奧馳亞 (MO) 2009 Q1 法說會逐字稿

Good day and welcome to the Altria Group first quarter 2009 earnings conference call.

(Operator Instructions) I would now like to turn the call over to Mr.

Cliff Fleet, Vice President, Investor Relations for Altria Client Services.

Good morning and thank you for joining our call.

This morning we will only be discussing Altria's 2009 first quarter business results and will not be discussing the status of litigation.

Our remarks today contain forward-looking statements and projections of future results.

I direct you to the forward-looking and cautionary statements at the end of the earnings release with the review of the the various factors that could cause actual results to differ materially from projections.

As a result of the spin off of Phillip Morris International in the first quarter of 2008, our reported results reflect PMI as a discontinued operation for the first quarter of 2008.

Revenues and operating Companies income for PMI are therefore excluded from Altria's continuing results.

Since Altria acquired UST and its smokeless tobacco and wine subsidiaries on January 6, 2009, US Smokeless Tobacco Company's and Ste.

Michelle Wine Estates' financial results from January 6th through March 31st, 2009 are included in Altria 2009 first quarter consolidated and segment results.

Additionally, Altria has revised reporting segments as a result of this acquisition.

Beginning in the first quarter of 2009, Altria's reporting segments are cigarettes, smokeless products, cigars, wine, and financial services.

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

Altria.com.

Altria reports its financial results in accordance with Generally Accepted Accounting Principles.

Today's call may contain various operating results on both a reported basis and on an adjusted basis which excludes items that affect the comparability of reported results.

Descriptions of these measures as well as reconciliations are included in the earnings press release.

Now it gives me great pleasure to introduce Mike Szymanczyk, Chairman and Chief Executive Officer of Altria Group, Inc.

Thanks Cliff and good morning to everyone and I appreciate you all joining with us this morning.

This is earnings release with lots of moving parts, in a year with still change to go in it.

But I think it is fair to characterize our first quarter performance as so far, so good.

Our business results we think are on track with our plan, our cigarettes, cigars and financial services segments delivered strong profit growth.

Cigarette infrastructure costs are declining ahead of schedule, and the UST integration is proceeding as planned.

We are also encouraged by the initial results from our special price promotion on USSTC premium brands in the southeast where their premium MST retail share has stabilized and begun to return retail share growth.

Altria delivered adjusted earnings per share growth from continuing operations of $0.39 up 5.4% from the first quarter of 2008 and in line with our expectations.

These results were driven by higher operating companies income growth from our continuing businesses as well as the operating companies income contribution from US Smokeless Tobacco Company and Ste.

Michelle Wine Estates partially offset by higher interest expenses.

We delivered these results despite a challenging economic environment, economic conditions remain weak with high unemployment, low consumer confidence, and the Federal Government significantly increased the excise tax on tobacco products as of April 1st as you all know.

The FET increase impacted wholesale and retail trade inventory levels on our tobacco businesses and thus volumes for the quarter.

Dave will go into more detail on trade inventory movements that occurred during the quarter when he reviews our business segment results.

In addition, the FET increase changed cigarette pricing dynamics in the marketplace in the second half of March, and into April 2009 as manufacturers used different strategies to deal with the FET increase.

PM USA is closely monitoring these changing dynamics and will make adjustments to its plans as appropriate as the quarter progresses.

In early 2009, January, we successfully completed the acquisition of UST which included its premium MST brands Copenhagen and Skoal.

And we're pleased to have completed all financing related to this acquisition in the first quarter of 2009, which you know in February Altria issued $4.2 billion in long term notes with an average weighted coupon rate of 9.4% to refinance its bridge loan facility.

Previously toward the end of 2008, Altria had issued approximately $6.8 billion in long term notes with an average weighted coupon rate of 9.2%.

In 2009, one of our key priorities is successfully executing the UST integration and that's proceeding very well.

Earlier this month, USSTC relocated its corporate headquarters to Richmond, Virginia and in the second quarter we plan to combine the USSTC and PM USA sales forces into a new entity, the Altria Sales and Distribution Company, this news sales organization will service all of Altria's tobacco businesses with an organization of approximately the same size of PM USA's sales force before the UST acquisition.

We plan to absorb substantially all of the cost related to the integration of UST in 2009 and remain on track to deliver an estimated $300 million in integration costs savings.

USSTC already has taken a number of important steps to enhance the value equation on their leading brands.

In February USSTC implemented a special price promotion in the high-volume southeast region on Copenhagen and Skoal and, as I mentioned, we are encouraged by their retail share performance.

In March, USSTC announced a national list price reduction of $0.62 per can on Copenhagen and Skoal.

These actions require upfront investment spending, which are a drag on near-term profitability but will be offset by cost savings that are realized later in the year.

We believe these actions position the Company well for future volume and moderate retail share growth in the MST category.

Altria's and its operating companies cost management programs continue to add value for shareholders.

Across the Altria family of companies we achieved $140 million in cost savings in the first quarter.

Altria expects to achieve approximately $720 million in additional cost savings by 2011 bringing the total projected cost reductions to $1.5 billion versus the 2006 cost base.

PM USA continues to focus on reducing cigarette infrastructure ahead of volume declines and the Company announced earlier today that it plans to cease production at its Cabarrus, North Carolina cigarette manufacturing facility by the end of July, 2009.

PM USA first announced in June 2007 that it would be closing the Cabarrus facility to address manufacturing overcapacity resulting from ongoing declines in US cigarette volume and reduced contract manufacturing.

PM USA is taking today's action to address ongoing cigarette volume declines including the projected impact of the recently enacted federal excise tax increase.

The Company plans to complete decommissioning the facility during 2010.

The Cabarrus facility closure is part of the manufacturing optimization program at PM USA which is expected to deliver ongoing annual savings of $188 million by 2011.

Before I turn the call over to Dave, I want to reaffirm Altria's 2009 EPS guidance.

We remain confident of delivering 2009 adjusted EPS growth of 3% to 6%.

2009 is turning out to be a difficult year for most companies, but we believe Altria is well positioned to continue delivering strong shareholder returns.

Appropriately managing the value equation on our brands combined with Altria's aggressive cost management programs and the successful integration of UST should allow the Company to continue growing earnings.

Now, I'd like to turn the call over to Dave Beran, Altria's Executive Vice President and CFO who will discuss Altria's business segment results.

Thank you, Mike.

Let me start with the cigarette segment which delivered strong operating companies income, in a challenging environment.

Reported cigarette operating Companies income increased 9.9% versus the prior year period to $1.1 billion due to list price increases, lower promotional allowance rates, decreased promotional volume, and lower SG&A spending, partially offset by lower volumes, as well as charges primarily related to the Cabarrus facility closure.

Excluding these charges, the cigarette segment operating Companies income increased by 10.7% to $1.2 billion.

First quarter results were impacted by the April 1st increase in the federal excise tax.

The FET increase led to significant wholesale and retail inventory depletions to minimize floor tax payments when they're inventories.

PM USA believes that these inventory depletions disproportionately impacted Marlboro as the trade focused on that brand due to its higher sales velocity.

PM USA cigarette shipment volumes declined 14% in the quarter, but were estimated to be down approximately 5.7% when adjusted for changes in trade inventories and calendar differences.

In April, PM USA saw higher out-of-stock levels at retail particularly on Marlboro as well as evidence of wholesalers and retailers rebuilding PM USA cigarette inventories.

PM USA estimates that total cigarette industry volume declined 5% in the first quarter of 2009 when adjusting for those same factors.

Marlboro continued its strong retail share as it gained five-tenths of a share point versus the prior year period to 42.4%.

Marlboro achieved these results despite lapping last year's very strong first quarter retail share performance.

Marlboro's price gap versus the lowest effective priced cigarette was 43% in the first quarter.

Marlboro's net pack price was $4.50 a pack and the lowest effective priced cigarette was $3.14.

Additionally, the discount segments' first quarter share remains stable at 25.4% versus the year ago period.

At the end of March, and just prior to the FET increase, Marlboro's price gap versus the lowest effective priced cigarette widened to approximately 50% due to price increase timing differences and competitive promotions.

By the second week of April, 2009, this price gap has narrowed to 47% as marketplace prices continue to adjust to the FET increase.

PM USA believes the percent price gap will continue to fall to the extent the full FET impact is realized when the lowest price brands in the second quarter.

Marlboro strong share growth was more than offset by share declines on Virginia Slims, Parliament and Basic.

PM USA strategy is to maximize the long-term profitability of these brands with focused regional investment spending.

These brands continue to perform well in their respective areas of strength.

PM USA's total cigarette segment retail share declined three-tenths of a share point versus the prior year period.

For perspective, PM USA's retail share was unchanged versus the first quarter of 2008.

Overall, we are very pleased with their first quarter cigarette segment results.

Marlboro continued its strong retail share performance and profitability growth was very strong.

Now let me turn to the smokeless product segment.

During the quarter, USSTC took investment spending actions which laid a strong foundation for future profit growth but impacted segment profitability.

USSTC quickly moved to enhance the value equation when the leading premium brands in the first quarter with the special price promotion and list price reductions on Copenhagen and Skoal.

In the first quarter, Copenhagen and Skoal's national net price gap versus the leading discount brand was approximately 80%.

In the southeast region, where USSTC implemented its special price promotion, Copenhagen and Skoal's net price gap versus a leading discount brand fell from approximately 105% in January 2009 to an approximate 58% in March.

Copenhagen and Skoal's national retail shares were each sequentially down two-tenths of a share point versus the fourth quarter of 2008 to 24% and 24.9% respectively.

However, USSTC's premium retail share responded well to the actions taken in the southeast region.

Its premium retail share at the end of March increased versus early February 2009.

While not predictive of future results, we are encouraged by this information.

In the first quarter of 2009, USSTC's domestic MST shipment volume declined 5.3% to approximately 152 million cans but was estimated to be flat when adjusted for the following.

First, the trade reduced inventories on USSTC products to minimize floor tax payments and in anticipation of a price reduction of Copenhagen and Skoal.

Second, USSTC discontinued its multipack deals in favor of everyday low prices.

And finally, USSTC incurred increased product returns from retail as a PM USA sales force assumed retail responsibilities in a broader store set than USSTC sales force, resulting in an inventory clean up.

USSTC believes MST industry volume continued to grow an estimated 6% to 7% in the quarter.

As a result of charges related to the acquisition of UST, actions taken by USSTC to enhance the value equation on its MST brands and costs associated with Marlboro smokeless products, the smokeless products segment reported an operating companies loss of $2 million.

This loss was primarily due to pretax charges of $128 million related to the UST acquisition consisting of employee separation costs, as well as inventory adjustments and other integration costs.

First quarter operating company's income results were further impacted by special price promotion spending in the southeast and costs for the wholesale incentive program that lowered the price of some of USSTC's brands.

As the year progresses, costs for this spending will be offset by cost savings.

Excluding the exit integration and acquisition-related charges, adjusted smokeless products operating companies income was $126 million.

Now let's turn to cigars which reported very strong results in the first quarter.

Unlike cigarettes and MST, there was no floor tax in the federal excise tax increase for large cigars.

Consequently, trade inventories increased in advance of the April 1st federal excise tax increase.

Middleton's cigar shipment volume increased 10.4% versus the prior year period, to 345 million units.

Middleton's volume growth reflects wholesale inventory accumulation in advance of the federal excise tax increase, and new product pipeline volume for Black and Mild wood tip.

Middleton believes that total machine made large cigar volumes continue to grow at an estimated rate of 4%.

Excluding integration costs, operating companies income for cigars increased 32.6% versus the prior year period to $57 million due to higher pricing and volume growth partially offset by costs related to the introduction of new wholesale and retail trade programs.

Black and Mild had another strong quarter of retail share growth as its share increased nine-tenths of a share point to 27.9%.

The brand benefited from the introduction of Black and Mild wood tip as well as the new brand equity campaign "Enjoy Black & Mild".

Now let's turn to our new wine segment.

We are pleased with the fundamentals of Ste.

Michelle's underlying business performance though there were some short-term events impacting first quarter results.

Ste.

Michelle suspended shipments during the first week of January to take inventory prior to the closing of the acquisition of UST by Altria.

Wholesalers purchased wine in advance of this suspension and also further reduced their inventories in the first quarter of 2009.

As a result, total Ste.

Michelle wine shipments declined 7.2% in the first quarter of 2009 to approximately 1.2 million cases.

However, Ste.

Michelle's volume from wholesale to retail was up approximately 6% during the first quarter of 2009.

In addition, Ste.

Michelle's retail volume, as measured by Nielsen and Food and Drug, was up approximately 11% in the first quarter of 2009 versus the prior year period.

Net revenues for the wine segment were $75 million and reported operating companies income was $1 million.

Excluding the $8 million in acquisition related charges, adjusted operating companies income was $9 million for the 12 weeks that Altria owned the Company.

Let me conclude with financial services.

Reported operating Companies income increased $46 million to $120 million primarily due to higher gains on asset sales.

Additionally, all lessees are current on their lease obligations and there were no changes to the $304 million allowance for losses.

Management believes that the amount is prudent based upon the underlying credit quality and collateral value of its existing portfolio.

Mike and I will now be happy to take your questions while the Operator compiles the calls I want to cover a few housekeeping numbers.

The average weighted cigarette state excise tax at the end of the first quarter of 2009 was approximately $1.13 per pack.

To date, three states in Puerto Rico have increased their cigarette excise taxes with an average increase of $0.56 per pack.

CapEx was $43 million and ongoing depreciation and amortization was $78 million.

Our first quarter MSA in quota buy out accruals were approximately $1.1 billion or $0.67 per pack.

Of the $0.67 MSA represents $0.61 per pack and the quota buy out represents $0.06 per pack.

Additionally, on April 15th, PM USA made its full 2008 MSA payment of approximately $4 billion.

And finally, we anticipate that our 2009 full year effective tax rate on operations will be approximately 37.1%.

However, our first quarter tax rate was 38.7% due to certain non-deductible costs related to the UST acquisition.

Operator, do we have any questions?

Thank you.

(Operator Instructions).

We will be taking questions from the investment community first followed by questions from media representatives.

Our first question comes from David Adelman with Morgan Stanley.

Please go ahead.

Good morning, everyone.

Good morning, Dave.

Mike, first a question for you, I am curious as to, at PM USA over the next couple of quarters in the cigarette business, given the FET dynamics, I am curious are you thinking any differently than you might have in a more normal environment with respect to how you are going to balance market share dynamics versus profitability?

Well, that's a good question.

Let me talk about that for a couple of minutes.

Look, when you have something like the FET event, that's a dynamic that impacts every single cigarette product that is on the marketplace in the country.

And it is a pretty significant event.

And it unfolds over time.

It just doesn't happen all at once.

So we anticipated as we went into the year and thought about if the FET did occur that there would likely be add a dislocation in the marketplace that would take place over probably a couple of months, as the market moved, its retailers moved and they moved at different paces and some tried to take advantage by renting some share during that period, and some responded in a defensive way during the period.

So that we would see generally a pretty dislocated marketplace and in this case given the timing of the FET that's probably from the back half of March given when some of the pricing began to occur through call it the middle of May.

And I think that is where we are now.

Dave's comments relative to gap movements are an indication of that.

You are seeing the market work its way through this period of time.

Our philosophy here is to not get too excited about the period of dislocation.

We'd like to have a static baseline and not find ourselves trying to respond to temporary market conditions as the market moves around.

And once it settles in, then we can see where we are and we will go back to doing what we normally do which is, we look at the market, we identify areas where we may have gap problems and we correct those and we build our brands based on equity-enhancing activity.

Gap management for us is not how we build the market on our brands, it is really making sure that is not an impediment to the other things we do in the marketplace to build the brand.

So, I think as we go on through the second quarter, we will see the market settle out, and then as it does that, we move on through the back half of the quarter, you will see more normalcy.

But we are of the mind to be thoughtful about monitoring what's going on and know what the situation is in terms of how the market settles out before we do too much from a resource point of view.

I'm also--

So to paraphrase you are not unduly concerned if you were to lose some market share for a period of time as long as the low end of the market is moving up over time with pricing.

Yes I think the key here is to let the market settle out before you decide what you are going do because otherwise you're moving into a moving playing field.

That doesn't allow you to know what you are doing.

So that's the way we look at it.

Actually more important than market share during this period is really volume.

And we have forecasted for the year on volume, and I think importantly we would like to see volumes show at a level that's equal to or better than our forecast regardless of where shares are on the short period of time.

It really is where is the overall volume circumstance going to be.

And I think so far so good is a good description of the circumstance.

So that's how we are looking at it.

So it is--you have to be reasonably pragmatic here, otherwise you can waste a lot of money on things.

And we don't see that as the right way to do it.

Okay.

One other quick cash question, at UST, you're saying that adjusted for anomalies in the quarter shipments were essentially flat.

I'm curious with higher levels of promotional spending, shouldn't volume trends be better than that?

Well, I think you've got to look at the smokeless market in a similar way to the cigarette market in the first quarter.

Keep in mind we changed a number of things.

We did have some investment spend in the southeast region, but in other markets around the US, toward the end of the quarter we were extracting what has been the normal promotion vehicle in the marketplace, these multipack deals in anticipation of the overall price reduction approach that we announced that went into effect at the beginning of April.

So, there was, yes,some investment in the southeast but also an extraction of promotion activity in the marketplace as well.

And then you had to add to that the fact that trade took the opportunity to reduce inventories because they had a floor tax situation in MST just like they did in cigarettes compounded in our case by the fact we were reducing our price.

We announced that ahead of time, because you have to, to get the trade prepared.

Well they naturally buy as little as they can going into that circumstance because we give them a limited amount of price protection, and they want to see if they can make a profit on that.

So, I wouldn't, again get too caught up in trying to read anything into the volume in the first quarter in MST because there is so much that moved around it is kind of impossible to read.

But our best estimate of it is that it was pretty flat when you factored in all of those things, and it will be easier to read it once we get to the end of the second quarter, and we look at the whole half.

In fact all of these businesses from a quarterly point of view, right now the quarterly numbers aren't going to mean a whole lot.

It is really, for example, looking at the half where we will see how things washed out in terms of inventory and so on.

The cigar business is the same way only reverse, there was no floor tax.

So we had inventory build that as provided probably an overstatement of volume and income growth for the first quarter, and that will wash out in the second quarter.

I think that's how we have looked at it.

But when we do adjustments, we try to understand whether or not we are on track.

When we do adjustments we feel pretty good about it.

Looks fine.

Okay.

Thank you.

Our next question comes from Ann Gurkin with Davenport.

Please go ahead.

Good morning.

Wanted to start with--

Morning.

Good morning.

UST, just a mix of the business, Skoal and Copenhagen, as a percentage of the volume, dropped more than we would have thought versus the fourth quarter.

Can you help me understand those numbers?

Is there anything unusual in those volumes?

Again it is the items that I mentioned a minute ago, Ann.

It is really the trade reduced their inventory at retail and wholesale because of the FET and because of our price decline.

We pulled the plug on multipack deals.

And that we subtract returns from our volumes.

So, we did a clean-up in the marketplace as we expanded coverage into the USA sales force.

So there was a higher than normal level of return activity that we anticipated in the quarter because of that.

But it impacts the number.

Those are really the items.

Should we expect the mix to move back toward that 84% or so, Skoal and Copenhagen, as a percentage of the total volume?

Well, I would expect to see with our value equation actions in the marketplace , that yes, we would see Skoal and Copenhagen be the strong part of our

Great.

Secondly, can you give us an update on the likelihood Senate may take up the FDA Bill that's past the House?

Your outlook, if you care to comment?

And is there any change in Altria's position on potential FDA regulation of tobacco?

We supported the Bill in the House and I think the situation in the Senate remains a bit unclear as to exactly when and what the Senate will take up.

But no our position hasn't changed relative to the Bill that we supported in the House.

Great.

Thank you.

Our next question comes from Christine Farkas with Merrill Lynch.

Thank you very much.

Good morning, everyone.

Hi, Christine.

I am going to start with cost savings, if I could, in the quarter.

These were quite strong certainly above what we were looking for.

I am just wondering from you surprised at the pace of how this is coming through and if this is just accelerated or pulling forward or do you see perhaps the program in cost savings getting bigger in the end?

Well, right now, what you have is what we have announced in term of cost savings and we are I would say we are pulling it in at a good rapid rate.

So, I wouldn't attribute it to higher levels of cost savings at this point.

I would attribute it to speed that we are moving along pretty well both from a share and infrastructure point of view and from the perspective of the UST integration, both of those things are going, if not on schedule, a little bit ahead of schedule.

That's what we would like to have happen.

That doesn't mean in the end we may find ourselves with a better performance but I wouldn't attribute it to that at this juncture.

And just to be clear, you haven't actually realized any UST synergies in the quarter; is that correct?

Well, no, I don't think that is entirely correct but I think that the way I would look at that is I would say, yes, we have begun to reduce staffing at UST, but at the same time, there's one-time costs that we incurred at the time that we reduced staffing.

So, the fact is yes we realized some synergies but no they didn't show up as a positive from a cost savings point of view yet.

They will though once we get past the one-time charges.

Okay.

Thanks for that.

Secondly, on this second quarter I think you are pretty clear about the disruption around March and April, the deloading and the loading.

And, of course, it sounds to me as your comments about so far so good means demand elasticity is so far probably running along as you have expected.

I am just wondering, in looking at the second quarter, would this be the quarter where we see the greatest sticker shock from consumers in the sense that this is where we might see the sharpest decline in category volumes and then it moderates?

Or could we see, as people understand the pricing or see the level, could we see that actually decelerate as we go through the year?

Well, I think relative to us, our products, because we were upstarted in early March, and this is probably important for people to understand what is different about us, we started in early March, earlier than anybody else.

Because of that the trade had more time to deload inventory on us than they had on anybody else.

And because of that, pricing on us probably moved the fastest in the marketplace.

So I would say for us, we probably seen what is going to wind up being the peak.

Probably not, in fact, the marketplace dynamics and the gap movements would indicate we haven't fully seen all of it reflected in other places in the marketplace.

So I don't think that for us there's anymore sticker shock really of significance for the consumer.

There may be on some other things because there are folks who lagged, there are folks who actually spin into it.

I mean we have some major competitors that actually spent into the increase, and so that-- eventually the tax man gets his money.

And so eventually that's going to come home to roost, but it hasn't fully happened yet.

Okay.

That's helpful.

My last question if I can just touch on minority interest, that was quite a decline year-over-year, and I am just wondering if there's anything else in that number aside from the underlying contribution from SABMiller et cetera, anything else in that number that would account for the 26% decline?

No, there is not.

And we look at the SABMiller investment as a good long-term investment.

They have great brands, they have great management, and just like the recession is impacting business this year and worldwide, we are seeing some impacts there.

But for further questions I would direct those questions to SABMiller.

Okay.

But we feel good about our investment.

Dave, when you describe this as a good long-term investment should we read into that as any change of your views of how you see SABMiller or that stake fitting into your long-term plan?

No.

As we said back in CAGNY, we are spending 2009 to evaluate our total alcohol strategy, we are doing that in 2009, and we will be back to you.

So don't read anything into my comment.

Okay.

Great.

Thanks a lot.

Our next question comes from Thilo Wrede with Credit Suisse.

Good morning, gentlemen.

Morning.

Mike you just mentioned at the beginning of the call that different manufacturers had different strategies to deal with the FET increase, could you elaborate on that a little bit and tell us why you think you had the right strategy there?

Well, I think it will remain to be seen whether or not we had the right strategy.

But as a practical matter, I think you saw different people take different approaches to it.

And some of them, some of them have different structures in their pricing and they approached from a reduction in promotion, some with increase in list price, some with a combination of activities, and so-- And then coupled into that you saw some spending strategies, we have seen some spending strategies unfold--they look like they were timed with the FET.

In other words, they represent changes in the strategies going into the FET and appear to be opportunistic situations where people will give it, give [renting] a share a try to see if some of it sticks.

That's what we have seen.

I wouldn't comment on any of them specifically, but I do think that there has been a number of different approaches, and there also have been a number of different approaches by retailers, too.

And that has an impact on pricing and price gaps.

You have some retailers who hold back hoping to build share and other retailers who go very quickly and you have some test the market in terms of how high they can go.

And then gauge the competitive situation and have to adjust accordingly.

You have lots of different approaches going on.

That's why I say I think it takes a couple of months for all of that to settle out.

And then that gives you a read of what kind of marketplace you are dealing with.

And then you can make decisions about how you want to go forward on a longer term basis.

Okay.

And the adjusted volume number for the, for the industry as a whole is down 5%.

Is that a-- is that just reflecting all of the distortions in the quarter, or should we read into that, that there is maybe a change in consumer behavior and the volume declines accelerating that?

I think, remember you had this adjustment that started at the beginning of March.

So you really had an adjustment that impacted about 30% of the quarter.

So I think there was some elasticity that affected the quarter.

But that would presumably be taken care of when you adjust the number down to just 5% decline for the industry rather than 14%, no?

Well the elasticity--remember the 14% is more driven by inventory change.

So inventory change wouldn't be part of your elasticity curve.

Okay.

But pricing could impact elasticity.

Okay.

Got you.

And then one last question, one New York state politician put out a proposal to ban cigarette sales in grocery stores and drugstores which follows similar actions by San Francisco and Boston.

Is that a trend that is accelerating across the country?

Are you seeing more proposals like this in cities or states, and what's your take on that?

I haven't--I'm not aware of I grocery store situation, but, yes, you are right there's a pharmacy situation in San Francisco.

I wouldn't call it a trend.

But certainly you have seen some proposals in that regard.

I think that-- I don't know that they-- from our standpoint, they make a lot of sense, but nonetheless you have seen some of that.

But it is nothing you are concerned about right now?

Well, look you have a broadly distributed product and its predominant channel is really C-stores and C-gas, and volumes in some of these other channels have declined over the years.

So I don't think that there's a shortage of retail distribution in the category.

Alright.

Thanks a lot.

At this time, we will begin taking questions from the media .

(Operator Instructions).

Our next question comes from Erik Bloomquist with JPMorgan.

Please go

Good morning.

Morning.

Just wanted to follow up then on the smokeless promotion in the southeast.

I was wondering what kinds of competitive responses you saw to that within that promotional period.

And secondly I was wondering if the share stabilization that you saw in that region, or in that period if there was a benefit from an easier comp because you had both Swedish Match and Reynolds American launching new products in the same period last year so if that made the comparison slightly easier for the USSTC brands?

I'm sorry.

Why would it be easier?

Simply because.

There's a lot of activity last year.

Yes.

In the first quarter which actually would make the comp probably more difficult but I don't know that I would say there was something there that made it easier.

Okay.

But could you comment then on competitive activity then in response to the $1 off promotion?

Well, I don't know how to do that for you.

I mean we don't necessarily try to make comparisons on competitive activity.

So.

Okay.

So they didn't--there wasn't really any--you are not willing to discuss any kind of competitive response?

I would decline to answer because we generally don't try to make comparisons on competitive activity.

All right.

And moving to the cigarette division, could you quantify the size of the deload?

Is it fair to think that's around a $3 billion stick and it sounded like from your previous answers and commentary at the beginning of the call that we can expect that to come back in the second quarter as things begin to normalize, is that a fair way to think about things?

We will have to see what happens but I think what we said is that we have seen some evidence of that taking place.

Okay.

And then again, this was eluded to in an earlier question, but is there any indication that consumer behavior has changed?

It sounds like the pricing elasticity has stayed about the same and moreover there doesn't to appear to be any meaningful change in terms of consumer down trading.

Is that also a fair way to characterize things?

I'm not going characterize the second quarter at this point.

As I already mentioned to you, that you saw some expansion of the gap that took place.

And there will be some disruption in the marketplace, I think from the latter part of March through probably the middle of May.

That's how we have looked at it.

So we would expect to see some movement taking place because gaps are going to be variable around the country in different marketplaces.

So I am not going to try to predict how that comes out during that period of time.

My point earlier was that I am not sure that that's really meaningful.

What is going to be important is once it settles in, where does it settle in and then where do we go from there.

I don't think we know the net result of that until we get on through the second quarter.

At this juncture, the market is still moving around and to draw conclusions about it at this juncture, I think is a bit misleading, it doesn't tell you much because it's point-in-time data and the next time point in time you look at it, it is different.

Okay.

Thank you.

Our next question comes from Chris Burritts with Bloomberg News.

Please go ahead.

Hey, good morning.

Hi, Chris.

Thanks for your time.

A couple of quick questions.

Mike, can you explain your-- or PM USA's strategy as it goes to state legislatures in places like North Carolina where tax increases are on the table?

What argument is the Company making to hold the line on those proposed tax increases?

Well, I think that varies based on what the tax proposal is.

So they're not all the same.

They're different.

So I think you have to look at them individually but I also think that, that tobacco users have been burdened by a high tax increase by the federal government this year.

And so I think that, that states need to be judicious and thoughtful about what they do on taxes because there has already been a significant tax increase put on the consumer.

Okay.

Thanks.

And Dave if you could offer me a little bit more explanation on the average price of Marlboro-- I believe you said $3.50 a pack.

Is that the average in convenience stores?

It was not, it was not $3.50 a pack.

That was the lowest priced products in the store.

For the quarter, the average pack price was $4.50.

I'm sorry, $4.50.

And that's average pack price in C-stores.

Can you tell me how that compared to the year earlier quarter?

We are going to have to get back to you on that.

We have the answer to that question right here.

Thanks very much.

Our next question comes from Judy Hong with Goldman Sachs.

Please go ahead.

Thanks.

Good morning.

Hi, Judy.

On the industry volume down 5% in the first quarter of 2009, when adjusted for the inventory changes and the calendar differences, Mike, can you tell us what that number was before the March price increases and after?

Sorry.

Which business are we talking about, Judy?

Sorry on the cigarette side you said the total cigarette industry volume was down 5% for the first quarter, if you adjust for the inventory changes.

Yes?

I am just wondering what that number was running before the price increases in March and then post-price increases?

Judy, I don't have that off the top of my head, but I think you can look at the year-end information for 2008, and I don't think there was any meaningful difference.

So before, I guess I am just trying to understand the price elasticity here in terms of what happened after the March price increases at the underlying consumption level.

I don't think you can calculate that yet.

Okay.

You have a month in March where it was all moving.

So it is really pretty hard to draw that conclusion to some, there's, these are are estimates and you have lots of moving parts so I wouldn't try and do that at this point.

Okay.

And just to clarify--your volume being down 5.7% adjusted for the inventory versus the industry down 5%-- so you lost shipment share but you gained retail share and the difference is really because you guys have taken price increases earlier than the industry so that impacted your shipment numbers more?

We lost a little retail share, we lost 3/10 total USA versus previous year in the first quarter.

Right.

And we were flat to the fourth quarter, but we lost 3/10 of a share point total USA in the first quarter versus the prior year.

Okay.

And then as you saw some of the dislocations happening in the marketplace with the price gap widening toward the latter part of the quarter, the share trends also were negatively impacted if you look at the retail numbers than the full quarter number would suggest?

I'm not sure I understand your question.

You talked about the price gaps widening after some of these price increases.

You are looking for share information into the second quarter?

Not necessarily in the second quarter but what has been happening to share post some of the price adjustments that you saw from a competitors perspective and your perspective?

Again I don't know that we have enough data at this point to draw any conclusions about that, Judy.

That's why I continue to say that you have a period of dislocation here, it runs from around the middle to the latter part of March, and it will likely run on through the beginning of May, where you are going to see things sort themselves out and to draw any conclusions about share trends during that period of time is probably misleading because they will move around.

One week they will be different than they are another week depending on how the markets move and what kind of activity goes into the marketplace.

So, I just think trying to hone in on that and draw conclusions at this point doesn't give you much that's worth operating with.

I wasn't asking for a conclusion.

I was just asking what color you have from a share perspective.

You have talked about the price gap movements and not to give color on the share movement which is pretty factual from my perspective just seems like --

No color, because color would be misinterpreted.

Okay.

On on the interest expenses, Dave, it looks like the first quarter seems to be running ahead of the run rate?

Can you--

In the first quarter, we had the additional charges related to the financing of the UST transaction, one-time charges in the first quarter.

Okay.

Can you quantify how much that was?

It was approximately $85 million.

Okay.

And then on the tax rate when you say 37% or 37.1% for the full year, that is including some of the charges that you're taking this year.

No, that 37.

1% is in the underlying, is on the underlying business.

The additional, the difference in the tax rate in the first quarter is not in that 37.1%, but it is a one-time event in the first quarter that will as a percentage of the total will go down over time, but 37.1% on the underlying business.

Sorry 37.1% compares to the 38% in the first quarter?

No, 37.1% is the effective tax rate on the business.

In the first quarter there were some items associated with the acquisition that aren't tax deductible.

Those items happened in the first quarter, and then starting in the second quarter our effective tax rate should be 37.1%.

Okay.

So on the full-year basis-- because if I calculate the tax rate adjusting for the one-time items in the first quarter, I get much lower tax rates of 33%.

So to get to the--

We will follow up with you, Judy, on that.

Cliff will get back to you.

All right.

Thank you.

Our next question comes from Thomas Russo with Gardner, Russo &Gardner.

Hi.

Good day.

David a couple of just balance sheet oriented questions.

When you unwind positions at Phillip Morris Capital and take gains like you mentioned in the quarter, where do the proceeds from those sales go?

And that's the first question.

Second, what will be the cash flow consequences of the pension fund, do you think for '09 or 2010?

How much will that consume cash would you expect?

And then third, what is your flexibility to return whatever free cash flow you might generate to the debt paydown of your highest coupon longest-term debt?

Three balance sheet questions.

Three questions.

First question, when we sale assets at PMCC, the cash comes in to the business, it is reported in the income segment but the cash comes in.

And we have, if you look at the asset portion of the balance sheet, finance the net finance assets which are approximately $5.1 billion, that number would go down.

Okay.

The, which is the total financial services assets.

The second question, right now we look at 2009 from a funding standpoint on pensions.

We are still in the neighborhood of approximately $20 million which represents, which represents the-- the nonqualified piece of our plan that we can't fund.

So, that could move around slightly, but at this point in time, we are not seeing any large movement there.

The third question, as we look at our balance sheet, we look at when debt comes due, and our ability to generate cash, yes, we will be looking at our, at our overall debt structure.

We have some debt coming due this year, that is short term.

Approximately $875 million over the next couple of quarters.

When we look at our liquidity and our access to the commercial paper market and the amount of cash we have, currently we don't need to go back into the long-term bond market.

There again we could, just based on the overall rates, but ut we are looking at our overall tranches going out into the future, but right now we are comfortable with where we are.

Thank you.

Your final question comes from Adam Spielman with Citigroup.

Please go ahead.

Hello, good morning.

One quick question you have said very clearly that the moment is too early really to judge the impact, I think either of the elasticity or the market share trends, but I was wondering when you think it would be reasonable for both yourselves and investors to actually come to a firm conclusion about how these things are we behaving?

And I guess at the time of the second quarter results we can reasonably expect to have some (inaudible) of clarity or whether it is really something we don't know about until the third quarter results?

I think as I have stated that probably by the middle of the quarter, we should have a market that is digested the FET.

And then we will return to a more normal competitive circumstance.

And then we will get to see what happens in that circumstance and how people respond to the new market that exists over the back half of the quarter.

And so I would say probably what will be most important to us will be the trends in the back half of the quarter, not in the front half of the quarter.

We will want to see how things are progressing at that point in time.

And as I mentioned a minute ago, volume will be important.

So, what is the volume trend appear to be as in particular as we get the inventory adjustment completed and we return to a more of a normal volume flow.

So as we get toward the end of the second quarter, we should begin to have a volume trend that is more predictive of what we will see, although I say to you that when we see these large increases take place in the state level, we normally see a pretty good spike down immediately after the increase and then we see volume return sharply, although not completely, and then the curve begins to extend out.

And it can take six months or so before you finally have the market settle back in to its adjusted level.

So, some of it, a good portion of it is likely to happen in the second quarter relative to volume.

But probably it will extend on into the third quarter before it is complete.

Will you give us when you announce your second quarter results some indication of how things have moved many the last month of the quarter?

Well, we will see when we get there but we will try and give you information that is useful to you so you will understand how the market is shaping up.

That is our objective.

Thanks.

And actually, can I ask another question, you have said a couple of times that is the cost savings are if anything ahead of schedule which is great.

But you have obviously left your EPS guidance unchanged.

Can I read anything into the fact about the underlying business excluding cost savings from that, that maybe it is not quite as strong as you are expecting?

Well, our guidance is 3% to 6%.

So as I said we have are reaffirmed our guidance and we continue to feel like we are going to fall within that guidance range.

Yes, but you also said your cost savings are ahead of schedule.

That means to say that if I look at the business, excluding cost savings, maybe I am reading too much into this, maybe that's --

I think you are reading too much into it.

A lot of pieces to the puzzle and they all come together with the guidance range andI think we don't have any reason to change our guidance range at this point.

Fair enough.

Thank you very much.

Thank you.

At this time, I would like to turn the floor back over to Mr.

Cliff Fleet for closing comments.

Thank you all for joining us today.

I invite you to listen to Altria's webcast of the 2009 annual meeting of stockholders on May 19th.

If you have any follow up questions after today's call, please call us at Investor Relations.

Thank you, and have a good day.

Thank you.

This conclude today's Altria Group first quarter 2009 earnings conference call.

You may now disconnect.