Altria Group, Inc. Q4 FY2022 Earnings Call

Good day, and welcome to the Altria Group 2022 Fourth Quarter and Full Year Earnings Conference Call. Today’s call is scheduled to last about one hour, including remarks by Altria’s management and the 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 Mac Livingston, Vice President of Investor Relations for the Altria Client Services. Please go ahead, sir.

Thanks, Todd. Good morning. And thank you for joining us. This morning, Billy Gifford, Altria’s CEO; and Sal Mancuso, our CFO, will discuss Altria’s fourth quarter and full year business results. Earlier today, we issued a press release providing our results. The release, presentation, quarterly metrics and our latest corporate responsibility report 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 U.S. Generally Accepted Accounting Principles. Today’s call will contain various operating results on both a reported and adjusted basis. Adjusted results exclude special items that affect comparisons with reported results. Descriptions of these non-GAAP financial measures and reconciliations are included in today’s earnings release and on our website at altria.com. Finally, all references in today’s remarks to tobacco consumers or consumers within a specific tobacco category or segment refer to existing adult tobacco consumers 21 years of age or older. With that, I’ll turn the call over to Billy.

Thanks, Mac. Good morning. And thank you for joining us. It was an exciting year for Altria as our businesses delivered strong financial performance, and we continued to strategically invest toward our vision. We grew our adjusted diluted earnings per share by 5%, and our tobacco businesses remained resilient and successfully executed their strategies. We also returned significant cash to shareholders through dividends and share repurchases. Last year, we returned more than $8.4 billion to shareholders, outpacing our record returns from 2021 and representing the largest single year cash return since 2002. Our vision guided our actions, and we believe we made meaningful progress on our journey toward moving beyond smoking. Our teams took several steps forward during the year, including accelerating the growth of on! nicotine pouches, creating long-term optionality for our inhalable smoke-free product portfolio, enhancing our digital consumer engagement and continuing to advocate for tobacco harm reduction. Helix grew on! reported shipment volume to 82.5 million cans during its first full year of unconstrained manufacturing capacity, an increase of more than 70% versus the prior year. At retail, on! share momentum continued in the fourth quarter as the brand reached 5.9% of the total oral tobacco category and 24% of the nicotine pouch category. This impressive performance was driven by continued increases in brand awareness and adoption by smokers and dippers. Additionally, we believe Helix effectively managed on! promotional spend as the year progressed and reduced on! promotional spend per can by approximately 15% during the second half of the year compared to the first half. In oral tobacco product development, we are excited to announce we have finalized a new product design, which will provide tobacco consumers with more smoke-free options within our portfolio. We also began regulatory preparations for the product, and we are encouraged by the initial research results and the response we have received from dippers and nicotine pouch users. We look forward to sharing more details and unveiling this innovative product at our Investor Day next month. Turning to our inhalable smoke-free portfolio. We created long-term optionality in the heated tobacco and e-vapor spaces. Internally, we have not yet finalized the design of our heated tobacco capsule product, but our teams continue to make progress. The consumer remains the focal point of our innovation system and our teams are tailoring the product to appeal to smokers who have not yet found a satisfying alternative to cigarettes. We also look forward to unveiling this exciting new product at our Investor Day next month as well. In October, we announced a strategic partnership with JT Group, including a joint venture for the U.S. commercialization of heated tobacco stick products. We’re encouraged by the initial collaboration between our teams and the pace at which they are operating. Horizon is optimizing for the U.S. market and plans to begin regulatory preparations later this year. We’re excited about the opportunity and are working diligently to bring Ploom to smokers in the U.S. In e-vapor, we previously announced we elected to be released from the noncompete obligations related to our JUUL investment. We retain our economic stake in JUUL. E-vapor remains the largest smoke-free category in the U.S. and the most successful category in transitioning U.S. smokers away from cigarettes. We believe the category can play an important role in harm reduction, and we’re continuing to evaluate all options to best compete in the category. Next, let’s discuss the progress we made to enhance our digital consumer engagement. We launched a new digital trade program last spring, and we believe this program enhances our ongoing commitment to responsible retail. The program includes multiple participation options for retailers. For those participating at the highest level we introduced incentives for retailers to include age and identity verification solutions in their digital platforms. And once the consumer is verified, retailers can then provide offers and messaging from our brands within the retailer’s app. I’m excited to share that we implemented these solutions in more than 33,000 stores, exceeding the goal we outlined last year at CAGNY. Currently, consumers can view offers from our smokeable and more smokeless tobacco brands. But going forward, we expect to expand the program to include on! and other smoke-free brands. As we continue to broaden our digital reach, data will help us better understand each smoker’s journey and help them successfully transition to other smoke-free alternatives in our portfolio. Moving to the regulatory environment. We remain optimistic about the future of harm reduction in the U.S. We believe we have an unprecedented opportunity to lead the way in shifting millions of smokers to smoke-free alternatives, if we follow the science and foster innovation with the support of reasonable regulation. In December, the Reagan-Udall Foundation published its operational evaluation of the FDA’s Center for Tobacco Products. We were among the stakeholders who provided input into this evaluation. Among its recommendation, the report urges the FDA to clearly define product pathways and accelerate PMTA decision-making, take enforcement actions against manufacturers and products in violation of the law and address the need for risk communications to tobacco consumers. We agree these are important opportunities and believe that the FDA should direct its focus toward implementing a framework to advance harm reduction, rather than focusing on prohibition policies that we believe will further expand the illicit market and create other unintended consequences. Let’s now move to the operating environment. We estimate that total equivalized tobacco volumes declined 6% for the year and 1.7% over the past five years on a compounded annual basis. Combustible volumes declined by an estimated 7.8% last year as smokers faced increasing economic challenges. We are encouraged that smoke-free volumes were stable compared to the prior year at 3.8 billion equivalized units and now represent an estimated 26% of the total tobacco space. E-vapor has been a major contributor to the growth of smoke-free products over the five-year period. Although volumes declined by an estimated 1% year-over-year amid considerable regulatory uncertainty such as the FDA denial order and subsequent temporary stay on JUUL products, which caused market disruptions for both consumers and retailers. In oral tobacco, volumes grew by an estimated 1.5%, driven by the continued adoption of all nicotine pouches. Turning to our financial outlook. Our plans for 2023 include a continuation of our strategy to balance earnings growth and shareholder returns with strategic investments towards our vision. For 2023, our planned investment areas include: continued smoke-free product research, development and regulatory preparations; digital consumer engagement; and marketplace activities in support of our smoke-free products. We believe the external environment will remain dynamic in 2023. We will continue to monitor the economy, including the impact of high inflation, tobacco consumer dynamics, and regulatory and legislative developments. Considering these factors, we expect to deliver 2023 full year adjusted diluted EPS in the range of $4.98 to $5.13. This range represents an adjusted diluted EPS growth rate of 3% to 6% from a $4.84 base in 2022. Before I turn it over to Sal, I would like to send a sincere thank you to our employees. I continue to be impressed by the talent within our companies and our ability to adapt and overcome challenges in a dynamic operating environment. The passion and dedication of our employee base is evident, and I’m confident in our ability to execute our vision because of you. Also, I’d like to honor the memory of Leo Kiely, a long-standing member of our Board who recently passed away. Leo served on our Board since 2011 and made many contributions to Altria, including as Chair of the Compensation and Talent Development Committee and as a member of the Innovation Committee. We will miss his leadership, guidance, and friendship. I’ll now turn it over to Sal.

Thanks, Billy. We were very fortunate to have Leo’s 12 years of service at Altria and our thoughts remain with the Kiely family. Moving to our results. Our tobacco businesses generated strong financial performance again this year and were responsive to changes in a dynamic external environment. In the fourth quarter, the smokeable products segment grew its adjusted operating companies income by 4% and expanded its adjusted OCI margins to 58.4%. The segment also reported robust net price realization of 13.5%. As a reminder, manufacturer price realization does not reflect retail price changes for smokers. For example, Marlboro net retail pack price increased 6.4% in the fourth quarter compared to last year. We continue to successfully execute against our strategy in the smokeable segment, maximizing profitability while balancing investments in Marlboro with funding the growth of smoke-free products. For the full year, smokeable segment adjusted OCI grew 2.9% to $10.7 billion, and adjusted OCI margins expanded by 1.4 percentage points to 59%. In smokeable segment, net price realization for the year was 11.1%. In addition, over the past five years, the smokeable segment has grown adjusted OCI by $2.2 billion, representing a compounded annual growth rate of 4.7%. Over the same time period, adjusted OCI margins have expanded from 51% to 59%, an impressive increase of 8 percentage points. Turning to volumes. Our smokeable products segment reported domestic cigarette volumes declined 12.1% in the fourth quarter and 9.7% for the full year. When adjusted for calendar differences and trade inventory movements, domestic cigarette volumes for the fourth quarter and full year declined by an estimated 11% and 9.5%, respectively. At the industry level, when adjusted for trade inventory movements, calendar differences, and other factors, we estimate that adjusted domestic cigarette volumes declined by 9% in the fourth quarter and by 8% for the full year. Next, let’s discuss retail share performance. Full year retail share for the industry discount segment increased 1.4 share points. We believe these results were driven by an increased pressure on smokers’ disposable income and increased competitive activity, including multiple branded discount offerings priced at deep discount levels. Marlboro retail share declined by 0.4 for the full year. Most of the full year share losses were attributable to the value options within the Marlboro brand family, such as Special Select and Marlboro 72s as some price-sensitive consumers continue to seek additional price relief. Meanwhile, the brand’s mainline non-menthol offerings, including the iconic red and gold pack varieties were resilient and performed well for the year. Marlboro’s share of the premium segment grew to 58.2% for the full year. Marlboro has performed better than many other premium brands over the last several years. In fact, over the past three years, Marlboro grew its share of premium by 1 full share point. We are encouraged by Marlboro’s resilient performance as the brand celebrates 50 years of leadership in the cigarette category. In cigars, reported cigar shipment volume decreased 4% for the full year. While Black & Mild continued to maintain its leadership in a profitable machine-made tip cigar segment. Next, we will move to the oral tobacco products segment. Full year segment adjusted OCI and adjusted OCI margins contracted as we continued to invest behind on!. Total segment reported shipment volume declined 2.4% for the year as growth in on! volume was more than offset by lower reported MSP volumes. When adjusted for trade inventory movements and calendar differences, we estimate that full year total oral tobacco segment volumes declined by an estimated 2%. Full year oral tobacco products segment retail share declined 1.3 percentage points as declines in MST were partially offset by the continued growth of on!. Within the traditional smokeless category of MST and snus products, Copenhagen’s share performance has been stable over the last three years, declining only 0.3 from 2019, whereas the second largest traditional smokeless brand has ceded 1.6 share points. Overall, we continue to be encouraged by the performance of our oral tobacco products as on! grew volume and share in a competitive category and Copenhagen remained the category leader. Turning to our investment in ABI. We recorded $571 million of adjusted equity earnings for the full year, down 10.6% versus 2021. We continue to view the ABI stake as a financial investment, and our goal remains to maximize the long-term value of the investment for our shareholders. In our all other operating category, we have completed our wind-down of Philip Morris Capital Corporation and no finance assets remain. I would like to thank the many PMCC employees who contributed to its success over the years and to the other Altria employees who helped complete a successful wind-down. Finally, we continue to effectively manage our balance sheet while generating strong financial performance and returning significant cash to shareholders. These results were driven by our tobacco businesses that continue to be highly cash generative. Our year-end credit metrics remain strong. Our debt-to-EBITDA ratio was 2.1 times, down 0.4 over the past three years, and our weighted average coupon was 4%, a decrease of 0.2 over the past three years. We also expect to retire approximately $1.3 billion of notes coming due later this month with available cash. In addition, we returned more than $8.4 billion in cash to shareholders last year through dividends and share repurchases. These record cash returns included paying $6.6 billion in dividends and raising the dividend for the 57th time in 53 years. We also repurchased more than 38 million shares during the year, totaling $1.8 billion, which completed our previously authorized program. Earlier this week, our Board authorized a new $1 billion share repurchase program, which we expect to complete by the end of 2023. I’ll now turn it back to Billy to conclude our remarks.

Thanks, Sal. 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. As we mentioned during the call, we have exciting topics to discuss at our Investor Day next month. We look forward to having a fulsome conversation about our smoke-free future, and we are excited to share more about our journey toward moving beyond smoking. Todd, we’ll now transition to the Q&A period.

Thank you. Our first question comes from Vivien Azer with Cowen.

So, I just wanted to start with the industry volume backdrop. I recognize you guys have kind of suspended the historical practice of offering industry guidance, and that makes good sense to me. But just hoping to get some color on how you’re thinking about the potential impact of the menthol ban in California if you think that’s an incremental headwind for the year. Thanks.

Sure. Yes, I think it’s a little early to say exactly what that headwind will be, Vivien. Certainly, it will be a headwind from the State of California having banned it. It went into effect, you remember in December. So, we’ll see how that proceeds. But yes, I would say that would be a headwind as we enter 2023.

Fantastic. Thanks for that. And then just pivoting to the oral tobacco segment, encouraging to hear some rationalization on the on! promo having fallen 15% in two half ‘22. Can you offer a little color on where that positions on! relative to the competitive set?

Yes. We were very pleased with the results, as we reduced it by 15% from the first half to the second half, and it maintained its momentum and gained market share. We believe this is a growing category, and the entire segment is expanding, and we want to be part of that growth. Therefore, we are continuing to invest in it. Moving forward, you will see the benefits of data analytics, and in the future, we plan to apply revenue growth management strategies that have proven successful in both traditional smokeless products and cigarettes. This is what you can expect from us as we progress.

Perfect. And just one last one for you, Sal, please, I recognize it’s premature for us to start modeling royalties from the IP litigation with British American Tobacco because there’s certainly an appeals process. But if you could just contextualize how we should be thinking about that incremental revenue stream as litigation draws to a conclusion, please? Thank you.

Yes, sure. Vivien, you’re right, there is an appeals process. We developed our guidance. We have not considered the royalty, any potential royalties in that guidance. But, as you know, with any year, you put plans in place and there are always puts and takes. So, I think it’s early to really think about how you might model that. Let’s see how the appeals process plays out.

Our next question comes from Pamela Kaufman with Morgan Stanley.

How would you characterize the current state of your consumer? And this builds on Vivien’s question, but just wanted to hear how you’re thinking about the puts and takes to figure out volumes in ‘23? Volume declines were clearly very elevated in ‘22. So, do you expect a more normalized year of mid-single-digit volume declines given easier comparisons and moderating gas prices?

Yes, Pamela, I understand you are seeking guidance on upcoming volume. Let’s discuss the challenges and opportunities as we move through the year. I will start with the consumer, as that aspect is crucial for volume. The consumer continues to face pressure. We emphasized that the effects of inflation compounded as we moved through 2022. You’ve likely heard various predictions, some suggesting a soft landing and others foreseeing no deep recession. Economists seem to have differing views. We remain optimistic about the guidance we provided and feel confident in the consumer's current state, but we need to maintain adaptability and flexibility to respond to consumer needs. I believe the consumer will continue to feel pressure until there is some relief from inflation in the market. Gas prices are one element; we have seen a decrease, but they are still not at the lower levels we experienced before the pandemic. Gas prices may fluctuate based on factors like China's reopening. When considering volumes, particularly combustible volume, it’s important to recognize how the consumer is influenced. The tobacco industry is not exempt from the economic environment, but it is less affected than other sectors. Historically, we have observed that as consumers experience rapid changes in their economic situation—whether positive or negative—they alter their purchasing behavior, gradually finding a new comfort level and adjusting various elements in their purchasing decisions. It remains to be seen how the macroeconomic landscape develops, but I would emphasize that this will significantly impact purchasing behavior.

Thanks. That’s helpful. And my other question is just on your 2023 earnings guidance, which reflects a slightly lower growth rate compared to your 4% to 7% guidance over the last several years. So, can you talk about the puts and takes influencing the outlook for ‘23? And how much incremental investment does this reflect behind reduced risk? And are there any other discrete factors contributing to the slight shift in the growth rate?

Yes. I think, the last comment you made, I would say there’s a slight shift. We’re very excited about the guidance we put out. I think when you think about it, it’s really the uncertainty around the macroeconomic environment was the biggest impact to the overall guidance. And you’ve mentioned it and you asked about that earlier. It’s where does the macroeconomic environment go through as we progress through 2023 and how does that specifically impact our tobacco consumer across all categories?

Our next question comes from Bonnie Herzog with Goldman Sachs.

I had a question about your pricing. Just thinking about the strength in your net price realization and smokeables over the past several quarters, it’s been so darn robust. So I just wanted to hear from you how sustainable you think this is, especially in considering, I guess, the pressure on the consumer and some of the other things you called out?

Sure, Bonnie. I will refrain from discussing potential future price increases. As you know, pricing is a key element in our strategy, especially in a declining category. Our focus is on maximizing long-term profitability while making necessary investments in Marlboro's growth segments. Essentially, we view this as our driving force. In terms of pricing, it's crucial to consider what Sal mentioned earlier. You can observe strong price realization, but from the consumer's perspective, Marlboro's average price increased by just under 6.5%. Therefore, the price hike that consumers see is much less than the overall price realization. We've previously noted that price realization consists of two components for us: the list price, which is standard across the industry, and the implementation of revenue growth management. Regarding price realization, the price gap is currently at 41%. It's important to remember that this data reflects consumer purchasing behavior over time, and the price gap can differ from one location to another, and even from store to store within the Marlboro brand. As Sal mentioned, within that overall price gap of 41%, you can examine specific pack types, like red and gold in the Marlboro franchise. When comparing total year 2022 with 2021, this remained stable. The variations we're noticing are in the specific pack types or SKUs designed for price-sensitive consumers. Therefore, we'll keep utilizing these strategies. Regarding our future pricing outlook, we've indicated that when comparing to the percentage of discretionary income or working minutes, the U.S. remains at the very low end compared to other countries globally.

Yes, that’s actually very helpful. I appreciate you explaining the gap; it's useful context. Changing topics, I have a question about your oral tobacco business. You mentioned the strong volume growth, but your total oral tobacco revenue and profit growth has been under pressure due to significant margin contraction. You touched on this, but I would appreciate if you could discuss your strategy for revitalizing the oral tobacco business. Are there any key initiatives you can share with us, and will you provide more details in March?

Yes, we are definitely looking forward to discussing this in March. You are right. In the oral tobacco market, we have traditional moist smokeless tobacco and novel oral pouches. The margin contraction you are observing is primarily due to the shift in consumer preference from traditional moist smokeless tobacco to novel oral products, which impacts the overall margin. We've mentioned the reductions in promotional spending per can while still maintaining minimum market share. The most exciting development is our upcoming product unveiling at Investor Day, along with related research. More details will be shared then.

Okay. Final one for me, just speaking of that. Any more color you could provide on your smoke-free vision today and maybe just how confident you are that you’re going to be able to deliver on your long-term strategy? I’m sure you’re going to talk through this in an investor meeting and I’m excited to hear about it, but any sneak preview as to what you’re most excited about?

I won’t necessarily give you a sneak preview because I don’t want to get ahead of myself for Investor Day. We’d like to unveil it in total context and paint the solid picture for investors. So, I appreciate the question. I look forward to being able to unveil that for you at Investor Day.

Our next question comes from Callum Elliott with Bernstein.

Billy, you spoke in the release and in your prepared remarks about making sort of "meaningful progress" on the smoke-free portfolio. And you also mentioned strategic investments in division. But at the same time, your CapEx guide is flat versus last year’s guidance. You’re continuing to deliver all algorithm EPS growth. And I think as you said, to Pam, that any slight reduction is more driven by the macro environment, which presumably also implies little or no incremental P&L investment in NGPs as well. So my question is, what are the strategic investments that you’re talking about? How meaningful are they? And where can we see them in the financial statements?

I appreciate your question. It's important to acknowledge that these investments are not purely additional spending; there are trade-offs involved. Some costs that were traditionally covered by the combustible or traditional MST sectors will now shift to the NGP space. We do have additional investments focused on NGP product development, regulatory preparations, and related research. For instance, consider our digital consumer engagement initiatives that we are applying to traditional smokeable products, which will also transition to NGP. Consequently, you'll notice these costs will manifest in the combustible and smokeless segments before being reflected in the NGP categories. There is a lot happening behind the scenes in terms of investment, but we have to balance our spending while also fostering growth in emerging sectors.

I guess, the natural follow-up is, if I benchmark relative to your big competitors, both in the U.S. and internationally, the two biggest amongst them are spending literally billions of dollars a year. And my guess is instinctively, if you’re just talking about switching a portion of your cigarette spend, over into NGP, you’re not going to get anywhere close to that billions of dollars a year. And so, the question is, do you genuinely believe you can be successful if you’re spending so much less than those competitors? And then how?

Yes, we do believe that we’re trying to really be driven by the consumer, learning from the global marketplace of products in the marketplace and use those as, if you will, a launch point for products and really trying to meet what the desires and needs of the consumers are in the marketplace that aren’t met by those existing products in the marketplace. And so, we feel like we can achieve the vision. We’ve highlighted for you guys that we really believe we can navigate strong returns to shareholders at the same time, making the appropriate investments in these growing categories. And we believe we can do that. I think you’ll continue to hear us talk about investments, and we’ll provide a lot more detail of some of the progress we’ve made at Investor Day.

Our next question comes from Gaurav Jain with Barclays.

Hi. So, I have three questions. So, first one to you, Billy. We will have a new competitor next year in the U.S. market with IQOS. And when you were distributing IQOS, then the volumes were much lesser than any of us had expected. So, what did you find were the challenges when U.S. consumers came to IQOS?

Yes. It’s a great question. I appreciate you asking it, Gaurav. I think when you think about IQOS, it was really about the disciplined approach that we were taking to introduce in a brand-new category. The consumer in the U.S. was used to the e-vapor space. They had understood that. When you’re introducing a new category that requires some education on how to use the product and how to maintain the product that there is investment there that takes place. And we talked about the learnings we had as we went along the way. But I would say the biggest challenge is educating the consumer on the product and then meeting their desires. And I think there’s still unmet needs in the marketplace.

Sure. The next question and perhaps to you, Sal, is around MSA payments next year and how we should factor in inflation? And if you could just help us understand because I think there is confusion about how does that 3% number work versus inflation, or is it the change of inflation that we should be looking at?

Gaurav, you are correct to point out that inflation is a factor when you think about MSA expense. A couple of points I’ll make. One is the high rate of inflation in 2022 has been accounted for and is already in the base. You are correct to point out that when you think about inflation related to MSA, there’s a 3% floor. So, even if inflation were measured below 3%, there would be a 3% increase in the MSA expense. And I’ll also remind you that inflation is measured at a point in time, December 31st current year to December 31st prior year. So, we have considered that when you think about 2023, there will be an elevated level of inflation. We have seen some receding of the rate of inflation, but still expect it to be elevated. So, we have considered that when we put together our guidance. And then finally, I’ll say, there are other factors besides inflation to consider when you think about MSA expense, including volume, shipment share and other such factors.

Sure. My last question is about share repurchases for next year, which are projected at $1 billion or below our previous expectations and what others anticipated. Even with your growing EBITDA and positive free cash flow after dividends, your leverage should decrease when you account for the ABI stake. So, what leads you to consider buying $2 billion of stock instead of $1 billion?

We are very pleased that the Board has approved a $1 billion share repurchase. Historically, we have maintained a balanced approach to capital allocation. As I mentioned earlier, we plan to pay back approximately $1.3 billion in notes that are due using available cash. We also continue to offer a strong dividend alongside the $1 billion share repurchase. Regarding the ABI asset, I don’t have any updates to share. We are conducting our usual analysis for all capital allocations, and at this time, we believe that retaining the asset is the best option for long-term shareholder value.

Our next question will come from Chris Growe with Stifel.

I just had a quick question for you on Marlboro. You have to be very happy with the resilient performance of Marlboro. And obviously, a round at though discount and deep discount share is accelerating, which has seemed to provide some risk to the brand. I’m sure we’re not going to get your promotional program on this call. But I wonder if you could talk about how you see the brand performing in ‘23? And maybe more pointedly, have you increased promotions at a faster rate behind Marlboro to preserve that share where it’s doing so well there?

Yes, those are excellent questions, Chris. We are very pleased with the resilience of Marlboro and its strong positioning with consumers. It remains the aspirational brand in the cigarette market. Regarding your question on promotions, the high price realization indicates that we have been effective and efficient with our Marlboro pricing strategy. To illustrate this, consider three types of consumers: one who primarily buys premium brands but occasionally tries a discount brand, another who alternates between premium and discount, and a third who mainly buys discount but sometimes opts for premium. We need to approach these consumers differently to encourage more consistent premium brand loyalty. Some discount smokers may never fully transition to premium due to their economic situation. As we focus on delivering personal value and getting closer to consumers, we can tailor our approach to each type. This strategy allows us to maintain Marlboro's resilience by addressing consumer needs on a more individual basis, ensuring we allocate our resources effectively to cultivate a more consistent base of premium consumers over time.

Thank you for the insights provided. I have one more follow-up question. This year, you have two significant factors impacting profit—specifically the winding down of PMCC and changes in pension costs. Can you elaborate on how much these factors are affecting profitability this year?

Yes, Chris, let’s discuss pensions for a moment. Pensions do have an impact on our profit and loss related to asset returns and discount rate changes, but I want to highlight that our pension plan is well funded. In fact, it’s fully funded, which gives us confidence. As for the changes in pension expense, it's important to remember that this is a noncash item. We have successfully wrapped up the PMCC wind-down. So, you're right that we had earnings and cash flow from it last year, but that won’t be the case this year. There's a slight year-over-year lag, but keep in mind that PMCC fell into our 'all other' category and is considered somewhat immaterial to Altria’s total earnings.

Our next question comes from Andrei Condrea with UBS.

Could you provide insight into your smokeless business? It seems that the brand has been heavily supported by strong discounts compared to your main competitor. Do you anticipate this trend will persist moving forward, or will you focus more on narrowing the price difference between your product and that of your main competitor, even with a decrease in promotional spending per can? Thank you.

Thank you. When considering the situation, it's important to note that they had the advantage of being first to market. To attract consumers to new brands, it's essential to encourage them to try the products, which is our focus. From the perspective of consumers, our presence is still minimal in comparison to the entire nicotine market. We plan to invest during this growth period to ensure we can be part of it. As we anticipated, adult dip tobacco users have quickly adopted our product, but we need to encourage trial among adult cigarette smokers, which is something we are actively working on and are optimistic about the results so far. Over time, we have been able to lower our promotional spending per can. When considering the price difference with competing products in the market, we see this as a necessary investment while the category is expanding, allowing our products to enter consumers' consideration. We have utilized data analytics effectively this past year, but there’s more work to be done. As we move forward, we remain confident in our strategy. It's crucial to understand that our approach isn't solely about discounts; it's about encouraging trial. We consider this a comprehensive marketing strategy that engages consumers where they are in their journey and supports them in transitioning from cigarettes to this innovative oral pouch. We are pleased with the progress we've made so far but recognize the need to keep driving awareness and encouraging trials.

That’s very clear. Thank you. And yes, you are completely right. It has been fantastic progress for one. And if I could squeeze in just one more if you don’t mind, is that Marlboro has indeed done very well, and congratulations for that. But for the rest of your portfolio, as small as it is versus Marlboro, what steps are you taking to defend your market share versus pressure, both from peers on the very top end of the price and the bottom end? Thank you.

Yes. I would say if you look at growth, I would say the growth, if you look at competitors has really been at the very, very bottom end. Sal highlighted in his comments, there are a number of major manufacturers that have what we would consider branded discount priced in deep discount space. And so, when we look at total portfolios for some of those, we don’t see the benefit of having gone down to that low price tier. They may grow one brand to the detriment of another brand within the discount space. So, we want to participate in the discount category. We think it’s important, but we certainly don’t want to grow the discount category. And I think being premium focused where we feel the profitability and the high loyalty is in the cigarette space is an important place to play, and that’s where we’re focused. And Sal highlighted for you, our premium brands are growing. Total premium share of the premium space is growing through time on the backs of Marlboro. So, we’re pleased with that. We talk about the RGM tools, so I won’t repeat that. But being able to continue to get closer to the consumer on a consumer-by-consumer basis and meet them where they’re at when they have needs is where we’re headed. And we’re excited about that progress.

Our next question comes from Priya Ohri-Gupta with Barclays.

So I really appreciate your commentary, Sal, around the intent to pay down your upcoming euro maturity later this month. I guess, as we take a step back, your euro-denominated debt has really sort of come down, I guess, partly driven by sort of the income that you’re receiving from the ABI stake given that that was sort of a natural hedge. Given where sort of your euro exposure stands now in terms of your debt portfolio, are you with where that is, or is there a need to continue to grow that euro exposure over time, either synthetically or through outright issuance in that market?

Yes, Priya, I want to start by saying that I don't have any updates to share. Regarding ABI, we still believe that keeping the asset is in the best long-term interest of our stakeholders. Additionally, while we do have some flexibility, our approach will depend on analyzing each market and transaction individually as we consider managing our debt in the future. That's how I would respond to your question.

At this time, we will open the Q&A to members of the media. We’ll take our next question from Jennifer Maloney with The Wall Street Journal.

My first question is about your JUUL valuation. I saw that you lowered the value of your stake to a price that values JUUL at $714 million. I wondered if you could explain the reasoning behind that valuation decrease. I was a little surprised because in the fourth quarter, JUUL resolved a large part of the litigation that it faced, which eliminated some of the uncertainty around the company. So, could you explain that valuation?

Sure. Good morning, Jennifer. I want to remind you that we previously recognized an impairment related to litigation, which we incorporated into our overall discount rate for the JUUL assets. We accounted for that. On a quarterly basis, we analyze the fair market value of our investment in JUUL since it is not publicly traded, requiring us to conduct an independent analysis. Consequently, there will be fluctuations from quarter to quarter, and we have been quite transparent about this. This quarter, our investment was reduced to $100 million, primarily driven by macroeconomic factors and other considerations involved in that analysis.

So, things like inflation and possible recession?

Yes, macro market conditions, inflation, discount rates, things like interest rates, consumer dynamics, all of that goes into the analysis.

You’ll note, Jennifer, when you build a discount rate, it starts with a risk-free rate. So certainly, the interest rate increases we’ve seen through time are going to continue to impact it as long as they’re still on an upward trajectory.

Got it. My second question is a little more color around the consumer purchasing patterns right now. Can you talk a little bit more about what you’re seeing consumers doing? The volume has come down. So, is it because people are making fewer trips to the store to purchase cigarettes, or are they buying less each time? Can you sort of talk about what the actual pattern is?

Yes. It’s a great question. What we’re seeing is as we see mobility increase, if you will, the U.S. is coming out of the COVID pandemic, we’re actually seeing a return to more frequent trips. Remember, our consumer pre-COVID would go either every day or every other day. I think what you’re seeing and what consumers tend to do when they get under economic pressure is they reduce their number of nicotine occasions in a day. So through time, that factors into their purchasing behavior. You see a little bit, and we highlighted that, which was the consumers that are under dire economic conditions at times will either switch out or trade out to a cheaper brand. We try to give them a safe landing place within the Marlboro franchise. But as far as a number of trips, we haven’t seen a reduction in the number of trips. It’s more about through time, reducing their nicotine occasions.

Thanks to everyone for joining us. Please contact the Investor Relations team if you have further questions. Thanks, and have a great day.

This concludes today’s call. Thank you for your participation. You may disconnect at any time.