Good day, and welcome to the Altria Group 2022 Third Quarter and Nine Months Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by Altria's management and a Q&A 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 conference over to Mac Livingston, Vice President of Investor Relations for Altria Client Services. Please go ahead, sir.

Thanks, Katie. Good morning, and thank you for joining us. This morning, Billy Gifford, Altria's CEO; and Sal Mancuso, our CFO, will discuss Altria's third quarter and first nine month 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 2021. 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. This is an exciting moment on our journey towards moving beyond smoking. Our tobacco businesses remained resilient during the first nine months of the year, and we continue to reward shareholders while making investments in pursuit of our vision. We have deepened our consumer understanding, enhanced our capability, and built the science to support smoker transition away from cigarettes. The tobacco harm reduction opportunity remains in front of us, and we continue to believe Altria is uniquely positioned to responsibly lead adult smokers to a smoke-free future. Our remarks this morning will focus on our progress to date and several exciting steps we have recently taken that we believe will accelerate our progress toward harm reduction. I will then turn it over to Sal, who will provide further details on our business and financial results. Let's begin with the heated tobacco category. Last week, we entered into an agreement with Philip Morris International, under which we will receive $2.7 billion in cash in exchange for assigning our exclusive US commercialization rights to the IQOS system at the end of April 2024. We believe this agreement provides us with fair compensation and greater flexibility to allocate resources toward moving beyond smoking. The heated tobacco category is still undeveloped in the US, and we believe we can lead in this space supported by our robust infrastructure and deep understanding of US tobacco consumers. This morning, we announced the pursuit of a global smoke-free partnership with JT Group. We signed a non-binding memorandum of understanding with JT signifying the commitment of both parties toward further smoke-free collaboration. JT is a leading international tobacco company committed to investing and growing reduced-risk products. We believe that together, Altria and JT can accelerate global harm reduction by collaborating on product development and global commercialization of smoke-free products. We believe this potential collaboration can leverage the strengths and resources of both companies to transition more smokers away from cigarettes. As a first step in this partnership, we announced the formation of Horizon Innovations, a joint venture between Altria and JT for the US commercialization of heated tobacco stick or HTS products. We believe that HTS products can appeal to certain smokers as they provide a more familiar, tactile, and sensorial experience to cigarettes. Under the terms of the JV, both parties will combine their scientific and regulatory expertise to jointly prepare PMTA filings for the latest version of the Ploom HTS products, which are not yet commercially available. The parties expect to file a PMTA in the first half of 2025. Upon authorization, Horizon will become the exclusive entity through which the parties market and commercialize stick products in the US. JTI will supply Ploom Heated Tobacco Stick devices, and PM USA will manufacture Marlboro HTS consumables for US commercialization. The parties have agreed to commercialization milestones for Horizon, which include distribution requirements and minimal levels of cumulative marketing investment. Under the financial terms of the JV, PM USA has a 75% economic interest in Horizon, with JTI having 25%. We're excited about the prospect of introducing the latest version of Ploom HTS products to US smokers. JT has demonstrated success innovating in the heated tobacco space. For example, JT launched Ploom X last year in Japan, and since its introduction, JT has doubled its share of the Japanese HTS segment. JT estimates that there are more than 1 million Ploom X consumers, and according to their research, these consumers perceive Ploom X as a stylish, credible, and unique brand. Consumers also describe the product as easy to use. We look forward to bringing the newest version of this exciting product to US smokers. We have discussed our increased focus and investment on internal wholly owned heated tobacco product development. Our approach puts the consumer at the center of everything that we do. We receive more data on their preferences, purchasing patterns, and friction points than we ever have. Additionally, we embedded our regulatory sciences team early in the process to align our product development efforts with FDA expectations. We believe these efforts are building a promising pipeline of wholly owned heated tobacco products and intellectual property consisting of heated tobacco capsule or HTC formats and new to market technologies. We believe capsule products can appeal to smokers who are open to novel, smoke-free products but have not yet found a satisfying alternative to cigarettes. This audience includes the millions of US smokers who tried but ultimately rejected e-vapor products. We expect to finalize the design of our first capsule product by the end of this year, and we expect to follow PMTA by the end of 2024. We also expect to partner with JT to launch this product in an international test market using JT's sales and distribution network. We plan to share more on this product platform once the design is finalized. We believe moving beyond smoking in the US requires multiple FDA authorized products within a smoke-free category to appeal to a diverse range of smokers and help them transition away from cigarettes. We believe that our pipeline of heated tobacco products and partnership with JT, combined with the internal capabilities I described earlier, positions us well to increase adoption of smoke-free products for the millions of smokers interested in these products. Let's now move to the e-vapor category. In the third quarter, total estimated e-vapor volumes declined by 4% versus a year ago and were flat sequentially. We believe the regulatory uncertainty related to JUUL caused market disruptions in the quarter, and we observed a reduction in JUUL purchases throughout the supply chain. We previously disclosed that we have exercised our option to be released from our noncompete obligations related to our JUUL investment. While we retain our 35% economic stake in JUUL, we're exploring all options to build an FDA authorized portfolio of e-vapor products that will help smokers transition away from cigarettes. For example, our teams are conducting consumer research, performing external scans, and evaluating internal product development options. We're excited about the opportunity to increase our participation in the largest smoke-free category in the US. Turning to oral tobacco, we remain encouraged by the growth of novel oral tobacco products, which grew their share of the total oral tobacco category for the 18th consecutive quarter. The category grew 6.5 share points year-over-year and now represents approximately 23% of the overall oral tobacco category. In the third quarter, on! reported shipment volume increased nearly 70% to 21 million cans, and on! retail share increased sequentially, reaching 5.2 share points of the oral tobacco category in the third quarter. We believe these strong results were driven by increased brand awareness and adoption of on!, supported by continued equity and promotional investment. Building on its second quarter launch of the carry on! brand equity campaign, Helix recently introduced on! Rewards, a digital program that enables on! consumers to track their rewards balance online and redeem their points for coupons or other items. We're excited about on!'s continued momentum, increasing brand loyalty and the opportunity for future growth. Let's now turn to our view of the regulatory environment. We continue to believe that more should be done to advance harm reduction in the US and that the FDA should move more deliberately toward creating a market of authorized smoke-free products to help accelerate smoker transition away from cigarettes. The fact remains that today only a small percentage of e-vapor volume has been authorized, and no oral nicotine pouch products have received market authorization. We believe collaboration and accountability from all stakeholders are required for this market transition to take place. We also believe that smoke-free products should serve as an offering for smokers, not an on-ramp for youth users. We remain encouraged that youth smoking rates in the US are at the lowest levels ever recorded. In fact, the latest Monitoring The Future study estimated that in 2021 the combined past 30 day smoking rates among 8th, 10th, and 12th graders was 2.3%, a nearly 92% reduction from its 1997 peak. Additionally, data from the 2022 National Youth Tobacco Survey indicate that while e-vapor usage remains high among middle and high schoolers, the levels were significantly lower than the peak observed in 2019. Per the 2022 NYTS survey, 50% of the middle and high school current e-vapor users indicated that they most often use disposable e-cigarettes such as Puff Bar. Moving forward, we hope to see timely science and evidence-based determinations on pending PMTA applications across all smoke-free categories and further enforcement on non-compliant manufacturers. Our journey towards responsibly moving beyond smoking continues, and we are optimistic that the actions we have taken to date have strengthened our portfolio across three major smoke-free categories. We have built a compelling portfolio in heated tobacco, enhanced our ability to compete in e-vapor, and continue to strengthen on!'s position in the oral tobacco category. And we believe that we are able to maximize the value of these actions by leveraging our existing scale and infrastructure, such as our manufacturing centers and sales force. For example, our flagship Richmond manufacturing center began production of oral nicotine pouches in 2020. We now expect to add production of heated tobacco sticks for our new JV. Our sales and distribution system, driven by our world-class sales force, gives us the ability to responsibly market products in over 200,000 stores. And we have decades of experience navigating dynamic US regulatory and political environments through the strength of our regulatory and government affairs organizations. These functions, together with our many other talented employees, give me confidence that we can achieve our vision. Before I conclude, I'd like to thank Leo Kiely for his distinguished service to Altria's Board. Leo has served on the Board since 2011 and will retire at the completion of his term early next year. I'd also like to welcome Jase Hernandez to our Board of Directors effective November 1st. Jase brings a significant and deep understanding of the tobacco landscape following his years as an investment analyst covering the tobacco industry. Jase will serve on the finance and innovation committees. 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 a review of the macroeconomic backdrop and its impact on US tobacco consumers. In the third quarter, consumer discretionary income levels remained under pressure as higher gas prices and inflation persisted. However, we saw signs of continued brand loyalty in the tobacco space. In September, we conducted research to understand how tobacco consumers were managing their spending in several categories, including tobacco, alcohol, groceries, and household items. Our research indicates that tobacco consumers continue to stick with their preferred tobacco brands at a higher rate compared to other categories when experiencing higher prices. These results were consistent with the results from our previous surveys. We believe inflation and the rise in gas prices were partially offset for some consumers by a strong job market and wage growth. Overall, average wages increased 6.9% in the third quarter compared to an average 8.3% increase in CPI. And for some occupations, including the service industry, wage growth outpaced inflation. We continue to monitor tobacco consumer behaviors and changes in marketplace conditions. Despite these macroeconomic challenges, our core businesses performed extremely well in the third quarter, underpinned by the strength of our premium brands. Marlboro, Copenhagen, and Black & Mild continued to grow profitably, and on!’s momentum and growth reflected strong positioning in the marketplace. This strong business performance, combined with fewer shares outstanding, drove Altria's adjusted diluted earnings per share results. Altria grew adjusted diluted EPS by 4.9% in the third quarter and by 4% in the first nine months. Turning to our business results, the smokable products segment continued to deliver on its strategy of maximizing profitability in combustibles while appropriately balancing investments in Marlboro with funding the growth of smoke-free products. The segment grew its adjusted operating company's income by 1.8% in the third quarter and by 2.6% in the first nine months. The smokeable products segment expanded its adjusted OCI margins to 58.9%, an increase of 0.9 percentage points for the third quarter and 1.2 percentage points for the first nine months. This performance was supported by strong net price realization of 10.2% in the third quarter and 10.3% for the first nine months. I'll remind you that manufacturer price realization does not reflect retail price change for smokers. For example, Marlboro price per packet retail increased 6% in the third quarter compared to last year, which was below overall inflation for the quarter. Smokable segment reported domestic cigarette volumes declined 9.2% in the third quarter and 9% for the first nine months, driven in part by the continued macroeconomic pressures I described. When adjusted for trade inventory movement and other factors, domestic cigarette volumes for the third quarter and first nine months declined by an estimated 10% and 9.5% respectively. At the industry level, we estimate that the adjusted domestic cigarette volumes declined by 8.8% in the third quarter and by 7.5% in the first nine months. We believe it's important to analyze cigarette volume trends over the longer term, as decline rates in any one period can be influenced by various factors. In fact, Q3 year-to-date adjusted industry cigarette volumes have declined by an average of 4.5% over the past five years. In the third quarter, the total discount segment retail share of the cigarette category increased 1.6 percentage points versus the year ago period, reflecting increased competitive activity and the challenging macroeconomic environment. We are encouraged that the discount segment share growth largely sourced from premium brands, reflecting the industry's dynamic environment. We are pleased with Marlboro's performance and stability over the long term. In the first quarter of 2020, Marlboro's retail share was 42.5 percentage points. We believe that increased discretionary income driven in part by government stimulus checks and lower consumer mobility led to an increase in Marlboro's retail share throughout the pandemic. As consumer mobility returned to prepandemic levels and federal stimulus checks ended, Marlboro's share returned to its prepandemic levels and has remained stable through the subsequent quarters. In fact, since the first quarter of 2020, Marlboro has performed better than many of the other premium brands in the category. As a result, Marlboro continued to grow its share of the premium segment to 58.4%, an increase sequentially and versus a year ago. We believe its performance over the long term is a testament to its positioning within the premium segment as the aspirational brand with strong consumer loyalty. In cigars, reported cigar shipment volume increased by 3.3% in the third quarter. Black & Mild continued its longstanding leadership in the profitable tipped cigar segment, and Middleton continued to provide a strong contribution to smokable segment financial results. Turning to the oral tobacco products segment, adjusted OCI grew 4.9% in the third quarter, but declined 3.4% for the first nine months, primarily due to higher investments behind on!. We're pleased with the strong overall margins for the segment and excited about on!'s performance in the marketplace. Total reported oral tobacco product segment volume increased by 1.3% for the third quarter and decreased 1.8% for the first nine months. When adjusted for trade inventory movement and calendar differences, segment volume decreased by an estimated 2% for the third quarter and 1.5% for the first nine months. Oral Tobacco Products segment retail share declined 1.5 percentage points as declines in MST were partially offset by the continued growth of on!. Turning to our investment in ABI, we recorded a noncash, pretax impairment charge of approximately $2.5 billion for the third quarter and first nine months of 2022. This impairment reflects the difference between the fair value and carrying value of our investment in ABI as of September 30th. We continue to believe that ABI's share price performance is not reflective of its underlying long-term equity value and that ABI's share price will recover. However, we believe that it will take longer than previously expected as macroeconomic and geopolitical factors may continue to impact foreign exchange rates and ABI's financial results and share price performance in the near term. As we have previously shared, we view our ABI's stake as a financial investment, and our goal is to maximize the long-term value of the investment for our shareholders. We remain committed to creating long-term shareholder value through the pursuit of our vision and our significant capital returns, which we demonstrated in the third quarter by paying approximately $1.6 billion in dividends, raising the dividend for the 57th time in 53 years, and repurchasing 8.5 million shares totaling $368 million. We have approximately $375 million remaining under the currently authorized $3.5 billion share repurchase program, which we expect to complete by the end of this year. Our balance sheet remains strong, and as of the end of the third quarter, our debt-to-EBITDA ratio was 2.1 times. In August, we retired $1.1 billion of notes that came due with available cash. As Billy stated, we will receive $2.7 billion as part of the IQOS agreement. We received $1 billion upon entry into the agreement and will receive the remaining $1.7 billion plus interest by July of 2023. Our expected use of the cash proceeds may include investments in pursuit of our vision, debt repayment, share repurchases, or general corporate purposes. Share repurchases depend on marketplace conditions and other factors and remain subject to the discretion of our Board of Directors. Turning to our financial outlook, we are narrowing our full-year 2022 guidance and now expect to deliver adjusted diluted EPS in a range of $4.81 to $4.89. This range represents growth of 4.5% to 6% from a base of $4.61 in 2021. We believe this range allows us the flexibility to react to marketplace conditions. With that, we'll wrap up, and Billy and I will be happy to take your questions. While the polls 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.

We will take questions from the investment community first. Our first question will come from Bonnie Herzog with Goldman Sachs.

A lot going on with a lot of announcements. But I wanted to maybe touch on what you announced this morning related to your JV with JT. I just was hoping, Billy, maybe you could help us better understand the opportunity potential for HTC versus HTS formats and then the target consumers for each? And also, I just wanted to verify something. The timeline with, I think, HTC is earlier and it's 100% owned and controlled by you. Is that correct?

Yes, Bonnie, there's a lot to unpack here. I'll address your points in reverse order. We fully own the HTC, and it is not part of the joint venture. When considering HTS and HTC, it's important to recognize the large segment of adult smokers seeking products that fulfill their preferences and needs. Some consumers prefer an experience that closely resembles smoking traditional cigarettes, which is where our HTS product comes in. On the other hand, many consumers have also experimented with e-vapor products, indicating their openness to more innovative options. We believe that HTC meets the desires of those consumers. Ultimately, we see potential for both products to thrive, which enables us to attract a broader audience of consumers looking to make a switch.

And then just a follow-up on that. How do we think about this potentially changing either your near or long term growth algorithm? And then I'm just thinking through in terms of future investments required. I assume there will be some other than the initial 250 million to develop and ultimately commercialize these products. Could you touch on that?

We are committed to maximizing our income over time while making the right investments in both Marlboro and growth areas, particularly in the smokeable products category. It's important to understand that not all our investments are purely incremental to our profit and loss statements. For example, we recently expanded our production capacity at our manufacturing center for on!, which will also handle production for JV heat sticks. This facility has the necessary infrastructure and skilled workforce, allowing us to leverage these investments effectively. While we are making investments and reallocating resources within our profit and loss, it's not entirely new investment.

My final question concerns the guidance you provided this morning, which you slightly narrowed by 20 basis points at the midpoint. You mentioned this adjustment allows for more flexibility to respond to market conditions. Could you share what factors may have worsened or created uncertainty? Is it related to consumer pressures, or are there other aspects we should consider?

Yes, I appreciate the question, Bonnie. I think you could think of most of that narrowing as the passage of time, right? We have more certainty because remember, we're on a quarter lag with ABI, and you saw them release results this morning. But certainly, it's no surprise that our consumers are under pressure and we want to maintain that flexibility, but nothing out of the ordinary that I would point out.

Our next question will come from Pamela Kaufman with Morgan Stanley.

I wanted to follow up on Bonnie's question and ask about how you're thinking about the evolution of the US tobacco market over the next five to 10 years? How do you think about the relative size of the e-vapor versus heat not burn categories over time? And now that you have greater flexibility to invest in e-vapor, given the noncompete termination with JUUL and the partnership with JT, how are you going to prioritize your investment between heat not burn and e-vapor?

Yes, it's a great question, Pamela. And I think it's important to remember as you step back, and that's why we tried to highlight in the remarks that the reduced harm in the US is really undeveloped. And the reason I say that is from an authorization standpoint, take the two that exist today, e-vapor and novel oral. A very low percentage has been authorized by the FDA in e-vapor, and we believe that's going to go through a period of transition as those authorizations come out and some make it and some get denied. When you move to the novel oral, really no authorizations have been received in that space. And so that, again, depending on how the regulatory body goes about assessing and authorizing those, there could be a bit of a transition there. And then in the heated tobacco space, it's really nonexistent. I think when you think about those three categories, we believe the extent of those three categories will really be shaped by three factors. So one, I mentioned, is the regulatory decisions that are taken in each of the individual categories. It will be legislative in tax policy, how does that develop through time related to the individual categories and then really through time is the innovation in the spaces that best address the consumer preferences based on what they desire. So that's really what's going to shape the size of the three individual categories. We believe those are the three categories that will grow through time as consumers continue to move away from cigarettes to the smoke-free products. As far as prioritizing, we're going to prioritize based on where we see the consumer moving and how we see the consumer moving. It's going to be completely consumer driven, and that's why we're excited to be able to leverage the sales force to get the products in the right stores as well as the amount of data we receive and the insights that we can garner from that.

My second question is on ABI. You previously expected the shares to recover and decided to hold on to your investment when your lockup expired. It seems that now you expect this recovery to take longer than expected. So how does this impact your thinking around the investment? And does this further extend your plans to hold on to the stake, or does it increase your willingness to sell it at a lower price?

The impairment of the ABI asset, the reduction in our carrying value is really accounting driven. When you think about whether an impairment is temporary or not, you have to look at timing of your expected recovery. As far as the ABI asset, as we stated, we view it as a financial investment. Our focus is to maximize the value for our shareholders. But share price value is one of many variables that go into that analysis. It's an analysis that we do on an ongoing basis, and we'll continue to focus on what's best for our stakeholders over the long term.

And maybe if I could squeeze one more in. Can you just talk about what you plan to do with the proceeds from the IQOS termination agreement? And if there are any e-vapor assets that would be attractive to you to help accelerate your entry into the category?

We mentioned them in our opening remarks. I don't have a lot to add to that. I mean, obviously, the proceeds provide us with increased flexibility, which is always a good thing. So there's really nothing more to add. I mean we're going to continue to look at all capital allocations through the lens of what's best for our shareholders, be it investments in our long-term vision, continuing to manage a strong balance sheet or provide further returns to our shareholders. But again, that's part of our broader capital allocation strategies.

Our next question will come from Chris Growe with Stifel.

I had a question for you, a bit of a follow-on to the agreement with JT. Obviously, it's very encouraging to get you back into that category. Given the timeline for development of your products and obviously, FDA review, do you have a reasonable timeframe for launching the product in the US? And if I could ask related to that, you'll have this international capability in terms of launching a product. So should we expect that you'll be able to develop products and kind of test and learn internationally to refine those for an ultimate PMTA application in the US?

Yes, Chris, thanks for the question. And you're right, we are excited about the opportunities we have in front of us. I think when you think about the timeline for launch, so what we tried to provide you is when we would anticipate being able to file PMTA then it will be dependent on how long it takes the FDA to authorize those products. I believe through time, those authorizations will become more predictable and quicker whether that's the next product that they authorize or it takes a couple for them to get used to the new categories remains to be seen. I think when you think about the launch internationally, yes, we're excited about the potential there for being able to test products in the live market in the international realm. We're excited about the ability to leverage that, but I don't want to get ahead of myself. We mentioned the memorandum of understanding about future collaboration, and we'll share more when it’s appropriate to share.

And just to be clear on that, Billy, given your timeline for when you expect the PMTA and for the product you're developing, would it be reasonable to assume we'd see that next year in the international market being tested at least and then moving to an application in 2024, or am I getting too far ahead of myself here?

I think you might be getting a bit ahead of yourself. Regarding the international launch, we're trying to indicate when we expect to introduce it to the international market. Your underlying question may be about why this process is taking so long. It really comes down to wanting to be disciplined and conducting preliminary studies to ensure that we can consistently meet the high standards for product quality that we set for ourselves, along with necessary reductions. We intend to approach this thoughtfully. However, we are excited about entering the international market and look forward to it.

And I had a question just in relation to your guidance this flexibility to react to current marketplace conditions. And as I look at your business today on the smokable side, in particular, you're gaining share in the premium segment. Obviously, premium is losing share, though, overall. So I guess as I think about where you need to invest, I would be curious, is it in the premium brands in the premium category to take back share from discount, or is it more on the discount side where you're losing share do you want to invest going forward?

I understand your question, Chris. I really would look at the narrowing of our guidance as the passage of time. Look, we wanted to make everybody aware that our consumers are under pressure just like consumers across all industry. And we like the flexibility. That's more of the range we had maintained for the establishment of the guidance. I wouldn't point out anything specific. We're very excited about the price realization we've been able to achieve, being on track for our guidance for the total year and the stability that Marlboro has experienced in the marketplace. I mean when you look at prepandemic to post-pandemic, and Sal mentioned this in his comments. When you saw government stimulus and less mobility in the marketplace, we actually saw it as encouraging. We weren't attempting to gain share; we were performing the business like we normally do. It shows that Marlboro is still the aspirational brand in the cigarette space, and that's what we saw take place during the pandemic. And as disposable income has gotten a little bit tighter and mobility is up affecting that as well, we see that we ceded some of that share back. But pre-pandemic to post-pandemic, roughly flat maybe up a little, and we're extremely pleased with where we're at.

Our next question will come from Gaurav Jain with Barclays.

So a few questions from me. So first is on the oral tobacco pricing this quarter, which was, I think, up 5.5%, and it was flat to manage, just 3% last year. And if I look at Copenhagen's pricing, based on your disclosure, it is still running at the same level of plus 7%. So does it mean that you are pulling back on on! promotions or you're increasing actually on!'s pricing now that on! is becoming a bigger part of your portfolio, and it has hit maybe some critical market share?

Look, Gaurav, we're excited about what on!'s been able to perform, how it's been able to perform and grow in the marketplace. Certainly, with the learnings we had in the other two categories where we have the analytics and the RGM tools that we have in place, we certainly see the opportunity to be able to apply that into new spaces as we gain volume and market share. And so overall, I think from a standpoint of the strategy in the on! space, it's really to maximize profitability through the long term with the strength of Copenhagen while balancing investments with on!. And I think that's exactly what you see taking place in that space.

My second question is on the Logic MDO on menthol e-cigarettes focused and I appreciate it's not your product. But just broadly, like if FDA now goes ahead and starts denying menthol e-cigarettes. Would it make any sense to invest in US e-cigarettes right now because maybe all the menthol e-cigarettes get denied?

Yes. I think it remains to be seen, and that's what we try to highlight for the size of each category. And you highlighted an important one that's in front of the entire industry in all of these spaces, is regulatory decisions. That will decide how large the individual categories can be. I would also highlight the other two. It's really legislative and tax policy, how does that mature through time, and then the last would be innovation. But I hear you, and that's why we try to highlight those three factors that could ultimately decide the size of each of those categories relative to each other.

On the California flavor ban that could happen next quarter. How are you planning to approach that?

So we've engaged with our government affairs team. We don't believe the science supports it from a standpoint, and we've highlighted that. And we've been pretty vocal with that even with the FDA as they looked at some of these things. We think those decisions are better based on evidence. But when you think about the overall category in California, certainly, it could have an industry impact. But we, as a reminder, SKU non-menthol and cigarettes and we SKU non-flavored products in the smokeless space. So again, I think it could have an impact on the industry; the science doesn't support it. But I just wanted to remind you of our positions from a SKU standpoint.

And if I could just squeeze the last one on CapEx, like you reduced the CapEx guidance slightly. Would you be able to help us understand why that happened?

When considering capital projects, Gaurav, the spending isn't always consistent. The projects are progressing well, and since we're three quarters into the year, we've adjusted our spending forecast due to timing. The projects are still on track. There have been some delays in the supply chain with equipment orders, but nothing significant. We've managed that effectively. It's typical to see variations in capital forecasts as the year goes on.

Our next question will come from Vivien Azer with Cowen.

So I also wanted to touch on heat not burn, please. I apologize, maybe it's just a lack of imagination on my part, Billy. But when you just guide the HTCs, the capsules, it reminds me of the original Ploom innovation that JT launched in 2016, 2017. Can you just expand on how that's different, if at all, because that didn't really resonate with consumers in Japan.

Sure. And I don't want to get too far ahead of myself. We'll come forward with the actual product, and I know you'll be excited about it when we're able to bring it forward once we complete design. If you think about the stick, that's pretty evident because everybody’s seen that in the marketplace. If you think about the capsule, the tobacco is contained within a capsule. It's different than the technology you're familiar with the Ploom, but again, I don't want to get too far ahead of myself from a standpoint of describing the device before we're ready.

But it is different in terms of the nicotine delivery?

That is correct.

I do look forward to seeing that, for sure. Maybe just pivoting to the smokeable segment, please. Understanding perfectly well that your objectives are really focused on profit growth. It's hard to ignore the fact that your price gap is now the highest it's been since 2009. And so I'm just curious how you think about operating leverage for that segment, modest market share declines are fine. You're right. Obviously, that on a three year basis, industry declines haven't gotten that much worse. But your two year stack is deteriorating on an industry adjusted basis. And so how do you think about operating leverage in that segment from a volume perspective?

I think when you look at the price gap, I just want to remind you, Vivien, and I know you know this, but that 40% price gap that we disclosed is really a barometer for the national level. We put that out because that allows you all to have a barometer, but we manage it much lower than that. And I think you see as the introduction and execution against the data analytics and the revenue growth management most people refer to those tools that we have available allows us to manage the price gap at a much lower level. And so that is, I think, what you're seeing in the success of the Marlboro market share through time. And so we're extremely pleased with where we're at. We feel good about the performance of Marlboro and being able to expand the price gap and increase profitability through time the way we've done.

And that segues really nicely into my last question, which is on the performance of the discount category. Obviously, deep discount share gains are now reaccelerating. You've articulated, I think, very helpfully, the puts and takes in terms of the backdrop of the consumer. But just any updates on how you're thinking about strategically positioning your discount brands against that backdrop?

And you'll recall, Vivien, we're premium focused. We participate in discount because it's important to our retailers to have a portfolio that services all of their customers that visit their stores, but we're premium focused. You know that we've ceded share in L&M; we felt like we would see cede share in L&M as we increase profitability. But we're pleased with the increased profitability we've experienced on L&M, and with the willingness to cede some of that share to deep discount. You'll remember our consumers at the lower end of that socioeconomic status. Loyalty is extremely high over 90% for premium brands. And so you always have that group of consumers who, when they get under pressure, are going to shop around and move around depending on their individual situations.

Our next question will come from Carla Cacia with JPMorgan.

This is Oliver Brotman on for Carla. Just a couple from us. So with regards to the announcement made last week on the agreement reached with Philip Morris. Is there any risk to the remaining $1.7 billion that Philip Morris owed? Could that value change between now and then?

With that value, it was an exchange of 2.7. The only thing that would change the 1.7 is the interest that would accumulate through time, depending on when they made that payment. Exclusivity remains with us until the final payment's made.

And then just secondly on JUUL. While the noncompete is no longer in place and you're turning your focus to bearing options to build out the portfolio, you still retain that 35% stake. Is there a plan longer term regarding what you would maybe do with that stake?

Really no plan at this point. We hold the economic state. We'll see what their performance is in the marketplace, but we thought it was important at that point in time to get out of the noncompete to open up our flexibility in the e-vapor category.

Our next question will come from Priya Ohri-Gupta with Barclays.

This is Argus in for Priya. One quick question. You have a euro debt maturity early next year. Do you need to have that euro exposure, or could you be flexible in refinancing that in US dollars?

I don't want to get ahead of ourselves on that maturing debt. So how we retire that debt and the process we go through, we'll wait and see. Obviously, we'll do the necessary analytics from a market perspective, from a capital allocation perspective. To your question though, while we have flexibility on where we could issue debt, we do not necessarily need to have the euro exposure now.

And one last one. What are your thoughts on the relative attractiveness of the US dollar market versus the European market in terms of swap rates?

Well, obviously, FX exchange rates are a factor that go into that allocation. I don't want to necessarily predetermine what's more attractive. But for us, what's important is to have flexibility in the marketplace. We are fortunate in that we have a strong balance sheet. We've got operating companies that do a tremendous job of converting income, the cash. So as debt comes due, we can refinance or we can think about other methods of retiring the debt. So for us, it's really the flexibility to determine how we want to handle that debt coming due but also with markets we may or may not want to enter. FX exchange is definitely part of that process though.

Our next question will come from Callum Elliott with Bernstein.

I'd love to ask you guys a little bit more about Horizon, if that's okay. I guess our sense is it feels like giving away a 25% economic share is a huge amount, given that candidly this is a poorly performing product, a weak number for brand globally without regulatory approval in the US. And so hoping you can just talk about the drivers behind why you entered this JV, how you arrived at the 75-25 economic split? It feels just to us and then based on the conversations we've had this morning to investors as well that this is going to be very difficult for this to be economically viable for you.

We think about it a bit differently. I mean let me describe. You'll recall when we look across the nicotine space in the US, it greatly reduces the decline rates. So if you look over the past five years, decline is at about 1%. We think it's important to have a portfolio of products in each of these categories and across the categories that attract consumers to them from a standpoint of being able to participate in those categories, have strong products and brands across those categories, which will be a benefit to volume and attract a larger group of consumers to transition from cigarettes over to the smoke-free space. I think it's important to remember that the JV that's in place is for a product that hasn't even been commercialized yet, as they continue to garner learnings and consumer insights and feedback. And so we're extremely excited and we think this is a foundation for future collaboration and potential exposure to international revenue as well.

And I guess just one follow-up, unrelated. I wonder if I can get you to talk a little bit about cannabis as well. I think you obviously still have your stake in Cronos, your warrants are set to expire in a few months. Presumably, you're not likely to exercise and given the way out to the money. But more broadly, my question is how you're thinking about the cannabis category has changed over the past three and a half years since you made that investment, and where does it sit on the list of capital allocation priorities today?

I think when you think back, we highlighted when we made that investment in cannabis that it was going to be a long-term investment. We still believe it has long-term potential in the US. Certainly, with the current political environment, it doesn't feel imminent that anything will switch in the US. I think the President made an important first step in some departments, but it's a first step and there's a lot more to take place before the industry dynamics change in the US to be able to capitalize on that. So we still believe it has long-term potential in the US, but certainly in the political environment, nothing is imminent.

Thank you. I will now turn the call back over to Billy Gifford for closing remarks.

Yes. Thank you, Katie. I'd like to conclude our remarks by going back to where I started. We are in an exciting period of Altria's history and have an unprecedented opportunity in moving beyond smoking. We expect that our actions will lead to a strengthened portfolio across the three major smoke-free categories that will help smokers transition away from cigarettes. In heated tobacco, we believe we have taken a huge step forward with our new joint venture with JT and our internal product development efforts. We now have the ability to compete in the e-vapor category and are already assessing our options in this space. And we have demonstrated progress in the growing novel oral category with on!'s continued growth. I continue to be confident in my belief that we can achieve our vision and create long-term value for our shareholders. Thank you for joining us, and have a great day.

Thank you.