Good day, and welcome to the Altria Group 2018 Fourth Quarter and Full Year Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by Altria's Management and a question-and-answer session. [Operator Instructions] I'd now like to turn the call over to Ms. Paige Magness, Vice President of Communications for Altria Client Services. Please go ahead, ma'am.

Good morning. Thank you for joining us. We're here this morning with Howard Willard, Altria's CEO; and Billy Gifford, our CFO; to discuss the Altria's 2018 business results and provide a deeper dive on the Juul opportunity and Cronos. Earlier today, we issued a press release providing these results which is available on our website at altria.com and through the Altria Investor app. During our call today, unless otherwise stated, we're comparing results to the same period in 2017. Our remarks contain forward-looking and cautionary statements and projections of future results. Please review the forward-looking and cautionary statements section at the end of today's earnings release for various factors that could cause actual results to differ materially from projections. Future dividend payments and share repurchases remain subject to the discretion of Altria's board. The timing of share repurchases depends on marketplace conditions and other factors. Altria reports it's financial results in accordance with U.S. Generally Accepted Accounting Principles. Today's call will contain various operating results on both, the reported and adjusted basis. Adjusted results exclude special items that affect the comparability of reported results. Descriptions of these non-GAAP financial measures and reconciliations are included in today's earnings release. With that, I'll turn the call to Howard.

Thanks, Paige, and good morning everyone. This morning I'll focus on addressing key questions we've been getting, including our outlook for cigarette volumes, our strategic investments in Juul and Cronos, and the current regulatory environment. I'll also review our guidance for 2019. Billy will then briefly highlight our 2018 performance. We've included some slides to accompany some of my remarks. Altria closed out 2018 with excellent full year adjusted diluted EPS growth of 17.7%, and we continued to reward shareholders by returning $5.4 billion in cash through dividends. PM USA stabilized Marlboro and strengthened our combustible business. We also took proactive steps that we believe uniquely position us for long-term success. Altria enters 2019 with an evolved business platform that includes our strong core tobacco businesses and new strategic investments with tremendous potential for growth. First, our operating companies continue to give us the industry leading portfolio in the U.S. through Marlboro, Black & Mild, Copenhagen, and hopefully soon IQOS. But now beyond these brands our investments in Juul, as well as Cronos, once closed, giving us exposure to new growth opportunities while also further diversifying our future income streams. The decision to pursue these investments stems from a desire to enhance Altria's long-term earnings and dividend growth, while also making progress on our harm reduction aspiration to help adult consumers switch from combustible cigarettes to non-combustible alternatives. We believe that Juul and Cronos present unique opportunities to meaningfully participate in fast-growing adjacent categories. Before offering additional detail on the investments themselves, let's discuss the dynamics affecting U.S. cigarette category volumes and our outlook. The U.S. cigarette category is large and resilient, and has absorbed many shocks overtime. And despite significant e-vapor acceleration in 2018, the U.S. cigarette category volume decline rate accelerated only modestly from the recent long-term decline rate of 3% to 4%. Let's look at the last two years for some context. In 2017, we estimated that U.S. cigarette industry volume declined by 4% which reflects the impact of a disruptive $2 per pack California state excise tax increase in the second quarter, and initial signs of the e-vapor category returning to growth during the second half of the year. In 2018 record growth in record growth in e-vapor of approximately 35% and higher gas prices accelerated U.S. cigarette industry volume declines outside the 3% to 4% range to a decline of 4.5%. Given the significant interest in cigarette category fundamentals, let me provide perspective on the specific drivers of the decline rate and our outlook for 2019. We previously cited a secular decline rate within a 2% to 3% range. This rate includes smokers who reduced their consumption, those who stopped using tobacco products, and smokers moving to other tobacco categories. In 2018 we estimate that the secular decline rate was elevated due to increased movement by adult smokers across categories which historically accounted for about one percentage point of the 2% to 3% secular rate. This acceleration is largely attributable to e-vapor category growth, especially in light of the decline in the smokeless category in 2018. In total, in 2018, we believe e-vapor represented the vast majority of the one percentage point component plus an additional three tens. Of course, other factors also affect the decline rate. In 2018 we believe macroeconomic factors, specifically gas prices, accounted for about half percentage point additional headwind on cigarette volumes. We believe the price elasticity component of the decline rate remains consistent with our long-term estimate of negative 0.3. Looking forward, we'll continue to closely monitor the various factors at play. We watch, for example, excise taxes at both, the federal and state level, gas prices, economic conditions affecting the adult tobacco consumer like housing starks [ph], unemployment rates, and consumer confidence in the regulatory environment. We also know that over half of adult smokers are looking for alternatives. With the recent e-vapor growth, almost entirely driven by Juul in 2018, and more alternative tobacco products available in the marketplace, we expect the 2019 U.S. cigarette industry volume decline rate to be in a range of 3.5% to 5%. This range -- this wider range covers a potential for higher levels of adult smoker trial log [ph] in conversion to non-combustible products, similar to 2018. For 2019 through 2023, our estimate for average annual U.S. cigarette industry volume declines is 4% to 5%. Let's now move to our recently announced strategic investments starting with Juul. Through Juul, we have found a unique opportunity to not only participate meaningfully in the e-vapor category, but to also support and even accelerate transition to non-combustible alternative products by adult smokers. The Juul investment provides Altria with a significant stake in the largest and fastest growing e-vapor company with a highly-talented management team, successful end market products, a strong innovation pipeline, and significant international opportunity. When you add the Juul's already substantial capabilities, our underage tobacco prevention expertise and ability to directly connect with adult smokers, we see a compelling future with long-term benefits for both, adult tobacco consumers and our shareholders. We are excited about Juul's domestic growth and international prospects and their potential impact on our investment. Juul's 2018 growth was quite remarkable. Juul had net revenues in excess of $1 billion in 2018, up from approximately $200 million in 2017. Juul overwhelmingly reaccelerated the U.S. e-vapor category growth rate growing Juul's volume by nearly 600% to over $450 million, refill kit pods. We estimate Juul represents over 30% of the overall e-vapor category across open and closed systems, and all-trade classes. After e-vapor growth plateaued from 2015 to 2017, rapid growth was reignited in 2018. And we expect U.S. e-vapor volume to grow at a compounded annual rate of 15% to 20% through 2023. As a reminder, Altria share of Juul's international e-vapor income would be 100% incremental to Altria. We believe the global e-vapor and heat-not-burned segments with estimated sales of roughly $23 billion in 2018 have substantial room to grow. Juul currently operates in eight countries with plans for additional expansion this year. We expect the Juul product features that have driven Juul's success in switching adult smokers in the U.S. to strongly appeal to international adult cigarette smokers. And Juul has designed products [ph] in international markets to meet applicable regulatory requirements and also has significant new innovations in its pipeline. Though still early days, some information from recent launch markets shows rapid growth and helps affirm our assumptions that Juul's product development and commercialization capabilities can solve for different regulatory restrictions and adult consumer preferences. Let's look at two examples. First, in Canada, where distribution is limited, Juul reports that retail takeaway grew to more than 60% dollar share in stores selling their products after only three months at retail. Juul is also seeing encouraging performance where they have achieved distribution in Europe. For example, in the Sainsbury Chain in the UK, Juul tells us that it recently became the number one e-vapor brand in the chain with a dollar share in excess of 23% in less than 12 weeks after launch. And just to remind you, the UK operates under the tobacco products directive adopted by many EU countries, which limits the nicotine concentration level. Ultimately, we expect the international revenue and income opportunity to end up being as large as or larger than the U.S. opportunity. Our 35% investment was based on a deep strategic operational and financial analysis of Juul in the marketplace. Clearly, we look at this opportunity over the long term, but for context, let us provide a view of five years out. Some of our independently developed key assumptions over the next five years that informed that analysis include a U.S. e-vapor category with a gross volume between 15% to 20% annually. Juul continuing to be the primary growth driver for the e-vapor category. Attractive Juul operating margins that achieved current cigarette-like-margins due to the benefits of increasing scale and automation in the supply chain. International revenues that equal domestic revenues by 2023 and international margins that approach current international cigarette margins. Under our assumptions, our investment in Juul would generate an after-tax return exceeding our weighted average cost of capital in 2023. Additionally, with five year e-vapor category volume growth in the range of 15% to 20% annually, we would expect the U.S. cigarette category volume decline rate to be consistent with the decline rate estimate of 4% to 5%. I'll remind you that in 2018 with e-vapor category volume growth of 35%, the cigarette category decline rate was 4.5%, including a 0.5% headwind from gas prices. Combined with the earnings and cash generation engine of our core tobacco business, we believe this investment in Juul will support consistent returns over the long-term by providing Altria with a significant stake in the fastest growing -- in the fast growing e-vapor category. Briefly touching on the regulatory environment, the FDA and many others are concerned about an epidemic of UV vapor usage. We share those concerns. This is an issue that we and others in the industry must continue to address aggressively and promptly. We understand that the long-term opportunity of tobacco harm reduction is threatened by continued under-age use. Juul has already taken significant action to address these concerns. Today, it remains the only e-vapor company to have stopped shipping flavored products other than tobacco, menthol and mint [ph] to retail. These shipments stopped on November 13. Juul has taken additional steps to enhance its online age verification processes for sales on its website to adult tobacco consumers 21 years of age or older as well as developing a restricted distribution system for retailers. Juul has also halted all promotional use of U.S. social media platforms and will continue to monitor and remove inappropriate material from third-party accounts. And Juul is developing new technologies to further restrict use access. We know more can and must be done. That's why we're engaged in unprecedented efforts at the federal and state level to raise the minimum legal age to purchase all tobacco products to 21. We believe it is the single most important step we can take today and will be stepping up our efforts in the coming months. Already this year, we are supporting legislation raising the legal age in both Washington State and Virginia, and we continue to engage nationwide in this effort. We recognize that some of these actions may impact the short-term growth of the e-vapor category. We also know that preserving the long-term opportunity of harm reduction for adults is critical. We remain committed to being part of the solution to this issue. Harm reduction remains central to our view of the future for the tobacco industry. In addition to the significant opportunity presented by e-vapor, we remain very excited about the prospects for heat-not-burned in the U.S. It is now approaching two years since PMI submitted the IQOS PMTA and we are fully prepared to commercialize IQOS in the U.S. We remain fully committed to the success of IQOS in the U.S. and are excited to deploy our robust commercialization plans. PM USA is establishing brick and mortar stores, including locations in multiple cities within the first year of launch. They've already hired personnel to support prelaunch activities and are collaborating with key partners to best position IQOS at retail. Let's now turn to Cronos. While the transaction is subject to customary closing conditions and expected to close in the first half of 2019, Altria's agreement to acquire a 45% stake in Cronos with a warrant to achieve majority ownership will create a new growth opportunity in an adjacent category poised for rapid growth. It complements our strong core tobacco businesses and expands our income opportunity beyond the U.S. After years of evaluating adjacent opportunities the cannabis category is quite attractive and delivers on some key considerations including accretion to our long-term financial performance and synergy without Korea's [ph] capabilities, allowing our combined resources to accelerate Cronos growth. While a range of estimates exist, a recent third-party report projects the 10-year global cannabis revenue opportunity to be in a range of $40 billion under a similar legal landscape to today to more than $250 billion assuming a fully legal market worldwide. We believe the growth opportunities are significant and will extend across the globe as cannabis markets open. Selecting the right partner in this category was critical and we've done just that. Cronos strong management team has built unique capabilities to compete globally across the medicinal, recreational and nutraceutical categories. Our investment will allow Cronos to more quickly expand its global footprint and production capacity. We also expect it to accelerate the execution of its strategic initiatives, including investments in cannabinoid innovation and developing differentiated products and brands across medicinal and recreational categories. We look forward to helping Cronos realize it's significant growth potential. In summary, 2018 was a transformative year for Altria. We are pleased with the performance of our core tobacco businesses as PM USA stabilized Marlboro through its equity investments. We made strategic investments in rapidly growing categories that we believe strengthen our long-term financial profile, enhance our growth prospects and better position the company to deliver long-term value to shareholders through earnings growth and dividends. And of course, we had significant earnings growth and increased our dividend twice. We look forward to sharing more with you at Cagney [ph] in a few weeks. Turning to 2019 guidance, we expect to deliver full-year 2019 adjusted diluted earnings per share of $4.15 to $4.27. This range represents a growth rate of 4% to 7% from 2018 adjusted diluted EPS base of $3.99. Our guidance reflects our expectation for a higher full-year adjusted effective tax rate, primarily resulting from lower dividends from AB InBev. It also includes increased interest expense from the debt incurred related to the Cronos and Juul transactions. Although we expect that expense to be mostly offset by savings from our previously announced cost reduction program. Our plans also take into account increased investments related to PM USA's lead market plans for IQOS once authorized by the FDA. And lastly, our guidance and little to no earnings or cash contributions from the Cronos and Juul investments. In the first quarter, we'll have the increased interest expense without the full benefits of our cost reduction program and one fewer shipping day in the smokeable segment. Therefore, we expect the growth to come in the last three quarters of the year. We have a proven track record of delivering against our objectives and we maintain our long-term financial goals to grow adjusted diluted EPS at an average annual rate of 7% to 9% and to maintain a dividend payout ratio target of approximately 80% of adjusted diluted EPS. I'll now turn it over to Billy to provide more detail on our 2018 results.

Thanks Howard, and good morning everyone. Although we had been busy securing these investments over the past few months, we can continue to compete vigorously in the cigarettes and smokeless tobacco categories which still deliver substantially all of our earnings. We're quite pleased with the performance of our core tobacco businesses in 2018 and believe the equity investments we made using the benefits of the corporate tax reform set them up to deliver strong income growth in 2019 and beyond. Here are some highlights. In the smokable product segment, our strategy remains unchanged to maximize income while maintaining momentum on Marlboro over time. We saw a slight decline in adjusted operating company's income for the segment primarily driven by lower volume and higher cost, including additional investments. Those included brand equity investments behind product expansions, innovative packaging and a digital loyalty program that allow PM USA to successfully stabilize Marlboro. Following soft this in 2017, Marlboro's full-year, 2018 cigarette retail share of 43.1% was unchanged compared to its fourth quarter, 2017 share. As we discussed in the third quarter, we believe keeping Marlboro strong and relevant is important to the long-term profit maximization in cigarettes. This may mean that Marlboro retail share varies up and down quarter-to-quarter as we continue to balance momentum behind the brand and profitability. Building off the success of Points West Marlboro's limited time reward program in Texas PMUSA watch Marlboro rewards nationally this month with the goal of its digital leadership, brand engagement and Marlboro's already strong brand equity and royalty. Within the first 10 days of the program, 700,000 adult smokers, 21 plus, enrolled and entered nearly $1.5 million pack codes. In the super premium tobacco and mortar segment, Nat Sherman continues to deliver against its plan and we're pleased with its performance following the regional expansion of that Nat across the Western U.S. in 2018. In the fourth quarter, Nat had a 0.3 share in the cigarette category in states selling the product. The team continues to evaluate further expansion opportunities, which we will share at the appropriate time. In non-combustible products our businesses invested in the regulatory science to support the MRTP falling for Copenhagen snuff and in our commercialization plans for the IQOS' lead market. These are important steps on our journey towards tobacco harm reduction. USSTC will present the science supporting its application to the Tobacco Products Scientific Advisory Committee next week, and we look forward to engaging with the FDA on this application. In the smokeless product segment, USSTC generated adjusted operating income growth of 7.5% in 2018 despite slowing category volumes. We continue to believe that Smokeless industry volume is being affected by higher pricing and adult consumer movement among tobacco products, including e-vapor and other innovative products. USSTC has exciting plans for its portfolio in 2019. USSTC announces plans to expand skull long cut, cool experiment nationally. This offering provides adult dippers [ph] a flavor ford experience and furthers USSTC's strong position in the mint and wintergreen segment. In the second quarter, Copenhagen will open its first retail location in Nashville, Tennessee. The store will sell Copenhagen products and provide a unique opportunity to directly engage with adult tobacco consumers, 21 plus. Turning to our alcohol assets. Ste. Michelle's adjusted OCI significantly in the fourth quarter, so let me provide some additional information on these results. Results were negatively impacted by higher investments in marketing and sales, lower volume and inventory adjustments. As we discussed previously, the growth rate in the premium wine category has slowed and Ste. Michelle works closely with its major distributors to reduce trade inventories. In beer adjusted earnings from our equity investment in AB InBev were $200 million in the fourth quarter, which reflects Altria share of AB InBev third-quarter results. In the short time we've held an interest in AB InBev, there's been volatility in its earnings resulting from the mark-to-market adjustments for hedging of share-based payment programs. A decrease in AB InBev share price as occurred last year results in losses on these hedges which are reflected in our underlying results. For the full year 2018 Altria share these losses was $128 million. I'd like to provide some insight on the cost reduction program that we announced last month. To offset most of the interest expense associated with the debt incurred to finance the Juul and Cronos investments, in the fourth quarter, we announced a cost reduction program expected to deliver approximately $575 million an annual cost savings by the end of 2019. The savings from this program will ramp up through the year. This program includes third-party spending reductions across the business such as professional and consulting services, information technology and product research and regulatory investments. The program also includes workforce reductions of approximately 900 people, particularly within our support services. With that, we'll wrap up and Howard and I will be happy to take your questions. While the calls are being compiled, I remind you that today's earnings release and our non-GAAP reconciliations are available no altria.com. We have also posted today slides and our usual quarterly metrics which include pricing, inventory and other housekeeping items. On that page, we've added quarterly shipping days. NPM USA's menthol share to provide additional color around that part of our business. With that, I'll open up the question and answer period. Operator, do we have any questions?

[Operator Instructions] We will take questions from the investment community. Our first question comes from Steve Powers of Deutsche Bank. Please go ahead.

So, Howard and Billy, I guess my first question is just how secure you see your fiscal '19 volume outlook in cigarettes to be. And maybe to help with that, I was just wondering if you're able to decomposed some of the volume drivers that you provided as it relates to the fourth quarter, that down 5%. It was worse than the full-year run rate, so I'm just wondering what the contribution from maybe macro-elasticity factors the next -- which I'm assuming that includes excise taxes as well as manufacturer pricing. And the cross category movement would have been in the fourth quarter. And then I guess more importantly, looking at '19, where do you see within the context of those drivers, the potential improvement coming from?

Steve, I think, if I understand your question correctly, if you look at it as we progressed through the year, we did have to SET increases. One was in Oklahoma and the other was in Kentucky. And so that had an effect because that was represented about 5% of cigarette industry volume. So as you progress through the year, of course, you have the initial drop for the price shock and then it returns to elasticity as you move through time. I would say as we moved to this year right now, gas prices are a tailwind to the overall adult cigarette consumer. As we experienced, gas prices dropped, last year they were up 13% year over year and we've seen them drop as we progress into the first part of this year. So we should see that impact through time.

So the big driver of incremental potential improvement '19 verse '18 is really your gas price outlook?

That and the overall macro-economic tailwinds that the consumer is experiencing.

Okay, great. And I need to run the math, but with 15% to 20% category growth in e-vapor, the negative 4%, negative 5% category declines, you call it in core combustible going forward, I'm assuming some positive contribution from IQOS and heat-not-burn in your outlook. I guess my question is that you look forward five years from now, are you expecting market wide nicotine consumption to be higher or lower in the U.S. versus now and maybe by what magnitude? And I guess within that there's an implied question about what the expected interplay between e-vapor and heat-not-burn may be with Smokeless.

I think with regard to your question, our primary focus has been on estimating by individual category and we provided that information to you. I think with regard to heat-not-burn, I think it's clearly going to have an impact going forward on cigarettes and likely e-vapor, but I think that we have not really included that in our calculations and we're really waiting until we get some experience in the marketplace this year and certainly we can make adjustments to any of our estimates. But certainly, we believe that when we do get approval from the FDA to put IQOS in the market, it is an additional driver of growth in the non-combustible tobacco product segment.

And if I could do one more related to Juul and I greatly thank you for the insight you provided in your slides and on the call today with respect to Juul. But I guess it's kind of three-follow on questions now that you've opened up on Juul. I find myself a little bit greedy for more. So just based on your conversations with Juul management, recognizing that they're independent and private, I guess as we go forward, what level of incremental disclosure do you expect you'll be able to share over time, whether in a few weeks at Cagney or just in general? Question number one. And I guess within that, related to that, two follow ons. The first one is your fiscal '19 guidance assumes zero -- effectively zero EPS in cash contribution from Cronos and Juul. And I guess -- is that affirm estimate of break-even or you're simply excluding Juul and Cronos from guidance? Another way to ask that question is are you able to absorb volatility in Cronos, Juul contributions within the four to seven range or does that create risk of pushing you outside the range? And lastly, sorry, the five year kind of break-even I'm return rate, economic return that you called out on Juul basing on your expectations is that -- what are you seeing in terms of like cash coming back to -- is that a theoretical return or is that actual -- do you expect to receive cash in the form of dividends from Juul? So your cash breakeven over that five-year timeframe. Sorry for all the questions. Thanks.

Well, you're going to make us work hard this morning, aren't you? I'll take a crack at them and if I miss something, I'm sure Billy will jump in. So with regard to the disclosure, as you pointed out, given the time since the closing, we put together significantly more information and shared it today. And obviously, as we get further questions, we'll look for opportunities to share more relevant information with investors. And the other thing I would reference is that we expect at some point in the future, probably later this year, we will be accounting for the Juul investment following antitrust approval using the equity income approach. And when we do that, there will be more disclosure in our SCC documents. So that's I think, something to look forward to and we do expect antitrust approval during this year. The second thing is with regard to our statement about 2019 income; I think that what that really reflects is that with regard to Juul, we're kind of waiting before it gets reflected in our income based on the equity income method. So we thought on the side of conservatism that it made sense to not guess as to the timing of antitrust approval. And then the second thing I would say is on Cronos, obviously they're a publicly traded company and so you have access to what their current income is. And their income today is modest. The investment is really designed to rapidly accelerate their growth rate. And so we don't expect it to be a material contribution in 2019. With regard to the guidance range of 4% to 7%, that is designed as it's always been in the past, to be a wide enough range to take into account of the variety of changes that could occur, and that could reflect changes in our core business with regard to Juul or with regard to Cronos. So it's designed to reflect our best all in estimate of what could happen during the year. Then you asked a question about the five-year breakeven, and I think the way we calculated that; it was really taking the equity income we expect in five years tax affecting it and then dividing it by the overall investment in Juul. So it is an equity income return, not a cash return, although obviously by that point, given the significant level of income, we would expect to have some dividends as well.

The only thing I would add Steve, I think it's important to remember under both, Juul or Cronos as a business is growing and faces significant opportunity to expand outside of the U.S. with huge growth potential. That reinvestment in the business for a period of time is appropriate.

Yes, that's absolutely right and I think we agree with the other Juul investors that its growth prospects are so strong that now's the time to invest in ultimately driving top line growth.

Our next question comes from Pamela Kaufman with Morgan Stanley. Please go ahead.

I was just hoping to get a sense for how you were thinking about Juul's mid-term growth outlook, just given that the company is removing flavors from retail channels and then what the impact is on the economics of the investment if the category grows faster than 15% to 20%, why is 15% to 20%, I guess the right forecast and what assumptions feed into that?

Sure. I think with regard to the mid-term forecast, one of the reasons why we selected a five-year period to estimate the growth rate of the e-vapor category and Juul as a significant driver of that growth is I think there is a bit of uncertainty as to whether or not there'll be a slowdown in growth in the next year or two as the industry works together with the FDA to drive down huge usage. And so I think that is a to be determined, but I think even taking into account the fact that there could be some impact in the short run. I think we're confident in that long-term growth rate that we forecasted. It may just be that they're slower growth early on and more rapid growth later on. I think with regard to the significant action Juul took in removing their flavors from retail, I do expect that that is going to have some impact on their overall growth rate this year. But I think we also believe that adults will continue to buy the other flavored products at mainstream retail stores and, of course, with heightened age verification, those other flavors are available to adults on the Juul website. So we still think they have pretty good growth prospects for this year even with those actions. I think we're pretty comfortable with our forecasts of 15% to 20% compound annual growth rate over five years. And certainly, with that level of growth, we believe the investment in Juul is additive in a significant way to our income growth. Your question is if it grows faster, is it still additive to our income growth? And I think that it can certainly grow faster than 20% and still be additive based on our estimates. I suppose there is some genetically higher growth rate, but that may not be the case, but we're pretty comfortable that it's under a whole range of scenarios that financially, this is a good thing for our income growth.

Okay, thanks. And then just with respect to Juul's international opportunity, how do you think about the impact of some of the differences in the regulatory backdrop just given the nicotine caps and international markets and then just lower barriers to entry for competitors in the category of relative to the U.S.?

I think that when you look at various international markets, there are different regulatory requirements that have to be navigated and frankly, there are different consumer expectations given differences between the cigarettes in those markets that are purchased by adults backhoe consumers over there compared to the U.S. So both of those things need to be navigated successfully in order to have a similar level of success internationally to what Juul has had in the U.S. We are a highly confident that Juul has the technical capability, the current products and the products in the pipeline to navigate those differences and have strong success overseas. So I think that frankly, that there certainly is some work to be done there, but I think that they are already well on their way to having done that and I think that we're encouraged by the products they have in their pipeline.

Our next question from Vivien Azer with Cowen. Please go ahead.

So, my first question is for you, Billy. You called out like the favorable macro backdrop in terms of your comfort around the 3.5% to 5% declined for 2019. I have a hard time reconciling that with the pretty consistent downgrading that we're seeing at the low end of the category, where deep discount is consistently gaining share at the expense of discount. So can you help me reconcile that? That's my first question. Thank you.

I think if you think about the economic recovery, it's a bit uneven. So it's a bit lumpy. So those consumers that were engaged in the branded discount as we've increased the margins and profitability of our brand specifically you can see some down trading that takes place because you can even think of the adult tobacco consumer with uneven economic recovery. Those at the lower end haven't recovered to the same extent as those at the higher end of the category and so that's where you're seeing that trend within the discount category as the branded discount brands are taking an increased profitability and margin

And you don't think that there's a risk over time that that starts to kind of bleed up into the branded premium segments?

Yeah, based on our consumer research, Vivien, because of that uneven, we keep an eye on that group of consumers at that lower end to make sure that we feel comfortable with where we're at. We feel very strong with the premium segment. I think that's reminiscent. You can see with the flatness of the overall discount category and just churn within. So we don't see any signs at this point that would point to it moving up to the premium segment.

Vivien, I'd refer you to the last couple of years. You know, what has really happened is you've had particularly over the last year, a pretty nice performance by the premium brands including Marlboro, but you've had -- and you've had a flat overall discount category from a market share perspective. But there's been significant movement from branded discount products to deep discount products. And of course, there's certainly market action that could be taken to try and address that, but given the nice margins that we have on L&M, I think that we're comfortable with the current trends in the marketplace.

My second question is around kind of the longer-term outlook for cigarette industry volume declines of 4% to 5%. It certainly makes sense that if you're expecting a deceleration in e-cig, it shouldn't be like incrementally that much worse for the cigarette category. That being said, I am curious to hear your thoughts around dual use within that e-cigarette revenue pool. Because if you've got dual users today that ultimately migrate to single category use on the e-cigarette side, that would suggest that there would be some incremental degradation on cigarettes if I'm thinking about it right. So I'd love to hear your thoughts on that. Thanks.

I think you have to consider, take 2018 as a guide. You had very substantial growth in e-vapor volume and it was both people converting completely from cigarettes to e-vapor as well as a substantial amount of dual use as people tried e-vapor and in many cases, Juul and are deciding whether to continue to dual-use or convert completely. So I think that 2018 was a pretty active year for e-vapor category growth. And, of course, as we know, the decline rate of the cigarette category was only 4.5% and that was elevated 0.5% by increasing gas prices. So, I think it shows you that the cigarette category decline rate is pretty persistent and it can withstand a fair amount of growth from e-vapor. So we continue to be very comfortable with our forecasted decline rate of the cigarette category over the next five years of 4% to 5%.

And I think it's important to remember, Vivien in the base 3% to 4% that was historical. There was always 1% of that that was included in sector decline of consumer doing exactly what you're saying, either replacing certain occasions or converting completely as Howard mentioned, so that if you will already in the 3% to 4% that was in the historical run.

Our next question is from Chris Growe with Stifel. Please go ahead.

Just to follow on Vivien's question there, you've mentioned this 1% is point drag on volume for moving across categories. And I think you said it was around a 1.4% drag on the category from e-vapor in 2018. That category was also pulling from smokeless tobacco as an example. I'm just curious how much of overall volume effect it might've had on your business, like how much did it pull from smokeable? Thank you. Define that as well as smokeless. I think we're seeing some effect in that category as well.

We don't have an exact number for you, but that's something that we're providing the future. But you're right. I think you also had dual usage between smokeless and the e-vapor category and so you're right at that. That is also pulling some of those consumers because the e-vapor experience was closer to what they were transitioning from being an inhalable type product versus a smokeless product.

Chris, I would also say on smokeless, you've got two things going on, which is I do think you have some consumers that were smokeless users that are moving into e-vapor. Probably the bigger impact on the smokeless growth rate is that in the past a lot of cigarette smokers were using smokeless as an alternative product, and I think a fair number of them have now said, "Boy, with the presence of Juul in the marketplace, I've got a closer experience to my cigarettes and smokeless that's attractive to me." So I think that has also contributed to the decline in the growth rate of smokeless.

And as you think about your outlook for them that through 2023, do you assume like e-cigarette starts to see excise tax is implemented? Is that a factor in that model? And then would you just assume from a high level that Juul grows in line with the category over that time?

Yes, I think we're comfortable with that growth rate over a variety of excise tax assumptions. But I would tell you that I believe that it's a reasonable assumption to believe that you'll get some incremental excise taxes on e-vapor, but then it will not be a significant acceleration of what's happened over the last few years. And I think that the argument that's been made at the state level about the fact that given the potential for harm reduction that's offered by e-vapor, that that is not a place where significant excise tax increases should be put in place. I think that's been fairly persuasive and I would expect it to continue to be. I think you had a second question. Remind me of it.

And then, just if Juul would grow in line with the category, would that be your operating assumption in that 5-year model?

Yes, I think our assumption is that the Juul is going to grow faster than the category. I mean, if you look at 2018, Juul growth represented more than the growth in the category, and I think there's probably -- as probably likely, that it may moderate from being the whole growth of the category going forward but we would expect it to be growing at a much more rapid rate than the other brands in the category.

Our next question is from Michael Lavery with Piper Jaffray.

On you decomposition on Slide 6; you show up modest deceleration in your projected or estimated impact from elasticity but it looks like that -- your pricing has actually accelerated in '18 versus '17; how do you reconcile that?

Yes, I think when you look at that Michael, you got to take in all -- the consideration of all factors. So you got to take in the total change to the consumer. So you have SET differentials that get annualized then across time, so that price elasticity is not just manufacturer list price, it's increase in list price to the consumer.

And on IQOS, can you just specify what it is that you are assuming in guidance? And would it be right to think you're not counting on any revenues until you get approval but that there are some costs you are factoring in and then would there be incremental spending if revenues come; how should we think about that?

We are optimistic and hopeful that IQOS is going to get approved fairly soon and so we've got out a full rollout of IQOS included in our guidance.

So you did also mention both, a lead market but also stores in multiple cities which sound a little bit broader and faster, and maybe a bigger launch then you've hinted at in the past. Have you expanded your plans? And you also said when you were reading through that slide related to it, you said that you are establishing stores; are you doing that now ahead of approval? And how should we think about what your -- how your position is relative to that?

You were listening carefully. Yes, I think -- I don't know that it's a change in our plans but our belief is that IQOS is going to be quite a success and that after the lead market we'll be moving quickly to other markets. And what we have learned as we've been focused on gaining access to and establishing retail locations is that it's not something you can do overnight. And so we've made the decision that it's worth the incremental investment in order to line up those locations in multiple markets in advance. And obviously, as the time for the approval of IQOS drags on, it does cause us to incur a little bit of incremental expense but we think the upside from commercializing IQOS is big enough that we want to be fully ready the minute we get FDA approval.

And so you mentioned the Copenhagen store in Nashville, is that one you would be able to quickly repurpose as a dual brand outlet or would you want to separate those for brand identity and marketing purposes?

I think that something we'll consider long-term Michael. I think the opportunity in Nashville, that's the home of the manufacturing base. And so we think it affords our consumer a great opportunity to engage with the brand, and be right there where we're manufacturing the product. So we're really focused currently on the engagement with those adult dippers right there where the product is made.

One real quick last one; will you give the share gains in the U.K. and Canada for Juul? Is that also driving category growth or is it primarily market share momentum?

No, I don't know that I have a good answer to that. I could speculate but I will not.

Your next question is from Judy Hong with Goldman Sachs.

I wanted just a quick clarification, the category volume for e-vapor; for that you laid out on slide number 8. Is that equalized volume to cigarette packs or what is the --kind of -- how should we think about that relative to the cigarette volume?

I think Judy that short is trying to equalize across open systems in closed. So if you think about it that's the number of pods that are in the marketplace. If you think about the equalization to total cigarettes, you have to think about what's their pod equivalent of a cigarette. And so a pod equivalent to a cigarette we would estimate to be around one pod per pack of cigarettes.

So basically, if you -- so Juul at 0.5 million pods would be equivalent to roughly like 6% or 7% of the total cigarette volume equivalent?

Yes, that would be the case.

Okay. So the total e-vapor category today is about 15% to 20% of the total cigarette equivalent volume in your estimate just based on this math?

That's correct, Judy.

So I guess that seems like it's a pretty big number in the context of the cigarette category, and I guess I'm still a little bit confused as to why it's not having a much bigger impact on the total cigarette volume if the size of the e-vapor category is already 15% of the total.

I think you have to think about it Judy is, a base of that has been in place for quite a while; so if you think about the initial start because we're including open systems in this overall equalization. Open systems have been in place going back a number of years and I think that's the point I was trying to raise is, it's important to remember, within the cigarette category the historical decline rate of 3% to 4% included 1% that was moving to other tobacco categories. And so part of the historical decline already assume that there were going to be consumers progressing from cigarettes to other tobacco categories.

And then just going back to the international opportunity for Juul, I mean it sounds like based on the assumptions would imply that your revenue for international markets from Juul is going to be a pretty sizeable number at a margin that's also pretty attractive. So given some of the experience that we've seen where -- we've seen some bumps along the way for IQOS and other players that have launched in markets outside the U.S. I guess I'm just wondering what gives you the confidence about sort of the big revenue contribution and margin contribution in five years.

Yes, I mean -- Judy, I think the way I would frame that is, I acknowledged that there have been a number of products, particularly in the e-vapor category that have had some success, and then that success has fizzled. And so certainly that is something you have to be sensitive to but I have to point out that Juul's growth and success in the U.S market last year was unique, and first of it's kind compared to other tobacco products successes both in the U. S. and overseas. I mean the growth rate was dramatic, it represented the entire growth of e-vapor for the year and it dramatically reaccelerated the growth of e-vapor. So I think the reason that we have confidence that it's going to have more success in overseas markets over the next five years than some of the other products that have been introduced over there is because it had such dramatic success in the U.S last year.

And then my last question, just -- Billy, when you think about Q1 combustible or smokeable volume, am I right in thinking that if you layer in the one less shipping day and then I think you're lapping a pretty big inventory levels a year ago; so volume sounds like it could be down double-digits in Q1; is that sort of in the ballpark?

Judy, you know we're careful not to guide to the quarter level on volume but I think you're thinking about trade inventories that was a big component in the first quarter of last year so it's important to pick that up; so you're exactly right from that standpoint, it's important to consider how trade inventories were moving last year versus your expectations for this year.

Our next question is from Bonnie Herzog with Wells Fargo.

I had a question on your EPS growth guidance; you guys now see a wide range in 2019 but you stated back in December that you expected your EPS growth to be slightly below your long-term 7% to 9% growth algorithm. So just wanted to understand what changed or are you guys just being prudent with a wide range? And then I wanted to confirm your guidance assumes no buybacks this year but just kind of wondering if there is a chance that could change or maybe what needs to happen to get you back in the market to buy back your stock?

I'll answer the first part of your question and then I'll turn it over to Billy. The short answer on December versus today is nothing changed. We viewed 4% to 7% guidance is slightly below the 7% to 9% long-term trend, and you are right that it is a three percentage point wide range but I think that -- we think it's prudent given some of the increased volatility we've seen in our income in large part driven by volatility in [indiscernible] income stream that in order to give the investment community the right confidence in our guidance that a bit of a wider range is prudent and appropriate.

And as far as share buyback Bonnie, remember, we had about $350 million; I think it was $345 million to be exact as we ended last year in the current program. And we expect to complete that by mid-year, that is unchanged; and then we'll assess the situation and come forward if anything is appropriate after that.

And then I had a question on Marlboro; you guys successfully stabilized Marlboro share in 2018. So as we look forward, do you believe it's realistic that Marlboro could take share in a shrinking volume pool, especially given your new Marlboro Rewards program? And then I also wanted to ask about the coupon inserts for Juul and Marlboro packs? Can you guys help us understand the strategy with those and how we should think about cannibalization of Marlboro versus maybe the opportunity to take share from competitors sick brands?

Sure. I think with regard to Marlboro, you're right, we did stabilize this year and we think it's got very strong momentum and that will continue into this year. But I also think you have to consider the fact that our objective in the smokeable segment is to maximize income, and so I think you will see us balancing our desire to maximize income against the momentum of Marlboro, and we did that this year and I think we'll continue to do it. I think with regard to your question about putting Juul inserts on our cigarette packs; I would first of all say that I think the vast majority of the support that we will provide to Juul is really going to be brand agnostic or company agnostic with regard to how it helps Juul source volume. So if you think about them putting Juul into a much better display space of retail and having higher visibility or you think about them potentially gaining access to some of our other services. I think most of those services are not going to have a greater impact on our brands than they would on our competitor's brands. I think you could particularly with the onserts; obviously, we can only put onserts on our packs, they don't go on competitors packs. So, theoretically I guess it could result in a bit more volume coming out of Marlboro but I think that is unlikely to be the case. And I say that for really two reasons; I think there is already very high awareness amongst all cigarette -- adult cigarette smokers and frankly, all Marlboro smokers about the availability of Juul. So I think that a lot of that awareness has already been established, I wouldn't expect a big incremental uptick from those onserts. And then secondly, I would point out that I think Juul tends to get more of it's growth from the 21-year old to 29-year old cigarette smoker than it does from the 30-plus cigarette smoker. And if you think about it, I think as we've communicated in the past; Marlboro share of those 21-year old to 29-year old smokers is about equal to it's overall share but there are several other cigarette brands that are overdeveloped amongst 21-year to 29-year olds such as Newport, Camel or Natural American Spirit that frankly, might actually give you more volume on a relative basis than Marlboro.

That's really helpful. My final question for you guys is about the FDA. I was hoping you guys could give us some color from your perspective on the FDA's recent commentary surrounding harsher [ph] e-cig regulation. Was it a surprise to you that they are now putting threats out there, especially after your investment in Juul? And then wondering if you've spoken to them recently and what's your sense of how they're thinking about your ownership stake in Juul as well as some of the initiatives Juul's working on to help reduce youth [ph] use e-cig to use? Thanks.

Sure. I don't think we've been surprised at FDA is concerned about youth usage of e-vapor products. I think as you know, both Juul and Alfie, we were in talking to them in November. They had a high level of concern then, we shared that concern and we've been interacting back and forth with the agency on the actions we're taking to try and reduce the levels of youth usage of e-vapor products. And frankly, I think their concern and their focus on the industry taking significant steps to drive down youth usage is appropriate and justified. And I think that we agree with Juul that we need to take significant action. I think Juul has already taken significant action, but we also agree that more must be done. So I think that our view is that it's important to drive down youth usage in order to preserve this opportunity for adult cigarette smokers to be able to switch to a very compelling non-combustible product. And I think we will ultimately achieve both. I think will drive down youth usage and still make this available to adult cigarette smokers as an alternative. And I just think we have some work to do and we're fully prepared to engage on that.

Our next question comes from Adam Spielman with Citi. Please go ahead.

Thank you very much. I suppose to kind say thank you for providing so much more data than usual. It really is appreciated. So thank you for that. I have two quick questions. I hope they're quick. So if I take what you've said about the impact of basically the growth of Juul, this is Slide 8, and equate that to cigarettes, it looks like the Juul has grown about 0.4 billion units, which equates essentially to a full percent market share growth. And that's true for the whole e-cigarettes or e-vapor category. And yet you've also said that the impact of the growth of e-vapor on cigarettes is about 1.3%, 1.4%. So this is outright [ph], we are thinking about it, but basically two-thirds of vapor growth is incremental. Is that how we should think about it? And I guess if that is right way of thinking about it, where is that increment coming from? Do you think it's mostly coming from people in their 20s or what? So that's one question.

I'm not sure I'm tracking exactly with your math, but let me try and answer the question in a more general way, which is, you're right about the impact that we think it's having on the cigarette category. But beyond the impact that it's having on the cigarette category, we think it's also sourcing, as we said earlier, from the smokeless category probably from the cigar category as well. And we also think that with all the trial that's going on, part of their volume is coming from increased usage occasions by a variety of adult tobacco consumers. And that may settle out over time. I think that given the increased availability of the product, I think you have a lot of people that are trying it while still using their existing tobacco product and I think over time they're going to make a decision and they'll either switch completely to Juul but I think you saw that in the 2018 number as well.

Fine. I mean, just to -- I mean, also how relevant it is but my math is basically, there was 400 incremental million pods of Juul sold in 2018 and that equates to roughly 4% of cigarette market if one pod is one pack of cigarettes. So that's how I was thinking about it. But the second question is really coming back to this question about the onsets and the inserts on your packs. I mean, can you confirm that Juul will be able to put or maybe deny, that they'll be able to put coupons. So the might be, I'm making this up here, but let's say $5 off advertising to somebody who buys a pack of Marlboro. So, is that right? That they'll be able to keep on whether it's just market raise awareness?

Yeah. I thinking you're thinking about it right. I think it's important to remember what Howard said, if our Marlboro consumer, so take the one person that receives that in their pack, if they have a decision to switch, they would have switched anyway. And so we would want them to switch to the Juul product, which we have an investment in versus searching for other alternative products out there. So the awareness is already high. If the individual is making the decision to switch, we want them to switch to Juul.

Fine. So, I understand that. And is that something you sort of been able to sort of validate with focus groups? Because to me, it's sort of kind of quite a thing that you're potentially offering your smokers let's say $5 off for sure.

Yeah, I mean, you are right that essentially we are cross-promoting, which is a fairly common thing and I think you may be thinking about the fact that we have a 35% economic interest in Juul and we have 100% economic interests in our cigarette business. And so that may be what's causing you to be surprised we would be willing to do this. I think I would frame it with a couple of thoughts. First of all, we think that even with the impact that the Juul could have on the overall volume growth and potential profit growth from our cigarette business going forward, even if it does impact it, we think when you take the sum of our of our cigarette profitability growth and you combine it with the economic contribution from Juul over the next five years, we think that's a net positive to us. And it's a net positive even if there's a bit more growth in Juul coming from our brands than from the competitors. So that's the first reason. The second reason is if you look at it, we four, frankly I've been with the company 26 years, almost my entire career. We have believed that our business would be better in the long-term if we could offer harm-reduced products that would represent attractive alternatives to our adult cigarette smokers to switch. And we've invested billions of dollars in it and lots of effort and ultimately, until December of this year, we really didn't have the product portfolio to fully achieve our harm reduction aspiration. And the opportunity to invest in Juul, I think really makes that harm reduction aspiration a reality. And if you look at it, we've got IQOS and the heat-not-burn category, the number one product and brand in that category. We've got Copenhagen and Skull and the oral tobacco products category and we had a hole in the e-vapor category and we've now filled that with our 35% economic interest in Juul. So I think that we are finally going to be able to achieve our harm reduction aspiration. And I think we can do that over the next 10 years and still deliver our long-term 7% to 9% EPS growth algorithm and give 80% of that adjusted EPS back to shareholders in the form of dividends. And I think our ability to achieve both harm reduction and secure our long-term financial performance was enhanced by the investment in Juul.

Thank you very much for those answers. Kind of just very quickly ask you. And have you actually done focus groups that are found out what might happen if you put coupons or other material in your cigarettes packets?

We've done a variety of work to understand the interaction between cigarette smokers and Juul. I don't know that we've done something specifically to what you're referencing, but we think we have a pretty firm understanding of what the interaction between the two categories is.

Our next question is from Nick [ph] with RBC Capital Markets.

I'll try to make this quick because I know we're going a little long here. How would you -- obviously a lot of decisions had been made, a lot of portfolio transformation. I'm just curious where the wine business fits into kind of your vision of the future of Altria. The second question is just on the pricing. I mean, very, very strong, at least relative to what we were looking for. Maybe you can provide some context around that. Was that the loyalty program kind of making you a little bit more efficient in terms of promo spend? And then the third is just on Cronos. Is this a kind of a platform, a strategy, meaning you will look to get into all types of products, or is this going to really be just focused on your existing categories? Thanks.

I think with regard to wine, I don't know that there's a real change there. I think that we have long said that we very much like the wine business and we are committed to returning it to strong income growth. But we've also said that it's not core like the rest of our tobacco businesses are. And that's been the case for quite some time and there hasn't been a change there. So we remain committed to running that business well. It's had a bit of a downturn over the last two years, but we're confident that the employees there have strategies in place to turn that around. With regard to Cronos, I think that you shouldn't assume that our existing product portfolio at Cronos is where we're going to stop. I think that both we and Cronos think there are opportunities really across the world in a variety of product categories, both recreational and medicinal that would involve them entering new product forms and developing new products and new product brands. I think it's early days there and we have really not restricted our thinking with regard to that. I think I'll hand over to Billy the question on cigarette pricing.

Nick, I would point you to, on pricing, it's the process of data analytics that we've enhanced here that allows us to be more efficient and effective. The way we think about the total value equation is specifically the promotional piece that we run at retail, so that drives the overall price realization up through time.

Thank you. At this time, I would like to turn the call back over to Ms. Paige Magness for closing comments.

Thank you all for joining our call this morning. If you have any follow-up questions, please call us at investor relations. Thank you.

Thank you. This concludes today's conference call. You may now disconnect.