奧馳亞 (MO) 2013 Q1 法說會逐字稿

Good day, and welcome to the Altria Group 2013 first-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 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, and 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 2013 business results for the first quarter 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 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.

As previously announced, effective January 1, 2013, Altria's reportable segments are smokeable products, smokeless products, and wine.

In connection with this revision, results of the financial services business and the alternative products business our combined in an all other category.

Prior-period segment data have been recast to conform to the current-period segment presentation.

It gives me great pleasure to introduce Marty Barrington.

Thanks, Brendan.

Good morning, everyone.

Altria's diverse business model delivered strong financial results for the first quarter as the Company increased its adjusted diluted earnings per share by 10.2%.

Higher pricing contributed to adjusted operating companies income and margin growth and all three of our reportable segments.

Higher earnings from our equity investment in SABMiller and lower interest expense also drove adjusted EPS growth.

In the smokeable products segment, PM USA grew adjusted operating companies income and margins while increasing retail share for both Marlboro and PM USA.

PM USA continued to support Marlboro's new brand architecture with brand-building activities that contributed to Marlboro's retail share gains for the first quarter.

Earlier this year, PM USA expanded distribution of Marlboro's Southern Cut nationally.

Marlboro Southern Cut, part of the Marlboro Gold family, has a uniquely rich and smooth flavor.

Each of Marlboro's product families has exciting activities planned for the year to enhance the brand strength.

Earlier this month, PM USA received a $483 million credit against its master settlement agreement payment to the states as a result of the settlement of NPM adjustment disputes with certain states.

The credit increased the smokeable products segment's reported operating companies income, but we excluded it from adjusted operating companies income.

Middleton's volume and retail share of large machine-made cigars decreased for the first quarter.

The quarter was marked by heightened competitive activity, including high levels of low-priced imported machine-made cigars.

In the smokeless products segment, USSTC and PM USA increased adjusted operating companies income and margins while growing Copenhagen and Skoal's combined retail share and volume.

USSTC is supporting both Copenhagen and Skoal with equity-building initiatives.

In the first quarter, USSTC expanded Copenhagen's Southern Blend into additional states.

In February, Skoal began to refresh its packaging to better reflect the brand's contemporary, premium qualities and differentiate its product offerings.

In the wine segment, Ste.

Michelle delivered strong operating companies income and margin growth by expanding distribution of its premium wines.

As we have explained in the past, our tobacco operating companies remain very focused on understanding the evolving preferences of adult tobacco consumers and creating superior new products for them.

In our core tobacco businesses, PM USA, USSTC, and Middleton are making disciplined investments in innovation to expand the reach of their premium products to segments in which they are underrepresented.

We apply the same disciplined approach to developing innovative tobacco products for adult consumers who are interested in alternatives to traditional tobacco products.

Today, we are pleased to announce another step in our efforts to address these changing preferences.

In the second half of this year, Altria's subsidiary Nu Mark plans to introduce an electronic cigarette into a lead market.

As you know, awareness and trial of these cigarettes have increased over the last year, a subject to which we have been devoting attention and product development resources.

We believe that Nu Mark should now enter the e-vapor category and we expect to provide more detail on these plans at our Investor Day in June.

Altria remains focused on cost management.

Our current cost reduction program remains on track and is expected to deliver $400 million in annualized savings versus previously planned spending by the end of 2013.

During the first quarter, Altria paid $886 million in dividends and purchased shares valued at $57 million.

We are also pleased to share with you today that our Board of Directors has authorized a new $300 million share repurchase program that we expect to complete by the end of 2013.

We are pleased with Altria's results for the first quarter.

Altria reaffirms that it expects its 2013 full-year adjusted diluted earnings per share to increase by 6% to 9% to a range of $2.35 to $2.41 from an adjusted diluted base of $2.21 per share in 2012.

Howard will now discuss Altria's business results in more detail.

Thank you, Marty.

Good morning, everyone.

In the smokeable products segment, first-quarter reported operating companies income increased 33.4%, largely due to PM USA's settlement of the NPM adjustment disputes with certain states and higher pricing, partially offset by lower reported shipment volume.

Excluding special items, first-quarter adjusted operating companies income for the smokeable products segment increased by 1.3% to $1.4 billion.

Adjusted operating companies income margins increased 0.9 percentage points to 41.9%.

PM USA's reported cigarette shipments decreased 5.2% for the first quarter, primarily due to the industry's rate of decline and one less shipping day, partially offset by retail share gains and changes in trade inventories.

PM USA believes that the trade depleted less inventory during the first quarter of 2013 compared to the first quarter of 2012.

When adjusted for one less shipping day and trade inventories, PM USA estimates that its cigarette volume was down approximately 4% for the first quarter of 2013, compared to the prior-year period.

PM USA estimates that the total cigarette category's adjusted volume declined approximately 4.5% in the first quarter.

PM USA's first-quarter retail share increased 0.5 share points versus the prior year, as measured by its new tracking service.

Marlboro grew its retail share by 0.2 percentage points and L&M drove a 0.5 percentage point share gain in discount for the first quarter.

These gains were partially offset by a 0.2 percentage point share loss on other premium brands.

Cigar shipment volume decreased 16.8% for the first quarter, primarily due to retail share losses and changes in wholesale inventories.

Black & Mild's retail share, as measured by its new tracking service, decreased 3.1 share points primarily due to heightened competitive activity including high levels of low-priced, imported machine-made large cigars.

Turning to smokeless products, reported operating companies income for this segment increased 15.6% to $222 million for the first quarter, due primarily to restructuring charges in the first quarter of 2012 related to the cost reduction program and higher pricing and volume.

These factors were partially offset by higher promotional investments and unfavorable mix due to growth in products introduced in recent years at a lower popular price.

Adjusted operating companies income increased 5.2% to $222 million.

USSTC and PM USA's combined reported smokeless product shipment volume increased 3.4% in the first quarter.

Strong volume gains for Copenhagen were partially offset by declines for other portfolio brands.

USSTC grew Copenhagen and Skoal's combined volume by 4.9%.

USSTC and PM USA estimate that the smokeless products category grew by approximately 5% over the 12 months ended March 31, 2013.

Adjusted smokeless products' volume is difficult to estimate on a quarterly basis.

However, after adjusting for changes in trade inventories and year-over-year calendar differences, USSTC and PM USA estimate that their combined 2013 first-quarter adjusted smokeless products shipment volume grew at a rate slightly below the 12-month category growth rate.

USSTC and PM USA's combined first-quarter retail share of the smokeless products category decreased 0.4 share points, as measured by the new smokeless tracking service.

Copenhagen and Skoal grew their combined retail share by 0.5 share points.

Retail share for other brands decreased 0.9 share points.

Copenhagen grew its retail share by 1.3 share points, as products introduced by Copenhagen in recent years continued to have a positive impact on the brand's retail share.

Skoal's retail share declined 0.8 share points as the brand was negatively impacted by competitive activity and Copenhagen's strong performance, partially offset by share gains for Skoal X-TRA.

Ste.

Michelle's reported and adjusted operating companies income of $20 million was up 33% for the first quarter, driven primarily by higher shipment volume and higher pricing.

Ste.

Michelle's reported shipment volume increased 9.5% for the first quarter, driven primarily by the growth of certain premium brands and the timing of the Easter holiday.

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

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

Keep in mind that the tobacco product pricing and retail share figures are from the new tracking services.

We will also provide you with restated figures from the first quarter of 2012 so you will be able to compare the periods.

Marlboro's price gap versus the lowest effective price cigarette was 34% in the first quarter of 2013.

Marlboro's price gap versus the lowest effective price cigarette was 35% in the first quarter of 2012.

Marlboro's net pack price in the first quarter of 2013 was $5.79, while the lowest effective price cigarette was $4.32.

In the first quarter of 2012, Marlboro's net pack price was $5.71 while the lowest effective price cigarette was $4.24.

The cigarette discount category's retail share was 25.5% for the first quarter of 2013, unchanged versus the first quarter of 2012.

The estimated weighted-average cigarette state excise tax at the end of the first quarter was $1.42 per pack, up $0.01 versus the fourth quarter and up $0.05 versus the first quarter of last year.

Copenhagen's first-quarter retail price was $4.07 and its price gap versus the leading discount brand was approximately 37% in the first quarter of 2013.

In the first quarter of 2012, Copenhagen's retail price was $4.07, and its price gap versus the leading discount brand was approximately 42%.

CapEx was $15 million for the first quarter, and we estimate capital expenditures for the full year will be the range of $125 million to $150 million.

Ongoing depreciation and amortization was $54 million for the first quarter, and we estimate depreciation and amortization will be approximately $215 million for the full year.

Operator, do we have any questions?

Thank you.

(Operator instructions)

Judy Hong, Goldman Sachs

Thanks, good morning, everyone.

Good morning Judy.

First, in terms of the industry consumption decline in the quarter, I think your competitors have commented on some of the factors that may have caused a little bit of a softness in terms of the industry volumes.

So, if you could just comment on what you think is driving a bit of a moderation in terms of the overall cigarette industry shipments?

Yes, thanks for the question.

I guess I would begin by observing, Judy, that this is best seen over time.

I think to take one quarter's worth of data try to extrapolate too much is probably a bit dangerous.

If you look over time, you see that the cigarette decline rate has been about 3% to 4%.

Our estimate, on an adjusted basis for the quarter, is about 4.5% although PM USA was less than that at about 4%.

We saw in 2012 it was about 3%.

When we look at it, we don't see any big drivers in the first quarter that would argue for a sustained acceleration in the volume decline.

Folks have pointed out various factors in the quarter, the end of the payroll tax holiday, some refer to gasoline prices and other factors.

So, I think we will have to see is the answer.

But again, we are informed, I think generally, by the fact that the historical decline rate has been in the 3% to 4% zone.

Okay, and then, just in terms of your decision to launch your own e-cigarette brand in the second half, I know we have got more details that you're meeting, but just in terms of why now?

Are you more comfortable with the potential regulatory environment for e-cigarettes?

Do you think that the category is starting to have a bit more of an impact on the cigarette consumption?

Or do think that you have got the product that you are really ready to go in with a differentiated positioning, just the rationale for why now?

Sure, we have observed previously that we were monitoring the category carefully of course.

It is obviously relevant to consumers that we know quite a lot about.

We had devoted significant product development work to it.

And, we think for all of those factors, the reason that we are announcing that we will be out in the second half is that we have a product and we have plans that I think will allow us to compete effectively in this area that is emerging.

It is small, of course, relative to traditional tobacco products, but there is no denying that adult tobacco consumers have shown some interest in it.

So, for us at Altria, that is spot on our mission.

We are about providing adult tobacco and wine consumers superior branded products, and that is our intention here.

And, we will learn our way in smartly.

Okay, and then just lastly on pricing.

So, if -- look at smokeable, your pricing was up pretty nicely both year-over-year and sequentially.

So, maybe if you could talk about your promotional activity in the first quarter versus the year ago or the fourth quarter?

And then, is there any impact in terms of the cigarette -- I'm sorry, the cigar either pricing or the volume decline that is causing the smokeable pricing to be up more?

Or is it really just consistent with more of the cigarette pricing?

Yes if you look at smokeable, if you look at the net effect of pricing actually it is quite nice.

Wasn't it -- call it, 4.5% give or take.

But, we had a significant volume decline year-over-year for the reasons that you have asked about and we've pointed out and others have pointed out.

So, basically it is driven by the volume.

The cigar numbers, if you look at cigar shipments obviously year-over-year, they were distorted a bit by trade inventories factors.

We have got pretty highly competitive dynamic in that cigar space with -- people with bringing in low-priced offshore made product.

In terms of the cigarette competitive space.

I would say it's pretty much inline with what we have seen before.

It is competitive out there but it has been competitive for some time.

We did not seen any particular change in the first quarter.

Okay, that's helpful.

Thank you.

Thanks for calling.

David Adelman, Morgan Stanley

Good morning, Marty.

Hi, David.

First, let me ask you about your cigarette promotional activity during the quarter.

Was that recalibrated at all because of the weaker volumes?

I think in line with what I just said, that there are plans, as you know.

In the smokeable segment we're trying to maximize income while making sure that we get modest share on Marlboro.

And, I think that is what you see play out in the quarter.

If you look at more per share growth year-over-year it is about two-tenths.

So, I think we stuck pretty much to our plan which is what we intend to do.

Okay, and then, on e-cigarettes.

I think it's a philosophical question, it is certainly legal to advertise those products much more broadly than other tobacco products -- or tobacco derived product, including television.

And, some of the leading brands in that category are on TV.

Is that something in the current regulatory environment you'd be willing to do?

We're looking at all of that now is the honest answer, David.

That is why we will have more on that in June.

Our intention is to do this, to do it responsibly.

And, of course, as you well know and everyone else who follows us knows, a lot of that will be defined by what the FDA has to say about how they intend to regulate these product.

So, our intention is to compete and to compete effectively.

We will work through all those particulars --.

Hello?

Hello?

Ladies and gentlemen please standby.

The conference will resume momentarily.

Thank you for standing by, you may now resume your conference call.

Marty, can you hear me?

Hold one moment.

Thank you for your patience.

You may now resume.

Thank you.

David, I apologize for that.

We had a technical difficulty that apparently caused the line to dropout.

Apologies to everyone.

No, no.

No problem.

I hope it wasn't something I said.

I was going to say to you it was nothing you said at all.

I'm not sure quite where we dropped.

So, let me know what you heard and I'll try to pick back up without repeating unduly.

Let me go onto different question.

I was able to hear you -- your response with respect to e-cigarettes.

The only thing I wanted to ask was about your management of your product mix within the smokeless tobacco business.

Both this quarter and really all of last year, revenue growth has pretty much been in line with volume growth.

You have taken these price increases but the mix within the portfolio has really offset the net pricing.

And, I am wondering, is that what you envisioned and hoped for?

Or can you do little bit better?

Are you over doing some of the price positioning of your line extensions or is that just a function of the competitive reality in that market?

I would not be too concerned about that.

If you look at the mix of the products in smokeable's, they're overwhelmingly premium.

We have discussed previously having to manage a brand and the size and scale of Marlboro and having some price points for people during a tough economy so I won't repeat all of that.

But, the overwhelming amount of the products in the smokeable segment are premium and that's our attention because we're trying to maximize income.

I'm sorry, if I said smokeless I misspoke, I meant to say smokeable.

Yes.

Okay, thank you.

Vivien Azer, Citigroup

Hi, good morning.

Good morning.

Just to go back on cigarette industry volume trends, I hear you loud and clear on an adjusted basis, not the end of the world the down 4.5%.

But, can you comment on the sequential trends that you saw intra quarter, month-to-month?

Well, again I guess I would go back -- I just hate to suggest that one quarters worth of data really provide us with a lot of insight.

I can tell you, Vivien, there was a slow start in the quarter and then it got stronger as we went through the quarter for the first quarter.

We obviously don't comment intra quarter.

So, that is not intended to be a comment on the second quarter.

But, again, it is just a cautionary note about trying to read too much into one quarters worth of data on this.

Understood.

And, do you guys have an estimate, perhaps, on potential volume impact from e-cigarette consumption in the quarter?

No, I think it is too small to read.

It's probably -- we know there's some interest, so it is probably having some effect but it is really too small to read and extrapolate from at this time.

Understood.

And, lastly, could you comment on our outlook for both state excise taxes and federal excise taxes?

Yes, let's take them one at a time.

In terms of state excise taxes, Howard gave you the numbers year-over-year.

We are watchful, of course.

There is a fair amount of activity.

This is the peak time, as you know, during this period of the year when state legislators are in.

We have some activity in Massachusetts and Minnesota.

There has been a proposal in California.

We and others are, obviously, doing our best advocacy to try and persuade legislators that that's not the way to go as consumers are already very heavily taxed in this area.

But, there is a fair amount of activity in the states and we will have to see how she goes.

If we switch to the federal excise tax, as you know the President raised this issue in his budget proposal.

We are strongly opposed to that.

As you know federal excise tax was raised 158% just a few years ago, it is incredibly disruptive.

These taxes are regressive, they're unfair.

And, to the extent that programs are proposed that are for the benefit of everyone, we think that there are better ways to finance them then to put it on the back of adult tobacco consumers.

So, we'll see how it goes.

It is dynamic in Washington but we are hopeful that that will not come to pass and we are certainly advocating against it.

Do you have a specific number in terms of your outlook for the weighted average state excise tax increase for the full year?

No, we don't forecast that.

Okay, thank you.

Bonnie Herzog, Wells Fargo Securities

Good morning.

Good morning, Bonnie.

I have a question on your decision to enter the e-cigarette category.

I was hoping you could give us a little more color on the process you undertook to evaluate your options for entering and what other options you considered?

And then, could you give us some color on any test markets you have had or focus groups you conducted for your e-cigarettes?

You just don't want to wait until June, do you Bonnie?

You want me --.

I don't.

I do not.

I can understand and I appreciate your interest.

But look, it always starts with the consumer and that is where we began.

Our mission, as I just mentioned a moment ago, is to provide adult tobacco consumers with superior branded products.

So, we wanted to make sure we understood the consumer dynamic.

And, as we discussed previously, there is some interest out there, there is some trial and awareness is high.

So, we started by trying to understand those dynamics and to understand them well.

Then, of course, you have to do product development to try to find products that are interesting to them that are going to have interest to them that will work in the marketplace.

And, that is the basic process that we follow.

We have a robust center for research and development.

We have robust product development capability.

We have good insight into this consumer.

We have great brand building capability.

And so, that is the process that we followed.

And then, when we have something that meets those standards, we will put it into a test or a lead market to see if the consumer reacts to it the way we predict he or she will.

And, that is what we are about to do the second half.

So, that is a bit of an overview and I know it's at a high level.

But, we can talk about that some more when we are ready to say more about our plans.

No, I understand, that was really helpful.

I appreciate it.

And then, I would love to hear your thoughts and reaction to some of the comments made recently by Mitch Zeller while I was on a panel at the NATO show?

Specifically, as it relates to three priorities, menthols, substantial equivalents, and then deeming regulations on e-cigarettes.

And, I'll be curious to hear if you have had much dialogue recently with Mr. Zeller?

Well, we engage with the FDA regularly up and down the agency at the Center for Tobacco Products and that includes at the Director level as well as with all of his staff and the various groups that work it.

Our strategy has been, and continues to be, to be in full compliance with the regulations that govern our businesses, as well as to engage and to try to be thoughtful and constructive about the issues that face the industry.

And, we did that before and we will do that again.

I was not particularly surprised about the topics that Mr. Zeller referred to as being his priorities.

Because, as well know, these are the topics that have been the subject of some discussion.

The agency had said for some time that it was working on deeming.

So, I'm not surprised that he will continue to work on deeming.

Substantial equivalents has been much discussed and the agency, I think, is working hard to try to move those along.

So, I think those are the topics we would expect.

And, we would expect for Mr. Zeller to come in and do a professional job in accordance with the statute as did his predecessor.

Okay.

And then, my final question is on your Marlboro Special Blend.

I was hoping you could talk further about any progress that you have made to relative narrow the relative price gap between your Special Blend line and then regular Marlboros?

And, as you are lowering promos on MSB, what has been the consumer reaction and then the retention?

Well, we do not break it out at that level of detail.

But, I would remind everyone what our strategy is here.

Overall, for the smokeable segment, because we're trying to maximize income while maintaining modest share momentum on Marlboro, we have deployed Special Blends for the purpose of making sure we have a price point for some price-sensitive consumers in the franchise.

They want to be in the Marlboro franchise, they like Marlboro.

But, the consumer macro economy has been hard on them.

So, we want to make sure that we have a place for them.

You correctly refer to our strategy of -- I'll begin, I guess, with list price reminding everyone that Marlboro sells for the same list price everywhere.

And then, we have different promotional platforms within the franchise.

And, we've reduced the promotions for Special Blend over time as we have been able to do that.

So, overall, I think we're pretty happy with how that has come together.

You see continued margin growth in the smokeable segment.

So, all in all, we are pretty happy with that.

I think we have also discussed previously, if and when the economy really begins to improve the get some traction, and adult tobacco consumers are feeling better, and we have higher consumer confidence, those promotional platforms can be further modified.

Okay, thank you.

Chris Growe, Stifel.

Hi, good morning.

Hi, Chris.

Hi, just had two questions for you.

The first one, and forgive me if I missed this, but there were some questions around the promotional spending.

I am just curious sequentially in the cigarette business, if you could talk about promotional spending?

Did that actually tick down in Q1 from Q4?

I think I'll refer to what I said before Chris, which is in terms of the competitive environment in the smokeable segment, it is about where we have been.

It is competitive out there, it has been competitive.

And, our plans take all of that into account.

Okay.

And the, I was also curious on a year-over-year comparison basis.

You had a lot of new product activity in the year ago period and heightened promotional levels.

Is that at all a factor in your volume performance in the first quarter especially with Marlboro Black launching a year ago at this time?

No I don't think that is the way to see it.

It looks to us like it's industry volume performance.

And, again, you can see the PM units they actually performed better on an adjusted basis against that volume than did the instrument.

Okay, then, if I could just ask one more.

There was a recent update by the FDA to Congress on -- and had some mentions and obviously some discussion of modified risk tobacco products.

Is that something that -- obviously, it's an opportunity for the industry.

There's been no applications for an MRTP.

Do you have any plans or anything that you could speak about in that regard or any update on modified risk tobacco products and how PM USA or other businesses may pursue that?

I can certainly comment on why we supported the FDA which included this protocol to get modified risk tobacco products approved.

And, we have advocated to the agency, as we have for some time now, and you can see these papers on altria.com, that we believe that is an important policy issue for FDA.

We believe that the role of manufacturers like ourselves are to try to develop these products, to make the case about why they should be considered for modified risk if the science and evidence supports it.

And, it is the agency's role to consider those applications and then communicate accurately to consumers if the case is made.

And, we're actually pleased that there's all this activity at FDA.

It is an important component of its mission to regulate tobacco products.

So, we support that.

Okay, thank you.

Thanks for your call.

Philippe Geason, Mitsubishi Securities.

Yes, good morning, two questions if I may.

The first one, you have about $1.4 billion of debt coming due in November.

I'm going to assume that you will refinance that.

Given the current rate environment might you also be taking advantage to refinance some of your higher coupon debt?

Or the premium at which those bonds trade is just too high that you are not willing to take the hit on the P&L?

I would rather not talk about our future plans for that debt.

Certainly when you look at our historical pattern, in some cases we have, when our debt has matured, we have issued new debt.

And, we did do a tender refinancing last year.

But, I am not in a position to share what our plans are through the end of this year.

Okay, and then, just a follow-up on Bonnie's question with regard to e-cigarettes.

As you know, one of your competitors yesterday estimated that the impact of e-cigarettes on volumes for cigarettes may have been somewhere around 1%.

I understand it is very early on, it is a small category.

But, more holistically, my question is the way that you see the category potentially evolve over time, what do you see the margin potential to be?

And, how do you make sure that you are going to protect the profit pull from the traditional cigarettes as there could be more cannibalization down the road?

Thank you.

Yes, I understand your question.

It's just so early to make any predictions about that.

I don't think I would be giving you any help.

I replied in response to a question a bit earlier about it is very hard to even understand at these small numbers the volume impact or not.

And so, to be predicting about future rates and margins and cannibalization is just a bit ahead of where we are.

Okay, fair enough.

Thank you, very much.

Thanks for your question.

Michael Lavery, CLSA

Good morning, just looking at your share repurchase pacing.

You have had comfortably over $1 billion each of the last couple of years.

And, now you have got the $300 million authorization for this year plus the little bit from Q1.

But, with the NPM cash coming in it seems like you'd be in a position to certainly do more comfortably.

Is there other strategic priorities that might be on your radar instead?

Or how are you thinking about the capital allocation?

Sure.

I think as you pointed out we have done over $2 billion since 2011.

Certainly, we feel good about the new $300 million program.

I think to start off with how we thought about this year, obviously the primary way we return cash to shareholders is through dividends.

And, the dividend was increased last August.

And, I think each year we look at our various cash needs and decide what the appropriate amount of share repurchase is.

And, I think, at this point we feel comfortable with the $300 million.

But, certainly we will keep an eye on that as the year evolves.

Okay, thanks, that's helpful.

And then, just looking at e-cigarettes, does today's announcement imply or suggest that you wouldn't do -- that you are only moving organically?

Or would you still consider an acquisition in that space as well?

Well, our announcement today is that we have developed a product that we intend to launch in the second half.

We don't comment on acquisitions.

Okay, fair enough.

And then, I realize you'll have a lot better detail in June, but is that something you would consider using the Marlboro brand for?

Or would it be a separate brand that you go to market with?

I know it is tempting, Michael, I am just going to ask everybody to hold on until we rollout our plans.

Good try.

All right, no problem.

Thank you, very much.

See you.

Ann Gurkin, Davenport

Good morning.

Wanted to switch to cigars.

I wonder if you would comment a little bit about your strategy for the cigar business.

Is there need for innovation, repositioning the brand?

Can you comment on the loss at retail?

Can you just give us an update on cigars?

Yes, it is pretty competitive out there in the cigar space.

You have our strategy which is we are trying to, just as we were cigarettes, we're trying to maximize income there.

We have, as you know, Ann, a large percentage of the tipped segment there and the profitability there remains pretty good.

It's in the cigarillos space where we are seeing lots of competition with low price entry.

Some of which is being facilitated by these imports that Howard and I mentioned in our remarks.

So, we would like to have greater exposure in the cigarillos but we are also mindful of trying to maximize our profitability there.

And, that's what the brand people are trying to work through right now.

If you've been at retail and you have seen this, it is just mighty competitive on price and we of course prefer to compete on equity.

Great, that helps.

Thanks you, that's all I have.

Thanks.

Thanks for asking.

Thilo Wrede, Jefferies.

Marty, you mentioned a minute ago that if the economy improves you might consider your promotional activities.

Is there any particular number that you look at when you judge the economy?

Is it unemployment, is it consumer sentiment?

Or is it more a gut feeling by management how the economy is doing?

I would say it is a combination of a number of factors that we track closely.

We certainly track unemployment.

We are mindful of underemployment.

I remind people that the labor participation rate continues to drop, which really, if it were -- if the unemployment rate were corrected for that unemployment would be even higher than is being what's reported.

So, we watch housing starts pretty carefully.

That is actually a bit of an encouragement, isn't it, that housing starts are doing better than they were a year ago.

We have got a number of those factors that we watch.

And then, of course we try to manage the brands to the gaps as best we can based on all of those data.

Okay.

And then, the other question I had for you, for five of the last six quarters, at least on my math, the retail price increase for Marlboro when you exclude the impact of state excise taxes has been below the price increase that I calculate when I look at the reported numbers that you have on income statement.

Can you help me understand philosophically how this continues to -- this retail price under performance continues to drag on like this?

Well, again, I would go back to if we start manufacturers pricing.

Our pricing ticked up really quite nicely.

At retail there are a number of factors that influence the average retail pack price.

Some of them are our trade programs.

Some of them are retailer strategies about how they choose to compete at the c-store.

And, what you have seen, I think, during the period that you have referenced, is a number of those strategies coming to bear in the retail market.

So, as you know, we offer a variety of Marlboro programs and LP, flax, margin option, [orchard] are intended to offer retailers the opportunity to align their strategies as best they think they can with Marlboro.

I think those are the dynamics you see.

Retailers have different strategies for different platforms, indeed for different stores.

Our goal is to try to offer programs that give them choices to make with respect to our business.

Okay.

Thanks, a lot.

We will now take questions from the media.

(Operator instructions)

Chris Ferrara, Bank of America.

Hi, thanks guys.

I just wanted to follow-up real quick on the buyback question.

I know you said $300 million is a number and you're comfortable with it.

But, can you just give a little color as to why you are comfortable?

I think you recognize the question, which is you had a lot of buyback, you have more cash coming in and now the buyback projection is lower.

So, any color you can give on why would be fantastic.

Thank you.

Sure.

I think, I hesitate to give a forecast on what we are going to use our cash flow through throughout the rest of the year.

But, I think it is something that we look at pretty carefully.

And, certainly when you look at an 80% dividend payout ratio, most of the cash is going out on a pretty regular basis.

I think for now, we feel that the $300 million number is the right number.

Certainly, there'll be greater color as to the cash usage as the year progresses.

Thank you.

Vivien Azer, Citigroup

Hi, thanks for the follow-up.

I just wanted to circle back on a question that Michael asked.

Can you just clarify from a regulatory standpoint is there anything that would preclude you from using an existing cigarette brand name on novel new tobacco products?

Well, that is a bit of a complex topic.

What I was trying to convey to Michael was as we're thinking about the product that we intended to launch in the second half, Vivien, that we will have our plans rolled out as they become more final.

Maybe that is best handled off-line.

I can get Brendan or someone to walk you through the complexities of using cigarette brands in various spaces.

Understood.

Thank you.

All right, thanks for following up.

Thank you.

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

Thanks, everyone, for your interest in Altria.

If you have any additional questions please call us today at investor relations.

Thank you.

This does conclude today's conference call.

You may now disconnect.