Altria Group, Inc.

Good day, and welcome to the Altria Group 2021 First Quarter 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. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, press star 0. 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 Mack Livingston, Vice President of Investor Relations for Altria Client Services. Please go ahead, sir.

Thanks, Stephanie. 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, and quarterly metrics are all available on our website at altria.com. During our call today, unless otherwise stated, we're comparing results to the same period in 2020. 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 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, Matt. Good morning, and thank you for joining us. We're off to a strong start to the year and believe our businesses are on track to deliver against their four-year plans. Against a challenging comparison, our tobacco businesses performed well in the first quarter, and we continue to make progress advancing our noncombustible product portfolio. This morning, we announced another important milestone in Altria's journey to move beyond smoking. We now have full global ownership of On oral nicotine pouches as we recently closed transactions to acquire the remaining 20% global interest. We're excited about the opportunity we have with On to convert smokers, and we have talented teams supporting the global plans for the brand. Before discussing our first quarter results in more detail, we would like to honor the memory of Tom Farrell, our late chairman of the board. Tom served 13 distinguished years on our board, offered valuable insights and guidance during his tenure, and was a true visionary. We will miss his leadership, contributions, and friendship. The board will appoint a new chair at its meeting following our annual shareholders meeting in May. Let's now turn to our first quarter results. Our first quarter adjusted diluted EPS declined 1.8%, primarily driven by unfavorable timing of interest expense and a higher adjusted income tax rate. In the smokable product segment, we continue to execute our strategy of maximizing profitability in combustibles while appropriately balancing investments in Marlboro with funding the growth of noncombustible products. Segment adjusted OCI margins expanded and Marble continued its retail share momentum from the back half of 2020. For volumes, reported smokable segment domestic cigarette volume declined 12% in the first quarter, reflecting year-over-year trade inventory movements, one fewer shipping day, and other factors. When adjusted for these factors, cigarette volume declined by an estimated 3.5%. We believe that in the first quarter of 2020, wholesalers built inventories by approximately 900 million units, driven in part by COVID-19 dynamics, compared with a depletion of approximately 300 million units in the first quarter of 2021. At the industry level, we estimate that first quarter adjusted domestic cigarette volume declined 2%. Looking at smoker retail dynamics, we estimated that total cigarette ship trips in the first quarter remained below pre-pandemic levels. Also, estimated expenditures per trip remained elevated when compared to pre-pandemic levels and were steady sequentially. We are continuing to monitor the impacts from external factors on tobacco consumer purchasing patterns and behavior. In March, the federal government passed a third stimulus package. An increasing number of people became vaccinated, and consumer mobility improved sharply. We're keeping a close eye on the tobacco consumer, and we will continue to provide our insights on the underlying factors as the year progresses. Moving to our noncombustible products, we are pleased to now have full ownership of our own oral nicotine pouches globally. We completed transactions in December and April to acquire the remaining 20% of the global owned business for approximately $250 million. When we made the initial 80% acquisition in 2019, the oral nicotine pouch category in the U.S. was rapidly growing off of a small base. Subsequently, oral nicotine pouch growth has exceeded our original estimates. In the first quarter of 2021, we estimate that retail share for all nicotine pouches was approximately 13% of the total old tobacco category doubled its share in the year ago period. We expect continued growth from the old nicotine pouch products and estimate that category volume in the US will grow at a compounded annual growth rate of approximately 25% over the next five years. Since 2019, Helix, supported by the enterprise, significantly increased on manufacturing capacity, broadened retail distribution, grew tobacco consumer awareness, and filed PMTAs for the entire product portfolio. Helix achieved an annualized manufacturing capacity of 50 million cans by the end of last year. And as of the end of the first quarter, ON was sold in approximately 93,000 stores. In the U.S. market, ON's momentum continued. In the first quarter, ON's share of the total oral tobacco category grew significantly to 1.7%. On a 12-month moving basis, in store selling and providing point-of-sale data, ON's retail share was 3.1%, an increase of seven-tenths from the 2020 four-year share. Going forward, we intend to report on share of the total U.S. oil tobacco category, as Helix expects to be in stores covering 90% of the industry's oil tobacco volume by mid-year. Our primary focus continues to be on increasing oil's growth in the U.S. Internationally, we see potential to strengthen oil in the Swedish market. We also see longer-term prospects in Europe to expand ONN and gain consumer feedback on potential non-combustible products for the U.S. To explore these additional opportunities, we have expanded the international ONN team. We believe ONN presents a compelling non-combustible alternative for smokers, and we look forward to supporting their conversion journey. Moving to eVapor. We estimate the total category volume increased 24% versus the year-ago period. As a reminder, in Q1 2020, the FDA restricted the sales of all flavored evapor products among pod systems, with the exception of tobacco and menthol. Sequentially, we estimate that the category volume increased 7% as competitive marketplace activity continued. As a result of these dynamics, JUUL's first quarter retail share of the total evapour category decreased to 33%. We continue to believe that a responsible evapour category consisting solely of FDA authorized products can play an important role in tobacco harm reduction. As for our JUUL investment, the FTC trial is now scheduled for June of this year, and we remain committed to vigorously defending our investment. In heated tobacco, PMUSA is continuing to expand ICOs and Marlboro Heat Sticks. Beginning this month, Heat Sticks are available in retail stores statewide across Georgia, Virginia, North Carolina, and South Carolina. Marlboro Heat Sticks retail volume and share continued to grow in the first quarter. In Atlanta stores with distribution, Marlboro Heat Sticks retail share of the cigarette category was 1.1%. an increase of two-tenths sequentially. And in Charlotte, HeatStick's retail share was 1%, an increase of three-tenths sequentially. Last month, PMUSA began selling the IQOS 3 device, which offers a longer battery life and faster recharging as compared to the 2.4 version. The new device is being offered through device and HeatStick bundles and through the lending program which has been effective at generating trial and driving purchase. We're encouraged to see that many consumers are upgrading their 2.4 devices, representing approximately 25% of all ICOS III device sales in the first quarter. Along with geographic expansion, PMUSA is increasing the use of its digital platforms like Marble.com and GetICOS.com to engage with smokers and communicate the benefits of ICOS including the MRTP claim on the ICOS 2.4 system. On Marble.com, ICOS content is now available nationwide. Smokers can sign up to receive communications and be notified when ICOS is available in their area. PMUSA is also using its Marbles Rewards program to drive ICOS awareness and value delivery. Smokers can earn mobile rewards points by learning about ICOS and can also redeem their points for discounts on the ICOS device. In June, PMUSA plans to open ICOS Boutique in the Tysons Corner Mall, which is a center point for the highly populated Northern Virginia metro area outside of Washington, DC. As a reminder, PMUSA plans to expand ICOS into three additional metro markets throughout the year and to expand the availability of marble heat sticks to geographies covering approximately 25% of U.S. cigarette volume by year end. We're making progress in driving awareness and availability of ON and ICOS while investing in future innovative noncombustible products. And we continue to acquire more tobacco consumer insights to inform our strategies to actively transition smokers to our noncombustible portfolio. Our smokable product segment continues to support our vision, generating significant cash that can be invested in noncombustible products and returned to shareholders. Turning to our financial outlook, we reaffirm our 2021 guidance to deliver adjusted diluted EPS in a range of $4.49 to $4.62. This range represents an adjusted diluted EPS growth rate of 3% to 6% from a $4.36 base in 2020. The guidance includes continued investments to support the transition of adult smokers to a non-combustible future. We will continue to monitor various factors that could impact our guidance. Our employees continue to drive the success of our businesses. They've risen to the challenge together to deliver results and are supporting each other and their communities. Over the past years, the challenges associated with the pandemic have been compounded by the continued social injustice and inequities that black and brown Americans still face every day. And the Asian American community is hurting. as violent and hateful attacks on Asians skyrocket. We condemn any form of hatred and discrimination against any person. To our Asian, black, and brown employees, we will continue to stand with you and we stand for you. We recently released our report on supporting our people and communities, which details the many ways we're making progress enhancing our culture, and positively impacting our communities. It is part of a series of corporate responsibility progress reports that we are issuing this year, and it is available on Altria.com. I'll now turn it over to Sal to provide more detail on our first quarter results.