奧馳亞 (MO) 2012 Q3 法說會逐字稿

Good day, and welcome to the Altria Group 2012 third-quarter earnings conference call.

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

(Operator Instructions).

I would now like to turn the call over to Mr. Brendan McCormick, Vice President Investor Relations for Altria Client Services.

Please go ahead, sir.

Good morning, and thank you for joining our call.

I am joined this morning by Marty Barrington, Altria's Chairman and CEO, and Howard Willard, Altria's Chief Financial Officer.

This morning, we will only be discussing Altria's business results for the third quarter and first nine months of 2012 and will not be discussing the status of tobacco litigation.

Our remarks contain forward-looking and cautionary statements and projections of future results, and I direct your attention 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.

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

Altria reports its financial results in accordance with US generally accepted accounting principles.

Today's call will 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 today's earnings press release and are 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 Marty Barrington.

Thanks, Brendan.

Good morning, everyone, and thank you for joining our call.

Altria delivered solid financial results for the third quarter and first nine months of 2012, while taking steps to strengthen its ability to create shareholder value in the future.

Our tobacco businesses grew their adjusted operating companies' income and expanded their margins for both the third quarter and first nine months of 2012.

Each of our tobacco companies also grew their retail share for the same time periods, while investing to develop their brands for the long-term.

Products introduced in recent years continued to support these income and retail share gains.

Our tobacco companies remain focused on developing and commercializing innovative new products to meet the evolving preferences of adult tobacco consumers.

The business performance of our operating companies enabled us to increase our already strong cash returns to shareholders.

Altria increased its dividend by 7.3% in the third quarter, our 46th dividend increase in the last 43 years.

We also returned cash to shareholders by repurchasing over $260 million of our stock during the quarter.

Earlier today, we announced a $500 million expansion of our current $1 billion share repurchase program.

We also took steps to enhance our capital structure during the quarter.

We purchased high-coupon debt and issued new, lower-cost debt.

These actions reduced our 2018 and 2019 debt maturity towers, lowered our future interest expense and reduced our weighted average coupon rate.

Altria grew its 2012 adjusted diluted EPS by 3.6% for the third quarter and 7.8% for the nine months.

These results were consistent with our expectations and include the negative impact of an increase in Altria's 2012 full-year effective tax rate on operations related to the debt tender offer.

The smokeable products segment delivered solid adjusted OCI growth and adjusted OCI margin expansion for the third quarter and nine months through higher list prices and effective cost management.

We coupled this solid OCI growth with retail share gains on Marlboro.

Marlboro's new brand architecture has contributed to the brand's results.

Marlboro's brand-building initiatives across our four product families have included the successful expansion of new products, equity-building promotions that engaged millions of adult smokers and promotional offers intended to generate trial and conversion by adult competitive smokers.

In addition, PM USA expanded Marlboro NXT, a product in the Marlboro Black family, into 27 states at the end of the third quarter.

Marlboro NXT contains capsule technology that allows adult smokers to switch from non-menthol to menthol taste.

Marlboro's growth was complemented by retail share gains by L&M in the Discount segment.

PM USA's strong shipment volume outperformed the industry and its principal competitors on both a reported and on an adjusted basis.

Black & Mild also delivered strong retail share growth for the third quarter and nine months behind products that were introduced in recent years.

Black & Mild's results also benefited from the 2012 third-quarter introduction of Black & Mild Jazz into select geographies and its seasonal offering, Summer Blend.

In smokeless tobacco, USSTC's objective is to increase its income through volume growth, primarily by focusing on Copenhagen and Skoal.

USSTC aims to maximize the combined performance of these two leading premium brands by focusing on the strengths of each brand.

Copenhagen and Skoal grew their combined reported shipment volume and retail share for both the third quarter and the first nine months.

This performance helped the smokeless products segment grow its third-quarter and nine-month adjusted OCI and adjusted OCI margins.

Copenhagen continued to be the primary driver of volume and retail share growth, as it benefited from new products introduced in recent years, including the recent expansion of Copenhagen Southern Blend.

Skoal's volume and retail share comparisons were impacted by competitive activity and Copenhagen's strong performance.

Skoal's nine-month comparisons were also impacted by last year's SKU de-listing and the introduction of Skoal Xtra.

USSTC is taking steps to improve Skoal's performance, and recently announced the fourth-quarter expansion of Skoal ReadyCut into over 20 states.

Skoal ReadyCut offers adult dippers an easier-to-control, long-cut product.

In the wine segment, Ste.

Michelle delivered strong adjusted OCI results for the third quarter and nine months through higher pricing, higher shipment volume and improved premium mix.

We are pleased with our business results through the first nine months of 2012 and reaffirm that we expect to deliver adjusted diluted EPS growth of 7% to 9% for the full year, representing a range of $2.19 to $2.23 per share.

We also expect to deliver full-year reported diluted EPS between $2.03 and $2.07 per share.

I will now turn things over to Howard, who will discuss our business results in more detail.

Thank you, Marty.

Good morning, everyone.

In the smokeable products segment, third-quarter reported operating companies' income grew by 3.9%, primarily due to higher list prices, effective cost management and higher reported shipment volume.

These favorable factors were partially offset by higher promotional investments behind Marlboro's new brand architecture, increased resolution expense and unfavorable mix due to L&M's volume growth in Discount.

For the first nine months, reported operating companies' income increased 4.2%, primarily due to higher list prices, effective cost management and lower charges related to tobacco and health judgments.

These favorable factors were partially offset by higher promotional investments behind Marlboro, increased resolution expense, unfavorable mix due to L&M's volume growth and lower reported shipment volume.

Excluding special items identified in our earnings press release, 2012 adjusted operating companies' income for the smokeable products segment increased by 4.3% to $1.6 billion for the third quarter and 3.7% to $4.7 billion for the first nine months.

Adjusted operating companies' income margin grew 4/10 of a percentage point to 42.4% for the third quarter and increased 8/10 of a percentage point to 41.6% for the first nine months.

PM USA's reported cigarette shipment volume increased 1.2% for the third quarter, primarily due to retail share gains and changes in trade inventories, partially offset by the industry's rate of decline and one less shipping day.

PM USA believes the trade depleted less inventory during the third quarter of 2012 versus the prior-year period, benefiting comparisons of reported shipments.

For the first nine months of 2012, reported cigarette shipment volume declined 4/10 of a percent, primarily due to the industry's rate of decline, partially offset by volume growth as a result of retail share gains.

When adjusted for trade inventory dynamics and other factors, PM USA estimates that its adjusted cigarette shipment volume was down approximately 1% for the third quarter and half a percent for the first nine months.

Total cigarette category volume was estimated to be down 3.5% for the third quarter and 3% for the nine months.

PM USA increased its retail share by 1.2 share points to 49.9% for the third quarter and by 8/10 of a share point to 49.8% for the first nine months of 2012.

Marlboro gained a share point to deliver a 42.7% retail share for the third quarter and was up half a share point to 42.6% for the first nine months.

For the third quarter and the first nine months, PM USA's Discount portfolio increased its retail share by 6/10 of a share point to 3.9% and 3.8%, respectively, as L&M share gains were partially offset by Basic's share losses.

Reported cigar shipment volume was down 14% for the third quarter, primarily due to the timing of promotional shipments and other changes in trade inventories and one less shipping day, partially offset by volume growth from retail share gains.

Middleton believes the trade built inventory in the third quarter of last year prior to Middleton's December 2011 price increase announcement, which impacted volume comparisons.

For the first nine months, Middleton's reported cigar shipment volume declined 6/10 of a percent, primarily due to changes in trade inventories, partially offset by retail share gains.

Black & Mild's retail share increased 8/10 of a share point to 29.9% for the third quarter and was up one share point to 30.1% for the nine months, primarily driven by the success of its Classic, Sweets, Wine and Jazz untipped cigarillos.

Turning to smokeless products, third-quarter reported operating companies' income was up slightly to $246 million and grew 2.7% to $678 million for the first nine months of 2012, primarily due to higher pricing, higher volume and effective cost management.

These favorable factors were partially offset by growth in products introduced in recent years at a lower popular price, higher restructuring charges related to our cost reduction program and higher promotional investments.

When adjusted for special items, primarily related to restructuring charges, the smokeless products segment's operating companies' income increased 3.3% to $254 million for the third quarter and 6.2% to $705 million for the first nine months of 2012.

USSTC's and PM USA's reported smokeless product shipment volume increased 5.9% for the third quarter, driven by Copenhagen's strong 12.1% volume growth, as well as Skoal's 2.8% volume gain, partially offset by volume declines in the balance of the portfolio.

Shipment volume for the first nine months of 2012 increased 1.9%, as volume growth on Copenhagen was partially offset by volume declines on the balance of the portfolio.

When adjusted for changes in trade inventories and other factors, USSTC and PM USA estimate that their combined 2012 third-quarter adjusted smokeless products volume grew approximately 5%.

USSTC and PM USA further estimate that the smokeless products category grew by approximately 5% over the 12 months ended September 2012.

USSTC's and PM USA's retail share of the smokeless products category increased four tenths of a share point to 55.5% for the third quarter and half a share point to 55.4% for the first nine months of 2012.

Copenhagen and Skoal delivered strong combined retail share growth of 1.6 share points for the third quarter and 1.8 share points for the nine months.

Copenhagen grew its retail share by 2.3 share points for the third quarter and 2.4 share points for the nine months.

Skoal's retail share declined 7/10 of a share point for the third quarter and 6/10 of a share point for the nine months, as comparisons were impacted by the factors mentioned earlier.

In the wine segment, Ste.

Michelle grew its third-quarter reported operating companies' income by 13% to $26 million.

When adjusted for the impact of 2011 costs related to the UST acquisition, third-quarter operating companies' increased income increased 8.3%.

For the first nine months of 2012, reported operating companies' income grew 16.7% and adjusted operating companies' income increased 8.6%, excluding acquisition-related costs from last year.

Ste.

Michelle's shipment volume increased 3.7% for the third quarter and 4% for the nine months.

The financial services segment's third-quarter reported and adjusted operating companies' income decreased 4.8% to $79 million, primarily due to a $35 million decrease in the allowance for losses that favorably impacted operating companies' income in 2011.

This factor was partially offset by 2012 third-quarter recoveries related to PMCC's lease investment with American Airlines, which filed for bankruptcy in November 2011.

For the first nine months of the year, the financial services segment's reported operating companies' income increased by more than 100%, primarily due to PMCC's leveraged lease related charge of $490 million in the second quarter of last year, higher gains on asset sales, recoveries related to American Airlines and a decrease in the allowance for losses that favorably impacted operating companies' income earlier this year.

These favorable factors were partially offset by lower lease revenues in 2012 and a 2011 decrease in the allowance for losses that favorably impacted operating companies' income last year.

Excluding the leveraged lease charges, the financial services segment's adjusted operating companies' income grew by 32.1% to $173 million for the nine months.

PMCC's allowance for losses at the end of the third quarter was $99 million versus $188 million at the end of the second quarter of 2012.

This reduction reflects write-offs related to the American Airlines bankruptcy.

Altria repurchased 7.7 million shares of its common stock in the third quarter for a total cost of $262 million.

Earlier this week, Altria's Board authorized the expansion of our current share repurchase program by $500 million to $1.5 billion.

Altria has $550 million remaining in this expanded program that it intends to complete by the end of the second quarter of 2013.

This program remains subject to the discretion of the Board and market conditions.

During the third quarter, UST repaid $600 million of debt that matured in July.

Altria also purchased $2 billion of notes due in 2018 and 2019 with coupons of 9.7% and 9.25%, respectively.

In connection with the debt tender offer, the company issued $1.9 billion in new 10-year notes with a coupon rate of 2.85% and $900 million in new 30-year notes with a coupon rate of 4.25%.

Our current cost management program remains on track, and we have recorded net pre-tax charges of $264 million over the past four quarters.

We expect to incur the remaining pre-tax restructuring charges in the fourth quarter of 2012.

Charges related to this program are reflected in our full-year diluted EPS guidance.

Marty and I are now 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 36% in the third quarter.

Marlboro's net pack price in the third quarter was $5.79, while the lowest effective priced cigarette was $4.24.

The cigarette discount category's retail share was 27.4% for the third quarter.

The estimated weighted-average cigarette state excise tax as of the end of September was $1.41 per pack, an increase of $0.04 per pack versus the prior year.

Copenhagen's third-quarter retail price was $4.08, and its price gap versus the leading discount brand was approximately 37% in the quarter.

CapEx was $38 million for the third quarter and $77 million for the first nine months of 2012.

We estimate that our 2012 full-year CapEx will be between $100 million and $125 million.

Ongoing depreciation and amortization was $56 million for the third quarter.

We estimate that 2012 full-year ongoing depreciation and amortization will be approximately $230 million.

Operator, do we have any questions?

(Operator Instructions) Judy Hong, Goldman Sachs.

Marty, in the last couple of days, obviously we've heard from your competitors about the promotional environment and sort of their view that you as the price leader is pressuring the pricing environment, and basically putting pressure on the overall industry profit pool.

So maybe just -- if you can just give us your perspective on your promotional strategy and how would you sort of defend against those comments from your competitors.

Good morning, Judy.

Thanks for calling in.

Listen, I'm not going to comment on what other folks are saying.

I will tell you what we are trying to do.

What we are trying to do in the smokeable segment is to maximize income while maintaining modest share momentum on Marlboro.

That has been the strategy for some time.

That strategy remains constant.

We have, I think, a good plan in place for 2012 to execute against that strategy and that is what you see playing out in the marketplace.

We are implementing a new Marlboro architecture which is part of our investment in Marlboro.

What I would say is that it is a competitive industry.

It has always been competitive.

It is competitive today, likely to be competitive as we go forward.

I don't see anything that is particularly unique about it.

Marlboro is investing in its new architecture, and that is a wise thing to do, because Marlboro has been the engine of income growth in the smokeable segment for Altria Group.

So that's how we look at it, and we are pretty happy with how that is playing out this year.

Okay, and if I sort of look at your income growth this year on the smokeable segment, so you are sort of down kind of 0.5% to 1% in volume.

You are getting pricing sort of 2% to 3%.

Your operating profit up 4% to 5%.

And then if you look at the last couple of years, you had volume down sort of 4% to 5%, pricing up 5%, 6%, getting to a similar operating profit growth of sort of 4% to 5%.

So if you can kind of take us through your thought process and one versus the other, more-driven strategy as opposed to more share and volume-driven strategy.

From your perspective, kind of how you think about which is maybe the more appropriate strategy, either in the near or on a longer-term basis?

I just would return to what I said, which is the strategy is to maximize income while maintaining modest share momentum on Marlboro.

It is not a question of choosing different strategies, as much as it is there are ways to grow income.

We've talked about cigarette pricing.

Pricing is of course important in the cigarette category, has been important, will remain important.

But of course, you can grow your income through other ways, and we have spoken about this previously.

We are trying to manage our cost structures as efficiently as we can.

You saw that PM USA took a higher list -- took list prices up in the middle of the year.

We've reduced our promotions actually, our promotional allowances on Marlboro, as we've gone through the year.

We will recall that on Marlboro Special Blend, we had geographies where it was being promoted at $0.75, other geographies where it began at $1.00.

And within the year, those allowances have come down not once, but twice, first to $0.90 and then to $0.85.

We've spoken about Marlboro Black; we had promotional allowances to generate trial and conversion among adult competitive smokers.

We've reduced those allowances as well, similarly to Marlboro Special Blend.

So for us -- and we've talked about this previously, right?

It is a balance between maximizing income while never taking your eye off of Marlboro, which is, after all, the driver of all that success.

So from time to time -- and we don't look at this necessarily quarter to quarter as much as we look at it over time -- because if you look how Marlboro has grown over time, that is how it has happened.

Whether it was Marlboro Red in the '50s or menthol in the '60s or Gold in the '70s or now Black, we grow it over time.

That's how we think about it over time.

And guess what?

It has been a great contributor to the growth in adjusted EPS that is our long-term goal.

So that is kind of how we think about it, Judy.

And I guess the last thing I would say on it for context is the macro environment is a factor.

Right?

We continue to be in an environment out of the great recession where the recovery has been modest at best.

Consumers remain under pressure.

Tobacco consumers remain under pressure.

We have to meet the consumers where they are, and so in that environment, it is hardly surprising that pricing may be a bit more restrained than in periods where housing is booming and unemployment is low and everybody is feeling good and consumer confidence is high.

That is not the situation.

The data tell us otherwise.

So that is not to be discouraged about it and there are some signs that it may be improving and we sure hope so, but that is how we've been thinking about it, which is trying to be sensible in that environment, following our strategy, maximizing income and keeping Marlboro healthy.

Okay.

Great.

Thank you.

Thanks for your question.

David Adelman, Morgan Stanley.

I also wanted to ask you a couple of pricing-based questions in the cigarette category.

That probably doesn't surprise you.

Glad to have your question in any event, David.

Whether it is the economy or the competitive set or the equity of Marlboro, do you think as a practical matter you are in a position where if you take more pricing than the category, Marlboro share doesn't grow, like last year?

Or if you take less pricing than the category, Marlboro's share does grow, which is this year?

I think it's our job to manage that balance, honestly, David.

That's the short answer, which is if you are trying to maximize income, like we are, we want to of course try to do that as best we can.

At the same time, you want to make sure that Marlboro is healthy.

Marlboro is one fantastic brand.

Right?

It's got high equity, it can command premium pricing, it has high loyalty.

But it's not the only brand in the marketplace, and we try to be cognizant of both the macro environment and the competitive environment, and our job is to balance that equation.

If you look at it, it is tempting again to look at it sort of within the quarter.

But if you look at Marlboro share growth, what do we see?

Sure, it is up in the third quarter.

But actually, for the nine months, what is it up?

It is up 5/10.

If you look at it over a longer period of time, if you look at it, say, from -- I don't know -- let's call it the end of the third quarter of 2008 to the end of the third quarter of 2012, Marlboro share is up 8/10.

So 8/10 over four years, I think we would characterize that as moderate share momentum, and I think it shows in the equity in the brand.

There shouldn't be any mistake that pricing is important, it will continue to be important.

But it is a balance and we are trying to be sensible about how we do it.

I think that is how we think about it.

Okay.

And then as a follow-up question, Marty, both with Marlboro, but also Copenhagen and Skoal, if you look at the Smokeless business, the growth and the brand initiatives have been principally at price points below the traditional full-price premium brand, whether it is Copenhagen Wintergreen or Skoal Extra or the bulk of the Marlboro line extensions.

Clearly, you've managed that from a price/mix perspective and a profit delivery perspective.

But the question I wanted to ask you in that context is what is the risk that two years from now or three years from now that those efforts have, in effect, eroded the premium brand equity.

They do account for a lot now of those brands' respective market shares.

I think we are quite confident in the equity of those brands, David, and there is good reason to be confident in those brands.

If you look at Marlboro again, just to take Marlboro before we go to Smokeless, remember, Marlboro all sells at the same list price.

So what you see in the marketplace though is the implementation of different promotional allowances to achieve different aims.

And we've spoken about this previously with you and others on the calls, but just to take one second.

Special Blend role, for example, is to make sure that for more price-sensitive consumers in the franchise that they have a place to go during this difficult economic period.

Your strategic choices obviously are you can not meet them where they are in your franchise with a big huge brand like Marlboro, and you can let them go.

We think the better strategy is to have a price point for them within the franchise and retain their business.

And I think that makes good sense.

And, oh, by the way, you see that the margin increases at the Marlboro level again.

So we are managing the margin there.

If you look at the brand equity components of Marlboro, they continue to be extremely strong.

We've shared the TNS scores over time.

It has high brand loyalty.

The price gaps were so constant during the worst recession, you would've thought that you would have seen if there were an erosion in equity that they wouldn't command those price gaps.

They've been absolutely constant during the period.

The Smokeless business, David, of course is a different situation, right?

Because we are trying there to grow income by participating in the growth in the category.

It is a growing category, unlike cigarettes, which is a declining category, as you well know.

So if we can participate in the volume growth there and with Copenhagen and Skoal together again some share, we can grow our income quite nicely.

And I think see that actually over the first nine months in the Smokeless business.

To be sure, we do have SKUs in the Smokeless franchise that are at popular price points, as well as having price points there that are main line.

And the reason for that is, again, that is where some of the business is.

So we have a competitor that has an offering at a popular price point.

We believe that Copenhagen and Skoal can compete there and should compete there.

All the while we want to manage the margin at the franchise level, if you will.

And guess what?

We've been pretty successful in doing that.

Copenhagen and Skoal have grown together very nicely.

If I look at it from -- again, call it the Q3 of 2009, after the acquisition, to Q3 2012, their combined retail share growth is about four points and the margins have expanded all the while.

So that is a bit more complex, I suppose, but we think that the strategy is right there.

And again, just to return I guess to the core of your question, while we are trying to manage through that environment, we are not concerned about the equity of those brands.

Okay.

Thank you very much.

Chris Growe, Stifel Nicolaus.

Good morning.

I had a question for you in particular with Marlboro Black as an example.

I know certainly the measure of success for a new product in this category is the degree to which you can reduce promotion and the time which you can do that.

So perhaps our expectation was a little high that promotion would come down.

I do characterize still the Marlboro Black promotion as a bit high.

It has come down through the year, no doubt, but still a bit high.

So I'm just curious -- as you look at the brand and the way it is positioned today, is it the economy, is it an attempt to retain some of those Marlboro consumers that will shift that is -- it is resulting in a requirement for you to keep promotions at a relatively high rate?

Or do you see this just as part of the natural progression of building this brand and it will keep ratcheting down?

The latter; I think it is part of the natural progression of building the brand.

Remember, Chris, brands aren't built in three months.

Marlboro Black was launched earlier this year.

This is a category in which there are relatively high loyalty rates.

People who are in the category like their brands.

There are some who participate more in the price-value equation.

But for premium brands, you have to have an offering that persuades someone not to buy the pack they've been buying and to try yours, and that is the purpose of those promotions, because we believe we've got a terrific product, it is in a terrific pack, it's in a terrific franchise.

But we have to offer -- we have to raise awareness, to begin with.

Then we have to incent trial and hopefully we will get some conversion.

But again, I would point out, as you know, the promotional allowances have come down, and I think what one might conclude from that is that those allowances are doing their job.

We've said previously we don't have any desire to have promotional allowances any higher than they need to be to achieve their purpose.

I think you should probably read into that that Marlboro Black is achieving its purpose.

We are very happy with that product.

We think it is a great addition to the Marlboro franchise.

It's got great demographics.

It's contributing to the equity.

It is a long-term play.

And the ultimate success of Marlboro Black, I think it will be measured over years, not over a quarter or two.

Did you suggest that margins for the Marlboro brand were up this quarter?

In the smokeable segment, I said that margins were up.

In the smokeable segment, got you.

And then just one final question.

It's just in relation to inventory levels, just to kind of get a base of where we are today on inventory.

And that's been jumping around quite a bit and it certainly could in the fourth quarter.

But where do we stand today on sort of your inventory level?

I know you mentioned it was less deloading that occurred in the prior year.

Where would you characterize -- how would you characterize inventory today?

It doesn't make -- for us, it has kind of washed out over the last nine months, Chris.

As you know, it does that over the course of the year.

There is just not a lot of difference over the nine-month period.

Howard referred in his remarks to the fact that there was less depletion in the third quarter which flattened the results a little bit, but it is not really significant for the nine months.

Okay, that's helpful.

Thank you.

Thilo Wrede, Jefferies.

Good morning, everybody.

Marty, given your comments about the macro environment and price-sensitive smokers, is it fair to assume that as long as the economy doesn't pick up, there is [little] chance that promotions for some of these line extensions will be dialed back much more significantly?

Well, we'll see over time, I guess, Thilo, is the answer.

Like you and everyone else, I'm sure everyone hopes that things are going to improve.

And if they do, obviously, we will all take that into account as we look at our promotional allowances.

I just don't know how to predict that going forward.

What is your best assessment of how much Marlboro market share would be at risk if you took away the promotions altogether?

We don't think about it that way.

We are managing the brand in a very different kind of way.

We are trying to maximize income in a category while making sure that Marlboro is healthy.

So that is just a completely different way of looking at it, which isn't ours.

But market share is part of the equation, right?

Well, sure, we are trying to maintain modest share on Marlboro.

Okay.

And then, Howard, a question for you.

Given the market share losses for Skoal and some of the smaller UST brands since you acquired UST, at what point will you have to seriously consider asset impairment tests, and at what point do we have to get concerned about write-offs for some of these brands?

As you know, that is a calculation we do on a pretty regular basis.

We certainly revisit that, in any case, in the fourth quarter.

So I think we will wait and see.

I think when you look at Copenhagen and Skoal, they've had quite nice growth over the time since the acquisition.

But obviously, Copenhagen has had the stronger share growth than Skoal.

So we are certainly doing those kinds of calculations, and if we end up in an impairment situation, we would certainly let you know.

But that is something we do quite regularly.

Just from an accounting perspective, is it just the volume growth you have to look at, or do market shares play a role in that determination as well?

The primary driver of the impairment test is really income.

And it is looking at what the expected income is out into the future, and comparing that to the valuations that were used in valuing the trademarks at the time of the acquisition.

So income is the bigger driver than either share or volume.

Great.

I appreciate the comments.

Thank you.

Vivien Azer, Citigroup.

Good morning.

Just to circle back on the competitive landscape -- sorry to belabor the issue -- as I think about the growth in the total tobacco profit pool, which is something you guys have pointed to in the past, over the last four years, it has been fairly volatile, ranging from anywhere to 2% to 8%.

As you think about the total US tobacco profit pool growth going forward, can you give us an indication of what you think the right growth rate is?

Well, I'm not going to comment on profit pools.

I'd just comment on how we think about running our business, which is, as you know, we have the company positioned to participate as a total tobacco company.

We have this terrific business at PM USA; we have the cigar business at Middleton; we have the great UST Smokeless business.

So as those companies follow their plans and maximize their income and participate in the way that we've described earlier in the call, we expect obviously that we will do just fine with that.

So I guess I would limit my comments to what our plans are, Vivien, as opposed to anything else.

Understood.

I'd just like to turn to NXT for a second.

I know it is definitely very early days, given the rollout that you've done in late September.

But can you give us any indications of early consumer response to that brand?

No, honestly, Vivien, I wish I could, but it is really literally weeks, so I just don't have anything to give you there.

I'm sorry.

Okay.

Any color on kind of future plans for the rollout?

We've, announced our plans for what we think we are going to do with Marlboro NXT.

I think it is a terrific product.

I think it is a nice offering.

I think it is going to be a nice addition to the Marlboro Black family.

Everyone has high hopes for it.

But again, as you correctly point out, you have to see what it does in the market.

We've got a good plan for it, good support plan, so I think it will do fine; we will just have to see the data.

Understood.

And just lastly, can you comment on what your share of menthol looks like today, and whether, you know, it is up kind of relative to the end of 2011, given the success we've seen from Marlboro Black?

I don't know that I have a comment on that.

I would have to -- maybe Brendan will get back to you on that.

I just don't have that number in front of me.

Sorry.

Okay, that's fine.

Thank you very much.

Bonnie Herzog, Wells Fargo.

Good morning.

I guess I also have a question on Marlboro, maybe asked a little differently, and it is related to innovation.

I am curious how much of your share gains in the quarter do you estimate were being driven by the new line extensions.

And I guess I'm trying to understand if you have comfort with how much incremental growth you are getting from these versus growth from your underlying core Marlboro brand.

Then I would be curious to hear how full your pipeline is next year for Marlboro and then overall.

Okay.

Innovation is a great topic.

Thanks for raising it.

We don't break out at the subsegment level, as you know.

But we can observe that if you look at innovation in Marlboro, it is going through a period, really, I think of accelerated innovation, isn't it?

We've got Marlboro Black, which we are very happy with.

We've got Marlboro NXT.

You will remember we have the packaging innovation on Marlboro 83's.

And while we don't disclose our pipeline, of course, we have excellent brand management teams.

This is actually part of the power of the architecture, I think, which is we have -- I think we've explained previously we have our brand management structure now aligned against the four product families within Marlboro, and each of them is developing excellent plans, I think, not just for this year or next year, but beyond, which includes a variety of product ideas, programmatic ideas and the like.

So we are pretty happy about how Marlboro architecture is rolling out and innovation is a key component of that.

Okay, thanks for that.

And then I guess the last question would be on your discount cigarette segment, which has sustained pretty strong momentum this year.

So could you talk a little more about your strategy for this segment?

And then in terms of L&M and its share gains, is the brand taking share, do you think, from other discount brands, or is the growth maybe being driven by down-trading from some of the premium brands, or are you seeing both?

Good question.

Our strategy, of course, is while we focus on premium -- and again, more than 90% of PM USA shipments are premium -- there is a discount segment in the category of about -- call it 27%.

We want to make sure we have an offering there.

And the offering we have is L&M, and it is doing a very nice job there, I think.

In some respects, it is taking share that our former discount brand, Basic, sheds as it raises its price and its margins.

Our strategy is obviously just to have an offering there.

Our retailers like for us to have an offering there.

There is some business there.

We have a competitor, obviously, that's got a significant offering there, and we want to make sure that we've got a competitive offering.

So our strategy on L&M is to have that offering there for that purpose.

And as you've seen this year certainly, it has been a contributor to volume, which is a nice.

Thank you.

Michael Lavery, CLSA.

Thank you.

Good morning.

As you talk about maximizing income, I guess I'd love for you to give a little color there.

Because this year certainly has been helped by the restructuring, the cost savings that you've got.

And those are, from what you said, skewed towards this year.

As you move into next year, do you think about maximizing your income on an operating basis or on a net income basis?

And by that, I mean how much would the interest expense savings become part of that equation?

You've got a couple different questions in there.

Let me try to unpack them to do justice to it.

Certainly, I am not in a position to talk about what we are going to do going forward.

But when we talk about maximizing income, I would refer to the comments I made earlier, Michael, which is you can do that through a variety of ways.

Right pricing is important, has been important, will continue to be important.

We do manage our cost structures carefully, because they can contribute.

We watch the promotional allowances very carefully.

So that strategy, I think, should be seen as constant, without commenting on what we may do in the future.

Do you want to talk about interest expense, Howard?

Sure.

I think Marty just referred to the strategy for the smokeable business.

I think when we look at the overall company, we've talked about our longer-term objective of growing our EPS 7% to 9%, and certainly there we have multiple levers.

Certainly the biggest contributor is the smokeable business.

But we've also seen nice contributions from our investment in SAB Miller, as well as the Smokeless business and some of the other areas.

And you importantly point out that as a result of the tender and refinancing we did this year, we expect to see a reduction in interest expense.

But when we think about our overall EPS growth, I think we look at really all of those levers as opportunities to increase EPS over time.

That's helpful.

But just to be clear, so you're saying when you talk about the cigarette business and maximizing income there, you don't necessarily mean operating income?

No, I don't think anybody said that.

What we said is there is a number of ways that you can, within the PM USA business, smokeable segment, to maximize income.

There is pricing, there is cost management and the like.

So I wouldn't take that from the comments.

And then Howard is correctly pointing out that the Altria business model, which is diversified, and I would argue differentiated from our principal competitors, is that there are multiple levers for us to achieve our long-term goals of adjusted diluted EPS, including our Smokeless business and our Wine business and our exposure to the SAB alcohol assets and the like.

And you know, it has provided us with a number of levers in order to achieve those goals.

I think that is what we were trying to communicate, if that wasn't clear.

No, that's helpful.

On the market share side, do you have specific objectives there?

And how significant is the 50% share mark psychologically?

Is that an internal objective?

Because obviously you reached that again last quarter.

It is, I guess, just barely below it right now?

Is that something that you focus on?

You're talking about PM USA, Michael?

Right, sorry.

I think it is best explained by the overarching strategy of maintaining modest share momentum on Marlboro, while maximizing income out of the smokeable segment.

And I think that there is no magic numbers anywhere.

You have to look at this competitive set and you have to look at the environment at any point in time.

As long as we are following that strategy, maximizing income and delivering to our shareholders what they expect, that is how we think about it.

Okay, thanks.

And then just one last question, back on the introductory pricing.

I know you've explained how valuable that is for getting trial.

But is it -- is there an expectation that those would -- like a Black or Special Blend -- would become at parity with the rest of the portfolio, given the stated list prices?

Or could they permanently have a discounted profile?

What is the right way to think about how those compare?

Well, I would refer to the explanation I gave earlier, which is each of those SKUs has role to play.

We have promotional strategies designed to help them achieve the objective set for those roles.

And obviously, as you know, we don't want to spend more promotional dollars than we have to to achieve them, because we are trying to maximize our income there.

So I wouldn't think of it as any one moment in time, as much as it is promotional allowances that support the strategy of growing those brands.

I guess what's making me wonder a little bit is that the Black strategy with the sort of a premium value, almost mid-price point in a little bit of a way is reminiscent of something like Grizzly has done in Smokeless.

But are you suggesting that is not meant to permanently be in that sort -- sort of a new lower tier, but that is just a gradual process to get that drifted back closer to a true premium price?

I think we've explained that it is a promotional allowance designed to raise awareness and generate trial and conversion of adult competitive smokers, and that is its purpose.

That's great.

Thank you very much.

We would now like to take questions from the media.

(Operator Instructions).

Thomas Russo, Gardner, Russo & Gardner.

I've switched over to the media.

Marty, thank you for being on the call, and a couple of quick questions for you.

First has to do with whether you and Murray might be spending any particular amount of time down in Madison County, and the general look across the developing aspects of litigation threats, specifically to the Price/Miles case that might be revisited.

What is your sense there?

We haven't heard anything.

As I think you know, we've got updates out on the Price case, but I think the issue has been briefed there Tom, and it is sitting with the judge, and I don't think we've heard anything as of this morning.

Okay, great.

Howard, congratulations on refinancing so much high-cost debt.

That was terrific.

Do you have the capacity to keep going back to the market like you did with the longer-dated paper and taking advantage of remarkably low rates for the (inaudible) prefunding in a sense the future paydowns of other blocks of debt?

I think if you are asking do we have the ability to do what we did this year into the future, and I would say that is certainly an option.

But it is just one of many options we have in thinking about how to use our cash and how to reduce our effective interest rate.

And I think we will make those decisions as the year progresses.

Congratulations on that move, though.

It was just fantastic.

And what about the role of the lower interest rates as it impacts your pension obligations and your funding requirements, and how you might be rethinking the overall pension asset liability exposure in light of the high net present values (inaudible) markedly low rates?

I think you raise an important point, which is as the discount rate has continued to trend downward this year, that does have an impact on our pension costs, and that is something we are looking at quite carefully.

I am pleased to say, though, that as you look at the overall market performance this year, the market performance has been a bit more positive than it has been in some years in the past.

So there is some offset there, but that is certainly something we are looking at quite closely, because both of those factors are going to have an impact on pension expense going forward.

Thank you.

Again, terrific having you on the call, Marty.

And a great bond buyback.

Thanks a lot for calling in.

Nik Modi, UBS.

Good morning, everyone.

Just a couple quick questions.

On the architecture, if I have the strategy right, it seems like you've been really focused on the Black portion of the architecture so far this year.

Is it fair to assume that you are going to kind of work your way around the architecture over the following quarters and years?

Is that kind of the way we should be thinking about it?

I think what we've said is that we will be rolling out our investments in that architecture through 2012 and 2013.

Okay, perfect.

Following up on Bonnie's question on the innovation, you said your folks are working on a lot of stuff.

But in terms of what is already approved by the FDA, is the pipeline still relatively full?

Because it seems like you guys had a lot of stuff in the marketplace before the proper date.

So I'm curious on how full your existing approved pipeline is.

That would be really helpful.

I understand your question.

We were, I would say, planful about the substantial equivalent state, and so I think we are in pretty good shape.

Obviously, the other dimension to your question is you would like for the FDA obviously to start moving on substantial equivalents, because people have applications that are pending.

And I think that is a fair request.

They are building out their structure over there, and they've made comments about how they are going about that.

I would expect that over time, you're going to see the FDA start to rule.

So I just wouldn't want to leave anyone with the impression, I don't think, that there is going to be some sort of a magic date and if you are in before, you are okay, and after that, you are not.

I think that will probably resolve itself over time.

Then the last question, Marty, is just kind of a bigger picture question.

The Altria business model has been kind of moderate share gains and balancing with profit growth.

And this quarter, obviously, 100 basis points of share gains from Marlboro is a pretty big number for a pretty large brand.

And you are a new CEO, and I know I've been getting a lot of questions and I'm sure your folks have been getting the same, about strategy and if it is changing.

It is very clear from what you've been saying that it is not changing, but certainly the numbers would suggest otherwise.

So I was hoping you can just give kind of your viewpoints of you can help clarify for people exactly kind of what is different about this strategy, what is not, relative to prior years, which has obviously been very good for the stock price.

Thanks.

Thanks for asking that question.

The strategy is not changing.

We've been very successful at doing what we are doing.

I think, again, as I've mentioned once or twice this morning, I think it looks -- it depends in some respect about how you look at the time period.

Sure enough, if you look at the quarterly comparison, it is 100 basis points.

If you look at it over the nine-month period, it is 5/10.

If you look at it over a four-year period it is 8/10.

I think that is consistent with how we've been thinking about that over time, and we have no intention of changing that.

It has been enormously successful for Altria.

Excellent.

Thank you very much, Marty.

Karen Lamark, Federated Investors.

Good morning.

Unless I missed it, did you give the comparable estimated market share for discounted brands in the prior year?

I think you suggested 27.4%, but I wondered if you could give the year-over-year comparison.

That's the first question.

If you look at the discount share that we spoke about was 27.4%.

In the prior-year quarter, it was 27.9%, so it has come down modestly.

Okay.

Not to be obtuse, but how do you define discount?

Is it simply by brand and known brand positioning?

That is, it does not include premium -- discounted premium brands or line extensions, is that true?

Yes, the way we define discount is we have a set of brands that we identify as discount brands, and it does not include promoted premium brand volume.

Has that changed over time, over say the last year or so?

No, it has been largely consistent for some time.

Okay.

And is it fair to assume that if the macro pressures and price-sensitive smokers persist that you would not change that definition?

In other words, you would not include anyone's line extension of promoted premium brands.

Is that true?

I hesitate to make a statement about what we might do in the future on something like this.

But I can tell you it is certainly not something we've considered.

This has been the way we've defined discount for quite some time, and to me at the time it seems quite logical.

Okay.

Thank you.

Andrew Kieley, Deutsche Bank.

Marty, I just wanted to ask a last question on promotion.

If the cigarette competitors are adjusting their promotion programs as well in response to the economy or other factors, how do you think about compatibility of that kind of situation with the profit pool and your sort of long-term income objectives?

I'm going to go back to what I said, Andrew, which is we've got good plans in place, we take everything into account when we put them in place, and we are going to execute against our plans, which are consistent with the strategy that I've outlined.

And I certainly wouldn't comment on what we might or might not do going forward.

We are going to stick to our knitting.

Okay.

On Marlboro, would you say at this point that the brand has -- I don't know -- somewhat more attractive opportunity in menthol than in non-menthol?

I think Marlboro has got a big reach.

It appeals to lots of adult smokers.

It has proven that not just recently, but over decades, as you've seen the charts where -- how the brand grows, first with Red and menthol and Gold and Black.

It is a big brand, it's got a lot of room for a lot of flavor segments, it's got room for a lot of adult smokers.

And that's how we think about it, as opposed to one particular segment or another.

Okay, thanks.

Just last question for Howard.

If you could comment on the cost savings program, if the dollar amount accelerated sequentially or sort of where we are on the status of the program.

Yes, we continue to make progress on the cost reduction program, and we are really on track for $400 million in savings by the end of next year.

All right.

Thanks very much.

Michael Felberbaum, Associated Press.

Good morning.

Thank you for taking my question.

Actually, I have two questions.

First can you talk a little bit more broadly about the Marlboro brand architecture and how that plays into your ability to maintain and gain market share for the top-selling brand?

And secondly, your competitors have made some investments in electronic cigarettes and other next-generation type products.

And wondering if you can comment at all about any of your plans in that area.

Sure.

Thank you for your questions.

We've explained previously, I think, that the Marlboro architecture is the next evolution really in how that brand, which has grown over time, can continue to grow into the future.

We have product families in it -- Red, Green, Gold and Black.

We've set up our SKUs at retail so that it is much more evident to an adult smoker when they walk in what the Marlboro architecture looks like.

We have our brand teams arranged around that.

It actually provides some room for the brand to operate.

Remember, it is about a 42 share brand, so it is really, if you will -- while they are all Marlboro and they all stand for Come to Where the Flavor is, they do have slightly different positions.

And we want to give Marlboro the license, if you will, to reach out to all the smokers who want to be in the franchise.

It is a terrific brand with great equity and great premium pricing.

And we believe that the architecture is the next logical step about how to grow that brand over time.

And you will see that played out in the marketplace through products and programs at retail and the like.

We are aware of the developments in e-cigarettes.

Look, it probably represents what we already know, which is that there are some adult smokers who are looking for alternatives in the tobacco space, and some of them have gone to e-cigarettes as an exploration at least about whether that is going to be for them.

That is a situation obviously that we monitor closely, and we will keep an eye on that.

Thank you.

At this time, I would like to turn the call back over to Mr. Brendan McCormick for closing remarks.

Thanks, everyone, for joining our call this morning.

If you have any follow-up questions, please contact us in Investor Relations, and we look forward to talking to you soon.

Thank you.

This does conclude today's conference call.

You may now disconnect.