奧馳亞 (MO) 2010 Q1 法說會逐字稿

Good day and welcome to the Altria Group 2010 first quarter 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.

Please go ahead, sir.

Good morning, and thank you for joining our call.

This morning we will only be discussing Altria's 2010 first quarter business results and will not be discussing the status of litigation.

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

And I would direct to you to the "Forward-looking and Cautionary Statements" at the end of our earnings release for the review of the various factors that could cause actual results to differ materially from projections.

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 6, 2009, are included in the 2009 first quarter consolidated and segment results.

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 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.

Thanks, Cliff.

And good morning to everyone.

We're very pleased with the performance of Altria and its Operating companies in the first quarter of 2010.

Altria has delivered strong adjusted earnings per share growth of 7.7%.

In addition, we increased our dividend by 2.9% to an annualized rate of $1.40 per share, reflecting our new dividend payout ratio target of approximately 80% of adjusted earnings per share.

Despite the continuing challenges of high unemployment and low consumer confidence, as well as an intensely competitive environment, Altria's operating companies continue to perform well.

The cigarette segments adjusted Operating Company's income increased by 6.7%, over the comparable year-ago period, to $1.3 billion.

Marlboro achieved record retail share results as the brand grew its quarterly retail share both sequentially and on a year-over-year basis.

We're particularly pleased with the cigarette segment results considering that the prior year comparison period included cigarette segments adjusted operating companies income growth of 10.7%, and a previous Marlboro retail share record high of 42.4%.

The smokeless product segment reported very strong adjusted operating companies income growth of 49.2% to $188 million.

Copenhagen and Skoal's combined retail share increased both on a sequential and comparable year-over-year basis, and the brands' combined shipment volume grew faster than the smokeless category's growth rate, for the second straight quarter.

Importantly, Copenhagen re-established itself as the largest smokeless brand, as measured by retail share in the quarter.

The cigar segments adjusted operating companies income declined by 15.8%, to $48 million.

Middleton had a very difficult income comparison against the first quarter of 2009, when its adjusted operating companies income grew by a very strong 32.6%, due to the timing of trade purchases around the 2009 FET increase.

The wine segment's adjusted operating companies income grew 33.3%, to $12 million.

Ste.

Michelle reported strong volume growth versus the prior year period, led by the 44.9% shipment growth of its Chateau Ste.

Michelle wines.

Ste.

Michelle continues to be recognized as a producer of a broad portfolio of high quality wines, as wine industry publications have given over 30 of its wines ratings of 90 or better already this year.

The four premium brands of Altria's tobacco operating companies performed well in a challenging environment.

Marlboro had a particularly strong performance, as I mentioned.

The brand launched two Special Blend non-menthol products in the quarter which contributed to the brand's strong retail share performance.

The strength of these two new products helped Marlboro grow its retail share one share point from the fourth quarter of 2009 to the first quarter of this year, despite continued heavy competitive spending on non-menthol discount products.

PM USA plans to broaden the availability of two more variants of Special Blend in 100's length in the second quarter of 2010, to build on this success.

Marlboro also launched Marlboro Snus nationally, as a spitless smokeless tobacco alternative.

Since the products did not ship nationally to wholesale until late in the first quarter of 2010, it is premature to talk about retail share and adult consumer feedback.

However, based on our test markets, we believe Marlboro Snus has a good opportunity for future growth.

Copenhagen continued its strong retail share performance behind Long Cut Wintergreen, which was successfully launched in the fourth quarter of 2009.

USSTC began shipping Copenhagen Long Cut Straight and Extra Long Cut Natural at the end of the first quarter of 2010, and we anticipate that these products will contribute to Copenhagen's growth this year and beyond.

Skoal showed solid momentum as it grew retail share each month throughout the first quarter, behind the Slim Can pouch initiative.

The brand will begin its Skoal Up to Summer campaign later this quarter, which is an integrated program of enhanced products and marketing activities to strengthen the brand's position in the marketplace.

Black & Mild continued growing its retail share, versus the first quarter of last year, despite a challenging environment, due to an increase in competitive promotional activities.

Middleton is monitoring the competitive environment and plans to respond appropriately to defend Black & Mild's marketplace position.

New products have played an important role in the brand's strong retail share growth and in the second quarter, Middleton plans to introduce Black & Mild Royale to continue building its strong position in the machine-made large cigar category.

As expected, trade inventory changes last year caused by the April 1, 2009 FET increase impacted shipment comparisons across all the tobacco segments for the first quarter of 2010, versus the comparable year-ago period.

Last year, the trade significantly reduced cigarette inventories in advance of the FET increase, and in the second quarter, they rebuilt these inventories.

In the first quarter of this year, the trade increased their inventory levels from the beginning to the end of the quarter.

Due to these inventory dynamics, PM USA's reported 2010 first quarter cigarette shipment volume was down only 0.7%, when compared to the first quarter of 2009.

However, when adjusted for these inventory changes, PM USA estimates that its shipments declined approximately 11% versus the year-ago period, and that the cigarette category declined approximately 10% in line with historical price elasticity.

Smokeless products shipment comparisons were also impacted by trade inventory depletions in the first quarter of 2009, in advance of the FET increase, as well as the timing of PM USA and USSTC's new smokeless product launches in the first quarter of this year.

Reported first quarter smokeless shipments were up 21.9%, versus the comparable year-ago period.

But when adjusted for the timing of new product launches, trade inventory movements, the discontinuation of Rooster and other factors, smokeless shipments were up an estimated 5%.

Copenhagen and Skoal's combined first quarter adjusted shipment volume increased an estimated 11%, when adjusted for the new product pipeline volume and trade inventory changes, as well as other factors.

The companies estimate that the smokeless category continued to grow at a rate of about 7% in the first quarter of 2010.

Cigar shipment comparisons were also impacted by events in the first quarter of 2009.

The trade increased cigar inventories in advance of the FET increase, since there was no floor tax on machine-made cigars, and the initial shipments of Black & Mild Wood Tip also occurred in the first quarter of last year.

For the balance of 2009, and into the first quarter of 2010, the trade reduced inventories of Middleton's machine-made large cigars.

The combination of all of these year-over-year dynamics had a substantial impact on Middleton's first quarter reported shipments.

Middleton's reported shipments were down 18% versus the first quarter of last year, but when adjusted for trade inventory changes, were estimated to be essentially flat, Middleton believes that, when adjusted for FET-related impacts, the machine-made large cigar category was essentially flat.

The Altria family of companies continued to make excellent progress on its $1.5 billion cost reduction program.

$43 million in cost savings were achieved across the enterprise in the first quarter of 2010, for $1.1 billion in total savings since the program's inception off the 2006 cost base.

We remain confident that we will realize the $419 million in additional cost savings by the end of 2011.

We continue to believe that the UST acquisition will be accretive to Altria's adjusted diluted earnings per share in 2010.

First quarter financial results for the smokeless product segment are in line with our year-to-date expectations.

These segment results are not comparable to USSTC's reported results, prior to Altria's acquisition, as they now include smokeless product results for PM USA.

In addition, we remain on track to realize the $300 million in cost savings resulting from the acquisition.

The impact of these cost savings is reflected partially in the smokeless product segment operating companies income performance, with the balance reflected in other business areas across the Altria family of companies due to our new, more efficient corporate structure.

We expect the second quarter of this year to be particularly challenging for income growth comparison purposes due to different trade inventory dynamics in 2009 versus 2010.

We continue to expect adjusted diluted earnings per share growth to build in the second half of this year.

For the full year, Altria reaffirms that its guidance for 2010 adjusted diluted earnings per share is expected to be in a range of $1.85 to $1.89, which represents a 6% to 8% growth rate from an adjusted base of $1.75 per share in 2009.

Now, I will 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.

I will begin by discussing our cigarette segment results.

During the quarter, PM USA successfully executed its objective of maximizing income while maintaining Marlboro's strong position in the cigarette segment.

For the first quarter of 2010, reported operating companies income for the cigarette segment increased by 7.6% to $1.2 billion, due primarily to higher list prices and lower pre-tax charges related to the previously announced closure of its Cabarrus manufacturing facility, partially offset by lower volume.

When adjusted for restructuring charges, first quarter adjusted cigarette segment's operating companies income grew by a strong 6.7% to $1.3 billion, versus the same year-ago period.

Trade inventory increases in the first quarter of 2010 helped cigarette segment volume and income results for the period.

We expect that the trade will return inventories to more normal levels which will have a corresponding impact on PM USA's business results when it occurs.

After adjusting for trade inventory changes, PM USA's first quarter cigarette shipment volume declined by approximately 11%, which is greater than the estimated industry decline rate of approximately 10%, primarily due to retail share losses when its portfolio brands of one share point.

PM USA profitably reset the retail share positions of these brands after the FET increase last year, and we therefore expect that PM USA's comparable year-over-year retail share results will improve over subsequent quarters as we begin to lap these reset retail share positions.

Marlboro had a record retail share of 42.7% in the first quarter of 2010.

Marlboro achieved this result with sequential retail share growth on both the menthol and non-menthol components of the brand.

While launch support for the Marlboro Special Blend products played a role in the strong retail share results, this share growth did not come at the expense of profits, as Marlboro grew its margins in the first quarter of 2010, versus the first quarter of 2009.

We are also pleased that Marlboro Menthol achieved record retail share results in the first quarter of 2010, with a six share.

Overall, we are very pleased with the performance of the cigarette segment.

Income growth was strong and Marlboro displayed great strength in a challenging environment.

We are similarly pleased with the smokeless product segment results in the first quarter.

Reported operating companies income was $178 million, an increase of $180 million from the comparable year-ago period.

When adjusted for exit and integration costs, and acquisition-related charges, adjusted first quarter operating companies income was $188 million, an increase of 49.2% from the prior year.

This strong income performance occurred despite costs associated with three national new product introductions in the first quarter of 2010.

Smokeless product shipment volume in the first quarter increased 21.9%, versus the prior year period, driven primarily by Copenhagen and Skoal, and the national expansion of Marlboro Snus.

Both Copenhagen and Skoal had solid underlying shipment performances.

After adjusting for the timing of new product launches, wholesale inventory changes and other factors, both Copenhagen and Skoal grew their first quarter shipment volumes versus the prior year period.

Copenhagen and Skoal's combined retail share performance was also very strong, as it grew both sequentially and on a year-over-year basis by eight-tenths and one share point, respectively.

Copenhagen's first quarter retail share of 25.6% was particularly impressive, as the brand share grew one share point on a sequential basis, and 1.9 share points on a year-over-year basis.

Now that Copenhagen and Skoal's combined retail share has been growing sequentially for the past couple of quarters, we expect that total smokeless products retail share will also return to growth on a year-over-year basis as the year progresses.

The cigar segment reported first quarter operating companies income of $47 million, down 13% from the prior year period.

When adjusted for integration costs, adjusted operating companies income declined 15.8%, to $48 million.

As Mike noted, Middleton's first quarter income and volume comparisons were particularly challenging due to the trade inventory build of machine-made cigars in the first quarter of 2009, prior to the FET increase.

Black & Mild increased its first quarter retail share of the machine-made large cigar category by three-tenths of a share point versus the first quarter of last year, to 28.2%, behind the continuing momentum of last year's new product launches.

Middleton has a strong pipeline of new products for 2010, including Black & Mild Royale, and plans to respond as appropriate to the competitive dynamics in the marketplace.

Ste.

Michelle also reported solid business results in the first quarter of 2010.

Overall reported operating companies income for the wine segment increased $6 million versus the prior year period, to $7 million.

When adjusted for exit integration and acquisition-related costs, adjusted operating companies income increased 33.3% versus the prior year period, to $12 million.

The wine segment shipment volume in the first quarter increased 22% to 1.4 million cases, versus the year-ago period.

Overall, the wine industry's retail unit volume, as measured by Nielsen Total Wine Database for US Food Drug & Liquor, increased 3.9% in the first quarter of 2010, and Ste.

Michelle's retail unit volume grew faster than the industry at 6.1%.

Reported operating companies income for the financial services segment in the first quarter of 2010 decreased $99 million versus the prior year period to $21 million, due primarily to lower gains on asset sales.

At the end of the first quarter, the allowance for losses was $202 million, reflecting a net decrease of $64 million, due primarily to write-offs on leases with General Motors.

Mike and I will now be happy to take your questions.

While the calls are compiled, let me cover a few housekeeping numbers.

Marlboro's price gap, versus the lowest effective priced cigarette was 33% in the quarter.

Marlboro's net pack price was $5.42, and the lowest effective price cigarette pack price was $4.08.

The cigarette discount categories first quarter retail share was 27.5%.

The estimated weighted average cigarette state excise tax at the end of the first quarter was $1.26 per pack.

There were no state excise tax increases in the first quarter of 2010.

However, New Mexico and Utah enacted legislation to increase their cigarette excise taxes on July 1.

Additionally, legislatures in Washington state and Hawaii sent bills to their respective governors that include cigarette excise tax increases.

Copenhagen's retail price was $4.15, and its net price gap versus the leading discount brand, was approximately 45% in the first quarter.

At the end of the first quarter, the District of Columbia, and 18 states, used a weight-based excise tax system representing 27% of the smokeless category's volume.

Our 2010 reported first quarter tax rate was 36.5%.

We anticipate that Altria's 2010 full-year effective tax rate on operations will be approximately 35.5%.

On April 15, 2010, PM USA made its full 2009 MSA payment of approximately $3.6 billion.

The MSA payment included approximately $209 million that PM USA disputes it owes as a result of the 2007 non-participating manufacturer adjustment.

In the first quarter, Altria recognized a one-time $12 million non-cash charge, due to the elimination of tax deduction for retiree prescription drug subsidies under the 2010 healthcare legislation.

And

CapEx was $38 million in the first quarter, and ongoing depreciation and amortization was $69 million.

Operator, do we have any questions?

Thank you.

(Operator Instructions) Our first question comes from Christine Farkas of Banc of America Merrill Lynch.

Thank you very much.

Firstly, a clarification, Dave, if I could.

The profitability on Marlboro was said to be higher year-over-year, but I'm wondering about the pricing for Marlboro.

You did have cost savings in the quarter.

Was the pricing up similar to your other brands or was it more moderate, or was it in fact down year-over-year with added promotions?

The overall profitability of Marlboro, as well as their other brands increased this quarter over last quarter, and it represents the strategy that we used in the marketplace, that includes our promotions and our new product launches.

So I hate to split out individual components of the brand marketing plans, but it was the totality of both the new product launches and our promotional activity in the quarter that enhanced Marlboro's margin.

Okay.

That's helpful.

And then just a broad question on smokeless.

If you can look at the regions around the US that were troubling given some high unemployment, if you look at where price gaps are now and Cope's (i.e.

Copenhagen) performance, can you talk about how that performance might have changed in the quarter?

Or are there some regions that are surprising you?

Thank you.

Well, hi, Christine, it's Mike.

I would say that in general, Copenhagen is doing very well, and that is pretty much across the board.

As you know, we look at price gaps pretty much by state and I wouldn't say that there is any particular areas right now where we would describe it as troubled, significant trouble spots, and on average, the gaps remain about where we thought they would be, which is in the kind of high 40's, mid to high 40's.

So there's nothing unusual going on.

Copenhagen's business is really being driven by getting the gap right, pretty averagely across the board, and by new products.

And in particular, the Wintergreen product at this juncture.

The other ones are so early in the marketplace, we really don't have any basis on which to read them.

Okay.

Great.

That's helpful.

Thanks, Mike.

Your next question comes from Chris Growe of Stifel Nicolaus.

Hi, good morning.

Good morning.

Good morning.

Hi, just had -- I had two questions for you.

The first will be that -- following on a bit to the question about price gaps here, in cigarettes, it has been at a pretty comfortable level, Marlboro versus the lowest effective price, around 33%, and that is a good percentage relative to history.

Do you foresee upward pressure on the discount packs as -- whether it is FDA costs or state tax increase, to where that gap could narrow a bill this year?

Would that be a reasonable assumption for the year?

Well, I don't know, I can't predict the future on that.

We kind of respond to what's out there in the marketplace.

And as I said before, we have had periods of time where the gap's wider than it is right now, when the economy is healthier.

And the two primary factors there are unemployment rates and consumer confidence, and so I think as unemployment rates come down, and confidence goes up, then there may be some opportunity there.

But I think the way we look at it is we watch the market and then we take advantage of opportunities in the market, as they unfold.

We don't try to guess where it is going.

We wait until it gets there and then we respond to it.

Okay.

And then I had a question for you on Marlboro overall.

Could you say within your market share, for Marlboro this quarter, how much new products like Special Blend, would have benefited the market share overall?

Well, I would just say to you that Marlboro actually exhibited strength in both the menthol and non-menthol side, and so we got some positive benefit on both those sides.

And certainly the new products were a part of that contribution.

But Marlboro was pretty healthy overall, and kind of across the board.

Okay.

And then just one final one for you.

You suggested that the inventory levels are at -- maybe coming down from where they are today overall.

Is that just an expectation for the rest of the year?

Do you foresee that happening in 2Q for example?

Or is that just an expectation given the levels they're at today that they do come down?

Well, I think that our view of it is that inventories, particularly at the wholesale level won't stay where they are.

I'm not going to speculate on when they come down.

I think that will be based on what wholesalers do.

But when you look at them, compared to the prior year activity, where you had an unusual circumstance in the prior year, where inventories really went to exceptionally low levels, where we knew they were going to come back up, it sets up a comparison that I've tried to explain, because it is a bit artificial.

It overstates, I think, what the real volume is.

But I can't tell you exactly what is going to happen, because I don't know.

But I would expect that we'll see some of that inventory depleted as the year unfolds.

Okay.

Thank you.

Your next question comes from David Adelman of Morgan Stanley.

Good morning.

Hi, David.

Hi, David.

Hi, Mike and Dave.

First, on the inventory dynamic in the first quarter in cigarettes, how much would your shipments have been down in Q1 if trade inventory levels did not increase during the quarter approximately?

Well, I think I gave you an adjusted number in the earnings release, which is 11%.

But that is taking into account both the anomalies last year and this year.

If you told us how much the first quarter benefited from trade loading this quarter, I think it would help us understand how much of a negative variance there would be later in the year if things reverted to where they were entering the year.

Well, I don't know that it is necessary.

I think you have a comparison that's adjusted, so that is the best I think I'm going to be able to give you at this point.

Okay.

And then in April, Mike, now that you've lapped the excise tax increase, what is your sense of the year-on-year consumption decline that the category is reverting to?

I'm not sure I know what you mean.

In other words, it has been an unusual period for consumers --

You have a quarter where, as I mentioned in the earnings release and in my remarks, you have a quarter where when we adjust out the factors, what we see is shipments.

Our estimate is that shipments in the industry are off about 10% when you adjust, and that that is consistent with normal price elasticity.

I don't know how to translate that into consumption.

No, all I'm saying, now in April, you've lapped the impact of the federal excise tax increase.

So second quarter to date, do you have an initial read of what it appears that underlying consumption declines are reverting to?

Well, we will look at the second quarter when we get to July.

We generally don't -- we don't start talking about the quarter until it is over.

Okay.

And then would the pending substantial potential increase in dividend taxation, is that going to cause the board to reconsider at all or re-evaluate the relative preference of dividends versus share repurchases?

As we have returning cash?

Both of those remain speculative issues.

We don't know what is going to happen exactly until we get there relative to tax rates, and the board makes those decisions when it thinks it has appropriate information on which to make them.

So I would say it is probably premature for us to be discussing it.

Okay.

And then last thing, Mike.

The historically Marlboro could grow share presumably with a price gap of in the mid-40s.

Do you think as the economy improves and unemployment rates get back to maybe where they had been two or three years ago, is that still a realistic benchmark or do you think with significantly higher pricing in the category, that more on a secular basis, the brand wouldn't be able to gain share with that magnitude of pricing gap?

Well I can't predict the future but I can tell you history would say that in a stronger economic environment where we have low, much lower unemployment, and we have higher consumer confidence, that we have seen the brand able to withstand broader gaps, and that is true pretty much across varying state tax laws, so there is significant difference between state tax levels and therefore, retail pricing.

So that is history.

Now I can't predict the future for you.

But I would say history would indicate that in those kinds of environments, gaps have been wider and the brand has been able to grow.

Okay.

Thank you.

Your next question comes from Judy Hong of Goldman Sachs.

Thanks, good morning.

Good morning.

Good morning.

Mike, just going back to David's question about the trade inventory movement, last year, you did quantify that your shipments were negatively impacted by about 800 basis points.

So if we take the gap between your reported shipments in the quarter, down 1%, and then your underlying shipments of 11% and assume that 800 points -- sorry, 800 basis points of inventory got rebuilt this year, is it really just two points of boost that you got from the quarter as the trade builds from beginning of the quarter to the end of the quarter?

Is that how we should think about it?

I don't know.

I'm not sure I understood exactly your equation there.

But look, I think the basic thing to understand here is that we saw inventories in the first quarter of this year build through the quarter.

And last year, what we saw is, as we got into March, was a significant depletion of inventory, and so that sets up a favorable comparison this year in volumes, but that ultimately we would expect there will be some depletion of that inventory.

That the trade won't carry that inventory forever.

So, that is what I think is important for people to know.

We can't predict exactly when that is going to occur.

But I think it is important for people to know it is there.

Beyond that trying to quantify it precisely is something I'm not going to do.

And Mike, was that more of a category-wide phenomenon?

Or was it more specific to your brands?

Why would the trade kind of rebuild inventory when the carrying costs are a lot higher this year, compared to history, because of the tax issue?

And is it any indication that they feel pretty comfortable with the underlying trends maybe going back to the historical trend line, as we are lapping the tax increases?

I'm not going to comment on that.

I think that's for wholesalers and for competitors to answer rather than for us to answer.

Okay.

And then on the smokeless side, again, as we think about the shipment number outpacing the underlying number, is there any way to quantify how much of that was specific to new product launches?

Well, I can't tell that you off the top of my head.

But what I would say to you is that what we saw on our two premium brands was pretty strong shipment performance throughout the quarter.

So that wasn't driven by tail-end shipments.

It was driven by pretty strong performance on those brands and share performance throughout the quarter, and some of that was driven by Copenhagen Wintergreen.

So I wouldn't attribute it simply to pipeline, on the two SKU's that we launched on Copenhagen at all.

It was a pretty good shipment performance, supported by share performance, and with good margins as well.

So, I would say that those two brands are doing a nice job right now.

Okay.

And then just broadly speaking on the smokeless side, I think clearly, you've set up the goal of achieving share gains on the premium brands, and sequentially it's gotten better year-over-year as their shipments are outpacing the broader categories.

So it seems like from a share perspective, you've achieved the goal of really gaining the share momentum back behind the brands.

As you think about your spending level behind the brands, and your investment that has gone against the two premium brands, are you comfortable now just in terms of the overall -- the pricing and promotional levels?

And at what point do you sort of start to think about maybe focusing a shift a little bit back toward profitability and price growth on these brands?

First of all, the brands are highly profitable.

So, I don't think there is a question of focusing on profitability.

They're highly profitable in the way we run them today.

And I think that it is a growing category.

And so it's appropriate when you have brands that look like they want to grow, and you're in a growing category, that of course, you want to have healthy margins, but you also want to take advantage of the growth potential that have you in front of us.

So we balance those two things.

And I think we're doing a pretty good job of that.

Okay.

Thanks.

Thank you.

Your next question comes from Thilo Wrede of Credit Suisse.

Good morning, gentlemen.

Good morning.

Good morning.

What is the expectation for the MST category growth for this year, now that we have one quarter behind us?

Well, you know, I think we quoted what looks to be our estimate of what the growth rate is in the category.

I'm not going to speculate on what it will do going forward.

But it seems to be running around 7%.

And so if you are expecting to grow share for the full year, does that mean that the adjusted OCI growth that you had for the smokeless product, is that sustainable for the full year?

Well, once again, I'm not going to speculate what is going to happen for the remainder of the year.

We give guidance for the total business, and we have reaffirmed that, but we don't do it by segment.

And so I think you're going to have to wait and see how the quarters unfold, just like we do.

Okay.

The Marlboro Special Blend, where did the smokeless for those line extensions come from?

It's got a pretty broad appeal, so it is coming -- some of it comes from some of the Marlboro franchise, but some of it comes from outside of the Marlboro franchise.

Some of it comes from some of the more branded oriented discount smokers, and it also comes from other competitive premium brands so its inflow is pretty broad.

Will the Special Blends, were they -- let's say accretive during the quarter given the discounted price that you offered them at?

Well, we haven't put an aggressive pricing structure on it.

So, it's been promoted but not at a level that exceeds what would be the level we use on other promotional SKU's.

So Special Blend is doing its job.

It is a nice addition to the portfolio.

And I'd note for you that Marlboro's margin improved during the first quarter, as we launched that product.

So, it hasn't had a negative impact on the overall brand's profit performance.

So not only the PM USA margin improved but the Marlboro margin as well?

Yes, the Marlboro margin was improved as well.

Okay.

Thank you.

Thank you.

Your next question comes from Nik Modi of UBS.

Good morning, everyone.

Good morning.

Good morning.

Just quickly want to clarify on the Special Blend promotional.

Is it a fair characterization to say that you reallocated some money from perhaps Marlboro Mediums on to the Special Blend for this launch?

I'm not going to discuss our spending strategies that we have.

Okay.

Second question, Dave, can you just talk about the raw material environment?

Are you still seeing pressure or has that abated somewhat from at least cost perspective?

I would say that it's moderate.

That when you look at the overall marketplace, with unemployment, recession, there have been a number of raw materials where price has gone up, a number where they've stayed somewhat steady.

So overall, I would say that it has been pretty moderate.

Moderate inflation you're saying?

Yes.

Okay.

And then the last question, for you, Mike, is just with the year now behind you with the UST integration and some new leadership at the UST division, just looking back on integration in your plans and the strategy, is there anything you see different going forward in terms of what you originally expected in terms of the plan?

Any changes you're making?

And from a cost savings perspective, are you searching and do you have any comfort with perhaps finding some excess upside in terms of the synergy number?

Well, I would say that we adjusted that number up a bit, after we bought UST, and we've had a lot of success in implementing the changes we wanted to make, and getting a different structure that was more efficient in place.

Not only as it related to the USSTC, but also relative to our other tobacco businesses, and I think we're pretty comfortable with how that's working.

But we are always looking for ways to continue to refine these things, and see if we can do them better, and do them more efficiently, so I wouldn't take that off the table.

That's just part of how we operate.

Overall, I think that transition was handled about as well as you could expect something like that to be handled.

It was done quickly.

It's been fully integrated into places like our sales force and our other consumer engagement activities, and we're collecting the savings that have been accrued from that process.

So I think we feel very good about that platform.

And we also feel very good about the brand opportunities that we have been able to identify to use to grow these businesses going forward into the future.

So we see plenty of opportunity there.

This is not an acquisition where the gains were simply short-term opportunities.

This is one where there is an opportunity to build and grow and continue to get momentum out of this business going forward, for an extended period of time.

That's what we expect to happen, and we're on the way to doing that.

Great.

Thank you very much.

Your next question comes from Adam Spielman of Citigroup.

Hello.

A lot of the questions I had have been asked.

But there is one other question that I hope you can answer.

You mentioned a couple of times you've seen increased promotional activity in the machine-made cigar category.

And I was wondering if you could say, if you could be a little bit more specific about which brands have been competing in this way?

I'd rather not be specific.

It's been a competitive marketplace and I think it will continue to be competitive.

But I would rather not highlight that.

Okay.

Okay.

Can I ask a question about smokeless, and in a slightly different way than before?

You've obviously, as always, you're balancing market share progression, and profitability, as all companies do.

Is it fair to say now that you're pretty comfortable with the trajectory of your market share, and it's time to start focusing more on the profitability side of that particular balance?

Well, again, I'll point out that these brands and this business is already highly profitable business, and so we haven't -- while we had to go through a transition of getting it reconfigured, as you can see by the first quarter, it makes a lot of profit.

And it makes a lot of profit in the way we're running it now, with the adjustments that we've made.

So I don't think we ever have not had a focus on profit.

We've had a focus on getting the system in place, in order to be able to maximize the potential of the business.

And we're going to continue now that we've got that system built to run the brand both to make money for our shareholders, and to sustain the ability to do that over the long term by building the brand equities that we have.

So both of those things have to remain important.

Thank you.

At this time, we will now take questions from the media.

Your next question comes from Chris Barrett of Bloomberg News.

Hi.

Good morning.

Actually, you folks have run through the answers to my questions so thanks for the time though.

Good.

You bet.

Your next question comes from Michael Felberbaum of Associated Press.

Good morning.

My question was whether you can say that, or whether you're seeing that consumers are more comfortable paying for premium brands like Marlboro, considering its strength this quarter?

And also, how much, if you could quantify, or give some detail as to how important the Marlboro Menthol and the Special Blends were to Marlboro's success this quarter?

Well, I would say just it is kind of difficult for me to give you an answer to your first question.

I would say probably the fact that gaps are being sustained at the level that they're at, which is a good indication of what people are willing to pay for in the cigarette business, and that the share has grown on a premium brand like Marlboro, would say that the status of things right now seems to be acceptable to consumers.

If they're looking for the Marlboro brand.

Whether that is changing or not is hard for me to speculate on.

Beyond that, I don't think we really would make a comment on your second question.

Thank you.

Your next question comes from Ann Gurkin of Davenport.

Good morning.

Hi, Ann.

Hi, Ann.

Hi.

With gas prices increasing, are you seeing any change in consumer purchase patterns at convenience stores?

What do you mean by gap prices?

At the pump.

Gas prices going up.

Oh, gas prices.

I thought you said gap prices.

I'm sorry, gas prices.

They've been this high before and frankly, we tried to do a correlation between gas prices and cigarette purchase behavior once before, and we couldn't find a correlation.

So I don't suspect there will be one this time, either.

But we haven't seen it to this point.

Okay.

And then second, regarding leaf purchases or contracting volume with farmers, are you reducing that contracted volume with farmers for leaf this year?

And if so, are you reducing your duration levels of your leaf inventory?

Well, we pretty much manage our duration levels based on our blends and then also based on volumes.

So we make appropriate adjustments and what our leaf inventory is as we go, and then that has implications on the quantity that we contract for to purchase.

So as cigarette volumes have come down, we have adjusted where our purchases are, and we also make appropriate adjustments in our inventory going forward.

That's kind of an ongoing process.

All right.

Thank you.

Your final question is coming from Thomas Russo of Gardner, Russo & Gardner.

Hi, Tom.

Good morning, Mike and Dave.

I have a question first for Dave on the equity income from Altria's investment at SABMiller, and the reason that it increased in the quarter seemed to relate to an issuance of common stock by SABMiller.

I'm curious how that worked out.

They issued stock in their treasury.

We assume that's going to be used for employee grants and options going out in the future.

There is an accounting rule that says you have to treat that as a sell, which we did, which resulted in a profit for this quarter.

I see.

And Mike, you can just take a look at the extent of the benefits from the efforts to rein back counterfeit and the contraband trade?

You're active around the country, and we read about your launches to go after certain retailers, and broadly speaking, what direction has that resulted in improving conditions?

Well, I would say that there was a time where you would have the kind of price changes that we saw in the market last year, and then you'd see this stuff pop up in a lot of different places.

And since we've put a stronger infrastructure in place and worked closely with law enforcement on this subject, it seems that, while it still will pop up, it gets identified more quickly and gets tamped back down again so it doesn't have as much of an impact on the overall business as it did a number of years ago.

So, it's one of those things where you have to invest and do due diligence on it on an ongoing basis.

In order to have some impact on the system that keeps it from occurring more broadly.

And that's why we do it.

We have the infrastructure and we sustain it.

And that's why I think we didn't see as much of it in this last go-around.

Sounds like money well spent.

The last question for me has to do with the lessons learned as you look across the category, across the markets for the rollout of Snus.

Either your early lessons or just looking across to your competitors experiencing Snus as a category.

Any early lessons that you can share with us?

Or are we still too soon on Marlboro's rollout?

Well, it's very early.

We're just in the stage of gaining distribution and getting it positioned on the shelf broadly.

We do have some learnings from our test markets relative to engaging cigarette smokers on this subject that we will be putting in place as a part of this expansion of Snus.

As I said, in my comments, we feel pretty good about the potential for Snus.

We have said for a long time, we think this will be kind of a methodical development of a business rather than something that happens rapidly.

And so based on the fact that I think we have a better understanding of that now, then we did when we went into test markets, we should see some more positive results from this, as it unfolds over the next few years.

But it's very early for us to be able to read anything on this.

And frankly, I think by the end of the year, we can probably compare it, at least somewhat, to kind of a similar duration of time in the test markets and see what is different.

And we will be looking back at that and trying to understand it.

Thanks, Mike.

Okay.

Thank you.

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

Cliff Fleet for closing comments.

I want to thank everyone for joining us today.

If you have any follow-up questions, please give us a call at Altria's Investor Relations group.

Thank you.

This does conclude today's conference call.

You may now disconnect.