奧馳亞 (MO) 2012 Q4 法說會逐字稿

Good day, and welcome to the Altria Group (inaudible) 2012 fourth quarter 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.

(Operator Instructions)

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

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.

Thank you for joining our call.

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

This morning we will only be discussing Altria's 2012 business results for the fourth quarter and full year 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 both on a reported and 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.

Before we begin, I want to make you aware that high winds in the Richmond area have been causing interruptions to our phone service this morning.

In the event we get disconnected, we have some backup plans in place and I ask for your patience.

If you will remain on the line we will rejoin quickly.

Now it gives me great pleasure to introduce Marty Barrington.

Thanks, Brendan.

Good morning, everyone.

Altria delivered strong results and returns for its shareholders in 2012.

Altria grew its full-year adjusted diluted earnings per share by 7.8% behind the business performance of our operating companies complemented by higher earnings from our equity investment in SABMiller.

Our 2012 total shareholder return of 11.8% for the full year outperformed are US tobacco peers and the S&P 500's consumer staples sector, though not the S&P 500 Index which delivered a total return of 16%.

Altria's results were driven by effectively executing on our core strategies.

First, our consumer products companies invested in strong premium brands that provide the foundation for future income growth.

Each of our tobacco operating companies seeks to grow income while maintaining modest share momentum for its core premium brands.

Despite a continuing challenging external environment, our tobacco operating companies premium brands had an excellent year as our companies continued investing for their long-term success.

These companies grew their adjusted operating companies income and gained retail share in cigarettes, cigars and smokeless tobacco for the full year of 2012.

Beginning with the smokeable products segment, PM USA introduced Marlboro's new brand architecture in 2012 and supported Marlboro's four product families, Red, Gold, Green and Black, with brand building activities throughout the year.

These activities included expanded distribution of products and equity enhancing promotions that engaged millions of adult smokers.

PM USA also engaged adult competitive smokers with trial-generating promotions that PM USA moderated as the year progressed.

Behind these investments PM USA grew Marlboro retail share and strengthened the Marlboro brand.

Middleton continued to enhance its product portfolio and new products contributed to its full-year retail share gains.

In the smokeless products segment, Copenhagen and Skoal delivered solid volume growth and retail share gains on a combined basis for the full year.

These results were primarily due to the ongoing contributions of Copenhagen Long Cut Wintergreen and Long Cut Straight and the expansion of Copenhagen Southern Blend.

In Wine, Ste.

Michelle delivered solid volume growth through its continued emphasis on expanding distribution into off-premise channels.

Second, our companies continued to pursue product innovation.

Products introduced in recent years by Marlboro, Black & Mild, Copenhagen and Skoal gained retail share and contributed to the Company's full-year share growth in 2012.

During the year, PM USA repositioned Marlboro Black, expanded Marlboro NXT, a part of the Marlboro Black family, into additional geographies, and introduced Marlboro EIGHTY-THREES, part of the Marlboro Red family in updated packaging.

In 2012, Middleton continued to address adult cigar smokers' interest in variety with seasonal cigar blends, Black & Mild Dark Blend and Black & Mild Summer Blend, as well as with its 2012 third quarter introduction of Black & Mild Jazz untipped cigarillos into select states.

In December 2012, the brand announced plans to launch Black & Mild Jazz plastic tip and wood tip cigars nationally.

In the smokeless sroducts segment, US STC expanded distribution of products including Skoal Ready Cut and Copenhagen Southern Blend.

Skoal Ready Cut offers adult long cut dippers great taste in an innovative, moist, smokeless tobacco form.

Copenhagen Southern Blend delivers a mellow taste in a manageable long cut form.

Our companies also continued to support the development of spit free, smokeless tobacco alternatives to cigarettes with the 2012 introduction of Verve discs into a lead market and an agreement to develop innovative nicotine containing products with Okono A/S.

Third, our tobacco operating companies effectively managed costs in 2012.

For the full year, cost management and higher pricing supported the expansion of adjusted operating companies' income margins for the smokeable and smokeless products segments.

Our companies made significant progress on our current cost reduction program by reducing headcount, consolidating certain facilities, improving business processes and pursuing other savings.

These actions, with initiatives planned for 2013 as part of the program, make us confident that we will achieve our goal of $400 million in annualized savings versus previously planned spending by the end of 2013.

Finally, Altria maintained a strong balance sheet which enabled it to continue to deliver strong cash returns to shareholders.

In 2012, Altria enhanced its capital structure by purchasing high coupon debt and issuing new lower cost debt.

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

Dividends contributed 5.8% to our 2012 total shareholder return of 11.8%, as Altria maintained its target dividend payout ratio of approximately 80% of its adjusted diluted EPS and increased its dividend by 7.3% in August.

As you know, Altria joined with a broad coalition of businesses, associations and shareholders to support making permanent the lower personal tax rates on dividend income and maintaining parity between the tax treatment of dividends and capital gains.

Congress and the President now have established dividend and capital gains tax rates for couples earning $450,000 or less between 0% and 15%, and at 20% for couples earning more than $450,000.

We are pleased that parity has been retained between the tax treatment of dividends and capital gains.

In addition to returning cash to shareholders through dividends, Altria repurchased $1.1 billion of its shares in 2012.

We have $57 million remaining under the current $1.5 billion program and expect to complete the program by the end of the second quarter of 2013.

In summary, in 2012, Altria continued its track record of delivering strong returns to shareholders.

We achieved these results through disciplined execution of our core strategies and we believe that our 2012 performance including investments in our premium brands positions us well for 2013 and beyond.

Turning to 2013, while there are signs of modest improvement in certain economic indicators we remain cautious about the business environment.

Adult consumers remain under economic pressure as they face the end of the payroll tax holiday, as well as continuing high unemployment.

And with a number of states facing budget shortfalls, tobacco products will remain a target for excise tax increases.

Altria forecasts that its full-year adjusted diluted EPS will increase by 6% to 9% to a range of $2.35 to $2.41 from a base of $2.21 in 2012.

We also expect to achieve 2013 reported diluted EPS in the range of $2.34 to $2.40.

Howard Willard, Chief Financial Officer, will now discuss Altria's business results in more detail.

Thank you, Marty, Good morning, everyone.

The smokeable products segment's reported operating companies income results for the fourth quarter increased 25.9%, primarily due to higher list prices, lower restructuring charges and lower charges related to tobacco and health judgments, partially offset by higher promotional investments by PM USA behind Marlboro's new brand architecture and increased resolution expense.

For the full year of 2012, reported operating companies income for the segment increased 8.8%, primarily due to higher list prices among lower restructuring charges, lower charges related to tobacco and health judgments and effective cost management, partially offset by higher promotional investments, increased resolution expense, unfavorable mix due to L&M's volume growth and lower shipment volume.

Adjusted operating companies income, which is calculated excluding restructuring charges and tobacco and health judgments, increased 5.9% to $1.5 billion for the fourth quarter and 4.2% to $6.3 billion for the full year of 2012.

For the fourth quarter and full year, adjusted operating companies income margins for the smokeable products segment increased 0.9 of a percentage point to 39.9% and 41.2%, respectively.

PM USA's reported cigarette shipment volume increased 0.4% for the fourth quarter, primarily due to retail share gains and one extra shipping day, partially offset by the industry's rate of decline.

After adjusting for the extra shipping day and changes in trade inventories, PM USA's fourth quarter domestic cigarette shipment volume was estimated to be down approximately 1%.

For the full year, PM USA's reported shipment volume decreased 0.2%, primarily due to the industry's rate of decline, partially offset by volume growth as a result of retail share gains and one extra shipping day.

When adjusted for an extra shipping day and changes in trade inventories, PM USA estimates that its full-year domestic shipment volume was essentially unchanged, outperforming the estimated adjusted industry rate of decline of approximately 3%.

Brand building initiatives to support Marlboro's new architecture contributed to the brand's retail share gains of 1 percentage point for the fourth quarter and 0.6 percentage points for the full year.

Marlboro's retail share was 42.6% for both the fourth quarter and full year.

These gains were complemented by L&M's growth in Discount.

PM USA's Discount products gained 0.3 percentage points to deliver a 3.9% retail share for the fourth quarter and 0.5 percentage points for a 3.8% share for the full year.

PM USA's total retail share grew 1 percentage point to 49.8% for the fourth quarter and 0.8 percentage points to 49.8% for the full year.

Middleton's fourth quarter reported cigar shipment volume declined 1%, primarily due to changes in trade inventories and retail share losses.

For the full year of 2012, reported cigar shipment volume declined 0.7% primarily due to changes in trade inventories, partially offset by volume growth as a result of retail share gains.

Black & Mild's retail share declined 1.4 percentage points to 29.3% for the fourth quarter and increased 0.5 percentage points to 30% for the full year.

The smokeless products segment's fourth quarter reported operating companies income grew 27.1%, primarily due to lower restructuring charges related to our cost reduction program, higher volume and higher pricing, partially offset by unfavorable mix due to growth in products introduced in recent years at a lower popular price.

For the full year, reported operating companies income increased 8.4%, primarily due to higher pricing, higher volume and effective cost management, partially offset by unfavorable mix.

Excluding the impact of restructuring costs and UST acquisition-related costs, operating companies income grew 9.5% to $254 million for the fourth quarter and 7% to $959 million for the full year.

USSTC and PM USA smokeless products shipment volume increased 9.6% for the fourth quarter and 3.9% for the full year, primarily due to the combined volume growth of Copenhagen and Skoal.

Copenhagen shipment volume increased 12.4% for the fourth quarter and 10.8% for the full year as the brand continued to benefit from products introduced in recent years including the May 2012 expansion of Copenhagen's Southern Blend into select geographies.

Skoal grew its shipment volume by 9% for the fourth quarter and 0.6% for the full year.

Comparisons of Skoal's full year shipment volume were negatively impacted by the de-listing of seven SKUs, partially offset by the growth of Skoal X-TRA.

After adjusting for changes in trade inventories and other factors, USSTC and PM USA estimate that their combined 2012 fourth quarter and full-year domestic smokeless products shipment volume grew approximately 5%.

USSTC and PM USA believe that the smokeless category grew at an estimated rate of approximately 5% over the 12 months ended December 31, 2012.

Copenhagen and Skoal grew their combined retail share by 1 percentage point for the fourth quarter and 1.6 percentage points for the full year.

Copenhagen's retail share increased 1.6 percentage points to 29% for the fourth quarter and 2.2 percentage points to 28.4% for the full year as of the brand continued to benefit from products introduced in recent years, including the 2012 expansion of Copenhagen's Southern Blend.

For both the fourth quarter and the full year, Skoal's retail share declined 0.6 percentage points to 21.9% and 22.2%, respectively.

Skoal's share for both periods was negatively impacted by competitive activity and Copenhagen's strong performance, partially offset by share gains by Skoal X-TRA.

The 2011 de-listing of SKUs also negatively impacted Skoal's retail share comparisons for the full year.

USSTC and PM USA's total smokeless products retail share decreased 0.1 percentage points to 55.4% for the fourth quarter and increased 0.3 percentage points to 55.4% for the full year.

The wine segment delivered strong operating companies income and volume results in 2012.

The wine segment's 2012 fourth quarter and full year reported operating companies income increased 10.8% and 14.3%, respectively, primarily due to higher pricing, improved premium mix and higher shipment volume, partially offset by costs related to Ste.

Michelle's sales force expansion.

Comparisons of full year reported operating companies income results were also impacted by higher costs for select vintages incurred in 2012, partially offset by UST acquisition-related costs incurred in 2011.

Adjusted operating companies income, which is calculated excluding UST acquisition-related costs, increased 10.8% for the fourth quarter of 2012 and 9.5% for the full year.

Ste.

Michelle's 2012 wine shipments grew by 2.9% for the fourth quarter and 3.7% for the full year.

The financial services segment's reported and adjusted fourth quarter operating companies income was unchanged at $10 million as comparisons were impacted by an increase in the allowance for losses in 2011 related to the American Airlines bankruptcy and lower gains on asset sales in 2012.

Comparisons of the segment's full year reported operating companies income were impacted by special items.

For the full year of 2011, the financial services segment reported an operating companies loss of $349 million, primarily due to the 2011 second quarter charge of $490 million related to the tax treatment of PMCC's LILO and SILO transactions.

Additionally, the financial services segment's reported operating companies income for the full year of 2012 was positively impacted by a decrease in the allowance for losses and recoveries related to transactions involving PMCC's leases to American Airlines.

These factors were partially offset by lower lease revenues.

For the full year, PMCC's adjusted operating companies income increased 29.8% to $183 million.

Marty 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 36% in the fourth quarter and for the full year.

Marlboro's net pack price in the fourth quarter was $5.80 and $5.75 for the full year while the lowest effective priced cigarette was $4.26 in the fourth quarter and $4.23 for the full year.

The cigarette discount category's retail share was 27.8% for the fourth quarter and 27.5% for the full year.

The estimated weighted average cigarette state excise tax at the end of the fourth quarter was $1.41 per pack, unchanged from the third quarter and up $0.04 from the fourth quarter of last year.

Copenhagen's fourth quarter retail price was $4.11 and its price gap versus the leading discount brand was approximately 38% in the quarter.

For the full year, Copenhagen's retail price was $4.09 and its price gap versus the leading discount brand was 39%.

CapEx was $47 million in the fourth quarter and $124 million for the full year.

Ongoing depreciation and amortization was $56 million for the fourth quarter and $225 million for the full year.

Operator, do we have any questions?

Thank you.

(Operator Instructions) Investors, analysts and media representatives are now invited to participate in the question-and-answer session.

We will take questions from the investment community first.

Our first question comes from the line of Nik Modi with UBS.

Yes, good morning, everyone.

Good morning, Nik.

Just a quick question on the Marlboro architecture, and I guess now that it has been in place for a year, and you saw some pretty good retail share gains with pricing improving, just curious if there are any diagnostics that you have or you can share giving us some insight on how effective this has been, so we can think about next year and the years after in terms of some of the benefits you will get from this initiative?

Well, thanks for your question.

Sure, we have diagnostics, some of which are internal and some of which we talk about in settings like this.

I think you have already alluded to one which is the -- we had nice share gain which is consistent with PM USA's objective to maximizing (inaudible) trying to keep Marlboro healthy.

We had a diagnostic on resetting retail.

One of our objectives during the year was to try to get a number of retail stores reset to better reflect the Marlboro architecture, and I think our sales and distribution group did an excellent job of doing that.

If you have been in stores, I think you have seen the improvements that have been made of the presentation of the Marlboro brand at retail.

At the end of the day, it is always about that balance, about trying to maximize income while taking the steps that are appropriate to make sure that Marlboro is healthy over the long term and we are very pleased with how PM USA executed on that this year.

And, Marty, just a quick follow up to that.

I don't think I remember two quarters in a row where Marlboro has gained this much market share which is quite a feat given how big the brand is.

Just philosophically, you say you want to maintain market share momentum and optimize income, would it be crazy of me to think that this is just too much share gains for a brand that size?

I think, Nik, the difference is simply in what time period you are looking at.

If you look at it, say, for a quarter or even for two quarters, to be sure that there were some share gains there but that is not the strategy.

I did give you, for example, just one data point, because we manage the brand over time and when we say over time we are talking about more than several quarters, in fact over years.

If one looks back, I'll pick a data point, fourth quarter of 2009 and you measure share gains to the fourth quarter of 2012, it is 0.9.

You have 0.9 of a share point over three years.

We would characterize that as modest share momentum for Marlboro over time.

And, of course, we have other metrics to measure Marlboro's health, we want to make sure that all of its brand equity numbers are strong and hopefully improving in the right direction.

Nik, I think that is how we think about it and we try, to be sure, share gains are not just a function of how much we invest in the brand but other competitive dynamics.

So it is an awfully, awfully hard to read simply on a quarter or over two quarters.

I would return, I think, to understanding our strategy.

Our strategy is to maximize income there.

Fair enough.

Thanks a lot, guys.

Thank you for calling in.

Your next question comes from the line of David Adelman with Morgan Stanley.

Good morning, Marty, and Howard.

Hi, David.

Just a follow up on pricing, Marty, if I could.

In 2012, relative to the last few years, there was clearly a greater emphasis on investing in Marlboro, promotional spending, somewhat less net pricing and very good share growth.

Can you give us a sense, what is in the plan for 2013 in terms of the relative emphasis of those variables?

No, I think we will continue with our strategy, David, and obviously for competitive reasons, we're not going to lay out PM USA's promotional plan for 2013, but I do think at a strategic level it is important for investors to remember our strategy is to maximize income.

You have seen the numbers in the release, in the Smokable segment we have got revenue, net of excise, up 3.6% for the fourth quarter, and overall the Marlboro brand is heading in the right direction.

We have the Marlboro architecture started, but remember, big brands like Marlboro, we don't do everything in one year, we have been clear, I think, about thing that we're going to invest in Marlboro appropriately throughout 2012 and 2013.

But I think that is just more of executing against that consistent strategy.

In some years, as we say, we invest a bit more, some years a bit less, some years the share goes up a bit more, it comes down a little bit, but it is consistent with that long-term strategy of trying to maximize income.

I think that is the way to understand it.

Okay.

And then, Marty, with respect to the total US cigarette category dynamic, you mentioned volumes for the full year, or consumption, down about 3%.

With almost no net price increase to the consumer, is that the kind of secular volume decline you would have expected and that you envision going forward?

Well, I don't about going forward because it is awfully hard to predict the future, but I think that, we've seen estimates of the secular decline rate being in the neighborhood of 2% to 3% for some period now, and that is probably in the right neighborhood.

Okay.

And then lastly, Marty, you would be surprised if the FDA doesn't release its report on menthol by when?

I try not to be surprised by regulatory action.

I just don't think we know.

They have had it for some time, as you know, and they -- our understanding remains, I think, the last time we spoke about this, which is they have sent it out for peer review on the science.

We are led to understand that they probably have it back and are looking at it, and we would expect that would be the first action that they would take, would be to publish their position on the science on menthol.

And as you know, they have had it for quite some time, so would you expect something in 2013?

I suppose so, we just don't have a lot of line of sight into that.

Okay.

Thank you very much.

Thanks for coming on the call.

Your next question comes from the line of Michael Lavery with CLSA.

Good morning.

Hi, Michael.

Just looking at CapEx, your guidance is for sort of roughly flat to up for '13 and it looks like this '12 was ahead of last year.

What is driving some of that increase?

I don't think there is any, this is Howard, I don't think there is any single big item.

As you will note, our CapEx runs at a relatively low level for a Company our size.

I think that is driven by the declining cigarette business.

Our direction to our operating companies is that they ought to spend the appropriate amount of money to keep the infrastructure appropriately ready to manufacture our products and execute our programs.

I think it really is more driven by the addition of a number of relatively modest-sized projects across the business.

Okay, thanks.

And then, just as you look at the e-cigarette segment, it is clearly got some strong growth, at least in very recent times especially.

How do you view that as an opportunity to get involved in, a threat, something that you sort of dismiss, what is your thinking there?

You obviously haven't made any announcements yet, but you have plans to participate in that some how?

Well, what I would say about e-cigarettes, Michael, is that we are monitoring it carefully.

It is, obviously, a development that has resulted in high awareness among adult smokers and everyone else as best as I can tell.

There is some trial, but it is still a relatively new phenomenon.

You're right to point out that it does grow off of a relatively low base.

The FDA has said, as you know, that it intends to regulate e-cigarettes, so we're monitoring all of that very carefully.

Okay, thanks.

And then lastly, just looking at share repurchases, you mentioned that you had $57 million remaining in this authorization, but you said you would expect to complete that by the end of 2Q which would be a sharp slowdown.

You did $360 million in 1H '12, if you use that up sooner, how quickly could you get a new authorization, or do you think it will run as late as 2Q before you have another one?

I think it is hard to project exactly when we will finish that authorization, but certainly we will have it complete by the end of the second quarter.

I you point out, I think rightly so, that we had fairly heavy purchases in the fourth quarter and with only $57 million left there's not a lot of share repurchase needed to complete that.

But at this point, the only authorization that we have out is that authorization that is scheduled to end in the second quarter.

Okay, thanks a lot.

Thanks for coming on the call, Michael.

Your next question comes from the line of Judy Hong with Goldman Sachs.

Thanks, good morning, everyone.

Good morning, Judy.

Marty, just a general kind of a macro comment, I know in the press release you talked about, and then also in your prepared comments, some of the cautions that you pointed to with the expiration of the tax holiday, et cetera.

I know you sort of start the year with similar caution in the past, but is there anything that you're seeing in the marketplace that gives you a bit more caution at this point, particularly with the tax holiday being expired?

No, we haven't seen any evidence of that, but we are reminded almost every day, right, about how complex the macro environment is.

It looks like on some days that things are starting to turn in the right direction, say housing starts or the like, which is important, and then you get a big drop in consumer confidence, or you see a tepid prediction on GDP.

I think that is part of it and I think the other part is excise taxes.

We're always careful at the beginning of the year with respect to state excise taxes.

State budgets remain in difficult circumstances.

Nothing has happened yet, but you have seen already a number of states proposing, and proposing is one thing and getting them is another, but they are proposing fairly significant excise tax increases.

And given that the SETs have been relatively restrained on the last couple of years we would expect that there would be an uptick in activity there.

To answer your question directly, it is not that we see anything in the market that gives us that, any cause for alarm, we're just trying to be careful as we read the macro environment.

Okay, that's fair.

And then, just going back to the Marlboro brand architecture, heading into the second year of that program, can you elaborate on your success with some of the line expansion, certainly the Black and then now with the NXT, how are each of those brands kind of tracking versus your expectations?

What are some of the other innovations or line expansions that we should look forward to in 2013?

And then just in terms of the level of investment behind the brand equity program, as well as some of the retail programs, how do you sort of gauge whether the spending level is at the right level or if there is a need to continue to step up that spending?

Okay, well, there's a lot in your question there.

Let me see if I can take sort of pieces of it at a time.

If you look back at '12, at the accomplishments of the Marlboro architecture, I think they are actually quite significant.

We pointed out that when we talk about building out the Marlboro architecture it consists of multiple elements, right.

It is focusing on all of the elements of the value equation that we use to manage that terrific brand.

So what have we done in packaging, you see what we have done with Marlboro 83's, which is really a nice expansion into some more modern classic packaging for that brand to bring news to Red.

You saw product expansions in Marlboro Black, which has been a terrific contribution to the family.

And while we don't report out at the sub-segment level on growth, as you know, I can tell you that we are very pleased with how Marlboro Black has done.

And it has certainly contributed, I think, to the overall Marlboro equity.

We see Marlboro NXT, you see all this innovation in the Marlboro space and that is good for the brand.

We think of building out the Marlboro architecture sort of less as a program, if you will, than what good stewards of wonderful brands like Marlboro are supposed to do.

They manage the brand over time, they keep it fresh, they keep it relevant to its target audience and that is how we have been working on it.

So you see, I have already mentioned retail, you see product introductions, you see packaging changes.

I think that is the way to try to understand how we are thinking about Marlboro.

It is a big brand, it has a big franchise, and our four product families, I think, are working hard to try to understand their consumer set carefully and bring to the market what that consumer wants.

So we don't announce in advance of when we are ready to announce what we're going to do in 2013, but you're probably aware of Marlboro Southern Cut, which has been launched already in January.

So there is a lot of innovation at Marlboro, but we do this in a disciplined way because all of that that I have described sits under the strategy of trying to maximize income in that segment while making sure that the brand does well.

It is a balance, that is what we get paid to balance, and that's what we'll be trying to do throughout 2013.

But I think that PM USA did an excellent job of that in 2012, as you see in the results.

Okay, thank you.

Thanks for the question.

Your next question comes from the line of Bonnie Herzog with Wells Fargo.

Hi, good morning.

Hi, Bonnie.

Hi.

I guess my first question is on retailers.

What are your thoughts on retailer cigarette margins being squeezed over the past year?

How do you strike the right balance between growing your own profitability and then maintaining a mutually beneficial relationship with your retail partners?

And also, how do you ensure that retailers continue to emphasize the important cigarette category and prevent them from shifting resources to other categories, either within tobacco or other categories outside of tobacco, maybe such as food service?

Okay, well, thanks for that question.

Our approach to retail has really been the same for some time, which is we want to have a terrific relationship that is mutually beneficial for both us and them.

And we work really hard at multiple levels to do that.

We do that programmatically, and so you see that we have programs like MLP, and Marlboro Flex, and the like.

We try to have a range of options so retailers can decide which programs, if any, they want to participate in with us and we try to make it attractive for them to do so.

Retailers, for their part, of course, the cigarette and the tobacco category is a big part of their traffic, a big part of their revenue stream and we try to work with them very carefully.

We do that through our very talented sales people who have very good market data to help them almost down to a store basis.

Our job isn't to tell them what to do or to prevent them from doing something else, it is to try to align their interests with ours so that as we go to market, that that is a robust trade channel.

And I think overall, our retailers would tell you we do, I think, a pretty good job of that.

We also meet with retailers regularly, Judy, both at the executive level and all the way down to the store level to get feedback from them about how we are doing.

Our hope is that we are really the category leader for them in terms of solutions.

Okay, that makes sense.

And then I had another question, kind of circling back on some of the earlier questions regarding promotions.

I am aware that your promotions on certain lines of Marlboro have decreased this month, and then in February, so I guess this leads me to believe the volume impact has been minimal on Marlboro, and I just want to make sure this is the right way to think about this?

And maybe you could touch on other levers you have to pull to improve your net price realization this year?

And I definitely would like to clarify or verify that this is, in fact, a priority for you in 2013?

Well, I think I would say what I've said before on this topic which is when you are trying to maximize income there are a number of ways one can do that.

Certainly, pricing has been important in the category.

It has been, it is likely to be.

It is certainly something we look at very carefully.

You saw PM USA took two price increases list last year.

You've already pointed out that you have seen some of the promotions moderate over time.

So PM USA is very attentive to keeping an eye on the pricing element, but it is not the only one.

You can expand your margins as you have seen them expand through effective cost management, and Howard has already described where we are in our current cost programs.

We try to be efficient in going to the market, so we keep a good eye there.

We have very good margins there, we have expanded them throughout 2012 and we are mindful of that as we head into 2013.

Okay.

And then just my final question is on innovation and your portfolio and understanding your strategy regarding innovation this year, in light of the lack of progress with substantially equivalent application approvals, so I guess I would like to know if your innovation will be as robust as last year if approvals don't happen for a while?

And maybe you could update us on the status of that, please?

Sure.

Well, we continue to engage with the agency on our substantial equivalents applications and I think we have good dialogue with them back and forth as they work through that.

You probably know, Bonnie, there's something in the order of 4,000 applications that came in, in March two years ago.

They're coming up on the two-year anniversary of that batch of filings, and so I think you would expect for them to start working through those at some point in time.

With respect to our pipeline, we were pretty thoughtful, I think, about trying to get ready for the new regulatory environment.

And you saw, actually in 2012, that we have been able to keep a pretty robust pipeline of products and other offerings to our consumers and we do that in compliance with all the rules that are in place.

We would expect to continue to do that.

It is awfully hard to predict, right, because we don't see into the agency, I know you don't and I don't, but I would expect for them to start moving things a long.

All right, thank you.

Thanks for calling.

Your next question comes from the line of Priya Ohri-Gupta with Barclays.

Good morning.

Thanks for the question.

Can you share your view around the potential for additional liability management exercises, perhaps targeting your longer dated maturities that did not get tackled the last time?

And then secondly, how do you think about the timing of pre-financing your upcoming maturities just given the current market backdrop?

Sure.

This is Howard.

I think as everybody is aware, we did do a tender for some debt last year.

And one of the drivers of that was we were mindful of the fact that we had some high maturity towers in 2018 and 2019.

Additionally, it provided us with some ongoing interest savings when we reissued debt at a lower interest rate.

I think we're pretty comfortable with our maturity towers right now, and I think as we look at both debt issuance and any kind of tender and refinancing activity, I think we look at it in the context of a much broader analysis of how to effectively use our cash.

And I think, as you know, 80% of our underlying EPS goes out in the form of dividends, and then each year, I think, we make a decision as to what the most effective use of that remaining cash is.

And I think we're going to remain flexible as to how we use that cash going forward.

And then just any comments on how you think about the runway ahead of the maturity, if you're thinking of refinancing if like to have a three- to six-month cushion, or potentially even do something afterwards just given the flexibility from commercial paper usage?

Yes, obviously, when we are looking at issuing debt we do quite a detailed analysis.

I don't know that we have a hard and fast rule like you may be suggesting there, but it is something we analyze quite carefully.

Thank you.

Your next question comes from the line of Vivien Azer with Citi.

Hi, good morning.

Good morning, Vivien.

I was hoping we could talk a little bit more about Marlboro and specifically the share gains that you have posted.

If you could give any color on the contribution from new product introductions to the share gains that you have seen in 2012, as well, if you could offer some color on some of the consumer demographics, if you have done any work on that?

Are you gaining outsize share with smokers 18 to 30 or anything like that?

We do look at those, of course, but those are competitively sensitive details that we don't discuss in these kinds of settings.

But I can tell you, Vivien, overall we are really happy with those product introductions and what they have brought to the brand.

They have brought innovation to the brand, they've brought great packaging to the brand.

We like the contribution that they are making to the overall equity of the brand.

As you might expect, our brand teams monitor all of that activity carefully and I think overall we are very pleased with that.

We just don't break it out at this level for these purposes, I am sorry.

That's fair.

In terms of your guidance for 2013, you are coming off of a big year in terms of the contribution that you got from SABMiller.

Certainly, that has been a good contributor to your earnings growth, but I was wondering if you could give us a sense of what your expectations are and how you're thinking about the balance between a non-operating items like that and then your reported operating income growth for your segments?

Well, I will start and then Howard they want to say a word on this.

We always start with the operating performance of our companies.

This is, you heard in my remarks that that is why we were able to grow the way we were in 2012, which was our operating companies had terrific business performance.

We always start with that and they have robust plans for '13.

Now that said, we do have other levers that we can use to try to balance the overall equation, but I think it is important to understand we always start with the operating performance of our tobacco companies and our wine company because that is the core of our business.

Howard, do you want to say more on that?

Sure, the comment on SABMiller, I think you point out rightly so that SABMiller has had a strong performance last year and has had quite a run of strong performances over the years.

So when we put together our guidance, we certainly factor in an estimate for SABMiller.

We have a fair amount of insight into that because of our Board participation.

Certainly, we have a much deeper assessment of the operating plans for the businesses that we operate.

We continue to expect SABMiller to be a nice contributor going forward.

Fair enough.

Thank you very much.

Thanks for calling.

Your next question comes from the line of Ann Gurkin with Davenport.

Good morning.

Good morning, Ann.

I didn't know if you would comment on the elasticity model and how it has performed, or how it compares to historical measures following the price increase taken in December, and I guess the elasticity for both the premium segment, the Marlboro brand architecture build-out and the discount segment, can you comment at all on that?

I can comment generally on elasticity.

Over time it has not changed very much with respect to cigarettes, negative 0.3.

We have seen that really for quite some time now and we don't see any change in that.

We haven't seen any change actually in a while, and we certainly don't see any change in it now.

Okay, great.

And then, just want to be clear, as you think about the Marlboro franchise and your MST business are there still white spaces, opportunities, whether it is packaging, or blends, or mixes to roll out new products, just in general not specifics?

That's what the brand teams are doing every day, they are trying to study their consumers set, trying to figure out where there is opportunity and trying to develop products for adult consumers that we can take to them, sure.

Perfect, thank you.

Thanks for calling.

Your next question comes from the line of Chris Ferrara with Bank of America.

Hey, thanks, guys, look, sorry for the basic question in advance, but, I guess, following up on the elasticity question, can you just talk about how, I guess, you gauge the long-term capacity of the U.S. consumer here to endure higher cigarette prices?

I hear you that the 0.3 has not changed in a while, but surely you guys must have spent some time thinking about at what price levels that might change, right?

So I am just curious how you sort of think about that framework?

I think it is -- I don't how to predict that in the future other than to be informed by what we have seen in the past.

There has been a lot of history with respect to what the prices have been in the industry over time and that elasticity has remained pretty durable.

I guess another way of looking at it, Chris, is that if you look at pricing in the U.S. domestic market relative to other markets, of course, you would see that it probably has a very long runway in front of it.

But nobody knows that, I think, until you get there and we are not there now.

Got it.

And, I guess, just bringing it more to the short term, do you guys think that at current levels you could sort of maintain or drive modest share momentum without pricing below the industry average in the cigarette category?

Well, I would go back to the comments I made before which is it is always tempting, I think, to kind of break these things out into single constituent elements, it just does not work that way.

There is always a dynamic between wanting to increase income, which is what our strategy is, while trying to maintain share, and that is a balance that you have to assess based on a lot of factors at any one point in time.

It depends upon what the economy is doing, it depends on consumer confidence, it depends on other factors that we have pointed out, I think, previously.

The way that we think about it is, we try to be thoughtful about that as we run our business each year and we pay close attention to it.

But to make a general statement about that is awfully hard to do.

Thank you.

Thanks for calling.

Your final question comes from the line of Chris Burritt with Bloomberg News.

Hey, thank you for your time.

Good morning.

I was going to ask, [Gus], the release mentions a headcount reduction and was wondering if you could discuss the number of jobs cut last year and whether there may be further cuts this year?

Well, I could certainly talk about the program that we had in place which was, I think, well described and if I'm not mistaken I think the results are in our public filings.

We have to watch our headcount like every business does, but particularly in our category because cigarette volumes decline.

We prefer to manage that over time and we work really hard to do that over time by maintaining our headcount through attrition if at all possible.

There have been programs in the past, no one can never say that there won't be one in the future, but that is not our current intention.

We're trying to manage our headcount over time and we hope that we're going to be able to do that.

Thank you.

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

Thank you, everyone, for joining our call this morning.

We appreciate your interest in Altria.

If you have any follow-up questions, please contact us at Investor Relations.

Thank you.

This does conclude today's conference call.

You may now disconnect.