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.

Thanks, Billy. I echo your sentiments, and to our employees, thank you for all you do. Moving to our results. Our tobacco businesses continue to perform well in the first quarter. The smokable product segment delivered over $2.3 billion in adjusted OCI and expanded adjusted OCI margins by 2.2 percentage points to 57.5%. PMUSA's revenue growth management framework supported the segment's strong net price realization. of 8% for the quarter. We continue to be pleased with Marlboro's performance in category leadership. In the first quarter, Marlboro's retail share was 43.1%, an increase of 4 tenths versus prior year. We believe that Marlboro is continuing to benefit from smoker preferences for familiar products during disruptive times. and is lapping the year-ago comparison quarter where we observed older consumers coming back to cigarettes from eVapor. In the first quarter, Marble's price gap to the lowest effective price cigarette increased to 37%, primarily driven by heavy competitive promotional activity in the branded discount segment. Despite this activity, branded discount share declined by four-tenths in the first quarter as deep discount gained share. The total discount segment retail share was 25.3%, an increase of one-tenth versus the year-ago period. In cigars, Black & Mild continued its long-standing leadership in the profitable tip cigar segment. Middleton's reported cigar shipment volume increased over 11% in the first quarter. Turning to noncombustibles, oral tobacco product segment adjusted OCI grew by 3.1% and adjusted OCI margins declined by 0.9 percentage points to 72.1%. Adjusted OCI results were driven primarily by higher pricing, partially offset by higher investments behind on. Total reported oral tobacco product segment volume increased 0.6%, driven by on. When adjusted for trade inventory movements, calendar differences, and other factors, segment volume increased by an estimated 0.5%. First quarter retail share for the oral tobacco product segment was 48.1%, down 2.3 percentage points due to the continued growth of oral nicotine pouches. Copenhagen continued to be the leading MST brand and on gained traction in the oral nicotine pouches. In alcohol, St. Michelle's first quarter adjusted OCI increased approximately 46% to $19 million, driven primarily by higher pricing and lower costs. And in Beer, we recorded $190 million of adjusted equity earnings in the first quarter, which was unchanged from the year-ago period. and represents Altria's share of ABI's fourth quarter 2020 results. Moving to our equity investment in Kronos, we recorded an adjusted loss of $27 million, representing Altria's share of Kronos' fourth quarter 2020 results. We continue to support our investment in Kronos by advocating for a federally legal, regulated, and responsible U.S. cannabis market. we joined the recently launched Coalition for Cannabis Policy, Education, and Regulation. This coalition is comprised of members across diverse industries and public policy experts who plan to inform the development of comprehensive cannabis policy that prevents underage use, advances science, creates quality and safety standards, and addresses social inequity. And finally, on capital allocation, we paid approximately $1.6 billion in dividends and repurchased approximately 6.9 million shares, totaling $325 million in the first quarter. We have approximately $1.7 billion remaining under the currently authorized $2 billion share buyback program, which we expect to complete by June 30, 2022. Our balance sheet remained strong, and as of the end of the first quarter, our debt to EBITDA ratio was 2.5 times. In the first quarter, we executed a series of transactions to take advantage of favorable market conditions to adjust our debt maturity profile and extend the weighted average maturity of our debt. We issued new long-term notes totaling $5.5 billion, and repurchased over $5 billion in outstanding long-term notes. In May, we expect to retire $1.5 billion of notes coming due with available cash. With that, we'll wrap up, and Billy and I will be happy to take your questions. While the calls are being compiled, I'll remind you that today's earnings release and our non-GAAP reconciliations are available on altrate.com. We've also posted our usual quarterly metrics, which include pricing, inventory, and other items. Let's open the question and answer period. Operator, do we have any questions?

Thank you. Once again, as a reminder, if you would like to ask a question, please press the star key followed by the number one on your touch-tone phone at this time. Investors, analysts, and media representatives are now invited to participate in the question and answer session. We will take questions from the investment community first. Our first question comes from Pamela Kaufman with Morgan Stanley.

Good morning. Thanks for the question. I wanted to see if you could comment on what you're seeing with respect to smoker behavior as things begin to reopen and how you're thinking about the industry volume performance throughout 2021. Do you expect to see elevated consumption in cigarettes per day continue throughout this year?

Yeah, good morning, Pamela. Thanks for the question. You ask a good one because the market is very fluid, as we mentioned in our remarks. I think when you look at the first quarter, and we provided the 12-month moving decomp, you can see that we still have somewhat of a tailwind, and we believed, as we believed at the end of last year, That is the consumer stay-at-home practices as they added nicotine occasions to their day. Certainly as we progress forward, you know, we highlighted that we are seeing mobility for our consumers increase significantly. But then you also have the offsets. You have the government stimulus that just came out. And we'll see how the consumer thinks about that as the mobility has increased and what other areas of discretionary spend they could use that stimulus towards. Certainly through the first quarter, we saw a continuance, even though it was a tough comp, a continuance of what we saw at the end of the last year. I think it remains to be seen what trends the consumer has picked up during the COVID pandemic that will remain and what will revert back to, and I'll use your phrase, to pre-pandemic or normal levels that they had in place prior to the pandemic. But thanks for the question.

Sure, and also obviously regulation is top of mind for investors given all of the headlines in recent weeks. Can you discuss your view of the current regulatory backdrop and what you might be anticipating from the FDA and then separately your thoughts on the FET proposal from last week?

Yeah, I think when you think about the regulatory framework, The two topics that have been in the headlines, and look, we expect to have continued headline news in the tobacco industry as you have a new administration that tends to take place. But let's just take them in turn. If you think about menthol, the FDA has been considering this for years. And, you know, when you step back from it and you really think about it, we have a common goal, which is to transition the adult cigarette consumer to a noncombustible future. Where we disagree is prohibition just doesn't work. It has unintended consequences, and criminalizing menthol has significant consequences. We think a better approach is to have an established marketplace of FDA-authorized noncombustible products. We've only heard what you've heard, so certainly whatever the FDA announces, we'll review what the FDA announces, and we'll engage and continue to focus on the science and evidence of what would be a multiyear process. I think when you think about lowered nicotine in cigarettes, it's very similar. It's something they've been considering for years. We know they're running studies related to this. Again, we don't believe prohibition works because it has so many unintended consequences. The better approach is to have that established portfolio of FDA authorized non-combustible products. In addition to that, we don't think it's practical or feasible from a standpoint of what's been suggested. And so when you look at overall the science and evidence, and you can see the comments that we submitted to the FDA as they were considering these previously, there are significant hurdles there from a science and evidence base that it has the impact that they have suggested. From an FPT standpoint, I think it remains to be seen. There hasn't been a lot of discussion. As you mentioned, it was a bit of a headline news last week. When you step back from the specifics, it's something that's been introduced before and it didn't get very far. I think when you think about some of the statements that President Biden has made about not wanting to raise taxes on individuals making less than $400,000 a year, an excise tax increase runs counter to that. I just remind you, we have an excellent government affairs team is ready to engage on all of these topics and our regulatory affairs team as well. So We're ready, but, you know, I would caution that we will see, we believe, continued headline news. Thank you. Thank you.

Your next question is from Vivian Azur with Cowan. Hi, good morning.

Good morning, Vivian.

Thank you very much for the more detailed outlook in terms of your growth expectations for the modern oil category. I was hoping to expand on that five-year kegger outlook and just understand what your underlying assumptions are in terms of cross-category engagement and if you can offer any detail around how you're thinking about competitive reduced risk categories. Thanks.

Sure. Thanks for the question, Vivian. I think when you think about modern oil, It's a very exciting category. We're extremely excited to now have 100% of the economics of O.R.N., both in the U.S. and on a global basis. When you think about the novel oral, I think it's very intuitive that it will interact with the adult dipper from the traditional MST. That consumer is used to putting things in their mouth. I think what has us so excited about O.R.N. is its engagement with the adult cigarette consumer And so, uh, as we do always, we run various scenarios. I think certainly that you can see the adult dipper converting to it, and it depends on how successful we are engaging with the adult cigarette consumer of how big that category can get through time. So we're extremely excited and we'll be very excited to get past the manufacturing capacity constraint, which we expect to do by mid year. I think from a competitive standpoint, you can expect that in new categories as volume grows, the various manufacturers that are participating in the category are trying to capture consumers and have them choose their products and brands. Certainly through time, I think all companies are in it for profitability. So there will be some competitive activities as volume grows and consumers are at play. And then you would expect for a turn towards profitability.

That's really helpful. Thanks. And while perhaps maybe the cross-category cigarette movement is a little bit more nascent relative to dip, does the migration from cigarette smokers into the modern oral or novel oral category over-index to menthol smokers?

Yeah, I don't have those factors in front of me, Vivian. I think when you think about it, certainly we've seen and we tried to have some of this available in previous presentations that it tends to have a higher than normal from the MST category interaction with the female cigarette consumer because they just don't appreciate putting tobacco in their mouth. And so it certainly over-indexes to that a bit compared to MST. But from a standpoint of that interaction, I think right now it's too early to tell, and it's very small when you try to diagnose who's coming over from the cigarette category.

Understood. If I could just squeeze one last one in. It's about the tax framing for the heat sticks in the United States. Can you just walk us through, like, what mechanisms would be necessary for the heat sticks not to be taxed as a cigarette?

Yeah, I think the biggest one I would highlight, Vivian, is the activity that our government affairs team has been able to secure now in seven states and with a different definition of heat sticks in the state of Virginia, so a total of eight. And that is that a product that has a designation of MRTP coming out of the FDA, that they have authorized it to have that claim, has a step function down in excise taxes in seven states, and again, the different definition in the state of Virginia. So I think that's going to be the best mechanism of any reduced risk product is those that have the designation of MRTP being authorized by the FDA. Perfect.

Thank you very much.

Thank you.

Your next question comes from Chris Groh with Steeple.

Hi, good morning.

Good morning, Chris.

So, Billy, I heard your commentary before about, you know, the transitioning the consumer and, you know, to reduce risk products as a backdrop for maybe perhaps the underlying, you know, factors in regulation. I guess what I'm curious by is if you think about the products that the FDA has approved so far, there's reduced risk products. There's been two of them. And it feels like they need to have a larger stable of products and products that consumers are aware of before they could ever really implement significant regulation at the risk of creating unintended consequences. That's obviously my opinion. But I just thought I'd get your thoughts on that. And I guess with that backdrop, does that influence or define the timetable the FDA has to pursue this regulation? They've got a lot more work to do, it seems like, on approving new products before they move forward with regulation.

So we would agree with your opinion, Chris, that that's the appropriate way to do it. Remember, I call it roughly half of conventional cigarette consumers are looking for a noncombustible product that satisfies them and certainly something that would reduce risk through time. And so certainly focusing on having a robust portfolio of noncombustible products that are authorized by the FDA and then eventually receive an MRTP, the cigarette consumers will move. They just need those products that satisfy them and meet their needs. And so certainly, to your point, prohibition tends to be fraught with unintended consequences that can take place based on prohibition.

Okay. And then I had just one other question. I know your pricing over the last few months, over the last year, it's a little different from some of your competitors, especially in the premium side. And I'm just curious, as you look at retail today, is there been any meaningful change in price gaps? I know we always look at it versus the lowest price product in the market, but I'm talking even amongst the premium brands. Have you seen any real deviation in the price gaps in those products, Marlboro versus other products?

Yeah, nothing that I'd highlight, Chris. We make our pricing decisions independent. I think when you look at price realization in the first quarter of 8%, that's pretty substantial, and it shows in the total results of the company. Marbles rock solid. You mentioned the price gap to lowest. That was really driven by a major manufacturer being very competitive in the branded discount category, and we highlighted that it didn't seem to gain a lot of traction. So you always have a little movement through time and in various periods that you look at, but nothing that I would highlight that's substantial.

Okay. Thank you for your time today.

Thank you.

Your next question is from Bonnie Herzog with Goldman Sachs. Thank you. Good morning, everyone.

Good morning, Bonnie. Good morning. I actually wanted to circle back on your oral tobacco business. You know, just looking at the performance over the last several quarters and years, you know, volume growth really has remained negative. So I guess I'm trying to understand ultimately, you know, how incremental – you know, do you anticipate on can be for you? I guess, you know, I'm wondering why we haven't maybe seen more of a lift on your total, you know, oral tobacco volume yet. You know, has this been more of a capacity constraint issue in the last few quarters or, you know, has the cannibalization been greater maybe than you anticipated? So that would be helpful if we could, you know, just hear some color on that. And then, Because you purchased on Outlight, how should we think about the potential global opportunity for that business?

Thanks. Yeah, thanks for the questions, Bonnie, and I'll try to take them in turn, but if I miss one, follow back up. I think when you think about the growth in the category, certainly we had a competitor who had a great head start on us. We've seen significant growth in the category. We have been constrained from a capacity in manufacturing, and so we look to be past that at mid-year. And then we can have it in the stores we want it to be in and engage with the consumer the way we would like to engage with the consumer. I think for the upside, from a total standpoint of growth, I think we're excited about ON because not only is it engaging with the adult dipper, but as I mentioned, also engaging with the adult smoker. So the more successful we are with that, you can see the size of the consumer base that you're able to engage with. I think your question related to international, it's important to remember that Oren already had a presence internationally. So, you know, we highlighted in our remarks we're going to certainly pay attention to where it's at in market, make sure that we have the right look and the right products in the marketplace, introduce products that are in the pipeline through time, and then we'll look at what other opportunities we have. And we've increased the international team supplementing what was already existing with some Altria employees to get consumer insights, both for the international market, but as well as to get consumer insights for future products in the U.S.

Okay, that's helpful. And that's what I was thinking. That could be a nice opportunity. I did want to ask also, if I could, on, you know, ICOs and the MRT and the marketing planets that relate to that. I think you touched on this a bit, but I just, Wanted to see if there's anything more you could share on, you know, really how you're marketing or, you know, communicating with consumers, given the fact that ICOS does have the MRTP. I think you even mentioned last quarter that you started to do some of this in certain markets. So love to hear any feedback on that in terms of how consumers have responded. You know, has it, you know, helped to drive trial or conversion in some of those markets? I think that would be helpful. Thank you.

Sure. Thanks for the question, Bonnie. Yeah, it's still a bit early yet, but certainly we're looking to engage with the consumer, both at retail through guided trials, through the heat sticks at C-stores, but just as importantly, and that was part of our investments we highlighted at the beginning of the year, is investing in what we would consider industry-leading consumer engagement system and really being able to engage with the consumer digitally so that we can connect with the consumer. If you think about it, not only when they're in the store, but from a 360 view of when they want to be engaged with. And that's what we're really on the path to do. I think from the standpoint of highlighting what the claim does is certainly in research, it showed that the consumer, once they understood the claim that was there, is that they were more inclined to both engage with the product and understand it, as well as try the product. So we'll have more to share as we move through the year.

Okay, that definitely makes sense and would be great. Appreciate it. Thank you.

Thank you.

Your next question comes from Priya Origupta with Barclays.

I was hoping that we could just talk a little bit about your elevated cash balance and how we should think about that trending through the year given the various puts and takes, you know, understanding that you've already identified an intent to repay that main maturity that you have coming up, but are there other sort of pieces that we should be mindful of as we look out, and where do you expect to sort of land that cash balance as we get into 2022? Thank you.

Good morning, Priya. This is Sal, and thank you for the question. You know, at the end of the first quarter, you did see an elevated cash balance. As I stated in my opening remarks and you spoke to, we do plan on paying the debt coming due with cash available. I'll also remind you of some rather large payments we have post the first quarter, which include our master settlement agreement payment, our quarterly taxes, our dividend. So that cash begins to get depleted in April and May as we make those payments. And of course, we still have our share buyback program in place.

Great. Thank you so much.

You're welcome.

Your next question comes from Owen Bennett with Jefferies.

Morning, Jen. Hope all well. Good morning, Owen. So I wanted to follow up on a comment by PM at its recent results that it plans to submit a PMTA for vapor in the US at some point. And so to me, I mean, it does appear clear that we will be returning to a global competitive environment going forward. So I was just wondering, how does this make you think about the need to have full control of a vapor business in the US or indeed globally? And then linked to this, especially now you're expanding with Modern Oral globally, how are you thinking about the need for your own heated tobacco product on a global basis? Thank you.

Yeah, thanks for the question, Owen, and I'll be careful not to talk about anything from a merger or acquisition or anything in the future. I think the way we think about it is we are primarily U.S.-focused because we have all of our infrastructure, Salesforce, relationships with retailers and wholesalers, are all primarily U.S. focused. And so that will be our focus of getting those consumers in their conversion journey from combustible to noncombustible. That will be our primary focus. But the learnings that we have, and you mentioned Modern Oral, the learnings that we have in the conversion journey that consumers take is very similar to the consumers around the world. And so we certainly want to pay attention to that and participate in that when it's appropriate. I think from a standpoint of the comments made by PMI, they're probably better directed to PMI, but certainly our primary focus is U.S., but we'll certainly seize on opportunities when appropriate around the globe.

Great. Thank you.

Thank you.

Your next question comes from Gaurav Jain with Barclays.

Hi. Good morning. Thank you. My question is on Jules. So your investment in Joule is now valued at about $1.5 billion. And if you could just remind us that if the value falls below 10%, which would be about $1.3 billion, you would be out of the non-compete clause with Joule. So how should one think of the valuation that you are now ascribing to Joule?

Thank you for the question. This is Sal. First, let me just state When we do our valuation analysis, that is independent of any agreement we have as it pertains to the JUUL ownership. You are correct that if the valuation were to drop below 10% of the original investment, which is slightly below $1.3 billion, we would have an option as it relates to our non-compete. But with that option comes some other minority investor rates we have. So it is not an automatic trigger. It is something that we as a management team would obviously have to analyze and discuss.

Sure. Okay. Thank you. My second question is on the oral tobacco market growth, where you are saying that for the next five years, the market will grow at 25% CAGR. If I look at just the Six-month data that you shared, it seems to be progressively decelerating over the last nine months. Is there any seasonality in this business, or is it just becoming bigger and bigger, so a lot of large numbers are applying, or how should I think of these deceleration and oral tobacco market growth?

Yeah, I think when you look at that, what you're seeing is you're exactly right. The larger the base gets, certainly from a mathematics standpoint, the growth rate reduces significantly. I would remind you when we show all tobacco, that's the total category. So that's MST and the novel oil pouches. And so you've got a total look at that growth of the category over the last six months. So you're going to have some cannibalization of traditional moist smokeless tobacco as novel oil pouches grow. But you're also correct, as I mentioned, just as the base gets larger on novel oil, the growth rate slows.

Sure, thanks. If I could just squeeze in one last question. Look, your 10-year vision is to responsibly lead the transition of adult smokers to a non-combustible future, which requires a lot of regulatory support. And regulators are right now planning a menthol cigarette ban process again, which you would be opposing. But would you be more supportive of some of these initiatives if At the same time, a regulatory pathway is created that helps you achieve your vision.

Certainly, we're looking for a regulatory pathway that helps us achieve the vision. You heard my earlier remarks on an outright prohibition, whether it be menthol or a great reduction in nicotine in cigarettes. We believe having that portfolio of noncombustible that's authorized by the FDA and then eventually through the MRTP process is a much better pathway because the consumer that uses conventional cigarettes has already shown an inclination that they want to transition. And so we believe we can get there with the right products and with the insights we have on the consumer. Certainly having a regulatory pathway that allows that to happen in the right order makes perfect sense to us.

Okay, brilliant. Thank you. Thank you.

Your next question comes from Michael Lavery with Piper Sandler.

Good morning, thank you. Good morning, Michael. Just wanted to come back to ICOS. You mentioned how with your digital capabilities and website, you've got the ability now for adult smokers to receive a notice when ICOS is available in their area. We've seen online, you know, chats and things, comments, lots of people outside the current launch markets who've asked how to get them. So this makes a lot of sense. Can you give us a sense of what response you've had so far and if and how much that might steer where you choose to expand in kind of next or in what order?

Yeah, it's a bit early, Michael. Certainly, we've announced the areas that we're expanding to. Certainly across the four states and then Northern Virginia and then three additional metro markets, which we haven't discussed what they are. And so certainly it's going to be informed by the consumer and informed by where we believe we can get the heavy foot traffic. Just a reminder, we want to launch initially in a densely populated area and then grow from that once you have a foothold, grow from that across states. And so certainly we're going to be influenced by the consumer. and the insights we have on the consumers, both from them and what we've seen in the existing markets to inform where we go next.

Okay, that's helpful. And just one more on ICOS. You mentioned that Marlboro Rewards can be redeemed for discounts on the ICOS device. Certainly this seems like it could help build momentum and some trial, but certainly could risk a little bit more cannibalization How do you balance those two? You certainly have a lot of incremental momentum already in the markets. You've given some color on that. Can you just give us some of the thinking here? Is it as simple as getting a bigger push, even if it might mean a little bit of cannibalization? What's the right way to think about some of that strategy?

Certainly, Michael, we always have incrementality in mind from a total profitability standpoint, but I think when you look at the vision, we know that our conventional cigarette consumers want to move, and we want to now proactively look at moving them. Certainly, incrementality, and you know the various ways we go to market, and we assess that for incrementality to see where we can really reach competitive consumers. but we don't want to ignore our consumers either. We know they want to move, and so we want to reach out when they're ready to move and have them stay in our portfolio of products. And so that's the fine balance, but certainly at retail and the way we reach out to consumers, we assess where we can get incrementality to the greatest extent.

Okay, that's great. Thanks so much.

Thank you.

Your next question is from Adam Spillman with Citibank.

Thank you very much. So two questions. First of all, on ICOS in Atlanta, I think you said it went to, if I remember rightly, 1.1 market share in the stores where you distribute it. But I'm interested to know how many stores that is in Atlanta. Thank you. That's the first question.

Yeah, Adam, we go to select retail chains because we want to make sure that we get great execution, the right look, and high quality because we want to learn when we have that, what does it look like for consumer engagement? We haven't mentioned the specific number of stores in Atlanta, but our goal, even when we expand to the states, is have great execution across the state and have it where each consumer, regardless of where they live, have access to the product to drive awareness and availability and interest. We may not be in every store in a certain locale, but we want to make sure that the consumer in any locale has access to the product.

And if I estimated that about in Metro Atlanta, ICOS has, including all stores, has around 30 bits of market share, would that be about right?

Yeah, we haven't done that, Adam, to go through that. So I'm hesitant to say, oh, that's exactly the way to go about it. The way we look at it is we take the geography by zip code and then say, okay, based on that, think about what are the cigarette offtake and what is ICOS offtake for the total geography. And so I'm hesitant to try to guesstimate or give you assurance on your estimates.

Your next question comes from Robert Rampton with UBS.

Good morning, and thank you for taking my questions. The first one is just on pricing. So it's running at record levels despite moderate tax increases. And I'd also argue that volumes are being more robust than maybe people expected towards the tail end of last year. Now, how do you think about the trade-off between, I guess, being more competitive on price versus taking that incremental margin and investing it in your efforts to transition to reduced risk? That's the first question. Thank you.

Yeah, thanks for the question, Robert. I would take you back to the overall strategy we have for the category, which is to maximize the profitability of combustibles through time. while balancing appropriate investments back into Marlboro and funding the growth initiatives, as you mentioned. And so it is a balance. It's something that we look at, but I would agree with you. I would say 8% in the first quarter from a price realization was a great result for the quarter.

Great. And then, sorry, just a quick clarification on Modern Oral. Are you saying the category, the nicotine pound category doubled versus 1Q20 and that your share within that is now roughly 13%? Is that the correct way to understand your comment?

No. So we were saying novel oil, the total category, had a share. So the novel oil tobacco of the total oil space was 13%. So the total novel oil of the total oil space.

Perfect. Very clear. Okay. And then just a follow-up on Modern Oral, specifically on pack inserts in, for example, Marlboro. Can you comment on their effectiveness and then how much of that are you doing? And I guess the broader question is why not put on pack insert in every pack of Marlboro, for example?

Yeah, it's certainly something that we wanted to test and learn about, understand the engagement, understand the most efficient way to engage with consumers. That's just one avenue. We're looking at digital avenues and ways to engage with consumers that way. And so what you're doing with our investments is we're looking at what are the various ways that we can engage with the consumer and meet them when they're trying to make those decisions for their conversion and then support them on that conversion journey as they commence it. And so that's just one avenue, but certainly we'll test and learn there and understand what the engagement success is and the efficiency of getting that consumer to convert.

Great. That's very clear. And if I may sneak in one more, apologies. Just in terms of ICOS, curious as to what, in your mind, drives the pace of the rollout. So right now, it looks like it's very tied to those tax breaks. So, I mean, I guess at what point would we expect a big bang in terms of national launch or, you know, given getting tax breaks is a slow process, it'll be more incremental? What do you think about that?

Yeah, the way we think about it is, and it's just important to remind everyone, look, PMI has been on this pathway for a long time. They've been talking about it. Certainly you guys have been talking about it. We have. It is brand new to the U.S. consumer. So we want to make sure that we're doing it the right way. I would say in a disciplined fashion versus your terminology of big bang. Once we feel like we have it right, we have plans in place to continue the expansion. Certainly we're going to be influenced by always being able to put our best foot forward and Now having the ICOS-3 device approved, having the MRTP claim on the 2.4 system gives us a much better indication and a much better engagement plan with the consumer. But we are learning along the way. I would say the Charlotte launch was more successful based on the learnings we had in Richmond and Atlanta. And so we're going to continue that disciplined approach, but I don't want you to think that we're trying to get these SET applications agreements with the state legislatures to influence how fast or how we think about the launch. That will not be an influence in how we proceed with the ICOS launch.

Great. That's very clear.

Thank you for taking my question. Thank you.

Once again, if you would like to ask a question, please press star, then the number one on your telephone keypad. That's star one. Your next question is from Jennifer Maloney with the Wall Street Journal.

Hi, good morning. So the FDA just published their press release, formally announcing that they intend to pursue a nationwide menthol ban. I wonder, from your perspective, what impact would this have on cigarette consumption? You know, how many people would quit cigarettes? How many would move to reduced risk products? How many would just like switch from, say, Newport to Marlboro, for example?

Yeah, it's a great question. And again, you've caught me off guard because I've been having the phone call, so I haven't had a chance to read it. I think it'll depend on what the proposal is, how they think about that proposal through time, and how they think about implementing it. You know, I would remind you that the science and evidence we see, and based on the comments that we have provided previously, we don't see the science and evidence that would support that. We don't think prohibition works. It's fraught with unintended consequences. But this is exactly the reason why we pursued a portfolio approach, that if there are any actions by the regulatory in any specific category that put the consumer at play, we wanted to make sure we had the right products, right brands in each of the categories and have those products and brands in their consideration set as they are faced with different choices. But we'll certainly be engaged with the FDA and continue to encourage them to focus on the science and evidence.

Do you think that if it were implemented, I know that's a big if and it wouldn't happen overnight, but would it accelerate the decline in U.S. cigarette volumes?

I think that's a tough hypothetical to answer. We'll have to see how it's implemented, if it's implemented and how they go about it and how the consumer considers that from a standpoint of what are the unintended consequences and access they have to menthol cigarettes outside of the legal system. And then are they at play for other products to gain their satisfaction?

Over the past few years, the company has been trying to expand its presence in the menthol category, noting in investor presentations that menthol represents a growing share of U.S. cigarette sales. Could you speak to the importance of the menthol category for Altria and for the U.S. cigarette industry?

Yeah, I think when you think about it for Altria, I would remind you that we're under-indexed in share in the menthol category. We tend to be over-indexed in non-menthol. And so from a total standpoint of the category, I would really direct you to the comments we provided to the FDA of our concerns of an outright ban on menthol that we provided previously when they've been looking at this.

All right. Thanks very much.

Thank you.

Your next question is from Nick Moddy with RBC.

Thank you. Good morning, everyone. So just wanted to follow up on the mental question. Billy, maybe you could just remind us the process from here, right, just in terms of the steps that need to happen just so we can kind of square it and make sure we're thinking about it the right way.

Yeah, we believe it to be a multi-year process, Nick. When you think about the administrative process, and again, you've caught me a bit unawares because I can't read what they have published and how they stated it. So we'll certainly be reading that and diagnosing it. But there's a rulemaking process that takes place. They have to come out with a proposed rule, if that's where they're at right now. They have to receive comments. They have to consider all of those comments. And then they have to go to final rulemaking. And so That's a pretty lengthy process that we will certainly be engaged in with the FDA to share a point of view.

Okay. And that was kind of my question, I guess, which is everything resets, right? Because obviously we've gone through this several times in the last 10 years. So I just want to make sure I'm thinking about that the right way, that they have to go through the whole process again.

Yeah, I don't know what they announced, so I can't speak to the specifics. But the normal process that they would go through is a proposed rule. There would be comments. Then there would be a final rulemaking. And so, again, I can't speak to specifics based on not having read what they announced.

Great. Thanks, Billy.

Thank you.

Thank you. At this time, I would like to turn the call back to Mack Livingston for closing comments.

Thanks, everybody, for joining us. Please contact the investor relations team if you have further questions. Thanks.

Thank you. This concludes today's conference call. You may now disconnect.