奧馳亞 (MO) 2008 Q2 法說會逐字稿

Good day and welcome to Altria Group second quarter 2008 earnings conference call.

Today's call is scheduled to last about one hour including remarks by Altria management and a question-and-answer session.

(OPERATOR INSTRUCTIONS) Media representatives on the call will also be able to ask questions following the conclusion of questions from the investment community.

I would now like to turn the call over to Mr.

Cliff Fleet, Vice President Investor Relations for Altria client services.

Please go ahead, sir.

Good morning and thank you for joining our call.

This morning we will discuss Altria's second quarter 2008 business results.

Our remarks contain forward-looking statements and projections of future results and I direct you to the Safe Harbor statement at the end of our earnings release for review of the various factors that could cause actual results to differ actually from projections.

As a result of the spinoff of Philip Morris International earlier this year, our reported results reflect PMI as a discontinued operation for the second quarter of 2007 and revenues and operating companies income for PMI are, therefore, excluded from Altria's continuing results.

For a detailed review of Altria's second quarter business results, please review the earnings release that is available on our website, Altria.com.

Please note that in this morning's call, we will only be discussing the second quarter business results, and we will not be discussing the status of litigation.

I would now like to turn the call over to Dave Beran, Altria's Executive Vice President and Chief Financial Officer.

Thanks, Cliff.

Good morning.

As you have seen from our press release, Altria reported very good business results in the second quarter.

Altria delivered strong earnings per share growth with solid operating companies income performance from PMUSA and John Middleton.

Altria reported diluted earnings from continuing operations of $0.45.

Excluding special items, Altria delivered strong adjusted earnings per share growth from continuing operations up 12.2% to $0.46, primarily driven by higher operating companies income and lower general corporate and interest expense.

For the first half of 2008, Altria's adjusted diluted earnings per share from continuing operations increased 10.8% to $0.82.

Altria is reaffirming that its full-year 2008 guidance for adjusted diluted earnings per share from continuing operations will be in the range of $1.63 to $1.67.

This represents an earnings per share growth rate of 9% to 11% from an adjusted base of $1.50 per share in 2007.

While our first half results were at the high end of our earnings guidance range, we are taking a measured approach to the second half of 2008 as two factors could potentially impact our ability to exceed our earnings per share guidance.

The factors include higher than expected inflation, which impacts PMUSA's resolution payments and input costs, as well as higher than expected cigarette industry volume declines.

Even with these two factors, we remain confident that Altria will meet its financial objectives based on the strength of our businesses and a history of delivering business results in challenging external environments.

This quarter Altria benefited from a accelerated cost savings generated by its previously announced corporate restructuring.

Corporate expenses declined $43 million in the second quarter to $73 million, which should be the approximate run rate for the rest of the year.

Altria expects to realize $250 million in annual savings beginning in 2009 as a result of the corporate restructuring.

Altria also returned a substantial amount of cash to its shareholders in the form of share repurchases and dividends.

Altria commenced its stock buyback program and repurchased approximately $1.2 billion of its stock.

We repurchased 53.5 million shares during the quarter at an average price per share of $21.81.

Additionally, Altria declared a quarterly dividend of $0.29 per common share paid to stockholders of record as of June 13, 2008.

This equates to approximately $600 million in dividend payments.

Combined, the stock buyback and dividends totaled approximately $1.8 billion.

This represents over 4% of Altria's June 30 market capitalization.

Now, let's discuss PMUSA's second quarter results.

PMUSA's second quarter revenues, net of excise taxes, increased 3.8% to approximately $4.1 billion.

Excluding the $107 million in revenues from contract volume manufactured for PMI, PMUSA's revenues net of excise taxes increased 1%.

PMUSA's operating companies income increased 33.2% to approximately $1.3 billion, due to lower pre-tax charges related to the closure of the Cabarrus, North Carolina cigarette manufacturing facility, as well as lower wholesale promotional allowance rates.

The positive impact of these factors on PMUSA's operating companies income was partially offset by lower volume, increased resolution expenses, and costs related to the reduction of contract volume manufactured for PMI.

Adjusted for items related to the Cabarrus facility closure, PMUSA's second quarter 2008 operating companies' income increased by 3.8% to approximately $1.4 billion.

PMUSA's adjusted OCI margins increased 90 basis points to 34.7% versus the year-earlier period.

Margin improvements were driven by lower promotional spending and SG&A cost reductions.

PMUSA's domestic cigarette shipment volume of 43.6 billion units was 4.5% lower than the prior-year period.

But was estimated to be down approximately 3.5% when adjusted for changes in trade inventories.

PMUSA's premium volume mix increased 50 basis points to 92.9% versus the year-earlier period.

In the second quarter, PMUSA estimates that total cigarette industry volume declined by approximately 4%.

For the first half of 2008, PMUSA's domestic cigarette volume of 83.7 billion units was 2.9% lower than the prior-year period, but was estimated to be down approximately 3.5% when adjusted for changes in trade inventories.

For the full-year 2008, PMUSA now projects a total cigarette industry volume decline of approximately 3 to 3.5%.

PMUSA is also revising its estimated long-term cigarette industry decline rate to a range of 3 to 3.5%.

These revised industry decline rate estimates reflect PMUSA's current assessment of business conditions, which include economic conditions, cigarette excise tax activity, adult consumer activity across multiple tobacco categories, and trade inventory changes.

Retailers appear to be carrying lower levels of cigarette inventories, which may be due to increased carrying costs for inventoried items such as fuel and cigarettes.

With over 400,000 stores selling cigarettes, this trade inventory reduction and its impact on industry volume estimates is difficult to measure precisely.

Industry volume estimates are very sensitive to these trade inventory movements.

The average cigarette state excise tax at the end of the second quarter was approximately $1.10 per pack, which is in line with PMUSA's 2008 forecast.

To date in 2008, five states have increased their cigarette excise taxes with an average increase per state of $0.89 per pack.

In a highly competitive environment, PMUSA's retail share grew a half a share point to 51% in the second quarter, driven by Marlboro.

Marlboro increased its retail share by 0.8 of a share point to 41.8% as the brand continued to benefit from investment spending that PMUSA made earlier this year.

Price gaps between Marlboro and the lowest effective priced cigarettes remained relatively stable at 43% in the second quarter.

Marlboro's strong retail share gains were partially offset by share losses for Virginia Slims, while Basic and Parliament's retail shares were essentially unchanged versus the prior-year period.

The discount category remains relatively stable.

Its second quarter retail share was unchanged versus the prior-year period.

PMUSA continues to invest in the development of adjacent smokeless products and test markets both Marlboro Snus and Marlboro MST.

PMUSA is pleased with these learnings and is incorporating them into future plans.

Let me briefly update you on PMUSA's cost reduction initiatives.

PMUSA has delivered approximately $25 million to date against the $300 million in additional SG&A reductions announced in March of this year.

In the past 18 months, PMUSA has delivered a total of $325 million in SG&A cost savings, and the company remains committed to achieving the additional $275 million by 2011.

PMUSA's manufacturing consolidation plan is on schedule and within budget and the company plans to close the Cabarrus manufacturing facility by year-end 2010.

PMUSA continues to transition its infrastructure to deal with the effects of the removal of the contract cigarette volume manufactured for PMI.

PMUSA expects this volume removal to be completed by the end of October 2008.

This transition negatively impacted cost by about $30 million in the second quarter and approximately $50 million in the first half of 2008.

PMUSA expects total 2008 costs of about $100 million, and the company continues to seek ways to reduce this impact.

Overall, PMUSA had solid income performance, their cost reduction efforts are on track, and Marlboro had strong retail share gains in this very competitive quarter.

Now, let's turn to John Middleton's results for the second quarter.

John Middleton had strong business results.

The company delivered $50 million in operating companies income and the company grew its total cigar shipment volume by 11% to 355 million units in the second quarter.

John Middleton is capitalizing on PMUSA's sales and distribution infrastructure and expertise to help grow Black & Mild.

At the end of the first quarter of 2008, John Middleton contracted to use PMUSA's sales force to represent Middleton's brands at retail.

In the second quarter, John Middleton saw the initial benefits from this representation as Black & Mild's retail product availability and visibility increased.

This contributed to Black & Mild's retail share and volume gains.

Black & Mild increased its share of the growing machine-made large cigar segment by 2.9 share points to 27%.

John Middleton will continue to focus on increasing product availability and visibility of its brands at retail as the year progresses.

Turning to our financial services business, Philip Morris Capital Corp.

reported $30 million in operating companies income in the second quarter, reflecting lower asset management gains and lower lease revenues versus the year-earlier period.

PMCC's results will vary over time as investments mature or are sold.

Overall, we are very pleased with Altria's strong second quarter performance.

To sum up, PMUSA delivered solid income growth and improved its adjusted operating margins.

Marlboro achieved record retail share results while lowering its quarterly promotional spending.

John Middleton delivered strong income, volume and retail share performance as Black & Mild benefited from PMUSA's sales and distribution infrastructure.

Our company's cost-management programs contributed to Altria's strong financial performance.

Altria's corporate restructuring program delivered significant cost savings and PMUSA reduced its SG&A spending.

These two programs combined contributed almost $65 million in savings for the quarter.

Altria commenced its share repurchase program and purchased shares for $1.2 billion, and finally, Altria reaffirmed its adjusted earnings per share guidance for the year reflecting our confidence in the strength of our businesses.

I am now happy to take your questions.

While the operator compiles the calls, I want to cover a few housekeeping numbers.

In the second quarter, Marlboro's net pack price in convenience stores was $4.31, and the lowest effective priced brand was $3 a pack.

CapEx was $40 million.

Depreciation and amortization was approximately $50 million.

Our second quarter MSA and quota buyout accruals were approximately $1.4 billion or $0.65 per pack.

Of the $0.65 MSA is $0.60 per pack and a quota buyout is about a nickel per pack.

Our cash balance as shown in schedule 8 declined because PMUSA made its MSA payment in the beginning of the second quarter.

This payment totaled $4.1 billion.

And finally, our second quarter tax rate was 36.8% and we expect a full-year tax rate of 37%.

Operator, do we have any questions?

Thank you.

(OPERATOR INSTRUCTIONS) our first question is coming from Nik Modi with UBS.

Please go ahead.

Good morning, guys.

Good morning, Nik.

Just a couple quick questions.

Just on the FDA bill given to the house, curious on your thoughts on the outcome, and then on the promotional environment, you seem to have gotten a materially better net revenue per pack realization in the second quarter but you only had part of the quarter with the price increase.

I'm just wondering if we're to expect that realization to improve in the second half of the year?

Thanks.

Okay.

Thanks for your question, Nik.

On your first question, as you know, Philip Morris USA has been a supporter of tough but reasonable federal regulation of tobacco products by the FDA.

And we think yesterday's vote by the House represents good progress.

And we remain hopeful that that bill can continue to receive attention during the rest of the session.

But given the calendar, and the many other issues pending before Congress, we just do not know the outcome at this point.

With regards to promotional activity in the second quarter, when we look at our own promotional activity, specifically I'll address all of our brands but specifically Marlboro, our promotional activity was less versus it was in the first quarter of 2008.

It was actually below what we spent in the second quarter of 2007.

And we can't say that across the board for all brands in the industry, it still remained a pretty hotly competitive environment with some major brands promoting at levels equal to or exceeding levels in the first quarter of last year -- excuse me, first quarter of this year.

But as we go look out into the future, we're looking at our business-- come back to -- we look at our business around the value equation.

So it's positioning of the brand, the product, the promotion and price is but one element, okay, of all of those elements working together.

And in the first quarter, we saw some opportunity, we went after that opportunity.

In the second quarter, you saw the benefit because we dropped-- we were able to drop our promotional levels, both on promoted units and price off, and saw the benefit of that investment spend in the first quarter.

And our spending will be going into third and fourth quarter, I won't go into it for competitive reasons, but we will continue to read the marketplace.

But what I can say is that despite lower promotional spending, Marlboro was able to grow share 0.8 of a share point.

Thanks for the question.

Thank you.

Your next question is coming from Judy Hong with Goldman Sachs.

Please go ahead.

Thanks, good morning.

Good morning, Judy.

A follow-up on the FDA question.

And my question really relates to some of the menthol provisions that were added to the original version, I'm just -- wanted to get your thoughts on how significant those provisions are, in your view, is my first question.

There was a lot of talk, there was a lot of talk early on about a menthol ban.

Neither the bill that passed the house last night nor the parallel senate bill contained such a provision.

So there's no reason for me to speculate on that.

And you're asking about specifics of these two-- of this legislation.

We are engaged in that process; we have good people on the Hill working on that process and you can see, by reading the bill, what specifics are.

But I would prefer to have that engagement with members of Congress and not discuss that in detail on this call.

Okay.

Dave, just looking at your industry volume decline outlook longer term now down 3 to 3.5%, a couple of questions related to that.

One is whether that changes your mid single-digit profit growth outlook long term, and then secondly, whether this sort of changes the way you look at the adjacent categories and perhaps expedite or increase your urgency to become a bigger participant in those adjacent categories where growth seems to be going, as well as looking at some of the cost savings opportunity more aggressively to perhaps offset a bigger volume decline?

If we use the second quarter as a proxy, and look at our assumptions for the second quarter, second quarter, the industry volume was down slightly more than we expected, but we delivered EPS growth on a six-month basis up 10.8%.

So when we look out into the future, we still haven't backed off our total shareholder return of 12% or better.

With regards to adjacent spaces, next to cigarettes, that's one of the levers that we talked about in our road show.

And you saw it with us getting into the cigar business with John Middleton, and had good results this quarter, and you see it with our test markets, both on Snus and moist snuff.

And I go back to the mission of Altria, okay, part of our mission is to make sure that we're financially disciplined.

Make sure that we're financially disciplined.

And right now, when we look at where we are, and the learnings that we're getting, we feel quite comfortable that we can hit the targets that I've given today, and continue on a path to take those learnings and then, when we think we have it right, okay, to take further actions.

But you're right, we are interested in those adjacent spaces.

That's why we have activity there.

Okay.

And my final question, Dave, just in terms of your full-year guidance for this year, in the last conference call, you talked about the growth being more weighed towards the second half of the year, and clearly the Q2 actually I think came in better than expected.

So my first question is what drove the Q2 results to come in better than when you had anticipated?

And then secondly, if you could elaborate a little bit more on the inflation outlook vis-a-vis the MSA accruals as well as some of the other cost increases that you're looking at that could potentially be more of a headwind in the second half of the year?

Okay.

When we look at the second quarter, we were actually pleased to get more cost reductions, both at the corporate level, and in our G&A functions.

The process that we put in place, we've had it for a number of years, that we have a well-thought-out process on how we go about looking to take out infrastructure that can give us cost reductions, but not do anything to impact the future of the business.

So in the second quarter, we were able to accelerate that.

Now, when we look out into the third and fourth quarters, the number 1 potential impact could be inflation.

Yes, we've seen fuel prices come down somewhat over the last two weeks, but inflation is still running at a level that is higher than we have seen for quite some time.

And the way the inflation works in the MSA, it's basically what the index, the CPI index is on December of 2009, so it's not the average -- excuse me, December 2008.

It's not the average year inflation, it's December 2008 over the index December 2007.

And in the past, over the past years, that number has fluctuated, depending on what happens during the course of the year.

We actually took our full up in the second quarter versus the first quarter, and we're monitoring the overall inflation rate as the year progresses.

The other place that the -- really the petroleum costs hit was in the area of leaf.

And because it hits -- it impacts fertilizer costs that farmers use to grow our product, and diesel fuel.

So we actually, back in the second quarter, built in inflation adjustments and also adjustments for propane prices for our farmers, and that should be hitting us in the second half of the year.

But typically, when we look at our overall materials cost, that's the cost of doing business, and but for those reasons, I feel quite comfortable maintaining our guidance at 9 to 11%, but not taking up at this time.

Thank you very much.

Thank you.

Thank you.

Your next question is coming from Christine Farkas with Merrill Lynch.

Please go ahead.

Thank you very much, good morning, Dave and Cliff.

Good morning, Christine.

A couple of questions for you, Dave.

Can you comment on what your underlying margins at PMUSA would have been or how much they were impacted by the contract volumes this quarter?

Or the lack of the contract volumes?

The -- well, two things, okay.

When we look at the costs that are associated with the contract volume, we're reducing our overall volume that impacted cost approximately $30 million.

$30 million in the second quarter.

Because we can't pull cost out quick enough because we have to shut down facilities, okay.

And that's the -- and we expect approximately $100 million for the total year 2008.

Now, the asset impairment charge in the second quarter was $35 million.

Okay, now, that's helpful.

The operating number, the $30 million is what I was looking for.

That's great.

A question on your outlook of the volumes being down 3 to 3.5% for the industry, and you commented on changes at retailer inventories, certainly that makes sense for this year or for the next few months as retailers reduce their inventories but I suspect they cycle that at some point.

So beyond '08 or part of '09, is your outlook more about the excise tax environment and cross-category behavior?

The way we kind of predict what will happen or make estimates what will happen in the future is basically what has happened over the last three to four or five years.

But, yes, I would say that if the economy, if the economy continues to go down, there will be upward pressure on the states to raise excise taxes.

And that's reflected -- it's reflected in our thinking but also when states raise excise taxes by sharp amounts, and this year even though we're on track with the average state excise tax position, it was made up a little bit differently.

Five states took up excise taxes on average of $0.89 per pack.

And what we saw happen is -- now, they're very small categories, but in a number of states, increase in other categories' performance, such as roll your own and small cigars, because they have a tax base that is vastly different than that of cigarettes.

And so it really brings up another question about the overall tax policy among the categories.

But they're tiny, okay, they're tiny categories.

For instance, roll your own probably -- well, based on tax records, the first five months is about 4 billion units.

Small cigars approximately 2 billion units.

But they were growing at rates about 18% off a very small base.

So we saw that taking place in a couple states where we saw these large increases.

So that's also has come into our thinking as we look down the road.

Okay.

And then my last question, Dave, with respect to the overall pricing environment and your comments were clear about that, but can you comment if at all there were pockets of extra promotional activity?

For example, maybe in Menthol or certain regions or geographies across the U.S.

where you saw heightened activity?

We basically saw, when we look at the total U.S., and I go back to remarks that we made back in the road show, about how Marlboro has a national platform, but then we do have tools at or disposal to go in where we see pockets of competitive activity, our competitors have a different brand development.

We have one that's strong on the West Coast, one that's strong on the East Coast, and we saw with their major brands competitive activity not changing a lot from what we saw in the first quarter.

Now, on some of the lesser brands, yes, less promotional activity.

On the major brands, no.

Okay.

That's helpful.

Thanks a lot.

Thank you.

Thank you.

Your next question is coming from David Adelman with Morgan Stanley.

Please go ahead.

Good morning.

Good morning, David.

A few things I wanted to ask.

Dave, first, your targets for consumption decline in the U.S.

cigarette category this year entail a fairly material improvement from the first half pace.

And I'm just curious why do you think that would occur?

We think that when we go back and look at consumption last year, we saw a rather steep decline in the first quarter.

It moderated in the second and third quarter.

And then the decline got steeper in the fourth quarter.

It moderated in the first quarter this year, was relatively the same in second quarter or moderated a little bit, and as we look out over the third and fourth quarter, at this point, we don't believe that the fourth quarter will have the same sort of decline that we saw in the fourth quarter of last year.

Okay.

And the numbers in the release, the 4% number, that's a consumption number you're speaking to?

Is that correct?

That's a consumption number.

Okay.

Okay, and that's based on our read of the shipments versus the overall change in inventories.

Okay.

Both at wholesale and retail.

Okay.

And then secondly, Dave, I'm curious about your reaction to the observation, particularly given some increased pace of movement within tobacco but outside of the cigarette category that you're not moving more aggressively with respect to moist smokeless tobacco in particular and perhaps Snus.

The test market, I think in Atlanta on moist smokeless started last October, it's almost a year ago, it really hasn't expanded materially, and I just wonder, the outside perception is that there's a lack of urgency on those types of efforts because you're not moving -- it would appear with great speed.

So I'm just curious about your reaction to that observation.

Yes.

And I would not characterize it as a lack of urgency.

I would characterize it as we want to make sure that we do this in a financially disciplined way, and when I say financially disciplined, that we go out, okay, we have tested all elements of the overall value equation behind both Snus and moist snuff, and we got it completely right.

Then we will incorporate that into our plans.

And right now, okay, right now both of those initiatives are investment spend for us.

And our goal was to take it from investment spend to being -- to making a profit.

But right now we are in these test markets, or I call them learning laboratories, to make sure we get it right.

Does the recent accelerated downtrading in moist smokeless make that category any less attractive to you?

The -- could you repeat your question?

Sure.

There's been a reacceleration in the consumer downtrading to price value products within moist smokeless tobacco, and I'm just curious whether that dynamic makes the category or your perception of the opportunity any less attractive than you might have thought six months or a year ago?

No.

No, it has not.

Okay.

And then two other things I wanted to ask, Dave.

One on the FDA, how do you conceptualize two particular risks, one is a follow-up to Judy's question, the risk with these revised provision to your Menthol franchise long term, and secondly, the risk if a real antitobacco zealot gets the roll of running the FDA's tobacco effort under this legislation?

As I said with Judy, okay, you're getting into specifics.

This is -- the first step is get the legislation passed, and then once the legislation is passed, actually go through the rule-making from the regulatory body.

And we support, okay, we support this regulation for all the reasons we have quoted over the past seven years, and, yes, there's risk anytime the business or the external environment changes.

But we built an organization and infrastructure up over the years that has enabled us to continue to be successful despite the changing business conditions that might present -- that might be presented to us in the future.

And this is but one of those.

Okay.

And then one last question.

Dave, on the Capital Corporation, there have been some adverse legal rulings on the [silo lilo] structures, and I realize that your leases are somewhat different than those, but can you frame for us what the, if all of those decisions ultimately were adverse to you, what your maximum tax liability associated with that would be?

Yes, thanks for the question.

And no, I won't frame what it will be in total because right now, as we look at this, the -- we believe our facts are different than the facts of these other cases.

As you know, we actually went and paid approximately $150 million in taxes on, I think it was the time period in '96 through '99.

And right now we have a summary judgment motion, it's fully briefed, we're waiting for the judge either to set oral argument or rule on that motion.

Predictions are that sometime by the fall.

But basically there's no dead line.

But if we win, the case is over.

If we lose, the judge will set a trial date likely in early to mid-2009.

We believe in our position, we'll defend it.

So I won't speculate on how the other three cases impact us because of back patterns.

But we think that our accounting treatment that we have in our financial statements are reflective of our performance there or future performance there.

Thank you.

Thank you.

Thank you.

Your next question is coming from Ann Gurkin with Davenport.

Please go ahead.

Good morning.

Good morning, Ann.

Good morning.

The second half, as we look to the second half and we see a heightened economic challenging environment for the smokers, is it fair to assume that there's an increasing likelihood that the industry becomes more promotional in the cigarette space?

That's always a risk.

Typically, what we have seen in past economic downturns, a number of things take place.

First, you see consumer confidence go down.

And we've seen that.

There was a slight tickup this past month.

But typically, with -- if you see consumer confidence below an index of 100, and you typically, we have seen in the past potential downtrading to discount products.

We have not seen that this time.

Because typically when you see the CPI, excuse me, the consumer confidence go down, you see a corresponding large step-up in unemployment.

Unemployment has inched up, but it's still not at levels that we have seen in past economic downturns.

And the other factor that comes into play is the overall relationship between the top and the bottom.

And currently -- and that's something we monitor every week, and through the second quarter the gap between Marlboro and the lowest effective priced product is about 43%, which we continue to see as a good spot for Marlboro.

So, but once again, we will remain a competitive marketplace depending on actions that take place there.

However, the second quarter we were able to pull back on promotions and still have solid share growth behind Marlboro.

Along the same discussion, I guess there's some mixed data on whether we're seeing an acceleration in consumer downtrading on cigarettes, and I would be interested in your comments on that notion right now.

We actually look at the lowest category, deep discount, in the cigarette market.

What we saw was a slight increase in deep discount from a year ago.

It went up 0.2 of a share point from 11.3 to 11.5.

But it actually came down 0.3 of a share point from the first quarter of 2008.

So we see some trading going in and out of the lowest, but if you look at it over the last 24 months, you'll see periods where it goes up 0.2, down 0.2, up 0.2, down 0.2 and the overall discount category is unchanged.

So it seems to be some in-switching within that category, but no concerted movement up that we can see at this time.

All right.

That helps.

Then if I can ask a couple questions on adjacent products.

In Atlanta, the Marlboro smokeless product, I understand you've instructed retailers to give away a tin to consumers who purchase any smokeless product.

Can you explain to me kind of that strategy, what you're trying to achieve from that change of strategy in Atlanta?

It's really not a change in strategy.

What you're talking about are tactics that we and other consumer goods product manufacturers employ when they're trying to get trial of a product.

So that's one promotional execution We have had many others in that marketplace.

And that gets to this whole concept of we really are using the test markets that we have, not only in Atlanta, but in Dallas as learning laboratories that will inform our future plans on how we go about entering those categories.

And then with respect to these test markets or learning labs, do you feel like the pace of adjustment to market findings is fast enough to get accurate reads on how either Snus or Marlboro smokeless is performing in these test markets?

Yes, we did.

Okay, great.

Thank you.

Thank you.

Thank you.

Your next question is coming from Filippe Goossens with Credit Suisse.

Please go ahead.

Yes, good morning, David and Cliff.

Good morning, Filippe.

Good morning, a few questions here for us as well.

Let me first start with the FDA.

I know you're not going to comment too much on it, but let me just at least try on one side.

If we read the bill correctly last night, we kind of came away with the impression that right now the committee who has to do the research on Menthol, that it was not given any indication what the remedies would have to be if it comes to certain conclusions.

So that basically for us means that there's absolutely no instruction here that the only thing they could do in the worse case scenario were to be to ban Menthol.

If that's the way we should read it, what could you see, David, today as some of the potential remedies in this scenario that they would come to the conclusion that Menthol might make it more difficult to quit or make it more easier to start smoking?

Filippe, as I said earlier, currently that bill nor the Senate bill contains any sort of -- any such provision of completely banning Menthol.

And as I said earlier, I'm not going to get into specifics, I don't think this is the proper forum for that, but thank you for that question anyway.

Okay.

Let me move on, then, to some other business questions.

And thanks very much for the frank outlook long term in terms of industry trends.

And I think I may have asked this on the last call already, but does that basically mean that currently the way you're thinking about what's going on in terms of the economy, excise taxes, et cetera, et cetera, that we might be seeing a potential change in the price elasticity of demand for cigarettes?

I mean, it's one thing for the industry to raise pricing 5% per annum all other things being equal, but given consumer's now being faced inflation on every single item that she or he purchases that maybe there will be more elasticity here going forward, is that basically what led you to your provision in the long-term outlook?

Yes, but it was, when you talk about elasticity, if you talk about elasticity to other nontobacco products, that's not it.

It's-- we're examining the elasticity that exists between cigarettes, okay, over the years it's been pretty solid, about 0.3.

But the question that we're asking ourselves now is the cross-price elasticity between cigarettes and other tobacco categories.

And like I commented earlier about some states this year where we saw $1 per pack increase in state excise taxes, typically in the past what you would see is a pretty sharp decline based on that 0.3 elasticity.

But what you would see is if it was greater that it might go to cigarettes sold through different channels, like contraband or over the Internet or even increases in counterfeit.

And today, okay, today we're starting to see, on -- I mention, too, small cigars and the roll-your-own, even though they're tiny, slight increases there.

So we're looking at that cross elasticity.

But even with that increased decline rate, we remain confident in achieving our goals.

But you're right, we're looking right now at cross-price elasticity, I have a number that I can quote, not at this time.

Then the other question, as you know, there is an attempt in the state of California to basically ban drugstores from selling tobacco products.

Any initial read on that in terms of what, if that were to be enacted, whether that could be followed by other states as well and if this could potentially in a worst case scenario also spill over to convenience store channels?

At this point, I do not know the status of the vote on that bill in San Francisco.

If you look at the US marketplace, though, there are approximately 400,000, okay, 400,000 outlets that sell cigarettes.

And the percent of cigarette volume in drug stores is a small number compared to the total overall industry.

And at this point, first we'll have to see what happens in San Francisco, and I can't speculate whether there would be any spill-over into the other states, but with the number of outlets selling cigarette products, I really don't see that much of an overall impact to the industry.

Okay.

And then my final question, kindly of more a broader industry strategic-type question, there was a report out this morning demonstrating that in Scotland somebody had conducted a study saying that in areas or public areas where smoking was no longer permitted, there were double-digit decreases in the number of illnesses.

And right now, if you look at the U.S., smoking bans are more enacted on a local basis.

How do you look at, if there were to be an attempt to enact smoking bans on statewide levels, whether that would at all accelerate the existing consumption declines that you are seeing and could this ultimately lead to what we would call kind of like the final round of consolidation with any tobacco space as companies would look at either ways to enter categories still growing good, you refer yourselves to smokeless, roll-your-own and cigars, or basically looking for other ways to leverage the cost infrastructure over a larger base of units?

Thanks, David.

That was a long question.

And let me try to put it in a few parts.

First, the question about in the U.S., federal versus local versus state smoking restrictions.

I don't have the number in my head, but there are quite a few states in the U.S.

with various forms of smoking bans.

And I think the first question was, if it got broader, what's the potential impact on the overall consumption or volume?

And we've done a number of studies looking at various impacts of smoking bans on consumption.

And it's tough to get an accurate read on that because the question, does the ban take place because incidents and/or consumption has changed over time that led to the ban, or did the ban cause it?

Quite frankly, we've looked at quite a few of these, and we can't draw a conclusion on that.

As far as the consolidation in the tobacco industry, consolidation has been with us for years and as I look out, I would say that it would it continue to be with us.

And that's nothing new, that's been with us for decades.

And thank you for the question.

Thank you, David.

Thank you.

Our final question is coming from Adam Spielman with Citigroup.

Please go ahead.

Hello, good morning.

Most of my questions have been answered and given the time I won't ask anymore.

So thank you very much.

Okay.

Thank you, Adam.

Thank you, Adam.

Thank you.

At this time, I would like to turn the floor back over to management for any closing comments.

Thank you all for joining us today.

If you have any follow-up questions please call us at Altria Investor Relations.

Have a good day.

Thank you.

This does conclude today's Altria client services second quarter 2008 second quarter 2008 earnings conference call you may now disconnect.