Good day and welcome to Altria Group 2020 Fourth Quarter and Full Year Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by Altria 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 Mr. Mac Livingston, Vice President of Investor Relations for Altria Client Services. Please go ahead, sir.

Thanks, Lori. 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, 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 2019. 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 US 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 2020 and managed through the challenges presented by the COVID-19 pandemic. Our tobacco businesses were resilient and our employees demonstrated unwavering commitment to their work, colleagues, and communities. Our employees continue to move Altria forward and we believe we're making steady progress toward our 10-year vision to responsibly lead the transition of adult smokers to a non-combustible future. We continue to execute against the strategies we previously shared, including maximizing profits in our combustible businesses, responsibly expanding our non-combustible products, and demonstrating science-based leadership in the external environment. We've remained active in our communities, supported relief efforts for the pandemic and the West Coast Wildfires. We're committed to driving positive change and addressing racial and economic inequities. Change starts from within and our employees are leading our efforts to build a more diverse, inclusive, and equitable organization. Our 11 employee resource groups are helping promote cultural awareness and diversity in our workplace and within our communities. Two of these organizations, Mosaic and Si!, were recently recognized for their contributions by the National LGBT Chamber of Commerce and by the Virginia Hispanic Chamber of Commerce respectively. We also acknowledged the importance of addressing environmental challenges, and we've established ambitious goals for 2030. Last month, we were among the 1% of companies awarded a AA rating from CDP for climate and water stewardship. We're proud of these efforts and I look forward to sharing more details about our ESG initiatives next month at CAGNY. 2020 was a dynamic year in the tobacco industry with notable changes in each category. Tobacco consumers continue to adopt non-combustible alternatives to cigarettes. Most significantly in the oral tobacco space, there was rapid growth in oral nicotine pouches off of a small base and a return to moderate buying growth in moist smokeless tobacco. The heated tobacco category also showed encouraging signs of smoker interest; still, it remains in its early stages. The e-vapor category, however, which had been the biggest driver of smoker conversion over the last several years, contracted in 2020 as it continues to undergo a transition period pending FDA market determinations. And in combustibles, cigarette volumes were little changed from 2019 as the COVID-19 pandemic altered smoker behaviors and purchasing patterns. Looking at the tobacco space as a whole, estimated volumes remained stable. In fact, over the last five years, we estimate that total tobacco volumes have only decreased by 1% on a compounded annual basis. While 2020 represented a pause in some industry trends away from combustible products, our plans to achieve our 10-year vision remain centered around building a deep understanding of evolving tobacco consumer preferences, meeting these preferences by expanding the awareness and availability of our non-combustible product portfolio, and when authorized by the FDA, engaging with smokers to educate them on the benefits of switching to alternative products. Let's now turn to our 2020 business results. Altria's full-year adjusted diluted earnings per share grew 3.6%, driven by strong performance from our tobacco businesses. We also returned nearly $6.3 billion in cash to our shareholders in the form of dividends, and our Board increased the dividend for the 55th time in the past 51 years. Our smokeable products segment continues to be the engine that powers our 10-year vision, generating significant cash that can be invested in non-combustible products and returned to shareholders. This segment has demonstrated strong profit growth in a variety of marketplace conditions. Over the last five years, smokeable segment adjusted OCI has grown by 5.5% on a compounded annual basis, and this segment has delivered excellent financial performance across various volume and market share dynamics. We continue to be pleased with the performance of our combustible businesses, and Sal will provide more details on this segment in his remarks. Moving to our non-combustible offerings, we're pleased with the continued strength of USTC's moist smokeless tobacco business and the encouraging results from our other non-combustible products. We believe our products and investments in the oral tobacco, e-vapor, and heated tobacco categories present compelling options for the millions of US smokers looking for alternatives to cigarettes. In oral tobacco, we believe we have an unmatched portfolio of MST and all nicotine pouch products. Copenhagen remains the leading oral tobacco brand and delivered strong volume and profit performance for the year. We are also excited about the potential for on! and believe it's a satisfying product for both smokers and dippers. Helix made significant progress in its first full year of operations. Over the last 12 months, our talented regulatory affairs team assisted Helix in following PMTAs for the on! portfolio, which we believe demonstrates that the products are appropriate for the protection of public health. Our highly skilled engineers and machine operators supported Helix to establish a manufacturing footprint for on! in our Richmond facility, and Helix has reached an annualized capacity for on! of 50 million cans. The team continues to install machinery, and Helix expects unconstrained manufacturing capacity for the US market by mid-year 2021. The Helix brand management and AGDC's sales teams collaborated to steadily increase the retail distribution of on! during the year and executed innovative trial-generating promotions that demonstrate the ability for on! to gain traction with smokers and dippers. On! was sold in approximately 78,000 stores at the end of 2020, up nearly 40% from the third quarter and with five times the store count from the end of 2019. In stores with distribution, on! achieved a retail share of 2.4 percentage points of the oral tobacco category in 2020, with significant growth coming in the second half of the year. Helix has strong plans for the year ahead and is focused on removing capacity constraints, reaching its retail distribution partners, building brand equity, and converting smokers. We're confident in the on! proposition and believe its satisfying range of nicotine strengths, flavors, and unique packaging position it well for success in directly growing the nicotine pouch space. Moving to e-vapor, we estimate that total category volumes decreased by 10% for the full year. The category continues to undergo a transition period as the FDA prepares to make market determinations on the thousands of PMTAs filed by the September 2020 statutory deadline. We continue to believe that e-vapor products play an important role in tobacco harm reduction and that a sustainable e-vapor category will consist solely of FDA-authorized products. We believe the category's long-term trajectory will be determined by regulatory decisions, legislative and tax policy, and innovation that best addresses smoker and vapor preferences. In the heated tobacco category, PM USA continues to expand IQOS and Marlboro HeatSticks responsibly and in a disciplined manner. PM USA's 2020 accomplishments included launching in Charlotte with a more disruptive retail fixture, expanding the retail distribution of HeatSticks to approximately 1,000 total stores, introducing devices into select Charlotte convenience stores, developing an array of new digital tools, including mobile video chat capability which gives PM USA's customer care experts a virtual option to build connections and support age-verified smokers through their conversion journey, and communicating with smokers using the FDA-authorized reduced exposure claim about the benefits of switching from cigarettes. We're excited that the FDA has authorized the IQOS 3 device for sale in the US. The new device offers several enhancements compared to the current 2.4 version, including a longer battery life and a faster recharging time. PM USA expects to begin selling the new device shortly, and it will be available across all existing retail channels in the Atlanta, Charlotte, and Richmond markets. PM USA also recently introduced new packaging for HeatSticks and has renamed the three currently authorized HeatSticks SKUs as Amber, Blue Menthol, and Green Menthol. The new packs feature a cleaner look, and PM USA believes the naming convention will facilitate HeatSticks line extensions in the future should additional variants be authorized by the FDA. PM USA is focused on expanding the availability and awareness of IQOS, achieving its contractual performance requirements, and remains on track with its 2021 plans to expand IQOS and HeatSticks into four new metro markets and surrounding geographies. We believe that PM USA has the right approach to maximize its first-mover advantage while responsibly positioning the US heated tobacco category for long-term growth and profitability. Let's now turn to our financial outlook for 2021. Our plans for the year ahead include accelerating investments in support of our 10-year vision. We expect to fund this through the financial strength of our tobacco businesses. The external environment remains dynamic; however, and we're monitoring various factors including unemployment rates, fiscal stimulus, tobacco consumer dynamics including stay-at-home practices, disposable income, purchasing patterns, and adoption of non-combustible products, regulatory and legislative developments, the timing and breadth of COVID-19 vaccine deployment, and expectations for adjusted earnings contributions from our alcohol assets. Taking these factors into consideration, we expect to deliver 2021 full year 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. Our 2021 guidance incorporates planned investments to drive smoker conversion to non-combustible products, including continued marketplace investments to expand the availability and awareness of our non-combustible offerings, building an industry-leading consumer engagement system that enhances data collection and insights in support of conversion, and increased non-combustible product research and development. We expect our 2021 adjusted EPS growth to come in the last three quarters of the year primarily due to prior year comparisons, which include one fewer smokeable products shipping day in the first quarter. Altria's tobacco business has delivered excellent results over the past year, and I'd like to thank our employees for their hard work. Their dedication drives our strong performance, and it's their passion and commitment that makes me excited for Altria's future. I'll now turn it over to Sal to provide more detail on the business environment and our financial performance.

Thanks, Billy. Let me begin by providing an update on US tobacco consumers. Economic conditions remained challenging for consumers in the fourth quarter as unemployment rates remained high and the enhanced benefits from the original pandemic assistance package were fully exhausted. However, we believe consumers continued their stay-at-home practices in the fourth quarter, contributing to more tobacco usage occasions and higher tobacco discretionary spending. At retail, we estimate that in the fourth quarter, the number of tobacco consumer trips to the store was slightly lower than prior levels. The tobacco expenditures per trip remained elevated versus the year-ago period. Turning now to our business, the smokeable product segment delivered excellent financial and marketplace results in 2020. The segment grew full-year adjusted OCI by over 10% and expanded its adjusted OCI margins by almost 2 percentage points. The smokeable segment also achieved robust net price realization of 6.7% for the year with PM USA's revenue growth management framework continuing to enhance the segment's top-line performance. Smokeable segment reported domestic cigarette volumes declined by 0.4% in 2020 versus the prior year. When adjusted for trade inventories, calendar differences, and other factors, we estimate that full-year segment cigarette volumes declined by 2%. At the industry level, we estimate that full-year domestic cigarette volumes were unchanged versus the prior year after adjusting for the same factors. Looking ahead, we expect 2021 cigarette industry volume trends to be most influenced by smokers' stay-at-home practices, unemployment rates, fiscal stimulus, cross-category movement, the timing and breadth of COVID-19 vaccine deployment, and consumer purchasing behavior following the vaccine. Due to the uncertain timing and magnitude of each of these dynamics, we're not providing a cigarette industry outlook. We believe the degree of cross-category movement will be influenced by several factors including consumer perceptions of the relative risk of non-combustible products compared to cigarettes, FDA determinations on PMTA filings, and legislative actions. We'll continue to monitor these factors and update you on the pandemic-driven and underlying smoker behaviors that we observe in the category. Turning to marketplace performance, Marlboro's fourth quarter retail share was 43.3%, up two-tenths versus the prior year and unchanged sequentially. Marlboro continued to benefit in the fourth quarter from smoker preferences toward familiar products during disruptive times and continued lower promotional spending among competitive brands versus the first half of 2020. For the full year, Marlboro's retail share declined three-tenths to 43%. Marlboro's full-year share performance was impacted by the movement of older consumers coming back into cigarettes from e-vapor, which we observed at the beginning of 2020. This demographic has a greater tendency to purchase discount cigarettes than the category average, which increased discount segment share to start the year. We continue to be pleased with Marlboro's performance and believe its leading brand equity positions the brand well to deliver on this long-term profit potential. In discount, total segment retail share was 24.5% in the fourth quarter, unchanged versus the year-ago period and up two-tenths sequentially. For the full year, discount segment retail share increased three-tenths to 24.5% driven by the cross-category movement observed at the beginning of 2020 and growth in deep discount products. Moving to cigars, Middleton provided a strong contribution to the smokeable segments financial results and continued to successfully navigate the regulatory environment. Reported cigars shipment volumes increased 9% for the year, and Black & Mild remained the leading tip cigar brand. Middleton has also received market orders or exemptions from the FDA covering over 97% of its volume. Turning to non-combustibles, we're very pleased with the performance of the oral tobacco product segment. Segment adjusted OCI increased 7.3% for the year and it maintained its strong adjusted OCI margin of 71.7 percentage points despite increased investments behind on!. Reported oral tobacco segment volumes increased by 1.2% in 2020 driven by on! oral nicotine pouches. In MST, Copenhagen reported shipping volumes were unchanged versus the prior year. When adjusted for calendar differences, trade inventory movements, and other factors, full-year oral tobacco segment volumes increased by an estimated 1%. Full-year 2020 retail share for the oral tobacco segment was 49.8%, down by 2.7 percentage points due to increased adoption of oral nicotine pouches. We remain pleased with the performance of Copenhagen in the MST category and we're excited about the growth potential of on! as we continue to expand capacity and distribution. In alcohol, the pandemic negatively impacted the 2020 financial performance of both Ste. Michelle and our equity investment in ABI. Ste. Michelle's full-year adjusted OCI decreased approximately 30%, driven primarily by lower on-premise and direct-to-consumer sales, partially offset by higher pricing. In beer, we recorded $157 million of adjusted equity earnings in the fourth quarter representing Altria's share of ABI's third quarter 2020 results and a decrease of more than 19% from the same period last year. For the full year, we've recorded $540 million in adjusted equity earnings from ABI, down over 36% from 2019. In our all other operating category, we've recorded $172 million in adjusted losses for the year, more than half of which related to non-cash reductions and the estimated residual value of certain assets at Philip Morris Capital Corporation. As of year-end 2020, the net finance assets balance for PMCC was $320 million. We expect to continue reducing this balance in 2021 through rent and asset sales, and expect to complete the PMCC wind down by the end of 2022. Moving to capital allocation, our balance sheet remained strong and our tobacco businesses are highly cash generative. Dividends remain our primary vehicle for returning cash to shareholders, and our long-term objective is a dividend target payout ratio of approximately 80% of adjusted diluted earnings per share. We believe our dividend target payout ratio provides significant shareholder return while allowing for flexibility in our capital allocation. We perform rigorous analyses to determine the best use of excess cash, including evaluating options for reinvesting behind our 10-year vision, refinancing our long-term debt, and repurchasing shares. Yesterday, our board authorized a new $2 billion share repurchase program which we expect to complete by June 30, 2022. The new authorization reflects the significant value the board believes exists in our shares today. 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 Altria.com. We've also posted our usual quarterly metrics which include pricing, inventory, and other items.

Thank you. Our first question comes from Nik Modi of RBC.

Just two questions from my side. If you guys can give us maybe a state of the union of what you're seeing from the excise tax front, that would be helpful. And then the broader question is just on Marlboro. I mean very good share performance which could be surprising given some of the stimulus was over; we had a kind of air pocket in terms of government stimulus. What really drove that? I mean you spoke in your prepared comments about well-recognized brands, but I'm just trying to get underneath there's other drivers like price gap management or the Marlboro rewards programs and how that played a role in terms of shifting the share trajectory because it's been losing share for a number of quarters now? Thanks.

Thanks for the questions, Nik. We'll take them in order. On the excise tax front, I would remind you that we had two state excise tax increases happen at the beginning of this year. Certainly with the bills that the states have racked up responding to COVID, it will be a little bit more challenging excise tax environment. We have a great government affairs team, as you know Nik, and they engage on both sides of the aisle across the states and really know how to engage on that. From that standpoint though, I think right now most governments are focused on how to get the COVID-19 pandemic under control, and so there's a little bit of chatter across the states. But nothing to point out at this point, but certainly it will be a challenging environment as they look to pay the bills related to their response to COVID-19. On Marlboro, Nik, I think what you saw, and Sal highlighted in his comment, is that people were concerned at the beginning of the year. We tried to highlight for the analyst and investor community that what we saw was consumers moving back from e-vapor into cigarettes and both premium brands and discount brands benefitted from it; but because it tended to skew older adults smoker coming back, we know that they have a proclivity towards discount brands. We didn't panic when that was taking place. We felt like we knew what was behind that, and I think you've just seen the strength of the Marlboro brand through time. Certainly there are some competitive premium brands that had some extra resources in the marketplace at the beginning of 2020. We felt those lessen as we progressed through 2020, and to your point, the programs we have in place, and the Marlboro brand team do an excellent job of engaging with the consumers and nearly building loyalty through time, whether you mentioned the rewards programs or other programs as well. I think that the strength of the Marlboro brand, and we're excited about where it stands.

Great, thanks guys. I'll pass it on.

Your next question comes from the line of Bonnie Herzog of Goldman Sachs.

So I guess my first question is on your EPS guidance. I guess I'd be curious to hear what did your guidance assume in terms of the tax increases that you just touched on? I mean I'm wondering, Billy, if it does consider a potential federal excise tax increase, maybe at the low end. And then I guess I'm a bit surprised you were unable to provide even a wide range for your cig volume expectations this year. I certainly understand there's a lot of uncertainty right now in our world. But you must have, I guess, some sense of the range of your cig volumes again given your EPS guide. So maybe you could touch on that for us a bit just at a high level, whether or not you expect cig volumes this year will possibly revert back to historical declines or maybe below historical declines given the tough comps and the potential for greater excise tax increases. Thanks.

Thank you, Bonnie, and we'll take those in turn as well. On the EPS guidance, really when you think about the EPS guidance, I know you're including kind of the cigarette volume in that. We run a range of scenarios around that. We really look at what our base expectations are. We have a very strong forecasting group. They forecast across the various categories and then we run a range of scenarios around that upside and downside, and we think about what we feel confident about in providing a short range of EPS guidance for the year, and that's where we landed. As far as cigarette volume, we didn't have a forecast for volume. We feel very good about the way we go about forecasting volume. But to your point, there are a lot of uncertainties and a lot of fluidness in the environment, whether that's the consumer and how they engage with some of these non-combustible categories as they continue to grow or to the things we've highlighted in remarks, whether it's unemployment or the fiscal stimulus if the government passes that. So there are a range of factors. What we think really focusing on the consumer and that's what we are trying to do is really give more information about how we're focused on the consumer and what or when they go, and that's exactly why we implemented the portfolio strategy. It's really looking at the consumer, and how they make different decisions depending on where they're at in their journey, and how do we really focus on the consumer and have the best products and best brands in each of those categories as they make decisions. Don't get me wrong. The cigarette, as I said in my remarks, really fuels the engine for fueling the 10-year vision. But we think what you should hold us accountable to is our success in meeting the customer where they're at, regardless of what category they're at.

Okay, that's helpful. I appreciate that. And then speaking of your 10-year vision, I did want to just maybe ask you to help us with that and maybe update us on where you're at with that. I know it's in the beginning, but are there any guideposts you could share with us? You're expecting to see for your business maybe even in the next three to five years. I'm asking because obviously per your guidance and your comments, you're entering a period near term here where you're stepping up spend to kind of accelerate this plan. So it would help us to understand maybe some targets like for you to convert your business to the non-combustible products as you mentioned. Is it fair to assume 20%, 25% for instance in the next, again, three, five, or five-plus years? And then as you execute on that vision, are you also open to or considering future M&A to even accelerate this further, or should we just assume this will all be done organically? And then I do want to hear about how you're incentivizing your employees to execute? Thanks.

Sure. Look, I'll take them in reverse order. As far as the employees, they have such passion. But you're right, incentivizing them in the right direction certainly directs that passion. We've shared that 10-year vision that we have and how we expect to progress through time with our employee base. They're passionate about it. They're excited to support that, and we think we have the right incentive program in place to work that excitement. As far as milestones, again I won't go into a specific numerical value. Remember from an overall objective we're looking to balance strong growth, EPS growth for investors, and the associated cash involved with that. But at the same time, making investments over the long-term to advance our non-combustible portfolio. So what we're really trying to do is have that balance, and so we're certainly going to share with you through time how we're making progress. But it's really about the journey of the consumer. So if you think about really driving awareness of the consumer for new categories, trial ultimately purchase and then at the final stage conversion to these new categories, that's the way we're thinking about the consumer journey. We're really investing to get to as close to the consumers as we can because each consumer is going to be in a different point in that journey and make different decisions across the categories, and that's exactly the portfolio approach. As different actions are taken, whether they're regulatory actions, whether they're consumers really enjoying a category, being able to be agile enough to not starve any category that's growing, and make the appropriate investments there. So that's how we're thinking about the consumer journey, and you'll see a share more through time of how we're progressing with those consumer journeys.

Okay, thanks. Maybe quickly on the M&A, would you be open to that as something over the next year if there's a way to further accelerate that, whether you develop it internally or would you be open to looking outside capabilities?

Yes, we'll keep our eyes open for everything. But we're extremely excited about the portfolio products that we have currently and it's really a focus on execution, and to your point that's exactly why we talked about the investments and their product development. It’s making sure that we're staying abreast of the consumer and really keeping pace and meeting their needs and desires.

All right, thank you. I'll get back in queue. Appreciate it.

Your next question comes from the line of Vivien Azer of Cowen.

So I wanted to speak on combustibles, please. So if we're looking at wholesale inventories for both you and the industry, they remain elevated at year-end relative to where you guys closed out in the last two years. Appreciate some of that probably is just stockbuilding because of COVID. But how should we think about inventory levels as we head into 2021, please? Thanks.

Yes, thanks for the question Vivien. I think you nailed it. I think it was as wholesalers and retailers are making decisions around where they stood with the COVID-19 pandemic and what was happening at different parts across the US. The surges that are taking place in different state government decisions about shutdowns and the consumers' mobility in the marketplace. I think certainly there is a slight level of increase over what you've seen in previous years, as they took those things into consideration. Certainly, as we always said through time, those wholesale inventories tend to balance out and so we'll see as we progress through the COVID-19 pandemic and the vaccination rollout, how wholesalers and retailers decide to what levels are appropriate for them.

Understood. Thank you so much for that. And my follow-up question is on oral tobacco. So industry volume growth in the quarter and the year. I was wondering whether you could unpack that at all and provide some color on how much of that growth came from modern oral so we could have a better sense of what's happening with underlying MST. Thanks.

Yes, I would say both pieces of that category did grow during the year. But certainly, the vast majority was the onset of the novel oral products, whether it be on! or Zen or other products in that space, and so that's the vast majority. But both segments of that category did grow. So we feel good about the offerings we have and brands in the traditional MST. Copenhagen continues to lead that category, and we feel great about its position.

The next question comes from the line of Michael Lavery of Piper Sandler.

Could you just talk a little bit about what you're seeing with IQOS and what engagement is really proving the most effective whether it's in the stores or digital or mail or anything else? And how does the IQOS 3 launch impact any of your marketing approach?

Yes, it's a great question Michael. We're very excited about what we've experienced in the first three markets. From a standpoint of the exact way to engage with the consumers; what's most important we've found is the consumer education that we understand what the IQOS device delivers and the Marlboro HeatSticks, what flavor expectations they can have and then really how to use the device. So from that standpoint, we're trying many things because remember we launch in densely populated areas. So you have one strategy there. But then as you move from those densely populated areas out that's exactly why we were testing the device sales in convenience stores to really meet consumers where they are, and as you get to more rural locations really have an outlet to engage with the consumer. We actually use all of those measures that you mentioned, whether it's direct mail, whether it's retail stores, the mobile units in the convenience store, whether it's corners and various places, or whether it's the mobile unit. Certainly, in Charlotte, we have used the mobile units to a larger extent because what we found is as you meet a certain capacity you can actually move those mobile units from one location to another and really maximize the number of consumers you're engaging with. Most certainly, in the COVID world, we had some challenges there because there was a lot of engagement one-on-one with the consumer. But our team implemented digital tools. We talked about the mobile chat capability that they installed, and so we're excited to continue to expand, and we'll have more to say on that.

Okay, great. That's helpful. And then could you just give your latest thinking on Cronos and would you expect to take full control if federal law were to change?

Yes, I'm not going to speak to taking control or any M&A activities. Certainly, we think Cronos has positioned itself well to take a role in the US if it becomes federally legal. I think it's important to step back and really state what we believe. We believe it should be legal at the federal level, but it's got to have the right regulatory framework. What it should address is it should address underage use and establish industry product standards, which includes safety standards. It really needs to be guided by the science so that from a standpoint of everything should be science-driven, and it really should deal with the social justice issues that are involved in that space. We believe it should be federalized at the legal level. We support that. We're engaged with that, but it's got to have the right comprehensive framework surrounding it.

Your next question comes from the line of Chris Growe of Stifel.

I just had a question for you. First of all, you've had an elevated rate of price realization in the cigarette business in particular, and as we enter the year, certainly as you lap increases that occurred in 2020, as well as presuming you take increases in 2021 beyond what you've done already. It would seem to provide the backdrop for an even stronger rate of profit growth. So I want to understand without getting into numbers, I realize that's going to be hard to get into. But just understand the concept, the desire behind the higher level of pricing in which you can do with that. So is there is a heavier rate of investment in the business? Is this going to help fund more of your expansion of on! and the part of the 10-year vision? I'm just trying to understand the pricing strategy as it's evolving here.

Yes, I appreciate the question. I'll be careful Chris, as you mentioned not to get into future pricing strategies. Look, we recognized that pricing is an important part of the algorithm. I would remind you that the strategy for the combustible segment, both cigarettes and cigars, is to maximize profitability over the long-term while balancing investments in mobile and funding the growth of the non-combustible portfolio; so certainly profitability in the traditional tobacco space is what we're using to invest in the future in these non-combustible product arenas. We'd look at that from a standpoint of when you look at pricing, a couple of the factors that we think about pricing as we move forward are really where our consumers are on an economic standpoint, what are they feeling, how do they feel, what are they thinking about? It's the strength of our brands, how do we think about our brands and the strength in the consumers' mind and then certainly business performance and objectives factor into that. I think when you look at price realization over the past couple of years, it's important to remember that's not all list price; it also has the price efficiencies we've been able to garner from the advanced analytics that we've put in place. With the amount of data that we get in and the advanced analytics that we've invested in, I think you're seeing the benefit in price realization of being more efficient, but just as effective, if not more, in the marketplace with the promotional spend that we have, so it's a combination of both. We're extremely excited about what our advanced analytics team has been able to accomplish.

Okay, thank you for that. I had one other question that's I hope it's not too general. I'm just curious as I look at cross-category movement, which was a modest factor throughout 2020; is that more difficult to forecast in 2021? Like, again, I hope that's how you're seeing that. But I guess I'm getting to just a year where your category, just modern oral or heated tobacco especially as they grow and become larger, could have a larger effect on the cigarette category as an example. So is this the year where you see the potential for that transition or acceleration and some of those categories that could further influence cigarette volumes in 2021 or is it just too soon for that?

Yes, I don't think it's too soon for that Chris. I'm hesitant to try to give much more on cigarette volume guidance. I think you're exactly right, though. The success of those categories and our success will certainly impact the cigarette category in line with their vision. But when you step back Chris, that's exactly why we really went with this portfolio approach to products. It's about meeting the consumer where they're at; each consumer is going to make different decisions, and that objective we have balancing strong growth in the associated cash for our investors and investing in these categories. As we progress through the year and we see a consumer following one of these categories, we want to make sure we're not starving it for investments. So, it provides us the flexibility we feel to make the right decisions as we progress through the year.

Okay, thank you for your time today.

Thank you, Chris.

Your next question comes from the line of Owen Bennett of Jefferies.

Just a quick one from me. You noted the increase in the R&D spend around non-combustibles, and I'm assuming it obviously can't be around vapor given the agreement with JUUL. So I'm just wondering what this R&D spend is on: is it your own heated product, is it advancements in modern oral, or is it something else entirely? Thank you.

Yes, you're exactly right, Owen. Thank you for the question. You're exactly right from an e-vapor standpoint; with the agreement we have in JUUL, we're not looking at product development in that space. But it really is staying focused on the consumer and staying where the consumer is going, and so it's across these categories that are growing, is where we want to have product development to make sure we're keeping pace with the consumers' needs and desires. So I think any CPG having a strong product development is important, and that's why we think it’s important for us to invest in that area.

Okay, and would that be, I mean even potentially looking at developing your own heated products, is that a possibility in the future?

Yes, I'm not going to get into specifics. Non-combustibles is where we're investing, and it's really about looking how the investor is what they're desiring and what needs are unmet and developing against that, and so that's as far as I'm going to go today. I think as we make progress in that space and we feel excited about the progress we've made thus far, we'll share more when it's appropriate.

Your next question comes from the line of Steve Powers of Deutsche Bank.

Billy, I guess when you step back and you sum up the elective investments that you seem to be prioritizing in 2021 both towards the vision of a non-combustible future and the new product development, but also just the enhanced analytics around consumer insights and revenue growth management. Is there any way that is mentioned maybe even just relative to similar investments in prior years whether we should have been viewing 2021 as a year of investment acceleration on those fronts or would you frame it more as a steady state glide path if you drew a line to the last years?

Yes, to characterize it either way, Steve. We feel like we've made the appropriate investments. Certainly, it's stepped up. But I wouldn't say that we're just gliding along. We're going to move where the consumer moves, and so it's that keen focus on the consumer. It's about driving the portfolio that we have. So if you think about investments around on! and the heated tobacco space with IQOS and Marlboro HeatSticks, it's about driving investments there, driving awareness, getting the distribution we desire at retail, and having it in the consumers' consideration. When you go to the next category about this digital platform, it's really about thinking about how do you – we've made great strides in analytics, and I think you've seen the benefit and the performance of our businesses. Now it's about those insights being really focused on the consumer, how do we get this close to the consumer, and understand where each consumer is at on their journey to conversion for whatever category they're choosing, and making sure that we're able to communicate and keep pace with them in that journey. The final one is, as we've seen in all of these categories, continued development around the product space is extremely important to the consumer, and investing there to make sure we're keeping pace with the consumers’ future wants and desires.

Okay, if I could just maybe I think these are probably for Sal, just a couple of cleanups. As I think about the 2020 cost base. Clearly there were some incremental COVID-related costs in that base and yet also some cost COVID-related savings. As you think about the move in 2021, is there a way to net out those dynamics in your base case? And also, if there's any advice you might have for us on the outside as to how we should think about the earnings impact as we go forward just as you continue to wind down the PMCC business; just how we should think about that flowing through the P&L? Thanks.

Sure, Steve, and good morning. As far as the cost base in 2020, remember we were lapping the cost reduction program that we implemented in 2019, and of course, cost management remains top of mind for us. When you think about 2021, we think we have the right structure for the business and the right size of the business. It's really about reallocating our spending, right? So we're moving spending from the combustible business as we invest into the non-combustible business in, and our employees do a terrific job or thinking about efficiencies in their infrastructure and their processes and how that frees up resources to reinvest in our 10-year vision and in our non-combustible platform. We feel really good about the right size organization. We have terrific employees. They've done a wonderful job of continuing to provide productivity during the pandemic, and so that's how I would think about 2021 costs. As far as PMCC, the folks of PMCC over the last many years have done a wonderful job of really unwinding that business and it has been lumpy at times. We're selling assets, when you think about 2021 and 2022; we've got the net finance assets at a low level. It's significantly lower than when we began to wind down that business, and really it's about rents received and the sale of asset. So there might be some lumpiness in there. But we feel good about the portfolio that remains and the ability to unwind the business, and we expect to be completely wound down in 2022.

Okay, thank you both, I appreciated.

Your next question comes from Gaurav Jain of Barclays.

I've three questions. So first is on the EPS guide for next year, which is 3% to 6%. In that, there is some component of share repurchases about 1% to 2%. So your pre-tax PBT, if your PBT guide is for 2% to 5% growth, so how are you incorporating the ABI equity income in that because that fell off quite a lot this year? And if I just look at consensus numbers, they ask for a very steep bounce back in ABI net income. So could you just help us understand that?

Yes, Gaurav. I want to be careful not to get into the particular components there. There's always puts and takes across the P&L. I think what's most important is, as I stated early, it is subjective to have strong growth but then make appropriate investments in our non-combustible portfolio. So as you think about, as we progress through the year, if one area or another performs well within that, it affords us as we're progressing through the year to make changes if necessary. But it also affords us the opportunity to invest in areas that we're seeing the consumer gravitate towards, so that we're starving any particular category for investments.

Sure, that's helpful. Now, my second question is about the recent price increases in the US industry. It seems that your primary competitor is setting prices before you, and you are not implementing all the price increases across every state. Is there a concern that this could affect pricing balance and lead to deterioration as we move forward?

Yes, Gaurav. To be quite honest, we really don't pay attention to who goes first, who goes second, or what order. What really matters, as I mentioned earlier, are the major factors that go into our pricing consideration, and nothing from a competitive standpoint. It's really about how our consumers are from their economic positions, what are they feeling, how are they feeling about their future prospects? The next is the strength of our brands, how do we feel about brands in the marketplace and in consumers' minds, and then it is around business performance and objectives. Those are the three factors we think about when we build our plan around pricing, and that's what drives our pricing decisions.

Sure, that is very helpful. And my last question is just on the IQOS packaging which you shared on Slide 15. So I don't see any of the MRTP risk messages that were authorized by the FDA, so would there be new packaging which would incorporate that? And is Philip Morris involved in fee design, or is this under your sort of consideration that you could put whatever branding and packaging that you would like?

Yes, certainly we collaborate with PMI, but those decisions are ours. From that standpoint, we wanted to make sure we had the flexibility as we move forward, where we will be communicating the MRTP with consumers, and we want to do it in the most effective way that has an impact on them. So we're rolling that out, and we started that process in some of our markets. What we saw and researched is - it does bear into the consumers' mind as they engage with the concept of the IQOS and the Marlboro HeatSticks, as well as their desire to stick with it. So we're looking forward to bringing that MRTP and we'll use the avenues that we think are most advantageous for us to get that message across to consumers.

Lori, before we go to the next question. We're aware that we've had a technical issue on the webcast and just want to make sure investors listening on the webcast are aware that we're going to work to get our transcript and replay up very quickly following the call. So we appreciate your patience on that.

Your next question comes from the line of Robert Rampton of UBS.

Three questions from me. The first is looking at over the quarters, I mean for the first time it seems like lowest effective price and the net pack price moved in opposite directions. Curious to understand what drove this; does it mean you're broadening the Marlboro price ladder? And if so, interested to hear why now?

I think when you think about our pricing decisions, as I mentioned earlier, the things that factor into our pricing decisions and that price realization is really around the list price increases we take and the efficiencies garnered across our promotional spend. I think when you look at the rest of the pricing decision, they're independent of us as manufacturers; they make those pricing decisions, and then of course, you have state excise taxes that get added to that, and then how retailers themselves are competitive in the marketplace. There are a lot of factors that go into that, and we feel good about where we're at.

Okay, cool. Second question, so in the annex, you suggest that macro factors were a 4% tailwind to industry volumes for 2020, which you said was primarily driven by stay-at-home. In the event stay-at-home ends, I'm just trying to get an understanding of how that evolves. Does it go to minus 4% or zero? I mean I'm not looking for a guide here. I'm just trying to better understand what you think the sensitivities are around the big uncertainties that you flanked; anything you can share here, maybe the experience in given states would be very helpful.

Sure. Really what we think drove that was exactly what you mentioned, and we had highlighted which were stay-at-home practices; consumers faced less social friction. We were benefitting from more discretionary income related to the stay-at-home practices. So less discretionary spending whether it be movie tickets, going out to eat, or even gas. As we progress through the year, we see consumers respond to how their behaviors relate to how comfortable they feel returning to some of those discretionary items or even to decide to go fully back to work versus work remotely. It really remains to be seen how much they adjust their lifestyle back to a normal pre-COVID state and now even past a COVID pandemic, how much they adapt and change. Something we will be monitoring, but certainly in our guidance, we ran ranges of scenario and feel comfortable that we have levers across the business to be able to respond to that regardless of what one of those scenarios occurs.

Okay, and then my final question, just on heated tobacco. Any chance you can give us an update on the tax reductions you've secured and in terms of numbered states and the magnitude? Thank you very much.

Yes, our government affairs team has been able to secure that reduction in six states, and then, of course, there is a slight definition change in the state of Virginia. So if you count that as a reduction, there would be seven states. But six that are part of if you will once it receives designation from the FDA step-down taxation.

And sorry, just a quick follow-up on that. As I understand, there was a kind of tiering element there with some saying 25-50 depending on what type of MRTP you get; is that still a fair way of thinking about it?

It is. It varies by state, but that is a fair way to think about it.

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

Thank you, Lori. Altria's tobacco business has a track record of delivering strong and consistent financial performance in challenging environments. Our outstanding 2020 results demonstrate the resilience of our business, and we continue to reward our shareholders by returning a significant amount of cash in the form of dividends. We have strong plans for 2021 in pursuit of our 10-year vision and believe our tobacco business platform has the winning brands and is unmatched. Thanks again for joining us. Please stay safe and contact our Investor Relations team if you have any further questions. Thanks very much.

Thank you for participating in the Altria Group 2020 fourth quarter and full year earnings conference call. You may now disconnect your lines and have a wonderful day.