Good day everyone, and welcome to the Altria Group 2023 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 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 Mac Livingston, Vice President of Investor Relations for Altria Client Services. Please go ahead, sir.

Thanks, Jamie. Good morning, and thank you for joining us. This morning, Billy Gifford, Altria’s CEO; and Sal Mancuso, our CFO, will discuss Altria’s fourth quarter and full year business results. Earlier today, we issued a press release providing our results. The release, presentation, quarterly metrics and our latest corporate responsibility reports are all available at altria.com. During our call today, unless otherwise stated, we’re comparing results to the same period in 2022. 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 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 a pivotal year for Altria, as we made significant progress in pursuit of our vision, by enhancing our smoke-free product portfolio, while our businesses performed well in a challenging environment. We grew adjusted diluted earnings per share by 2.3% and continued our long history of rewarding shareholders by delivering nearly $7.8 billion in dividends and share repurchases. Throughout 2023, we took several transformative steps that we believe position us for sustained success in the U.S. nicotine space, including completing our acquisition of NJOY and fully integrating it into our family of companies, making exciting progress on our promising smoke-free pipeline including launching on! PLUS internationally in Sweden, one of the world's largest modern oral tobacco markets. Continuing preparations to bring heated tobacco products to market includes heated tobacco stick products through Horizon, our joint venture with JT, and our heated tobacco capsule product SWIC and advocating for a responsible and well-regulated e-vapor market including stepped up enforcement against illicit disposable products. Our vision continues to guide our actions and we believe that our growing portfolio of smoke-free products positions us well to lead in the evolving nicotine space. My remarks this morning will focus on our view of the U.S. nicotine space and our progress in each of the smoke-free categories. I'll then hand it over to Sal, who will provide an update on consumer and industry dynamics and further detail on our business and financial results. Let's begin with the operating environment. We estimate that total industry equivalized nicotine volumes increased approximately 3% for the year, and approximately 1% over the past five years on a compounded annual basis, driven by the growth of illicit flavored disposable e-vapor products. This new estimate marks a change from our previously provided estimates of a low-single-digit decline in total nicotine over the past several years. Our new estimate reflects a deeper ongoing analysis of the impact of illicit products on the e-vapor category. We have previously acknowledged the challenges associated with reading illicit market activity that takes place in less traditional channels. And we believe we have deepened our understanding of market dynamics through improved data sources; information gaps still remain. As a result, we're making some informed assumptions to better reflect the dynamics at play. For example, we account for differences in liquid volume across products, device attributes, and usage patterns by equivalizing e-vapor volume across different form factors. We then equivalized e-vapor volume back to cigarettes, our base unit of equivalized volume. Because of the volatility that exists in reading the illicit market, our estimates may change over time and we plan to provide you with our latest and best thinking as it evolves. Of note, our estimate focuses only on usage among age 21 plus consumers. Looking now by category, industry cigarette volumes declined by an estimated 8% last year primarily due to the historical secular rate of decline, the growth of illicit vapor products and continued macroeconomic pressures on smokers. And while we're deeply concerned about the growth in illicit product use, we are encouraged that adult smokers continue to transition to smoke-free alternatives, which now represent approximately 40% of the total nicotine space. E-vapor continues to be the largest smoke-free category and we have observed an increase in the number of adult vapers driven primarily by those choosing illicit products. Based on our new estimate, we see the e-vapor category grew approximately 35% in 2023. We believe the category growth was largely driven by illicit flavored disposable products, which we estimate represent over 50% of the category. We estimate that pod-based products declined approximately 50%, and represent between 15% to 20% of the category. We continue to believe the e-vapor category is at the beginning of a reset and the steps that we have taken since closing the NJOY transaction will allow us to responsibly participate in the category's growth. Let's briefly recap our 2023 actions with NJOY. Following the completion of our acquisition on June 1st, first we strengthened NJOY's supply chain to enable our expansion plans. Our teams worked diligently to solidify the entire supply chain from sourcing direct materials through shipment to retail. We now expect to have capacity to support our expansion plans for NJOY moving forward. Next, we prioritized closing inventory gaps at retail and expanding the distribution of ACE. For example, prior to closing, a number of stores had ACE pods in distribution, but no devices, while other stores were missing various pod varieties. Our teams have closed inventory gaps in stores that already had distribution, which has significantly improved in-stock conditions at retail. During the fourth quarter, we expanded the distribution of ACE to over 75,000 stores, surpassing our previously announced goal of 70,000 stores. These stores represent approximately 75% of e-vapor volume and 55% of cigarette volume sold in the U.S. multi-outlet and convenience channel. We also introduced NJOY's first retail trade program, which we believe will help NJOY achieve optimal visibility and product fixture space at retail. Retailers can sign up for the program at various levels with merchandising options designed to position NJOY strategically and responsibly to tobacco consumers while creating further awareness of the brand. We're encouraged by our trade partners' responses to the program, with approximately 70% of stores having chosen options that secure premium positioning in the e-vapor fixture for NJOY. Fixture resets are well underway and we expect the majority will be completed in the first half of this year. We believe that achieving manufacturing capacity, supply chain security, and optimal product distribution and placement at retail were necessary precursors to engaging consumers with impactful marketing and promotional offers. Turning to NJOY's business results, NJOY consumer shipments volume was approximately 11 million units for the quarter and 23 million units since closing. NJOY's retail share in the multi-outlet and convenience channel was 3.7% in the fourth quarter. In November, we began testing trial-generating bundle offers in a limited number of retail accounts and the results were very encouraging. Despite the limited reach of these offers, NJOY retail share increased 0.3 of a percentage point nationally in November and another 0.3 in December. While still early, we are excited by NJOY's momentum and remain optimistic about its potential in the U.S. market. We expect to further expand NJOY promotions and marketing activations in the first quarter, and we anticipate submitting a PMTA for NJOY's age-restricted Bluetooth device with non-tobacco flavors in the first half of this year. We look forward to sharing more detail about our plans for the year at CAGNY. Looking more broadly at the e-vapor category, we continue to believe that the current state of the market is intolerable for both legitimate manufacturers and consumers. As I previously stated, the total nicotine space grew in 2023, largely because of illegal flavored disposable e-vapor products. These products are being distributed by companies violating virtually every rule and guidance the FDA has issued since 2016. We are actively engaging with regulators, state and federal lawmakers, trade partners, and other stakeholders to build awareness of this serious issue and drive marketplace enforcement. While we believe there is still significant work ahead to eliminate these illicit products from the market, we have seen some encouraging actions. In December, the FDA, in collaboration with U.S. Customs and Border Protection, announced the seizure of approximately 1.4 million unauthorized e-vapor products, including Elf Bar and other brands that are popular with underage users. We believe that adopting comprehensive border protection programs is an important step toward clearing the market of illicit products. Additionally, we have worked with legislatures in a number of states that have passed or are considering legislation requiring manufacturers to certify that they have either submitted a PMTA, which is pending, or received a marketing order in compliance with FDA regulations. We also initiated litigation in the United States District Court in California relating to the sale of unlawful products. And although this litigation is facing some initial procedural challenges, we remain committed to exploring and pursuing all litigation opportunities against manufacturers, distributors, and online retailers related to the sale of unlawful products. A strong course correction is needed to protect the tobacco harm reduction for the millions of adult smokers in the U.S. We've learned from past experiences that complex issues like this require the work of many stakeholders. For our part, we're working with regulators, legislatures, law enforcement and others to address the illicit market. And while the FDA and other authorities are stepping up enforcement, more action is needed. Turning to oral tobacco, the nicotine pouch category experienced sizable growth once again, resulting in an estimated 7.5% increase in total U.S. oral tobacco volumes over the past six months. In the fourth quarter, oral nicotine pouches grew 11.8 share points year-over-year and now represent more than 35% of the total U.S. oral tobacco category. On! continued to participate in the category growth as reported shipment volumes increased nearly 33% in the fourth quarter and 39% for the full year. In the fourth quarter, Helix continued its focus on volume growth while improving profitability. Helix applied its analytics and revenue growth management capabilities to be more flexible and efficient with its promotional investments in the marketplace. As a result, on! retail price increased over 47% versus the year-ago period, while growing its retail share by 1.1 percentage points. Encouragingly, we continue to see increasing levels of both trial and adoption of the brand with repeat purchases up more than 30% year-over-year, despite the substantial increase in retail price. We remain excited about on! PLUS and its potential in the U.S. market. We believe its long-lasting flavor system and proprietary softened material are differentiators in the category. We continue to see encouraging results from the on! PLUS test launch in Sweden. Consumer research from the fourth quarter indicates that on! PLUS is competitive with the market-leading oral nicotine pouch products in Sweden and is seen as a unique offering with a strong repeat purchase rate of over 30% in the e-commerce channel. Given the success of on! PLUS Net and Smooth Net in December, we introduced on! PLUS berry and citrus in 6 and 9 milligram strength variants in the e-commerce channel. We also plan to expand on! PLUS to additional retail accounts in Sweden. Our teams are on track to submit the PMTA for on! PLUS in the first half of this year and upon FDA authorization, we expect it will contribute meaningfully to Helix's growth. In heated tobacco, we believe our compelling portfolio of products will appeal to the millions of adult smokers seeking innovative and scalable alternatives to e-vapor products. We are continuing regulatory preparations to bring heated tobacco stick products to the U.S. market through Horizon, our joint venture with JT. We remain on track to follow up the PMTA for Ploom in the first half of 2025. And we are making continued progress on our heated tobacco capsule product SWIC. While we believe heated tobacco products can play an important role in achieving harm reduction, the category remains nonexistent in the United States. We're encouraged by the progress we made in 2023 and we are committed to achieving long-term leadership in each of the smoke-free categories while delivering strong shareholder returns. Last March, we introduced our 2028 enterprise goals. We provided updates on our progress in this morning's press release and we expect to provide progress updates annually moving forward. We look forward to discussing our exploration of non-nicotine and international mid-teen markets at CAGNY later this month. Turning to our 2024 financial outlook. Our plans include a continuation of our strategy to balance earnings growth and shareholder returns with strategic investments toward our vision. For 2024, our planned investment areas include marketplace activities in support of our smoke-free products and continued smoke-free product research, development and regulatory preparations. We believe the external environment will remain dynamic in 2024, and we will continue to monitor the economy, including the cumulative impact of inflation, tobacco consumer dynamics including purchasing patterns and adoption of smoke-free products, illicit e-vapor enforcement and regulatory litigation and legislative developments. Considering these factors, we expect to deliver 2024 full year adjusted diluted EPS in a range of $5 to $5.15. This range represents an adjusted diluted EPS growth rate of 1% to 4% from a $4.95 base in 2023. We expect 2024 adjusted diluted EPS growth to be weighted to the second half of the year. Our guidance includes the impact of two additional shipping days in 2024 and assumes limited impact from illicit e-vapor enforcement on combustible and e-vapor volumes. Before I turn it over to Sal, I'd like to take a moment to recognize Murray Garnick, who recently announced his decision to retire from Altria. During his remarkable career, Murray represented Altria and its subsidiaries for nearly 40 years, both as outside and in-house counsel including his last seven as General Counsel, leading the law and regulatory affairs departments. Under his guidance, we have successfully managed significant litigation challenges and established Altria as a leading advocate for tobacco harm reduction policies in the U.S. We will continue to benefit from Murray's guidance through the first quarter, at which time, Bob McCarter will assume the role of General Counsel. Bob currently leads the management of tobacco health and other litigation. Bob has been with Altria since 2015 and spent 18 years before that representing the company as outside counsel. Please join me in thanking and congratulating Murray on an incredible career. And we look forward to introducing Bob to many of you at CAGNY and in years to come. And I'll now turn it over to Sal to provide more detail on the business environment and our results.

Thanks, Billy. Let's begin with a review of the macroeconomic backdrop and its impact on U.S. tobacco consumers. We believe that discretionary income levels remained under pressure through the fourth quarter. While slightly lower gas prices in the fourth quarter were a modest tailwind, we believe the cumulative effects of inflation and higher consumer debt levels led to lower discretionary income for tobacco consumers. Late last year, we conducted research to understand how tobacco consumers were adjusting their purchasing behaviors to the current macroeconomic environment. Our research indicates smokers continue to feel economic pressure throughout 2023 and were more likely to search for deals when purchasing tobacco products in the fourth quarter. We will continue to monitor tobacco consumer behaviors and changes in marketplace conditions in 2024. Moving to our results, our tobacco businesses generated solid financial performance again this year in a challenging external environment. In the smokeable products segment, adjusted operating companies income declined by 1.3% in the fourth quarter and was essentially flat for the full year. Adjusted OCI results in the fourth quarter and full year were primarily driven by elevated industry volume declines and higher promotional investments. Adjusted OCI margins expanded by 0.6 and 0.9 in the fourth quarter and full year, respectively. Net pricing remained robust and net price realization for the segment was 5.5% for the fourth quarter and 8.8% for the full year. Marlboro displayed resiliency during a period of continued uncertainty for consumers. In the fourth quarter, Marlboro's retail share was 42.2%, unchanged versus the year-ago period and down just 0.1 sequentially. Marlboro also grew its share within the highly profitable premium segment to 59.2%, an increase of 0.8 versus a year-ago and 0.3 sequentially. In 2023, PM USA utilized a sophisticated suite of RGM tools to make investments in Marlboro Black to support its share performance. The investments in Marlboro Black provided consumers under economic strain a place to stay within the Marlboro portfolio while positioning PM USA to maximize profitability over the long term. Historically, we have seen similar investments improve brand loyalty during times of economic uncertainty, which has contributed to Marlboro's long-standing leadership in the category. We continue to believe that Marlboro remains the aspirational brand in the cigarette category, and we are encouraged by its performance in 2023. Total discount segment share was 28.6% in the fourth quarter, up 0.4 sequentially and 0.9 versus a year ago. We believe that results were driven in part by seasonal trends in the discount segment and the macroeconomic factors that I just discussed. Turning to volumes, smokeable products segment reported domestic cigarette volumes declined by 7.6% in the fourth quarter and 9.9% for the full year. When adjusted for trade inventory movements, domestic cigarette volumes for the fourth quarter and full year declined by an estimated 9% and 10%, respectively. At the industry level, when adjusted for trade inventory movements and other factors, we estimate that domestic cigarette volumes declined by 8% in the fourth quarter and for the full year. In cigars, reported shipment volume decreased 1.4% for the fourth quarter and increased 2.8% for the full year while Black & Mild continued to maintain its leadership in the profitable machine-made cigar segment. The oral tobacco products segment reported strong fourth quarter results. Adjusted OCI and OCI margins increased and on! continued to grow its retail share of the oral tobacco category year-over-year. For the fourth quarter, adjusted OCI grew 10.3% and the segment expanded adjusted OCI margins to 63.1%, an increase of nearly 2 percentage points versus the prior year. This performance was supported by robust net price realization due in part to lower promotional investment behind on!. For the full year, the segment grew adjusted OCI by 5.5% with adjusted OCI margins of 67.4%, up more than 1 percentage point. Total segment reported shipment volume decreased by 2% and 2.2% for the fourth quarter and full year, respectively. The segment's volume decline was primarily driven by declines in MST volume, partially offset by the growth of on!. When adjusted for trade inventory movements and calendar differences, segment volumes declined by an estimated 2.5% for the fourth quarter and full year. Oral tobacco products segment retail share declined by 5.8 percentage points in the fourth quarter as declines in our MST brands were partially offset by the year-over-year growth of on!. Turning to our investment in ABI, we recorded $628 million of adjusted equity earnings for the full year, up 10% versus 2022. We continue to view our stake in ABI 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 recorded $74 million in adjusted losses for the year, and we continue to return significant cash to shareholders while maintaining a strong balance sheet. Last year, we paid approximately $6.8 billion in dividends and raised our dividend by 4.3% in August in line with our new progressive dividend growth goal. This marked our 58th increase in the last 54 years and repurchased 22.7 million shares, which completed our previously authorized $1 billion program. Our balance sheet remains strong. As of the end of the fourth quarter, our debt-to-EBITDA ratio was 2.2x in line with our new capital structure goal of approximately 2x. In the fourth quarter, we issued $1 billion in debt that we plan to use to retire approximately $1.1 billion in maturing debt in the first quarter. Earlier this week, our Board authorized a new $1 billion share repurchase program, which we expect to complete by the end of 2024. 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. Let's open the question-and-answer period. Operator, do we have any questions?

Our first question will come from Matt Smith with Stifel.

Wanted to ask a question if we could start with the EPS guidance for the year. When we consider the 1% to 4% growth, you note that it will be weighted towards the second half. Can you talk about the factors supporting that higher growth in the second half? How much of that is the difference between incrementally higher investment in the first half before you anniversary some higher investment levels in 2023 versus your outlook for the cigarette volumes, including the additional shipping days in the second half?

I think when you think about it being weighted to the second half of the year, I think there's two major components you should think. I'm the biggest being NJOY. You remember, we closed that on June 1. So we had amortization of that acquisition. And so you'll have the investments that we highlighted in our remarks of course, in the first half of the year where you didn't have that in the first half of last year. I think the other thing to note is, remember, the two extra shipping days, one of those will occur in the third quarter and one in the fourth quarter. So they're both back half of the year weighted. I think those are the two major things. And of course, there are always puts and takes, but those are the two major things I would highlight.

If I could ask a second question here. When we look at the price realization on a per pack basis in the smokeable business, that year-over-year contribution decelerated through 2023, especially in the second half with realized pricing well below the rate of list price increases. Can you talk about the offsets to the price announcements that you have made, how much of that difference between list and realized prices is due to trade down mix within Marlboro, with Marlboro Black Gold and other extensions versus increased promotional spending?

Yes, it's a combination of factors. When considering this, we want to emphasize that our consumers are facing challenges. We believe we can leverage the standard Marlboro franchise while also enhancing that portfolio with the usual gold pack. Historically, we’ve utilized these strategies. They enable us to offer a specific segment of Marlboro to consumers under pressure, as Marlboro remains the aspirational brand in the market. Those experiencing economic difficulties still have the opportunity to engage with and buy Marlboro. You’ll notice that when economic conditions improve for our consumers, we can reduce those promotions. We have maintained the focus on the Marlboro franchise itself, which proves to be more effective and efficient than attempting to win back consumers who may have downgraded. It's important to consider long-term price realization. On a quarterly basis, pricing timing and related factors play a role. I encourage you to think about it over the long term and examine year-over-year costs. If you look back to last year, you’ll find that the fourth quarter marked a high point in terms of price realization compared to the other quarters, so comps will have a certain impact as well.

We'll turn now to Pamela Kaufman with Morgan Stanley.

Congrats to Murray, and thanks to him for all of the help over the years.

Thanks for that, Pamela.

So question on the guidance for low-single-digit earnings growth in 2024. This follows a year of low-single-digit growth in '23, but your growth algorithm calls for mid-single-digit earnings growth. So do you think that your longer-term targets are still achievable? And what do you anticipate changing over the next few years that can put you on that path?

Thank you for your question, Pamela. There are several factors to consider. When we set that enterprise goal, we discussed it on a compounded annual basis and noted that there would be variability over time. There will be years where we have significant investments, such as when we closed NJOY in the second half of the year, which means we will have a full year of investment now. Additionally, various factors will influence this as we saw an increase in profitability with our product, on!. As our investments vary across different categories, we expect to gradually ease those investments. Our goal is to become a leader in each category, and we have been quite successful in improving our margins over time.

And then in the smokeable segment, this was the second consecutive quarter of negative sales and OCI growth. Given several years of elevated cigarette volume declines and a heightened competitive backdrop, how do you get comfort that your financial model is sustainable and more near-term? Do you anticipate that smokeable segment operating profit can grow in 2024?

Yes. I would point you back to the decomposition of overall industry volume and the factors affecting it. The ones I would highlight are really the macroeconomic and other. And remember, there are two components there. One, we've been highlighting for you that the consumer is under economic pressure. And when they're under economic pressure they make different decisions in the moment. The other is the explosion of the illicit base. It's having an impact both in the combustible segment as well as the e-vapor segment, the legitimate e-vapor segment, if you will, and so it's having an impact on both. So I think as you think about the economy through time as well as what is necessary, which is significant more enforcement of illegitimate and illegal product in the marketplace, those consumers will be at play. We want to keep them in the e-vapor market, and that's why you see the distribution and the movements we've made with NJOY, but keeping them in the e-vapor market responsibly. And so that's the way we think about it through time.

And just one last one. Can you talk about the current competitive backdrop and what you're observing from the premium and deep discount cigarette segments as well as from e-vapor and your strategy to compete against each of these segments?

Yes. I think when you think about the combustible segment, it has always been a competitive marketplace. So I think we're seeing these other bigger challenges with the consumer being under pressure and the illicit base. From an illicit base standpoint, the consumers are moving. What's encouraging is it's a proof of harm reduction. If we had harm-reduced products in the marketplace, consumers remove. But they have to be reviewed and authorized by the FDA for the consumer to be able to count on that. So I think when you think about through time, the competitive, I would point to Marlboro continues to grow its share in the premium segment. And its overall share has been really steady if you go pre-pandemic to post-pandemic, but it continues to be a competitive marketplace. I think when you think about e-vapor, we've certainly seen competitors step up their promotional spending as we have expanded the distribution of NJOY. We've shared with you, if you will, the consumer research that we did prior to the acquisition. We feel good about the proposition we have with NJOY and the early consumer feedback we have on the product in the marketplace. So we look forward to being able to continue to engage with the consumer as we move through 2024.

We'll hear next from Bonnie Herzog with Goldman Sachs.

Murray definitely all the best to your retirement.

I'm sure he will appreciate that, Bonnie. Thanks.

I had a quick follow-up question about your smokeable segment. Could you provide some insight into what's included in your EPS growth guidance for this year? I'm particularly curious about the lower end of your guidance range. Does that assume no dollar profit growth for smokeable? I'm trying to understand how much flexibility you have to meet these ranges.

Yes. I appreciate your question, Bonnie. You'll recall we don't really offer guidance down to that level because we're balancing that. That's why we put forward the enterprise goals. Remember, one is the overall margin for the portfolio of products because, as I mentioned earlier, each of those categories has different points of investment. What we strive for in the combustible segment is to maximize profitability in the long-term and we're going to make appropriate investments in Marlboro and investments in the growth categories. And so we try to lay for you, if you will, the groundwork of how we're going to manage the business through time.

And then I did want to ask about your smoke-free vision. Just hoping for maybe a little more details on the vision and where you expect by the end of the year in terms of progress. You touched on NJOY and the Navy. A little bit more color and update on your JV with JTI etc. And then I'm also trying to understand how to think about required investments this year versus last year. Can you give us a sense if spending behind your vision will accelerate in '24? And if so, are your core smokeable and I guess, all tobacco business strong enough to support this stepped up spending and your ability ultimately to generate EPS growth? I think that's one of the key questions here.

Yes, there was a lot in that question, so I'll try to address everything. I'll start by saying that our core businesses are very robust. Marlboro continues to show strength in the marketplace, and both Copenhagen and MST are performing well over time. Regarding investments, we are still working on the Ploom application and anticipate filing it in the first half of 2025. We are optimistic about our consumer interactions so far. Concerning NJOY, you can expect more investment in 2024 compared to 2023. We only closed the acquisition on June 1, but we are now in 75,000 stores. We're excited to have our products in more accessible locations, prominently displayed as never before. Our research shows that once consumers try the product, they tend to enjoy it and will likely continue purchasing it.

We'll go now to Callum Elliott with Bernstein.

Another one on price mix, but maybe from a slightly longer-term perspective. We've obviously seen a divergence. I think I would describe it this year between your pricing strategy and some of your big peers. And it seems like the peers are signaling that they're set to continue on their path. So I guess this is for Billy. My question is do you see a strategic imperative to react to some of that more competitive pricing? And maybe is that what we're seeing in the big step down in sequential price mix this quarter? Or are you content over the longer term to continue this divergence?

Yes. I appreciate your question. I think if you recall, as we progressed through 2023, we highlighted for you pockets of the U.S. where we felt like we needed to make some investments. Some in the menthol segment, we saw some competitors getting a bit aggressive in the menthol space, and we made those investments. And some was related directly to the discount category and some of the aggressiveness there. I think overall, when you look at Marlboro and its steadiness and share and its growth in the premium segment, you can see with the RGM capabilities and the data analytics that we have, we're able to be very efficient and effective with spending in the marketplace. Trying to get, if you will, to the individual consumer so that we can deal with the individual consumer that is facing those either competitive decisions with the aggressiveness that they take or with just their economic situation. And I think you see that we've actually been able to implement that very well, again, with the steadiness of Marlboro and the investments that we've made.

I mentioned in our opening remarks that we have previously used the full range of Marlboro's brand family and various SKUs to connect with consumers facing economic challenges. This has been demonstrated before, such as with our special blend during tough economic periods. While you referred to it as a divergence, I would argue that this is a strategy we have successfully executed in the past. As the economy has improved, we've been able to enhance the margins on those SKUs while also witnessing a return of consumers to the mainline Marlboro brand.

I guess I'm just slightly surprised because I think your table in the quarterly metrics disclosures suggest that the macroeconomic pressure has actually lessened this quarter, whereas obviously, the price mix suggests that that trade down has accelerated in a very meaningful way.

Yes, I think you have to think about it as headwinds and tailwinds. Certainly, gas prices have declined, so you can take the gas prices being a bit of a tailwind. You also have to think about the debt load and the cumulative impact of inflation on the total basket that our consumer purchases. It's that cumulative impact that's affected the discretionary income. And then I mentioned that load, just because from a debt load standpoint, the increase in interest rate also affects the discretionary income. So I think overall, if you think about the discretionary income, it's down.

And I have just sort of very, very different follow-up. The question is, can you talk about some of the recent regulatory changes in Louisiana, where I think they've been taking it upon themselves to clamp down on the illegal sales that you spoke about the disposable vaping products given the action that we've seen from the FDA? I think some of those changes took place in November. So should have a couple of months' worth of data now. What impact have you seen in Louisiana? And do you expect that other states might follow that path that Louisiana has taken?

Yes, there has been significant progress due to our efforts and collaboration with state legislatures. Louisiana requires manufacturers to certify that they are either following FDA guidance with a legitimate application pending or have received authorization. It's early days in Louisiana, but initial signs are positive as we observe a reduction in illegal products in the market. We hope this trend continues. Several other states have also enacted similar legislation, while others are considering it. Overall, the early signs are indeed encouraging.

We'll go next to Pallav Mittal with Barclays.

Can you please comment on the sell-through trends for NJOY? Or is the $11 million number the shipment similar to retail trends as well?

Yes. What we tried to share with you is that was the shipment volume. We tried to share with you also the share, and if you will, that's an estimate of consumer take. So it was 3.7% for the period that we owned them and then we try to highlight for you that we have put in place testing some bundle offers, where we could test trial promotions so that we're prepared for the full distribution and be able to bring that across the U.S. this year. We did it on a small scale, but just that small-scale impacted national share, an additional incremental 0.3 in November and another incremental 0.3 in December. So it's early. We'll be bringing that marketing activation and promotional to the nation this year. But certainly, the early results are very encouraging.

And one more. So the minus 8% decline in industry volumes, how much do you think is the cannibalization from e-cigarettes? And how much is the impact from the growth in modern oral?

Yes, I would say from modern oral, there is minimal impact. You'll recall that in secular decline, we represent historically about 1% across category movement. Then we try to call out any additional or special items. And what we call out, and you'll see that in our quarterly metrics is that about 1.5% to 2.5% is related to the illicit e-vapor category. And so if you think about historically 1% being up in secular decline, this 1.5% to 2.5% being related to the illicit base. But yes, we are encouraged that we're seeing some interaction with going with adult smokers. But at this point, from an impact to the overall industry, it is minimal. It is really the illicit base that is driving the majority of that.

We'll go now to Jennifer Maloney with Wall Street Journal.

I have a question about the California market dynamic data that you shared this morning. It looks like overall cigarette industry sales fell in California more steeply than the country overall in 2023. But it also looks like Marlboro, I thought Morris USA retail share increased in California more than elsewhere. So is it fair to say that as a result of the menthol ban, some consumers moved away from cigarettes, either stop smoking or move to other products, but also there was a dynamic here where people who might have smoked menthol cigarettes switch to Marlboro cigarettes.

Yes. It's a complex issue. So let me try to unpack it for you. When you look at that 15%, we would consider that legitimate shipments that went to California. What you're seeing is a lot of black market activity that takes place in California. So you see gray market consumers going across the border, and we've seen that whether it be Nevada or other bordering states, some consumers go across to get them menthol cigarettes. We're seeing a lot of black market enter up from Mexico into the state of California. That would not be included in the 15%. So that is black market or illegal product that has made its way into California for the consumer to buy. Again, that wouldn't be in the 15%. We do believe some consumers have moved. Certainly, there's a huge market of illicit vape in California. That continues even though the flavor ban is in place. To answer your question on the adult cigarette consumer, what you see with the benefit of Marlboro is I think if you look at various studies, when there's a menthol ban, the consumer really doesn't leave the nicotine space and a lot of them don't even leave cigarettes. They look to non-menthol cigarettes as an alternative. And with our over-indexing and non-menthol, it makes sense that they would move to Marlboro. One of the other things I would highlight in moving to non-menthol, we've seen an influx of what we call menthol cards into the state of California. So again, they're illegal, but it allows the consumer to buy a non-menthol pack of cigarettes, insert the card and then if you will self-ventilate their cigarettes. So there, I think it points again to when you pass the law without an eye towards how you're going to enforce the law, you see a significant amount of illicit activity that takes place related to that.

What I don't see here is PM USA total shipments in California. I see that there's a retail share increase, but did your sales in California decrease in 2023 more than the national average?

They did. They are commensurate with overall industry.

So based on your observations of the market dynamics in California, what would you expect to see this a national ban menthol cigarette ban were implemented in terms of market dynamics and the impact on your sales?

It's challenging to respond to the hypothetical, and I apologize for the uncertainty surrounding the proposed rule and its implications. It's difficult to predict what enforcement actions will occur. If you examine our comments on the menthol ban, you'll notice that we believe the FDA needs to consider all the unintended consequences, which are currently evident in California. There is an increase in black market activity, with illicit products entering the marketplace, including methylated cards. Therefore, there are numerous unintended consequences. As a result, it’s hard to determine how consumers will respond based on what is available to them.

But in California, your sales went down, although you did see some share gain as menthol smokers switched over to Marlboro.

That is correct.

If the draft rule becomes the final rule, do you plan to challenge it legally once it is published?

I think it's too early to tell. We certainly anticipate that there would be legal challenges, but it's too early to tell whether we would be involved. We would like to be able to understand the rule as it's published finally and then make that decision, and we'll share it with you when we have anything to share.

One last question on modern oral nicotine products. Are they a risk to young people? What flavors and marketing approaches do you think are appropriate for that category?

Yes. I think there could be a risk for underage if not marketed and sold responsibly. So we actually sent a letter to the FDA many months ago that they should encourage them to issue marketing guidelines for the category. So that regardless of authorizations or not, be able to have marketing guidelines for that category so that all industry members could follow to protect the harm reduction for adults without exposing underage users to the category. We haven't seen any action by the FDA. But certainly, we, as our approach to the marketplace, has very minimal underage interaction with our brand. Well, I won't get into the details because we shared that with the FDA, and we haven't seen any action at this point. But certainly, what would be considered a responsible approach to the marketplace.

We'll go next to the representative from Thomson Reuters.

My first one is around the successful challenges to the FDA's marketing denial orders for some vapes, which have started to put some pressure on the agency and also increased the likelihood of a case going to the Supreme Court. I wondered whether Altria would want to participate in any Supreme Court case. And if so, how it's preparing for that possibility?

Yes. I think you certainly highlight that the circuit courts have taken different positions on the approach by the FDA in the e-vapor market when we certainly are closely monitoring these cases. But I think when you step back from it, we're in a unique position. We're the only cloud-based product that has received authorization from the FDA. So if you think about other major competitors in the cloud segment, they have not received authorization. Our authorization was in the tobacco-flavored pods and our application for the menthol version of the same product is pending with the FDA. And we really feel like looking at those court cases in both instances where the courts have taken different positions. We believe that we should get a marketing order for this menthol product, whether you look at the holdings on either of those instances of the second quarter. So we'll monitor those, but we're in a unique position.

Just a follow-up to an earlier question around the sustainability of the financial model for the smokeable segment in particular. Obviously, the industry has for some time now effectively used pricing increases to offset volume declines. The last couple of quarters, it seems that that's been a bit more difficult, given the down trading and the promotional environment that you flagged. So I'm wondering whether the ability to offset declines with pricing in the smokeable segment is kind of disappearing or you feel that will return when the economic environment improves and promotions sort of fees a little bit.

Yes, I'll be careful not to talk about future pricing, but I'll describe how we think about pricing. It's certainly an important part of the algorithm. I think you've seen us take pricing. I know people are focused on fourth quarter price realization. I tried to express that if you're going to look at it on a short-term basis, at least look at comps versus prior year, we look at price realization over the long term. And when we think about the strategy in combustibles, it really is to maximize profitability over the long term while balancing appropriate investments in Marlboro with the areas that are growing. And when you look at that and look through history and see the price realization, you see the data analytics and the revenue growth management capabilities kicking in. Marlboro has been steady, is growing its share of premium, and we continue to compete what we feel like very effectively and efficiently fulfilling what our strategy is for the category through time.

So you're kind of confident that the smokeable segment can return to revenue growth in the future?

I think when you look at it, we'll continue to execute against our strategy, which is to maximize profitability over the long term.

There appears to be no further questions at this time. I'd like to turn the call back over to Mac Livingston, for any closing remarks.

Thanks, everyone, for joining us today. Please feel free to contact the Investor Relations team if you have any further questions. Have a great day. Thanks.

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