Altria Group, Inc.

Good day and welcome to the Altria Group 2019 fourth quarter and full year earnings conference call. Today's call is scheduled to last about one hour, including remarks by Altria's management in a question and answer session. In order to ask a question, please press star followed by the number one on your touchtone phone at any time. 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 send the call over to Mr. Mike Livingston, Vice President of Investor Relations for Altria Client Services. Please go ahead, sir.

Thanks, Brandi. Good morning, and thank you for joining us. We're here this morning with Howard Willard, Altria's CEO, and Billy Gifford, our CFO, to discuss Altria's 2019 fourth quarter and full year business results. Earlier today, we issued a press release providing these results. The release, presentation, and quarterly metrics are all available on our website at altria.com and through the Altria Investor app. During our call today, unless otherwise stated, we're comparing results to the same period in 2018. 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. Share repurchases also depend on marketplace conditions and other factors. Altria reports its financial results in accordance with U.S. generally accepted accounting principles. Today's call will contain various operating results on both a reported and adjusted basis. Adjusted results exclude special items that affect comparisons with reported results. Descriptions of these non-GAAP financial measures and reconciliations are included in today's earnings release and on our website at altria.com. With that, I'll turn the call over to Howard.

Thanks, Mac, and good morning, everyone. 2019 was a dynamic year for the tobacco category. For Altria, it was a year characterized by two distinct stories. the outstanding performance of Altria's core tobacco businesses, and significant progress advancing our non-combustible business platform, alongside disappointing performance from our JUUL investment. Across our businesses, our employees accomplished more with less and responsibly delivered outstanding results. Despite unexpected challenges with our investment in JUUL, which led to impairment charges and reported losses, we grew adjusted diluted earnings per share by 5.8% and continued to reward our shareholders with growing cash dividends. In 2019, we paid $6 billion in dividends to shareholders and increased the dividend for the 54th time in 50 years. Our core tobacco businesses delivered strong financial performance. With each of the smokable and smokeless product segments, delivering high single-digit adjusted operating companies' income growth, significantly expanding their adjusted operating companies' income margins, and maintaining strength on their leading premium brands. In fact, if you look at the performance of our smokable and smokeless product segments on a combined basis over the past five years, 2019 was a high watermark for combined adjusted OKI and margin expansion. In addition, We exceeded our $575 million cost reduction target, made significant progress advancing and building our noncombustible business platform with the launch of ICOs in two lead markets and the completion of the ON transaction. And we successfully advocated for moving the legal age to purchase all tobacco products to 21 to address social access concerns among youth. Turning to Juul, we are disappointed in the performance of our Juul investment in 2019, and we recorded a second impairment of the Juul investment, which Billy will discuss in more detail shortly. It's a critical time for the eVapor category, and we believe manufacturers must take responsible steps in the short term to protect the long-term opportunity that the category presents for adult smokers looking for alternatives. We believe that the eVapor category in its current form needs a reset. And we believe the most important next steps to create a sustainable path forward are FDA's review and ultimate decisions on PMTA filings and driving down youth usage of eVapor. This morning we announced that we've reached an agreement with JUUL to revise some of the terms governing our investment. We've agreed with JUUL to continue providing regulatory affairs services including supporting JUUL's efforts to prepare and submit its PMTA filings by May 2020. And we will discontinue all other services by the end of March 2020. Our regulatory affairs team is working collaboratively with JUUL on its PMTA effort, and we're committed to helping JUUL achieve this critical milestone. We also agreed that JUUL will create a new or independent board structure after we receive antitrust clearance from the FTC. We believe the new board structure will provide diverse perspectives and independent expertise to help JUUL's management team successfully and responsibly navigate the very dynamic e-vapor market going forward. For Altria, we remain committed to preventing kids and non-tobacco users from using tobacco products. According to 2019 Monitoring the Future, Underage use of cigarettes is at a historic low at 3.7%, down more than 85% from its 1997 peak. Although this is significant progress, we're troubled by the alarming rise in youth evaper use. This is why in early 2019 we launched a national campaign to raise the minimum tobacco purchase age to 21 and worked persistently with state and federal lawmakers to support this legislation. In December, Congress enacted landmark federal legislation moving the legal age to purchase all tobacco products to 21. We have much more work ahead of us in reversing the youth evaper trends, and our efforts will not stop at tobacco 21. We must continue to advance harm reduction. There are approximately 40 million adult smokers in the U.S. today, with more than half interested in alternative products. While Juul forges its way in an ever-changing eVapor category, we remain highly focused on our portfolio approach with alternative products like Icos and On. We want our organization, including our sales force, to most effectively and responsibly advance the non-combustible portfolio options we're building. And we're moving forward on these opportunities responsibly and with increased resources. With ICOs, we're encouraged by early interest from adult smokers and excitement from the trade. Heat sticks are now distributed across more than 500 retail stores in Atlanta and Richmond combined. Both launch markets include an innovative retail ecosystem that focuses on the consumer journey of awareness, engagement, trial, purchase, and conversion. We now have more than 100 trained ICOs professionals provide guided trials. We continue to advance our commercialization plans and are gathering insights from our lead markets to inform them going forward. Philip Morris International's MRTP application for ICOS remains pending with the FDA, and we remain optimistic about its authorization. Additionally, PMI plans to submit a supplemental PMTA in the coming months for ICOS III, The device offers a more premium and modern design and a rapid charge battery compared to the currently authorized 2.4 device. We plan to capitalize on our first mover advantage while considering the opportunities presented by an FDA authorized reduced risk claim for IQOS 2.4 and the launch of a more modern device. In oral nicotine pouches, we're advancing our plans quickly in this rapidly growing category. focusing on regulatory, manufacturing, and distribution efforts. First, our Helix subsidiary expects to submit its PMTAs for ON by the May 2020 deadline. Second, our best engineers are building manufacturing capability for ON at our Richmond Manufacturing Center, and we expect to begin manufacturing there this quarter. We are targeting annualized manufacturing capacity of 50 million cans by mid-year and 75 million cans by the end of 2020. Onn can be purchased on its premium branded website through a robust age verification platform and is now sold nationally in 15,000 stores, including Circle K, Sheetz, and Murphy USA, representing three of the top five retail chain accounts for smokeless volume. The Onn brand team will use our adult tobacco consumer database to communicate responsibly with adult tobacco consumers about Onn and its broad portfolio. In addition, The On Team plans to enhance the packaging to build brand equity and increase the visibility of the broad range of nicotine strengths and flavors to address the varying preferences of adult smokers and dippers. As eVapor goes through a period of transition, we believe it's an opportune time to further invest in our plans in heated tobacco and oral nicotine. The strength of our core tobacco businesses provides us with the financial flexibility to make these investments as we capitalize on our first mover advantage in heated tobacco and on its compelling proposition and broad portfolio. We enter 2020 with continued focus on harm reduction and preparing for a future where adult tobacco consumers overwhelmingly prefer noncombustible products over combustible products. We look forward to sharing more at Cagney. Let's turn to our financial outlook. For our JUUL investment, we now expect HSR resolution in the first half of 2020. Upon antitrust clearance, we expect to account for our equity investment in JUUL using the fair value option. Under this option, Altria's income statement will include any cash dividends received from the investment and quarterly changes in the fair value of the investment. Quarterly changes in the fair value of the investment will be treated as a special item and excluded from adjusted diluted EPS. We don't currently expect to receive equity earnings contributions from Juul over the next three years. Therefore, we've lowered our 2020 through 2022 compounded annual adjusted diluted EPS earnings growth objective to 4% to 7% from our previously announced objective of 5% to 8%. For our 2020 guidance, we expect to deliver full-year adjusted diluted earnings per share of $4.39 to $4.51. This range represents a growth rate of 4% to 7% from a 2019 adjusted diluted EPS base of $4.22. The 2020 guidance includes increased investments in our noncombustible platform and one extra shipping day in the first quarter. We'll remind you that in 2019, the benefits from our annualized cost reduction program were uneven and ramped up as the year progressed. I'll now turn it over to Billy to provide more detail on our 2019 performance.