ALTRIA GROUP, INC. Q4 FY2024 earnings call

• Nicotine Space View: The potential for tobacco harm reduction in the US is significant with adult nicotine consumers ~28M, and smoke-free alternatives representing ~45% of the nicotine space. However, illicit e-vapor products represent over 60% of the e-vapor category, jeopardizing smoke-free growth. The regulatory structure is broken.
• Smoke-Free Performance: NJOY grew volume/share in the pod segment, on! grew in the oral tobacco category, and heated tobacco made progress with Ploom PMTA submission plans.
• 2025 Financial Outlook: Expected adjusted diluted EPS for 2025 is in the range of $5.22 to $5.37, 2%-5% growth from 2024, considering factors like economy, tobacco consumer dynamics, and illicit product enforcement.

Tobacco (Smokable): The smokable product segment grew adjusted operating company's income by 5.5% in Q4 and 2% for the full year. Adjusted OCI margins were 61.2% in Q4 and 61.6% for the full year. Domestic cigarette volumes declined in Q4 and full year. Marlboro's premium share increased. Cigar shipment volume was up 2.9% in Q4. Oral Tobacco: The oral tobacco product segment had strong Q4 results with adjusted OCI growing 13% and margins expanding to 69.5%. For the full year, adjusted OCI grew 5.2% with margins of 67.8%. on! grew retail share. NJOY: In Q4, NJOY consumables shipment volume grew by over 15% to 12.8 million units, device shipment volume grew by over 22% to 1.1 million units. Retail share of consumables was 6.4 share points. on!: In Q4, on! shipment volume grew by over 44% to nearly 44 million cans. on! grew its retail share of the oral tobacco category and achieved profitability in Q4 ahead of 2025 goals.

Altria expects 2025 full year adjusted diluted EPS to be in the range of $5.22 to $5.37, representing a 2% to 5% growth from 2024. The guidance includes one fewer shipping day in Q1, limited impact from illicit e-vapor enforcement, reinvestment of cost savings, and lower net periodic benefit income.

• Illicit E-Vapor Market: Illicit products make up over 60% of the e-vapor category, compromising smoke-free growth and NJOY targets. Regulators are not holding bad actors accountable.
• Patent Litigation: ITC issued an exclusion order on NJOY ACE, under review by USTR; NJOY's case against JUUL has an ITC final determination expected in early April.

Q: Good morning. Billy, maybe to start out, the guidance for the year, the 2% to 5% EPS growth, can you talk about the phasing of earnings growth? You have lower MSA costs than the first three quarters, but one less shipping day in the first quarter. So just as we consider the shape of the year, can you help us in terms of phasing?

A: Yes. Matt, we don't guide to the quarter, but I think as you think about the year, nothing is really distorting in 2024 as we look forward to 2025. You remember, 2024 to ‘23, we ramped up spending and NJOY because we had a half year to a full year ownership of that brand. Nothing like that would stand out for 2025 as we go forward. We did want to highlight the one last shipping day in the first quarter. So just to make sure people understood that was occurring in the first quarter.

Q: All right, thank you. Good morning. I was hoping you could provide a little more color on the possible options you have for NJOY, and would a potential settlement with JUUL be on the table? I guess, how are you guys thinking about playing in the e-vapor category right now, especially given how the market has evolved, with illicit, et cetera?

A: Yes, you brought up a lot of good points, Bonnie, I'll try to give you a concise answer, but if I miss anything or you have follow-up, please do. I think when you step back as far as pathways, there are a number of pathways. There’re still some steps in the process. I talked about the review of the trade representative. While that has been, you look back at history, it's been very rare. I think there are special circumstances here. If you think about public health, you have a market that's flooded with illegal vapor products, specifically disposables, that have completely shirked the regulatory processor in the market, while you have NJOY, which authorized on the tobacco flavors and the only authorized thus far on the menthol side. So when I think you think about that from a public health perspective, I really believe public health and the improvement of public health through time should be a determining factor as we go through that process. But you mentioned settlement, and you mentioned the factors that we'll be considering. One, you need a reasonable party on the other side. We're going to be disciplined about it. When you think about the e-vapor from market, the pod segment, declining at roughly 15%, you have to be, and we will be, disciplined on what you consider reasonable. I think when you think about what's winning in the marketplace is illegal disposable products. And that's clearly the winner in the marketplace. The brands may change names, but that is what's winning. So we're certainly taking that into consideration as we consider pipeline products to meet consumer demands in the e-vapor space. There are a number of avenues to continue, we've shared with you previously. We've followed SE exemptions for three patents where we worked, our engineers worked to not infringe on the patents. And I think when you come to the bottom line, from the patent standpoint, nothing changes that goes into the product and nothing changes that comes out to the consumer. It's really some modifications to the device itself and so I'll pause there and see if I hit all your points but that's how we're thinking about it.

Q: Good morning, guys. I just have one follow-up and then maybe two actual questions. Just going quickly back to the question on NJOY and the fourth patent that your engineers are furiously working behind. If you are able to successfully navigate that patent and are able to submit an SE application for that, by when do you expect to receive approval for that SE application and thereby you could be able to bring that NJOY product back on the market. The second question that I have was just on the Q4 results and particularly in the smokable division, your controllable costs in the final quarter was up around 13% which is a sharp movement particularly from the previous quarter. Could you just maybe explain the dynamics in the fourth quarter which resulted into that as well as how we should think about controllable costs going into 2025. The final question is on nicotine pouches. I was a bit surprise that oral tobacco category didn’t grow faster in ‘24 versus ‘23 given the rapid growth but how do you see the growth of nicotine pouches in 2025 and particularly the competitive dynamics from both your legal players as well as some of the illicit ones?

A: Yes. I will answer the question on the fourth patent and the nicotine pouches and then I'll let Sal answer the one on smokable costs. I think when you think about that fourth patent, it really depends on the final lockdown of the change that we would make to be able to not infringe on the JUUL patent. If it follows the other three, it would be to do the SE exemption process. And as you recall, the SE exemption process is a more rapid, while not predictable, a more rapid process to get authorized by the FDA. As far as nicotine pouches, I think as you see introductions of new categories, they always have fits and starts as far as growth, depending on what consumer base they're reaching. I think you saw nicotine pouches grow so rapidly in the introduction because you had the traditional moist smokeless tobacco consumer movement over who was used to putting, if you will, tobacco or nicotine enjoyment products in their mouth. And so that's intuitive. I think what will continue to grow is if it can speak to and consumers can make the change from other forms of nicotine, such as cigarettes over to nicotine pouches. And so while we don't guide on volume, we think we have a great product with on! We're looking to on! PLUS to be authorized so that we can bring that to market and continue to engage the consumers to switch them over to smoke-free products.

Q: Hi, good morning, everyone. Thank you for taking my questions. So a few for me. So the first is on! pricing was up nicely in Q4. And despite that, the volume growth remains impressive. So is that something now how we should think of on! that you can keep pricing up given especially the spread which is still in risk with the market leader and yet your volume can continue to compound at the rate at which industry is growing?

A: Yes, I appreciate the question. I think when you think about the nicotine space, it's getting more and more competitive both with illicit product in the marketplace as well as what we see is the FDA is applying enforcement discretion against synthetic nicotine products in the marketplace that it followed PMTA even though it appeared that the statute was pretty clear so I think their application of enforcement discretion has bled over to the synthetic in that area. I think when you think about on! I think it's, the product itself it resonates with the consumer. We certainly have gotten a bit sharper with how we put promotional spending in the marketplace. It allows us to continue to generate trial while being able to increase if you will the profitability of the product in the marketplace. We were extremely pleased to be able to meet our profitability target ahead of time and will continue to use that analytics to get sharper to generate trial but to keep loyalty with the brand as well and you heard in the remarks the loyalty percentage of the consumers year-over-year who are returning to purchase on! we feel like it's very impressive.

Q: Great. Just wanted to circle back on the EPS guidance for 2025. You called out one less, well, there's obviously one less day in the first quarter, but you called out a somewhat lower tax rate and lower pension income. Are there any other items that we should think of, and can you help us quantify the pension income? Just trying to bridge to mid-single digit EPS algo, given you do have a benefit from the tax rate, but kind of offset by the pension income. Thank you.

A: Yes. I'll start us off, and then I'll ask Sal to just mention on tax rate. I think when you think about it, look, every time you start a year, you have put and takes, and you see that historically through time. What we tried to highlight is the things that we incorporated into that range of scenarios that we look at for the EPS growth rate. When you think about it, that last -- that one shipping day is in the first quarter, but it's a total year impact. When you think about the, we wanted to highlight from enforcement, we don't really see any impact stepped up enforcement in 2025. We mentioned net periodic pension income that's really just the performance in the marketplace of the asset that's related to the pension investment. And then I'll let Sal speak to the tax rate.

Q: Hi, guys. Thanks a lot for doing the call and the opportunity to ask questions. I wanted to hear a little bit about your expectations for policy changes under the new administration. So, first of all, on combustibles, obviously the menthol ban has been scrapped. What about the proposed nicotine pouch? Do you see any prospect of that being picked up by the Trump administration?

A: Yes, we'll wait and see on that. We will certainly be excited to hear the outcome of that. I would remind you that was a proposed rule at the time. We see it as completely technically not feasible, and we provided detailed comments to the FDA. And we really believe that the future should be harm reduction. And you heard me mention in my remarks earlier that we believe the regulatory system is broken and really not functioned in the way Congress intended. If you step back and think about what that regulatory system was designed to do, it was to have a third party look at the signs, authorized products, and enforce against illegal products. And none of that is really happening to any scale thus far. So, what I believe, we expect from the current administration is that they will look at this and really get the agency function in the way it was intended to function.