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.

Thanks, Katherine. Good morning, and thank you for joining us. This morning, Billy Gifford, Altria's CEO, and Sal Mancuso, our CFO, will discuss Altria's Third Quarter and first 9 months 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. During our call today, unless otherwise stated, we're comparing results to the same period in 2020. Our remarks contain forward-looking and cautionary statements and projections of future results. Please review the forward-looking and cautionary statements 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. Altria reports its financial results in accordance with U.S. generally accepted accounting principles. Today's call will contain various operating results on both a reported and adjusted basis. Adjusted results exclude special items that affect comparisons with reported results. Descriptions of these non-GAAP financial measures and reconciliations are included in today's earnings release and on our website at altria.com. Finally, all references in today's remarks to tobacco consumers or consumers within a specific tobacco category or segment refer to existing adult tobacco consumers, 21 years of age or older. With that, I will turn the call over to Billy.

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…

Thanks, Billy. I'd like to begin by discussing the macroeconomic factors we believe influence the tobacco consumer. We believe rising gas prices, inflation and the conclusion of COVID-19 relief programs led to a decrease in disposable income versus the previous quarter. In addition, increased consumer mobility offered consumers more options for their discretionary spending. At retail, trends were unchanged sequentially. We estimate that compared to pre -pandemic levels, the number of tobacco consumer trips to the store continued to be depressed. But tobacco expenditures per trip remained elevated. We continue to monitor tobacco consumer behaviors and we will provide our insights on the factors impacting those behaviors as we move forward. Moving to our businesses. The smokeable product segment expanded its adjusted OCI margins to 58%, an increase of a half percentage point for the third quarter in more than one percentage point for the first 9 months. This performance was supported by strong net price realization of 11.3% in the third quarter, and 9.2% for the first 9 months. Smokable segment reported domestic cigarette volumes declined 12.9% in the third quarter, an 8% in the first 8 to 9 months. We believe reported volumes reflect an absolute wholesale inventory swing of 1.5 billion sticks. As wholesalers bill inventory in the third quarter of last year, but depleted inventories this quarter. When adjusted for trade inventory movement, calendar differences and other factors. Domestic cigarette volumes for the third quarter and the first 9 months declined by an estimated 7% and 5% respectively. At the industry level, we estimate that adjusted domestic cigarette volumes declined by 6.5% in the third quarter, and by 5% in the first 9 months. Marlboro remains strong and resilient despite a widening price gaps in a dynamic macroeconomic environment. In the third quarter, Marlboro retail share…

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.

Hi. Good morning.

Good morning, Pamela.

I had a question on pricing, so PM USA net pricing growth was very strong this quarter. Can you discuss the levers that you're managing to drive net price realization and how much of the growth in net pricing has been driven by your strategy around L&M versus how you're managing Marlboro and what you're doing differently from an RGM perspective?

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.

Thanks. As a follow-up, how are you thinking about the balance between generating price realization in light of some of the macro headwinds that you highlighted that might weigh on tobacco consumers? And it looks like sure --

I'm sorry, Pamela. Finish up.

Just related to that, it looks like the discount segment experienced stronger share gains this quarter driven by the deep discount segment. So are you seeing any increasing propensity of down trading in the current environment?

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.

Thank you.

Thank you.

I will pass it on.

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

Hi, thank you. Good morning.

Good morning, Vivian.

So in terms of the consumer, I think you guys rightly pointed out gas prices as key consideration in terms of watching out to the health of your core tobacco consumers. I recognize we’re possibly early cycle inflation in inflation in gas. But I'm curious, as you look at the various regions in the United States, obviously very different gas price dynamics, anything to call out in terms of underlying initial response from consumers higher gas prices?

Nothing there to call out, Vivien, you're right, we actually look at it down to the state level and below that; and I would say nothing really to call out specifically different from what you're seeing on a national base.

Okay. That's helpful. Thank you for that. Moving to the oral Tobacco segment, I was wondering if you could unpack the components of the 430 basis points decline in EBIT margin mix, versus the higher level of promo in on!. And to follow up on that, given the current levels of profitability in that segment, but you're focused on on!, do we think that this kind of 68% level is the right one or should we expect a recovery to more normalized rates like we've seen over the last few years? Thank you.

Thank you Vivien. I think when you think about our strategy in all tobacco, you can see what we are doing as we have great margins in traditional MST, we continue to lead in that category and we're making great strides in the on!, in the novel oral space, and we're very pleased with what we saw with the results. Once we got past manufacturing capacity constraints the progress we've been able to make with their sales force and the Helix team. It's important to remember that you're disrupting the consumer and introducing them to a new category that's grown extensively. And so we're not just investing in price promotion, we're investing in making it a premium brand and really engaging with the consumer both digitally as well as with equity images so that they understand the nature of the brand. So you're disrupting that retail and then you're reinforcing it with equity through time. So, that's how we're approaching the all-tobacco category. We believe on! through time, we can achieve Tobacco - like margins, but certainly we are in the investment phase right now.

Okay. Thank you very much.

Thank you.

Our next question comes from Owen Bennett with Jefferies. Your line is open.

Hope all is well. And first question is, just going back to the pricing and the dynamics with the growing deep discount segment and the price gaps with the bottom of the market. So it does appear right now, the industry share loss to deep discount is coming from discount. But at the same time with the aggressive pricing we've seen the price gap between the top and bottom of the market is now at 38%. And this is historically how constant around 30%, so we are seeing quite a sharp increase there. Is there any risk if this continues to pick up than the premium segment also starts to lose share, i.e. I guess, what I'm trying to get, is there a tipping point where you think that price gap becomes too sizable?

Yes, it's something we certainly monitor Owen, thank you for the question, and it's something that we supply to you guys the overall national price gap. But we look at it, back to Vivien 's question, at a much lower level. I think when you think about that price gap, I would point to the performance on Marlboro through time, being able to achieve that price realization and I mentioned advanced analytics before and what's that team has been able to do in making the retail promotions we put in the marketplace effective and more efficient. And so you see the steadiness of Marlboro through time, you see the price realization where we -- what we were able to achieve for -- through the first 9 months. But it's certainly something we monitor, but we feel good about the position that our tobacco businesses are at.

Okay, fine. And then second question, just wanted to come back to the ABI stake and some of the thought process around that, and specifically potentially creating more value from holding onto that versus potentially owning JUUL outright. So I mean, JUUL got the potential to be hypergrowth, especially if it gets traction internationally. It's also a segment that’s cannibalizing cigarette, so incentive to own all the economics and then arguably as well it can also boost your ESG credentials. Then on the flip side, you've got ABI arguably [ex] (ph) growth, not cannibalizing your cigarette, and it does nothing for ESG credentials. And then you've got potentially the corporate tax rate increasing soon into the [tops] (ph) charge on sale could increase. So I was just thinking, given those dynamics -- I mean, why do you think ABI can potentially offer more long-term value for shareholders than owning JUUL outright could?

Good morning, Owen. This is Sal. So there's a lot to unpack in that question. Let me start by saying, as you know, we don't comment on hypotheticals or speculation around M&A. So let me move on to the ABI question which you've touched on a lot of the analytical factors I talked about in my opening remarks. At the center of the analysis though, is really thinking about what's best for the shareholder over the long term. At this time, we believe holding the asset is what's best for the shareholder over the long term. As I said earlier, we'll continue to monitor the asset and perform the detailed analysis that we perform as we do with all capital allocation decisions and we'll continue to do that moving forward.

I think the only thing I would add, Owen, is you can take up and you've been following us for quite a while. It's no different than the analysis we went through with SAB. We look at the asset, we look at that, go through the analytics and doesn't make sense to hold the asset or reallocate that capital somewhere else. And so that's something now that the restriction has gone, that will do on a regular basis and we'll update you at the appropriate times.

Great. Thanks, gents. Appreciate the questions.

Thank you.

[Operator Instructions] We'll go now to Gaurav Jain with Barclays. Your line is open.

Hi, good morning. Good morning, Billy. Good morning Sal.

Good morning.

I've 3 questions. So the first question one is on other questions which have been asked earlier on the Marlboro's price premium versus lowest effective. So what I understand is that BATLD position Lucky Strike below [Indiscernible] and then used to compete against [Indiscernible] at the equivalent price and now you do not actually have a brand which is competing against Lucky Strike, which is why we are seeing these 20% plus volume declines on the LNN side of things. So do you think you also need to reposition a brand to compete more effectively against Lucky Strike?

Yeah. Gaurav, I would remind you how we think about the combustible category and it's really about maximizing profitability over the long term, and then balancing investments in Marlboro because we're premium focus with investments in the noncombustible portfolio that we have, and so that's how we -- the overall strategy for the combustible segment. I would point to the performance of Marlboro again, of 5 to 6 quarters our RAC steady performance, and the price realization we've been able to achieve, both from list price as well as the advanced analytics and applying that to the marketplace. So we feel good about where we're positioned, as far as other companies they can make decisions independent of us.

Sure. Thank you. The second question I have is on component shortages. So we have how [Indiscernible] battling a lot of industries. Have you seen any shortages and bad thing that e-cigarette market, which could help the cigarette volumes in the next few quarters. And we also had one of your competitors talk yesterday about shortages in some cigar components. So are you seeing any shortages in cigars as well?

Yeah. Nothing to point out, Gaurav, that would be material. We've had -- from a standpoint of our procurement team, they stay on top of this. They are able to work around whether it's storms, or shortages, or supply chains. But we haven't experienced any shortages either from a labor standpoint or from a product input standpoint. So we're extremely pleased with what our procurement and our hourly workforce has been able to achieve through this process.

Sure. And the last question on the MSA calculation and you will realize that because of inflation, next year there could be higher adjustment. So could you just remind us how that calculation works and how inflation plays a role in it.

Sure, Gaurav. Good morning. This is Sal. The MSA does have an inflation factor associated with the calculation of the payments. It has a floor of 3% and anything above 3% impacts that costs. Now, it's a point in time calculation. So at CPIUS of December 31st for the current year versus the prior year. We have had times where we've been above the 3%. It's something we are used to managing and we've managed in the past. I pointed it out only because it is a differential aspect of inflation for the Tobacco business versus other CPG industries.

Okay. Thanks a lot, Sal.

Sure.

We'll take our next question from Jennifer Maloney with Wall Street Journal. Your line is open.

Hi, good morning.

Good morning, Jennifer.

I just wanted to talk about consumer behaviors. Could you talk a little bit about why you're seeing a drop in industry cigarette volumes of 6.5%? Is it because people are spending more on travel and gas? Is it because they're out and about more, and not spending as much time at home?

Yeah, it's a great question. I would point to the mobility of our consumer and we talked about the extra nicotine occasions that we believe were added last year because of the stay-at-home practices. They -- and so as they've increased their mobility and you pointed to both factors that out about more and they're using their discretionary income on other things. The only other thing I would highlight that you did not highlight is gas prices and we know gas prices affect our consumers. But these are characteristics of the consumer. We know how to navigate through and I think you've seen we've been successful in the past, but those would be the major factors I would highlight.

And are our e-cigarette sales a factor? Are you seeing continued downturn in e-cigarette sales as affecting -- is that easing somewhat and hurting cigarette sales?

Yeah. I think if you refer to -- we try to provide a decomposition of industry volume. And so we do it on a 12-month moving. And so as of the end of the third quarter on a 12-month moving, remember, in secular decline, which is people smoking less or quitting smoking or moving to other categories, that's always contained about 1% of people leaving cigarettes for other categories. And then if we see additional cross-category movement beyond that, we highlight that. And you see that was up 0.2%. And so you can see about 1.2% of consumers leaving cigarettes for whatever other category they choose.

Okay, thanks very much.

Thank you.

Our next question comes from Patrick Folan with Redburn. Your line is open. And Patrick, please check the mute function on your phone. Patrick, please check the mute function on your phone. We're unable to hear you at this time.

Katherine, maybe we move on and come back to Patrick.

We have no further questions in queue. At this time I would like to turn the call back to Mac Livingston for closing comments.

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

This does conclude today's program. Thank you for your participation. You may disconnect at any time.