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.

Thanks, Gretchen. 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. During our call today, unless otherwise stated, we're comparing results to the same period in 2021. 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 the 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'll turn the call over to Billy.

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…

Thanks, Billy. I'd like to begin with a discussion on the inflationary environment, which was exacerbated by the Russian invasion of Ukraine. We continue to monitor the potential impacts to our operations and supply chain, and we are actively working to mitigate risk. Thanks to the hard work of our teams, we have not experienced a material adverse impact from these events. While our company will continue to monitor the situation, our hearts go out to the suffering Ukrainian people and to all of those affected by the war. Moving to our businesses. The smokeable products segment delivered excellent financial performance once again. In the first quarter, the segment grew its adjusted OCI by 5.7% and expanded its adjusted OCI margins to 59.5%. The segment also reported strong net price realization of 9.2%. First quarter smokeable segment reported domestic cigarette volumes declined 6.3%. When adjusted for trade inventory movements and other factors, we estimate that segment domestic cigarette volumes for the first quarter declined by 8%, and that industry volumes declined by 6.5% over the same period. We believe it's important to analyze cigarette volume trends over the longer term as decline rates in any one period can be influenced by various factors. In fact, the 2-year average decline rates for first quarter adjusted smokeable segment and industry cigarette volume declines were 5.5% and 4.5%, respectively. In the marketplace, Marlboro demonstrated strength and resilience during a dynamic period for consumers. In the first quarter, Marlboro's retail share of the category was 42.6%, stable sequentially and down 0.4 versus the year ago period. Marlboro also maintained its leadership among premium brands, growing its share of the premium segment to 57.8%, up 0.2 sequentially and versus year-ago. And in discount, total share of the cigarette category in the first quarter increased 0.3…

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

I just had a question for you. You've had -- there's a little bit more of a macro headwind that's been occurring. Obviously, some areas where wages you showed, I think were doing a little better. But as I think about that, as you look at your kind of the way you look at it today, whether it be unemployment, gas prices, those sorts of things, is there a point -- at what point this year would you expect that to be less of a drag on volume? And I guess related to that, in terms of what you're seeing within the Marlboro franchise, Marlboro's share was quite resilient this quarter. Are consumers moving around within that visage of -- to Marlboro, the different blends as an example?

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.

Okay. I just had one other question. I think you talked about the dynamic of consumers moving into vape shops, for example, for vapor. And is that a movement away from traditional outlets? And I guess just what could be driving that? And I guess, to that effect, what that could mean to JUUL in the future based on that movement by consumers?

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.

Our next question comes from Vivien Azer from Cowen.

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.

Yes. So to your point on our metrics page, you can see our share of menthol is 9.4% across PM USA, and it's pretty consistent from an industry standpoint that it represents about 1/3 of industry from a menthol cigarettes in the marketplace versus non-menthol.

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?

Yes. I think you can think of it as a form of government stimulus, to a certain extent, Vivien. When you think about it, the actual refund checks are up. As far as -- we'll see how that plays out through the second quarter, not everybody gets their refund checks in the first quarter. But we certainly want to highlight it for our consumer. I think the bigger call out, though, and you saw it, was the wage inflation. And that's a piece that was benefiting our consumer, and that would be something that we would anticipate would be consistent throughout the year.

Our next question comes from Pamela Kaufman from Morgan Stanley.

Can you give an update on your strategy in the oral tobacco segment? Performance reflects continued elevated investment behind on! How should we think about profitability in this segment and how it evolves? And is there a level of market share or particular goalpost that you can point to that would drive a shift towards more of a profit focus for on!?

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.

Great. And then can you discuss what you're observing from the competitive landscape within the cigarette category in light of the current consumer environment. The deep discount segment continues to gain share at a higher pace, and price gaps remain wide relative to historical levels. Can you talk about how you're thinking about trade down within the cigarette category given some of the consumer headwinds?

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.

The next question comes from Gaurav Jain from Barclays.

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?

Yes. It's an interesting question. We don't disclose to that level, but we do see where wage inflation has -- and we try to highlight a couple of the categories, but where wage inflation has benefited to the back of consumer, and that's why we wanted to highlight that for you.

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.

Yes. I think the macroeconomic environment, to your point, is very dynamic. Certainly, we would expect wage inflation to at least be consistent throughout the year. In your hypothesis of it increasing, I guess, we'll see on how unemployment goes and how job openings respond to that. I think the other side, though, is the tailwind. You highlighted gas prices. We'll see where gas prices go through the remainder part of the year and where inflation trends. So I think it's very dynamic, and that's why we wanted to highlight some of the tailwinds and headwinds that we were seeing.

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?

Yes. So when you think about the total nicotine, you've seen us highlight that a couple of times and really looking at how the consumer is moving around. And that's exactly why, Gaurav, we put the portfolio approach in place because FDA decisions in one category put consumers at play and force them to other categories. And so we believe in having the portfolio approach is important. And so you can take the e-vapor category, depending on the decisions made by the FDA, that's why we highlight that, that category could be in a bit of a transition for the next year to 18 months as decisions come out and some products make it through and some products do not. Those consumers for products that do not make it will be at play either for other e-vapor products or other categories that they have in their consideration set.

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?

Can you repeat that? I apologize.

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…

That's a reflection of the strength -- I'm sorry to interrupt. That's a reflection of the strength of our funding of our pension plan and also some favorability in our overall performance in the pension plan, which, as you know, gets amortized over time. So you are correct in that, it has had a slight benefit to our P&L.

Our next question comes from Bonnie Herzog from Goldman Sachs.

I actually -- I wanted to circle back on your cig volumes, just given some of the investor concerns about your volume in this environment, especially your premium Marlboro volume given the wider price gap. So first, Billy, could you highlight for us if your Q1 results were in line with your expectations? And then maybe share some more color for us around your strategy to protect your volume and share. For instance, I think you guys are stepping up promotional spending a bit for some of the price-sensitive consumers. And then maybe highlight for us how you leverage your special select bring during these times to kind of keep more consumers in your Marlboro franchise? And then I'd like to just better understand why you aren't maybe striking a better balance between your pricing and volumes?

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, I would just add one other point, which we highlighted in our opening remarks. I think the strength of Marlboro's performance within the premium category, where share of premium has grown as a reflection of the effectiveness of the programs and tools Billy just mentioned.

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.

Yes. I think you see with the results through the first quarter. I think that was -- from a macroeconomic standpoint, it was a pretty tough quarter. And you've seen other industries be impacted by that, and we were able to navigate that very nicely. Again, I would just highlight, with the advanced analytics and the tools we have available to us, we can be much more precise. When you look at the 12-month decomposition we provide on volume, you can see from a price elasticity, it's holding firm from a standpoint of total price elasticity. You can really see it's just the macroeconomic factors that have switched around through time.

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.

Yes. I appreciate it, Bonnie. And I know that you're looking for volume guidance that we don't provide. I think with this dynamic marketplace, the reason we give a range of guidance is we know that things are going to change for our consumer base. And we want to be able to provide the consumer what they need. And so that's why we put a range of guidance out there. Volume is one component, but there are multiple components that go into that guidance. So just to highlight one factor, I don't think is appropriate. It's really -- we feel comfortable reaffirming our guidance in the quarter. And it's really about keeping an eye on how the consumers bearing through this macroeconomic environment.

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

Sal, I was wondering if you could just provide us with some thoughts on your outlook for the refinancing market. You do have a little over $1 billion maturing later this year and how you're thinking about other opportunities for perhaps greater interest expense management across your debt portfolio? And then secondly, you do have one of your euro bonds maturing early in 2023. If I recall, that serves as a net investment hedge against the dividend you received from ABI. So strategically, how should we think about sort of the need to refinance that in euro versus sort of refinancing in dollar?

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.

And we have a question from Gaurav Jain from Barclays again.

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

There's really nothing new to say. We continue to perform the analysis related to our ABI stake. As we spoke about in our opening remarks, it's a financial investment. Our focus is on maximizing that investment for the long-term shareholder value. We continue to do the analysis, and there's nothing new to report on the asset itself.

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

I wanted to ask about consumer switching patterns that you would expect to see if a menthol ban were implemented either in the state of California or nationwide. First of all, would you expect to see Newport smokers switching to Marlboro? And if so, what net impact would you expect to see on your overall cigarette business?

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.

One quick follow-up. What products would you expect Marlboro menthol smokers to switch to? And would you market any products specifically to them in the event RECONNECT of a menthol cigarette brand like Marlboro Gold or JUUL or on!

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.

At this time, I would like to turn the call back to Mac Livingston for closing comments.

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

This does conclude today's program. Thank you for your participation. You may disconnect at this time. Have a great day.