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

Good morning, and welcome to Altria's 2023 Investor Day. Thanks to those of you joining us here at the New York Stock Exchange and to those of you on the webcast. I'm Mac Livingston, Altria's Vice President of Investor Relations. Throughout the morning, the Investor Relations team will be around to assist you should any needs arise. I'm going to start by covering a few housekeeping details. To guide us over the course of the day, we've created a dedicated web page on altria.com that includes today's meeting materials, including the agenda, management bios and slides that will be posted as we progress through the morning. We have also posted reconciliations and further explanations of the non-GAAP financial measures we discuss today, and we will post our remarks following today's event. Our remarks this morning contain certain forward-looking statements and projections of future results. Please review the safe harbor statement in the slides for the various factors that could cause actual results to differ materially from our forward-looking statements and projections. Additionally, the longer-term goals we discussed today assume the successful completion of the pending NJOY acquisition. And finally, all references in today's remarks to consumers refer to existing adult tobacco consumers 21 years of age or older, unless otherwise stated. In today's presentation, we're going to focus on our pursuit of leadership in the reduced harm space. You will hear from many leaders in our management team who champion our efforts in moving beyond smoking. We believe that by meeting the opportunity to advance tobacco harm reduction, we will both align with societal demands of our business and create substantial shareholder value. So without further delay, I'll turn it over to Billy Gifford, Altria's Chief Executive Officer, for his opening remarks.

Thanks, Mac, and good morning to all of you in the room and on the webcast. It's my great pleasure to be with you today to discuss our progress and path forward in pursuit of our vision to responsibly lead the transition of adult smokers to a smoke-free future. As Max said, you will hear insights from several members of our talented management team, who are driven to make our vision a reality. Our primary goal is to leave you with greater confidence in our ability to make significant progress in reducing the harm of tobacco use for the approximately 47 million U.S. tobacco consumers. And through that progress, we believe that Altria will advance its remarkable legacy of industry leadership by becoming a more consumer-centric, sustainable and enduring company. Over the past 2 decades, our company has successfully evolved from a global consumer products company to a U.S.-focused tobacco company, creating significant shareholder value in the process. Today, our evolution continues as we are moving beyond smoking. We're guided by consumers and by the science that strongly supports the significant public health benefit of moving smokers towards a smoke-free future. Of course, the best choice for smokers is to quit. But if they can't quit or won't quit, we strongly believe that the best choice for them is to move to FDA-authorized smoke-free products. In fact, the FDA agrees that there is a continuum risk among tobacco products. And independent research shows that it's not just a continuum, but a risk cliff that reflects a dramatic reduction in risk for smokers who fully switch to smoke-free alternatives. Today, we outlined how we're preparing to capture the harm reduction opportunity in the U.S., including expanding our understanding of tobacco consumers. Enhancing our innovative smoke-free product portfolio, creating the external conditions for tobacco harm reduction to succeed and building the commercial engine to responsibly drive transition to smoke-free products. Of course, even with a marketplace of smoke-free alternatives, we know that many smokers will not switch overnight. It will take time, support and encouragement. We have learned a great deal about the journey smoker space through our first-hand experience commercializing our moist smokeless tobacco brands on! and IQOS. Over the past few years, we've built valuable infrastructure that provides opportunities to engage with smokers, learn about their purchasing behaviors and support them on their journey. We believe much of this infrastructure is category agnostic. While much of it was originally funded by our smokeable products segment and used to support Marlboro, we believe a significant portion of it can be used to drive our smoke-free businesses forward. And today, we will provide examples of this as we share more about our digital work, trade relationships and manufacturing footprint. While our smokeable segment has helped fund many of our smoke-free efforts. It's also significantly contributed to nearly $23 billion of cash return to shareholders over the past 3 years through dividends and share repurchases. SAL will join us towards the end of the morning to discuss our smokeable segment and how we're viewing our balance sheet and capital return programs going forward. Our goal remains to balance investments in their future with returning cash to shareholders as we continue to build a smoke-free future. We believe the most successful consumer products companies are obsessed with their consumers. Over decades, our teams have studied tobacco consumers, their behaviors, needs and desires and where they aren't being satisfied. For more than half a century, the vast majority of tobacco consumers in the United States found satisfaction in cigarettes. And many of them chose Marlboro. In the back half of the 20th century, the Marlboro brand became the gold standard in the category and represented a moment of independence and freedom for smokers. Philip Morris USA built significant brand loyalty that continues with Marlboro smokers today. In fact, in 2022, Marlboro was larger than the next 11 cigarette brands combined. Today, tobacco consumers are evolving, and many are increasingly considering a smoke-free nicotine product. We try to stay with our consumers as they've evolved, sometimes with success and other times falling short. But it's because of these learnings gain, from these shortfalls that we feel we can succeed going forward. Today, our businesses and product portfolio look different. We now have full control over our path within modern oral. And upon completion of our pending acquisition of NJOY, we have full global ownership of FDA-authorized products in the e-vapor space. And we've established new external partnerships that are built on mutual respect, a commitment to harm reduction and the desire to achieve win-win results. We've also made significant changes within our company that may go unnoticed to external observers. We have enhanced our product development processes and are now iterating alongside consumers to bring to market products that address their feedback and meet their expectations. We've made significant investments to enhance our digital capabilities across the entire organization, including in our supply chain and our consumer engagement and trade programs. And we have established 2 new organizations that are focused on delivering superior products and experiences to our consumers. All of these changes are built on what we have learned about helping smokers make better choices than continuing to smoke cigarettes. To achieve our vision, we know that we must continue to actively participate in the external environment to help influence policymakers embrace harm reduction as the right path forward for tobacco policy and include the opinions of smokers in the discussion. We're working to create the conditions for harm reduction and are focused on 4 key areas: First, we continue to encourage the FDA to make more progress for the benefit of the 47 million tobacco consumers. That means authorizing reduced risk product applications in a reasonable timeframe and exercising appropriate enforcement actions for manufacturers that fail to comply with the regulations. Next, we need to address the widespread misperceptions about the relative risks of tobacco products for smokers seeking less harmful alternatives. We believe tobacco consumers deserve this information and regulators have a duty to provide it. Third, we need to continue to lead the way on responsibility. That means demonstrating through our actions that we're invested in addressing the issues people care most about, including underage use. And lastly, for harm reduction to become a reality, we believe policymakers, including the FDA, have to say no to calls for prohibition based policies that will send us in the wrong direction like broad-based flavor bans. We have all seen that prohibition does not work in other context and that creates unregulated markets with negative unintended consequences. While more work needs to be done in these areas, we are optimistic we can get there in time. Change won't happen overnight, but we will continue to do our part to create the conditions for harm reduction. We plan to stay the course and believe that our actions will benefit tobacco consumers, our businesses, our shareholders and society. As we execute on our vision, we also believe that you, our investors, should better understand where we're going and how we're holding ourselves accountable. With that in mind, we are introducing our new 2028 enterprise goals to more clearly define where we are headed. Our enterprise goals include corporate financial metrics, specific U.S. smoke-free volume and revenue targets and our desire to move beyond the U.S. nicotine space. Jody, Sal and Olivier will share more details on each of these goals in their upcoming remarks. Going forward, we expect these goals to be incorporated in our executive compensation program. Disruption and corporate evolutions require perseverance and commitment. I believe we have both and that with our talent, passion for the consumer, belief in harm reduction and evolving capabilities, we can deliver for consumers, our investors and society over the long term. Thanks once again for being here. We have a great day in store for you, and I will be with you throughout the morning to guide the meeting and facilitate our Q&A sessions. Our next presenter is our newly appointed Consumer Experience Officer, Shannon Leistra. Prior to her current role, Shannon was the President and CEO of U.S. Smokeless Tobacco Company, and she's held various leadership roles in our brand management and sales organizations. Please join me in welcoming Shannon to the podium.

Thank you, Billy, and good morning, everyone. I am excited to be here today to share our insights on the U.S. tobacco consumer. We like to say that we are consumer-obsessed and for good reason. Consumers are at the center of our vision and are a key stakeholder in achieving tobacco harm reduction. Of the 47 million tobacco consumers in the U.S., approximately 28 million are smokers. While all of these consumers use nicotine products, they vary greatly as individuals. We have developed a deep understanding of them as both consumers and people, the role tobacco products play in their lives and how they choose products and brands across a range of usage occasions. In 2022 alone, we conducted consumer research with approximately 50,000 tobacco consumers, analyzed more than 4.5 billion consumer transactions at retail and engaged with consumers approximately 730 million times through our brands. Combined, this data fuels our digital consumer engagement system and transition marketing efforts. We believe that by blending our consumer understanding and advanced data analytics, we are creating a holistic view of smokers and their individual journeys switching to smoke-free products. Today, I'll share some of our findings that we've refined through decades of research. We have identified 7 unique clusters of U.S. tobacco consumers, the distinct moments in which they use tobacco products and their barriers and motivators to switching to smoke-free products. Let's start with the clusters, which group tobacco consumers based on their product choices, personalities and world views. We believe these clusters provide important insights into who our consumers are and how, when and why they engage with tobacco products and might engage with innovative smoke-free products in the future. Let me share a few examples of the differences among clusters. Our research indicates that some embrace innovation, while others prefer familiar experiences. Some are more individualistic while others are more community-minded. And some use smoke-free products for more than half of their total occasions, while others almost exclusively use cigarettes. Clusters that predominantly smoke account for about 2/3 of the tobacco consumer population. To be clear, these consumers and these clusters are not stagnant. We have observed growing interest in switching to smoke-free products across all of them. And in some cases, use of smoke-free products is growing as well. This primarily has been driven by male consumers, ages 21 to 29 who tend to be more comfortable with the change. In addition to consumer clusters, we have also identified distinct moments for tobacco enjoyment, which we believe provide a deeper understanding of the where, when and why behind tobacco format and brand choices. We broadly grouped these moments into 2 categories: in one group are the detached moments, which include indulge, reward and break. And the other are the engage moments. These include the enhanced, hangout and multitask occasions. I will begin with the detached moments. These are occasions when consumers use their tobacco product to help them disconnect. In indulge moments, consumers take their time to fully relish the multi-sensorial experiences of their product. I compare this to savoring a nice bottle of wine. It starts with the ritual of pouring a glass, then swirling it around and appreciating the aroma. And finally, enjoying how it tastes. Let's move to reward, which are those moments of me-time or micro vacations. They occur after finishing a difficult task or a long workday. The tobacco product is a sort of treats. And then there is break such as the classic cigarette break. When consumers are looking to step away from the task at hand to reset before returning to it. Conversely, there are the engage moments when consumers want to connect with others and life around them. And the tobacco product is a part of the occasion as opposed to the focus of it. Tobacco complements other sensorial experiences and enhanced moments such as enhancing drinks with friends, with a Black & Mild cigar or enhancing a quiet morning fishing with their favorite Copenhagen dip. Hangout is the quintessential social moment. During these occasions, product choices are more likely to be shaped by the opinions of those around the consumer. And there's an inherent desire to stay with the group. And then there are multitasking occasions when consumers use tobacco while performing an unrelated task. In multi-task, the project is the focus and the tobacco product is simply along for the ride. There is one usage occasion that is not a detached or engage moment. And it is one of the most common, the routine occasion. Consumer engagement with both the tobacco product and the moment itself is low during routine moments. Our research indicates that not every moment has the same level of satisfaction and enjoyment for every consumer. Not surprisingly, a routine moment is likely not as enjoyable as a reward moment. A consumer's product requirements can vary depending upon the moment and may not be fully met by their current product choice. Consider a smoker in a hangout moment. He wants to stay with the group and enjoy a cigarette, but his ability to do so may be limited if he's in doors. In this instance, a cigarette fails to meet his requirements because it does not deliver on the ability to joy anywhere. Like the consumer clusters, we have observed shifts in the key tobacco moments. For example, the pandemic disrupted consumer routines and multitask moments increased. Consumers were more likely to use their product at home and while alone, decreasing the number of hangout occasions and eliminating the product requirement to minimize social friction. We believe that understanding consumers and their tobacco usage occasions is crucial for driving transition to smoke-free products. And we believe that smoker transition happens across all of these moments. However, our research indicates that while there is broad interest in completely switching, only 6 million lifetime smokers have fully switched to smoke-free products. To better understand this gap, we believe it is critical to understand consumers' motives behind their choices, including any barriers or motivators for switching. While barriers and motivators can vary by consumer cluster and tobacco moment, our research indicates that some barriers are universal with the most important being nicotine satisfaction. Smokers will reject a smoke-free product if it fails to deliver nicotine satisfaction regardless of how motivating they find the product benefits. Additionally, smoke-free products must be easy to carry around and deliver an enjoyable sensory experience. For most smokers, we believe there are still more barriers than motivators to switch and most smokers are skeptical that smoke-free products will meet their requirements, likely in part due to prior unsatisfying experiences. For harm reduction to succeed, we believe smoke-free products must address smokers barriers and deliver relevant benefits that they find compelling. We continue to believe that no single product will satisfy all tobacco consumers. In fact, we believe that the majority of smokers will use multiple smoke-free products in order to completely transition away from cigarettes. They'll use different platforms to meet the unique requirements they have across each moment. But we believe transitioning to smoke-free alternatives requires more than just the right product mix, is a complex and personal behavior change. So I want to go back to what it means to be consumer obsessed to us, it means going beyond consumer understanding to consumer empathy. As part of our comprehensive research program, we followed smokers on their transition journey to gain further insights into the challenges and emotions they face. And we'd like to share some of their experiences with you. [Presentation]

We believe our consumer obsession is a critical enabler to moving beyond smoking. So at a high level, let me show you how it informs our enterprise-wide efforts. Layering the components of our consumer understanding, we have created a framework to identify opportunities for what smokers may want next. We believe this approach unlocks a competitive advantage for us. It increases our consumer relevance by delivering against diverse consumer needs, and it drives internal focus and discipline. By putting the consumer at the center of everything we do, we believe we can more effectively and equitably transition smokers to less harmful alternatives. Now I'm going to turn it over to Jody Begley, our Chief Operating Officer, who will share how our innovation system activates against the framework and one of its outputs, the promising smoke-free product portfolio we are creating.

Thank you, Shannon. And good morning, everyone. We are building a compelling portfolio of smoke-free products to succeed in the future. We've been building our portfolio through acquisitions, strategic partnerships and organic product development. Our organic smoke-free product development is a multi-step process, but I'm going to simplify it into 3 phases. In the first phase, we identify unmet consumer needs for their tobacco moments, assess the business opportunity and the best path to compete. In the second phase, we designed the product, iterate with the consumer and conduct preliminary regulatory studies. And once the design is finalized, we began formal regulatory preparations. As Shannon mentioned, no single product will fit all consumers' needs. But by centering our efforts on the consumer and the science, we believe we are building a promising smoke-free portfolio that delivers enjoyable nicotine satisfaction to a wide range of consumers. The majority of smokers who are open to innovative tobacco products are looking for an inhalable option. Based on our research, smokers are particularly motivated to switch to an inhalable platform if it's perceived to be less harmful and if they can use the product while being respectful to others. We believe that the opportunity for innovative inhalable platforms primarily exists within the enhance and indulge moments, which are both highly enjoyable and sensorial occasions. So let's dive into this portfolio, beginning with the e-vapor category, which remains the most successful category in transitioning U.S. smokers away from cigarettes. Earlier this month, we exited our minority investment in JUUL and made an exciting announcement regarding our agreement to acquire NJOY and its portfolio of e-vapor products. NJOY has received 6 of the 23 marketing orders granted by the FDA to date for the entire e-vapor category. NJOY's marketing orders include the ACE device, Three ACE tobacco-flavored pods and two, tobacco-flavored disposable products. Notably, NJOY ACE is currently the only pod-based product with market authorization from the FDA. Based on our consumer research, product and device performance are important attributes that smokers and vapors consider when selecting an e-vapor product. We believe that ACE is well positioned in this regard compared to competitive products. ACE has a long-lasting battery life and provides more puffs per pod than either JUUL or Vuse Alto. Based on our research, smokers and vapors find ACE to have an enjoyable, full-bodied and balanced flavor and a smooth inhale that is easy to pull. They also appreciate its durable design and described it as comfortable to hold and convenient to carry. In our home usage test, we found that post-trial smoker and vapor purchase intent for ACE was comparable to that of Vuse Alto and better than that of JUUL across both the non-menthol and menthol variants. NJOY is currently sold in a limited number of stores and consumer awareness of the product is low. We believe we can responsibly accelerate U.S. smoker and competitive vapor adoption of NJOY in ways that NJOY could not as a stand-alone company. Youth usage of NJOY products is limited according to the latest national survey data. Additionally, NJOY is developing access restriction technology for its devices to further address underage use. This technology uses Bluetooth connectivity to authenticate the user before unlocking the device. NJOY is currently preparing PMTAs with this technology for menthol and to non-tobacco flavored ACE pods. I'll remind you that FDA's premarket review must consider risks and benefits to both tobacco users and nonusers. There is significant evidence that flavors play an important role in helping smokers move to smoke-free products, and we believe this access restriction technology will further limit underage use. After closing, we expect to continue these efforts and complete the filings if they have not already been submitted to the FDA. We are excited to expand competition in the e-vapor category through NJOY and believe that this transition complements our efforts in the heated tobacco category, which I will now discuss. Our research indicates that about 1/3 of U.S. smokers interested in innovative inhalable alternatives would prefer a heated tobacco product. These consumers are looking to reduce the social friction associated with cigarettes, but they also want a satisfying, real tobacco taste. And while the heated tobacco category is undeveloped in the U.S., we believe our compelling product portfolio can lead in this space over time. Our joint venture with JT Group is an important step in strengthening our heated tobacco product portfolio. It provides us with a committed long-term partner with significant product development expertise for heated tobacco sticks. Our research indicates that some of the smokers looking for an innovative heated tobacco product, are hesitant to try something entirely new and can be overwhelmed by too many choices. We believe the Ploom system can appeal to this particular audience as the stick format provides a familiar tactile experience to cigarettes. When paired with the Marlboro brand, we expect Ploom to be an approachable and familiar heated tobacco proposition for U.S. smokers. Our teams are working to select the final Marlboro heated tobacco stick blends for the U.S. market and complete preliminary PMTA research. We're encouraged by the initial results. Machine testing demonstrates that Ploom has significantly lower levels of many of the harmful and potentially harmful constituents that the FDA has identified in cigarettes. Following our rigorous scientific framework, the team's plan to formally begin regulatory preparations later this year. And plan to file a PMTA in the first half of 2025 and then MRTP later that year. Our research also indicates that some smokers are interested in innovative heated tobacco products that bear less physical resemblance to traditional cigarettes. This includes the millions of U.S. smokers who tried but ultimately rejected e-vapor products. These consumers are self-conscious about the image of being a smoker. And they find heated tobacco stick products, cumbersome and complex. This is where our new heated tobacco capsule product fits in. This product, which is still in development, aims to address the consumer pain points that may have hindered this audience from transitioning to smoke-free products in the past. And so I would like to introduce our capsule product which is unlike any other in the heated tobacco category. [Presentation]

So as you just saw on that video, SWIC is a new type of heated tobacco product that does not have the visual cues of cigarettes. Using our proprietary technology, tobacco field capsules are heated to a precise temperature to deliver a satisfying inhale that is similar to a cigarette. And because there is no combustion, there is no ash or lingering odor. Each capsule is single-use and last for one tobacco occasion. The sleek design fits in the palm of your hand and features a simple and intuitive user experience. Our research suggests that consumers find the product concept appealing and unique. And after trying it, smokers said they found the device simple and easy to use versus heated tobacco stick products. We believe that SWIC holds promise for tobacco harm reduction, and we continue to make significant progress towards its development. Our capsule pilot line is operational at our Richmond manufacturing center, and prototypes are delivering low levels of HPHCs compared to cigarettes. Our regulatory sciences team conducted research on product concepts and marketing materials to evaluate interest in SWIC. We found that smokers showed interest in trying and using SWIC and this interest was even greater among smokers who viewed the promotional materials. And importantly, intentions to try and use the product among non-tobacco consumers were low and statistically did not change after viewing the materials. We are excited by these results and believe they demonstrate our responsible consumer-focused approach to product development. Turning to our oral tobacco efforts. Our research suggests that many smokers will use a combination of inhalable and oral products to fully transition away from cigarettes. There are approximately 6 million oral tobacco consumers in the U.S. We expect this number to increase as smokers transition to a portfolio of smoke-free products. Oral products are particularly convenient option that can be used hands-free and without a charging device. We believe we are building a compelling oral tobacco portfolio that appeals to a wide range of consumers and exceeds expectations across a variety of nicotine moments. Let's begin with traditional MST. Dippers typically choose MST for its simplicity and long-lasting tobacco taste. MST is used in both detach and engage moments. For example, dippers use MST to enhance an experience, such as a favorite outdoor activity and as a reward like when relaxing after work. Our MST portfolio is anchored by Copenhagen, the long-standing leader in the category. Copenhagen celebrated its 200th anniversary last year, making it one of the oldest brands in America. We're extremely proud of Copenhagen's history and its long-term stability within the traditional MST category. Copenhagen remains the #1 dip brand with its iconic brand status, relevant product portfolio and exciting product innovations, including Copenhagen Packs and most recently, Copenhagen Fine Cut Wintergreen. To honor its 200-year milestone, the team launched Cope Rewards, the first and only national rewards program for an MST brand. The program is resonating with dippers and adding to our vast database of tobacco consumer purchasing data. Brand loyalty increased among dippers enrolled in Cope Rewards and we're excited about its potential contributions to sustaining Copenhagen's leadership in MST. Today, approximately 1 of every 2 MST consumers buys a UST brand. USSTC is the most profitable smoke-free company in the U.S. and it provides strong contributions to our financial results. Our oral tobacco products segment boasts robust adjusted OCI margins of approximately 66%, more than double that of many other CPG companies. Although most dippers are satisfied with their MST product, they're also open to product innovation, particularly if it provides additional flexibility to use anywhere. We believe it's these benefits that make nicotine pouches an attractive option for some dippers, especially in moments where it's hard to spit. Retail data suggests there are now approximately 2 million nicotine pouch consumers in the U.S., a 33% increase versus 2021. The category is appealing to both smokers and dippers. In fact, consumer purchase data show that Camel and Natural American Spirit smokers and Camel Snus users repurchased nicotine pouches at the highest rate relative to other brands in their respective categories. Our research indicates that nicotine pouches, particularly appeal to smokers, and poly-category users who are looking to reduce social friction, especially those who prioritize being respectful around others. We think that the opportunity for smokers to begin transitioning to nicotine pouches primarily exists within the hangout and multitask moments. In these occasions, nicotine pouches offer a particularly compelling proposition to smokers. The ability to use hands-free while enjoying discrete nicotine satisfaction. The nicotine pouch category continues to expand, representing 1/4 of total oral tobacco retail share in the fourth quarter of last year. Helix had a remarkable year in 2022. In fact, on! was the fastest-growing brand within the nicotine pouch space year-over-year. On! increased its retail share of the oral nicotine pouch category to 24% in the fourth quarter, an increase of 2.5 percentage points over the prior year period. We're encouraged by these results and the brand's appeal to a broad set of tobacco consumers, which we believe reflects on!'s wide range of flavors and nicotine strengths. And competitive oral nicotine pouch consumers are showing increasing interest and on!. Roughly 55% of on! consumers are aged 21 to 39. And a higher percentage than in the cigarette and MST categories, and approximately 30% of on! consumers are women. In comparison, women represent only 5% and of the MST category. Helix remains focused on driving awareness of on! and transitioning smokers. Last year, the team launched the Carry on! equity campaign. Which is designed to build a meaningful connection with consumers that spans each stage of their transition journey to on!. As a result of the team's efforts, consumer awareness of on! grew approximately 40% year-over-year. Data-driven promotional strategies complement on!'s equity building campaign at retail. Helix uses sophisticated analysis to evaluate the impact of its promotional tools and effectively drive trial, repeat purchase and adoption. This approach powered on!'s continued momentum in 2022 and enabled the team to efficiently manage promotional spend throughout the year. Helix reduced on! promotional spend per can by approximately 15% during the second half of '22 -- 2022 compared to the first half. Looking ahead, we expect to realize further spending efficiencies and anticipate that Helix will be profitable in 2025. PMTAs for the entire on! portfolio remain pending with the FDA. We've previously shared research from our applications including evidence of on!'s ability to transition smokers from cigarettes and that on! has substantially lower levels of HPHCs than those found in traditional tobacco products. The harm reduction potential of on! is further illustrated by the results of our smoker clinical study. The study found that compared to consumers who continued smoking, those who switched to on! had substantially lower levels of HPHC exposure. Additionally, the reduction in biomarkers observed among those who switched was comparable to tobacco abstinence over the same period. We believe there is overwhelming evidence that on! can benefit the health of the population as a whole. In addition, the National Youth Tobacco Survey indicates that prevalence of nicotine pouch use among middle and high school students remains low. We remain committed to preventing underage use through our responsible marketing efforts, which Jennifer will discuss in more detail later today. While we await the FDA's decision regarding on!, we've continued to invest in rigorous scientific studies to support and expand our portfolio of oral tobacco products. We recently announced that we finalized the design of a new oral tobacco product. This product is an output of our innovation system. But before I unveil it, let's first review some of what I just shared about the oral tobacco consumer with a little more context. Consumers are satisfied with MST in most settings, but when they're multitasking or hanging out with non dippers. They're interested in a less disruptive product like spit-free nicotine pouches. Some dippers have tried and adopted nicotine pouches. However, many want flavor and nicotine satisfaction that is more like MST. We had these consumers in mind when we designed on! PLUS. [Presentation]

On! PLUS is a wet, spit-free, tobacco-derived, nicotine pouch product that provides consumers the flexibility to enjoy anywhere. On! PLUS was designed for dippers and dual users with an optimized long-lasting flavor system and a range of nicotine strengths. Additionally, on! PLUS pouches are larger than any other tobacco-derived nicotine pouch on the U.S. market. It's seamless pouches are made of our proprietary soft feel material for a more comfortable product experience. And the on! PLUS can features a compartment to responsibly dispose of used product just as the current on! packaging does today. We're excited about on! PLUS and believe consumers will be, too. While a small sample size, our early research indicates that about 3 out of 4 dippers and nicotine pouch consumers in our study preferred on! PLUS over Zyn on a blind basis. We expect to file a PMTA for on! PLUS next year. Our regulatory sciences team is working diligently to compile scientific research to support the submission. For example, Here, we compare the HPHC levels of a 6-milligram on plus against Grizzly long-cut Wintergreen. As shown on the slide, A majority of the HPHCs found in the Grizzly product are absent from on! or absent from on! PLUS or are substantially reduced. We're excited about the early results of our PMTA research, as we prepare to demonstrate that on! PLUS is appropriate for the protection of public health. To support our regulatory studies, the team stood up a pilot line for on! PLUS at our MC campus. This line will also support a test market for on! PLUS through Helix's international distribution infrastructure which we expect to formally announce later this year. Going forward, we expect to use a combination of our existing manufacturing facilities to produce on! PLUS. And as you've seen, we are building a comprehensive smoke-free portfolio that appeals to a range of consumers across their tobacco usage moments and has the potential to reduce harm. And we have a promising pipeline of future products in development. We believe that with this portfolio, we can achieve 2 of our enterprise goals. Our first 2028 enterprise goal is to grow total U.S. smoke-free volumes by at least 35% from our 2022 base of 800 million units. Our second goal is to approximately double our total U.S. smoke-free net revenue to $5 billion over the same time frame, with $2 billion coming from innovative smoke-free products. Our 2022 smoke-free net revenue was approximately $2.6 billion, substantially all of which came from MST products. These goals are ambitious for the U.S. market, but we believe we have the right plans in place to make them a reality. And with that, I'd like to invite Shannon and Billy back on to the stage for Q&A, and we will also be joined by Murray Garnick, our General Counsel, who also leads our law and regulatory affairs organizations. We have about 15 minutes for questions before we take a break.

Thank you. I have a few questions, your line SWIC, you mentioned it leverages some of the proprietary technology. So could you provide a little more color on this technology and maybe what is so unique and then curious about the charging of the device. And if there are any advantages there? And then finally, how will you ultimately position this product technology in the market, especially relative to the heated tobacco sticks with the JV you have with Japan Tobacco, thinking about it from which types of consumers do you expect both to attract? And how will you possibly position it from a pricing perspective?

Jody, do you want to kick us off?

Sure. So SWIC technology, we had purchased some IP a few years back, and we've been iterating on that technology over the past couple of years to design what we have today. Then I have the device here. By the way, some of the IR team has a device, so you can touch and feel it at the break. But in essence, as you saw on the video, we have tobacco filled capsules. There's a heater in the tobacco that heats it to a precise temperature, fairly simple to use, done, ready to go. And so this is IP again, that we purchased a while back. Sometimes we get the question, "Hey, was this IP that we purchased from Poda?" The answer is no. If that's what -- part of the question behind the question, we've been working on this for a while. We think Poda actually gives us maybe a different product platform to continue to iterate off of in the future. As it relates to go-to-market plans, there was a lot of your questions, so if I missed something, let me know. As it relates to go-to-market plans, actually, let me start with consumer. Based on some quantitative research we've done as we've evaluated stick products versus capsule products, there's really a pretty even split between consumer preferences of formats for those who are interested in heated tobacco products. So we think there is a space for both to play, for those who are looking for more a familiar cigarette experience than stick products for them. I mentioned in my remarks, there are a number of smokers that had tried and rejected vapor. But are looking for a real tobacco taste. So we think that's the audience that this is going to appeal to. So we think there is room for both over time. With respect to pricing and go-to-market plans, it's a little early for that right now to comment on specifically how we'll move forward with that. But we think the portfolio of Ploom using Marlboro heat sticks as well as SWIC give us a really competitive portfolio in the market.

I think the way I think about it -- kind of think about it simply, if you think about cigarettes over here and stick heat not burn, right, being similar to that an experience, and then you think about e-vapor being over here, I would say SWIC lands in the middle of that. So it gives the consumer the experience of real tobacco, with all of the benefits that they could get on either end, but they went over and tried to e-vapor and rejected it. And so we think that's a prime audience for the SWIC device.

Pam Kaufman from Morgan Stanley. I also have a question on SWIC. Can you talk about your expected timeline for PMTA submission? And how are you thinking about when it could ultimately hit the market. And then my second question is just around flavors in nicotine pouches. I noticed that on! PLUS is -- there is a mint and menthol varieties, so how are you thinking about how the FDA is going to approach flavors in pouches?

Jody, why don't you kick us off with SWIC and then Murray, you can follow with flavors.

Remind me one more time on your question for SWIC.

The time line for PMTA submission.

Yes. So as I mentioned in my remarks, the product is still in development. We have made tremendous progress. As a matter of fact, it's given me an opportunity to really brag on a lot of the folks that are sitting back home in R&D and other functions that have made this a reality. We have made significant progress. And as we've continued to iterate with the consumer, and you heard Shannon's remarks earlier in terms of being consumer obsessed, we've had thousands of interactions with consumers on this product proposition. And we've identified a couple of things that we think can really further differentiate it, and that shouldn't take too long. But we're still in the development process, so more to come over time, but I think we're really close to having finalized a product here.

On flavors, look, the public health community, the FDA recognizes that flavors are important in transitioning smokers to noncombustible tobacco products. At the same time, some flavors are -- seem attractive to youth and that becomes a problem. And you see that over the last couple of years, the FDA has been trying to wrestle with that issue. We saw that in the e-vapor context where the FDA hasn't said no to flavors, but so far they haven't found an e-vapor product with flavors that they think will be appropriate for the public health. When you get to these other oral products, where the used numbers are virtually nonexistent or extremely low. As long as those numbers remain low, and we're certainly dedicated to make sure that, that is true and where it's an incredible high priority for us, as you'll hear later today to keep those numbers low. Then we think that they really provide a public health benefit by helping to transition smokers. So flavors become important in that respect. So we're very optimistic that with respect to these oil tobacco products, flavors will be allowed by the FDA, and we're going to do everything we can to make sure those numbers remain -- those use numbers remain low.

Gaurav Jain from Barclays. So on these products, you can file PMTs today, and it will take years for them to come and it's 3 years away when they can be launched in the market or you can partner with some international partner and launch these products today internationally, like what PM has done with KT&G. So would you launch something like on! Plus internationally first and also like SWIC can you launch it internationally first before you launch it in the U.S. And the second is how exactly do you do consumer testing because because of the PMTA process, you cannot really launch it in a big enough area. So what has allowed under the FDA guidelines? Like how many consumers can you test it on?

Yes, I'll kick us off on the international, and then Murray, you can talk about the ability of the consumer to use it for PMTA testing. When you think about international, we certainly see that as an opportunity. We're excited about the conversations we're having with JT as we had mentioned when we announced the joint venture, we think there is an opportunity. And you're going to hear a lot more about what we are thinking about there and how we're thinking about the international opportunity later in the day. And if we don't answer your question, please ask it again, Gaurav.

Well, look, there are some studies, scientific studies that you have to do in order to make a submission to the PMTA. We're able to do those studies. The FDA does not, at the same time, require us to conduct a study and then impose regulations barring us from conducting that same study. So we feel absolutely confident that we'll be able to conduct all the studies we need to submit a PMTA and that has not been a problem.

Ann Gurkin with Davenport. I have two questions. One, if you could talk about -- or first, congratulations on the MRTP for Copenhagen. Is there any change in the speed of approval maybe from the FDA, any kind of timeline that might be accelerating or opening up or shaking out from approvals? And then secondly, if you could comment on -- you talked about promotional appeal for consumers to trust SWIC, can you talk about leveraging your database for promotion opportunities or to try to get trial on these new products?

You want to kick us off on now?

Look, we were delighted to get an MRTP for Copenhagen. We were disappointed. It took 5 long years to do that. We are optimistic that over time, the FDA will simplify and expedite how it handles these applications, especially the PMTAs. We we've seen long delays, but we have to keep in mind that both the PMTAs is a new process for the FDA and that it was inundated by millions of applications virtually overnight. So we do think that as time goes forward, they themselves have acknowledged the need to expedite and simplify the PMTA process through the Reagan-Udall Foundation report that was one of the priorities set forth in that report. And the FDA has reacted very positive to it. So we think over time, that will happen. We have some experience with the SE process, the substantial equivalence process at first, that was a long delay process. Now we're seeing it go much faster. It is far more clear what the FDA is looking for. The FDA has made it more clear what they're looking for in that SE process. So again, we remain disappointed that at this time, the processes, especially the MRTP process takes a long time, but we are very optimistic in the future.

And I think when you think about the consumer, you're right, the database, we consider that a huge competitive advantage. But it's also the number of interactions we have with our brands with the consumer at retail. You saw some of those stats in the moist smokeless. You'll see some more, and you know them well and the cigarette. So we interact with the consumer, and we're looking for ways to continue to build that database so that we can leverage those interactions. And when they're ready to get on the journey, and we want to prompt them, we can start them on that journey. So we see it as a huge competitive advantage in the U.S.

Vivien Azer from TD Cowen. I really appreciated the 2025 and 2028 commentary on the oral tobacco category. And I just wanted to dive into that, please. So in terms of the 2028 volume and revenue targets, is it fair to assume that the core on products any incremental volume and revenue that you generate from that given that on! Plus still has to go through FDA approval, that would all be included in that target?

Those products are included in that time.

Okay. Got it. And then in terms of the 2025 profitability target, how should we think about that relative to the segment level OCI margins because smokeless products have tremendous margins. So it seems like to have to commercialize that product for the better part of 4 or 5 years before you get to profitability would suggest that you're taking either a conservative approach to industry volume progression or you expect that the category will remain more promotionally intensive than legacy Smokeless?

Go ahead, please.

So we've seen -- and then jump into your view. I want to add something. So we've seen, obviously, and you saw in the data, and you continue to see it month after month, the growth of the oral tobacco pouch segment continues to grow. And while it's growing, we think it's important to continue to invest to get a foothold. We've had terrific success. Over time, and I highlighted in my remarks, we're working to refine how we go to market. And I think you saw some of that from the first half of the year for the last half of the year where we reduced promotional spending, but you didn't see the momentum of the brand slow down. So we think it's important to continue to invest, but we certainly have an eye toward profitability, and we'll continue to make progress there. And a lot of the digital and data and analytics capability we have are going to help us get there because we want to make sure we do it in a smart way. But again, we feel good about the trajectory where we headed from a profitability standpoint and expect to break even by 2025. I don't know if there's anything you want to add?

No. You're going to hear a little bit more, Vivian later in the day of how we're thinking about margins across the space.

Owen at Jefferies. I'm not sure how much you can talk about it, but you mentioned the age verified technology for NJOY. An additional couple of flavors. I mean, how do you view a PMTA there? Will that need to be tested in a market outside the U.S. to actually show it works as intended with teenagers or if you don't do that, do you think its chance is a more limited via PMTA.

I'll kick this off, but Murray certainly add anything. I think when you think about it, Owen, when you think about that the FDA has been denied because they're concerned about underage use, we are as well. But they haven't had to really deal with yet that they know and they agree flavors play an important role in transition in adults over because you're going to have a flavored deficit from a cigarette but they haven't had it where age restriction is a part of it or access restriction. And so if you can basically kind of walk this line of the benefit is there for adults but you can prevent under a juice of it because of access control, I think that will be something important for the FDA to consider as they move forward.

Yes. As far as how NJOY is pruning together, it's PMTA. We haven't closed yet. That task still belongs to NJOY, NJOY is doing it. We are not, when we close, if the PMTA has not been submitted will then take over. But right now, we're not involved in that because the transaction has not closed. But I will rely generally on what I said before, that is NJOY will be able to -- we'll be able to conduct the necessary research and make the necessary showing under the FDA regulations in order to submit a PMTA. So we're not concerned about that but we're not involved at this point in putting together that PMTA.

Thank you. All right. I don't see any other questions in the room. So this is -- we're going to take a short break. During the break, as you heard that the IR team, some of us will actually have both new products while we can't let you use them because they haven't reached the FDA authorization, we can start with to touch, feel and we'll be happy to entertain any other questions that you may have then. And then after that short break, we'll start up again. Thank you. [Break]

Good morning. I'm Scott Myers. And for the past 4 years, I've had the privilege of leading Altria Group's sales and distribution company. I've been with Altria since 1996 and held various leadership positions within Altria's family of companies. This morning, you've heard about our exciting new enterprise goals, and I'm here to discuss what I'll call our enterprise goal enablers, our systems and expertise that exists throughout our supply chain that we believe provide us a competitive advantage and will help accelerate our progress to a smoke-free future. Let's begin this morning with an inside look at our world-class manufacturing facilities. Our operating companies have manufacturing centers and processing facilities across several states, including PM USA's flagship cigarette manufacturing center in Richmond, Virginia or the MC as we call it. We have successfully repurposed several areas within MC to support our innovative products. For example, we now produce over 90% of on!'s volume in the MC and expect to add the production of Marlboro heated tobacco sticks in the future. The MC has a modular design, which allows us to employ different bays within the factory for different products while spreading out fixed cost such as skilled labor. By repurposing existing manufacturing space, we're able to expand our businesses using our highly talented workforce while managing our overhead and capital expenditures. Our strong manufacturing capabilities are underpinned by our supply chain and procurement organizations. We have consistently sourced raw materials and product inputs during a very dynamic period that has stressed global supply chains. We have strong relationships with our growers and our suppliers, and we expect to strengthen these partnerships as our business evolves, while establishing new ones along the way. We believe our ability to efficiently get our products into the hands of our wholesale and retail partners remains a tremendous competitive advantage. Our distribution system is efficient and time tested with some of our partnerships exceeding 60 years. The network includes over 20 public warehouses that ships our products to over 900 distributors and then sends our brands to retail outlets across the United States. The strength of Marlboro is the bedrock of our distribution network and allows us to get our new products to consumers across the country. In other words, as one of my distribution partners told me during the pandemic when driver shortages were high, "Scotty, Marlboro makes the truck go." Our long-standing trade relationships have provided the foundation for us to develop programs powered by data and consumer insights that support our collective business objectives. For example, PM USA enhanced its wholesale leaders program in 2021 to encourage our wholesalers to maintain more consistent ordering for our cigarette brands while creating more financial flexibility for their businesses. This program enhancement has created less volatile inventory levels over the past 6 quarters, while allowing PM USA to manage its business in a more efficient manner. It is the same program that allows us to get a new product once it's received at wholesale to over 90% of targeted stores in less than 3 weeks. Let's now move to the retail environment. In the U.S., there are approximately 25 million tobacco transactions at retail each day. I love that fact. And tobacco consumers' shopping behavior is highly routine with 75% of consumers purchasing their product at a single preferred store. U.S. tobacco volumes is dispersed across rural and metropolitan areas and across several different trade channels with most transactions taking place, as you all know, in convenience stores. Our roughly 1,600-person sales force has vast coverage across these areas, servicing more than 1,200 headquartered chain accounts and over 200,000 retail stores, which represents more than 90% of the U.S. tobacco industry volume. Our sales team is organized by field sales and account management. More than 1,100 sales managers are focused on influencing retailers and executing operating company plans at the store level, while our account teams help drive strategic alignment with our largest accounts at their headquarter level. This structure maximizes our ability to create the best in-store experience for our consumers while delivering the highest quality service to the trade and to our operating companies. In fact, when we ask retailers, they ranked AGDC personnel better than all other CPG manufacturers for both account management and store level personnel. We believe this is a clear indicator of the strength of our sales organization and the trade relationships we have. These relationships serve several purposes, including creating the best in-store experience for the consumer and importantly, supporting responsible retailing of tobacco products and efforts to limit reach, access and appeal to unattended audiences. And our trade programs serve as a foundation for us in helping accomplish these objectives. As an example, through PM USA's retail leaders trade program, stores receive incentives and promotional resources to help them grow their cigarette business. In return, retailers are required to agree to certain merchandising requirements and display underage tobacco prevention signage. This program provides us best-in-class visibility and product placement behind the selling counter, connecting smokers with our leading cigarette brands. PM USA has achieved the #1 placement on cigarette fixtures in over 93% of its volume. Our trade programs also contain incentives for retailers to provide transaction-level scan data to PM USA. This is the data, Shannon mentioned earlier, which enables us a feedback loop between our brands and our consumers, serving as a data engine for our revenue growth management infrastructure. You've likely heard us discuss our RGM capabilities in the past, but I'd like to provide a little more detail on how we execute these strategies and how they will be a critical tool moving forward as we progress towards our vision. Years ago, when PM USA made a pricing decision in the market, it was done at a national level. Over time, PM USA has evolved its pricing and promotion strategies to become more precise. In 2018, the introduction of manufacturer-supported off-invoice program, or MSOI, allowed us to support Marlboro more effectively at a state level. This program has delivered tremendous efficiencies. We recognize an opportunity to be even more surgical with our strategies and deploy our promotional allocations at the store level. For example, as you might imagine, a store in downtown Houston may have very different category dynamics than a store in suburban Dallas. And accordingly, PM USA may offer different levels of promotional support. Building on the success of MSOI, PM USA introduced strategic options or PSOs and yes, we like acronyms, in 2021 to offer a variety of store level value delivery strategies. To support the introduction of PSOs, our teams evaluated over 250 data points to analyze the dynamics at the store level. Through this analysis, over 200,000 stores were placed into smaller groups based off a category, consumer and competitive dynamics. Each group was then assigned a recommended strategic option that optimized Marlboro's price in those stores. Our highly skilled sales force, then work with our trade partners to provide recommendations on the appropriate option for their stores. As a result, PS USA can be more efficient with its promotional resources across stores and offer increased incentives to consumers under greater economic pressure. There are at least 4 strategic options available within each state and PM USA has continued to adjust these options as market conditions evolve. The closer we've gotten to the consumer through data, the more efficiently, we're able to manage our promotional spend. Our ultimate aspiration is to deploy individual consumer level RGM strategies through personalized consumer offers and our teams continue to pursue this opportunity. Moving to our digital efforts. We launched a new digital trade program last spring and we believe this program enhances our ongoing commitment to responsible retailing. The program includes multiple participation options for our retailers. And for those participating at the highest level, we introduced incentives for retailers to include age and identity verification solutions in their digital platforms. Once a consumer is verified, retailers can provide offers and messaging from our brands within their apps. Currently, consumers can view offers from smokeable and MST brands. But going forward, we expect to expand this program to include on! and other smoke-free brands. Our strong presence at retail, along with our robust adult tobacco consumer database gives us broad reach among the 47 million U.S. tobacco consumers. And we have a long history of effectively communicating with consumers across a variety of channels, from disruptive activations at retail to innovative digital programs such as Marlboro Rewards. And as Shannon mentioned, we acknowledge that smokers have different barriers and motivations as they consider moving to the smoke-free products. Our newly established transition marketing organization led by Shannon is focused on walking alongside smokers to support their transition journey. We believe our infrastructure has helped Altria achieve long-standing leadership in the U.S. tobacco space. Our manufacturing and supply chain capabilities are state-of-the-art. Our footprint at retail and our trade relationships are best-in-class. Our proprietary and advanced analytics, RGM and digital capabilities keep us connected to our consumers. And our marketing organization is agile, nimble and very innovative. We are confident that as we continue along our journey, we can optimize our tools to help us achieve our enterprise goals. I'd now like to turn the presentation over to Megan Witherspoon for creating the conditions for panel discussion. Megan?

Good morning, everyone. I'm Megan Witherspoon, Vice President of Communications. I'm delighted to be here joined on stage with these amazing Altria leaders. I'll quickly introduce them. So on the end here, we have Paige Magness. She's our Senior Vice President of Regulatory Affairs; Jennifer Hunter, She's our Senior Vice President of Corporate Citizenship and also our Chief Sustainability Officer. And here we have Todd Walker, our Senior Vice President of Government Affairs. I'll be moderating this morning's panel, and we'll be discussing the ways we work together across the enterprise and also with our key external stakeholders to create an external environment where harm reduction can truly succeed. In Billy's remarks this morning, he talked about 4 conditions that we're actively working to advance in the external environment. The first is, we know we need a responsible marketplace where underage use of tobacco products continues to decline. Second, we need a robust marketplace of smoke-free alternatives that are authorized by the FDA for adult smokers to switch to. Third, we know we need adult smoker education around the relative risks of these various tobacco products and the benefits of switching to smoke-free alternatives. And then finally, we need legal and regulatory policies that really advance harm reduction and avoid prohibition. So during the panel, we're going to speak through each of these conditions, talk a bit about the work that we have underway in each, where we see signs of progress and where we see ongoing opportunity. So with that, we're going to jump into the first condition related to responsibility and underage prevention, and I'm going to start with Jennifer.

Obviously, underage prevention is something we've been focused on for many years. Responsibility is core to and actually embedded in our vision, something we take quite seriously. So Jennifer, can you talk a little bit about our approach to responsibility broadly? And then how harm reduction and underage prevention fit in?

Absolutely. First of all, thank you, and it's exciting to be here with you all. I think you've heard from our conversations already this morning that to Megan's point, responsibility is embedded in everything that we do. We believe that understanding what stakeholders expect of us and aligning our business practices as appropriate with those expectations and measuring and communicating progress in those areas is critically important. So when we talk to our stakeholders through form of materiality assessments, we know that the 2 most important expectations of our companies are to address the harm associated with tobacco use and to make sure young people are not using our products. So that's why we have invested in preventing underage tobacco use now for 25 years because we know for harm reduction to be a reality for those adult smokers that Shannon talked about today, we need to make sure that underage use is absolutely under control. And a broader approach to leading responsibly, we know, creates long-term business and social value and that's where we remain focused.

So dive a little bit deeper, if you will, into underage prevention specifically. What are the actions that we're taking? And why do you think that those are the most appropriate things for us to be doing?

So we have a comprehensive approach to preventing underage use. Young people use tobacco products for a variety of different reasons. It's a complex issue. So we have a comprehensive framework that actually has guided our work for the 25 years that we've been investing in preventing underage use. And we have seen the benefits of a number of different stakeholders working to address underage use, specifically on smoking, as we saw cigarette rates come down. So you can imagine our disappointment and concern when we saw the rapid increase in e-vapor. We announced in 2019 a $100 million commitment to address underage use of e-vapor. And so we relied on that framework. And then we also invested in some new areas. Support for increasing the legal age of 18 -- purchase from 18 to 21 was one of those because we know that social access is the primary way young people get access to tobacco products. So working with Todd's team and others, we were successful in increasing through our advocacy legal age of purchase at the federal level, 41 states, Washington, D.C. and Puerto Rico. So now 87% of the U.S. population operates under legal age of 21. We also, as you heard Scott talk about, the sales organization plays a tremendous role in preventing access at retail. So we invested in age validation technology. This was intended to help take the human error out of purchase at retail. Today, there are 137,000 stores that have age validation technology, representing 80% of PM USA volume. We also set up what we call the Underage Tobacco Use Survey. This is actually run by Paige's team. So there's a theme here. This is really an effort across the organization. But underage tobacco use survey helps us have an early read on what's happening with underage use. We still rely on the national data sets but it is important for us to see, especially with new-to-market products, if there is underage use and then that informs our underage prevention strategies as well as our regulatory strategy. So -- and then with all of this, we've got to make sure we continue to market our products responsibly and that's to adults who are interested in using them and avoiding unintended audiences, including youth.

Great. Thanks. Todd, obviously, your government affairs team is actively involved in this work as well. Jennifer talked about legal age of purchase of 21, and I know your team played a huge role there. How else are you engaging with policymakers around responsibility and underage prevention specifically?

Yes. Thank you. Good morning, everybody. It's great to be here with you. Thank you for joining us both in person and on the webcast for our Investor Day, and I'm honored to be with you. Jennifer talked about our decades in leadership and responsibility in our industry. And the same is true in the public policy arena. It goes back for decades. And so think about FDA regulation of tobacco products. We were the only company to support FDA regulation of tobacco products. Jennifer mentioned Tobacco 21, over the last several years, a tremendous progress we've made passing Tobacco 21 at the federal level and in the states and what a positive impact that's had. And then just a year ago, last Congress, we were part of a coalition and really leaders in helping to make sure that synthetic nicotine products were regulated by FDA and that legislation passed Congress and was signed into law about a year ago, I think, April of 2022. And so if you sort of take a step back and think about it, we have a comprehensive regulatory framework in this country between FDA, new Tobacco 21, synthetic nicotine, the regulatory system at the state level, we have a comprehensive framework for the sale of the legal and regulated products in the U.S. and it works well. What we're focused on now is really enforcement in the illicit market. And you all know the e-vapor market has been in a bit of a flux throughout this PMTA process. And that's contributed to a growth in illicit e-vapor products on the market. The FDA and others are now focusing on this and -- but we think there's an opportunity to do more and to do it quicker. So we're going to support the FDA and encourage the FDA to use all the tools they have in their toolbox to partner with others to make sure that the enforcement is effective. We're also engaging with state policymakers, state regulators, states' attorney generals to educate them on the need for enforcement in this space. And we're starting to see interest and some movement there, for example, some states are considering adding e-vapor products to their registries in the state, so that an e-vapor manufacturer would have to certify that they're in compliance with federal law to sell in that state. So our trade partners care deeply about this. I was looking over for Scott, but our trade partners care deeply about this issue too and want to see enforcement. So I think right now, that is from a responsibility standpoint, our primary focus. I think it's starting to get the focus and attention that it deserves. And I'm hopeful that in the near future, we'll start to see some real progress.

Thanks. So speaking of progress, obviously, a ton of really important work going on here, Jennifer, can you just sum up kind of the progress that we're seeing in the marketplace and where you see the biggest opportunities?

Absolutely. So again, if you think about underage rates of cigarette smoking, according to the most recent Monitoring the Future, they are 2.1%. This is nearly a 93% reduction since its peak period in 1997. And as we look at the most recent National Youth Tobacco Survey, we know that after e-vapor rates reach their peak in 2019, they've reduced by almost 50%. So I think as we talk about the complexity of this issue, the comprehensive approach that's required in all of the stakeholders that touch it, this is a moment to like pause and celebrate and to continue to say more work needs to be done in order to make sure underage use remains in check so that harm reduction remains a reality. And that means enforcement that Todd talked about. So products that should not -- are not authorized and should not be in the marketplace. Young people do not have access to them. That is just really critical that, that happens. So encouraged by where we are but know that as we look to pursue our vision and harm reduction that we need to make sure we remain focused on underage.

Yes. Thank you. So great progress. As you said, cause to celebrate for a moment and continue to maintain the focus there. Okay. We're going to switch to the second condition, which is really focused on the regulatory environment. So Paige, I'm going to come to you. Obviously, we know for harm reduction to succeed, we need to have a marketplace of FDA-authorized smoke-free products for adult smokers to switch to. And those products need to meet the desires and requirements that we heard so much about this morning. Obviously, the FDA plays a critical role in this and we'd love to see more and faster progress. So Paige tell us a little bit about where you see the biggest opportunities in the regulatory space?

Happy to. Good morning, everybody. Really good to see you all. As Todd mentioned, we were the company to support FDA regulation, right, many, many years ago. And really, I think there were 2 principles behind that, that really hold true today. And that is our desire for a science-based framework that would evaluate products and the communications about them and a common set of rules for all manufacturers. And we believe those were important conditions for the tobacco industry to proceed. And so when I think about where we are today, the system really is not optimized. That is clear. And so what we are focused on is how do we advocate for and influence a few things: clearer, more transparent and more efficient product pathways, which are necessary to bring that authorized marketplace to life that we've talked about, clear communications to adult smokers about the risk and the relative risk of the products. We know that the information smokers receive is important to the choices that they're making every day. Enforcement, as Todd said, there has to be a common set of rules for all manufacturers, which does require appropriate enforcement. And so advocating for all the tools to be brought to bear that are necessary to create that. And we continue to advocate really for a system that we think would better benefit the adult smoker who -- in the video you saw earlier today, sometimes they get lost in the policy debate. So that's really where we're focused.

And there has been a lot of conversation recently about the Reagan-Udall report and the recommendations that it put forth to the FDA, what's your assessment of the report and how the FDA is responding to it?

Yes. So as most people know, the FDA Commissioner, Dr. Califf had asked a third party, the Reagan-Udall Foundation to conduct an assessment of a couple of FDA's programs, including the Center for Tobacco Products. And that concluded in December of last year. And what the foundation or the committee, I guess, had come forward with was, I would group into just a few things, although there were a lot of recommendations. They talked about the need for clear and efficient and transparent pathways for products. They talked about the need to support industry innovation better and the need to build trust with stakeholders in FDA's activities. And so most recently, the Center for Tobacco Products issued its response to that report, which laid out a set of actions that the Center for Tobacco Products wants to pursue in order to improve its operations. And we were really generally encouraged by those and we think they really set the right foundation. So they talked about a need for a strategy, right, a 5-year comprehensive strategic plan, which would be very helpful to stakeholders, like all of us and understanding the direction of the agency. They talked about the real opportunities around the product pathways, including even considering some new pathways. Communications came up, something that we advocate for a lot. And even in -- the agency has begun undertaking some research in terms of what messaging can go to adult smokers regarding relative risk, enforcement came up. So -- and particularly enforcement around market denial orders. So really, what we saw was the agency laying out action steps around the things that we continue to believe are really important for the ultimate success of the regulatory framework, which we do want to succeed. I think where we are is the details will matter. And we think this needs to be moving forward with urgency. So we'll be looking for that activity to proceed in an expedited fashion, hopefully.

Great. Thanks for that. So you mentioned one of the Reagan-Udall recommendations around correcting nicotine misperceptions and communications to adult smokers. So that's a great segue to our third condition, which is on that topic. So it's clear from the data that there's widespread misunderstanding about the relative risks of tobacco products. And that is a substantial barrier to harm reduction. So can you talk a little bit about kind of why that is such a barrier, why it's critical to address and kind of who is really supposed to take the lead on these communications to adult smokers?

Certainly. So misperceptions about product risk are, in fact, a barrier to switching. Our analysis, for example, of the PATH data, which is a longitudinal data set, would tell you that smokers who had an accurate perception of risk were 3x more likely to switch in subsequent waves of the study. So we do know that it affects the product choices that they make. And this is something we continue -- I personally continue to be very vocal about the real opportunity here. I'm optimistic. I think there are a few reasons to be optimistic. Other nations, I think, have provided a nice model for how this can work. The U.K. is a great example of a country that really appreciates when you provide specific information about relative risk that it can impact the public health in a constructive way. Dr. Califf, for example, he has expressed concern about misinformation and the threat that it can cause to public health. He doesn't link it to nicotine, but we think that creates an opportunity for a conversation there. We are seeing coming out of the Center for Tobacco Products much clearer articulation of the risk, for example, of e-vapor products use. So I do see signs of progress. And then I would add, we know that public opinion is squarely in the camp of that the agency has a responsibility to communicate clearly about the risks of products. So I believe we'll make progress over time. I think there are some specific things I would be looking for. We believe that FDA does have a role to play here. And when you think about their public communication aspect of the center, they have experience, right, running public health campaigns and with effective messaging. So we know from our experience as tobacco marketers that you can do so in a very targeted way and make sure the message reaches the adult smoker and avoids unintended audiences. We would encourage that. We would also encourage communications to physicians, whom we know are the most trusted source for information about choices that a smoker might make to leave cigarette smoking. We also believe, as Murray said earlier, that the MRTP pathway needs to be much more functional and efficient. It is our job as manufacturers to develop the products, to conduct the science and bring that forward. But then what we would expect is that FDA can be more efficient in evaluating those products and the communications about them. So those are some of my thoughts.

Yes. Obviously, some encouraging signs of progress and more work to be done. So we've been talking a lot about the regulatory environment. So let's broaden this now and talk a little bit about the legislative environment as well and our fourth condition, which is really around policies that support harm reduction and avoid prohibition. We've said for a while now, we believe prohibition doesn't work. And yet we're seeing some more of these kind of this push for some of these prohibitionist policies like Total Flavor bans and nicotine caps and such. So Todd, kind of what's your perspective on all of this? And where -- how is your team working to address this issue?

Sure. Thank you for the question. Look, I feel good about how we're positioned to engage on these issues. And if you sort of take a step back and Paige you mentioned some of this and think about the external environment, I think it helps to put it in context. First of all, Americans don't like prohibition. They know that if you -- the best approach is to keep tobacco products legal and regulated and the data supports that. Secondly, most policymakers understand that if you force tobacco products out of legal commerce and into the illicit market, you're going to create significant public health and public safety issues. So those things are sort of understood. Third, and we know from public opinion research that Americans overwhelmingly support harm reduction over prohibition. So those are just, I think, real important ground setting facts as to why we're seeing what we're seeing in terms of most prohibitionary legislative policies being defeated. And then when you take all that and think about it. And you can look as an example, the FDA comment period on menthol, where during a relatively short period of time, there were over 850,000 communications combined to Congress and FDA, expressing opposition to the ban and expressing support for harm reduction as a better path forward. So at the end of the day, I think all of that positions us in a place to engage effectively on these topics. There's a growing course of diverse stakeholders who are interested in this and are engaging adult tobacco consumers, the trade, retail and wholesale partners, public health advocates, criminal justice reform advocates, law enforcement, tobacco growers and others. So again, I feel like we're positioned in a good place, and we're seeing most of these proposals that are introduced in the states being rejected.

So with all that you're seeing kind of in the legislative environment and kind of what you see on the horizon, what's your outlook over the next few years? And where is your team most focused?

So I'm optimistic that the policy environment is going to continue to favor harm reduction over prohibition and that is where we're focused. Our focus is on advancing policies that work and support harm reduction, many of which we've already talked about here today, putting the adult smoker squarely into the harm reduction equation, making sure that when policymakers and regulators make decisions on thinking about harm reduction opportunities for adult smokers. Paige mentioned the product pathways, making sure they're efficient and making sure they're timely, at least have a reasonable time to make those decisions. Correcting nicotine misperceptions is an important component of where we're focused and hoping that FDA will take a more active role on that and then enforcement, which we've mentioned a couple of times. So those are some of the key focus areas, building on the points that Billy made at the beginning of the presentation. And given what we've talked about, public opinion, the fact that the science and evidence, there is consensus around that, public opinion supporting harm reduction over prohibition. The fact that harm reduction, if you think about it, is a really pretty common sense policy approach and it's used in other areas, preventing initiation, encouraging cessation and providing alternatives to those who don't quit. I think it sort of adds up into a place that we're going to continue to see progress because it makes so much sense.

Excellent. Well, thank you all for that excellent conversation. This is going to conclude today's panel. Hopefully, you all heard examples of our leadership in this space and our ongoing commitment to this work. Really excited to kind of see what's next and appreciate all of your ongoing commitment to this work. So with that, we're going to invite Scott Myers back to the stage and take your questions.

Gaurav Jain from Barclays. So clearly, there is a lot of focus on the growth of disposables in the U.S. e-cigarette market as well as internationally. And we saw with the EVALI crisis here that it did impact what happened internationally. And you are seeing this disposable growth quite a lot right now in Europe. So if something happens there, it could also impact how people think of e-cigarettes here. So how are you thinking about this entire e-cigarette disposable growth? And what can you do to maybe better engage with the FDA and make them aware of what's happening?

Gaurav, is your question getting to growth in terms of use by youth, is that where you're coming from? Okay.

That is I guess what's there in the media that we probably are seeing something happen again.

That's right. So yes, one of the, I guess, biggest concerns is you see disposable products that are emerging as the top brands among kids in the [indiscernible] that is a great concern. It gets back to our comments about enforcement. For the system to fully operate the rules have to be enforced. And there -- I continue to think that is a critical opportunity to be addressed. I know Todd hears that from stakeholders as well.

Yes. No, I agree, and I think it comes back to the enforcement comments and making sure that policymakers are informed with the information that there's the right resources available and that there's appropriate enforcement happening in the marketplace. And I think the FDA is looking at all that as well in terms of the disposable piece.

Scott, I wanted to touch on some of the capabilities that you guys have in store, in particular, as a very large market share leader in the overall nicotine category and how you think that you can affect back bar shelf sets. I think in the 13 years that I've been covering the space, the modern oral segment as a whole seems very hard to shop from a consumer standpoint because it just has so many SKUs from a flavor and then strength perspective. So what do you think Altria can do to help better merchandise that segment overall?

That's a great question. Thanks for it. We're working with the trade every day on their back bar and how it presents to the consumer and certainly bringing them information about how the consumer reacts as well as all that data we have about what's really selling in their stores versus what's not. And then really spending a lot of time with them on just availability. They're not used to dealing with categories that grow 65%, 75%, 80% year-over-year. And so you have to really hold their hand, if you will, a little bit and intervene on the inventory ordering systems and those things. And that's where we're in such a good position. We have 1,100 people walking in the doors to help the store managers who are really constrained right now from a labor standpoint, manage those systems, keep them in stock and then over time, create the category that kind of presents the product the best way to the consumer. And I'm really happy with what we've done with our friends in Helix on with a product as far as how we moved it forward and getting the visibility we've achieved. So we're on the right path, but it takes a lot of intervention and a lot of engagement from us.

I also had a question for Scott. I was hoping maybe you could share some color on your distribution or go-to-market strategy with SWIC and then ultimately, maybe for Japan Tobacco's heated tobacco sticks? And how that may differ from your strategy with IQOS when you distribute that? I'm just wondering if you could highlight for us any of the key learnings and how you might approach things differently?

No. Great question. Thanks, [ Manny ]. I mean the trade is excited about these new categories first. And so they're really open to ideas about ways to disrupt in their stores and create that awareness with the trade or the consumers. And so first, you start there and that they're really excited. Then we work with their brand teams, what they're trying to achieve in that store and how they want to connect with the consumer, whether it's disrupt or engage the consumer in the store or let the platform do the work. And then ultimately, we build a program with them. So as you think forward with those categories, it will be the same process we do there as we've done with on!. We'll think about the consumer. We'll talk to the trade, we'll engage with them. And then we'll kind of bring forward a program that hopefully presents the product in the best light inside that store.

Thank you. I was just wondering if you'd comment on going back to the database and working with that database. Do you need to outsource some of that management to firms outside of Altria or do you have the necessary manpower? Can you attract talent to continue to manage that database and leverage it, especially as you bring on all these new products?

Yes. That's one of those areas, it's certainly a core competency for us. Our advanced analytics team, if you spend a few minutes with this team and you really see their capability and how they're able to look at all this data, model it, help us better understand things from pricing, all the way through basic things like availability in the store and build proprietary models for us to manage that business. So I would tell you, the team we have is phenomenal. And the access to 4.5 billion transactions of data plus loyalty IDs and those type of things that lets us see a consumer anonymized, shop across the category, really is a competitive advantage. And so our talent is certainly there and we can attract the talent for it.

So your pricing strategy has become even more targeted and sophisticated over the years. Where do you see further opportunity for improvement? And what are some of the initiatives that you have there?

No. I think our brand teams are learning from this data every day with our advanced analytics teams help, right, as they're studying and they build a long history of data so they can model these things out. And then the second part of the opportunity is, you bring in new types of information and insight to the trade, they don't have any other CPG company bringing them with. And so to kind of march them along the journey about what is the optimized approach, whether it's availability or pricing or whatever it may be, you build their confidence in it. And then over time, you move them towards the direction they should be for their consumer in their marketplace.

All right, question for Todd. How do you think about the FDA's proposed nicotine product standard in the context of some of your comments about prohibitionist policies?

Well, I think it sort of fits in with that. I mean, Paige, can talk about what FDA is currently saying in terms of their timing on that, which is not completely clear. We certainly think if they move forward, whether it's going to be a very, very long process. But certainly, we view that as another approach towards prohibitionary type policy that is not practical and would not be likely to work and would have faced, I think, significant opposition from the stakeholders I talked about earlier, growers, the trade, adult tobacco consumers and others. And so we'll see where FDA goes with it, Paige, I don't know if you want to comment on timing. But at this point, I think if they go forward, it's going to be a very, very long process.

So I would agree with everything Todd said. FDA has reiterated that it's still on their agenda. They've become a little bit less precise when they talk about the timing. So it may be something that we see proposed this year but I'm not sure.

All right. I don't see any other questions. So if you have no more questions for the panelists, thank you all. And I think we're going to take another short break. Thank you.

Thank you. [Break]

Good morning, everyone. It's great to see so many familiar faces. Today, I'll discuss the largest component of our business, the smokeable product segment. Then I'll transition to our financial -- our enterprise financial goals and capital allocation. The smokeable products segment, which includes our cigarette and cigar businesses has been and will continue to be a significant contributor to our earnings. Our ability to grow profits in this segment requires a thoughtful balance of pricing, cost management, retail share performance and equity building. Our proud and passionate PM USA and JMC employees continue to manufacture and manage iconic premium quality brands for smokers. Over the past 5 years, the smokable 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. Let's now dive deeper into cigarette category and marketplace dynamics. The cigarette category's secular decline rate is influenced by a variety of factors, including prevalence, demographics, incidents and cross-category movement, macroeconomic factors, purchasing behaviors and pricing also impact category dynamics. We've studied the U.S. cigarette category for decades. We believe that the secular decline rate of approximately 2.5% is still relevant today. Cigarette prevalence trends for smokers in 2022 remain consistent with previous years. Demographic trends, such as smoker age cohorts also remain largely in line with patterns observed in previous years. Our data analytics and tools allow us to analyze trends at a more localized level to increase the precision of our models and assess consumer behaviors around various pricing scenarios. Based on our recent analysis, we have identified a slight change in the national price elasticity coefficient for the cigarette industry. We now estimate that the elasticity coefficient is negative 0.35 for the total industry. This is a small adjustment from our previous estimate of negative 0.3 and we believe it reflects the impact of higher cigarette retail prices. Our analyses indicate that a significant driver of the volume decline in 2022 was attributable to macroeconomic and other pressures that impacted smoker disposable income and purchasing behavior. Those macroeconomic pressures, along with increased competitive activity contributed to growth in the discount segment, which grew more than a share point in 2022. We also observed certain branded discount offerings priced at deep discount levels. As we've noted in the past, some smokers will adjust their purchase behaviors based on short-term economic conditions. However, over the long term, we believe the majority of smokers continue to value the premium quality and consistency of brands like Marlboro. We remain premium focused to maximize long-term profit over low-margin share gains. PM USA continues to make investments in Marlboro to maintain the brand's leadership in the cigarette category. As a result, Marlboro remained the undisputed leader in the category last year. Marlboro's share of the premium segment grew to 58.2% for the full year, an increase of [ 5p ] versus the prior year. Marlboro has performed better than many other premium brands over the last several years. In fact, over the past 3 years, Marlboro grew its share of premium by 1 full share point. We are encouraged by Marlboro's resilient performance and the brand remained the share leader in all 50 states for full year 2022. Our 2028 enterprise goal is to maintain our leadership position in the U.S. tobacco space. We expect Marlboro to continue its impressive leadership in the cigarette category, where we grow our presence in the major smoke-free categories. And let's not lose sight of the prominence of Black & Mild in the machine-made tip cigar space and Copenhagen in oral tobacco. This new enterprise goal reflects the strength of our current brand portfolio and our confidence in our ability to build leadership positions in smoke-free categories over time. Let's now transition to our financials and capital allocation. We have achieved substantial earnings growth and rewarded shareholders with significant cash returns throughout our history. Since 2018, we have grown our adjusted diluted earnings per share by 4.9% on a compounded annual basis and returned more than $36 billion to shareholders through dividends and share repurchases, which is larger than the market caps of over 50% of the companies in the entire S&P 500. We achieved this while effectively managing a strong balance sheet. As we advance our vision, we remain committed to long-term shareholder value creation. Today, we are excited to share with you how we are evolving our enterprise financial goals alongside our growing smoke-free portfolio. One of the common themes I've heard was your desire to better understand our long-term EPS growth, operating margin and capital allocation strategies. We've heard your feedback and have established goals in each of these areas. Let's begin with our EPS growth objective. Based on the strength of our core tobacco businesses, we expect to maintain our ability to grow full year adjusted diluted EPS over time. Our goal is to deliver mid-single digits adjusted diluted EPS growth on a compounded annual basis through 2028. We believe this goal provides flexibility to allocate the necessary resources to advance our vision while continuing to drive earnings growth through our core tobacco businesses. We expect investments in growth areas to vary from year-to-year, and that some years may have a lower EPS growth rate, while other years may have higher EPS growth. We plan to continue to provide EPS guidance ranges on an annual basis to account for business and market dynamics applicable to any given year. Moving to our 2028 enterprise operating margin goal. We expect to continue delivering strong margins while investing behind innovative smoke-free products. Our goal is to maintain a total adjusted OCI margin of at least 60% in each of the next 5 years. Turning to capital allocation. We have a long-standing commitment to a strong and consistently growing dividend. Our dividend remains the primary vehicle for returning cash to shareholders. We recognize the dividend is a top priority for our investors, and it remains a top priority for us. We have increased our dividend for more than half a century with 57 increases over the past 53 years. Since 2018, our annualized dividend purchase -- our dividend per share has grown by 4.1% on a compounded annual basis. Since 2010, our objective has been a target dividend payout ratio of approximately 80% of adjusted diluted EPS, subject to the discretion of our Board. As we invest in our vision, adjusted EPS growth may be slightly more variable year-to-year compared to our history of steady and consistent growth. Therefore, to provide investors with confidence in consistent dividend growth, we are establishing a new progressive dividend policy that targets mid-single digits dividend growth annually. We believe this dividend goal is an acknowledgment of our strong commitment to consistent dividend growth and shareholder return. The strong cash generation of our businesses has annually produced about $1 billion of cash in excess of our dividend payments. As we consider this excess cash, we expect to continue balancing share repurchases with investments in our business and debt repayment. We continue to see value in our shares. At year-end 2022, we completed our previous share repurchase program repurchasing $3.5 billion of shares over the last 2 years. For 2023, we expect to complete our current $1 billion program by the end of this year, and continued our balanced approach as we also retired approximately $1.3 billion of notes at maturity with available cash. Most recently, we announced our plans regarding the NJOY transaction. We have multiple sources of funding for this transaction, including our significant cash generation, strong access to the credit markets and committed short-term financing. Our options are also enhanced by the $2.7 billion transition agreement with Philip Morris International for the IQOS system. We received $1 billion from PMI in the fourth quarter of last year and expect to receive a payment of $1.7 billion plus interest by July 2023. Our balance sheet remains strong, and we have manageable annual debt maturity towers through 2038, none of which exceed $2 billion. As of year-end, our debt-to-EBITDA ratio was 2.1x, down 0.4x over the past 3 years. Looking ahead, we continue to believe a strong balance sheet is in the long-term interest of both debt and equity investors. Our enterprise goal is a capital structure with leverage of approximately 2x debt-to-EBITDA. We believe this level will provide us with appropriate access to the capital markets and the flexibility to invest in pursuit of our vision while providing strong returns to shareholders. Turning to the tax impact of our former JUUL stake. We estimate that we have more than $12.5 billion in losses. For tax purposes, we plan to claim approximately $6.4 billion in ordinary losses this year. However, we do not expect this tax position will have an impact to our 2023 financial results as we plan to record a full reserve pending an IRS review. We expect the balance of losses related to the investment to be capital losses, and we plan to claim a portion of these on our 2023 federal income tax returns to offset capital gains from our IQOS agreement. We have flexibility on when to realize the remainder of the capital losses given our entity structure. We will continue to evaluate opportunities to use these losses with the objective of maximizing long-term shareholder value. Finally, I would like to discuss our investment in ABI, the world's largest brewer. We continue to evaluate the stake as a financial investment. And our goal remains to maximize long-term value of the investment for our shareholders. As a reminder, our investment in ABI has a tax basis of approximately $3 billion. In summary, our leading tobacco brands will continue to be an engine for earnings growth and support our significant cash returns to shareholders. Our enterprise goals offer more clarity on our aspirations to continue to lead in the U.S. tobacco space, maintain strong operating margins, generate earnings growth, steadily grow our dividend and maintain a strong balance sheet. We are confident in our ability to achieve our financial aspirations while we advance our vision and remain focused on creating long-term value for our investors. I will now pass it over to the newest member of our executive leadership team, Chief Innovation & Product Officer, Olivier Houpert.

Good morning. It is a pleasure meeting all of you. As Sal mentioned, I currently serve as Altria's Chief Innovation & Product Officer. I am responsible for leading the development of Altria's long-term product pipeline and enhancing a comprehensive innovation system, inclusive of partnerships and internal capabilities. . Prior to joining Altria in May of last year, I spent 30 years at Procter & Gamble, mostly working across multiple roles in R&D and innovation. My most recent role at P&G was Vice President of Global Dishcare and site leader for the P&G Innovation Center in Brussels. I chose to join Altria because I believe in the company vision, and I am motivated to help accelerate the company's transformation to a smoke-free future. This morning, I am happy to be here to discuss our new innovation and product organization. We have centralized our product development, consumer research and innovation functions while also creating an open innovation system to enhance our internal capabilities. We have also begun exploring how we can leverage our existing capabilities to create incremental value through non-nicotine adjacency strategies. Let's walk through each of these areas starting with product development. Our team is focused on providing Altria's operating companies with the best smoke-free products to effectively compete. We have evolved our product development efforts to be more consumer-centric and we've adjusted our organization accordingly. Our new products now exist within an innovation system that better leverages consumer insights, data, emerging trends and our existing talent. This system ensures a disciplined approach to product development that will align with consumer expectations, meet regulatory requirements and align with our stringent requirement for commercial success. We are led by the science and work with an agile mindset to rapidly design and prototype to increase learning potential. This morning, you heard Jody shared the exciting progress we've made on 2 new products coming out of this innovation system. But we're not stopping there. We want more products, we want the best products, and we want them faster. With the changes we have made, I believe that we have a very bright future ahead, and I look forward to sharing more exciting product news with you over time. We have also created an open innovation system called Connect & Transform. This team is focused on partnering externally to leverage subject matter expertise, new technologies and disruptive innovations to augment our internal capabilities and support our innovation strategies. This system will balance our desire to create meaningful and productive external relationships with maintaining ownership of our proprietary technologies and competitively sensitive plans. We believe that the fastest, most effective way to understand emerging trends and technologies is to develop relationships with those that are inventing tomorrow's solutions. Moving to growth opportunities beyond nicotine products. We believe we can create incremental value through non-nicotine adjacency strategies. Earlier today, Shannon discussed how tobacco consumers use tobacco products to elevate certain everyday moments when they're looking to either detach from or engage with the world around them. Understanding these moments and the tobacco products that best satisfy them, is a core competency that we've built over many years. As we look to the future, we see opportunities to build on this knowledge to identify non-nicotine products that could satisfy this same moment. Cannabis products are one such example, but we're also expanding our lens to a broader consumer base to understand other everyday moments that could be elevated through non-nicotine products. Our approach is to understand what problems or gaps consumers are facing today within these moments, identify new and different ways to solve them and then leverage a combination of our core competencies and new external relationships to create product solutions that can address these consumer needs. While this is an exciting area of exploration for our company, we intend to be disciplined and thoughtful when identifying potential non-nicotine opportunities. We are also focused on the international tobacco opportunity, which we know will be largely incremental to our business. We are continuing to explore the best path to compete in overseas market and are holding discussions with JT about potential future collaboration opportunities for smoke-free products. We are excited about the international opportunity of our portfolio of smoke-free products. To be clear, we are committed to growing beyond the U.S. tobacco space, which is why, in addition to our corporate and smoke-free product goals, we're also in the process of establishing long-term growth goals. We believe that the international smoke-free and global non-nicotine spaces are a combined multibillion-dollar opportunity for us. Our teams are currently evaluating these opportunities, and expect to finalize strategies for these growth areas over the next 12 months. Once the strategies are completed, we will share them with you alongside specific metrics that you can use to hold us accountable. I joined Altria because I am motivated to accelerate the company's transformation. And I believe that the steps we are taking today will pave the way for a continued success in the future. Thank you very much for your time today. And I will now turn the podium back over to Billy for closing remarks.

Thank you, Olivier, and thank you all for joining us today. As I stated in my introduction, our primary goal today is to leave you with greater confidence in our ability to make significant progress on the harm reduction opportunity in front of us. I hope you have enjoyed hearing from members of our talented leadership team and that these conversations provide greater clarity on the direction of our company. Let's revisit the 2028 enterprise goals framework and recap what we shared throughout the morning. As Sal mentioned, these goals reflect our long history of delivering strong financial performance, growing our dividend and maintaining a flexible balance sheet. They also reflect our intent to maintain our leadership position in the U.S. tobacco space due to the strength of our amazing brands, including Marlboro, the undisputed leader in the cigarette category for decades. Copenhagen, the leading oral tobacco brand with a rich 200-year heritage, and Black & Mild, the leading tipped cigar brand in the most profitable machine-made large mass cigar segment. And we believe we will be well positioned to achieve our U.S. smoke-free goals by enhancing our portfolio across the 3 major smoke-free categories, including on! and on! PLUS and nicotine pouches, SWIC and a joint venture for Ploom in the heated tobacco category and NJOY ACE in e-vapor upon closing. As Olivier said, while we're extremely pleased with our portfolio, we will never be satisfied. We want more products, we want better products, and we want them faster. So we will continue to explore how we can add to our nicotine portfolio through partnerships and internal product development. Additionally, we are exploring opportunities beyond U.S. nicotine with Olivier's new organization. We believe our 2028 enterprise goals reflect our desire to deliver strong shareholder returns while investing and growing our smoke-free businesses. While some of these metrics may be discussed during our quarterly earnings calls, we will provide an annual update on the complete set of goals moving forward. Our path forward continues to be guided by the consumer. We're learning from the past and applying these learnings to how we approach the future. And we're realistic about the road ahead. We know that change does not happen overnight and that there will be bumps along the way, but we remain relentlessly committed to the path ahead. The internal capabilities that Scott outlined, along with our enhanced portfolio of smoke-free products and the grit and determination of our talented employees gives me confidence we will achieve our vision. Before moving to the final question-and-answer session, I'd like to thank you, our investors, for your interest in Altria. I appreciate your engagement over the years for pushing and challenging us and for sharing our commitment to achieving harm reduction. We look forward to continuing our relationship for years to come. With that, I'd like to invite Sal and Olivier back on stage for our final question-and-answer session.

Sal, I was hoping that you could touch on the adjustment that you guys made to your view of price elasticities in U.S. combustible cigarettes. Can you remind us how long it took for you guys to adjust back from 0.25 to 0.3? And then I have a follow-up.

The first part of your question, I don't quite recall when we made that adjustment. I will tell you the negative 0.3 has been in place for decades. We made a slight adjustment based on the data we're seeing. We do believe the elevated retail cigarette price is a factor. So it's a slight adjustment. It's not a big adjustment, but that elasticity coefficient has been in place for a very long time.

I think if you think about it, the 0.25, the adjustment of 0.3 did take a long, long time. And what you see and what Sal is highlighting is the step-up in just the price structure in the cigarette category. So we thought it was necessary to make this small adjustment. Now that's the entire cigarette industry. I know that with the data analytics, there's lots of price elasticity between brands, between the way the consumer thinks about brands, the new smoke-free category. So there's a lot of detail under that, that's really just what we see as the national price elasticity.

Understood. And recognizing that I'm sure you guys are all students of the global tobacco market, where price elasticities are not necessarily as accommodative as they are in the U.S. I think what we've observed is that as price elasticities degrade even modestly, that you do tend to see an acceleration in down trading. So I was wondering if you guys could touch on the role that Marlboro Special Blend can play in the portfolio to help you better compete against the down trading that we're seeing largely driven by your competitors?

When you think about it, you actually have to step back and think about the last couple of times that the consumer is under such economic strain. And this is true across all categories, but let's go specific to tobacco. When you look at the last couple of times, go back to '08, '09, you saw that the discount category go up and premium go down slightly. But it recovered through time. That's what history would tell us. What we want to do, and we see it as more efficient and more effective use of our resources is actually have places for the consumer to land. You'll recall during the pandemic, we actually saw Marlboro share go up. The consumer had extra discretionary income. The Marlboro brand is still the aspirational brand in the cigarette category. So we saw the benefit of that. We saw when they had extra -- now they're under pressure. And so we want to have a safe place for them to land. It's harder to win them back and more costly than giving them a safe place to land. So Special, Select and those types of things, the data analytics we have, where we can get as close as we can get to the individual consumer when they're under economic strain keeps them loyal to Marlboro.

Priya Ohri-Gupta from Barclays. Sal, thank you so much for giving us the context around the leverage target. I was hoping that I could ask 2 follow-ups around that. One, any thoughts around sort of a ratings objective that we might think about as tied to that? And then two, as we're thinking about sort of the next few years, particularly over that 5-year horizon that you guys are talking about, how closely should we expect debt approximately 2x target to be managed to? So as we think about this year, for example, given where you ended last year at the target of about 2.1x, having repaid some debt already, should we expect you to then issue in order to come back up to that level? Or is there flexibility to sort of trend above below that 2x?

No, it's a great question. The first part of your question, what I would say is, it's important for us to be investment grade. As you know, from time to time, we will access the CP market, the short-term market because our cash inflows vary and outflows vary. So coming March, April time frame when we're [indiscernible] you have a significant amount of cash outflow. The second part of your question, I would think of the 2x target as a target. There are going to be years where we're below it. There'll be years where we're above it. There's a lot of variables that go into that determination, not only market conditions but company needs, opportunities. So think of that as a target and know that we may be below, we may be above it depending on what's happening in the marketplace and what's happening with our business.

Pam Kaufman. So what level of investment behind your smoke-free vision are you incorporating into your mid-single-digit EPS growth target? And given the reliance on the cigarette business to fund the investment, how are you thinking about the long-term pricing strategy, particularly given that elasticities are increasing, although modestly? As pricing steps up, can elasticities move higher?

Yes. And that's why I wanted to take us back a bit more historical perspective. When the consumers are under economic pressure, you see some of these shifts take place. I would push back on you a bit to say this is a significant degradation in the price elasticity because this is the total category. When you look at the price elasticity even at a negative 0.35. I would say when you look at other categories, that's really small based on the pricing strength in the industry. I think when you think about future price, I'll be careful not to talk about it, it is an important part of the algorithm. I think when you think about investments, what we wanted to provide you all was a framework. So overall margin is not below 60%. That tells you we're going to be disciplined and look for ways to utilize infrastructure from either cigarettes or moist smokeless and other parts of the business and leverage that Marlboro paid for it but then we can utilize the knowledge and the learnings in other parts of the business. I think when you think about the EPS, what we wanted to provide there was 2x on a compounded annual basis, we wanted to target mid-single digits. So that gives you some idea that we're going to invest in growing businesses. We're not going to starve them. And that we're going to balance that with the total portfolio that we have to be able to make the appropriate investments and grow, but at the same time, investing in Marlboro when necessary.

Maybe a quick follow-on on that as it relates to the EPS growth that you talked about just being mid-single digits. But you did highlight Sal that some years you might be lower and some years you might be higher. So in the context of what you just said, can you give us a sense of how much lower below mid-single digits? Or are you talking low end of the mid-single-digit range? I'm just trying to understand could your EPS in some particular year be as low as low-single digits, flat? And if so, how in the context of what you just mentioned?

Somehow I anticipated that question coming from you Bonnie, that we provide more information and then we need more information. So I think what we're really looking at is on a compounded annual basis, be mid-single digits. That would allow us when we see the consumer move into a category, we can invest in the category. But through time, we're targeting that mid-single digits. So that through this transition period, if you will, with the consumer over the next 5 years, that you have an idea of how we're going to manage the business across the entire portfolio. So I know you would like a specific range, but I'll ask for some grace to say that.

A couple of questions, please. First one on the 2028 targets. I think you said targeting more than $2 billion in new reduced sales. I was just wondering if you could kind of give some color on how you see that $2 billion being split across the different categories?

Yes. I think when you think about it, I think it's important to look at where the market is today and where the consumer is. So e-vapor is the largest. A large portion of the consumers have moved to e-vapor. Unless we see the FDA take draconian measures to force them out of that category, they would have to have a significant reason to move. We know that a large portion of consumers went over to e-vapor and rejected it and moved back to cigarettes. We think both the capsule and the stick product from Ploom, while there is no heat-not-burn category in the U.S. currently, that has potential through time. But you remember, we have to go through the FDA authorization to get there. And then Marlboro oral with the product that we have in the marketplace, attracting both smokers and dippers. We believe in that period of time, will be a category that's growing and will continue to grow.

And then next question just on beyond nicotine. I know you said you're finalizing strategies there, but is that something you're looking to develop technology internally, and invest externally into that? Obviously, PM has a venture capital and BAT, we get visibility on some of their investments. Tifton Tobacco spoke about that recently as well. Is that something you'll be looking to invest in terms of venture investment in these areas as well?

Yes. I appreciate your question. And I think it's early on in the exploration phase. We're going to come back with the specific measures on how you should hold us accountable. I think when we're thinking about the exploration phase, all of those costs are in the goals that we have here. I wouldn't think of anything drastic. It's really thinking about what are our strengths and how do we leverage them into moments for consumers across all the categories. It's not to move people to tobacco. It's to -- is there a space for us with permission to play in other categories that consumers enjoy for moments in their life.

A couple of questions from me. So on JUUL loss, which you have a split between income tax losses and capital losses, like if it can be split, why not put 100% under income tax losses? That's number one. And second, this year, you will not reduce our income tax rate. But if IRS agrees, that means that your income tax rate will go down over the next few years. So that mid-single-digit EPS growth can just come from that. So is that guidance on a constant tax rate or there is an assumption that tax rates will be going down in the next few years?

Yes. Well, we give guidance on our effective tax rate, which we did in our January call, and that's for the current year. You are correct. We do not expect that to change. We are holding or I should say, this does not impact that guidance because we are fully reserving for the ordinary losses for this year. And we've shared our position with the IRS and we're waiting here any feedback from them at this point. When you think about the losses, they're split between ordinary and capital, as I said, we do have the ability on timing of some of the future capital losses. In 2023, we are going to offset some of the capital gains related to the IQOS transition agreement with capital losses. So we are not really giving longer-range guidance related to the effective tax rate. But we have really good people in our tax department. They continue to plan and manage our tax liabilities to both comply with the regulations, but to maximize shareholder return.

Sure. And secondly, we will have a new competition in the U.S. market next year with IQOS. So you -- how do you factor that potential share loss in this entire framework of pricing, volume decline in cigarettes and EPS growth guidance?

Yes. So in setting the goals, we try to look at multiple scenarios and then take what we thought was a stretch but realistic. And so it will really depend on the consumer. We've had competition in the U.S., as you know, for quite a while. And so it's how the consumer is making choices between these various categories and how they put products in that consideration set and that was all incorporated in our goals. That's exactly why we used the portfolio report, is we think about the consumer and external factors that can influence and where would they -- if something happens in one category, what categories would they go to and how can we compete best in each.

Olivier question for you. You've joined from P&G who have an R&D budget of about $2 billion a year and where innovation is obviously a core competency for their business. And you've joined a business where at least historically in cigarettes, innovation has taken a bit more of a back seat. My question is, what you found at Altria since you started in terms of their internal capabilities in this area? And what surprised you? .

Yes. Thank you for the question. I would say the number of core competencies that I found at Altria is quite impressive. They're the best. We're the best at doing certain businesses. Our core business is very strong. Our ability, for example, to create great flavors, but not just that. And in the tobacco space, there's a lot of core competencies that we have from how we understand even the plants and how we could potentially modify that. So there's a lot of core competencies. You can't really compare with P&G, which operates across a large number of very different categories. If you took every individual business unit at P&G and you look at their core competency, it becomes much more comparable to where we are at Altria, given the space that we cover. So yes, I mean, if you look at the numbers, even resources and budget, you're not in the same league, but that's where we are today. And I joined, as I said, because I think we can make a big impact on this market. I think we can transform this company and serve many more consumers than we're serving today. So I think the future is ahead of us.

You talked about some of the macro impacts on the consumer last year that drove declines in the category. How are you thinking about the potential impact of the reduction in SNAP benefits on the cigarette category and given the exposure to the lower-income consumer?

Yes. I mean I think it will have an impact. So you mentioned one headwind, but I think there are other tailwinds as well. Unemployment is at significantly low. So you have headwinds and tailwinds all the time with our consumer. And I think that's what we've proven that we know how to navigate. I think with the tools and the advanced analytics we have in place, it's getting to those individual consumers as close as you can get to them to provide them the economic benefit if they need it because that they're under strain at the current time.

Okay. Sal, you touched on your ABI -- or your ABI asset. But just maybe a quick question. Would it be fair to say that you may now be more interested in possibly exiting that asset, just given the tax shield you now have on JUUL as you laid out and as you step up investments to pivot your portfolio to smoke-free? So that's maybe my first question for Sal. And I have another question about the opportunities you have internationally, and as you continue to explore those opportunities and you touched on possibly with JT. So could you just shed a little bit more color on that and then possibly timing? And then how much of a role M&A may play in your desire to move more internationally?

I'll start with ABI. So really nothing to report on ABI. You're right, Bonnie, in that tax is one of the variables we analyze when we look at the ABI investment. But there are other variables that we also consider, and we've talked about those in the past, including use of proceeds, including the health of ABI's business, the health of the overall beer industry. So we'll continue to do the analysis. If we have anything to report, of course, we'll be transparent and report that to you. But as of now, nothing new to report.

And as far as international, we see that as a huge opportunity. It's a benefit. It's completely adjacent. How do we leverage any of the products that we produce for the U.S. and the U.S. consumer into international markets. We said we're in the exploration phase. So you mentioned whether it's partnerships and who the partnerships with, we'll come back to you. We suggested that we will come back within 12 months. What we're extremely excited about though is the conversations we're having with JT. You remember when we put the JV in place for the U.S. for the Ploom device, there was a memorandum understanding of what other areas could we collaborate on, whether that's future product development, international opportunities. And so we'll continue to explore those and come back when we have something to share.

Olivier, you referenced some of the consumer work that Shannon's group is doing is being critical to informing how you're thinking about the initiatives that fall under your purview. I'm interested to hear how you're thinking about leveraging Altria's route to market capabilities in terms of informing the different pathways you might pursue?

Thank you for the question. It's a great question because while we're being consumer-centric, I think, obsessed, as Shannon said, we also want to understand how people buy their products, how they use their products. And so leveraging our core competencies, including our go-to-market strategy is part of the equation. You heard Shannon said this morning, and this is something I observed when I joined the company, is all the products we're selling today, I think with no exception are always with their users. That's a very unique thing, something that many other companies would love to have. So when we think about that and how they buy their products, how they consume their products, we're being led by what is closest to that in terms of where the next product iteration could be. So that includes the way people purchase their products. And as we explore the non-nicotine opportunities, for example, that's going to be an important lens that we use to make sure we capitalize on what we're really good at.

Brian Callen from Bank of America. Sal, can you talk about the capital needs for smoke-free or for international through 2028? And does this change sort of the CapEx trends, which have been relatively modest for your business? And then maybe separately, how should we think about inventory dynamics within working capital, especially as you build up smoke-free?

First, again, we're going -- we wanted to be transparent and provide you with a leverage target, and I thought that was important. We got a lot of feedback from investors that they'd like to know that. When you think about CapEx, you're right, we've had a modest level of capital expenditures because we've had a very mature business. And it's allowed us to have capital expenditures in line with depreciation. The way I would think about CapEx today is you're seeing a shift from core business to new businesses. And we're able to leverage the breadth of our portfolio and our footprint to be efficient in how we allocate those CapEx dollars. So as an example, when we expanded manufacturing for on!, which allowed us to move into over 100,000 stores, we bought equipment, we got it up and running, but we are able to do that within our Richmond MC campus. So we didn't have to build a greenfield, we could leverage that fixed cost, as was discussed earlier and also manage our CapEx. That being said, we're going to make the necessary capital expenditures in these new categories because we believe that's the future of our business. And it's important to have manufacturing capability to be able to put product in the stores and have it accessible to the consumers, drive awareness, trial and conversion. So we feel good about the leverage target. We feel good about our ability to use cash derived from our core businesses, which convert income at a very high level for cash. So we feel good about that. And we will -- as I said, we will make the necessary capital investments that are required in these new categories. As far as working capital, again, we -- it's important for us to manage our strong balance sheet. It's important for us to provide cash returns to our shareholders. And we believe we can manage that across our portfolio very effectively.

Sal, over the next 2, 3 years, you are investing in these 2 categories, which -- where you will have products in the market. One is through Helix and the other one will be through NJOY. Now in Helix, you are saying you will breakeven in 2025. If you look at Swedish Match, their margins were like north of 50% at the volumes that you have today. So one could argue that if you were to price up on on!, you could take that incremental sort of money and put it more aggressively behind your e-cigarette business and drive that more aggressively. So what I'm trying to understand is how are you making that choice -- those choices because you have created an overall envelope of EPS growth. So that's a constraint. And you have new competition on cigarette side so that we will see how things evolve. So how do you make those choices is what I'm very curious to hear.

Yes, it's a good question. I think you have to think about it. We and others have been the beneficiary that a large group of consumers chose cigarettes. Yes, we had many SKUs, but if you think about the supply chain, the production, slight differences in ingredients, but everything was the same. The distribution was the same. And I think as you think about the consumer making different choices, and we believe they're going to fragment across these 3 spaces, and that's why we want to participate in all 3. You're going to want to make that -- as they're in that transition period, you're going to want to make the investments that are necessary to get those products in their consideration set. We believe we're on track to have the best products. You saw it with NJOY. Once it's in their hands and they try it, they like their product better than other products in the marketplace. And so what we're trying to do is make sure that we get it in their consideration set. So we're going to make the necessary investments. And there is a trade-off. And that's why we try to give you a total picture. Here's what we're going to do in EPS and where our goal is. Here's how we're going to think about total margin because you're going to be investing in some and some you're going to be backing off of investments because you feel like the category is more at a stable state. So we're going to be balancing that across time. Their individual decisions on an annual basis. And so we're going to make those decisions as we're moving through time. But yes, all of those factors considered in as we make those.

We may have time for one more, it's out here.

Thanks. So we talked about a lot today, a lot of innovation in the pipeline. That you've announced and some maybe you haven't yet announced. So as you sit here today, what are you most excited about in terms of having the biggest impact on your business and getting you to your goal to have a greater presence in smoke-free as well as what do you think will have the most impact on your margins. So for instance, Billy, we were talking earlier about the advantages SWIC has given that it will be taxed as an OTP. So maybe you could just highlight for us as you sit back today, what are you most excited about in the context of that?

Yes, I really appreciate the question, Bonnie. And it's going to sound cliche, it really is, but I mean it. It's the people. Altria has, I think, the strongest talent base. We have curveballs that come our way, and the team -- if you allow me to use the baseball analogy, continues to hit it out of the park. And so it's the passion of the -- our colleagues across Altria. You saw some display today with the talent from the leadership team that we put on display. It really is the people of Altria, our colleagues that give me the most excitement, the passion and grit that they have. Thank you all very much for your time today. Thank you for your continued interest in Altria. And we'll be available for those in the room to answer any last questions. Thank you very much.