Altria Group, Inc. (MO) Earnings Call Transcript & Summary

Hi, if you could take your seats, please. Please join me in welcoming Altria back to CAGNY and thanking them for sponsoring the break, which will take place immediately after this presentation. Clearly, the tobacco industry has been going through significant change over the last couple of years with Altria navigating regulatory changes and consumer shifts through alternative products. Altria is addressing these changes by taking a portfolio approach with traditional products complemented by multiple potentially reduced-risk products, which include the commercial rights to IQOS in the U.S., its investment in JUUL and on!. 2019 was a tale of 2 cities with strong operating profit growth of 9% in its core smokeable segment, while JUUL faced a more difficult year. Altria has a market-leading smokeless franchise and is well positioned in heat-not-burn with IQOS, which is the first product to have received authorization by the FDA to launch a heat-not-burn product in the U.S. under the premarket tobacco application. 2020 will clearly be a year where Altria continues its focus on harm reduction. While the range for lows -- earnings growth algorithm has widened, mostly given lower visibility, Altria remains committed to its dividend, which has increased 54x in the company's 50-year history. With us on stage to tell us more about Altria's past, present and future are CEO, Howard Willard; and CFO, Billy Gifford.

Thanks, Janet. Good afternoon, everyone, and thank you for joining us. We're excited to be back at CAGNY to update you on our business performance. I'm going to quickly recap our 2019 results, discuss our commitment to responsibility and provide an update on our evolution to a noncombustible future. Billy Gifford, our Chief Financial Officer, will then discuss our core tobacco businesses and adjacent assets. Before we begin, we ask that you carefully review the safe harbor statement in today's presentation and the forward-looking and cautionary statements section in today's press release. These documents are available on altria.com, along with reconciliations and further explanations of the non-GAAP financial measures we discuss today. 2019 was a dynamic year in the tobacco industry. Adult tobacco consumer migration to noncombustible tobacco products accelerated, and the regulatory landscape continued to evolve. And while this adult consumer movement has created volatility within each individual category, the total tobacco space remains quite stable. In fact, over the last 5 years, total tobacco volumes have only decreased by approximately 1% on a compounded annual basis. Altria is the leader in the U.S. tobacco industry. And we built a strong platform designed to continue our leadership into the future. We have consistently delivered strong adjusted earnings with adjusted diluted EPS growth of 10.4% over the last 5 years on a compounded annual basis. While cigarette volumes have attracted much attention over the past year, we believe it's also important to focus on profitability and margin expansion. Our core tobacco businesses provide significant profit growth and cash generation, enabling us to invest in our noncombustible portfolio and return cash to our shareholders. Since 2014, our core smokeable and smokeless tobacco products segments have grown their combined adjusted operating companies income by 6.2% on a compounded annual basis. And they've expanded their combined adjusted operating companies income margins by over 10 percentage points. We've also returned a significant amount of cash generated by our core tobacco businesses to shareholders in the form of dividends and share repurchases. In fact, over the last 5 years, we paid approximately $25 billion in dividends, repurchased over $7 billion in shares and have grown the dividend by over 10% on a compounded annual basis. We continue -- we expect to continue rewarding our shareholders through a strong dividend, and we remain committed to our 80% dividend payout ratio target. We're also investing in the future. We've built a diversified noncombustible business model to further our tobacco harm-reduction goal. Our unmatched noncombustible platform includes: U.S. smokeless tobacco, the most profitable moist smokeless tobacco company anchored by Copenhagen, the leading MST brand; IQOS, the only FDA-authorized heated tobacco system; on! with the broadest portfolio of oral nicotine pouches; and a strategic investment in JUUL, the leading e-vapor manufacturer. We believe the foundation for tobacco harm reduction in the U.S. is firmly set. Adult tobacco consumers are increasingly seeking alternatives to combustible products. And we have a regulatory framework that has established pathways to bring new tobacco products to market and communicate about their relative risks. We recognize the importance of this opportunity. And over the next 10 years, our vision is to responsibly lead the transition of adult smokers to a noncombustible future. To achieve our vision, we will pursue a number of strategies, including: leading the industry in operating responsibly and preventing underage use of adult products; developing and expanding our portfolio of FDA-authorized noncombustible products and actively converting adult smokers to them; maximizing the profitability of our combustible products while appropriately balancing investments in Marlboro with funding of the growth of our noncombustible portfolio; and seizing leadership in the external environment through communications, engagement, science-based policy and regulatory solutions. We've learned over the years that operating responsibly must be our #1 priority, and it's foundational to how we do business. In the late 1990s, our license to operate was threatened as youth smoking rates hit record levels. We responded by launching a comprehensive youth smoking prevention effort, which, along with complementary actions by many other stakeholders, helped lower youth smoking rates to generational lows. In fact, the latest Monitoring the Future study estimates youth smoking rates to be 3.7% in 2019, an 87% reduction from its 1997 peak. 20 years later, the tobacco industry is once again at a crossroads with the youth vaping epidemic. Drawing from our experience, we know that trust and credibility are essential to the future of the industry. We must build credibility through our actions and earn our license to operate every day. We also know that we cannot accomplish our vision alone and that tobacco harm reduction simply cannot be achieved if underage tobacco prevention is not a priority for all stakeholders. We championed legislation to raise the legal age of purchase for tobacco products to 21 at the state and federal levels and are pleased with the recent congressional action to enact Tobacco 21 nationwide. We believe this is essential to reducing youth tobacco use, especially within the e-vapor category. Additionally, we announced last year at CAGNY our plan to spend an incremental $100 million towards underage tobacco prevention over the next several years. Over the last year, we've created a new retailer trade program to reward responsible retailing through age validation technology at the point of purchase, supported retailer compliance with Tobacco 21 laws through training and moved to 21 signage kits, and funded the expansion of our Success360 prevention and cessation partners programming into new geographies and beyond middle schools into high schools. The concepts of tobacco harm reduction and youth tobacco prevention are directly linked, and we remain steadfastly committed to both as we lead the adult smoker transition to noncombustible products. We have invested in the 3 most promising noncombustible product platforms: e-vapor, heated tobacco and oral tobacco. We recognize that no single product would likely satisfy all adult smokers looking for alternatives and believe our diversified model allows us to meet adult consumers where they are going and invest appropriately to support their migration and conversion. As we discussed in our last earnings call, we're disappointed by the 2019 performance of our JUUL investment. We believe the recent agreement with JUUL better positions both companies for future success. We continue to expect the FTC to complete its review in the first half of this year. We continue to believe that the e-vapor category holds promise for harm reduction. The growth of the e-vapor category since 2017 illustrates the willingness of adult smokers to try these products, and JUUL, in particular, has been highly successful at moving adult smokers away from cigarettes. We're quickly approaching the May 2020 deadline for all e-vapor manufacturers to submit PMTA filings to the FDA. As we've previously stated, the PMTA standard sets a high bar that requires a manufacturer to submit significant scientific data that demonstrate their product is appropriate for the protection of public health. We think such a standard is warranted and is one of the reasons we originally supported this tobacco regulatory framework. We believe it is important to preserve e-vapor as an alternative for adult smokers in the future and that the category needs a market ultimately consisting solely of FDA-authorized products; clear FDA marketing guidelines and ongoing postmarket surveillance to help ensure that products do not reach unintended audiences; proactive regulatory enforcement against noncompliant manufacturers and new entrants trying to avoid premarket regulatory requirements; and uniform rules and regulations that apply to all e-vapor types, manufacturers and retail trade classes. While pod-based products have received much of the recent attention from the media and FDA, we believe the 2019 National Youth Tobacco Survey highlights the need for uniform rules, regulations and enforcement across all e-vapor products. In the latest survey, over 1/3 of youth e-vapor users reported using vapor devices other than pod-based products, including refillable tanks, mod systems and disposables. These systems were excluded from FDA's recent ENDS guidance but are still subject to the May 2020 PMTA filing deadline. Additionally, underage tobacco prevention needs to be a focus for all retail trade channels as similar numbers of youth users reported sourcing their e-vapor products from convenience stores and vape shops. We're hopeful that all parties will meet this urgent call to action, so that we can successfully reduce underage vaping. In the meantime, we believe we're well positioned for future success with our oral tobacco portfolio and exclusive license for IQOS in the U.S. We believe adult smokers are looking for alternatives to cigarettes beyond just the e-vapor category. While many adult smokers have used e-vapor products to transition away from cigarettes, third-party research indicates that approximately 40% of current U.S. adult smokers have tried but ultimately rejected e-vapor products. When you combine this data with the current challenges in the e-vapor market, we believe this is the opportune time to expand IQOS and on!. We believe that these products could be satisfying alternatives for adult smokers who have rejected e-vapor, and we're excited about our commercialization plans for these brands. Let's start with IQOS, which has been available in the Atlanta and Richmond markets for 5 months and 3 months, respectively. Our IQOS team is testing a variety of approaches in these markets to learn how to best convert adult smokers and apply these learnings to efficiently scale our efforts. The key learning from our lead markets is that IQOS is resonating with adult smokers. We're focused on the consumer journey from awareness to conversion, and we're encouraged that many adult smokers have found relevance in the IQOS proposition of real tobacco, less odor and no ash. Let's take a deeper look at our consumer journey framework by reviewing the metrics we've achieved to date in the Atlanta market. We're using multiple channels to generate adult smoker awareness for IQOS, including paid media communications, using our adult tobacco consumer database and retail touch points at both our boutiques and trade partner stores. After just a few months in market, we have 40% brand awareness among adult smokers in the area. To put this in context, IQOS awareness is 9 points higher than adult smoker awareness of the recent Marlboro Smooth Ice cigarette expansion. We have a number of unique consumer touch points to drive engagement and trial in Atlanta. Our flagship boutiques and nearby kiosks are designed to generate adult smoker awareness and provide them with the opportunity to engage fully with the brand. IQOS mobile infrastructure, which includes pop-ups and pods, allows the IQOS team to meet adult smokers in different locations, such as at events or outside retail stores. IQOS Corners, which are set up within select retail stores, engage adult smokers where they normally purchase their cigarettes. Finally, we have a network of over 100 trained IQOS experts who can provide guided trials across these and other locations. Through our early marketing efforts, we've found that more than half of adult smokers who engaged with IQOS continue to the guided trial process. We know that guided trial is critical for explaining how to use the IQOS device, its nonhealth benefits and its taste profile. We are encouraged that more than half of adult smokers who tried IQOS have ultimately purchased the product. The early adult consumer profile shows that IQOS is appealing to a wide variety of age cohorts. In fact, over half of the adult smokers who purchased IQOS are ages 21 to 39. Nearly 3/4 of purchasers are male, which is consistent with PMI's early international results, though based on this early data, it appears we have an opportunity to better connect with female adult smokers looking for alternatives. We've found that some engagement channels are more successful than others at generating purchase among competitive adult smokers. Specifically, we're encouraged that our IQOS expert network has resulted in a greater percent of purchases from competitive adult smokers, especially Newport adult smokers. We've received valuable feedback from Atlanta and Richmond and are excited to apply these learnings to our next lead market in Charlotte, beginning in April. Charlotte is a growing metropolitan region with a pro harm-reduction legislative environment. In fact, North Carolina is one of four states that's enacted legislation to lower excise tax rates for products that receive a modified risk claim from the FDA. Our Charlotte expansion will include several enhancements from our earlier launches. Specifically, a more disruptive retail fixture to drive awareness and trial; the use of more mobile retail touch points to broaden our reach among competitive adult smokers; and essentially located boutique with a smaller footprint allowing for guided trial throughout the store. Finally, we are encouraged that PMI will be submitting a supplemental PMTA in the coming months for IQOS 3. The upgraded device charges more quickly than the currently authorized 2.4 device, which should address some of the consumer feedback concerning the charging time. PMI's modified risk application for the IQOS 2.4 device remains pending with the FDA, and we remain optimistic about its authorization. Turning to on!, we completed the transaction last August. And in less than 6 months, we've started production in our Richmond, Virginia manufacturing facility. This remarkable turnaround time is a testament to our talented manufacturing teams and the Burger Group employees who facilitated a fast and efficient knowledge transfer. Our Richmond manufacturing center is a state-of-the-art, FDA-compliant facility that's a key competitive advantage to our success as an enterprise. We believe our ability to seamlessly fold the production of on! within the facility provides significant cost efficiencies. As we have previously stated, we expect to have annualized capacity of 50 million cans by midyear and 75 million cans by the end of the year. We're also introducing new packaging for on!. The new can design has a cleaner look and enhances the visibility of the nicotine strength indicator. on! has an unparalleled product portfolio of 35 SKUs, 7 flavor varieties across 5 nicotine strengths. We believe the on! proposition can appeal to all adult tobacco consumers and that the breadth of the nicotine strengths and flavors is a significant competitive advantage. In fact, we recently completed research in support of the on! PMTA that provides strong evidence of its appeal to adult smokers. In the study, adult smokers and dippers used on! for 6 weeks after a screening and trial period. These consumers were provided the product in various nicotine levels and flavor varieties. At the end of the study, more than 1/4 of the adult smokers completely switched to on! products, and over 70% of the adult dippers did the same. Additionally, we observed that women were just as likely as men to switch to on! at the end of the study. While these results must be considered in the context of study limitations, the data illustrate the promise offered by on! and support our belief that various nicotine levels and flavor options are important to adult tobacco consumers looking to switch to potentially less harmful products. The adult smoker opportunity for on! is also illustrated by our consumer data collection at retail. Based on our analysis of adult tobacco purchases in a large convenience chain, cigarette smokers were a higher percentage of the first-time on! buyers as compared to first-time Zyn buyers. As a reminder, on! is currently distributed in 3 of the top 5 convenience store chains by smokeless volume, with plans to be in all 5 by the end of the first quarter. We will also be enhancing on!'s visibility at retail by merchandising the product using premium fixture space. Finally, we're on track to file PMTAs for the on! portfolio in May and believe that our total application will make a compelling case to FDA that the broad on! portfolio is appropriate for the protection of public health. It is well documented that noncombustible oral tobacco products have lower or nondetectable levels of many of the harmful and potentially harmful constituents found in combustible cigarettes. Because on! products are tobacco-free, they have even lower levels of these constituents, commonly referred to as HPHCs, than traditional oral tobacco products such as snus. For example, here, we compare the HPHC levels for the popular on! mint-flavored pouches containing 4 milligrams of tobacco-derived nicotine against the General Snus products, which have been granted both market orders and authorization to be marketed with a reduced risk claim. As shown on the slide, the on! product has significantly lower HPHCs versus the General products. We're excited about the results of our PMTA research, and we're looking forward to finalizing our submission in the coming months. As we illustrated with on!, robust retail data collection provides tremendous insights into our business, and it's just one of the many benefits we've received from our sales and distribution transformation efforts. Altria Group Distribution Company is a world-class sales organization with over 1,600 employees and strong relationships with the nation's leading tobacco retailers. We believe AGDC can quickly adapt to the changing business environment and is able to effectively and responsibly support the broad commercialization of new noncombustible platforms such as IQOS and on!. AGDC's data-driven approach allows our sales force to efficiently prioritize in-store activities to deliver maximum value to all our tobacco operating companies. Our companies have a strong legacy of leadership in traditional tobacco categories with highly profitable premium products and iconic brands. And while we expect to continue our leadership position in these categories, we recognize that adult tobacco consumers are demanding alternatives. The efforts to advance our vision will require investments from our core tobacco businesses, which Billy will now discuss.

Thanks, Howard. This afternoon, I'm going to discuss the excellent 2019 results of our core tobacco businesses and their plans to compete in the coming year. Then I'll provide an update on our adjacent assets and capital allocation before turning it back over to Howard. Let's begin with a review of the macroeconomic factors that impact the adult tobacco consumer. The U.S. economy remained strong in 2019 with unemployment averaging 3.7% for the full year. Consumer confidence and housing starts remained high and essentially unchanged from their 2018 levels. We believe adult tobacco consumers will continue to benefit from the economic improvement but will remain somewhat cautious regarding their future financial situation. In the cigarette category, we believe that despite elevated industry volume declines in 2019, cigarette fundamentals remain solid. First, cigarette prevalence trends for adult smokers remained consistent with previous years. Second, we estimate that 2019 U.S. cigarette category volumes declined by 5.5% when adjusted for trade inventory movements and other factors. Adjusted volume declines peaked in the second quarter with a 6% year-over-year reduction but moderated thereafter and declined by only 4.5% in the fourth quarter. The fourth quarter improvement in cigarette category volumes coincided with the sequential slowdown in the e-vapor category. We continue to believe that increased adult smoker movement to e-vapor and high levels of exclusive e-vapor category usage were the primary drivers of the accelerated decline rate over the past year. Our estimates of the secular decline rate and price elasticity are unchanged. We expect cigarette industry volumes to remain dynamic in 2020, in light of ongoing e-vapor category developments and implementation of the federal Tobacco 21 law. Taking these factors into account, we estimate that full year 2020 adjusted cigarette industry volumes will decline in a range of 4% to 6%. Third, category price changes at retail over the last 20 years have remained relatively stable. As a reminder, cigarette retail pricing is influenced by various factors such as manufacturing pricing, excise taxes and changes in trade margins. Except for disruptive excise taxes, adult smokers typically observe modest annual retail price increases. In 2019, total cigarette industry retail prices increased approximately 4%, a slight increase from recent historical pattern. For those investors concerned about the discount segment growth, total discount segment retail share was 24.2% in 2019, up 0.4 from its 2018 level. Since 2001, we have observed the discount segment retail share to be in the range of 23% to 26% of total cigarette category with fluctuations on an annual basis. We believe historical increases in annual discount share were due to several factors, including excise tax increases, distribution pushes from smaller manufacturers and changes in retailer strategies. However, we believe these increases reflected a short-term retail share focus and were not sustainable due to limited manufacturer profitability in the deep discount segment and overarching adult smoker preferences for premium-branded products. We will, however, continue to monitor dynamics in the discount segment. As for our core tobacco businesses, 2019 was an exceptional year. Our core tobacco business strategy is to maximize profitability over time while maintaining a focus on our category-leading brands, Marlboro and Copenhagen. We're very pleased with our performance in 2019 and especially proud of our people supporting the core every day. Despite the challenging external environment, our people were highly engaged and delivered outstanding business results. Last year, our smokeable products segment increased adjusted OCI by 8.6% and increased its adjusted OCI margins to 54.5%. PM USA uses a revenue growth management framework, which enables the operating company to more efficiently allocate promotional resources across geographies and packings. The approach leverages our leading retail trade programs, robust consumer data collection and advanced data analytic capabilities. Marlboro's category-leading retail share was 43.1% in 2019. Marlboro's share was stable, and its equity and relevance continue to be supported by product expansions, packaging innovation and digital loyalty and trade programs. Last month, PM USA expanded Marlboro Bold Ice, which brings together a bold tobacco flavor with a cool menthol taste. Bold Ice will further enhance Marlboro's menthol offerings and is available nationally in the innovative reseal pack. The Marlboro Rewards program is resonating with adult smokers and driving visits to marlboro.com. Over 2.5 million loyal Marlboro adult smokers have enrolled in the program, entering 200 million pack codes since it launched early last year. In discount, PM USA's strategy is to profitably compete within the branded discount segment. Our primary brand is L&M, and we continue to be pleased with its increasing profitability over time. We also refreshed the Chesterfield brand last year to serve as a complementary discount offering focused on older adult smokers. Our smokeless products segment also delivered strong adjusted OCI growth of nearly 10% and increased its adjusted OCI margins by 3 percentage points to 71.7%. USSTC also uses revenue growth management to more efficiently allocate its promotional resources across geographies, brands and styles. Copenhagen continues to be the leading MST brand, and its 2019 performance was highlighted by the opening of the Original Snuff Shop in Nashville. USSTC is excited about its latest innovation for the brand, Copenhagen Packs. We've heard from adult dippers over the years that they like the convenience of pouch products but didn't want to sacrifice the taste of a long cut experience. We had these consumers in mind when we designed Packs, which has a softer, more permeable pouch that allows for better manageability and long-lasting flavor. Available in the popular wintergreen flavor, adult dippers have described Copenhagen Packs as the perfect mix between long cut and a pouch, and like the increased size of Packs versus traditional pouches. Beginning with the first quarter 2020 results, we expect to rename the smokeless products financial reporting segment to the oral tobacco products segment. It will include the financial results, volume and retail share performance from our MST and snus products as well as on! oral nicotine pouches. Before closing the discussion of our core tobacco businesses, I would like to acknowledge the accomplishments of our regulatory and science teams. Our teams have engaged with the FDA on the substantial equivalence, or SE, process for cigarettes and smokeless tobacco for a decade and more recently, for our cigar business. It began slowly, but we continue to work constructively with the FDA, and our success rate steadily improved. Through the end of 2019, we've received more than 270 market orders for our core cigarette and smokeless products. In cigars, we believe John Middleton is best -- is the best-positioned cigar manufacturer to navigate the regulatory environment. Middleton has been proactively engaging with the FDA and was the first cigar manufacturer to receive a market order following the August 2016 deeming date. In fact, Middleton has already received premarket authorization for over 80% of its volume, and it intends to submit SE applications for the vast majority of the remaining volume by the May deadline. We're extremely proud of our long history of leadership within the cigarette, cigar and MST categories, and we believe we're well positioned to continue our success into the future with our iconic brands, world-class manufacturing facilities and talented employee base. Our core business -- businesses have a critical role to play, achieving our new vision, and we believe that they will continue to deliver outstanding results. Turning to our complementary alcohol assets. Our investment in AB InBev and our Ste. Michelle Wine Estates business contributed over $900 million to our 2019 pretax adjusted income. We value their diverse income streams, and they have served us well over time. In cannabis, the industry remains in nascent stages across the globe, and we are very excited about the opportunity for Cronos to position itself for future leadership. We believe their asset-light strategy is prudent, especially given the current oversupply challenges that face many of the other Canadian-licensed producers. We view Cronos as a long-term strategic investment for Altria. And to support our investment, we have provided consulting services to Cronos for several projects. In the United States, we support the federal legalization of cannabis under an appropriate regulatory framework, and we intend to work with policymakers and regulators to establish a responsible operating environment. Moving to our balance sheet. We remain committed to maintaining an investment-grade credit rating. We believe our balance sheet is strong, and that our current debt load is quite manageable. Our net debt-to-EBITDA ratio was 2.3x as of December 31, and our weighted average coupon rate decreased during the year to 4.2% by year-end. As we have done in the past, we intend to steadily grow our EBITDA and further strengthen our credit metrics over time. We remain committed to our 80% dividend payout ratio target, and we have consistently rewarded our shareholders with a strong and growing dividend. In fact, 2019 marked our 54th dividend increase in the past 50 years. Additionally, our businesses generate significant cash flow. We've produced about $1 billion of cash annually in excess of our dividend payments, which provides flexibility to invest strategically in the business, finance debt maturities and repurchase shares. We've entered 2020 with $500 million remaining in our currently authorized share repurchase program, and we intend to complete the program by the end of this year. Now turning to guidance. We reaffirm our 2020 adjusted diluted EPS guidance of $4.39 to $4.51. This range represents a growth rate of 4% to 7% from our adjusted diluted EPS base of $4.22 in 2019. The assumptions behind our guidance range are unchanged from the ones we described in our recent earnings call. We also maintain our compounded annual adjusted diluted EPS growth objective of 4% to 7% for the years 2020 through 2022. We are excited about our 2020 plans and the opportunities to grow our portfolio of noncombustible products. I'll now turn it back over to Howard for closing remarks.

Thanks, Billy. Before closing, I'd like to take a moment to recognize our people. We're a relatively small organization, especially considering the profitability of our businesses. Our employees didn't miss a beat in 2019, and they understand where we're headed as a company. Their resolve and collective experience underpin my confidence in our ability to achieve the vision we've laid out today. To conclude, we believe we are the best-positioned company to navigate through the current U.S. tobacco environment. The current price-to-earnings multiple of our stock reflects investor uncertainty about our ability to succeed in the future. For context, the last time we traded at these levels was in 2008 and 2009. During that time, investors were concerned about our ability to succeed as a domestic-only cigarette company with cigarette volumes under pressure from a federal excise tax increase and increasing consumer migration to moist smokeless tobacco. We responded to these challenges by continuing to maximize our smokeable businesses and investing in fast-growing segments of the tobacco category. This platform served us quite well, and we've delivered significant income growth and shareholder returns over the last decade. Today, we face a different set of challenges but believe we have the right strategies, products and people to continue delivering outstanding results. We have a strong and resilient core business, and we are once again investing in growth opportunities with IQOS, on! and our stake in JUUL. In this pivotal moment, we can make more progress on harm reduction in the next 10 years than we have in the past 50. We intend to seize this opportunity. And over these next 10 years, we will invest in our business and in our people to responsibly leave the transition to a noncombustible future and propel us forward as the leader in the next chapter in U.S. tobacco. We appreciate your attention and interest in Altria. And we'll be happy now to take your questions.

Let's start with Vivien.

Howard, I'm intrigued by your 10-year vision. I was just wondering if you could elaborate on what the picture of success is. You certainly laid out some of the key benchmarks in terms of youth incidents and regulatory progress. But just from an industry mix and an Altria mix standpoint, clearly, there has been a rate of change moving away from combustibles. Are you looking to accelerate that? Is there a target mix around combustibles? Any incremental color would be helpful.

Sure. I think as we look 10 years out, we think that given consumer interest in switching to noncombustible tobacco products, which has been significant in the past, but I think it's even more significant today, the availability of compelling products that consumers are willing to switch to and the regulatory environment that there is the opportunity to significantly accelerate the growth of the noncombustible segment and to have accelerated declines in the combustible segment. In 10 years, I believe that we'll have a product mix that potentially could have the majority of our volume coming from noncombustible tobacco products. And while we will certainly, I believe, continue to have a significant and highly profitable combustible business, I think, increasingly, the volume will be in the noncombustible segment. And I think that's a positive for our consumers. It's a positive for public health, and it's a positive, I think, for Altria. Michael?

Two, if I may, one on combustibles first. You gave some of the history of the pricing. It's pretty volatile. There's been some -- a little bit more elevated increases recently but also elevated category declines. Just looking ahead without obviously being anything specific, can you give us a sense of your thinking? And would it be reasonable to assume it tends to revert a little bit to a mean and that with -- especially if category volume declines or moderate a bit, the price increases would also be a little bit more moderate?

Billy, you want to take that?

Sure. I'll be careful, Michael, not to talk about future price. And I think when you look at last year, I think it's important to separate manufacture pricing from retail pricing. So our list price, we realized about 8% last year. That's a mix of list price as well as more efficient use of promotional resources and better analytics. At retail, it only increased 4%. So that's really what drives price elasticity is that retail price change. And I think you saw from the chart, yes, it appeared volatile, but the real volatility came from large excise tax increases in certain years. Other than that, it remains fairly stable.

And then just on IQOS, you've touched on some of the learnings you're applying in Charlotte. It's a little bit of a short list. It's some new signage and some more mobile units. But is that at a high level, more or less the gist of it? And then is that partly a sign that things are going pretty well so far, and that there's not too much to except for some tweaks?

Yes. I would say that we had significant time to prepare for the Atlanta launch. We had the benefit of PMI's learnings and countless markets around the world. And I think as a result, the Atlanta launch is going quite well. I think the uptake by adult cigarette consumers in Atlanta is quite strong. But certainly, there are opportunities to make adjustments along the way. We've listed some of those for Charlotte. One of the things we're particularly excited about is the enhanced retail fixture because if you think about it, having real breakthrough visibility for IQOS where the vast majority of adult cigarette smokers are making their purchase is a real opportunity to drive awareness, which is what ultimately drives engagement with the brand, trial, purchase and conversion. Pamela?

So I wanted to ask about your outlook for cigarette volumes in 2020. Specifically, are you seeing a deceleration in the rate at which smokers are converting to e-vapor since the category slowed last year? And then how much of a headwind would you expect Tobacco 21 to be?

Sure. Billy, you want to take that?