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

Thanks, Jamie. Good morning, and thank you for joining us. This morning, Billy Gifford, Altria’s CEO; and Sal Mancuso, our CFO, will discuss Altria’s fourth quarter and full year 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 2022. 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 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. It was a pivotal year for Altria, as we made significant progress in pursuit of our vision, by enhancing our smoke-free product portfolio, while our businesses performed well in a challenging environment. We grew adjusted diluted earnings per share by 2.3% and continued our long history of rewarding shareholders by delivering nearly $7.8 billion in dividends and share repurchases. Throughout 2023, we took several transformative steps that we believe position us for sustained success in the U.S. nicotine space, including completing our acquisition of NJOY and fully integrating it into our family of companies, Making exciting progress on our promising smoke-free pipeline including launching on! PLUS internationally in Sweden, one of the world's largest modern old tobacco markets. Continuing preparations to bring heated tobacco products to market. This includes heated tobacco stick products through Horizon, our joint venture with JT, and our heated tobacco capsule product SWIC and advocating for a responsible and well regulated e-vapor market including stepped up enforcement against the listed disposable products. Our vision continues to guide our actions and we believe that our growing portfolio of smoke-free products positions us well to lead in the evolving nicotine space. My remarks this morning will focus on our view of the U.S. nicotine space and our progress in each of the smoke-free categories. I'll then hand it over to Sal, who will provide an update on consumer and industry dynamics and further detail on our business and financial results. Let's begin with the operating environment. We estimate that total industry equivalized nicotine volumes increased approximately 3% for the year, and approximately 1% over the past five years on a compounded annual basis, driven by the growth of illicit flavored disposable e-vapor products. This new estimate mark stayed…

Thanks, Billy. Let's begin with a review of the macroeconomic backdrop and its impact on U.S. tobacco consumers. We believe that discretionary income levels remained under pressure through the fourth quarter. While slightly lower gas prices in the fourth quarter were a modest tailwind, we believe the cumulative effects of inflation and higher consumer debt levels led to lower discretionary income for tobacco consumers. Late last year, we conducted research to understand how tobacco consumers we're adjusting their purchasing behaviors to the current macroeconomic environment. Our research indicates smokers continue to feel economic pressure throughout 2023, and we're more likely to search for deals when purchasing tobacco products in the fourth quarter. We will continue to monitor tobacco consumer behaviors and changes in marketplace conditions in 2024. Moving to our results. Our tobacco businesses generated solid financial performance again this year and a challenging external environment. In the smokeable products segment, adjusted operating companies income declined by 1.3% in the fourth quarter and was essentially flat for the full year. Adjusted OCI results in the fourth quarter and full year were primarily driven by elevated industry volume declines and higher promotional investments. Adjusted OCI margins expanded by 0.6 and 0.9 in the fourth quarter and full year, respectively. Net pricing remained robust and net price realization for the segment was 5.5% for the fourth quarter and 8.8% for the full year. Marlboro displayed resiliency during a period of continued uncertainty for consumers. In the fourth quarter, Marlboro's retail share was 42.2%, unchanged versus the year ago period and down just 0.1 sequentially. Marlboro also grew its share within the highly profitable premium segment to 59.2%, an increase of 0.8 versus a year ago, and 0.3 sequentially. In 2023, PM USA uses a sophisticated suite of RGM tools, to make investments…

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

Wanted to ask a question if we could start with the EPS guidance for the year. When we consider the 1% to 4% growth, you note that it will be weighted towards the second half. Can you talk about the factors supporting that higher growth in the second half? How much of that is the difference between incrementally higher investment in the first half before you anniversary some higher investment levels in 2023 versus your outlook for the cigarette volumes, including the additional shipping days in the second half?

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

If I could ask a second question here. When we look at the price realization on a per pack basis in the smokeable business, that year-over-year contribution decelerated through 2023, especially in the second half with realized pricing well below the rate of list price increases. Can you talk about the offsets to the price announcements that you have made, how much of that difference is between list and realized prices is due to trade down mix within Marlboro, with Marlboro Black Gold and other extensions versus increased promotional spending.

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

We'll turn now to Pamela Kaufman with Morgan Stanley.

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

Thanks for that, Pamela.

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

Thanks for your question, Pamela. I think there are a number of factors you should think about. When we put that enterprise goal out there, we talked about it on a compounded annual basis. And we highlighted for you that there would be variability throughout that process because there are going to be years where you have investment and you heard the answer to the previous question, we closed NJOY in the second half of the year. And so now you have a full year of investment. On the other hand, you have puts and takes across it because you saw the increase in profitability with on!. So as you're investing, the various categories is going to be at different levels of investment and as we're able to ease those investments that's what we anticipate through time. You know the aspiration is to be the leader -- a leader in each of the categories, and you know that we are pretty successful in increasing margins through time.

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

Yes. I would point you back to the decomposition of overall industry volume and the factors affecting it. The ones I would highlight is really the macroeconomic and other. And there remember, there are two components there. One, we've been highlighting for you that the consumer is under economic pressure. And when they're under economic pressure they make different decisions in the moment. The other is the explosion of illicit base. It's having an impact both in the combustible segment as well as the e-vapor segment, the legitimate e-vapor segment, if you will, and so it's having an impact on both. So I think as you think about the economy through time as well as what is necessary, which is significant more enforcement of illegitimate and illegal product in the marketplace those consumers will be at play. We want to keep them in the e-vapor market, and that's why you see the distribution and the movements we've made with NJOY, but keeping them in the e-vapor market responsibly. And so that's the way we think about it through time.

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

Yes. I think when you think about the combustible segment, it has always been a competitive marketplace. So I think we're seeing these other bigger challenges with the consumer being under pressure and the illicit base. From an illicit base standpoint, the consumers are moving. What's encouraging is it's a proof of harm-reduction. If we had harm-reduced products in the marketplace, consumers removed. But they have to be reviewed and authorized by the FDA for the consumer to be able to count on that. So I think when you think about through time, the competitive, I would point to Marlboro continues to grow its share in the premium segment. And its overall share has been really steady if you go pre-pandemic to post-pandemic, but it continues to be a competitive marketplace. I think when you think about e-vapor, we've certainly seen competitors step up their promotional spend as we have expanded distribution of NJOY. We've shared with you, if you will, the consumer research that we did prior to the acquisition. We feel good about the proposition we have with NJOY and the early consumer feedback we have on the product in the marketplace. So we look forward to being able to continue to engage with the consumer as we move through 2024.

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

Murray definitely all the best to your retirement.

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

Yes. I just -- I had a quick follow-up question on your smokeable segment. I guess, Billy and so, I mean, could you guys give us a sense of what's factored into your EPS growth guidance this year? I guess I'm thinking about it on the low end of your guidance range. Just does the low end assume essentially no dollar profit growth for smokeable, just trying to understand maybe how much flexibility you have to kind of hit some of these ranges?

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

And then I did want to ask about your smoke-free vision. Just hoping for maybe a little more details on the vision and where you expect by the end of the year in terms of progress. You touched on NJOY and the Navy. A little bit more color and update on your JV with JTI et cetera. And then I'm also trying to understand how to think about required investments this year versus last year. Can you give us a sense if spending behind your vision will accelerate in '24? And if so, are your core smokeable and I guess, all tobacco business is strong enough to support this stepped up spending and your ability ultimately to generate EPS growth. I think that's one of the key questions here.

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

[Operator Instructions] we'll go now to Callum Elliott with Bernstein.

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

Yes. I appreciate your question. I think if you recall, as we progressed through 2023, we highlighted for you pockets of the U.S. where we felt like we needed to make some investments. Some in the menthol segment, we saw some competitors getting a bit aggressive in the menthol space, and we made those investments. And some was related directly to the discount category and some of the aggressiveness there. I think overall, when you look at Marlboro and its steadiness and share and its growth in the premium segment, you can see with the RGM capabilities and the data analytics that we have, we're able to be very efficient and effective with spending in the marketplace. Trying to get, if you will, to the individual consumer so that we can deal with the individual consumer that is facing those either competitive decisions with the aggressiveness that they take or with just their economic situation. And I think you see that we've actually been able to implement that very well, again, with the steadiness of Marlboro and the investments that we've made.

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

I guess I'm just slightly surprised because I think your table in the quarterly metrics disclosures suggest that the macroeconomic pressure has actually lessened this quarter, whereas obviously, the price mix suggests that that trade down has accelerated in a very meaningful way.

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

And I have just sort of very, very different follow-up. The question is, can you talk about some of the recent regulatory changes in Louisiana, where I think they've been taking it upon themselves to clamp down on the illegal sales that you spoke about the disposable vaping products given the action that we've seen from the FDA? I think some of those changes took place in November. So should have a couple of months' worth of data now. What impact have you seen in Louisiana? And do you expect that other states might follow that path that Louisiana have taken?

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

We'll go next to Pallav Mittal with Barclays.

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

Yes. What we tried to share with you is that was the shipment volume. We tried to share with you also the share, and if you will, that's an estimate of consumer take. So it was 3.7% for the period that we owned them and then we try to highlight for you that we have put in place testing some bundle offers, where we could test trial promotions so that we're prepared for the full distribution and be able to bring that across the U.S. this year. We did it on a small scale, but just that small-scale impacted national share, an additional incremental 0.3 in November and another incremental 0.3 in December. So it's early. We'll be bringing that marketing activation and promotional to the nation this year. But certainly, the early results are very encouraging.

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

Yes, I would say from modern oral, there is minimal impact. You'll recall that in secular decline, we represent historically about 1% across category movement. Then we try to call out any additional or special items. And what we call out, and you'll see that in our quarterly metrics that about 1.5% to 2.5% is related to the illicit e-vapor category. And so if you think about historically 1% being up in secular decline, this 1.5% to 2.5% being related to illicit base. But yes, we are encouraged that we're seeing some interaction with going with adult smokers. But at this point, from an impact to the overall industry, it is minimal. It is really illicit base that is driving the majority of that.

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

I have a question about the California market dynamic data that you shared this morning. It looks like overall cigarette industry sales fell in California more steeply than the country overall in 2023. But it also looks like Marlboro, I thought Morris USA retail share increased in California more than elsewhere. So is it fair to say that as a result of the menthol ban, some consumers moved away from cigarettes, either stop smoking or move to other products, but also there was a dynamic here where people who might have smoked menthol cigarettes switch to Marlboro cigarettes.

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

What I don't see here is PM USA total shipments in California, I see that there's a retail share increase, but did your sales in California decrease in 2023 more than the national average?

They did. They are commensurate with overall industry.

So based on your observations of the market dynamics in California, what would you expect to see this a national ban menthol cigarette ban were implemented in terms of market dynamics and the impact on your sales?

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

But in California, your sales went down, although you did see some share gain as menthol smokers switched over to Marlboro.

That is correct.

And if the draft rule were adopted as a final rule, would you -- do you intend to by a legal challenge, if that is -- if that final rule is published?

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

One last question on modern oral nicotine products. Are they a risk to young people? And do you -- and what flavors and marketing approaches do you think are appropriate for that category?

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

So what would those marketing guidelines look like ideally, in your view, would it entail labor restrictions? Would it entail restrictions on social media, marketing and influencers?

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

[Operator Instructions] We'll go next to [indiscernible] with Thomson Reuters.

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

Yes. I think you certainly highlight that the circuit courts have taken different positions on the approach by the FDA in the e-vapor market when we certainly are closely monitoring these cases. But I think when you step back from it, we're in a unique position. We're the only cloud-based product that has received authorization from the FDA. So if you think about other major competitors in the cloud segment, they have not received authorization. Our authorization was in the tobacco flavored pods and our application from the menthol version of the same product is pending with the FDA. And we really feel like looking at those court cases in both instances where the courts have taken different positions. We believe that we should get a marketing order for this menthol product, whether you look at the holdings on either of those instances of the second quarter. So we'll monitor those, but we're in a unique position.

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

Yes, I'll be careful not to talk about future pricing, but I'll describe how we think about pricing. It's certainly an important part of the algorithm. I think you've seen us take pricing. I know people are focused on fourth quarter price realization. I tried to express that if you're going to look at it on a short-term basis, at least look at comps versus prior year, we look at price realization over the long-term. And when we think about the strategy in combustibles, it really is to maximize profitability over the long-term while balancing appropriate investments in Marlboro with the areas that are growing. And when you look at that and look through history and see the price realization, you see the data analytics and the revenue growth management capabilities kicking in. Marlboro has been steady, is growing its share of premium, and we continue to compete what we feel like very effectively and efficiently fulfilling what our strategy is for the category through time.

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

I think when you look at it, we'll continue to execute against our strategy, which is to maximize profitability over the long-term.

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

Thanks, everyone, for joining us today. Please feel free to contact the Investor Relations team if you have any further questions. Have a great day. Thanks.

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