Altria Group, Inc.

Stand by, your program is about to begin. If you need assistance on today's conference, please press star zero. Good day and welcome to the Altria Group 2021 Fourth 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. 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.

Mack Livingston Thanks, Leo. Good morning, and thank you for joining us. This morning, Billy Gifford, Altria's CEO, and Sal Mancuso, our CFO, will discuss Altria's fourth quarter and full year business results. Earlier today, we issued a press release providing our results. The release, presentation, quarterly metrics, and our latest corporate responsibility reports are all available at Altria.com. During our call today, unless otherwise stated, we're comparing results to the same period in 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, Mac. Good morning and thank you for joining us. Altria delivered outstanding results in 2021 across our businesses, including strong financial performance, progress toward our vision, and advancements in our ESG efforts. This morning, we'll highlight our accomplishment in each of these areas. First, Altria grew its 2021 adjusted diluted earnings per share by 5.7%. driven in part by the resiliency of our cigarette, cigar, and moist smokeless tobacco businesses. Additionally, we return more than $8.1 billion in cash to shareholders through dividends and share repurchases. This total represents the third largest single year cash return in Altria's history and the largest annual return since 2002. We have continued to make progress toward our vision of responsibly leading the transition of adult smokers to a smoke-free future. Our teams took several steps forward in 2021, including accelerating the retail share growth of oil and further enhancing the capabilities to expand heated tobacco and other new U.S. tobacco products, advancing the science, research, and development behind our smoke-free products, advocating for tobacco harm reduction by encouraging the FDA and other stakeholders to address the widely held nicotine misperceptions in society. And we made excellent strides in establishing a best-in-class consumer engagement system to support smoker transition to smoke-free products. Our system leverages robust transactional data and our advanced analytic capabilities to engage with consumers at the point of purchase. Finally, some of our achievements across our responsibility focus areas included publishing six corporate responsibility reports summarizing our progress in critical areas such as harm reduction and underage prevention, and publishing our inaugural Task Force on Climate-Related Financial Disclosures report. We were recognized for the second consecutive year with a double A rating from CDP for climate and water stewardship. And we advanced our internal talent and cultural goals, embraced workplace flexibility, and embedded inclusion and diversity considerations within our performance review process to hold our leaders accountable. We're excited to share more about our responsibility efforts and our consumer engagement system next month at CAGNI. 2021 was a dynamic year for the U.S. tobacco industry. and total industry volumes were influenced by several factors, including pandemic-induced shifts in consumer purchasing behavior and tobacco usage occasions, a continued trend towards smoke-free alternatives, and an evolving regulatory and legislative landscape. Despite year-over-year volatility due to pandemic-related factors, total tobacco volume trends remain stable. In fact, we estimate that overall tobacco space volumes have decreased by 0.3% annualized for the past two years and by 0.8% over the last five years on a compounded annual basis. Diving deeper, total estimated equivalence volumes for smoke-free products in the U.S. grew to 3.8 billion equivalence units in 2021 and represented approximately 24% the total tobacco space we estimate that year-over-year increases in smoke-free volumes were driven by the evapor category which result resumed its growth after a temporary pause in 2020 and oil nicotine pouches which continue to grow rapidly from a small base 2021 smoke-free volumes also benefited from the geographic expansion of icos in the heated tobacco categories but were pressured by modest declines in the MST category due to shifts in consumer purchasing behavior and movement to other smoke-free categories. And in combustibles, volume declined to approximately 11.8 billion equivalized units, driven by several factors, which Sal will discuss later in his remarks. Turning to our smoke-free product portfolio, We're excited by the exceptional performance of ON in oil and nicotine pouches. ON retail share of oil and tobacco increased by nearly a full share point sequentially, reaching 3.9 share points for the fourth quarter and nearly doubling its share over the past six months. These strong results were primarily driven by an increase in multicam purchases. As of the end of the year, ONN was available for sale in approximately 117,000 U.S. retail stores. The all nicotine pouch category reached a total all tobacco retail share of 17.9 percentage points in the fourth quarter, growing 7.4 share points year-over-year. We're encouraged that ONN represented more than one-third of this growth and the brand is proving to be a highly competitive product in this space. Our premarket tobacco applications for the entire ONN portfolio remain pending with the FDA, and we believe that the FDA should determine that the marketing of these products is appropriate for the protection of public health. We are also actively working on modified risk tobacco product applications for ONN and expect to submit these applications to the FDA by the end of this year. We believe an MRTP claim would be an impactful point of differentiation for the brand and an important tool in educating and ultimately transitioning smokers to less harmful products. In heated tobacco, our teams made excellent progress with ICOS in the Northern Virginia market. with Marble Heat Sticks achieving a 1.9% retail share of the cigarette category in stores with distribution for the month of October. Unfortunately, PMUSA had to remove IKOS from the market in November due to the International Trade Commission's importation ban and cease and desist orders. PMI is responsible for IKOS manufacturing, and we have been in contact regarding product availability. At the present time, we did not expect to have access to ICOS devices or marble heat sticks in 2022. However, we remain focused on returning ICOS to the market as soon as possible. Our teams are actively working on reentry plans, and we expect to be ready to bring ICOS back to U.S. consumers when available. Our agreement with PMI contemplates disruptions. such as those caused by the ITC orders, and requires the parties to negotiate in good faith to amend the agreement appropriately. In the second quarter of 2020, we disclosed two milestones in our ICOS agreement with PMI necessary for PMUSA to maintain its exclusive license and distribution rights for ICOS in the U.S. and to earn the renewal option for an additional five-year term. The initial five-year term does not expire until April of 2024, but we believe that PMUSA has already met these milestones based on the strong performance of ICOS in the Charlotte and Northern Virginia markets. PMI has communicated that it disagrees with their position. We expect to continue discussing these matters with PMI. We firmly believe that heated tobacco products can play an important role in U.S. harm reduction and we are continuing our efforts to support the category's growth. We have gained significant knowledge from our ICO's commercialization efforts, which we expect to use going forward. Our teams learned how to educate U.S. smokers on a brand new tobacco category and how to effectively support their transition journey to smoke-free alternatives. We demonstrated improved performance in each successive market and gain valuable knowledge on leveraging MRTP claims to transition smokers. Additionally, we have built a robust post-market surveillance system, all of which we believe will position us to successfully achieve our objective of moving beyond smoking. Moving to the eVapor category, the 2021 Monitoring the Future study was recently released, and the data showed positive improvements in underage usage trends. Both underage use of nicotine vaping products and JUUL specifically show continued signs of decline. The latest data shows that JUUL underage usage is down by 70% from 2019, with total underage nicotine vaping down 27% over the same period. We are encouraged by the progress, but more still needs to be done and we remain committed to continuing our work to reduce underage use of all tobacco products. Turning to the regulatory environment, the FDA is currently weighing several decisions that we believe will shape the future of harm reduction in the U.S. In the eVapor category, the FDA has issued marketing denial orders for many eVapor PMTAs, predominantly applications for open systems and flavored e-liquids. These denial orders have resulted in significant litigation across the country. In the meantime, TMTAs for most leading evapor products, including JUUL, are still in FDA review. The FDA granted its first evapor market order last year for the tobacco variant of a Cigalite product. The FDA has not reached a final decision for that manufacturer's menthol variant but did deny its submissions for its other flavored cartridges. In oral tobacco, PMTAs for the leading oral nicotine pouch products, including ON, remain pending with the FDA. Last year, the FDA granted the first market authorizations among innovative oral tobacco products for our VIRB discs and chews in the flavors of green mint and blue mint. These were also the first flavored product authorizations for newly deemed tobacco products. Additionally, MRTP applications previously submitted for Copenhagen snuff and competitive snooze products remain in FDA review. Finally, in combustibles, the FDA has stated that they are on track to issue proposed product standards by April 2022 regarding menthol in cigarettes and characterizing flavors in cigars. As a reminder, the FDA rulemaking process for these and all potential product standards has multiple steps and provides several opportunities for stakeholders to provide input. There are formal requirements related to public notice and comment, and steps requiring the Office of Management and Budget to assess economic consequences at several points in the process. Importantly, if the FDA chooses to move forward with a final rule They must address all comments received throughout the rulemaking process. Of course, any final rule must take into account the potential for unintended consequences and would be subject to legal challenges. We plan to review the proposed rules in detail and intend to engage with the FDA throughout the rulemaking process on each of these issues. We remain optimistic about the future of harm reduction in the U.S. We believe we have an unprecedented opportunity to lead the way in shifting millions of smokers away from cigarettes if we follow the science and foster innovation with the support of reasonable regulation. We're encouraged that the FDA has authorized a product in each of the three major smoke-free categories. Going forward this year, we expect the FDA to carefully consider the scientific merits of each remaining application And we're hopeful for significant progress in product marketing and claim authorizations. I would like to end my commentary regarding 2021 with a message to Altria's employees. Thank you for your dedication, passion, and creativity through a difficult period. We experienced several challenges last year in both our professional and personal lives. And I admire your resiliency and fortitude. You are a driving force in moving beyond smoking, and we are very appreciative of your efforts and commitment. Let's now move to our financial outlook for 2022. Our plans for the year ahead include a continuation of our strategy to balance earnings growth and shareholder returns with investments toward our vision. For 2022, our planned investment areas include digital consumer engagement, smoke-free product research, development, and regulatory preparations, and marketplace activities in support of our smoke-free products. The external environment remains dynamic, however, and we're monitoring various factors such as the economy, including the impact of increased inflation, the impact of current and potential future COVID-19 variants and mitigation strategies, tobacco consumer dynamics, including tobacco usage occasions and available disposable income, and regulatory and legislative developments. Taking these factors into consideration, we expect to deliver 2022 full-year adjusted diluted EPS in a range of $4.79 to $4.93. This range represents an adjusted diluted EPS growth rate of 4% to 7% from a $4.61 base in 2021. We expect 2022 adjusted diluted EPS growth to be weighted toward the second half of the year. Their guidance includes anticipated inflationary increases in master settlement agreement expenses and direct materials expenses, and our current expectation that we will not have access to the ICO system in 2022. I'll now turn it over to Sal to provide more detail on the business environment and our results.

Thanks Billy. I'd like to begin with an update on consumer disposable income, mobility, and retail store traffic. We believe rising gas prices, inflation, and the reduction of COVID-19 relief programs led to a decrease in disposable income on a sequential and year-over-year basis.