the past six months. Full nicotine pouches grew nearly 10 share points year-over-year and now represent more than 32% and the US oral tobacco category. on! participated in the category growth as third quarter reported shipment volumes increased nearly 37% versus the year ago period. During the quarter, Helix focused on continued volume growth, while improving profitability. Helix applied its evolving analytical resources to be more flexible with its promotions in the marketplace. As a result, on!'s retail price increased 33% per can sequentially and 52% versus the prior year, closing the gap [indiscernible] in by over $1 year-over-year. Encouragingly, we continue to see increasing level of both trial and adoption of the brand with repeat purchases up more than 35% year-over-year despite the substantial increase in retail price. In addition, on's! retail share of the oral tobacco category was 6.9%, up 1.7 share points versus the prior year and stable sequentially. Internationally, on! PLUS began its test launch in Sweden, one of the largest modern oral tobacco markets in the world. And consumers are engaging with the brand through both e-commerce and select retail locations. While still early days, we are encouraged by the feedback we've received from consumers. Initial consumer data showed that on! PLUS performed well in the areas of comfort, flavor and overall satisfaction. We believe that on! PLUS' long-lasting flavor system and proprietary software material are differentiators in the category. We are at an exciting period in our history. We have an unprecedented opportunity to responsibly lead the transition of adult smokers to our smoke-free future. Our smoke-free portfolio is compelling, and I am encouraged by our initial progress with NJOY and on's! strong performance. I believe we have the appropriate strategy. on! people in place to execute our growth plans. I continue to believe that we can achieve our vision and create long-term value for our shareholders. I'll now turn it over to Sal to provide more detail on the business environment and our results.

Operator:

Thank you. [Operator Instructions] Our first question comes from Pamela Kaufman with Morgan Stanley. Please go ahead.

Billy Gifford:

Good morning, Pamela.

Sal Mancuso:

Pamela, first, good morning, and I'll start the answer. So this is very typical of us to narrow guidance as the year plays out, and we're through three quarters, and we were happy to provide more transparency in narrowing our guidance to 1.5% to 3% growth off of last year's adjusted EPS. We feel really good about the guidance we've been able to provide. Of course, across the plan, there's always puts and takes. We feel that we have enough levers to deal with any changes in the marketplace, but we feel good about the narrowing of the guidance. And I think that's, as I said, pretty typical of how we manage guidance as the year progresses.

Billy Gifford:

Yeah. Pamela, as you know, we don't provide look forward guidance. But I think when you think about volume, and it's important to look at the e-comp [ph], we tried to highlight for you that, look, our consumer is still under macroeconomic pressure both the cumulative impact of inflation, but even gas prices moving around. But more importantly, what we're seeing is an influence of the illicit vapor and the impact it's having on the cigarette industry. And you see that we're estimating that to be about 1.5 to 2.5. The reason that's such a broad range is the nature of the illicit product. It's going through distribution channels that we feel like we have some information gaps and we're going to be looking to fill those information gaps. But we wanted to highlight that to that as we discovered it. What we did is we used the data sources we had, and we're able to triangulate it. I would point you to our quarterly metrics that we shared, and you see the significant jump up in adult vapors just over the nine months thus far in 2023. So we think that's having an impact consider out buying too. We talked about some of the enforcement activities, some of the things the FDA could do, some of the things we're doing. And we would look to get that enforcement active in the marketplace.

Billy Gifford:

We believe, we can grow NJOY brand. Remember, it competes and our focus is in the pod base. The FDA still needs to get through its authorizations and we believe that is going to cause transition in the marketplace as well. I tried to step you through the plan with NJOY as we progress through what we did in the third quarter as we progress through the fourth quarter, but I'll just highlight it. We really wanted to make sure we had the foundation built. And so the focus was on making sure that the supply chain would support the increased line, and we feel good about that. We wanted to fill the inventory gaps and improve visibility in the stores that NJOY was already present, and we've made significant progress on that. Then we're going to expand to 70,000 stores by the end of the year, really with some disruption at retail, we feel like the visibility will continue to improve. But we're in the midst of selling in our trade program, which we think is a sustainable position on the retail fixture at retail. That will take place as we progress into the New Year. And I highlighted the equity campaign is really establishing the brand equity for NJOY and being able to unveil that as we progress into the New Year for the consumer.

Billy Gifford:

Thank you.

Bonnie Herzog:

All right. Thank you. Good morning, everyone.

Bonnie Herzog:

Good morning. I had a question on your guidance. You narrowed it, but essentially lowered your EPS growth this year. And then your new EPS guidance this year is below your mid single digit algo. So I guess I'm trying to understand how much of this is due to planned investments as you build your smoke-free vision versus maybe greater-than-expected headwinds. If you could touch on that for us it would help.

Sal Mancuso:

Bonnie, I'll also remind you that when we restated guidance upon the NJOY deal, there is amortization. It's a non-cash expense drag on the year-over-year comparison.

Billy Gifford:

Yes. Certainly, you saw the overall industry volume at an increased rate of decline, and we tried to highlight that in the decomposition and the impact that the illicit e-vapor was having on the cigarette category. I think when you think about it, look, we're very pleased that margins overall would step up. I wouldn't get hung up in eight quarters price realization. We really think about it through time. So we highlighted as we progressed into the year, that there are a couple of pockets that we needed to invest in. I think you see the benefit of those investments with Marlboro share. And so -- but again, I wouldn't get hung up on any particular quarter, we tend to look at it over a bit longer term than just quarter-to-quarter. And so that's the way we manage the business. I think when you think about the cost, as you have fluctuations again in a quarter as you have fluctuations in volume, that's going to gyrate that controllable cost per pack.

Billy Gifford:

Thank you, Bonnie.

Andrei Condrea:

Hi. Thank you for taking my question and good morning, Billy. Good morning, Sal. One from me, please. When thinking just about your price increases. Obviously, one you took in Q4 was larger than your previous increases over the past, call it, two years. Should -- basically, my question is should we kind of expect this higher and higher level of price taken from you and your peers as volumes come under pressure from macro factors? Sorry, it was very long-winded. And …

Andrei Condrea:

Yeah. I got -- I got another one after that.

Andrei Condrea:

Thank you. That makes sense. And secondly, I mean we saw -- obviously, you filed a lot of litigation versus illicit vapor manufacturers and well, BAT did the same went by another avenue. Probably what we'd be looking for is any inkling on how long this would take to crystallize, one way or the other?

Andrei Condrea:

Very clear. Thank you. I will pass it on. Thank you very much.

Operator:

Thank you. We'll take our next question from Vivien Azer with TD Cowen. Please go ahead.

Billy Gifford:

Good morning, Vivien.

SalMancuso:

Good morning, Vivien and thank you for the question. And yeah, we're really happy with the OTP margins. And I would say both traditional smokeless and oral TDN are contributing to the strength of those margins. So you're right to point out the strength of, in particular, Copenhagen in the MSP category. And then as we discussed in our opening remarks, the net pricing increases for on -- both on a year-over-year basis and a sequential basis.

Billy Gifford:

Yeah. We're certainly pleased with the Marlboro Black Gold launch. We're certainly pleased with the utilization that the [indiscernible] has put on Marlboro Black and use in the marketplace to give consumers that are under economic strain, a place to stay with Marlboro because that's what the consumer wants. I think when you think about overall, Marlboro Black, it represents about 10% of the Marlboro franchise. It's very similar as far as being used as a tool, you'll recall this, Vivien, back when we use special blend and the other downturn that we saw in 2008, 2009. And so when you think about it, it's being able to utilize a tool, we're very pleased with the rounding out of the portfolio in Marlboro Black with Mobile Black Gold and very pleased with the results we're seeing in the marketplace.

Billy Gifford:

I think it really highlights the illicit activity that takes place in California. You'll recall previously, so some of it was cross-border, but as the illicit activity takes place in California, whether that be menthol cards that we highlighted last time, or even menthol -- menthol cigarettes, finding their way into the state of California. Again, it's another example where probation doesn't work. You don't have enforcement and that illegal activities take place to get the consumer what they're desiring and that's what we're seeing take place in California.

Billy Gifford:

Thank you.

Owen Bennett:

Morning, gens. Hope all well. I had a couple of questions around vapor again. And first one, is coming back to disposable enforcement. So realistically, ignoring the actions by yourselves and BAT and looking at FDA specifically, do you actually see kind of any chance of meaningful measures in the next six to 12 months, given obviously, in the middle of last year, the FDA spoke that are now working with the government agencies to address this. And then they also flagged the possibility of possible federal statutory changes to address this. So just love to get your thoughts around if we could see kind of any meaningful action from the statutory perspective or the FDA in the next three to 12 months.

Owen Bennett:

And then when they spoke about statutory changes, do you see any possibility of that happening?

Owen Bennett:

Okay. Fine. And then just my second question, on the QC [ph] metrics, you showed a slide highlighting the spike in the number of adult vapors. This has replaced the slide you showed historically that actually showed estimated industry rate volumes. Can you maybe talk about what the volume number was for the quarter? I just want to get a better idea of what the vape impact would be on cigarettes from an absolute volume perspective? Thank you.

Owen Bennett:

Okay. And then any broad guess of what the sequential volume increase was industry-wise in the second quarter, given kind of the big variance?

Owen Bennett:

And then how overall was it? The overall e-vapor?

Sal Mancuso:

Hey, Owen. This is Sal. And I would also point out, not only is it flavors in this illicit disposable category, flavors are really not in line with regulations. They're flavors like bubblicious cotton candy. I mean, they -- I agree with Billy the need for enforcement is very important, and we need it to happen. We'd like it to happen as soon as possible.

Billy Gifford:

Thank you.

Matthew Smith:

Hi. Thank you, operator, and good morning all.

Matthew Smith:

Wanted to ask a follow-up question around the change in the impact of cross-category dynamics and now the 2% drag you're seeing on cigarette volumes. Can you talk about your expectations for how these consumers that are using the illicit products that are generating that higher drag, how do you expect them to behave once you do see enforcement in the category and these products that they're using today are removed from the marketplace. Do you expect those current users to shift into lawful smoke-free products, including vapor? And then do you then expect the drag to lessen going forward given the removal of the flavor products? Or do you expect the vapor category to continue to grow through the enforcement of illicit products?

Matthew Smith:

Thank you, Billy. Just as a quick follow-up. I wanted to ask about the distribution opportunity around NJOY. You understand that you laid out the priorities in your first quarter of ownership focusing on the supply chain. But I was curious if there is any prioritization of expanding distribution for if and when FDA actually picks up its enforcement against illicit products, do you need to see a more proactive FDA before you expand the distribution of NJOY to take advantage of the disruption in the marketplace?

Matthew Smith:

Thank you, Billy. I will pass it on.

Operator:

Thank you. We will take our next question from Gaurav Jain with Barclays. Please go ahead.

Billy Gifford:

Good morning.

Billy Gifford:

Yeah. I understand your question, Gaurav. I think when we look at the information, certainly, we're having some impact, and we've tried to highlight that from a sourcing perspective with novel oral products. What we highlighted for disposable is what we feel is what's taken place from the disposables. So that's separate and distinct from novel oral. So we feel like what we've estimated that 1.5 to 2.5, and I explained why it's a range. is really the impact of disposable e-cigarettes on cigarettes.

Billy Gifford:

Yeah. I understand the theory that you have regarding that. I think when you look at the science, you look at the trends and you look at the fact they've even what's taken place to date related to GLP-1 drugs we see no indication of that. We'll certainly continue to monitor, but we don't see any indication.

Billy Gifford:

Yeah. I think you saw that -- it went to the OMB, the Office of Management Budget on October 13, it sits with them. The FDA has announced publicly that they anticipate issuing that by the end of the year, but I think it remains to be seen when that will be issued. So from that standpoint, really you've seen our comments on menthol. We don't think it's based on -- or supported by science and evidence. And so if it's issued, I think you could anticipate potential legal challenges from the industry.

Billy Gifford:

Thank you.

Unidentified Analyst:

Hi, thank you for taking our questions. This is Argus [ph] in for Priya. We saw that you just filed your updated shelf. How are you thinking about entering the January maturity in light of the current market backdrop? Thank you.

Unidentified Analyst:

Thank you.

Steven Marascia:

Thank you. Good morning, gentlemen. Just sort of a follow-up. Looking at your consolidated statement of earnings, you guys reported interest and debt expense about $272 million. Given the current ongoing in the treasury department rise in rates, is -- do you anticipate that number remaining level? Or should we expect some type of bump up? And if so, any idea in terms of bump up towards what?

Steven Marascia:

Thank you.

Operator:

[Operator Instructions] We will take our next question from Jacob De Klerk with Redburn Atlantic. Please go ahead.

Billy Gifford:

Yes, we can hear you.

Billy Gifford:

We believe there is. I think when you think about it, I wouldn't rule up menthol. We feel good about the application, the current application in front of the FDA from a menthol standpoint. I think if you look at some of the recent marketing denial orders, it was related to new following. And as we pointed out when we made the NJOY transaction, there was virtually no use following. As far as additional flavors, we're excited and currently looking forward to being able to file in the near future, and we'll come back to you when we are able to do that of additional flavors with access control. We believe that allows for adult consumers to have it as an off-ramp, but not an on ramp for underage users. So we still see the potential for flavors. But to answer your question, we feel like the consumer wants alternative products. We followed that previously, and they'll continue to want that.

Billy Gifford:

That certainly is the biggest outflow or inflow into nicotine pouches is coming from traditional MST consumers. Our plans there, and we highlighted them is participate with on!. And then we're excited to be able to file the PMTA for on! PLUS. And we highlighted while it's early, some of the consumer engagement that we're having over in Sweden, and we feel like that's a great product, and we're looking forward to be able to bring that to market once we receive authorization.

Operator:

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

Mac Livingston:

Thanks Ashley. Thanks to all for joining us. Please contact the Investor Relations team if you have further questions. Thanks, and have a great day.

Operator:

Good day, and welcome to the Altria Group 2023 Second Quarter and First Half Earnings Conference Call. Today’s call is scheduled to last about one hour, including remarks by Altria’s management and a question-and-answer session. [Operator Instructions]. Representatives of the investment community and media on the call will be able to ask questions following the conclusion of the prepared remarks. I would now like to turn the call over to Mac Livingston, Vice President of Investor Relations for Altria Client Services. Please go ahead, sir.

Billy Gifford:

Thanks, Matt. Good morning and thank you for joining us. We had a solid first half of the year, and we continue on our exciting journey towards Moving Beyond Smoking. We completed our acquisition of NJOY and delivered strong business results, growing adjusted diluted earnings per share by 5% in the first half, and we returned $3.8 billion to shareholders while investing in pursuit of our Vision. We look forward to executing our commercialization plan for NJOY in the second half of the year, and we reaffirm our guidance to deliver 2023 full-year adjusted diluted EPS in a range of $4.89 to $5.03. This range represents an adjusted diluted EPS growth rate of 1% to 4% from a $4.84 base in 2022. My remarks this morning will focus on three topics

Billy Gifford :

Just quickly before we turn it over to the Q&A, I just want to apologize to those of you on the webcast for some audio issues we had early on in the call. So we will work to expedite the posting of our replay, so you'll have full access to the remarks. So with that, we'll turn to Q&A.

Pam Kaufman:

Hi! Good morning.

Pam Kaufman:

How do you think about the long-term industry volume outlook for the cigarette category? Cigarette industry volumes were down 8% in the first half of this year. Do you expect industry volumes will return to the mid-single-digit decline rate? And what would need to happen for them to normalize towards that level?

Pam Kaufman:

Thanks, that's helpful. And in your prepared remarks, you touched on some of the initiatives that you have to drive NJOY growth. Now that you've owned the business for two months, can you just elaborate on where you see opportunities to operate the brand more efficiently? And how are you thinking about the contribution from NJOY over the coming quarters and the level of investment that you'll need to make behind the brand?

Pam Kaufman:

Great. Thank you.

Operator:

And we'll take our next question from Bonnie Herzog with Goldman Sachs.

Billy Gifford:

Good morning, Bonnie.

A - Billy Gifford:

Well, certainly we’ve highlighted for you Bonnie that we'll be investing behind the NJOY brand as we expand distribution and have equity spending. I think the other thing is, look, the economy is very dynamic right now, and we've highlighted for you that the adult cigarette consumer is under extreme pressures, and we want the flexibility to adapt to them and be there for our consumers if necessary. So I think we'll see how the economy progresses and we'll see how the adult cigarette consumer returns to, if you will, more of a comfortable position from an economic standpoint.

Billy Gifford:

Yes, I won't go into details just for competitive reasons. Certainly we'll be, as I mentioned, really enhancing the brand equity to increase awareness amongst both adult vapors and adult cigarette consumers, and then we'll be looking for distribution. So both, filling distribution gaps, as well as improving the visibility of ACE in stores where it's currently distributed and then expanding to new stores.

A - Billy Gifford:

Yes, thanks. And I'll be careful to not talk about future pricing, but I think you can see like going from first to second quarter. We highlighted for you some areas of where we thought additional investment was necessary and you saw the significant result of those Marlboro increasing a tent sequentially. So we want that flexibility, but I would remind you that the RGM tools, so that price gap that you're seeing is on a national basis, and the RGM tools that we have in the advanced analytics allows us to monitor that price gap down to a very, very low level and we can be efficient with spend and even move spend around if necessary, around the U.S. So that's how we're thinking about it. From a standpoint of Marlboro itself, you see it continues to grow in the premium segment. It's performing very well. And as I highlighted for Pamela, we've seen instances of this in the history of when the consumer is under pressure that you see discount grow, you see premium from a total industry perspective, and then you see that moderate through time.

A - Billy Gifford:

Thank you.

Vivien Azer:

Good morning.

Vivien Azer:

So I'd like to start on your oral tobacco margins, please. Quite nice to see some year-over-year improvement given kind of the multiyear degradation we've seen in support of on! So Sal, I was wondering, can you just comment on how we should think about margins for oral tobacco in the back half? Thanks.

Vivien Azer:

Certainly. Thank you for that. And then for my follow-up question, Billy, nice to see the Marlboro market share advance sequentially, despite some of the heightened competitive activity that you called out from competitive premium menthol offerings. Do you – just given kind of the competitive backdrop, do you think that you need to have the Marlboro Black Gold in the marketplace longer than you had originally contemplated?

Vivien Azer:

Certainly. Thank you so much for that.

Operator:

And we'll take our next question from Matt Smith with Stifel.

A - Billy Gifford:

Good morning Matt.

A - Billy Gifford:

Yes, I wouldn't think of it as more volume under promotional. I think it's being more efficient and effective with that promotional spend. It's trying to get it to the individual consumers as close as we can get to that, that needs it, while not subsidizing adult cigarette consumers that don't need it. And I think you've seen that with both, the growth of Marlboro in the premium space, the investments we made first to second as Marlboro [ph] has the 10th sequentially bump and the price realization we're experiencing in the cigarette space.

A - Billy Gifford:

Yes, I think from a distribution we've got it in the stores and while you may see small fluctuations as we decide if we want to add additional stores and distribution, but we've got it to where we want it. You’ll recall we were capacity constrained from a manufacturing basis where beyond that it continues to grow. I would say that growth as we move forward, as it continues, even though we've been talking about it and you guys have been talking about it for a while, it's still fairly new to the consumer. So it is continuing to drive awareness and specifically trial. Once the consumer tries it, they enjoy the product. So that's where the growth will come as the success in achieving new consumers to the category as they transition. I think when you think about that transition through time, it's important to remember that you're looking at the consumer, specifically dippers that are moving currently in large amounts, but it's also talking to the cigarette consumer and it allows oral tobacco product to be available to consumers that previously rejected moist smokeless tobacco.

A - Billy Gifford:

Thank you.

Andrei Condrea:

Hi, good morning everyone. Thanks for taking my questions. Two from me please, if you don't mind. Firstly, when looking at the U.S. Cigarette industry, we saw that discount was stable on a sequential basis, bucking the trend from the past three to four years. How much of that do you think could be attributed to your Marlboro Black Gold for instance, and just increased promo activity from your NPS? Thank you.

Andrei Condrea:

Makes sense, thank you. And secondly, this is a bit more medium-term, but as you're pushing harder into vaping now with NJOY, illicit products are a problem on the market as flagged by one of your peers. What can you and said peer do more to, well, basically improve enforcements in the area and get those numbers down?

Andrei Condrea:

Very clear, thank you. I’ll pass it on.

Gaurav Jain:

Hi. Good morning, Billy. Good morning Sal.

Gaurav Jain:

Hi. A couple of questions from me. So one is on the e-cigarette industry growth, clearly disposables are cannibalizing closed end e-cigarettes. So why are you launching the NJOY ACE and not the NJOY daily product? In that context, can you also just tell us where you are with the PMPA application of the next gen product, which is – which you have mentioned you have filed.

Gaurav Jain:

Sure. Thank you. And can you also update us on this Juul patent litigation that they have filed against NJOY, which I found very surprising, considering I thought you would have – when you walked away from June, you would have gained access to all their IP. So could you just help us understand what's happening there?

Gaurav Jain:

Okay, sure, and if I could just sneak in one last one, because you mentioned that on! PLUS you will launch in Sweden even if it is targeted. Would you also be looking at launching NJOY internationally at some point of time?

Gaurav Jain:

Well, thank you so much.

Operator:

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

Operator:

This concludes today's call. Thank you for your participation. You may disconnect at any time.

Operator:

Good day, and welcome to the Altria Group 2023 First Quarter Earnings Conference Call. Today’s call is scheduled to last about one hour, including remarks with Altria’s management and a question-and-answer session. [Operator Instructions] Representatives of the investment community and media on the call will be able to ask questions following the conclusion of the prepared remarks. I would now like to turn the call over to Mac Livingston, Vice President of Investor Relations with Altria Client Services. Please go ahead, sir.

Billy Gifford:

Thanks, Mac. Good morning, and thank you for joining us. We are off to a strong start and believe our businesses are on track to deliver against full year plans. Our tobacco businesses performed well in a challenging macroeconomic environment, and we announced exciting progress toward our vision. Highlights from our first quarter included strong adjusted diluted earnings per share growth of 5.4%, resilient end-market performance from our leading brands, including Marlboro and Copenhagen and continued volume and share growth from on!, and announcements made at our Investor Day, including updates on our pending acquisition of NJOY, the unveiling of our exciting smoke-free products in development, and the introduction of our 2028 Enterprise Goals. Let’s now review first quarter results in more detail, beginning with the macroeconomic environment and its impact on industry cigarette volumes. In the first quarter, consumer discretionary income levels remained under pressure due to the active effect of higher inflation over the past year. As a reminder, the cigarette industry experienced a higher rate of volume decline beginning in the second quarter of 2022 as smokers shifted their purchasing behavior as a result of widespread inflation and the rapid increase in gas prices that were exacerbated by the Russian invasion of Ukraine. While gas prices began to recede in the second half of last year, higher inflation persisted across other goods and services and cigarette volumes remained under pressure. Moving into the first quarter of 2023, the cumulative effects of inflation over the past several quarters continued to impact tobacco consumers’ discretionary income and tobacco industry volumes. We will continue to monitor these factors and their impact on tobacco consumers as we progress throughout the year. Sal will provide additional color on industry volume in his remarks. Let’s now turn to the oral tobacco category. We are excited by the continued growth of oral nicotine pouch products, which grew their share of the total oral tobacco category for the 20th consecutive quarter. Oral nicotine pouches grew 7.1 share points year-over-year and now represent 26.2% of the oral tobacco category. Encouragingly, continued oral nicotine pouch growth was the primary contributor to the estimated 1% increase in total oral tobacco volumes over the past six months. Helix grew on! reported shipment volume to 25.2 million cans during the first quarter, an increase of 38%. On! continued its momentum at retail growing its share of the total oral tobacco category by 2.4 share points to 6.5% and on! continued to grow its share of the nicotine pouch category, reaching 24.6% in the first quarter, up 3.3 percentage points. Notably, on outgrew Zen sequentially on an absolute basis in 50,000 stores. Helix delivered these impressive results as on!’s retail price grew 7% sequentially and 32% versus the year-ago period. We believe on!’s ability to continue to grow share while effectively reducing its promotional investment demonstrates the strength of its product portfolio and brand equity. Helix is continuing its focus while strategically investing behind the brand as the category grows and remains committed to achieving profitability in 2025. Let’s now move to e-vapor, which has been the most successful category in the U.S. in transitioning smokers to alternative products. We believe the category is continuing to undergo a significant reset, and we estimate that first quarter e-vapor volumes decreased 11% versus a year ago and 1% sequentially. We have observed a decline in traditional multi-outlet and convenience channel volumes, which we believe is primarily a result of the FDA marketing denial orders issued for JUUL and myblu. This volume decline has been partially offset by increased volume in nontraditional channels, such as e-commerce and vape stores. We are excited about our pending acquisition of NJOY and its portfolio of e-vapor products. NJOY is the only company to receive a marketing granted order for pod-based product. We continue to believe the strength of our commercial resources can benefit smokers and vapors across the U.S. and expand smoke-free competition in stores where NJOY ACE has not been distributed. The completion of the NJOY transaction is subject to customary closing conditions, including clearance from the Federal Trade Commission. Moving to the regulatory environment. We remain optimistic about the future of harm-reduction in the U.S., and we continue to encourage the FDA to make more progress for the benefit of the 47 million tobacco consumers. In February, the FDA provided a response to the Reagan-Udall Foundation’s assessment of FDA’s tobacco operations. We are encouraged that the agency recognizes some important areas for improvement, including developing and communicating a five-year strategic plan, improving transparency and defining more efficient pathways, increasing enforcement of marketing denial orders and exploring ways the agency can and should address nicotine risk perceptions through communication. We look forward to learning more details on these efforts. In addition, FDA enforcement is critical to making continued progress toward reducing youth usage of e-vapor products. The FDA has the necessary enforcement tools. And we encourage them to take the appropriate action against noncompliant manufacturers. We continue to believe that harm reduction, not prohibition is the best path forward and we have made this clear in the public comments we submitted in response to the FDA’s proposed menthol ban. Our comments highlight the many unintended consequences of prohibition, including the adoption of adulterated and unregulated products and the development of illicit markets. Unfortunately, we believe a number of those consequences are playing out in California, where a ban on flavored nicotine products went into effect in late 2022. Our operating companies immediately ceased the shipment of products to California wholesalers that we determined were not compliant with the law. That brand’s continued to perform well in the state with Marlboro and Copenhagen growing retail share sequentially. However, we remain concerned with the lack of enforcement in the state as some flavored products remained in the market. We also believe some manufacturers have introduced new products, or rebranded existing ones to sidestep the purpose of the law. In March, menthol cigarettes still represented nearly 40% (sic) [4%] of the volumes sold in the multi-outlet channel in California, an increase of 1.3 percentage points from January. Additionally, we have seen evidence that some California smokers are self mentholating their cigarettes using alternative products such as flavor cards and menthol drops. We have also observed flavored e-vapor products in the market that appear to have been renamed to mislead state regulators. And trade dynamics in surrounding states suggest that some smokers are crossing state borders to purchase menthol products. For example, the share of menthol in Nevada increased 1.3 percentage points sequentially in the first quarter to 37.4%. We believe this is significant as the total share of menthol in Nevada has not been greater than 36.5% over the past four years. Compliance remains a top priority, and our government affairs teams are engaging with California government officials to encourage them to enhance enforcement and to hold all manufacturers to the same standard. Our goal is for policymakers to embrace harm reduction as the proper framework for tobacco and nicotine product regulation. In fact, public opinion strongly favors harm reduction over prohibition, and science shows a significant public health benefit of moving smokers away from combustible products toward a smoke-free future. As we described at our Investor Day, we are continuing our efforts to create the conditions for harm reduction to succeed through advocacy, engagement and our actions. I believe we are well positioned for success in 2023 and beyond. And while the external environment remains dynamic, I am confident that we have the tools in place to succeed. We have amazing brands, sound strategies and most importantly, talented indebted employees. With these things in mind, we reaffirm our guidance to deliver 2023 full year adjusted diluted EPS in a range of $4.98 to $5.13. This range represents an adjusted diluted EPS growth rate of 3% to 6% from a $4.84 base in 2022 and excludes the potential financial impacts of the pending NJOY transaction. I’ll now turn it over to Sal to provide more detail on the business environment and our results.

Operator:

[Operator Instructions] Our first question comes from Bonnie Herzog with Goldman Sachs.

Billy Gifford:

Sure. Thanks for the question, Bonnie. I think, I’ll try to take it in part. So, I think when you think about the consumer, we tried to highlight in our remarks where you’re seeing the cumulative impact of high inflation across all of their spending categories. So it’s not just high inflation in the quarter, it’s the cumulative impact of that through time. I think certainly, you’re seeing interest rates climb, which is impacting consumers, mortgages, credit cards, car loans. And underneath all that, to respond to the consumer, we are seeing accelerated debt as well as decline of savings rates. So they’re using what they have available to them. But it’s the cumulative impact of that. It’s not new to the cigarette space. I think you can go back in history a bit, and we see other instances where the consumer came under extreme pressure. You can look at the ‘08, ‘09 period or the ‘01, ‘02 period, and you see where the consumer -- in those instances were under pressure because of the recessions that were taking place. Here, the other factors I described, we feel like we have the tools in place. I think you see the resiliency of Marlboro in the marketplace, gaining share in the premium space. Certainly, we’ve seen competitors, I’ll call it using your term, Bonnie, share at the bottom, where they’re pricing some of their discount brands at deep discount levels. And really, if you think about our strategy in the cigarette space, that’s to maximize profitability over the long term while making appropriate investments in Marlboro and the growth areas. I think when you think about the question about price elasticity, yes, we made the minor investment at Investor Day. But if you look at even the decomposition that we provided in our metrics, you can see that’s been pretty consistent over the past four periods that we showed on a 12-month moving. We really don’t see anything there from a standpoint of the consumer -- any changes in the price elasticity other than the minor adjustment that we made going into Investor Day.

Billy Gifford:

Yes, I appreciate the question, Bonnie. And I’m sure you’ve seen with your connections to retail as part of that price announcement, we also made a separate announcement making some adjustments to promotional spend in the marketplace. Those adjustments are really down at the local level. And what we are seeing were pockets of area where we felt like Marlboro menthol was under pressure and Sal highlighted in his remarks, stepped up promotional spend by a competitor in the menthol space. So, we’re making some adjustments there using various packings within the Marlboro franchise depending on what resonates with the consumer in those localities. Some of the other adjustments are related to, exactly your question, where we see the consumer under extreme economic pressure, and we’re making some adjustments within the Marlboro franchise on promotional spend to counteract and give them a place where they can continue to engage with Marlboro. It’s not new. We’ve done this before, Bonnie. I’m sure you’re well aware, whether you think about Marlboro Special Blend in history, which is now Special Select in the marketplace. What it allows us to do is to keep the consumer who aspires to be a Marlboro consumer, engage with Marlboro, and then as their economic conditions change, we can actually shrink that promotional discount to the Marlboro mainline. And what we see through time is it’s actually much more efficient and effective because we see in going back in history when we did it with Special Blends, some of the consumers as we shrunk that discount popped back to mainline and some of them stuck with Special Blend because it was a flavor that they enjoyed. So, we feel like we have the tools available to us, and we’ll continue to monitor all those adjustments that we announced effective May were included in the reaffirmation of the guidance.

Vivien Azer:

Thank you so much for the incremental detail around California. That was particularly helpful. And I noted the intra-quarter commentary, the January through March, which I really appreciated, Billy. I was wondering whether you’d be willing to expand on any of that intra-quarter commentary. How did Marlboro share trends progress through the first quarter in California, if you wouldn’t mind commenting on that? Thanks.

Vivien Azer:

Understood. That’s helpful. Thank you. And I think encouraging to hear that you guys are going to be introducing Marlboro, I believe you said it was Black Gold pack. So, do you have a targeted ASP or a price gap relative to mainline Marlboro in mind, recognizing, of course, it will vary by geography?

Vivien Azer:

Perfect. And my last quick one. The call out about kind of some of the category dynamics relative to ‘09 and ‘01, make sense. I mean, it seems like in terms of premium share of segment, it’s basically where we were in ‘09. But I think one of the nuances of course is that in both of those prior periods, not only were their macroeconomic heads for the consumer, they were also compounded by the introduction of disruptive federal excise tax increases. So, how do you think about that, recognizing maybe this macroeconomic backdrop is incredibly nuanced because of COVID comps, but there’s not disruptive excise tax increases happening right now?

Operator:

[Operator Instructions] Our next question will come from Andrei Condrea with UBS. Your line is now open. We are hearing no response from the line. We will go to our next question. Our next question will come from Pamela Kaufman with Morgan Stanley.

Billy Gifford:

Yes. Vivien, I think I would really point you to price elasticity. And when you think about price elasticity, that’s the nature of a negative 0.35, is that for percent that you increase price, you expect that 0.35 impact on volume. So it’s much, much lower than other industry categories in the CPG space. You can see in the decomposition we try to break down what’s taking place in the cigarette category. You see secular declines pretty steady. The big factor is macroeconomic that swings around. I think if you go back in history, you’ll see macroeconomic, the conditions that the consumer is under will swing it up or down. You can recall in 2015, I think you were asking us, did we expect volume to stay flat for a period of time? These are natural fluctuations that take place as the consumer experiences their economic conditions differently, sometimes under pressure and sometimes they have a one call. So it’s natural. We’ll continue to monitor and make the adjustments that we feel appropriate. I mentioned in earlier answers some of the adjustments we’re making going into May, down at the local level where we see different conditions for consumers versus just a homogeneous, if you will, condition of the consumer across the entire U.S. That’s some of the benefit of the tools and the analytics team that we have is we can make those adjustments down at the granular level.

Billy Gifford:

Yes. I appreciate it, Pamela. Certainly, we’re going to participate, but we’re premium focused. I would remind you that the strategy hasn’t changed in the cigarette space for us. It’s maximize profitability over the long term while making appropriate investments in Marlboro and into the growth areas. You may have heard in my previous answer, it’s not something that is new to the cigarette space. I pointed to a couple of time periods where we saw similar things. You see as the economic conditions for the consumer change through time, it tends to revert back on a historical perspective. So again, we want to be there for our consumers. It’s really about keeping the consumer engaged with Marlboro, whether they want to stay with Marlboro long term or whether we put them on the journey to the smoke-free products in our portfolio. And so, it’s really about continuing to engage with the consumer through time.

Andrei Condrea:

I have two. The first one is just on the California menthol ban because obviously, this isn’t the first flavor than we’ve seen in the U.S. on a state level. But if you were to just -- net-net, the impact you’ve seen in California versus other neighboring states, could you hazard a guess as to the impact on the total U.S. level just in terms of the haircut?

Andrei Condrea:

No, that’s fair. Thank you. And my second one is it’s a bit more long term. Thinking about your international expansion with your heated tobacco capsules, but most of your nicotine pouches, whether it’s on! PLUS or on!. Are you seeing any feedback for the time being on your current on! pilots, because I know you’ve got one going on in London. I’m just wondering if you will take rather the foot off the pedal until you get on! PLUS online?

Operator:

[Operator Instructions] Our next question will come from Matt Smith with Stifel.

Billy Gifford:

Nothing that I would point out as trend break. You always have consumers moving around. And that’s really -- goes back to what I was referring to as far as advanced analytics. Depending on the situation of the consumer in a locality, they’re going to face different pressures than other parts of the U.S. And so you’ll see fluctuations at the local level around the U.S. and sometimes they’re in sync with each other and sometimes they’re counter to each other as far as what way the consumer is moving and what they’re feeling. I think overall, though, the takeaway right now is with the adjustments that we’re making to our promotional spend in some locales, we’re seeing a more widespread of the consumer being under economic pressure. And I highlighted some of the reasons we believe that it’s occurring, and we want to keep the consumer engaged with Marlboro.

Billy Gifford:

We know that the consumer aspires to be Marlboro. You heard my comments earlier about in the pandemic when they had extra discretionary income, Marlboro share actually went up. So it shows that Marlboro is an aspirational brand in that category. And so, it’s to do both. If consumers had felt the need to trade out because they were under economic pressure, it gives them a space within the Marlboro franchise where they can reengage or if a consumer comes under pressure, it gives them a space to continue to engage with Marlboro. So, it’s really about the engagement with the consumers that want to choose Marlboro as their brand.

Jennifer Maloney:

Hi. I wonder if you could explain to me what you think is going on in California with respect to the increase in menthol share to 40%. So I’m trying to like imagine what’s actually playing out in stores. Is it like consumers are finding retailers who still have menthol cigarettes on the shelves and then they’re stocking up a lot because they think that it might not be available soon, or what do you think is going on there?

Jennifer Maloney:

Overall in California are cigarette volumes down more than you would normally expect with any absence of a menthol ban?

Jennifer Maloney:

No, go ahead.

Jennifer Maloney:

Right. So, you highlighted Nevada, and I wonder is there -- can you quantify the uptick in volumes in all of the bordering states that might -- that might mitigate somewhat the decline in shipment volumes in California?

Operator:

Thank you. This appears to be no further questions at this time. I will now turn the call back over to Mac Livingston for closing remarks.

Operator:

This concludes today’s call. Thank you for your participation. You may disconnect at this time.

Operator:

Good day, and welcome to the Altria Group 2022 Fourth Quarter and Full Year Earnings Conference Call. Today’s call is scheduled to last about one hour, including remarks by Altria’s management and the question-and-answer session. Representatives of the investment community and media on the call will be able to ask questions following the conclusion of the prepared remarks. I would now like to turn the call over to Mac Livingston, Vice President of Investor Relations for the Altria Client Services. Please go ahead, sir.

Billy Gifford:

Thanks, Mac. Good morning. And thank you for joining us. It was an exciting year for Altria as our businesses delivered strong financial performance, and we continued to strategically invest toward our vision. We grew our adjusted diluted earnings per share by 5%, and our tobacco businesses remained resilient and successfully executed their strategies. We also returned significant cash to shareholders through dividends and share repurchases. Last year, we returned more than $8.4 billion to shareholders, outpacing our record returns from 2021 and representing the largest single year cash return since 2002. Our vision guided our actions, and we believe we made meaningful progress on our journey toward moving beyond smoking. Our teams took several steps forward during the year, including accelerating the growth of on! nicotine pouches, creating long-term optionality for our inhalable smoke-free product portfolio, enhancing our digital consumer engagement and continuing to advocate for tobacco harm reduction. Helix grew on! reported shipment volume to 82.5 million cans during its first full year of unconstrained manufacturing capacity, an increase of more than 70% versus the prior year. At retail, on! share momentum continued in the fourth quarter as the brand reached 5.9% of the total oral tobacco category and 24% of the nicotine pouch category. This impressive performance was driven by continued increases in brand awareness and adoption by smokers and dippers. Additionally, we believe Helix effectively managed on! promotional spend as the year progressed and reduced on! promotional spend per can by approximately 15% during the second half of the year compared to the first half. In oral tobacco product development, we are excited to announce we have finalized a new product design, which will provide tobacco consumers more smoke-free options within our portfolio. We also began regulatory preparations for the product, and we are encouraged by the initial research results and the response we have received from dippers and nicotine pouch users. We look forward to sharing more details and unveiling this innovative product at our Investor Day next month. Turning to our inhalable smoke-free portfolio. We created long-term optionality in the heated tobacco and e-vapor spaces. Internally, we have not yet finalized the design of our heated tobacco capsule product, but our teams continue to make progress. The consumer remains the focal point of our innovation system and our teams are tailoring the product to appeal to smokers who have not yet found a satisfying alternative to cigarettes. We also look forward to unveiling this exciting new product at our Investor Day next month as well. And in October, we announced a strategic partnership with JT Group, including a joint venture for the U.S. commercialization of heated tobacco stick products. We’re encouraged by the initial collaboration between our teams and the pace at which they are operating. Horizon is optimizing team for the U.S. market and plans to begin regulatory preparations later this year. We’re excited about the opportunity and are working diligently to bring Ploom to smokers in the U.S. In e-vapor, we previously announced we elected to be released from the noncompete obligations related to our JUUL investment. We retain our economic stake in JUUL. E-vapor remains the largest smoke-free category in the U.S. and the most successful category in transitioning U.S. smokers away from cigarettes. We believe the category can play an important role in harm reduction, and we’re continuing to evaluate all options to best compete in the category. Next, let’s discuss the progress we made to enhance our digital consumer engagement. We launched a new digital trade program last spring, and we believe this program enhances our ongoing commitment to responsible retail. The program includes multiple participation options for retailers. For those participating at the highest level we introduced incentives for retailers to include age and identity verification solutions in their digital platforms. And once the consumer is verified, retailers can then provide offers and messaging from our brands within the retailer’s app. I’m excited to share that we implemented these solutions in more than 33,000 stores, exceeding the goal we outlined last year at CAGNY. Currently, consumers can view offers from our smokeable and more smokeless tobacco brands. But going forward, we expect to expand the program to include on! and other smoke-free brands. As we continue to broaden our digital reach, data will help us better understand each smoker’s journey and help them successfully transition to other smoke-free alternatives in our portfolio. Moving to the regulatory environment. We remain optimistic about the future of harm reduction in the U.S. We believe we have an unprecedented opportunity to lead the way in shifting millions of smokers to smoke-free alternatives, if we follow the science and foster innovation with the support of reasonable regulation. In December, the Reagan-Udall Foundation published its operational evaluation of the FDA’s Center for Tobacco Products. We were among the stakeholders who provided input into this evaluation. Among its recommendation, the report urges the FDA to clearly define product pathways and accelerate PMTA decision-making, take enforcement actions against manufacturers and products in violation of the law and address the need for risk communications to tobacco consumers. We agree these are important opportunities and believe that the FDA should direct its focus toward implementing a framework to advance harm reduction, rather than focusing on prohibition policies that we believe will further expand the illicit market and create other unintended consequences. Let’s now move to the operating environment. We estimate that total equivalized tobacco volumes declined 6% for the year and 1.7% over the past five years on a compounded annual basis. Combustible volumes declined by an estimated 7.8% last year as smokers faced increasing economic challenges. We are encouraged that smoke-free volumes were stable compared to the prior year at 3.8 billion equivalized units and now represent an estimated 26% of the total tobacco space. E-vapor has been a major contributor to the growth of smoke-free products over the five-year period. Although volumes declined by an estimated 1% year-over-year amid considerable regulatory uncertainty such as the FDA from denial order and subsequent temporary stay on JUUL products, which caused market disruptions for both consumers and retailers. In oral tobacco, volumes grew by an estimated 1.5%, driven by the continued adoption of all nicotine pouches. Turning to our financial outlook. Our plans for 2023 include a continuation of our strategy to balance earnings growth and shareholder returns with strategic investments towards our vision. For 2023, our planned investment areas include

Billy Gifford:

Thanks, Sal. While the calls are being compiled, I’ll remind you that today’s earnings release and our non-GAAP reconciliations are available on altria.com. We’ve also posted our usual quarterly metrics, which include pricing, inventory and other items. As we mentioned during the call, we have exciting topics to discuss at our Investor Day next month. We look forward to having a fulsome conversation about our smoke-free future and we are excited to share more about our journey toward moving beyond smoking. Todd, we’ll now transition to the Q&A period.

Vivien Azer:

So, I just wanted to start with the industry volume backdrop. I recognize you guys have kind of suspended the historical practice of offering industry guidance, and that makes good sense to me. But just hoping to get some color on how you’re thinking about the potential impact of the menthol ban in California if you think that’s an incremental headwind for the year. Thanks.

Vivien Azer:

Fantastic. Thanks for that. And then just pivoting to the oral tobacco segment, encouraging to hear some rationalization on the on! promo having fallen 15% in two half ‘22. Can you offer a little color on where that positions on! relative to the competitive set?

Vivien Azer:

Perfect. And just one last one for you, Sal, please, I recognize it’s premature for us to start modeling royalties from the IP litigation with British American Tobacco because there’s certainly an appeals process. But if you could just contextualize how we should be thinking about that incremental revenue stream as litigation draws to a conclusion, please? Thank you.

Operator:

Our next question comes from Pamela Kaufman with Morgan Stanley.

Billy Gifford:

Yes. Vivien, I know you’re looking for -- I’m sorry, Pamela, you’re looking for guidance on upcoming volume. Let’s talk about the headwinds and tailwinds as we progress through the year. I’ll talk about the consumer first because that’s the most important when you think about volume. I think the consumer remains under pressure. We tried to highlight that it was the compounding of the inflation’s impact as we progressed through 2022. I think you’ve heard as many predictions as I have had soft landing, no deep recession. So, I think even the experts from an economist standpoint are all over the board. We feel good about the guidance that we put out. We feel good about where the consumer is, but we want the adaptability and the flexibility to be able to move with the consumer needs. So I think the consumer will remain under pressure until we see some relief, if you will, from inflationary pressures in the marketplace. Gas prices is just one aspect. That’s -- we certainly have seen a decline, but nowhere near the lows we were seeing as we were pre-pandemic levels. So, gas prices can move around depending on China reopening and things of that nature. So, we’ll see where that goes. I think when you think about volumes, it’s specifically combustible volume. It’s important to remember that what we’re looking at is how the consumer is impacted. Tobacco, the industry is not immune to macroeconomic environment. It’s just less impacted than other industry categories. And so, from that standpoint, historically, what we’ve seen, Pamela, is that as the consumer is experiencing this rapid change in their economic condition, whether up or down, they make changes in their purchasing behavior and then it becomes more comfortable to them through time and they adjust various factors in their purchasing basket. So, it remains to be seen. We’ll see how the macroeconomic shapes up. But I would say that’s the biggest thing and how that macroeconomic impacts purchasing behavior.

Billy Gifford:

Yes. I think, the last comment you made, I would say there’s a slight shift. We’re very excited about the guidance we put out. I think when you think about it, it’s really the uncertainty around the macroeconomic environment was the biggest impact to the overall guidance. And you’ve mentioned it and you asked about that earlier. It’s where does the macroeconomic environment go through as we progress through 2023 and how does that specifically impact our tobacco consumer across all categories?

Bonnie Herzog:

I had a question about your pricing. Just thinking about the strength in your net price realization and smokeables over the past several quarters, it’s been so darn robust. So I just wanted to hear from you how sustainable you think this is, especially in considering, I guess, the pressure on the consumer and some of the other things you called out?

Bonnie Herzog:

Yes. That’s actually super helpful. And that was going to be a question. I’m pleased you kind of walked through the gap. That’s useful context. Just switching gears, if I may, a question on your oral tobacco business. You highlighted how strong on! volume growth has been and -- but in the context of that, your total oral tobacco revenue and profit growth has been under pressure with a fair amount of margin contraction. So, you did sort of touch on this. But hoping maybe you could talk a little bit further about maybe your strategy for turning around the entire oral tobacco business. Any key initiatives that you could highlight for us, and maybe you’ll talk about this more in March?

Bonnie Herzog:

Okay. Final one for me, just speaking of that. Any more color you could provide on your smoke-free vision today and maybe just how confident you are that you’re going to be able to deliver on your long-term strategy? I’m sure you’re going to talk through this in an investor meeting and I’m excited to hear about it, but any sneak preview as to what you’re most excited about?

Operator:

Our next question comes from Callum Elliott with Bernstein.

Billy Gifford:

Yes. I think it’s a great question. I appreciate it. I think when you think about where those investments show up, it’s important to remember, they’re not all incremental spend. They’re always puts and takes. They’re going to shift some of those -- the infrastructure that the combustible or traditional MST has bore the cost through history, and you’re going to shift that to the NGP space. We do have incremental investments around NGP product development, the regulatory preparations associated with that and the research associated with that. Here’s an example for you, Callum. If you think about like even the digital consumer engagement, that we’re implementing in traditional smokeable or combustible and MST, and we mentioned in the remarks being able to transition that over. So, you’ll see those costs will actually appear in the combustible and the smokeless before it appears in the NGP categories. So, there’s a lot going underneath the surface, if you will, from an investment standpoint. But there are always puts and takes. We’re trying to be wise with the investment but not restrict growing categories.

Billy Gifford:

Yes, we do believe that we’re trying to really be driven by the consumer, learning from the global marketplace of products in the marketplace and use those as, if you will, a launch point for products and really trying to meet what the desires and needs of the consumers are in the marketplace that aren’t met by those existing products in the marketplace. And so, we feel like we can achieve the vision. We’ve highlighted for you guys that we really believe we can navigate strong returns to shareholders at the same time, making the appropriate investments in these growing categories. And we believe we can do that. I think you’ll continue to hear us talk about investments, and we’ll provide a lot more detail of some of the progress we’ve made at Investor Day.

Gaurav Jain:

Hi. So, I have three questions. So, first one to you, Billy. We will have a new competitor next year in the U.S. market with IQOS. And when you were distributing IQOS, then the volumes were much lesser than any of us had expected. So, what did you find were the challenges when U.S. consumers came to IQOS?

Gaurav Jain:

Sure. The next question and perhaps to you, Sal, is around MSA payments next year and how we should factor in inflation? And if you could just help us understand because I think there is confusion that how does that 3% number work versus inflation, or is it the change of inflation that we should be looking at?

Gaurav Jain:

Sure. And my last question is on share repurchases for next year, which at $1 billion or below what we thought and I think where most people were. And even though your EBITDA is growing -- you’re generating free cash flow after dividends, your leverage will anyway be down when you have the ABI stake. So, what mix you buy $2 billion of stock and not $1 billion?

Operator:

Our next question will come from Chris Growe with Stifel.

Billy Gifford:

Yes. They’re great questions, Chris. I think when you think about the resilience here at Marlboro, we’re very pleased with it. We’re pleased with how it’s positioned with the consumer. We are pleased with that. It’s still the aspirational brand within the cigarette space. I think when you think about your question on promotions, I would point to you that the high price realization actually shows that we’re able to be more effective and efficient on our Marlboro price promotion. I think it may be useful that -- I talked about Marlboro Red and Gold versus some of the price sensitive, but some of the tools that we have in place actually allow the precision. So, I’ll just walk through a quick example with three consumers. You have one consumer that’s purchasing premium brands and occasionally pops up and buys a discount brand. The other consumer is continuing to flip flopping between premium and discount. And the third consumer is a discount consumer that occasionally pops up and smokes a premium cigarette. When you think about those consumers, you’re going to treat those differently to make them more of a continuous premium brand smoker. That discount smoker, you may never be able to get them to convert to a premium because of the condition -- the economic condition that they’re in. So, as we move to personal value delivery as close as we can get to the consumer, we can tailor that across those three. And so that’s where I refer to the price that being at the national level. We’re doing this down at the local level and on our journey to move as close as we can get to the consumer. And so, that allows us to have Marlboro be resilient, address the consumers’ needs on a case-by-case basis, if we can get really close to the consumer and spend those resources accordingly to have a more consistent premium consumer through time.

Sal Mancuso:

Yes, Chris, I’ll be -- so let’s talk about pensions for a moment. If you think about pensions, obviously, there’s a P&L impact related to return on assets, changes in discount rate, but I would say the pension is really well funded. We have strong funding in that pension plan. It’s actually fully funded. So, we feel really good about that. And I would say the changes in pension expense I’ll remind you a noncash. We have successfully completed the wind-down of PMCC. So, you are correct in that we had earnings and cash flow last year, and this year we will not. And it is a year -- on a year-over-year basis is a slight lag. But remember, PMCC was part of our all other category. It was -- so we consider it fairly immaterial to the total earnings of Altria.

Andrei Condrea:

One for me, please, if you don’t mind. On your smokeless business, especially on what we’ve seen, the brand has been driven by strong discounting versus the main peer. Now, do you expect that to continue going forward or rather just closing the price gap between you and your main peer, even if you put your product -- promo spend per can is decreasing? Thank you.

Andrei Condrea:

That’s very clear. Thank you. And yes, you are completely right. It has been fantastic progress for one. And if I could squeeze in just one more if you don’t mind, is that Marlboro has indeed done very well, and congratulations for that. But for the rest of your portfolio, as small as it is versus Marlboro, what steps are you taking to defend your market share versus pressure, both from peers on the very top end of the price and the bottom end? Thank you.

Operator:

[Operator Instructions] Our next question comes from Priya Ohri-Gupta with Barclays.

Sal Mancuso:

Yes. Priya, first, I’m going to start my answer by just reiterating, I really have nothing to report. And as it pertains to ABI, we continue to believe holding the asset is in the best interest -- long-term interest of our stakeholders. Second, I would tell you that while we have flexibility, it’s really a market-by-market analysis and a transaction-by-transaction analysis related to what markets we may or may not enter as we think about managing our debt going forward. So, that’s kind of how I would answer your question.

Jennifer Maloney:

My first question is about your JUUL valuation. I saw that you lowered the value of your stake to a price that values JUUL at $714 million. I wondered if you could explain the reasoning behind that valuation decrease. I was a little surprised because in the fourth quarter, JUUL resolved a large part of the litigation that it faced, which eliminated some of the uncertainty around the company. So, could you explain that valuation?

Jennifer Maloney:

So, things like inflation and possible recession?

Billy Gifford:

You’ll note, Jennifer, when you build a discount rate, it starts with a risk-free rate. So certainly, the interest rate increases we’ve seen through time are going to continue to impact it as long as they’re still on an upward trajectory.

Billy Gifford:

Yes. It’s a great question. What we’re seeing is as we see mobility increase, if you will, the U.S. is coming out of the COVID pandemic, we’re actually seeing a return to more frequent trips. Remember, our consumer pre-COVID would go either every day or every other day. I think what you’re seeing and what consumers tend to do when they get under economic pressure is they reduce their number of nicotine occasions in a day. So through time, that factors into their purchasing behavior. You see a little bit, and we highlighted that, which was the consumers that are under dire economic conditions at times will either switch out or trade out to a cheaper brand. We try to give them a safe landing place within the Marlboro franchise. But as far as a number of trips, we haven’t seen a reduction in the number of trips. It’s more about through time, reducing their nicotine occasions.

Billy Gifford:

That’s correct. So remember, as we came into the -- there’s no change in the overall trend, if you will, the long-term trend. As we went through COVID and there was less mobility, less societal pressures, we actually saw what we believe nicotine occasions go up. We see in -- when the economic conditions and the macroeconomic environment is greatly impacting the consumer, they will strict their nicotine occasions. As they become more comfortable with that they tend to return to a normal trend.

Mac Livingston:

Thanks to everyone for joining us. Please contact the Investor Relations team if you have further questions. Thanks, and have a great day.

Operator:

Good day, and welcome to the Altria Group 2022 Third Quarter and Nine Months Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by Altria's management and a Q&A session [Operator Instructions]. Representatives of the investment community and media on the call will be able to ask questions following the conclusion of the prepared remarks. I would now like to turn the conference over to Mac Livingston, Vice President of Investor Relations for Altria Client Services. Please go ahead, sir.

Billy Gifford:

Thanks, Mac. Good morning, and thank you for joining us. This is an exciting moment on our journey towards moving beyond smoking. Our tobacco businesses remained resilient during the first nine months of the year, and we continue to reward shareholders while making investments in pursuit of our vision. We have deepened our consumer understanding, enhanced our capability and built the science to support smoker transition away from cigarettes. The tobacco harm reduction opportunity remains in front of us, and we continue to believe Altria is uniquely positioned to responsibly lead adult smokers to a smoke-free future. Our remarks this morning will focus on our progress to date and several exciting steps we have recently taken that we believe will accelerate our progress toward harm reduction. I will then turn it over to Sal, who will provide further details on our business and financial results. Let's begin with the heated tobacco category. Last week, we entered into an agreement with Philip Morris International, under which we will receive $2.7 billion in cash in exchange for assigning our exclusive US commercialization rights to the IQOS system at the end of April 2024. We believe this agreement provides us with fair compensation and greater flexibility to allocate resources toward moving beyond smoking. The heated tobacco category is still undeveloped in the US, and we believe we can lead in this space supported by our robust infrastructure and deep understanding of the US tobacco consumers. This morning, we announced the pursuit of a global smoke free partnership with JT Group. We signed a nonbinding memorandum of understanding with JT signifying the commitment of both parties towards further smoke free collaboration. JT is a leading international tobacco company committed to investing and growing and reduced risk products. We believe that together, Altria and JT can accelerate global harm reduction by collaborating on all the product development and global commercialization of smoke free products. We believe this potential collaboration can leverage the strengths and resources of both companies to transition more smokers away from cigarettes. As a first step in this partnership, we announced the formation of Horizon Innovations, a joint venture between Altria and JT for the US commercialization of heated tobacco stick or HTS products. We believe that HTS products can appeal to certain smokers as they provide a more familiar, tactile and sensorial experience to cigarettes. Under the terms of the JV, both parties will combine their scientific and regulatory expertise to jointly prepare PMTA filings for the latest version of the Ploom HTS products, which are not yet commercially available. The parties expect to file a PMTA in the first half of 2025. Upon authorization, Horizon will become the exclusive entity through which the parties market and commercialize stick products in the US. JTI will supply Ploom Heated Tobacco Stick devices and PM USA will manufacture Marlboro HTS consumables for US commercialization. The parties have agreed to commercialization milestones for Horizon, which include distribution requirements and minimal levels of cumulative marketing investment. Under the financial terms of the JV, PM USA has a 75% economic interest in Horizon with JTI having 25%. We're excited about the prospect of introducing the latest version of Ploom HTS products to US smokers. JT has demonstrated success innovating in the heated tobacco space. For example, JT launched Ploom X last year in Japan. And since its introduction, JT's doubled its share of the Japanese HTS segment. JT estimates that there are more than 1 million Ploom X consumers and according to their research, these consumers perceive Ploom X as a stylish, credible and unique brand. Consumers also describe the product as easy to use. We look forward to bringing the newest version of this exciting product to US smokers. We have discussed our increased focus and investment on an internal wholly owned heated tobacco product development. Our approach puts the consumer at the center of everything that we do. We receive more data on their preferences, purchasing patterns and friction points than we ever have. Additionally, we embedded our regulatory sciences team early in the process to align our product development efforts with FDA expectations. We believe these efforts are building a promising pipeline of wholly owned heated tobacco products and intellectual property consisting of heated tobacco capsule or HTC formats and new to market technologies. We believe capsule products can appeal to smokers who are open to novel, smoke free products but have not yet found a satisfying alternative to cigarettes. This audience includes the millions of US smokers who tried but ultimately rejected e-vapor products. We expect to finalize the design of our first capsule product by the end of this year, and we expect to follow PMTA by the end of 2024. We also expect to partner with JT to launch this product in an international test market using JT's sales and distribution network. We plan to share more on this product platform once the design is finalized. We believe moving beyond smoking in the US requires multiple FDA authorized products within a smoke free category to appeal to a diverse range of smokers and help them transition away from cigarettes. We believe that our pipeline of heated tobacco products and partnership with JT combined with the internal capabilities I described earlier, positions us well to increase adoption of smoke free products for the millions of smokers interested in these products. Let's now move to the e-vapor category. In the third quarter, total estimated e-vapor volumes declined by 4% versus a year ago and were flat sequentially. We believe the regulatory uncertainty related to JUUL caused market disruptions in the quarter, and we observed a reduction in JUUL purchases throughout the supply chain. We previously disclosed that we have exercised our option to be released from our noncompete obligations related to our JUUL investment. While we retain our 35% economic stake in JUUL, we're exploring all options to build an FDA authorized portfolio of e-vapor products that will help smokers transition away from cigarettes. For example, our teams are conducting consumer research, performing external scans and evaluating internal product development options. We're excited about the opportunity to increase our participation in the largest smoke free category in the US. Turning to oral tobacco. We remain encouraged by the growth of novel oral tobacco products, which grew its share of the total oral tobacco category for the 18th consecutive quarter. The category grew 6.5 share points year-over-year and now represents approximately 23% of the overall oral tobacco category. In the third quarter, on! reported shipment volume increased nearly 70% to 21 million cans. And on! retail share increased [3.10s] sequentially reaching 5.2 share points of the oral tobacco category in the third quarter. We believe these strong results were driven by increased brand awareness and adoption of on!, supported by continued equity and promotional investment. Building on its second quarter launch of the [carry on!] brand equity campaign, Helix recently introduced on! Rewards, a digital program that enables on! consumers to track the rewards balance online and redeem their points for coupons or other items. We're excited about on!'s continued momentum, increasing brand loyalty and the opportunity for future growth. Let's now turn to our view of the regulatory environment. We continue to believe that more should be done to advance harm reduction in the US, and that the FDA should move more deliberately toward creating a market of authorized smoke free products to help accelerate smoker transition away from cigarettes. The fact remains that today only a small percentage of e-vapor volume has been authorized and no oral nicotine pouch products have received market authorization. We believe collaboration and accountability from all stakeholders are required for this market transition to take place. We also believe that smoke free products should serve as an offering for smokers, not an on ramp for youth users. We remain encouraged that youth smoking rates in the US are at the lowest levels ever recorded. In fact, the latest Monitoring The Future study estimated that in 2021 the combined past 30 day smoking rates among 8th, 10th and 12th graders was 2.3%, a nearly 92% reduction from its 1997 peak. Additionally, data from the 2022 National Youth Tobacco Survey indicate that while e-vapor usage remains high among middle and high schoolers, the levels were significantly lower than the peak observed in 2019. Per the 2022 NYTS survey, 50% of the middle and high school current e-vapor users indicated that they most often use disposable e-cigarettes such as Puff Bar. Moving forward, we hope to see timely science and evidence based determinations on pending PMTA applications across all smoke free categories and further enforcement on noncompliant manufacturers. Our journey towards responsibly moving beyond smoking continues and we are optimistic that the actions we have taken to date have strengthened our portfolio into three major smoke free categories. We have built a compelling portfolio in the heated tobacco, enhanced our ability to compete in e-vapor and continue to strengthen on!'s position in the oral tobacco category. And we believe that we are able to maximize the value of these actions by leveraging our existing scale and infrastructure, such as our manufacturing centers and sales force. For example, our flagship Richmond manufacturing center began production of oral nicotine pouches in 2020. We now expect to add production of heated tobacco sticks for our new JV. Our sales and distribution system driven by our world class sales force gives us the ability to responsibly market products in over 200,000 stores. And we have decades of experience navigating dynamic US regulatory and political environments through the strength of our regulatory and government affairs organizations. These functions, together with our many other talented employees, gives me confidence that we can achieve our vision. Before I conclude, I'd like to thank Leo Kiely for his distinguished service to Altria's Board. Leo has served on the Board since 2011 and will retire at the completion of his term early next year. I'd also like to welcome Jase Hernandez to our Board of Directors effective November 1st. Jase brings a significant and deep understanding of the tobacco landscape following his years as an investment analyst covering the tobacco industry. Jase will serve on the finance and innovation committees. I'll now turn it over to Sal to provide more detail on the business environment and our results.

Operator:

[Operator Instructions] We will take questions from the investment community first. Our first question will come from Bonnie Herzog with Goldman Sachs.

Billy Gifford:

Yes. So there was a lot in that, Bonnie. So I'll take them in reverse order. The HTC is 100% owned by us. It is not part of the JV. I think when you think about HTS and HTC, you've got this huge group of adult smokers looking for products that satisfy and meet their desires and needs. And so you have some that want a familiar experience as close as they can get to cigarettes, and that's where we believe the HTS product fulfills for them. There are other consumers and a lot of -- as we've pointed out before, a lot of consumers went over and tried e-vapor, so they were willing to go with a more novel type product. And we believe the HTC fulfills those desires and needs. So we actually see room for both to be successful and it actually allows us to reach a larger group of consumers that are looking to switch.

Billy Gifford:

I think -- look, we certainly are going to -- as we said previously, but remember, our overall strategy, even in the smokeable products category is to maximize our income through time but to make appropriate investments, both in Marlboro and balancing that with investments in the growth areas. So there are always puts and takes. I don't want you to think all of the investments that we make are completely incremental to the P&L. We’ve tried to leverage and we try to point out some of that in our remarks this morning. So for instance, the manufacturing center, where we expanded our production for on! in that facility. The heat sticks for the JV will be produced by the manufacturing center. So there you have the infrastructure in place. You have a strong talented group of employees that are familiar with running those machines. So you leverage some. So yes, there are investments and you have reallocation across the P&L, but it's not all incremental investment.

Billy Gifford:

Yes, I appreciate the question, Bonnie. I think you could think of most of that narrowing as the passage of time, right? We have more certainty because remember, we're on a quarter lag with ABI, and you saw them released results this morning. But certainly, it's no surprise that our consumers are under pressure and we want to maintain that flexibility, but nothing out of the ordinary that I would point out.

Pamela Kaufman:

I wanted to follow up on Bonnie's question and ask about how you're thinking about the evolution of the US tobacco market over the next five to 10 years? How do you think about the relative size of the e-vapor versus heat not burn categories over time? And now that you have greater flexibility to invest in e-vapor, given the noncompete termination with JUUL and the partnership with JT, how are you going to prioritize your investment between heat not burn and e-vapor?

Pamela Kaufman:

My second question is on ABI. You previously expected the shares to recover and decided to hold on to your investment when your lockup expired. It seems that now you expect this recovery to take longer than expected. So how does this impact your thinking around the investment? And does this further extend your plans to hold on to the stake, or does it increase their willingness to sell it at a lower price?

Pamela Kaufman:

And maybe if I could squeeze one more in. Can you just talk about what you plan to do with the proceeds from the IQOS termination agreement? And if there is any e-vapor assets that would be attractive to you to help accelerate your entry into the category?

Operator:

Our next question will come from Chris Growe with Stifel.

Billy Gifford:

Yes, Chris, thanks for the question. And you're right. We are excited about the opportunities we have in front of us. I think when you think about the time line for launch, so what we tried to provide you is when we would anticipate be enable to file PMTA then it will be dependent on how long it takes the FDA to authorize those products. I believe through time, those authorizations will become more predictable and quicker whether that's the next product that they authorize or it takes a couple for them to get used to the new categories remains to be seen. I think when you think about the launch internationally, yes, we're excited about the potential there for being able to test products in the live market in the international realm. We're excited about the ability to -- whether it's in any of the new categories to be able to leverage that. But I don't want to get ahead of myself. We mentioned the memorandum of understanding about future collaboration and we'll share more when it’s appropriate to share.

Billy Gifford:

I think you're getting a little bit ahead of yourself. I think from an international launch, we tried to say, look, when we would anticipate getting it launch that into international market, maybe your question underlying that is why are you taking so long? And I think it really goes back to -- look, we want to be disciplined. We want to conduct preliminary studies to certify that we can consistently meet the high standards for product quality that we hold ourselves to as well as the constituent reductions. And so we're going to go about it in a thoughtful manner. But yes, we are excited to get it into an international market and look forward to.

Billy Gifford:

I understand your question, Chris. I really would look at the narrowing our guidance as the passage of time. Look, we wanted to make everybody aware that our consumers are under pressure just like consumers across all industry. And we like the flexibility. That's more of the range we had maintained for the establishment of the guidance. I wouldn't point out anything specific. We're very excited about the price realization we've been able to realize, being on track for our guidance for the total year and the stability that Marlboro has experienced in the marketplace. I mean when you look at prepandemic to post-pandemic, and Sal mentioned this in his comments. When you saw government stimulus and less mobility in the marketplace, we actually saw it as encouraging. We weren't attempting to gain share. We were performing the business like we normally do. It shows that Marlboro is still the aspirational brand in the cigarette space, and that's what we saw take place during the pandemic. And disposable income has got a little bit tighter and mobility is up affecting that as well, we see that we ceded some of that share back. But pre-pandemic to post-pandemic, call it, roughly flat maybe up a [10th] and we're extremely pleased with where we're at.

Gaurav Jain:

So a few questions from me. So first is on the oral tobacco pricing this quarter, which was, I think, up 5.5%, and it was flat to manage, just 3% last year. And if I look at Copenhagen's pricing, based on your disclosure, it is still running at the same level of plus 7%. So does it mean that you are pulling back on on! promotions or you're increasing actually on!'s pricing now that on! is becoming a bigger part of your portfolio, and it has hit maybe some critical market share?

Gaurav Jain:

My second question is on the Logic MDO on menthol e-cigarettes focused and I appreciate it's not your product. But just broadly, like if FDA now goes ahead and starts denying menthol e-cigarettes. Would it make any sense to invest in US e-cigarettes right now because maybe all the menthol e-cigarettes get denied?

Gaurav Jain:

On the California flavor ban that could happen next quarter. How are you planning to approach that?

Gaurav Jain:

And if I could just squeeze the last one on CapEx, like you reduced the CapEx guidance slightly. Would you be able to help us understand why that happened?

Gaurav Jain:

The CapEx number, the CapEx guidance was reduced. So what are the factors driving that?

Operator:

Our next question will come from Vivien Azer with Cowen.

Billy Gifford:

Sure. And I don't want to get too far ahead of myself. We'll come forward with the actual product, and I know you'll be excited about it when we're able to bring it forward once we complete design. If you think about the stick, that's pretty evident because everybody’s seen that in the marketplace. If you think about the capsule, the tobacco is contained within a capsule. It's different than the technology you're familiar with the Ploom, but again, I don't want to get too far ahead of myself from a standpoint of describing the device before we're ready.

Billy Gifford:

That is correct.

Billy Gifford:

I think when you look at the price gap, I just want to remind you, Vivien, and I know you know this, but that 40% price gap that we disclosed is really a barometer for the national level. We put that out because that allows you all to have a barometer, but we manage it much lower than that. And I think you see as the introduction and execution against the data analytics and the revenue growth management most people refer to it as those tools that we have available allows us to manage the price gap at a much lower level. And so that is, I think, what you're seeing in the success of the Marlboro market share through time. And so we're extremely pleased with where we're at. We feel good about the performance of Marlboro and being able to expand the price gap and increase the profitability through time the way we've done.

Billy Gifford:

And you'll recall, Vivien, we're premium focused. We participate in a discount because it's important to our retailers to have a portfolio that services all of their customers that visit their stores, but we're premium focused. You know that we ceded share in L&M, we felt like we would see cede share in L&M as we increase profitability. But we're pleased with the increased profitability we've experienced on L&M, and with the willingness to cede some of that share to deep discount. You'll remember our consumers at the lower end of that socioeconomic status. Loyalty is extremely high over 90% for premium brands. And so you always have that group of consumers when they get under pressure are going to shop around and move around depending on what their individual situations are.

Oliver Brotman:

This is Oliver Brotman on for Carla. Just a couple from us. So with regards to the announcement made last week on the agreement reached with Philip Morris. Is there any risk to the remaining $1.7 billion that Philip Morris owed, could that value change between now and then?

Oliver Brotman:

And then just secondly on JUUL. While the noncompete is no longer in place and you're turning your focus to bearing options to build out the portfolio, you still retain that 35% stake. Is there a plan longer term what you would maybe do at that stake?

Operator:

Our next question will come from Priya Ohri-Gupta with Barclays.

Sal Mancuso:

I don't want to get ahead of ourselves on that maturing debt. So how we retire that debt and the process we go through, we'll wait and see. Obviously, we'll do the necessary analytics from a market perspective, from a capital allocation perspective. To your question though, while we have flexibility on where we could issue debt, we do not necessarily need to have the euro exposure now.

Sal Mancuso:

Well, obviously, FX exchange rates are a factor that goes into that allocation. I don't want to necessarily predetermine what's more attractive. But for us what's important is to have flexibility in the marketplace. We are fortunate in that we have a strong balance sheet. We've got operating companies that do a tremendous job of converting income, the cash. So as debt comes due, we can refinance or we can think about other methods of retiring the debt. So for us, it's really the flexibility to determine how we want to handle that debt coming due but also with markets we may or may not want to enter. FX exchange is definitely part of that process though.

Callum Elliott:

I'd love to ask you guys a little bit more about Horizon, if that's okay. I guess our sense is it feels like giving away a 25% economic share is a huge amount, given that candidly this is a poorly performing product, a weak number for brand globally without regulatory approval in the US. And so hoping you can just talk about the drivers behind why you entered this JV, how you arrived at a 75-25 economic split? It feels just to us and then based on the conversations we've had this morning to investors as well that this is going to be very difficult for this to be economically viable for you.

Callum Elliott:

And I guess just one follow-up, unrelated. I wonder if I can get you to talk a little bit about cannabis as well. I think you obviously still have your stake in Cronos, your warrants are set to expire in a few months. Presumably, you're not likely to exercise and given the way out to the money. But more broadly, my question is how you're thinking about the cannabis category has changed over the past three and half years since you made that investment, and where does it sit on the list of capital allocation priorities today?

Operator:

[Operator Instructions] Thank you. At this time, I will now turn the call back over to Billy Gifford for closing remarks.

Operator:

Thank you [Technical Difficulty].

Operator:

Good day, and welcome to the Altria Group 2022 Second Quarter and First Half Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by Altria's management and a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Mac Livingston, Vice President of Investor Relations for Altria Client Services. Please go ahead, sir.

Billy Gifford:

Thanks, Mac. Good morning, and thank you for joining us. Altria's tobacco businesses performed well in a challenging macroeconomic environment for the first half of the year. The smokeable products segment delivered solid operating company's income growth behind the resilience of Marlboro, and our moist smokeless tobacco brands continued to drive profitability. We also continue to make progress toward our vision through the investments we laid out in January, which included supporting the expansion of on!. We are encouraged by on!'s retail momentum and significant share growth since achieving unconstrained capacity last summer. We believe this is a pivotal point in the U.S. tobacco industry. The FDA has the opportunity to create a mature, regulated marketplace of smoke-free products that can successfully realize tobacco harm-reduction and improve the lives of millions of smokers. We share the FDA's goal, to transition smokers away from cigarettes, but we continue to believe that harm-reduction, not prohibition is the best path forward. My remarks this morning will focus on 3 topics

Operator:

[Operator Instructions] Our first question comes from Chris Growe with Stifel.

Billy Gifford:

Yes. Thanks for the question, Chris. I think when you think about where we're investing, certainly, we invested in our innovation process. We have the internal development going on. And I've spoken previously about changing that innovation process so that it's laser-focused on the consumer. It monitors the marketplace. But I think before we were -- I would characterize it as almost chasing the market versus sitting side-by-side with the consumer. And so there's a lot of consumer interaction, almost to the point of co-developing with the consumer in those categories that we can develop in. To your point, we can't develop, per agreement with JUUL, in the e-vapor category. But it's something -- we continue to monitor the marketplace and understand consumer satisfaction with the various products in the marketplace. We monitor the entire globe as far as alternative products to both influence -- how we think about internal development, but looking for products that could be emerging in the other markets as well.

Billy Gifford:

It certainly won't be off the table, Chris. But I think for the investments we're making in our internal development, we feel good about the pipeline of products that we have.

Billy Gifford:

Yes. Chris, it’s a good question and it's something we monitor. But I think when you look at the sequential performance of Marlboro, and even the discount category, you saw sequential stability. Marlboro actually grew 1/10 and the discount category stayed flat. So that were experienced first quarter to the second quarter. From a standpoint of the tools that we put in place with advanced analytics, we feel good about the position. Sal raised an important point. When you think about the impact to the consumer and you think about industry-wide, call it a 5% to 6% price increase, that's well below the inflation they're experiencing in other categories. And you saw the results and their remarks of the -- where we went to the consumer and talked about how they think about the tobacco categories and other categories, and you see they continue to prioritize the tobacco category at the top of their list. And I think that's telling. And you it -- we get a lot of questions about the -- I think you have to step back and think longer term on this. If you think about Marlboro's share, we're right where we were prepandemic, certainly during the pandemic as they received additional funds, whether that be from government or unemployment or things of that nature, it reinforced that Marlboro's the aspirational brand. So Marlboro benefited during that period. Certainly, we've given a little bit of that share back and feel satisfied with where Marlboro is. We've really -- the teams in advanced analytics as well as the Marlboro team putting those into the marketplace, the stability of Marlboro is incredible.

Pamela Kaufman:

So industry cigarette volumes have weakened considerably during the second quarter. You highlighted the headwinds facing smokers and how they're adjusting their purchasing behavior. I guess how are you thinking about the outlook for cigarette volumes over the remainder of the year? And then related to that, how much more pricing do you think that consumers can tolerate just given so far, we really haven't seen a meaningful acceleration in trade down to the discount segment, it's been consistent over the last couple of quarters. Do you see an accelerated risk of trade down within the category?

Pamela Kaufman:

That's helpful. Definitely, I just wanted to ask about how you're thinking about the implications to your relationship with Philip Morris in the heat-not-burn category, given their planned acquisition of Swedish Match? And how are you preparing for changes in the competitive in the U.S.?

Operator:

And we'll take our next question from Azer, Vivien with Cowen.

Billy Gifford:

Yes. Vivien, it's a great question. I think when you think about on! our research teams are really looking repeat purchases versus a trial offers. And we want to have increases in both. If you think about repeat purchases, we're very pleased with where we're at. Certainly, to your point, as we're investing, you have those repeat purchases that take place and you want to see the concreteness of that. And we feel very pleased and enjoy the repeat purchases that we have. But we felt like there was still opportunity to drive awareness and you've seen the increase in awareness we've been able to drive. And it's specific to the adult consumer that the product is product is very satisfying to the adult cigarette consumer, and we feel like there's still opportunity for trial there.

Billy Gifford:

It has not, Vivien. When you think about it -- and can take those quarters that we provide and stretch them back, and you thought -- and you saw macroeconomic was a benefit not that many quarters ago. So you certainly see the swing. It's no different than the swings we see through history. You have the -- macroeconomic economic can be a benefit at times. We saw gas prices in 2015 were a huge benefit. And so I think the only thing I would point out is we're seeing a higher correlation with gas prices and purchasing behavior. That would be the only -- because historically, we tried to correlate gas prices to it. And they were moving nickels and dimes at a time. I think you're seeing faster swings in gas prices so there's a correlation the consumer behavior as they adapt to the short-term nature of those changes.

Bonnie Herzog:

I just have a question on your guidance. You maintained your full year mid-single digit EPS growth guidance, but that does imply the second half EPS growth will need to accelerate versus the first half to hit the midpoint of your full year guide? So I just want to hear from you, what gives you the confidence this is going to happen, especially during an economic slowdown. I mean are your expectations that this will be driven from greater net price realization, assuming volumes remain pretty pressured or decelerate further? Are there any expected cost savings that you're hoping to realize in the second half that you could share with us? And then just finally, how do we think about stepped up investments that you might be making towards your smoke-free vision. Is that something that's factored into your guidance?

Bonnie Herzog:

All right. And then I did just want to ask about the -- I guess the uncertainty around your smoke-free future, given everything going on from JUUL to Philip Morris entering in the U.S. via Swedish Match, I guess, the dispute you have with Philip Morris as it relates to IQOS. This continues to be one of the key concern from investors. I know you've touched on this, but any more color you can provide or share with us as to your goal to kind of hit the smoke-free future or transform your business in the next, I guess, decade would be helpful. I mean I know with your agreement with JUUL now that the fair value is below the agreement, I think you have the ability to compete in the e-vapor market. So is that an option you're exploring? And then just maybe color -- a little more color on the timing as it relates to your heat-not-burn. You mentioned it's in final design by the end of the year, and then you're going to begin regulatory preparations. But how long before you have a product that you can bring to the market, do you think? Is that 2 years out, 3 years out? Just trying to get a sense of some parameters as to how you're going to achieve your goal?

Operator:

And we'll take our next question from Priya Ohri-Gupta with Barclays.

Sal Mancuso:

Sure. And thank you for the question. I'm really not going to signal future capital allocation decisions. I'm happy to share how we think about capital allocation, which, of course, considers a number of factors in those decisions including marketplace dynamics. We manage our balance sheet very carefully. We want to have a strong balance sheet. We want to continue to have investment-grade credit rating. So when we think about capital allocation, we take a balanced approach, and we've made the decision in August to use available cash to retire that debt, but future debt maturity towers, we'll analyze the marketplace at the time and make the appropriate decision.

Sal Mancuso:

Yes. Look, we are very fortunate in that we have operating companies that generate a significant amount of growth in cash. In a typical year, after paying our dividend and making the necessary investments, we traditionally have had, let's call it $1 billion in excess cash. And at the time, we make various decisions. There are times where we've gone to the Board and ask for a share buyback program. There are times where we've done some liability management to manage our maturity towers going forward, and strengthen the balance sheet. And there are times where we've made some investments such as the investment we made for the Poda technology recently. So that's how we think about cash going forward. But again, our operating companies do a tremendous job of generating cash flow for the shareholder and other stakeholders.

Gaurav Jain:

A couple of questions from my side. So look, we have had some discussion around the harm-reduction opportunity in front of us, and how it is very early. But if we really look where harm-reduction is really developing, it is all international because it's very hard to introduce new products in the U.S. market because of the PMTA process. But do you think that really to explore the harm-reduction opportunity, you need to go international, much like Philip Morris is entering U.S.?

Gaurav Jain:

Sure. And just also , a follow up on the questions around JUUL and potential end of exclusivity, and you also met -- referenced the synthetic nicotine market. And some of these companies have applied for PMTAs, and can potentially get PMTAs. So how do you think of synthetic nicotine as an ingredient? Like is that a market you would like to explore? And if some of the companies get PMTAs, that's an area you would like to enter?

Operator:

[Operator Instructions] We'll open it for the media. We'll go next to Jennifer Maloney with Wall Street Journal.

Billy Gifford:

Yes. While I don't speak to M&A in any regards. As I mentioned, look, we've always been monitoring the marketplace in the e-vapor space. We want to make sure we understand consumers' interactions with the various brands in the marketplace, whether they like those brands, whether they like the product -- satisfaction that those products give them. Now that we've written down this quarter below 10%, it affords us the opportunity to really explore those opportunities and make different decisions if we so choose. At this point in the process, we chose not to make any different decisions. We believe that where it's at in the process, as I mentioned earlier, with the FDA today and relooking through the review process of the applications as well as for -- some of our rights that we have as part of the agreement, we think those are beneficial. And we think, as we stated, the right decision currently is to stay under the non-compete.

Billy Gifford:

Yes. We highlight that we see 3 categories right now as the growth potential in the U.S. That's the heat-not-burn category, the e-vapor category and the novel oral. Certainly, they will be shaped by regulatory decisions, Federal Legislative decisions on excise taxes and future innovation in those categories from the various manufacturers. So that will shape how large they are, but we see those as the 3 potential growth areas, and we look to participate in those. I would remind you that's why we work with the portfolio approach because we see consumers going from cigarettes to those various categories, and we want to be there for the consumer, depending on what category they choose.

Mac Livingston:

Thanks, Ashley, and thanks, everybody, for joining us. Please contact the Investor Relations team if you have any further question. Thanks a lot.

Operator:

Good day, and welcome to the Altria Group 2022 First Quarter Earnings Conference Call. Today's call is scheduled to last about an hour, including remarks by Altria's management and a question-and-answer session. Representatives of the investment community and media on the call will be able to ask questions following the conclusion of the prepared remarks. I would now like to turn the call over to Mac Livingston, Vice President of Investor Relations for Altria Client Services. Please go ahead, sir.

Billy Gifford :

Thanks, Mac. Good morning, and thank you for joining us. We're off to a strong start to the year and believe our businesses are on track to deliver against their full year plans. Our tobacco businesses performed well in a challenging macroeconomic environment, and we continue to make progress toward our vision to responsibly lead the transition of adult smokers to a smoke-free future. Let's start with a review of the macroeconomic backdrop and its impact on U.S. tobacco consumers. In January, the surge of Omicron cases disrupted consumers' routines and purchasing patterns, resulting in short-term decreases in retail trips and overall tobacco volumes. Increased inflation throughout the quarter pressured discretionary income levels as the consumer price index reached a 4-year high in March, and higher gas prices were exacerbated by the Russian invasion of Ukraine. However, the rise in inflation was partially offset by improved employee metrics and increased wage growth for some consumers. The unemployment rate was 3.6% at the end of March, down from 6% in March of 2021. Total wages grew by nearly 5% in the first quarter compared to 8% average inflation. For some occupations, wage growth outpaced inflation, including occupations that over-indexed toward tobacco consumers. For example, wages grew 11% for production-related jobs and nearly 10% for jobs pertaining to transportation and materials moving. Additionally, the pressures of inflation were also offset for some consumers by higher federal income tax refunds. In the first quarter, the average federal income tax refund payment issued by the IRS increased by approximately 12%. We do expect inflation to persist for the balance of the year, however, and we will continue to monitor its effect on tobacco consumers. Moving to our consolidated results. Altria delivered strong first quarter performance in this dynamic environment, growing adjusted diluted earnings per share by 4.7%. Adjusted EPS growth was primarily driven by higher operating companies income and fewer shares outstanding partially offset by lower adjusted earnings from our ABI investment. In the smokeable products segment, we continued to execute our strategy of maximizing profitability in combustibles, while appropriately balancing investments in Marlboro with funding the growth of smoke-free products. First quarter smokeable segment adjusted OCI increased 5.7% and Marlboro retail share was stable sequentially. We believe Marlboro's share performance through this period reflects its continued strong brand equity among smokers. We believe the investments we have made behind data analytics and revenue growth management provide us with the right tools to support the smokeable strategy. These tools include PM USA's manufactured supported off-invoice program, which enables more efficient resource deployment for Marlboro as well as retail trade programs with multiple options designed to provide retailers with store-level solutions for our brands. We believe these capabilities position our smokeable businesses to navigate the current environment and to continue to deliver strong profitability in support of our vision and shareholder returns. Turning to our smoke-free product portfolio. We are excited by the performance of on! and oral nicotine pouches. on! reported shipment volume nearly doubled to 18 million cans in the first quarter. At retail, on! share of old tobacco increased by 2.5 percentage points, reaching 4.1%. As we shared at CAGNY, on! share growth has been primarily driven by repeat purchases from existing on! consumers and increased tobacco consumer trial. We are encouraged that these dynamics continued into the first quarter. At the category level, oral nicotine pouches reached a total oral tobacco retail share of 19.3 percentage points in the first quarter. The category grew 6.1 share points year-over-year, with on! representing more than 40% of this growth. We believe the brand continues to be a highly competitive product in the space, and it continues to perform well in all regions of the U.S. As a reminder, our premarket tobacco applications for the entire on! portfolio remain pending with the FDA. And we believe the FDA should determine that the marketing of these products is appropriate for the protection of public health. We are also actively working on modified risk tobacco product applications for on! We believe MRTP claims would provide impactful points of differentiation for the brand and important tools in educating and ultimately transitioning smokers to less harmful products. In e-vapor, we estimate that total category volume increased 10% versus the year-ago period and increased 4% sequentially as a result of increased volume in the vape store channel. Our minority investment in JUUL remains subject to challenge by the U.S. Federal Trade Commission. In February, an administrative law judge found in favor of Altria and JUUL and dismissed the entirety of the FTC's claims. The FTC is appealing that decision to the FTC. Any decision by the FTC is subject to appeal in federal appellate court. In heated tobacco, our teams are continuing to work with PMI on IQOS reentry plans, and we will keep you informed on developments as circumstances warrant. There is no change to our expectations regarding IQOS product availability. Moving to the regulatory environment. President Biden signed a bill last month to bring synthetic nicotine products under FDA regulation by updating the definition of a tobacco product within the Food, Drug and Cosmetic Act to include only product that contains nicotine, including synthetic nicotine products. The bill allows manufacturers of synthetic nicotine products currently on market to keep those products on the market for 120 days after the bill's enactment, provided that they have submitted a PMTA for those products by May 14. Unless the FDA grants a PMTA within that time period, the products become unlawful and subject to the FDA's enforcement discretion. The bill creates a certain exception for this review period for those circumstances where the FDA issued a denial of a marketing order and the manufacturer thereafter marketed the product with synthetic nicotine. We believe this legislation is an important step toward the creation of a responsible smoke-free marketplace, consisting solely of FDA-authorized products. In combustibles, the FDA has indicated that it is on track to issue proposed product standards this month regarding menthol in cigarettes and characterizing flavors in cigars. As a reminder, the FDA rule-making process has multiple steps and provides several opportunities for stakeholders to provide input. Underage smoking is at the lowest level in a generation and efforts to prohibit the legal sale of products to adults as we have seen with alcohol prohibition and cannabis criminalization have consistently failed. Prohibition pushes products into illegal markets that lack regulatory oversight and lack underage prevention. We believe equitable harmed option is a better public policy approach to reducing smoking and improving public health. This means manufacturers must develop and the FDA authorize an array of potentially reduced harm alternatives that can appeal to and transition smokers across all backgrounds and demographic routes. We expect to be actively engaged in providing our perspective to the FDA throughout the process. We remain optimistic about the future of harm-reduction in the U.S. We believe we have an unprecedented opportunity to lead the way in shifting millions of smokers away from cigarettes. We're encouraged that the FDA has started authorizing smoke-free products, but more needs to be done to build a marketplace of authorized reduced-harm products that smokers can consider as they move away from cigarettes. Our tobacco businesses delivered extraordinary results in a challenging and dynamic environment. And this could not be done without the passion, resiliency and fierce determination of our employees. Their talent and dedication continue to give me confidence in our ability to move beyond smoking. I'll now turn it over to Sal to provide more detail on the business environment and our results.

Operator:

[Operator Instructions]. We will take questions from the investment community first. Our first question comes from Chris Growe from Stifel.

Billy Gifford:

Yes. Thanks for the question, Chris. I'll take them in order. So from a standpoint, we were excited to see the resilience of our consumer. And that's why we wanted to highlight the wage inflation that I think a number of industries don't see it's benefited our tobacco consumer. It's something that we'll continue to watch. Certainly, gas prices has impact on our consumers because usually they're filling up their car truck and then going in and purchasing the product. So it's something that we'll continue to watch, but we feel pleased through the first quarter with the resiliency we've seen in the tobacco consumer. As far as Marlboro, we're extremely excited with the stability of Marlboro. And if you go back, you can see pre-COVID, we had the benefit of the strength of Marlboro. And we benefited from the consumer having extra discretionary income as we proceeded through the COVID pandemic. And I think that pointed to that Marlboro's still the aspirational brand in the marketplace. And then as we've seen discretionary income come under pressure, we gave a little bit of that share back that we had benefited during the COVID virus. But through that entire period, the Marlboro brand has held up. You always see a little bit of movement. If you think about Marlboro as the brand, it has over 90% loyalty. That's a consumer that's buying it every time they make a purchase of a cigarette in the marketplace. But you see a little bit of movement, but nothing that I would highlight for you at this point.

Billy Gifford :

Yes. What we tried to highlight was where we saw some of the growth. It was in the vape shop channel. Again, no trend there to highlight. Just wanted to highlight where we saw the growth sequentially. I think if you step back and look at the entire e-vapor category, what we've tried to highlight is as all of these products are coming under FDA regulation, and we should see and have started seeing some of the decisions by the FDA, I think that entire category will be in a bit of a transition over the next year to 18 months as some products make it through the process and some are denied. And so those consumers will be moving around a bit. What we look forward to and continue to believe is that e-vapor can play an important role in harm reduction in the U.S. once we get to a total FDA-authorized marketplace.

Vivien Azer:

So the menthol news has been long anticipated, certainly over the last 12 months given the April 2022 target. Billy, maybe it will be helpful. You guys have been pretty consistent in disclosing your share of menthol, but just dimensionalizing how big the menthol category is in the broader category context.

Vivien Azer:

Understood. That's really helpful. My next question is on the IRS call out. That's a bit of a unique call out relative to what we've been hearing from other companies under my coverage. So is the message that this is kind of a one-quarter benefit? Like how are you guys kind of thinking about that? Like does it annualized? Or you kind of thought that, that was kind of a onetime offset to inflationary pressures for the consumer?

Operator:

Our next question comes from Pamela Kaufman from Morgan Stanley.

Billy Gifford:

Yes. I appreciate the question, Pamela. I think when you think about our strategy in oral tobacco, it's to maximize profitability over the long term in the moist smokeless category with the strength of Copenhagen, while making responsible investments in on! for -- to continue to fund its growth. We believe, long term, we can achieve tobacco-like margins within the oral nicotine pouch category. But certainly, to your point, we're in the investment period now. And you saw the significant growth we saw year-over-year, almost doubling volume from a comparison first quarter-to-first quarter. And we've been trying to highlight all along, once we got past the manufacturing capacity constraint, that we wanted to invest to make sure it was in the consideration set of our consumers when they're making those choices for alternative products. What you'll see that we've started is really using our advanced analytics that we invested in to be more targeted with some of the promotions. But we're still in the investment period, and we'll remain in that for a period of time.

Billy Gifford:

Yes, sure. Some of what you've seen is exactly what you highlighted, Pamela, which is as the discretionary income comes under pressure, whether that's through inflation or gas prices or even mobility, you'll see some trade down. I think if you think about the total cigarette consumer group, think about it as a bit of a barbell. There's a group of consumers that are at the bottom end of that, that are always buying the cheapest in the store. And so you see that occur. You saw the benefit in Marlboro that we experienced when discretionary income wasn't under so much pressure. But the way we think about it is we're a premium-focused company, and you see this, the rock-solid stability of Marlboro through time.

Gaurav Jain:

So a couple of questions here. Billy, so the Slide #6 in which you are talking about how wages are trending across different professions is very interesting. Now if I apply a similar sort of lens to the entire U.S. and different states and maybe different wage inflation in different states, are you seeing better volume trends in the states where wage inflation is higher versus where wage inflation is lower?

Gaurav Jain:

Sure. If I were to just say that wage inflation will likely accelerate as we go through this year, because of we can see weekly jobless data and everything and federal reserve is still behind the curve. So then -- should we then expect that cigarette volumes, which fell minus 6.5% in Q1, which are difficult comps, which are the gas price spike. So it should start moderating from here and improve as the year progresses.

Gaurav Jain:

Sure. And coming to the synthetic nicotine market and what the FDA has done. So in the synthetic nicotine market, like how do you see this entire category playing out in the next few months and will that be a benefit to your volumes as well?

Gaurav Jain :

Sure. And if I could just sneak in a last one for Sal. So Sal, there's this net periodic benefit income line item in your P&L, which has been a constant benefit. And I used to think that when interest rates go up, it will become a headwind, but it hasn't. So how does this line item work?

Gaurav Jain :

The net periodic benefit income, that line item, which I think is linked to your pension, interest and income and expense. So it has always been a tailwind to your P&L. And I thought that it would become a headwind as interest rate rise, but still there is a benefit that's happening. So how do…

Operator:

Our next question comes from Bonnie Herzog from Goldman Sachs.

Billy Gifford:

Yes, Bonnie. So I'll try to address it. There were multiple parts there, but I'll try to address it with the strategy we implemented. I think what you've seen with Marlboro and we highlighted for you is the rock-steady performance of Marlboro through time. I think when you think about the pricing and the promotions in the marketplace, we highlighted for you the way we're using advanced analytics and revenue growth management is what most companies call it, being able to get closer to the consumer and provide more -- if we're having promotions, provide it closer to the individual consumers. And so whether that's through retail trade programs, where we have multiple options for retail trade partners, to really have multiple solutions, store-level solutions versus more of a total geographic solution for consumers in the marketplace because, as you know, certain states, the consumers are under different economic health than other states, as well as the ability to have our manufacturer of invoice. And so our price realization, I would just remind you, is made up of 2 components. It's list price and it's the efficiencies that we're getting through our revenue growth management and our advanced analytics. So when you think about that in totality, you see the steadiness of Marlboro and the efficiencies coming through the promotional process. And so it's allowing us to be more targeted and efficient with the way we spend promotions.

Bonnie Herzog:

All right. Yes. I mean, so I guess the right way to think about your smokeable business, I mean it's industry that's in secular decline in terms of volumes. They've been declining for a very, very long time. So the way you're managing this is offsetting that with pricing and trying to drive, whether it's low or mid-single-digit operating income growth and expanding your margins. And you feel good, even in this environment, that you're going to be able to continue to do that.

Bonnie Herzog:

And just one quick final clarification just on your guidance. Can you touch on what it assumes in terms of total industry cig volumes? I mean are you assuming that volumes decelerate further this year? Any color on that would be helpful to kind of frame all of this.

Operator:

Our next question comes from Priya Ohri-Gupta from Barclays.

Sal Mancuso :

Sure. So I'll take those questions in order. First, I guess the way I'd respond to your initial question is that it's critical for us that we continue to manage a strong balance sheet going forward. As you know, last year, in part of our capital allocation, we did do some tender refinancing of debt, which extended maturities of low interest debt. We're pleased with the results of that transaction. And part of the way we manage the balance sheet is we manage our debt towers going forward so that we're less impacted by market dynamics and we have the ability to have flexibility in how we treat maturing debt. So I'm not going to forecast out necessarily how we'll handle that debt that's coming to maturity. But of course, we will do the analysis and determine the best way to handle that, whether it's paid off with existing cash or think about refinancing as such. And the same answer goes for the euro debt that's coming through -- that's coming due. We'll do the analysis. You are correct in that it is a natural hedge against the ABI dividends that we receive. And we do have flexibility to think about being how we can be opportunistic across various markets, whether we're thinking about managing our balance sheet going forward or refinancing or managing debt as it comes due.

Gaurav Jain :

Just a quick question on the ABI stake, believe, Sal, like any updated thoughts on how you are thinking about it.

Operator:

We will now take questions from the media representatives. And our next question comes from Jennifer Maloney from Wall Street Journal.

Billy Gifford :

Yes. I think it's tough to say. I think with some of the alternative products that are in the marketplace, certainly, if there were an outright ban using your hypothetical to menthol, the consumer for the menthol cigarettes will either go to the illegal market, as we highlighted under unintended consequences of an outright ban, or look to either non-menthol cigarettes or alternative products. So it's tough to say where that will go. I think if you look at some of the research, there's limited research on it, but some would say that they would convert to non-menthol cigarettes. I think the better point here, though, is if you step back, prohibition, at least through history, hasn't worked. The better approach is to have these alternative products and allow we know consumers want to move to alternative products that have the potential to reduce harm. That seems like that should be the focus and a better approach than an outright ban.

Billy Gifford:

Yes. We'll have to wait to see what the proposal that comes out and how it approaches menthol. We would really look to, as we said, to support our vision and really look to move the consumer down the continuum of risk. And so -- that's the way we would approach it with the alternative products that are in the marketplace. But certainly, it's ultimately the consumer's choice.

Mac Livingston:

Thank you all for joining us this morning. Please feel free to contact the Investor Relations team if you have further questions. Thanks again.

Operator:

Good day, and welcome to the Altria Group 2021 Fourth Quarter Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by Altria's management and a question-and-answer session. Representatives of the investment community and media on the call will be able to ask questions following the conclusion of the prepared remarks. I would now like to turn the call over to Mac Livingston, Vice President of Investor Relations for Altria Client Services. Please go ahead, sir.

Billy Gifford:

Thanks, Mac. Good morning, and thank you for joining us. Altria delivered outstanding results in 2021 across our businesses, including strong financial performance, progress toward our vision and advancements in our ESG efforts. This morning, we'll highlight our accomplishments in each of these areas. First, Altria grew its 2021 adjusted diluted earnings per share by 5.7%, driven in part by the resiliency of our cigarette, cigar and moist smokeless tobacco businesses. Additionally, we returned more than $8.1 billion in cash to shareholders through dividends and share repurchases. This total represents the third largest single year cash return in Altria's history and the largest annual return since 2002. We have continued to make progress toward our vision of responsibly leading the transition of adult smokers to a smoke-free future. Our teams took several steps forward in 2021, including accelerating the retail share growth of on! and further enhancing the capabilities to expand heated tobacco and other new U.S. tobacco products, advancing the science, research and development behind our smoke-free products, advocating for tobacco harm reduction by encouraging the FDA and other stakeholders to address the widely held nicotine misperceptions in society. And we made excellent strides in establishing a best-in-class consumer engagement system to support smoker transition to smoke-free products. Our system leverages robust transactional data and our advanced analytic capabilities to engage with consumers at the point of purchase. Finally, some of our achievements across our responsibility focus areas, included publishing six corporate responsibility reports, summarizing our progress in critical areas such as harm reduction and underage prevention and publishing our inaugural task force on climate-related financial disclosures report. We were recognized for the second consecutive year with a AA rating from CDP for climate and water stewardship. And we advanced our internal talent and cultural goals, embraced workplace flexibility and embedded inclusion and diversity considerations within our performance review process to hold our leaders accountable. We're excited to share more about our responsibility efforts and our consumer engagement system next month at CAGNY. 2021 was a dynamic year for the U.S. tobacco industry, and total industry volumes were influenced by several factors, including pandemic-induced shifts in consumer purchasing behavior and tobacco usage occasions, a continued trend towards smoke-free alternatives and an evolving regulatory and legislative landscape. Despite year-over-year volatility due to pandemic-related factors, total tobacco volume trends remained stable. In fact, we estimate that overall tobacco space volumes have decreased by 0.3% annualized for the past two years and by 0.8% over the last five years on a compounded annual basis. Diving deeper, total estimated equivalized volumes for smoke-free products in the U.S. grew to 3.8 billion equivalized units in 2021 and represented approximately 24% of the total tobacco space. We estimate the year-over-year increases in smoke-free volumes were driven by the e-vapor category, which resumed its growth after a temporary pause in 2020 and oral nicotine pouches, which continue to grow rapidly from a small base. 2021 smoke-free volumes also benefited from the geographic expansion of IQOS in the heated tobacco category. But we're pressured by modest declines in the MST category due to shifts in consumer purchasing behavior and movement to other smoke-free categories. And in combustibles, volume declined to approximately 11.8 billion equivalized units driven by several factors, which Sal will discuss later in his remarks. Turning to our smoke-free product portfolio. We're excited by the exceptional performance of on! in oral nicotine pouches. on! retail share of oral tobacco increased by nearly a full share point sequentially, reaching 3.9 share points for the fourth quarter and nearly doubling its share over the past six months. These strong results were primarily driven by an increase in multi-can purchases. As of the end of the year, on! was available for sale in approximately 117,000 in U.S. retail stores. The on! nicotine pouch category reached a total oral tobacco retail share of 17.9 percentage points in the fourth quarter, growing 7.4 share points year-over-year. We're encouraged that on! represented more than 1/3 of this growth and the brand is proving to be a highly competitive product in the space. Our premarket tobacco applications for the entire on! portfolio remain pending with the FDA. And we believe that the FDA should determine that the marketing of these products is appropriate for the protection of public health. We are also working -- actively working on modified risk tobacco product applications for on! and expect to submit these applications to the FDA by the end of this year. We believe an MRTP claim would be an impactful point of differentiation for the brand and an important tool in educating and ultimately transitioning smokers to less harmful products. In heated tobacco, our teams made excellent progress with IQOS in the Northern Virginia market with Marlboro HeatSticks achieving a 1.9% retail share of the cigarette category in stores with distribution for the month of October. Unfortunately, PM USA had to remove IQOS from the market in November due to the International Trade Commission's importation ban and cease and desist orders. PMI is responsible for IQOS manufacturing, and we have been in contact regarding product availability. At the present time, we do not expect to have access to IQOS devices or Marlboro HeatSticks in 2022. However, we remain focused on returning IQOS to the market as soon as possible. Our teams are actively working on re-entry plans and we expect to be ready to bring IQOS back to U.S. consumers when available. Our agreement with PMI contemplates disruptions such as those caused by the ITC orders and requires the parties to negotiate in good faith to amend the agreement appropriately. In the second quarter of 2020, we disclosed two milestones in our IQOS agreement with PMI necessary for PM USA to maintain its exclusive license and distribution rights for IQOS in the U.S. and to earn the renewal option for an additional five-year term. The initial five-year term does not expire until April of 2024. But we believe that PM USA has already met these milestones based on the strong performance of IQOS in the Charlotte and Northern Virginia markets. PMI has communicated that it disagrees with our position. We expect to continue discussing these matters with PMI. We firmly believe that heated tobacco products can play an important role in U.S. harm reduction, and we are continuing our efforts to support the category's growth. We have gained significant knowledge from our IQOS commercialization efforts, which we expect to use going forward. Our teams learned how to educate U.S. smokers on a brand-new tobacco category and how to effectively support their transition journey to smoke-free alternatives. We demonstrated improved performance in each successive market and gained valuable knowledge on leveraging MRTP claims to transition smokers. Additionally, we have built a robust post-market surveillance system, all of which we believe will position us to successfully achieve our objective of moving beyond smoking. Moving to the e-vapor category. The 2021 Monitoring the Future study was recently released, and the data showed positive improvements in underage usage trends. Both underage use of nicotine vaping products and JUUL specifically show continued signs of decline. The latest data shows that JUUL underage usage is down by 70% from 2019 with total underaged nicotine vaping down 27% over the same period. We are encouraged by the progress, but more still needs to be done, and we remain committed to continuing our work to reduce underage use of all tobacco products. Turning to the regulatory environment. The FDA is currently weighing several decisions that we believe will shape the future of harm reduction in the U.S. In the e-vapor category, the FDA has issued marketing denial orders for many e-vapor PMTAs, predominantly applications for open systems and flavored e-liquids. These denial orders have resulted in significant litigation across the country. In the meantime, PMTAs for most leading e-vapor products, including JUUL, are still in an FDA review. The FDA granted its first e-vapor market order last year for the tobacco variant of a Cigalike product. The FDA has not reached a final decision for that manufacturer's menthol variant but did deny its submissions for its other flavored cartridges. In oral tobacco, PMTAs for the leading oral nicotine pouch products, including on! remain pending with the FDA. Last year, the FDA granted the first market authorizations among innovative oral tobacco products for our Verve Discs and Chews in the flavors of Green Mint and Blue Mint. These were also the first flavored product authorizations for newly deemed tobacco products. Additionally, MRTP applications previously submitted for Copenhagen Snuff and competitive Snus products remain an FDA review. Finally, in combustibles, the FDA has stated that they are on track to issue a proposed product -- to issue proposed product standards by April 2022 regarding menthol in cigarettes and characterizing flavors in cigars. As a reminder, the FDA rule-making process for these and all potential product standards has multiple steps and provide several opportunities for stakeholders to provide input. There are formal requirements related to public notice and comment and steps requiring the office of management and budget to assess economic consequences at several points in the process. Importantly, if the FDA chooses to move forward with their final rules, they must address all comments received throughout the rule-making process. Of course, any final rule must take into account the potential for unintended consequences and would be subject to legal challenges. We plan to review the proposed rules in detail and intend to engage with the FDA throughout the rulemaking process on each of these issues. We remain optimistic about the future of harm reduction in the U.S. We believe we have an unprecedented opportunity to lead the way in shifting millions of smokers away from cigarettes if we follow the science and foster innovation with the support of reasonable regulation. We are encouraged that the FDA has authorized a product in each of the 3 major smoke-free categories. Going forward, this year, we expect the FDA to carefully consider the scientific merits of each remaining application, and we're hopeful for significant progress in product marketing and claim authorizations. I would like to end my commentary regarding 2021 with the message to Altria's employees. Thank you for your dedication, passion and creativity through a difficult period. We experienced several challenges last year in both our professional and personal lives, and I admire your resiliency and fortitude. You are a driving force in moving beyond smoking and we are very appreciative of your efforts and commitment. Let's now move to our financial outlook for 2022. Our plans for the year ahead include a continuation of our strategy to balance earnings growth and shareholder returns with investments toward our vision. For 2022, our planned investment areas include digital consumer engagement, smoke-free product research, development and regulatory preparations and marketplace activities in support of our smoke-free products. The external environment remains dynamic, however, and we're monitoring various factors such as the economy, including the impact of increased inflation; the impact of current and potential future COVID-19 variants and mitigation strategies; tobacco consumer dynamics, including tobacco usage occasions and available disposable income; and regulatory and legislative developments. Taking these factors into consideration, we expect to deliver 2022 full year adjusted diluted EPS in a range of $4.79 to $4.93. This range represents an adjusted diluted EPS growth rate of 4% to 7% from a $4.61 base in 2021. We expect 2022 adjusted diluted EPS growth to be weighted toward the second half of the year. Our guidance includes anticipated inflationary increases in master settlement agreement expenses and direct materials expenses and our current expectation that we will not have access to the IQOS system in 2022. I'll now turn it over to Sal to provide more detail on the business environment and our results.

Operator:

Thank you. [Operator Instructions] We will take questions from the investment community first. Our first question comes from Pamela Kaufman from Morgan Stanley.

Mac Livingston:

Pam, this is Mac. Just one quick second before your question. We understand that there were some technical issues associated with the webcast. So I want to apologize for the disruption to those listening there. We will work to get our recorded remarks up on the website as soon as possible. Thanks, and go ahead, Pam.

Billy Gifford:

Good morning, Pamela, and thanks for your question. I think I would start with Marlboro's share. I mean when you look at Marlboro's share performance over the past eight quarters, it has been stable. So you can look at kind of this period in the pandemic to pre-pandemic levels and you see Marlboro has remained strong throughout that period. I think when we went through the pandemic, though, there were several macroeconomic tailwinds. So - and we've mentioned them before. There was lower consumer mobility, there is higher government stimulus payments in what we believe led to increased smoking occasions. And when you think about that, that led to increase or higher discretionary income for competitive adult smokers who then traded up to Marlboro. And I think that really showed the continued appeal of premium brands. Now as we start seeing some of those pressures you're referring to put pressure or decrease the discretionary spend of some of our consumers, you see the more price-sensitive adult smokers moving back to discount brands. And I think that would be expected. Look, we believe that the current discount share, to your point, is at the high end of historical norms. But we do expect quarterly fluctuations in share to continue until the economy begins to stabilize from the pandemic. I think overall, from a pricing standpoint, and I'll be careful not to talk about future pricing. You recall the four factors that we look at to make pricing decisions

Billy Gifford:

Yes, it's a great question. I appreciate you raising it. I think when you think about it Pamela, we had talked, as we progressed through 2020 that we were really focused on getting past the manufacturing capacity constraints. And that would allow us to really start engaging with the consumer -- so now being in the 117,000 stores, you want to have a nice look at retail. You're going to want to engage with smokers with equity messages that go to the consumer, whether through direct mail or through digital. And then because you're introducing a new category and is growing, you want to have some disruption at retail, both with the look and with some price off and so you have price promotions that take place in the marketplace. So those are the major factors that as we're investing on it and it's growing impact the overall oral tobacco category from a margin standpoint. I know you would like me to say this is the exact date we expect to end that. But I think as you think about a growing category and on! certainly participated in that growth, we're going to invest appropriately as that category continues to grow.

Billy Gifford:

Thank you.

Bonnie Herzog:

Hi, thank you. Good morning, everyone.

Bonnie Herzog:

I have a question on your '22 EPS guidance. You mentioned you plan to balance earnings growth and shareholder returns with investments towards your vision, which includes increased smoke-free product R&D. But at the same time, you don't expect to have IQOS in the market. So two questions. One, can you give us a sense of your investment spend in R&D? For instance, will your investments in this effort be elevated above '21 levels? And then two, can you share maybe just a little bit more with us about your 2030 vision and how the development of an additional smoke-free product could fit into your portfolio. I'd be curious to hear what that product might look like, when it might be ready to test? Just be curious to hear if it's closed or is this still a year or two out? Thanks.

Bonnie Herzog:

Okay. That's helpful. And then just speaking or thinking about your 2030 vision, could you give us maybe an update on that? And I just keep thinking about any guidepost you guys could share with us that you expect to hit for this business or your business, I should say, in the next three to five years? What ultimately is a realistic target in terms of converting your business to non-combustible products. And then in the context of that and executing on this vision, curious to hear if you're open to M&A to accelerate this? Or are you going to continue to remain focused on things that you develop in-house?

Operator:

Our next question is from Owen Bennett of Jefferies.

Billy Gifford:

Yes. I appreciate it. I want to appreciate your question. Look, we disclosed what we felt like we could from a standpoint. Remember, we have cross-confidentiality in place with PMI. And we disclosed that in 2020 because we thought it was important for you guys and the investors to know that there were performance objectives in the contract. We feel like we have hit those as far as the extension or renegotiation that's taken place. Look, we described that we feel like we hit on PMIs in this agreement with that and their mechanisms in the contract to be able to settle any disputes that take place. You can see with any 2 parties that have an agreement, there can be disputes or disagreements. And that was all contemplated in the agreement.

Vivien Azer:

I really appreciate the commentary on the health of the consumer and some of the normalization in terms of down trading behavior. Billy, as I kind of think back to the evolution of the Marlboro franchise over the last decade, there was a big push, if I recall correctly, coming out of the last recession to balance out the price points that were available for Marlboro. So can you just remind us where special blend fits into the total Marlboro franchise? And I recognize your revenue growth management tools have gotten a lot more sophisticated over the last decade. But the role that you envision special blend playing to the extent that we see sustained down trading?

Vivien Azer:

That's really helpful. And then just my follow-up question is on the on! franchise. Clearly, the promotional investments that you guys are making are translating to market share gains, which is great to see. I was wondering if you could offer any color on where you see on!’s promotional spending relative to the broader competitive backdrop?

Operator:

Our next question is from Chris Growe of Stifel.

Billy Gifford:

I think when you think about cigarettes, certainly an important factor in that, but there are always puts and takes that take place in the P&L. And so as I mentioned, Chris, we run a range of scenarios. And in those scenarios, we have puts and takes that take place across the various categories. Certainly, cigarette volume is 1 of the factors, but it's not the only factor.

Billy Gifford:

It's something -- we'll certainly monitor, Chris, going through time. And we talked about, look, we're mindful of keeping pace and understanding how we need to adapt to our consumers across all of our categories. I think I go back to the comment I made to Vivian. Our goal with Marlboro is not to grow share through time, its to have stable share and be able to grow profitability. And I think you see we were very successful with that in 2020.

Callum Elliott:

Look, Billy, I appreciate the color on the dispute resolution process with PM. My question is, do you guys have contingency plans in place in heated tobacco in the event that, that dispute resolution process goes against you and the licensing agreement isn't extended beyond 2024.

Callum Elliott:

Okay. And just a quick follow-up, on Vivien's question about sort of promotional environment in nicotine pouches. I guess my question is, are you concerned at all that, that heavy promotional environment for on! might damage the brand equity, and selling today at a huge discount to the market leader, as you mentioned, are you not at all concerned that, that might impact the long-term brand perception here?

Operator:

At this time, we'd be happy to open up the queue for our media representatives. We'll take a question from Jennifer Maloney of the Wall Street Journal.

Billy Gifford:

Yes. I think from an R&D portfolio, I'll take that first. You'll remember our agreement with JUUL precludes us from being able to do any organic development in e-vapor. So that's 1 category that we do not have any organic development going on. If you think about the 2030 vision, the way we think about the e-vapor category, certainly as the entire category is going through the FDA authorization process as they make decisions, the e-vapor category will be in a bit of transition. But we believe the e-vapor category and JUUL included in that can play an important role in the U.S. in harm reduction and the future of harm reduction. So when you think about that, e-vapor can play an important role, but it's going to be in a bit of a transition as it goes through the FDA authorization process.

Billy Gifford:

There -- our only participation in the e-vapor category would be through our minority investment in JUUL. And I think if you step back and see the success JUUL’s had in the marketplace with converting adult smokers to the e-vapor category, you’ll see that it still has the lead in market share in the U.S. with adult tobacco consumers.

Mac Livingston:

Thanks, Leo, and thank you all for joining us. I'll remind you, once again, we're going to work quickly to get the recording of the remarks back up on the webcast for those who were disrupted there. So apologies for that again. If you have any other further questions, please contact the Investor Relations team. Thanks

Operator:

Good day and welcome to the Altria Group 2021 Third Quarter Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by Altria's management and a question-and-answer session. Representatives of the investment community and media on the call will be able to ask questions following the conclusion of the prepared remarks. I would now like to turn the call over to Mac Livingston, Vice President of Investor Relations for Altria Client Services. Please go ahead, sir.

Billy Gifford :

Thanks, Mac. Good morning, and thank you for joining us. In the third quarter, Altria continued to balance maximizing profitability from our core tobacco businesses, with investing to realize that vision of responsibly leading the transition of adult smokers to a smoke-free future. Our tobacco businesses performed well against difficult year-over-year comparisons. And we're encouraged by the significant retail share growth from on! in the third quarter. We also continued to reward shareholders with a strong and growing dividend, and announced today the expansion of our share repurchase program to $3.5 billion. Both Altria and the tobacco industry are evolving, and with transformation comes opportunity. It also brings uncertainty and adversity, including the recently International Trade Commission decision related to IQOS. We knew our journey to a smoke-free future would not be easy, but our determined and talented employees have demonstrated they are up to the challenge. The pursuit of our vision is not based on a single brand or product platform. Our vision is built on our understanding of tobacco consumers, our capabilities as a leading tobacco Company and a portfolio of smoke-free brands and product formats. We've made progress through the performance of our current smoke-free portfolio and advancements in regulatory sciences, data analytics and a robust consumer engagement system. Our tobacco businesses remained strong and our vision keeps us focused and guides us forward. Let's now turn to our business results. Altria grew its third quarter adjusted diluted earnings per share, 2.5%, despite a backdrop of challenging comparisons and unfavorable year-over-year trade inventory movements. For the first nine months of the year, adjusted EPS grew 4.5%, primarily driven by the strong financial performance of our tobacco businesses and higher ABI adjusted earnings. Our smokable products segment continues to generate significant cash and return to shareholders -- to return to shareholders and fuel our vision. Third quarter adjusted operating Company's income decreased 2.2%, reflecting the impact of trade inventory swings, but grew 2.6% to $7.9 billion for the first 9 months, while Marlboro remained strong. The all-tobacco products segment continued to deliver robust profit margins, while Copenhagen maintained its leadership position. In all nicotine pouches, we have accelerated investment behind Helix and believe that the on! portfolio is well-positioned in this fast-growing category. We're advancing the sophistication of our analytics across our companies. The Helix team uses this capability to evaluate the impact of promotional tools on tobacco consumers, and understand what actions effectively drive trial, repeat purchase and adoption. on! retail share of all tobacco increased a full share point sequentially, reaching 3 share points for the third quarter and nearly tripling since the end of last year. These strong results were driven by increased smoker trial and repeat purchase from existing on! consumers. We're excited by the performance of on! during the first 9 months of the year, and believe consumer insights, disruptive retail executions, and consumer engagement will continue to fuel its growth. Last year, we submitted pre -market tobacco applications to the FDA for the entire on! portfolio. While the FDA has made substantial progress in reviewing millions of PMTAs, they received our applications for on! are still pending. A week ago, the FDA authorized the marketing of four of our all-nicotine products, Verve Discs and Verve Chews, in the flavors of Green Mint and Blue Mint, and determined that the marketing of these products is appropriate for the protection of public health. This is the first flavored product authorization issued by the FDA for newly deemed tobacco products. While our Verve products are not currently in market, we believe the learnings we gained from developing our Verve submission were critical in following compelling and timely submissions for on! which we completed in only 9 months after closing the on! transaction. We're also actively working on modified risk tobacco product applications for on!. We believe an MRTP would be an impactful point of differentiation for the brand, and an important tool in educating and ultimately transitioning smokers to less harmful products. In e-vapor we estimate that the total category volume increased 17% versus the year-ago period and increased 2% sequentially as a result of continued elevated levels of competitive activity. While we had hoped for clarity on the categories outlook as manufacturers received PMTA decisions, the future of e-vapor is still uncertain. For most of the leading e-vapor products, the applications are still pending, including those submitted by JUUL. Moving forward, we expect e-vapor buying trends to be influenced by regulatory activity, which has the potential to impact the degree of cross category movement. Recently, the CDC published an update from their national youth tobacco survey. While caution is warranted when comparing results year-over-year, due to the impact of the pandemic on the survey’s methodology underaged e-vapor use, including use of Juul, shows continued signs of decline. We're encouraged by the progress, but more still needs to be done and we remain committed to continuing our work to drive down underage use. Turning to heated tobacco. The IQOS team continue to refine it's go-to-market approach for new and innovative products. Across the four states were IQOS is available, total Marlboro HeatSticks volume continued to grow with repeat purchase accounting for approximately 85% of sales. According to IQOS consumers, our IQOS experts program played a significant role in their repeat purchases. The program offers smokers personalized support and encouragement through consistent tailored engagements. In the Northern Virginia lead market device penetrations, as a percent of the smoker population, continued to exceed the performance of previous roll outs. In the last four weeks of the third quarter, Marlboro HeatSticks achieved a cigarette category retail share of 1.8% in Northern Virginia stores with distributions. As we mentioned earlier, the International Trade Commission recently imposed an importation ban, and issued cease and desist orders on IQOS, Marlboro HeatSticks, and infringing components. We're disappointed in this decision as IQOS is the only inhalable tobacco product to have received FDA authorization as a modified risk tobacco product. The ITC's importation ban will make the product unavailable for all consumers who have switched to IQOS, reduce the options for over 20 million smokers looking for alternatives to cigarettes, and ultimately is detrimental to public health. We continue to believe the plaintiff’s patents are invalid, and that IQOS did not infringe on those patents. The ITC's decision is currently under 60-day review by the administration's U.S. Trade Representative. In the event that the administration does not reject the decision, we are preparing to comply with the order. We've been focused on our contingency plans surrounding sales and distribution and had been in communication with PMI on their domestic manufacturing plans. We view the ITC's decision as a frustrating obstacle, but we're not deterred from the work required to realize our vision. We remain committed to the heated tobacco category and believe it can play an important role in transitioning smokers to a smoke-free future. Going forward, we expect to apply the knowledge and capabilities we gained from introducing and responsibly marketing a brand-new product category. For example, we've learned how to blend behavioral science, data insights, and consumer engagement to support smokers on their smoke-free journey; leverage MRTPs to educate consumers on the benefits of reduced risk products, and established a robust post-market surveillance system as required to monitor FDA authorized products. I'm optimistic about the future for tobacco harm reduction in the U.S. We have an unprecedented opportunity to lead the way in shifting millions of smokers away from cigarettes, if we follow the science and foster innovation with the support of reasonable regulation. Let's turn to our financial outlook. We are raising the lower end of our full-year 2021 guidance and now expect to deliver adjusted diluted EPS in a range of $4.58 to $4.62. This range represents a growth rate of 5% to 6% from a $4.36 base in 2020. I'd also like to welcome Marjorie Connelly and Matt Davis to our Board of Directors, as announced this morning. They bring significant combined expertise in operations, business strategy, consumer insights, and public policy, and will be tremendous assets as we pursue our vision. I will now turn it over to Sal to provide more detail on the business environment and our results.

Operator:

Thank you. Once again, as a reminder, [Operator Instructions]. Investors, Analysts, and Media Representatives are now invited to participate in the question-and-answer session. We will take questions from the investment community first. Our first question comes from Pamela Kaufman with Morgan Stanley. Please go ahead.

Billy Gifford :

Good morning, Pamela.

Billy Gifford :

Thanks for the question, Pamela. I think when you think about pricing, it's important to remember our price realization has really two major components. The first component, everybody is all aware of it and talks about regularly which are list price increases, and that's across our portfolios. When you think about the other component, and we've referred to it before as the investments we've made around advanced analytics and the amount of data we get from retail. And with that advanced analytics, some companies refer to it as revenue growth management but it's really taken the retail promotions we put in the marketplace for consumers and really making it more efficient and as effective, or maybe at times more effective than without the Revenue Growth Management. So that's allowing us to increase the price realization. I think that's what you experienced through the quarter and through the first 9 months. And from a standpoint of L&M, look, we've increased our profitability on L&M. We have ceded some share there, but we are a premium focused Company. We liked the results that we've experienced in L&M. And I think you see what the advanced analytics model has been rock solid for, call it now, 5 to 6 quarters.

Billy Gifford :

I'm sorry, Pamela. Finish up.

Billy Gifford :

I think if you look at the slides we provided, I will take the discount question first, you can see discount bounces around from time-to-time. It's still in the range where it has been for quite a while. I think you see the propensity for consumers to still vastly value premium brands over discount brands. From a standpoint of how we think about pricing, and I'll be careful not to talk about future pricing, I mentioned before there are several factors we think about. We think about the health of our brands, the demographics that are associated with our brands, are we being relevant across all adult cohorts. And we think about the economic health of our consumers. That is a factor that we factor in and then we think about overall corporate objectives. And so we looked about how we make decisions there. I think when you think about the overall strategy that we apply to the combustible segment, it's really about maximizing profitability over the long term while making appropriate investments and balancing investments in Marlboro with investments in the non-combustible portfolio.

Billy Gifford :

Thank you.

Operator:

We'll take our next question from Vivien Azer with Cowen. Your line is open.

Billy Gifford :

Good morning, Vivian.