Good day, and welcome to the Altria Group 2017 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 Mr. Bill Marshall (00:40), Vice President, Investor Relations for Altria Client Services. Please go ahead, sir.

Thank you, Lori. Good morning and thank you for joining us. We're here this morning with Marty Barrington, Altria's CEO; and Billy Gifford, Altria's CFO, to discuss Altria's 2017 third quarter and first nine months business results. Earlier today, we issued a press release providing these results, which is available on our website at altria.com and through the Altria investor app. During our call today, unless otherwise stated, we're comparing results to the same period in 2016. Our remarks contain forward-looking and cautionary statements and projections of future results. Please review the Forward-Looking and Cautionary Statement section at the end of today's earnings release for various factors that could cause actual results to differ materially from projections. Future dividend payments and share repurchases remain subject to the discretion of Altria's board. The timing of share repurchases depends on marketplace conditions and other factors. Altria reports its financial results in accordance with U.S. Generally Accepted Accounting Principles. Today's call will contain various operating results on both the reported and adjusted basis. Adjusted results exclude special items that affects the comparability of reported results. Descriptions of these non-GAAP financial measures and reconciliations are included in today's earnings release. Now, I'll turn the call over to Marty.

Thanks, Bill (01:59). Good morning, everybody. Altria delivered outstanding financial performance in the third quarter contributing to a strong first nine months of 2017. We grew adjusted diluted earnings per share of 9.8% in the third quarter and 5.5% for the first nine months. As we expected, our earnings growth is accelerating as we move through the second half of the year. We continue to return a significant amount of cash to shareholders through both dividends and share repurchase as Billy will describe in more detail, and in August, our board of directors voted to increase our quarterly dividend by 8.2%, and that's the 51st increase in the past 48 years. Our core tobacco businesses were the primary drivers of our earnings growth. In the quarter, the smokeable products segment delivered 7.7%, adjusted operating company's income growth, a strong pricing and lower cost more than offset volume declines. For the first nine months, smokeable products segment adjusted operating company's income grew 7.4%. Reported cigarette volumes were challenged in the quarter due to the industry's rate of decline, trade inventory movements, retail share declines and one fewer shipping day. We're very pleased with the financial performance in the smokeable segment. Our strategy continues to be to maximize income while maintaining momentum on Marlboro and Black & Mild over the long-term. As you know, we view momentum has continued strength across various brand metrics including equity, demographics, profitability and retail share. Marlboro continues to have category-leading equity, strong demographics and is, of course, highly profitable. As for retail share, Marlboro declined by 0.5 share point to 43.2% in the quarter and 0.3 for the first nine months to 43.4%. So let's look at what's happening here beginning with California. As we described in the second quarter call, we expected the dynamics related…

Thanks, Marty, and good morning, everyone. I'll start with some further color on the smokeable products segment. Cigarette industry volumes declined an estimated 3.5% in the third quarter. The smokeable products segment's reported cigarette shipment volume declined by 6.2%, primarily driven by the industry's rate of decline, trade inventory movements, retail share declines and one fewer shipping day. When adjusted for inventory movements and calendar differences, PM USA's cigarette shipment volume declined by an estimated 4.5%. The better look is probably the first nine months, where industry cigarette volumes declined by an estimated 3.5% and PM USA's cigarette shipment volume decreased 4% from both a reported and adjusted basis. The cigar business continues to perform extremely well, delivering volume growth of 6.6% in the third quarter and 10.6% for the first nine months. Smokeable segment adjusted OCI margins expanded by 4.5 percentage points to 52.2% in the third quarter, driven by higher pricing and lower SG&A and resolution expense. The favorable cost comparison is driven in part by California ballot spending in the year-ago period and NPM-related credits booked in this quarter. For the first nine months, adjusted OCI margins expanded by 3 percentage points to 51.6%. In the smokeless products segment, industry volume grew by an estimated 0.5% over the past six months. After adjusting for trade inventory movements and other factors, USSTC estimates that it's adjusted smokeless products shipment volume declined by 3% in the third quarter and 1.5% for the first nine months. Smokeless products segment adjusted OCI margins increased by 6.8 percentage points in the quarter to 70.3%, driven primarily by higher net pricing and lower cost, partially offset by unfavorable mix. For the first nine months, smokeless products segment adjusted OCI margins expanded by 1.6 percentage points to 67.7%, primarily due to higher pricing, partially offset by unfavorable mix. Turning to our alcohol assets. Wine segment adjusted OCI declined 5.3% in the quarter due primarily to higher cost. Ste. Michelle's volume trends improved in the third quarter relative to the first half and were essentially unchanged compared to the year-ago level. In beer, third quarter adjusted equity earnings from our investment in Anheuser-Busch InBev were $203 million, reflecting AB InBev's second quarter results which were reported in July. I'll wrap up by highlighting our cash returns to shareholders. Through the first nine months of 2017, we paid shareholders more than $3.5 billion in dividends and increased the dividend in August. We repurchased nearly $2.4 billion in shares, leaving $576 million in the program as of September 30. We expect to complete the program by the end of the second quarter of 2018. That concludes our prepared remarks, and Marty and I are now happy to take your questions. While the calls are being compiled, I'll remind you that today's earnings release and our non-GAAP reconciliations are available on altria.com. We've also posted our usual quarterly metrics, which include pricing, inventory and other housekeeping items. With that, Operator, do we have any questions?

. Your first question comes from the line of Chris Growe of Stifel. Christopher R. Growe - Stifel, Nicolaus & Co., Inc.: Hi. Good morning.

Hi Chris. Christopher R. Growe - Stifel, Nicolaus & Co., Inc.: Hi. I thought I'd just start with a question for you on California, really on the smokeable business and some of the challenges you had there around elasticity. So I just wanted to understand did you see an improvement in the quarter or do you expect the kind of the consumer to adjust to these price a little more, you'll see less elasticity going forward? And if I could ask related to that, does the new product pipeline from Marlboro, is there more – it sounds like there's more to come, we'll hear that next week, but just to understand how the new products have been contributing to potential market share improvements for that brand?

Sure. Good questions, both. So we've discussed previously, Chris, that elasticities with respect to cigarettes and we've had big jolts before like the one that we've experienced in California. And what happens is, as you know, there's an immediate disruption and you get a deep decline, and then it comes back to the curve that we've observed over the years, which is about negative 0.3. So a lot of it depends on how big the shock is California $2 a pack, after not having had an increase for decades, really. So it's coming back. We expect it will come back to where it is on the curve and we see some improvement there. But it's going to take some time. It was a big shock to the system. And you see that in the numbers, I think. So on Marlboro, we're very pleased actually with Marlboro's product pipeline. You see that what we try to do is we try to bring out SKUs to the market where we think that there's a niche where Marlboro can gain some business from competitive smokers. We're also, frankly, trying to create news in the marketplace about Marlboro to keep its momentum moving forward, and so we're going to talk about this next week. And I mentioned, I think, Black label already in the remarks. Christopher R. Growe - Stifel, Nicolaus & Co., Inc.: Okay. And to just a follow-up for you then on – you have a larger than expected price increase you put through recently. So I suspect there's some areas you want to invest in, having more pricing coming through. Can you talk about that broadly or perhaps just specifically where you want to invest in some areas that you can fund, perhaps an advance on RRPs or that kind of thing before that may become an opportunity for a launch next year?

Yeah. I won't comment too specifically, Chris. But I think we've called out several areas before. We are building a very, very strong competitive advantage in digital marketing and we continue to invest there. We continue to invest in the equity behind our brands. And obviously, as the FDA has now set the new direction with respect to reduced-risk products, you have to make investments there in order to compete effectively. And those are some areas that we obviously have been investing in and expect to invest further. Christopher R. Growe - Stifel, Nicolaus & Co., Inc.: Okay. Thanks for your time this morning.

Thanks for calling.

Your next question comes from the line of Vivien Azer of Cowen & Company. Vivien Azer - Cowen & Co. LLC: Hi. Good morning.

Hi, Vivien. Vivien Azer - Cowen & Co. LLC: So, I was hoping you can touch on, please, the evolution of your inventories as well as wholesaler inventories. I recognize that it ebbs and flows quarter-to-quarter for a variety of reasons; taxes, price increases, new product launches. But as I look at the absolute levels of inventory in the system, both for you and for the industry as a whole, I don't think I've ever seen numbers this high before. And for your inventories, it's going to be the third quarter of a sequential build. So any color on that would be really helpful. Thanks.

Yeah. Thanks, Vivien. Vivien, this is Billy. You're right, the third quarter ended a bit higher than if you look at it on a historical basis. But as you mentioned, when we look at this over a longer period of time, they tend to ebb and flow. It's really when the wholesalers decide to take inventory. At times, it can be when the holiday occurs in a quarter. But again, we expect that to balance out as we move through the rest of the year. Vivien Azer - Cowen & Co. LLC: But anything else that you could offer really because it doesn't seem like it's just a one quarter phenomenon if it's three quarters of sequential increases? I mean it's not quite close to a doubling versus where you were second quarter of 2016.

I guess the only thing I'd add to that, Vivien, has been that the wholesalers have strategies around when they build their inventory in, when they decide to take their inventory down, which they're free, of course, to do. Vivien Azer - Cowen & Co. LLC: Okay, that's fair. Then just in terms of Marlboro and perhaps we'll hear more about this when we see you at the Analyst Day, but any incremental color just in terms of the composition of some of the share evolution, either by price segment within the Marlboro brand family or by geography, anything outside of California to call out, perhaps reflecting back on some of the commentary from last quarter's call around some softness in the Rust Belt and the Southeast? Thanks.

Yeah, sure. So I'm glad we're going to see you next week and we are going to talk about Marlboro in some detail there. I think what we would say is you have to assess it in the context of the strategy, which is to maximize income. And so when we look at back at Marlboro shares, we don't decompose it down to the SKU level, despite I know there's quite a lot of interest in that; we don't do it for competitive reasons. But if we go back to Marlboro share gains, for example, during the period 2011 through 2016, we actually gained ahead of what the historical rate had been. It was about 1.7 percentage points of share gain. And you can see in the first nine months, we've given back about 0.3 share points. So I think the reasons are pretty straightforward. It is California for the reasons we just finished discussing. There were all these competitive launches and then I think there is a market dynamic change, which is – because of industry consolidation, there are very few brands left, frankly, that don't have marketing support on them. So Marlboro used to gain share by picking up some of the share from those unprotected brands as did other competitive brands – that's a market dynamic change. But, overall, I think we're on strategy, particularly when you see the income performance. So we'll talk more about the Marlboro brand family next week. We just don't break it down sort of at the level that you're asking. I hope you can appreciate that. Vivien Azer - Cowen & Co. LLC: Certainly, I can. Thank you so much.

All right. Thanks for calling.

Your next question comes from the line of Adam Spielman of Citi.

My question, I hope you can answer. So if you looked at Marlboro outside California, so the other 49 states, my guess is you've lost market share in the first nine months but to a lesser extent. I was wondering if you can help quantify that since you're trying to get rid of the California effect?

0.3 share points.

Thank you very much. Secondly, turning to smokeless. You obviously gained margin very strongly. And one of the things you said is in the nine months, it was mainly driven by price increases. But in the final quarter we're talking about – the third quarter, there were also some cost saves. I was wondering if you could detail that. And also you've given some around color around competition in the smokeable, I was just wondering if you can give some color about the competition in the brand dynamics and what's really happening in smokeless because you haven't so far and I'd really appreciate that.

Sure. Let's try both. So I think one of the principal contributors at the cost line was, remember in the year-ago comp, we had California ballot spending, Adam.

Yeah.

And that came out obviously in the comp and that was a significant delta in the year-over-year comp. I would say that the competition in the smokeless side of the business is competitive. We obviously are doing great with Copenhagen. You know our strategy on Copenhagen and Skoal but we have a competitor that's got a brand there, and there were significant promotions in the quarter. I think that accounts for it as well.

Okay. Thank you very much.

Thanks for your call.

Your next question comes from the line of Judy Hong of Goldman Sachs.

Hey, everyone. It's Rita Joe (22:19) filling in for Judy.

You're welcome. (22:23)

Thank you. So I have a question on the competitive activity that you're seeing in combustibles. Greatly appreciate the color on the call thus far, but digging a little bit deeper in terms of the increased competitor spending. Has it primarily been related to these new launches or is it behind the core flagship brands and how do you expect some of those competitive dynamics to persist over the next few quarters?

Sure, let me see if I can help you. I think the answer is, there was quite a lot of activity around new product launches. So we mentioned in our remarks, we've got, I think, five of them over the course of the year, which is higher than we typically see. It's also worth mentioning that it's just not five, there are multiple SKUs with the five, so you actually have a lot of SKUs coming into the marketplace. And as you know, in our category, because of the way we have marketing restrictions is the battle is at retail. People put promotional resources on them, including us, when we do this, to try to promote trial. And when you have smokers who are trying a new product, it puts pressure on the share leader on Marlboro. So that's our diagnosis of what's been happening; that and California, obviously.

Great. And then a follow-up on MarkTen. So the results were pretty positive this quarter, with volume growing more than 50%. So what are your expectations this year for e-vapor category growth? Clearly, it's accelerated a little bit this year versus what we've seen over the past couple of years and what are the plans behind further investment behind the MarkTen franchise?

Yeah. So on your last question, I'd invite you – either Judy will let you come to the Investor Day or you can certainly dial in, we're going to have a lot to say about our vapor business on Investment Day, and we've got exciting plans there. Look, the category has picked back up, as you say. The last number I saw, I think it looks like it's picked up maybe about 8% on a volume basis, higher on a dollar basis because you've got devices obviously which contribute to the dollar sales there. So as the technology gets better in vapor and those products become more acceptable to the consumer, we continue to see high trial and there is some stickiness as the products get better. So I think that's one of our key platforms for our innovative products and we're excited about the chance to continue to grow that business.

Great. Thanks so much.

Thanks for calling.

Your next question comes from the line of Michael Lavery of Piper Jaffray. Michael S. Lavery - Piper Jaffray & Co.: Good morning.

Hi, Michael. Michael S. Lavery - Piper Jaffray & Co.: I'm wondering if you could help us just get a sense for some of the timing on any potential IQOS approval. I know that the FDA accepted your PMTA application in August, I believe, and the targeted time from then is, I think, usually it's six months; I don't think they're bound to that. And, if I'm correct, I also think that sort of clock stops, so to speak, if they come back with quick questions and there's a dialogue back and forth which obviously we wouldn't have visibility on. But have you had a lot of interaction like that or what do you think you could give color-wise as far as what we should anticipate?

Sure. First of all, I think the timelines that you called out are correct, and those haven't changed since our last discussion on that. And as you point out, they are nominal, to use that word, I guess, at the FDA. But I think that they're working hard on it; those are PMI applications, of course, it's assisted by us so you may want to speak to them as well about it. But we've been encouraged by the degree of interchange on those applications and I think maybe another milestone to be watching for is if there were to be a TPSAC hearing on the applications, Michael, which as you know, is part of the process. And so PMI, with our assistance, is getting ready for all those things and we are working really hard to be ready so that when that authorization comes, as we hope it does, that we can get to market quickly. But I think your understanding of the process is correct and I don't really have anything new to add except perhaps the possibility of a TPSAC hearing should they announce one. Michael S. Lavery - Piper Jaffray & Co.: Okay, great. Thanks. And then just on the buybacks, you've got a little over I think $750 million in this quarter. You've got an average close to that for the year, and you've got about $570 million something, I think, left in the authorization. Your cash balance relative to the third quarter is above average in the recent history. Would it be reasonable to assume you might conceivably finish ahead of the 2Q 2018 schedule and what would we relatively expect beyond that? I know it's at the discretion of the board, but is that something you think you have some upside to perhaps?

Hi, Michael, this is Billy. I won't forecast out what we're going to do in the future on share repurchase. To your point, we still have the $576 million left. We'll see how we progress with that before we take any action. But if we're going to take any, of course, we'll go to the board and we'll be sure to tell you when we do. Michael S. Lavery - Piper Jaffray & Co.: Okay, great. Thanks. And just one last one, for the corrective statement ads that you're going to be starting running next month, that's, I believe, around the $31 million cost. Can you just help us understand how to think about modeling that and is that an incremental expense and would it be spread evenly over the next year or so? How do we factor that into our numbers?

Yeah. So you remember when we actually proceeded with that case, that $31 million has already been accrued, and so those expenses, as we go through time, will be charged against the accrual. Michael S. Lavery - Piper Jaffray & Co.: Okay, great. Thank you very much.

Thanks for calling, Mike.

Your next question comes from the line of Matthew Grainger of Morgan Stanley. Matthew C. Grainger - Morgan Stanley & Co. LLC: Hi. Good morning.

Hi, Matt. Matthew C. Grainger - Morgan Stanley & Co. LLC: Just had two quick questions. One, I guess with respect to some of the competitive dynamics in the smokeless business. You called out unfavorable mix as being one of the drivers of net revenue in the quarter and it's – I think that may be a factor that you don't typically call out in the release. Just wondering if you could elaborate on whether that's a byproduct of some of the competitive promotion that's going on or whether there are other factors driving that?

Yeah, Matt. Basically, if you look at the smokeless market, it has a couple of different price points that occur in the marketplace. And so it's just a mix of the volume that occurs at those 2 price points related to Copenhagen and Skoal. Matthew C. Grainger - Morgan Stanley & Co. LLC: Okay, understood. So is that something that was an outside impact from the quarter or is that a dynamic that you as being maybe a bit stickier as you've observed it over this year and going forward?

I think if I recall correctly, Matt, we called it out a couple of times in the past. I wouldn't say anything was abnormal about this quarter than other quarters. Matthew C. Grainger - Morgan Stanley & Co. LLC: Okay. Thanks, Billy. And then just from a category standpoint, a variety of peers across the CPG landscape have talked about C-store trends some more cautiously than others. So just curious if you were seeing any perceptible change or slow down in C-store activity within the tobacco category, specifically.

No, we haven't. Although we're following it closely, because obviously we've been following other people's reporting on that. And we've been following the C-store dynamics. It just hasn't shown up in our category, Matt. Matthew C. Grainger - Morgan Stanley & Co. LLC: Okay. Thank you, Marty.

Thanks for calling.

Your next question comes from the line of Bonnie Herzog of Wells Fargo. Bonnie, your line is open. Please state your question.

Hi. Good morning.

Hi, Bonnie.

Hi. A question on the FDA's plan to reduce the levels of nicotine in combustible cigs. You touched on this and how you're thinking about it but I guess any more color on this would be really helpful given the pressure that's been on your stock. And then I know it's still very early to talk about, but could you touch on your capabilities to reduce nicotine levels in your tobacco leaves and the expected costs involved? I guess I'm trying to understand how complicated this might be and if you really have the capability to do this?

Sure. So this is another topic that we're going to cover in some detail next week. So I don't want to put you off on your question but I'll give you a high-level sort of a lead-in, if you will. There's quite a lot to do, obviously, as you know of any nicotine standard or any other standard, for that matter. Wherever to be implemented, there has to be science and evidence-based, and in the nicotine area there's a lot of science that would have to be answered, so let me just call out a few for instance. So I think folks are going to have to understand how consumers might react to a nicotine standard, including the question of whether compensation would occur, because you obviously, from a public health point of view, wouldn't want people smoking more cigarettes to get their nicotine. There is no standard that is currently developed with respect to what the level should be or where it should be measured – is it in the aerosol or is it in the filler? How would it be implemented? Would it phased in over time or would it be done on a more immediate basis? Those are questions which have to be answered that are not answered yet; and the government has research going on that regard. As you might expect, our scientists are fully engaged in all the scientific questions, both tracking government research as well as doing our own research so that we're fully informed on those. There are big questions around technical achievability, which is an area that you're asking about. Now, the possibility of a standard around nicotine has been in the statute since 2009, so it won't surprise anyone to know that we have been looking at ways that we might meet any potential standard. You can look at product design, you can look at tobacco leaf treatments, you can look at tobacco seed technologies; most of which are proprietary, so I won't comment beyond them, but I think people should be assured that we have been looking at this. And then finally, I think another area that's going to have to be wrestled with is what about unintended consequences if a standard comes in? We're going to have to make sure that the market still works. So as you can tell, just from that high-level description, there's quite a lot that has to be wrestled to ground and again we'll talk more about that next week.

Okay. That was really helpful. And I'll come next week to hear more.

We're looking forward to seeing you.

I have another quick question, if I could, on Marlboro.

Sure.

You touched on this a lot. You mentioned that the Marlboro's equity is quite strong. So is there any more color you can give us on that or any metrics? I'm just trying to understand how you measure that and what you're looking at that we are not able to see.

We tried to share that with you on a yearly basis. I think you'll remember, typically at CAGNY, we put up the equity scores. We do an equity study every year. I believe the last chart we put up, we called out that Marlboro's equity is at least 14 points higher than the next closest competitor, off of an already high base, and that Marlboro's equity has been improving over time. So that work is underway again, and as soon as we have an update to the equity study, I assume that we'll be updating you in due course. But its equity remains strong, there's no question about it, and you'll see it in the premium price it's able to command.

Okay. And then one final quick question on your debt levels. Your net debt-to-EBITDA is pretty low right now at around 1.5 times. And I know you guys don't have targets for this, but could you give us a sense of how you're thinking about current levels and your possible appetite for taking on more leverage?

Yeah, it's a good question. We'll end the quarter, Bonnie, at 1.3:1. From a standpoint of taking on additional debt, I think if we see the opportunity to do that, based on what the business needs are, we will. As you know, we generate after dividends about $1 billion in excess cash just from the normal operations in the business, so it's a really cash-generative machine that we have here in the operating companies. And so at this point, we're very happy with where we're at. You're right, we don't have a specific target number that we're looking at, but we definitely want to make sure we maintain investment grade.

Okay. I'm just thinking, again a comment on the stock pressure, it could be a way to create values for shareholders, just even more aggressively buying back your stock at these lower levels. All right. Thank you.

I understand, but you're...

All right, Bonnie. Thanks.

Thank you.

Your next question comes from the line of Nik Modi of RBC Capital Markets.

Hey, good morning, everyone.

Hey, Nik.

Hey. So some of this stuff you might cover next week, so I look forward to seeing you guys then. But maybe if you could just give some thoughts on Nat Sherman, how it's doing? I guess, it's been over a year now since it's been in the portfolio, so I was just curious on how that's doing? The second question is, would it be a fair assumption to say that if IQOS have rolled out into the U.S. more broadly after the testing and all that kind of stuff, would be a lower margin than your overall portfolio just given the – it will have the same SCT, the same MSA, but perhaps you'll have to spend a little more to kind of build brand awareness? That was the second question. And then I have a third question after. I don't want to ask too many at once.

All right. Yeah, we're going to talk about Nat Sherman next week. Just for precision, we acquired it in January of this year, so it hasn't been quite a year. I think we just talked about before what we've been doing is getting the product ready, getting the package ready. It's a huge whitespace opportunity for us as you know, Nik, and we've got plans to get that in distribution, and I think it's going to – I think you'll be interested to see what we have on Nat Sherman. For IQOS, well, for sure, when we launch IQOS, it's going to have a lower margin because we're going to be investing in it. But the idea, over time is, is that when you get to scale obviously, that you could have a nice margin business in IQOS. So we're working through all that. We're going to talk about IQOS in some significant detail as well next week.

And then, I guess, the last question is kind of more of a broader question from looking across CPG. It seems like a big trend, there's kind of local assortment even in the U.S. And I'm wondering, Marty, given all of your very sophisticated relationships with distributors, with retailers, all your trade contracts, if there's a way for the company to optimize its assortment in different regions to kind of get the best out of the portfolio.

The answer is yes, Nik. I think it's a very insightful question, and in fact, our sales team has been working on that project and others. I think as personalization becomes more important to the consumer and particularly with the analytical tools and the data sets that we now have that – take revenue growth management tools, for example, which we've deployed already in the smokeless business and are rolling it out across the rest of the businesses, it allows you the precision to do just that. It's an excellent question and we're working on it.

Great. Thanks a lot, Marty. See you next week.

Thanks for calling. Okay, I look forward to it.

Thank you. At this time, I would like to turn the call back over to Mr. Bill Marshall (37:56) for closing comments.

Thank you all for joining our call this morning. If you have any follow-up questions, please contact us at Investor Relations.