奧馳亞 (MO) 2010 Q4 法說會逐字稿

Good day and welcome to the Altria Group 2010 fourth-quarter and full-year earnings conference call.

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

All lines have been placed on mute to prevent any background noise.

Representatives of the investment community and media on the call will be able to ask questions following the conclusion of the prepared remarks.

(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 business results for the fourth quarter and full year, and will not be discussing the status of tobacco litigation.

Our remarks contain forward-looking statements and projections of future results and I direct you to the Forward Looking and Cautionary Statements section 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, U.S.

Smokeless Tobacco Company's, Ste.

Michelle Wine Estates financial results from January 6 through December 31, 2009, are included in Altria's 2009 consolidated and segment results.

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

Altria reports its financial results in accordance with U.S.

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 and reconciliations are included in the earnings press release or are already available on our website.

In addition, comparisons discussed in this conference call are to the same prior-year period unless otherwise stated.

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.

Altria delivered strong results to its shareholders last year in a challenging business environment.

Adjusted diluted earnings per share grew by 8.6% to $1.90 per share, which exceeded our original 2010 guidance for adjusted diluted earnings per share growth.

We increased our dividend twice last year for a total increase of 11.8%, and Altria's total shareholder return in 2010 was 32.9%, significantly outpacing the S&P 500's total return of 14.8%.

Solid operating companies income results from the cigarettes, smokeless products, and wine segments as well as growth in earnings from our SABMiller equity investment were partially offset by lower operating companies income results from the cigar and financial services segments.

In the cigarette segment, PM USA successfully grew operating companies income by expanding margins while also maintaining share momentum on Marlboro.

The brand continue to perform very well in the marketplace as both the Marlboro non-menthol and Marlboro menthol components of the brand had solid retail share gains last year.

In addition, careful management of Marlboro's value equation helped the brand expand its operating margins while also supporting strong retail share growth.

A variety of new products continue to help build Marlboro's marketplace position.

The successful launch of the two Marlboro Special Blend non-menthol products in the first quarter last year and the introduction of Marlboro Skyline Menthol in the fourth quarter of 2010 helped build the brand's position.

In the first quarter of this year Marlboro is launching two new Special Blend products, one non-menthol and the other menthol, to round out this portfolio.

Marlboro Special Blend products give the brand new flavor profiles designed to appeal to competitive adult smokers and offers existing adult smokers equity building news on the brand.

In the smokeless products segment, USSTC and PM USA successfully grew their combined 2010 full-year retail share which enabled their combined adjusted volumes to grow faster than the category.

This adjusted volume growth contributed to strong adjusted operating companies income growth for the smokeless products segment in 2010.

Copenhagen performed particularly well in 2010 as the new product launches of Copenhagen Long Cut Wintergreen, Long Cut Straight, and Extra Long Cut Natural helped drive strong retail share gains and volume growth for the brand.

In the fourth quarter the brand also offered Copenhagen Black as a unique offering, specially blended with a rich dark character for a limited time only.

USSTC is now beginning to roll out a comprehensive set of brand-building initiatives to enhance Skoal's position in the marketplace.

These include the national launch of 10 new products for Skoal in the first quarter of 2011, including eight new Skoal Xtra products that build on Skoal's heritage as an innovative smokeless brand that delivers smooth taste.

USSTC and PM USA also continue to build their businesses in the emerging snus segment of the smokeless products category.

In the first quarter of last year, PM USA expanded Marlboro Snus nationally to build awareness in trial among adult cigarette smokers for these innovative smokeless tobacco products.

This month PM USA began shipping two new Marlboro Snus varieties in a bigger and bolder format for adult cigarette smokers looking for a more flavorful experience.

Also this month, Skoal began shipping two new snus varieties for adult smokeless tobacco consumers seeking a spit-free smokeless tobacco alternative.

We are pleased with the business and financial results achieved since we acquired UST a little more than two years ago.

The strong 2010 adjusted operating companies income results of our smokeless products and wine segments, when combined with the cost savings realized across the Altria family of companies resulting from the acquisition, made it accretive to our 2010 adjusted diluted earnings per share.

In our cigar segment, 2010 adjusted operating companies income, adjusted shipment volume, and retail share were all down due to increased competitive pressures that forced Middleton to invest in promotional initiatives to defend its position in the marketplace.

Some manufacturers are reportedly sourcing untipped, machine-made, large cigars from overseas locations.

Because the federal excise tax on cigars is calculated as a percentage of the product's price rather than per unit, companies that are importing cigars may be structuring their import transactions in such a manner intended to reduce their tax payments below comparable product manufactured domestically.

Although we believe these discrepancies will ultimately be resolved, in the short term Middleton plans to balance its operating companies income results with Black & Mild's retail share performance while determining the best approach to deal with the post FET increase challenges.

Middleton launched Black & Mild Royale last year to address adult cigar smokers preferences for different blends and tastes in cigars.

This launch, in conjunction with Black & Mild's other initiatives, restored the brand to sequential retail share growth in the back half of 2010 compared to the first half of 2010.

Black & Mild has a strong pipeline of new products and initiatives planned for this year, including two new untipped cigarillo products currently in test markets.

Altria Sales & Distribution made significant progress in the back half of 2010 creating an enhanced retail platform to support future initiatives in the smokeless tobacco and cigar businesses.

Over the last four months we have announced the national launch of 13 new smokeless products that are expected to build USSTC's and PM USA's smokeless products businesses in 2011.

In the wine segment, last year Ste.

Michelle achieved strong volume growth which contributed to strong operating companies income performance.

Ste.

Michelle drove this volume performance with continuing efforts to build distribution of the wines it owns or represents, and by continuing to produce high-quality premium wines.

Last year wines that Ste.

Michelle either produced or represented received more than 150 ratings of 90 or higher.

Altria and its operating companies delivered $317 million in cost savings in 2010.

We have now delivered over $1.3 billion of cost savings across our companies against the $1.5 billion cost reduction program off our 2006 cost base.

We are confident that we will successfully complete this program by the end of the year.

Altria remains committed to returning a large amount of cash to shareholders in the form of dividends as evidenced by last year's increase in our adjusted earnings per share dividend payout ratio target of 80%.

We are also pleased to announce that Altria's Board of Directors has authorized a $1 billion share repurchase program as an additional way to return cash to shareholders.

Altria intends to repurchase these shares in 2011, but the timing of such purchases depends upon marketplace conditions and other factors.

We also remain committed to reducing our financing costs over time and have made progress against this objective.

2009 and 2000 we paid off $1.7 billion of debt coming due and in 2010 we took advantage of the low interest rate environment to issue $1 billion in new debt.

These actions reduced our long-term weighted-average coupon cost and helped lower the company's debt-to-EBITDA ratio.

As additional debt comes due over the next few years, Altria will decide whether to refinance or retire this debt in whole or in part depending upon the marketplace, business needs and conditions, and other factors, including our desire to maximize cash returns to our shareholders.

The business environment for 2011 is likely to remain challenging.

Adult consumers remain under economic pressure and face high unemployment.

We are also cautious about the competitive promotional environment and mindful of uncertainties facing our tobacco businesses as they enter the year.

In the cigarette business, PM USA is continuing to see significant competitive activity and is also cautious about the outlook for excise tax increases given the budgetary situation in many states.

In the smokeless products business, while we are very pleased with our business results, USSTC is just beginning to execute its plans for Skoal.

And in the cigar business Middleton faces an especially challenging competitive environment, which we believe will be resolved over time.

Our guidance for 2011 is, thus, appropriately prudent in light of these uncertainties.

Altria forecasts that adjusted diluted earnings per share will increase by 6% to 9% to a range of $2.01 to $2.07 from an adjusted base of $1.90 per share in 2010.

Due to inventory movements in the cigarette business and the timing of new product launches in 2010, we anticipate 2011 adjusted diluted earnings per share to build and accelerate as the year progresses.

I will now turn the call over to Altria's new Chief Financial Officer, Howard Willard, who will discuss Altria's business segment results in more detail.

Thank you, Mike.

Good morning, everyone.

Before I begin let me take a moment to introduce myself.

I have been with the Altria family of companies since 1992 and I have held leadership positions across the organization in finance, sales, information services, compliance, and corporate responsibility.

Most recently, I led our Strategy and Business Development Group where I had responsibility for the acquisition and integration of Middleton, USSTC, and Ste.

Michelle.

I look forward to meeting many of you at our investor day next week.

The cigarette segment reported solid operating companies income results in 2010.

Last year the cigarette segment's reported operating companies income increased by 7.8% to $5.5 billion due primarily to higher list prices, lower restructuring costs and promotional spending, as well as higher cost savings from its manufacturing optimization program.

These factors were partially offset by lower volume and higher FDA user fees.

Excluding restructuring charges, adjusted cigarette segment operating companies income grew by 4.5% to $5.6 billion.

PM USA grew 2010 adjusted operating companies income by expanding its adjusted cigarette segment's operating margins by 1.6 percentage points to 38.3%.

PM USA's reported cigarette shipment volume declined 5.3% for the full year, but was down an estimated 6% when adjusted primarily for trade inventory changes.

PM USA estimates that the total cigarette category's adjusted volume declined 5% last year, which is in line with historical price elasticity of negative 0.3.

The cigarette category's estimated volume decline rate was 7% in the first half of the year as the category lapped the FET-related pricing actions which occurred in the first half of 2009 and 4% in the second half of 2010.

Marlboro performed very well last year as it grew its full-year retail share of the cigarette categories by 0.8 of a share point to 42.6%.

Marlboro had balanced retail share growth as its non-menthol business grew 0.5 a share point to 36.6% and its menthol business grew 0.3 of a share point to 6%.

Marlboro's strong retail share growth largely offset retail share declines from the balance of PM USA's brand portfolio.

PM USA's 2010 retail share of the cigarette category was down 0.1 of a share point to 49.8%.

The cigarette segment's operating companies income, shipment volume, and retail share results in the fourth quarter were impacted by trade inventory changes and differentials in retail pricing around the list price increases taken by some cigarette manufacturers in the quarter.

In the fourth quarter of 2010, reported cigarette segment's operating companies income was up 7.4% to $1.2 billion.

Excluding restructuring costs, the cigarette segment's fourth-quarter adjusted operating companies income grew by 1% to $1.2 billion.

PM USA's reported fourth-quarter cigarette shipment volume declined by 7%, but when adjusted primarily for changes in trade inventories declined an estimated 6%.

This volume decline rate exceeded the estimated fourth-quarter cigarette category decline rate of 4% due to moderate retail share losses in the quarter for PM USA's cigarette brand portfolio.

Marlboro's fourth-quarter retail share grew by 0.6 of a share point to 42.3%.

Continuing momentum from the Marlboro Special Blend products launched earlier in 2010 as well as the introduction of Marlboro Skyline Menthol in the fourth quarter contributed to these strong retail share results.

Marlboro's retail share gains largely offset retail share declines in the balance of PM USA's cigarette portfolio.

PM USA's retail share in the fourth quarter of 2010 was down 0.2 of a share point to 49.2%.

The smokeless products segment had strong financial results for both the full year and fourth quarter of 2010.

Reported smokeless products segment's operating companies income for 2010 grew over 100% to $803 million.

Excluding restructuring and acquisition-related costs, 2010 adjusted operating companies income for the smokeless products segment grew 30.9% to $827 million.

In the fourth quarter, USSTC and PM USA reduced promotional activities and allowed trade inventories to adjust and stabilize as ALS&D implemented its enhanced retail platform in about 60,000 stores.

These activities impacted the adjusted operating companies income margins, shipment volume, and retail share results for the smokeless products segment in the quarter.

Reported smokeless products segment's income for the fourth quarter grew over 100% to $217 million.

Excluding restructuring and acquisition-related costs, fourth-quarter adjusted operating companies income for the smokeless products segment increased 63.5% to $224 million.

In 2010, USSTC and PM USA's adjusted smokeless products volume growth exceeded the smokeless product category's estimated growth rate of 7%.

Reported smokeless products shipment volume increased to -- by 12.2% last year, but when adjusted primarily for trade inventory changes and new product pipeline volume was estimated to be up 8%.

In the fourth quarter, reported smokeless products shipment volume increased by 2.5% but when adjusted primarily for trade inventory changes and new product pipeline volume was estimated to be up 7%.

USSTC estimates that the smokeless products category grew 6% in the fourth quarter of 2010.

USSTC and PM USA grew their combined full-year retail share of the smokeless products category by 0.7 of a share point to 55.3%.

Copenhagen's strong retail share gains of two share points for the full year more than offset Skoal's retail share declines and was a principal driver of overall retail share growth.

In the fourth quarter, USSTC and PM USA's retail share of the smokeless products category declined 0.1 of a share point to 54.5%.

Copenhagen grew its fourth-quarter retail share by 1.1 share points to 25.7% behind the continuing marketplace momentum from its new product launches.

Skoal's fourth-quarter retail share declined by 1.6 share points to 21.7%.

USSTC expects Skoal's performance to improve in 2011 due to planned brand-building initiatives and new product launches.

Reported cigar segment operating companies income for the full year and fourth quarter declined by 5.1% to $167 million and 43.2% to $[21] million, respectively.

When adjusted for integration costs, adjusted cigar segment's operating companies income for the full year declined by 8.6% to $169 million and 43.6% to $22 million for the fourth quarter.

Adjusted cigar segment's operating companies income declined in both periods largely due to promotional investment made by Middleton in response to competitive dynamics in the marketplace.

Middleton's 2010 reported cigar shipment volume declined by 1%, and when adjusted for changes in trade inventories declined by an estimated 4%.

In the fourth quarter of 2010 reported cigar shipment volume was essentially unchanged, and when adjusted for changes in trade inventories declined by an estimated 1%.

The primary driver of volume declines in both periods was retail share losses on Black & Mild.

Middleton estimates that the machine-made large cigar category grew by 2% in 2010 and approximately 4% in the fourth quarter of 2010.

Black & Mild's full-year retail share of the machine-made large cigar category declined by 1.3 share points to 28.5%.

For the fourth quarter of 2010, Black & Mild's retail share declined by 1.5 share points to 29.1%.

Black & Mild's retail share declines in both periods were driven primarily by increased competitive activity.

Black & Mild's successful brand building efforts, which included the launch of Black & Mild Royale last summer, helped the brand return to sequential retail share growth.

The brand's second half of 2010 retail share was 1.2 share points higher than the first half of 2010.

The wine segment reported strong operating companies income and volume results in 2010.

The wine segment's reported operating companies income increased by 41.9% to $61 million for the full year of 2010 and by 42.9% to $30 million for the fourth quarter.

Excluding restructuring and acquisition-related costs, adjusted operating companies income for the wine segment increased by 13.7% to $83 million for the full year and by 23.3% to $37 million for the fourth quarter.

Ste.

Michelle's 2010 wine shipments grew by 10.8% in the fourth quarter and 11.3% for the full year.

The financial services segments reported operating companies income for 2010 declined by $113 million to $157 million, due primarily to lower gains on asset sales.

For the fourth quarter of 2010 the financial services segment's reported operating companies income increased by $60 million to $70 million, due primarily to higher gains on asset sales and asset impairment and exit costs in 2009.

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

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

Marlboro's price gap versus the lowest effective priced cigarette was 35% in the fourth quarter and 34% for the full year.

Marlboro's net pack price in the fourth quarter was $5.66 and for the full year was $5.55 while the lowest effective priced cigarette was $4.20 in the fourth quarter and $4.14 for the full year.

The cigarette discount category's fourth-quarter retail share was 27.9% and was 27.4% for the full year.

The estimated weighted average cigarette state excise tax at the end of the fourth quarter was $1.36 per pack.

Copenhagen's fourth-quarter net retail price was $4.25 and its price gap versus the leading discount brand was approximately 39% in the quarter.

For the full-year, Copenhagen's net retail price was $4.20 and its price gap versus the leading discount brand was 41%.

As of January 1, 2011, 20 states and the District of Columbia used a weight-based smokeless tobacco excise tax system representing approximately 32% of the smokeless tobacco category's volume.

And CapEx was $52 million and $168 million for the fourth quarter and full year of 2010, respectively.

Ongoing depreciation and amortization was $68 million and $276 million for the fourth quarter and full year time periods, respectively.

Operator, do we have any questions?

(Operator Instructions) Christine Farkas, Bank of America Merrill Lynch.

Thank you very much.

Good morning, everyone.

Mike, I am wondering if I can ask you regarding your opening remarks, you talked about a competitive promotional environment as you enter the year, yet your cigarette pricing in the fourth quarter, the net pricing to Altria, was strong, over 7%, as per our calculations.

Were your comments really about cigars or broader tobacco?

Well, I think the answer is yes, yes, yes.

All of these categories [have and] continue to be competitive, and so that is not a new thing in particular to the business.

So I would say that, yes, the cigarette category continues to be competitive, continues to be competitive activity out in the marketplace, but the other two categories are competitive as well.

Okay, thanks for that.

And moving to smokeless, also you mentioned trade inventories were adjusted or you allowed trade inventories to adjust in the fourth quarter and this is a factor in your smokeless share.

Would you say that we are at normal levels now?

And, of course, with new products in January do you expect load in the first quarter?

Well, we mentioned in our remarks that we have been busy really getting the space right for the category in a large number of stores.

We have worked on that through the entire back half of the year.

I think we have accomplished that in about 60,000 stores that represent a good percentage of the smokeless volume in the US.

Part of what we did was we reduced significantly in the fourth quarter the amount of promotion activity in the smokeless -- in our smokeless business in order to be able to let the inventories get stabilized in light of a change in the shelf space that had occurred over the back half of the year.

So I can't speak to whether or not that is fully balanced out in retail storage right now because I don't know.

I just can tell you we wanted to give it a chance to occur.

And you are right; there will be a number of new items that go into the category.

All of these products are short of shelf life products, Christine, so they don't tend to have a large amount of inventory go in when they are launched, because you have to be mindful of the limited shelf life.

Okay, that is helpful.

Can you just describe what the changes in the shelf space was, just in summary, in terms of more or less or different?

Well, you know, post the FET you had a pretty good decline in overall cigarette volumes in the industry and you have continued to have growth in the smokeless category and you have continued to have growth in the cigar segment.

So much of this was really a rebalancing of the space in these stores in order to get the room right for cigarettes and to get the inventories right-sized for cigarettes relative to the changes in overall industry volume.

And then take that space and use it to accommodate the growth because the smokeless category was behind relative to its growth rate in terms of how space was being allocated.

It just wasn't being focused on the way it should have been.

So it really is -- I think the best way to describe it is a reallocation of space within the total sector to accommodate the trends that have been going on for a while in those sectors.

Great, that makes sense.

And finally, for Howard, if I could.

On CapEx the guidance for 2011 is $200 million as per your press release and I am just wondering why that would tick up from 2010.

Well, I think there is a number of factors but when you look at our capital expenditures you have to look at what is occurring across not only cigarettes but also our other tobacco businesses.

And then, of course, in the wine business that is a bit more capital intensive as well.

Okay, thank you very much, everyone.

Chris Growe, Stifel Nicolaus.

Good morning.

I had two questions for you.

The first one would be when you talked about kind of the phasing of earnings in the first half of 2011 versus the second half, you mentioned cigarette inventories and some of the introduction of smokeless products.

I guess I just wanted to better understand, do you foresee some inventory adjustments to cigarettes here early in the year and is there any follow on from what you are doing on the smokeless side to cigarette inventories?

Are we seeing inventory levels at cigarettes come down because of the space allocation changing?

Well, I can't suggest to you that I think you are going to see retail cigarette inventories come down because of the space changing in retail stores because I think much of that has been reflected in 2010.

But I think the comment that we made was that we expect to see our earnings growth build and accelerate as the year progresses in 2011, both because -- we don't run the same set of plans in each year.

We are putting out things in the marketplace based on what we think is best for the business in that coming year relative to the competitive environment.

And there are other factors that influence inventories during the year, things like timing of pricing and so on.

So all we are saying is that when we are looking at the year it appears to us that is how it will unfold based on what we know today.

Okay, okay.

And then I have a question regarding the -- I guess really in regard to promotion behind the smokeless tobacco business.

There was a pullback here in the fourth quarter.

It sounds like it may have accomplished most of what you want to do; maybe there is some lingering there.

But with 10 new products behind -- for Skoal I guess what I am trying to understand is from a promotional standpoint in 2011 do you see any material change year-over-year for the full year?

Could we see that tick up a bit here around the new product activity?

Do you expect to back off a little bit on Copenhagen?

Is there any color you can offer there?

No, I think that would be competitively sensitive information so I don't think I will go into any detail.

Okay.

And then my final question is was to be, you did discuss the state excise taxes as, I guess, a bit of a risk factor for 2011.

Do you have an estimate of what you believe today?

I know it's hard to predict that, but what sort of increase we could expect for this coming year?

And I guess does it all depend on the state budgets and that kind of thing, any sort of early indication?

You know, we make estimates and they are a part of our planning process, and that would be included in the guidance.

But beyond that I wouldn't provide specific detail.

It sounds like you would start with a conservative estimate for the year given what you know today, is that right?

Well, we would start with an estimate.

Okay, thank you.

David Adelman, Morgan Stanley.

Good morning, everyone.

Mike, first let me follow up on the Skoal effort.

These 10 new product launches, how much or approximately what percent of Skoal's volume do you think those products will ultimately be?

I am just trying to understand the magnitude of what you are doing.

Ten products is obviously a lot to introduce on any brand.

Well, not so much when you see the variations of styles that exist in the smokeless business.

It's really four flavors in a line of products that have multiple forms, so that is the bulk of these product launches.

But, no, we wouldn't give out what we would estimate to be the volume.

They are just now being announced so it's a little early to start predicting how they are going to perform in the marketplace.

Can you comment on where those products are likely to be priced versus discount competition, because obviously Copenhagen Wintergreen is essentially priced, as far as I understand it, in line with discount wintergreen products?

Well, they will be launched with some introductory pricing and then beyond that we won't speak to what we are going to do with them.

Okay.

And then are you willing to comment on what you envision as a reasonable rate of decline of the US cigarette category during 2011?

No, I wouldn't say anything other than I guess the way we look at it is there is no evidence that we have from history that the category decline rate, based on normal price elasticity, is going to show some deviation from that history.

So I don't have any reason to believe that it will.

Okay.

And lastly, what is the intent or the capacity for material cost reductions through the organization upon the completion of the existing program this year?

Well, as you know, over the last three years we have done a major restructuring of the corporation and made a couple of acquisitions and taken out factories as part of that restructuring.

And so we have announced what it would produce when we did that and how long it would take, and we have been getting that work done.

I think looking ahead, as we look at a cost saves, we believe that we will continue to see declines in volume in the cigarette industry and in our cigarette business.

So we are focused on continuing to methodically reduce cigarette infrastructure.

We don't have major factory locations that will be affected by that decline because we only have one major manufacturing facility now.

But we do have other areas in the operation of cigarettes that we can -- have declined in terms of cost as the volume comes down.

So that will be a primary component.

Then in the growth businesses, particularly the smokeless business but also the cigar business -- but primarily in the smokeless business -- we want to realize that growth in a way that we are not adding a lot of cost, so we can have an impact that is positive on our cost per unit as the volume will grow and we won't have to expand capacity or take a major costs.

So we are looking for ways to really be more efficient in the way we operate our smokeless operations as the volume grows so we can absorb that volume growth and get a positive impact on our cost structure.

That also is the case of some of the service areas, like Sales & Distribution and the Altria Client Services operation.

We are looking for ways to be able to absorb smokeless growth.

Sometimes be able to, in those service organizations, transfer assets that have been applied to the cigarette business over to the smokeless business.

Sometimes we won't and we will be taking some of those assets out.

But that is really the fundamental approach as we look at how we are going to get productivity out of the business, at least over the next two years.

Okay, thank you.

Judy Hong, Goldman Sachs.

Thanks, good morning.

Mike, just looking at your cigarette performance in the fourth quarter, it looks like your net pricing per unit actually was down sequentially from the third quarter, yet your Marlboro share was also a little bit weaker just compared to the third-quarter performance.

So I am just trying to understand whether you think that the line extensions and some of the promotional activity that you are putting into plays around these line extensions are actually benefiting the Marlboro trademark enough.

And then just broadly longer term the implications on the Marlboro trademark with these line extensions.

Well, first of all, I wouldn't get too focused on quarter-to-quarter comparisons because we really don't run the business that way.

We really do have an approach that is longer term than that.

We are looking for modest growth on the Marlboro brand in terms of share and maximizing profitability out of our cigarette business.

That is the way we run the business and we make decisions based on what we think is best for that outcome.

It can have a negative -- those decisions can have a negative impact on the comparison of one quarter versus a previous year at any point in time.

So we don't worry too much about that.

We feel like Marlboro had nice growth, share growth, in the fourth quarter versus the previous year and that the equity remains strong.

We will talk some about that on Monday in our investor day in more detail.

But, no, I don't see anything there to be particularly concerned about.

Okay.

And then just in terms of broadly, I guess just going back to my question about these line extensions and -- the strategy that you are using these line extensions to really help the Marlboro trademark are they going after different consumer segments?

Would the price points come up over time as you get more traction on these line extensions?

I guess I am just trying to understand sort of the broader --.

Well, I wouldn't generalize on any of this.

It's a big country.

It has got lots of different markets within it.

Lots of different states, lots of different pricing variables that exist all over the place, and there are different kinds of development on different products and competitive products in the marketplace.

I think what you have to recognize is that Marlboro is a big brand and that in a declining category the way that brand grows is that it has to get competitive smokers to join its franchise, and it needs to keep its adult smoker, consumers that are in that brand that are continuing to participate in the category.

So the kinds of extensions that we do are designed to reach out to competitive adult smokers and give them an opportunity to join the brand franchise called Marlboro.

At the same token, we get an additional benefit on the brand because it provides equity news.

And so even if an existing consumer for the Marlboro brand on mainline SKUs isn't interested in the new SKU, it does in fact bring news about the brand to them.

So that is the reason why we do them, because this brand is a brand that continues to show the equity strength to grow out into the future.

But to grow it has to reach out to competitive adult smokers.

Okay.

And then the $1 billion share buyback program, I am just curious in terms of how you have come up to a decision to buy back stock rather than maybe using the money to pay down the debt or just reduce the financing costs even more than what you have done so far.

Well, I think what we said in the past on this subject is that when it comes to our balance sheet, our objective is to maintain a strong investment-grade credit rating and it's to support a strong dividend payout ratio targeted at 80%.

Then it's to make progress on reducing our financing costs relative to the debt we took on from the UST transaction.

We made good progress in all three of those fronts in 2010.

As the Board has looked at the circumstance we feel like we will continue to make progress there but that we have to take the capability buy back $1 billion worth of stock in 2011.

And so our interest is in doing things that are in the interest of our shareholders and we think that is.

Okay, thanks.

Ann Gurkin, Davenport.

Good morning.

Congratulations on continuing to gain share in Marlboro.

I guess I am still wrestling with the greater PM USA cigarette volume decline versus the industry and how to think about that for 2011.

Is there some more trade inventory adjustment or how should we think of volume loss versus share loss gain?

Can you just help me better understand that relationship?

Well, I actually think that when we look at the year for our overall cigarette volume that it was in line with what we would have expected.

And as I said before, I wouldn't get too caught up with the quarter-to-quarter change given all of the moving parts that can have an impact on a quarter and relative to comparison with the previous year's quarter.

So as we look out into 2011 should we see PM USA cigarette volume track more like the industry, is that a fair assessment?

Well, I can't predict the future but we don't see anything that is out of line relative to the way our volumes are performing.

That is great.

Thank you.

Vivien Azer, Citi.

Good morning.

I was wondering if we could circle back to the retail reset.

It sounds like you guys did a ton of heavy lifting in the back half of 2010 in terms of reconfiguring the in MST category.

Is there more work to be done for 2011?

Well, there is always work to be done in the new year, but the initial phase of what we wanted to get accomplished in 2010 got completed so that is on track.

We will continue to work on improving the segment's retail presentation, but what we set out to accomplish in the back half of 2010 we accomplished.

Okay, fair enough.

And then on the margin, given that reconfiguration, does that give you increased confidence in the outlook for the category growth given the new phasing structure?

Sorry, I didn't quite get all of that.

Do you have -- where does that leave you in terms of your outlook for the MST category in terms of volume growth?

I don't think we see any fundamental change in the trend line in that category.

It has been -- if you look at it, it has been pretty steady at a 7% growth rate so I am not anticipating any significant change in that.

Fair enough.

My last question has to do with the new Marlboro Snus introduction.

Are those incremental or are those replacing what is existing in the market today?

No, those are new products, incremental products.

They are of a different format so they offer, as you study the consumer in this segment and the development of this segment you see different -- people have kind of different preferences relative to these Snus products.

So these products have a different pouch size, for example, and they are a different set of flavor profiles, and that is all based on continuing consumer research.

Fair enough.

Thank you very much.

Philip Gorham, Morningstar.

Good morning.

A question on menthol.

I think you said in the last quarter that you were building your share in menthol and obviously the Special Blend launch is part of that.

Could you update us on how that is going and just perhaps talk about what opportunities you see there?

Particularly curious because of the FDA overhang and the timing of that launch.

Well, first of all, the initial launches on special blend that took place at the end of 2009 were both non-menthol products.

The launches that are taking place, just beginning to be announced actually at retail and really won't impact the marketplace until March, one is a non-menthol product and the other one is a menthol product.

So there hasn't been really any impact on our menthol business by Special Blend thus far.

We did launch in the fourth quarter a product called Skyline, Marlboro Skyline, which is a different blend on Marlboro that has a different appeal to competitive menthol smokers to the brand.

And that is off to a good start but it's early for that product.

But it's continuation of us reaching out to competitive menthol smokers with products that they might enjoy.

Then beyond that relative to FDA that process continues and sometime in here I think over the next couple of months we ought to see whatever recommendations come out of the TPSAC committee.

We will talk about that in a little more detail on Monday.

Okay, thanks.

And could you update us as well on the rollout of the new retail platform in smokeless?

How many markets are you in with that and how much of the incremental shelf spacing [label] (inaudible)?

Well, it's approximately 60,000 stores.

They are spread around the US, focused really on the more highly developed smokeless tobacco marketplaces in the country.

The space variation is really by store so it's really based on how the business has developed in a particular store.

Averages don't mean much in that regard.

Okay.

Thanks a lot.

Priya Ohri-Gupta, Barclays Capital.

Good morning.

I was just wondering if you could elaborate on your plans to fund the $1 billion share buyback program.

Thank you.

If I could elaborate on what?

Your plans for funding of the share buyback program.

Our plans for funding it?

Yes, cash.

Well, we will fund it out of assets that we have on our balance sheet.

Yes, we have numerous sources of liquidity and we are not going to comment further.

Okay, that is helpful.

Thank you.

Todd Duvick, Bank of America and Merrill Lynch.

Good morning.

Quick question for you on the balance sheet again.

Can you just give us any updated thoughts in terms of whether or not you are still looking at your high coupon debt potentially taking out some of that, or refinancing any of that?

No, we wouldn't make any comment on what our plans are there.

Okay.

All right, thank you.

That was our final question.

I will now turn the floor back over to management for any closing remarks.

I want to thank everyone for joining us here today.

If you have any follow-up questions, feel free to give us a call at Investor Relations.

We also hope that you will participate in our investor day presentation on Monday, January 31, 2011, which will be webcast on www.Altria.com.

Have a good day.

Thank you.

This does conclude today's conference call.

You may now disconnect.