Good day, and welcome to the Altria Group 2024 First Quarter Earnings Conference Call. Today's call is scheduled to last about 1 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, Savannah. 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 2023. 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 our Board. We report our 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'll turn the call over to Billy.

Thanks, Mac. Good morning, and thank you for joining us. We made meaningful progress in pursuit of our vision, and our highly profitable traditional tobacco businesses continued to perform well in a challenging environment. In spite of the absence of an effective regulatory environment, we saw continued early momentum from NJOY and believe our businesses are on track to deliver against full-year plans. We also demonstrated our continued commitment to maximizing the return on our investments and delivering strong shareholder returns with the sale of a portion of our investment in ABI and the subsequent expansion of our share repurchase program in March. My remarks this morning will focus on the continued early momentum behind NJOY's commercialization, the state of the e-vapor category and enforcement progress, encouraging first quarter results from on! and our financial outlook. I'll then turn it over to Sal, who will provide further detail on our financial results and additional information on the partial sale of our ABI investment. Let's begin with our e-vapor business. After 3 full quarters of ownership, we remain excited about NJOY and its potential in the legal U.S. e-vapor market. In the first quarter, we broadened NJOY's distribution to over 80,000 stores. And we expect to expand to approximately 100,000 stores by year-end. We also continued the rollout of NJOY's first retail trade program, which we believe will help NJOY achieve optimal visibility and product fixture space at retail. Today, more than 70% of contracted stores have chosen options that secure premium positioning in the e-vapor fixture for NJOY. And we expect the majority of fixture resets to be completed in the first half of this year. To generate trial of NJOY, we expanded promotional offers at retail in the first quarter and saw promising results. NJOY's retail share of consumables…

Thank, Billy. First quarter adjusted diluted earnings per share declined by 2.5%. As we previously noted, we expect that 2024 adjusted diluted EPS growth will be weighted to the second half of the year, resulting from two main factors. The first relates to the timing of the NJOY acquisition in 2023. Since we closed this transaction on June 1 of last year, we are lapping quarters in the first half of the year that do not include the impact of amortization or investments behind the brand. The second factor is the impact of 2 additional shipping days in the smokable segment, each of which occur in the second half of the year. Turning now to our first quarter business results. The smokeable products segment delivered over $2.4 billion in adjusted operating company's income, with robust net price realization of 8.5%. And Marlboro maintained its long-standing leadership in the cigarette category. Adjusted OCI margins were 60.2% for the quarter, down slightly from a year ago. Year-over-year margin comparisons were impacted by higher per unit settlement charges and some elevated manufacturing costs. Year-over-year MSA and manufacturing cost per pack increases were higher in the first quarter than we expect for the remainder of the year. These higher costs were partially offset by lower SG&A costs in the quarter. We also expect this segment to benefit from lower SG&A costs as the year progresses. Total smokeable products segment reported and adjusted cigarette volumes declined by 10% in the first quarter. When adjusted for trade inventory movement and other factors, we estimate that industry volumes declined by 9% over the same period. We believe that industry volume trends have been negatively impacted by the proliferation of illicit disposable e-vapor products and continued pressures on tobacco consumer discretionary income. At retail, the discount segment grew…

[Operator Instructions] Our first question will come from Pamela Kaufman with Morgan Stanley. Please go ahead.

I wanted to ask about the modest of raise to your full-year guidance following the ABI share sale despite your plans to repurchase an incremental 3% of your stock. What considerations went into that? And is it a reflection of weaker-than-expected underlying performance relative to your outlook at the beginning of the year?

Thanks for the question. We were really happy to be able to revise our guidance and take up the bottom end of the guidance by a full percentage point. We took the top half -- the top end of the guidance up about 0.5 percentage point. I would read into that the confidence in our core businesses. But also, it provides us with flexibility as we go throughout the year to manage not only our overall business, but to make investments behind our innovative tobacco products. So we feel really good about being able to provide the guidance. It reflects the accretion of the ABI transaction.

Okay. And the second -- my second question is a bit more philosophical. Historically, your strategy has been to maximize operating profit by [ taking ] price in excess of cigarette volume declines. And given this is becoming increasingly difficult because of the magnitude of volume declines and the need to reinvest behind alternatives, do you think that this strategy is sustainable in the changing operating backdrop? And have you considered other approaches to maximizing profitability?

Yes. We always look at our strategies, Pamela, but we feel like that is the right strategy. I would phrase it a little bit differently than you did. It's to maximize profitability over the long term while making appropriate investments in Marlboro and the growth segment. So when you think about that, I think when you think about the pricing, and we've talked about the factors that go into pricing decisions, certainly, we've highlighted for you that our consumer is under economic strain, both from the cumulative impact of inflation as well as debt loads and high interest rates. And so we're going to continue to maximize profitability over the long term. We feel good about the price realization we had in the quarter, it was [ 8.5% ]. I think it's important to step back and think about what the consumer felt at retail. And so when you think about that, that was just shy of 6%. So there's still competition out there. But our consumer is under pressure, and we're going to make appropriate investments and be there for them. I think if you look back through history, that's proven to be a strong strategy.

Our next question will come from Bonnie Herzog with Goldman Sachs.

Maybe a bit of a follow-up question to Pamela. Just one thing I certainly saw in the quarter was your controllable cost in smokable per pack were up quite a bit, I think up mid-teens. So hoping you could touch on the drivers of that, and how we should think about that moving forward? And then honestly, just ultimately, your expectations for improved dollar profit growth in smokable in the back half. I guess I'm trying to understand, can you guys hit the mid- to high end of your EPS guidance this year, if dollar profits don't recover? Again, kind of a little bit of what Pamela was asking, but just trying to understand how much flexibility you have.

Bonnie, I'm going to unpack that question a little bit. Hopefully, I touch on all aspects of it. If I don't, please follow up. As we talked about in our opening remarks, I think first quarter, there's a couple of items that I would point out. It's really about comparisons to prior year that impact the first quarter at a higher level then we think will impact the rest of the year. A couple of adjustments, if you will, accounting adjustments as you think about. One is within the MSA cost per pack. We've seen adjustments in the past. There's a lot of variables. It's a complex calculation when you develop the accrual for MSA. And in the past, you've seen adjustments related to things like inflation. This quarter, we did make an adjustment. It was really specific to industry profits. Specifically, one of our major competitors had lower profits than anticipated. And then on the cost side, not to get too deep into the accounting, but we do account for inventory in the [ LIFO ] methodology. So when you revalue the inventory, it does impact the P&L, and it impacts the P&L in the first quarter at a higher level than it will in the remainder of the year. To your broader question, we feel very confident in our ability to continue to grow margins within the smokable products segment. And we're really happy with the performance of that segment, the performance of Marlboro, where you saw stable share performance and growth in the premium segment of the cigarette category.

Okay. And I guess that's helpful. But I guess if I'm hearing you correctly, it's really maybe more of a timing like the one-off that you mentioned. So as we think about just honestly, the controllable cost, if those moderate, moving forward and especially in the back half, that's going to help to drive the dollar profit growth? Is that part of the confidence you have?

Yes. The year-over-year increase was higher in the first quarter. And then finally, let me also point out, the smokeable products segment did benefit from lower SG&A costs that -- and it will continue to benefit from that throughout the year. So again, we feel very good about the smokable products segment, going forward.

No, that helps. And then maybe my next question or final question is on pricing. You guys have taken 2 increases so far this year, and I am talking about [ cig ] pricing. So that seems to follow your typical quarterly cadence, which sounds reasonable, given the unrelenting pressure on [ cig ] volumes, but your peers don't seem to be following in terms of frequency or strength. And I guess I'm asking because how concerned are you about the price gaps, and how much they've widened? And I'm asking especially in light of the down-trading pressures that we're seeing, which seems to be continuing to accelerate. And as you guys called out, the continued proliferation of illicit e-cigs. How should we think about that and your ability to kind of manage these price gaps, et cetera, and down-trading?

Yes, I appreciate the question, Bonnie. I'd be careful not to talk about future pricing decisions. But I think when you step back and you look at how it's performed over time, I think what you see is the benefit of the investments we made in data analytics, really from a standpoint of being able to bring revenue growth management, where we started in traditional moist smokeless tobacco and brought it over to cigarettes. You see that Marlboro is steady overall share and growing share of premium. Yes, you see a little bit of down trading. But I think if you look back through history, you see that occur when the consumer is under economic pressure. We feel good about the tools we have within Marlboro, and I think it shows in the strength of the performance of that brand. From a standpoint of the pressures on volume, we try to provide for you the decomposition. And you see from a secular decline in price elasticity holding steady, it's really the macroeconomic and to your point, the proliferation of illicit e-vapor. And so we really need to see from an overall standpoint, a regulatory environment that is effective and is both looking at authorizing smoke-free products that the consumer is demanding and enforcement against illicit e-vapor products.

Our next question comes from Faham Baig with UBS.

A couple of questions from me, both on the smokables division. I just want to understand if the industry volume decline remains at minus 9% for the rest of the year, whether that still allows you to hit the bottom end of your EPS outlook? In other words, you still have some room to reduce SG&A costs further and raise pricing higher? And the second question is whether you can share your estimate of the growth of the vapor category in Q1, and what impact this might have had on cigarette volumes in Q1, please?

Yes. I appreciate your question. I think from a standpoint of guidance, look, we run a range of scenarios of what could be the outcomes as we progress through the year. We reaffirmed that guidance and feel very good about the guidance that we have out in the marketplace. I think when you think about the e-vapor, we believe that the overall e-vapor category continues to grow, with the vast majority of that coming from illicit disposable e-vapor products. While there, we started filling some of our information gaps, the nature of it being illicit as it goes around the normal distribution chain. I think the best thing I can point you to, and we included this in our quarterly metrics, you saw the growth and the consumers engaged on a 12-month moving just shy of [ 18 ] million consumers now engaged with a step-up of both those that are fully converted and those that are still using cigarettes and e-vapor. And then going to the decomposition, range estimate for the impact of e-vapor in the cigarette category is 1.5 to 2.5. And again, we're looking to fill those information gaps that the nature of it being illicit. We feel good about that range. I know it's a bit of a wide range, but as we continue to fill those information gaps and try to get a read on the illicit marketplace, we'll provide those updates as appropriate.

Our next question comes from Matt Smith with Stifel.

There was a reacceleration of price realization in the combustible business in the quarter with pricing per pack, up 8.5%, that's above the 5.5% in the fourth quarter. Can you talk about the factors behind the stronger price realization? And are you now lapping some stepped-up investments in the Marlboro brand in response to the pressure on the -- in response to the economic pressure on the consumer?

Yes. I think from a standpoint, I would encourage you to look at price realization over the longer term. I think it's exactly what you referred to. We highlighted as we progressed through 2023, there are some investments we wanted to make, both on the menthol segment of Marlboro as well as some of the discount pressure we're seeing, in pockets. I think it's important to remember that price gap that we show on a national basis, we're managing that price gap down at the store level. So you can go from one side of the city to the other and see different price gaps in stores. And so being able to mine that data, I think you see it with the strength of Marlboro and to your point, the strong price realization we experienced in the quarter.

And my second question, R&D spending is shifting to the all other segments. The impact from that shift, did that seem meaningful in the first quarter, given the unique higher costs in smokeable? Can you talk about the phasing of that R&D shift through 2024? Should we think of the smokable profitability growth weighted to the second half in addition to the overall company EPS growth weighted to the second half?

Matt, we don't -- as you know, we don't guide at the segment level, but you are correct in that you are seeing a shift in R&D spending towards the innovative products, and that's part of the SG&A benefit I talked about within the smokable segment earlier with Bonnie. The smokeable segment will continue to benefit from those lower SG&A costs as the year progresses.

And our next question will come from Gaurav Jain with Barclays.

Two questions from me. So one is on retail pricing. I think you are saying in Q1, it is [ 347 ]. And in Q4, it was [ 377 ]. So have you stepped up promotions on on! to stem the share loss that you have seen in oral nicotine pouches?

I wouldn't say stepped up for any purposes from a share standpoint. Really, what we -- you see happening, Gaurav, you see that the data that we have, I mentioned the investments in advanced analytics, being able to bring that from both moist smokeless tobacco and the smokeable segment over to the nicotine pouch segment. And so you're going to have pulse promotions through time. The real goal there is to keep the converted consumer engaged with the brand, but still induce trial, both from competitive and those that are making different choices in the nicotine space. And so you're going to see variability on a short-term basis. But over the long term, I think it's important to step back and see the volume growth that we experienced with significant retail price year-over-year.

Sure. And my second question is on ABI's stake. So you're highlighting that the remaining stake has a $1.2 billion tax basis. So just sort of 1 tranche, your [ JUUL ] losses expire in March 2028. So would we be fair in expecting a progressive exit from the rest of the stake over the next 4 years?

I want to make sure I'm answering your question, Gaurav, if I don't, please follow up. You are right that we provided you with the new tax basis. And tax is just one of many variables that we consider related to the ABI investment and our capital allocation analysis. The transaction that we executed earlier this year, the shares we sold were a mix of both the restricted and unrestricted shares. And what we shared with you is that the tax liability was less than $100 million. Our expectation is that we can offset that in the future related to ABI losses -- I'm sorry, [ JUUL ] losses. The other thing I'll just remind you is that if you think about the [ JUUL ] losses, we took about half, let's call it, just over half; as ordinary losses for tax -- for cash tax purposes, but we fully reserve that on the P&L. We continue to wait to get feedback from the IRS. We hope to hear more as the year progresses.

Our next question comes from Callum Elliott with Bernstein. Please go ahead.

Couple of slightly different questions from me. On NJOY, you called it the 60 basis points of share gain, which we can see in this candidate and sounds impressive and a nice improvement. But this kind of data do also show us that the retail sales for the brand are down double digits for the past few months. So I guess my question is, this deterioration, is that just ongoing pressure from illicit products that's impacting the legal products in the market to cause this sort of heavy decline despite the share gain? Or is there something else going on in the category?

Yes. I think what you see is exactly what you pointed out, Callum, is that the overall disposable, specifically the illicit vapes in the marketplace, continue to grow, while pod, the segment that's pod are replaceable capsules, continue to shrink in the marketplace.

Okay. And then my second question is on oral tobacco. You touched on this a little bit earlier with, I think, Faham's question, but just building upon that. I think based on the numbers in your release, your share of total oral is now 33% and volumes declining slightly. I've got Zyn share, based on some numbers from PMI, at 28% on an apples-to-apples basis and growing 80% year-on-year. So it seems, to be clear, that you guys are on the cusp of losing your leadership position now in all tobacco as a whole. So I guess my question is, does losing the leadership position change your mindset in how you're going to come about this category? Can you maybe be free in a sense to come at this from a slightly more challenger mindset relative to the sort of maybe slightly defensive mindset that you've necessarily had over the past several years through this pressure from Zyn?

Yes. I think when you think about the overall oral tobacco category, really the strategy there is to maximize profitability while balancing investments behind Copenhagen, which is the aspiration of Brian in [ MST ] and making appropriate investments in on!. Copenhagen continues to be the leader in the [ MST ] space, and we are pleased with the results we saw in on! in the first quarter, certainly the growth in volume, the growth in overall share of the oil tobacco space and the significant increase in retail price. And then behind that, being able to file the application with the FDA for the on! PLUS, which we feel like will perform very well in the marketplace once authorized.

[Operator Instructions] Our next question comes from Jennifer Maloney with Wall Street Journal.

First, I wanted to ask about consumers under pressure. You said on this call that you were going to make appropriate investments and be there for them. Could you tell what do you mean by that? What kind of investments are you referring to?

Yes, Jennifer, really, it's around promotions in the marketplace. When you think about the data analytics that we received, and I highlighted earlier, the price gap in a store can be different than a store across a city or town. And it's really mining that data and seeing the consumer economic pressure and being able to dial those resources appropriately for the situation that they're facing. And so it's really about retail promotions in the marketplace that we continue to adjust through time. It allows us to be there for the consumer. Another example would be Marlboro Black, having a place for the consumer that wants to engage with Marlboro, having a place that they can continue to gauge, even when they're under academic pressure.

And when you say promotional activity, would that apply to both the Marlboro brand and also some of your lower-priced brands?

When you look across the portfolio, we think of the portfolio as one big RGM pool. And just like I mentioned Marlboro Black and the Marlboro family, it allows us to take a small segment of Marlboro and be there for the consumer. It gives them a place to continue to engage with the brand, but we look across the entire portfolio.

Looking out at the rest of 2024, do you expect pressures on lower-income consumers to continue or to moderate?

Yes. I think when you think about the consumer being at the lower end of the socioeconomic status, they've been impacted. While inflation has slowed down a bit, it's still increasing and it's the cumulative impact of that inflation on their total market purchase, as well as the increase in debt levels. And that, coupled with increased interest rates through time has impacted discretionary spend for our consumers.

One more question on modern oral tobacco. So looking at the share losses in Skoal and Copenhagen and also the share performance in on!, it seems like Zyn is taking significant share from traditional oral tobacco and on! isn't catching up to Zyn. So what's your strategy for that overall oral tobacco category and then specifically for the modern oral subcategory?

Yes. You may have heard me mention earlier, the overall strategy in oral tobacco is to maximize profitability over the long term while making appropriate investments in Copenhagen and the investments in the -- in our on! product in the marketplace. I think when you think about it, it's intuitive that the moist smokeless consumer is the first to move over. They're used to putting nicotine products in their mouth. And moving from [ MST ] to nicotine pouch allows them to avoid some of the social friction, spitting things of that nature, in relation to enjoying nicotine in their product. When you think about the Zyn versus on!, we feel very good. I think you saw that -- and we highlighted in our remarks, we feel like we're going to have better positioning at retail. We feel good about the existing product, and we feel great about the pipeline to follow, which we'll be following with the FDA, PMTAs in on! PLUS as we progress through the end of this quarter.

So would it be fair to say that your goal would be to capture those folks who are moving from Skoal and Copenhagen to modern oral to capture as many of those folks as possible with on! rather than losing them to Zyn?

That would be correct.

And there appears to be no further questions at this time. I would like to turn the call back to Mac Livingston for any closing remarks.

Thanks for joining the call today. Hope you all have a great day. Thanks so much.

And this concludes today's call. Thank you for your participation, and you may disconnect at any time.