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.

Thanks, Katie. 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 nine month 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 US 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 Web site 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. 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…

Thanks, Billy. I'd like to begin with a review of the macroeconomic backdrop and its impact on US tobacco consumers. In the third quarter, consumer discretionary income levels remained under pressure as higher gas prices and inflation persisted. However, we saw signs of continued brand loyalty in the tobacco space. In September, we conducted research to understand how tobacco consumers were managing their spending in several categories, including tobacco, alcohol, groceries and household items. Our research indicates that tobacco consumers continue to stick with their preferred tobacco brands at a higher rate compared to other categories when experiencing higher prices. These results were consistent with the results from our previous surveys. We believe Inflation and the rise in gas prices was partially offset for some consumers by a strong job market and wage growth. Overall, average wages increased 6.9% in the third quarter compared to an average 8.3% increase in CPI. And for some occupations, including the service industry, wage growth outpaced inflation. We continue to monitor tobacco consumer behaviors and changes in marketplace conditions. Despite these macroeconomic challenges, our core businesses performed extremely well in the third quarter, underpinned by the strength of our premium brands. Marlboro, Copenhagen and Black & Mild continued to grow profitably, and on!’s momentum and growth reflected strong positioning in the marketplace. This strong business performance, combined with fewer shares outstanding, drove Altria's adjusted diluted earnings per share results. Altria grew adjusted diluted EPS by 4.9% in the third quarter and by 4% in the first nine months. Turning to our business results. The smokable products segment continued to deliver on its strategy of maximizing profitability in combustibles while appropriately balancing investments in Marlboro with funding the growth of smoke-free products. The segment grew its adjusted operating company's income by 1.8% in the third…

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

A lot going on with a lot of announcements. But I wanted to maybe touch on what you announced this morning related to your JV with JT. I just was hoping, Billy, maybe you could help us better understand the opportunity potential for HTC versus HTS formats and then the target consumers for each? And also, I just wanted to verify something. The time line with, I think, HTC is earlier and it's 100% owned and controlled by you. Is that correct?

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.

And then just a follow-up on that. How do we think about this potentially changing either your near or long term growth algorithm? And then I'm just thinking through in terms of future investments required. I assume there will be some other than the initial 250 million to develop and ultimately commercialize these products. Could you touch on that?

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.

And then just maybe my final question is related to your guidance, which you narrowed this morning. You narrowed it slightly, I guess, 20 bps at the midpoint. You stated just -- to give you more flexibility to react to marketplace conditions. So I just wanted to maybe hear from you what got a little bit worse or uncertain? Is it the pressures on the consumer, or is there something else that we should be mindful of?

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.

Our next question will come from Pamela Kaufman with Morgan Stanley.

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?

Yes, it's a great question, Pamela. And I think it's important to remember as you step back, and that's why we tried to highlight in the remarks that the reduced harm in the US is really undeveloped. And the reason I say that is from an authorization standpoint, take the two that exists today, e-vapor and novel oral. A very low percentage has been authorized by the FDA in e-vapor, and we believe that's going to go through a period of transition as those authorizations come out and some make it and some get denied. When you move to the novel oral, really no authorizations have been received in that space. And so that, again, depending on how the regulatory body goes about assessing and authorizing those, there could be a bit of a transition there. And then in the heated tobacco space, it's really nonexistent. I think when you think about those three categories, we believe the extent of those three categories will really be shaped by three factors. So one, I mentioned, is the regulatory decisions that are taken in each of the individual categories. It will be legislative in tax policy, how does that develop through time related to the individual categories and then really through time is the innovation in the spaces that best address the consumer preferences based on what they desire. So that's really what's going to shape the size of the three individual categories. We believe those are the three categories that will grow through time as consumers continue to move away from cigarettes to the smoke free products. As far as prioritizing, we're going to prioritize based on where we see the consumer moving and how we see the consumer moving. It's going to be completely consumer driven, and that's why we're excited to be able to leverage the sales force to get the products in the right stores as well as the amount of data we receive and the insights that we can garner from that.

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?

The impairment of the ABI asset, the reduction in our carrying value is really accounting driven. When you think about whether an impairment is temporary or not, you have to look at timing of your expected recovery. As far as the ABI asset, as we stated, we view it as a financial investment. Our focus is to maximize the value for our shareholders. But share price value is one of many variables that go into that analysis. It's an analysis that we do on an ongoing basis, and we'll continue to focus on what's best for our stakeholders over the long term.

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?

We mentioned them in our opening remarks. I don't have a lot to add to that. I mean, obviously, the proceeds provide us with increased flexibility, which is always a good thing. So there's really nothing more to add. I mean we're going to continue to look at all capital allocations through the lens of what's best for our shareholders, be it investments in our long term vision, continuing to manage a strong balance sheet or provide further returns to our shareholders. But again, that's part of our broader capital allocation strategies.

Our next question will come from Chris Growe with Stifel.

I had a question for you, a bit of a follow-on to the agreement with JT. Obviously, it's very encouraging to get you back into that category. Given the time line for development of your products and obviously, FDA review, do you have a reasonable time frame for launching the product in the US? And if I could ask related to that, you'll have this international capability in terms of launching a product. So should we expect that you'll be able to develop products and kind of test and learn internationally to refine those for an ultimate PMTA application in the US?

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.

And just to be clear on that, Billy, would it be -- given your time line for when you expect the PMTA and for the product you're developing, would it be reasonable to assume we'd see that like next year in international market being tested at least and then moving to an application in 2024 or I'm getting too far ahead of myself here?

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.

And I had a question just in relation to your -- just part of your guidance this flexibility to react to current marketplace conditions. And as I look at your business today on the smokable side, in particular, you're gaining share in the premium segment. Obviously, premium is losing share, though, overall. So I guess as I think about where you need to invest, I would be curious, is it in the premium brands in the premium category to take back share from discount, or is it more on the discount side where you're losing share do you want to invest going forward?

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.

Our next question will come from Gaurav Jain with Barclays.

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?

Look, Gaurav, we're excited about what on!'s been able to perform, how it's been able to perform and grow in the marketplace. Certainly, with the learnings we had in the other two categories where we have the analytics and the RGM tools that we have in place, we certainly see the opportunity to be able to apply that into new spaces as we gain volume and market share. And so overall, I think from a standpoint of the strategy in the on! space, it's really to maximize profitability through the long term -- with the strength of Copenhagen while balancing investments with on!. And I think that's exactly what you see taking place in that space.

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?

Yes. I think it remains to be seen, and that's what we try to highlight for the size of each category. And you highlighted an important one that's in front of the entire industry in all of these spaces, is regulatory decisions. That will decide how large the individual categories can be. I would also highlight the other two. It's really legislative and tax policy, how does that mature through time, and then the last would be innovation. But I hear you and that's why we try to highlight those three factors that could ultimately decide the size of each of those categories relative to each other.

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

So we've engaged with our government affairs team. We don't believe the science supports it from a standpoint, and we've highlighted that. And we've been pretty vocal with that even with the FDA as they looked at some of these things. We think those decisions are better based with the FDA, where it finds an evidence base. But when you think about the overall category in California, certainly, it could have an industry impact. But we, as a reminder, SKU non-menthol and cigarettes and we SKU non-flavored products in the more smokeless space. So again, I think it could have an impact to the industry, the science doesn't support it, but I just wanted to remind you of our positions from a SKU standpoint.

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?

Can you repeat that Gaurav?

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

If you think about capital projects, Gaurav, the spending is not necessarily linear, right? The projects are moving along quite well. The year -- time has passed throughout the year. So we're three quarters through the year. So we just lowered our forecast for spending. So that's more timing. The projects remain on track. Of course, there are some delays in supply chain when you're ordering equipment, but nothing material. We've been able to manage that quite well. So it's not uncommon for fluctuations in capital forecast as the year progresses.

Our next question will come from Vivien Azer with Cowen.

So I also wanted to touch on heat not burn, please. I apologize, maybe it's just a lack of imagination on my part, Billy. But when you just guide the HTCs, the capsules, it reminds me of the original Ploom innovation that JT launched in 2016, 2017. Can you just expand on how that's different, if at all, because that didn't really resonate with consumers in Japan.

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.

But it is different in terms of the nicotine [indiscernible]?

That is correct.

I do look forward to seeing that, for sure. Maybe just pivoting to the smokeable segment, please. Understanding perfectly well that your objectives are really focused on profit growth. It's hard to ignore the fact that your price gap is now the highest it's been since 2009. And so I'm just curious how you think about operating leverage for that segment, modest market share declines are fine. You're right. Obviously, that on a three year basis, industry declines haven't gotten that much worse. But your two year stack is deteriorating on an industry adjusted basis. And so how do you think about operating leverage in that segment from a volume perspective?

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.

And that segues really nicely into my last question, which is on the performance of the discount category. Obviously, deep discount share gains are now reaccelerating. You've articulated, I think, very helpfully, the puts and takes in terms of the backdrop of the consumer. But just any updates on how you're thinking about kind of strategically positioning your discount brands against that backdrop?

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.

[Operator Instructions] Our next question will come from Carla Cacia with JPMorgan.

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?

With that value, it was an exchange of 2.7. The only thing that would change the 1.7 is the interest that would accumulate through time, depending on when they made that payment. Exclusivity remains with us until the final payment's made.

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?

Really no plan at this point. We hold the economic state. We'll see what their performance is in the marketplace, but we thought it was important at that point in time to get out of the noncompete to open up our flexibility in the e-vapor category.

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

This is [Argus] in for Priya. One quick question. You have a euro debt maturity early next year. Do you need to have that euro exposure or could you be flexible in refinancing that in US dollars?

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.

And one last one. What are your thoughts on the relative attractiveness of the US dollar market versus the European market in terms of swap rates?

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.

Our next question will come from Callum Elliott with Bernstein.

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.

We think about it a bit differently. I mean let me describe. You'll recall when we [indiscernible] across the nicotine space in the US, it greatly reduces the decline rates. So if you look over the past five years, decline is at about 1%. We think it's important to have a portfolio of products in each of these categories and across the categories that attract consumers to them from a standpoint of being able to participate in those categories, have strong products and brands across those categories, which will be a benefit to volume and attract a larger group of consumers to transition from cigarettes over to the smoke free space. I think it's important to remember that the JV that's in place is for a product that hasn't even been commercialized yet, as they continue to garner learnings and consumer insights and feedback. And so we're extremely excited and we think this is a foundation for future collaboration and potential exposure to international revenue as well.

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?

I think when you think back, we highlighted when we made that investment in cannabis that it was going to be a long term investment. We still believe it has long term potential in the US. Certainly, with the current political environment, it doesn't feel imminent that anything will switch in the US. I think the President made an important first step in some departments, but it's a first step and it's a lot more to take place before the industry dynamics change in the US to be able to capitalize on that. So we still believe it has long term potential in the US, but certainly in the political environment, nothing is imminent.

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

Yes. Thank you, Katie. I'd like to conclude our remarks by going back to where I started. We are in an exciting period of Altria's history and have an unprecedented opportunity in moving beyond smoking. We expect that our actions will lead to a strengthened portfolio across the three major smoke free categories that will help smokers transition away from cigarettes. In heated tobacco, we believe we have taken a huge step forward with our new joint venture with JT and our internal product development efforts. We now have the ability to compete in the e-vapor category and are already assessing our options in this space. And we have demonstrated progress in the growing novel oral category with on!'s continued growth. I continue to be confident in my belief that we can achieve our vision and create long term value for our shareholders. Thank you for joining us, and have a great day.

Thank you [Technical Difficulty].