奧馳亞 (MO) 2014 Q4 法說會逐字稿

Good day and welcome to the Altria Group 2014 fourth-quarter earnings conference call.

(Operator Instructions)

I would now like to turn the call over to Ms. Sarah Knakmuhs, Vice President, Investor Relations for Altria Client Services.

Please go ahead, ma'am.

Good morning and thank you for joining us.

We are here this morning with Marty Barrington, Altria's Chairman and CEO, and Howard Willard, Altria's CFO, to talk about Altria's 2014 business results for the fourth quarter and full year.

During our call today, unless otherwise stated, we are comparing results to the same period in 2013.

Earlier today, we issued a press release regarding our fourth-quarter and full-year results.

For a detailed review of Altria's business results, please review the earnings release on our website at altria.com or via the Altria investor app.

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

Please review the forward-looking and cautionary statements section at the end of today's earnings release for various factors that could cause actual results to differ materially from projections.

Future dividend payments and share repurchases remain subject to the discretion of Altria's Board.

The timing of share repurchases also depends on marketplace conditions and other factors.

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 release, which is available on our website and via the Altria investor app.

Now I will turn the call over to Marty.

Thanks, Sarah.

Good morning, everyone, and thanks for joining our call.

Altria had another terrific year in 2014.

For the full year, we again delivered against our two long-term financial goals.

We grew adjusted diluted EPS by 8% and we paid out approximately 80% of adjusted diluted EPS to shareholders in dividends, which totaled $3.9 billion.

We also raised our dividend by 8.3%, marking the 48th increase in the last 45 years.

We further rewarded shareholders by repurchasing nearly $1 billion in shares between the program we completed in 2014 and the new $1 billion program we announced in July.

And in 2014, Altria delivered total shareholder return of 34.5%, far outpacing both the S&P 500 and the Food, Beverage, and Tobacco Index.

We achieved these results by the clarity of our core strategies and our talented employees' strong execution against them.

Here are some important segment highlights from the quarter and full year.

The smokeable products segment produced outstanding results by consistently executing its strategy of maximizing income while maintaining modest share growth on Marlboro and Black and Mild over time.

The segment grew adjusted operating companies' income by almost 8% in the quarter and by nearly 7% for the full year, primarily through higher pricing.

The end of the federal tobacco quota buyout payments also contributed in the quarter.

The segment also expanded adjusted operating companies' income margins in both periods.

Marlboro was the primary driver of these strong financial results.

PM USA's long-term investments in the Marlboro architecture have strengthened the brand's equity and expanded its ability to engage both loyal and competitive adult smokers.

In 2014, the brand posted its third consecutive year of retail share growth.

And Marlboro continues to innovate.

In November, PM USA expanded distribution of Marlboro Menthol Rich Blue to 28 states, primarily in the Eastern US, to enhance Marlboro's position in the menthol segment.

It's early, but Rich Blue is off to a good start.

In the machine-made large cigar category, John Middleton strengthened its leadership position in the tipped segment.

The Company posted solid volume growth in the quarter and the full year, driven primarily by Black & Mild.

Over time, Middleton has enhanced the brand with innovative introductions like Black & Mild Jazz.

And in December, Middleton announced the national expansion of Black & Mild Casino, a dark tobacco blend in the tipped segment.

In the smokeless products segment, USSTC continued to execute its strategy in 2014.

USSTC grew full-year adjusted operating companies' income by more than 3% and expanded its already strong adjusted operating companies' income margin by more than 1%, despite a slowdown in the industry volume growth rate.

We estimate that growth rate to be about 2% for the last 12 months.

USSTC maintained retail share leadership in the smokeless category in 2014 with its premium brands, as Copenhagen and Skoal grew their combined share in the quarter and for the full year.

Copenhagen posted strong share gains in both periods behind the strength of Copenhagen Long Cut Wintergreen.

In 2014, USSTC began enhancing Skoal's value equation with a new equity campaign and targeted investments to narrow price gaps on Skoal Classic.

We are pleased with the results we've seen so far.

Turning to innovative tobacco products, Nu Mark made steady progress as it builds e-vapor category leadership.

The Company is taking a disciplined approach and remains focused on building a robust portfolio of superior innovative products for adult smokers in vapor.

In the fourth quarter, Nu Mark evolved MarkTen by adding a new offering with 2.5% nicotine concentration by weight in classic and menthol varieties.

In December, Nu Mark completed its national launch of MarkTen e-vapor products, achieving distribution in over 130,000 stores.

And at year end, MarkTen was ranked among the top e-vapor brands nationally based on retail market share.

Nu Mark also acquired and integrated Green Smoke in 2014.

This acquisition added great people, deep supply chain expertise and technology, and we are excited about the brand's potential.

It's still early days in this dynamic and evolving category, but we believe Nu Mark is increasingly well positioned for the future.

In 2014, our alcohol assets continued to diversify our income and contribute to income growth.

In the wine segment, Ste.

Michelle posted another year of double-digit operating companies' income growth, primarily through higher volume.

Critics awarded Ste.

Michelle's premium wines more than 180 ratings, of 90 or better in 2014.

Our earnings also benefited from our SABMiller investment, which continues to support our strong balance sheet.

So to sum up, 2014 was another excellent year for our strong premium brands, for our Company, and for our shareholders.

We are maximizing income in our core premium tobacco businesses and innovating for the future.

We are extremely proud of the results produced by our very talented employees and of our track record for creating value for shareholders.

Looking ahead to 2015, Altria forecasts its 2015 adjusted diluted EPS will increase by 7% to 9% to a range of $2.75 to $2.80 from an adjusted diluted EPS base of $2.57 in 2014.

Finally, today, we are announcing some executive leadership changes, all to be effective March 1 this year.

First, Dave Beran, our President and Chief Operating Officer, has decided to retire after 38 years of distinguished service to the Company.

Dave's strong expertise, knowledge, financial acumen, and leadership have contributed immeasurably to Altria's success and he will be missed.

When Dave retires, Howard Willard will become Altria's Chief Operating Officer.

He has significant experience, having been with Company since 1992.

In addition to his current role of CFO, Howard has held leadership positions in numerous business functions of the Altria companies.

Billy Gifford will succeed Howard as Altria's Chief Financial Officer.

Billy has been with Altria since 1994 and also has held numerous roles, including President and CEO of PM USA and his current role as Altria Senior Vice President, Strategy and Business Development.

These moves are consistent with our long-term succession planning and these talented, experienced leaders will serve us well for the future.

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

Thank you, Marty.

Good morning, everyone.

In 2014, strong performance in our smokeable products segment helped drive adjusted diluted EPS growth of almost 16% in the fourth quarter and 8% for the full year.

A lower effective tax rate on operations and lower interest expense were also contributors to adjusted diluted EPS growth in both periods.

The smokeable products segment delivered strong adjusted operating companies' income growth in the quarter and for the full year.

The segment also expanded adjusted operating companies' income margins 1.8 percentage points in the fourth quarter and 1.9 percentage points in the full year.

For the full year, PM USA grew Marlboro's retail share by 1/10 of a share point and grew its total cigarette category retail share by 2/10 of a share point.

L&M share gains also contributed to PM USA's full-year retail share performance, while the cigarette discount segment declined slightly.

The smokeable products segment's fourth-quarter reported operating companies' income grew 7.6%, primarily driven by higher pricing.

For the full year, the segment's reported operating companies' income declined 2.7%, primarily due to higher gains on NPM adjustment items in 2013.

After adjusting for trade inventory changes and other factors, PM USA estimates that its fourth-quarter and full-year cigarette shipment volume declined approximately 2% and 3%, respectively.

And that total industry volumes declined approximately 2.5% and 3.5%, respectively.

The 2014 full-year industry cigarette decline of 3.5% continues to be in the range of the decline rate we've seen in the last few years.

In cigars, Middleton's reported cigar shipment volume increased by almost 4% for the fourth quarter and over 6% for the full year, driven primarily by Black & Mild's strong performance in the tipped cigar segment.

Black & Mild's retail share declined 4/10 for the quarter and 3/10 for the full year.

In the smokeless products segment, adjusted operating companies' income was unchanged in the fourth quarter, as higher pricing and higher volume were offset by higher promotional investments and the timing of selling, general, and administrative expenses.

For the full year, the segment grew adjusted operating companies' income 3.3%, primarily due to higher pricing and higher volume, partially offset by higher promotional investments and product mix.

Adjusted operating margins declined 2.5 percentage points in the fourth quarter, to 60%, and grew 1.1 percentage points to 63.4% in the full year.

After adjusting for trade inventory changes and other factors, USSTC estimates that its domestic smokeless product shipment volume grew approximately 2.5% in both the fourth quarter and full year of 2014.

Copenhagen and Skoal's combined retail share grew 4/10 of a share point in the quarter to 51.3% and grew 5/10 to 51.2% for the full year.

The wine segment delivered strong results in the fourth quarter and the full year.

Ste.

Michelle grew operating companies' income by 17.8% in the fourth quarter and 13.6% in the full year, primarily driven by higher volume.

Shipments increased 9.6% in the quarter and 4.8% for the full year.

That wraps up our operating results.

Marty and I will now take your questions.

While the calls are being compiled, let's cover a few housekeeping items.

As a reminder, comparisons when made are against the fourth quarter and full year of 2013 unless we note otherwise.

Marlboro's price gap versus the lowest effective price cigarette was 32% in the fourth quarter, down 2 percentage points, and 33% for the full year, down 1 percentage point.

For the fourth quarter, Marlboro's net pack price was $6.02, up $0.16, and the lowest effective priced cigarette was $4.55, up $0.17.

For the full year, Marlboro's net pack price was $5.96, up $0.13, while the lowest effective priced cigarette was $4.49, up $0.15.

The cigarette discount segment's retail share was 24.9% for the fourth quarter and full year, down 3/10 in each period.

The estimated weighted average cigarette state excise tax was $1.49 per pack for the fourth quarter, up $0.02, and $1.48 per pack for the full year, up $0.04.

Wholesale inventory changes are one factor PM USA uses to estimate adjusted PM USA and industry volumes.

PM USA estimates that its 2014 wholesale inventories were approximately 2.4 billion units at the end of the fourth quarter and 2.3 billion units at the end of the third quarter.

In 2013, PM USA's wholesale inventories were estimated to be approximately 2.5 billion units at the end of both the fourth and third quarter.

PM USA estimates that the 2014 cigarette industry wholesale inventory levels were 5.5 billion units at the end of the fourth quarter and 5.7 billion units at the end of the third quarter.

PM USA estimates that 2013 wholesale inventory levels were 5.9 billion units at the end of the fourth quarter and 6.3 billion units at the end of the third quarter.

Copenhagen's price gap versus the leading discount brand was 32% in the fourth quarter and full year, down 3 percentage points for the fourth quarter and 4 percentage points for the full year.

Copenhagen's retail price was $4.19 in the fourth quarter, up $0.12, and $4.13 for the full year, up $0.07.

The price of the leading discount brand was $3.17 in the fourth quarter and $3.14 for the full year, up $0.15 in each period.

CapEx was $47 million for the fourth quarter and $163 million for the full year.

Ongoing depreciation and amortization was $59 million for the quarter and $208 million for the full year.

Looking ahead to 2015, we expect capital expenditures will be in the range of $200 million to $250 million and the depreciation and amortization will be approximately $200 million.

Operator, do we have any questions?

(Operator Instructions) Matthew Grainger, Morgan Stanley.

Hi.

And congratulations to everybody.

There's a couple people, so I'll just say everyone.

But -- so Marty, I guess first, I just wanted to get your updated thoughts on the current economic outlook and how that is impacting cigarette consumption, because we've seen now two consecutive quarters of improving volume trends, which I know, generally, you would attribute just to quarterly volatility and the full year was in line with the long-term average.

But at this point, can we say that we are seeing some evidence of stronger consumption or as you look across the industry, better product -- better portfolio mix?

Yes, that's great question.

Let me give you are view of the adult tobacco consumer for 2015, which I really think goes to the heart of what you're asking about.

We've been cautious for the last several years, as you know, as we went through this difficult recession.

We are actually seeing a modest improvement, I think, in the economic situation for the adult tobacco consumer, although it remains a bit of a mixed bag.

The US economy is clearly improving, as everyone knows, and particularly in relation to the rest-of-the-world economies, we see unemployment and underemployment have come down, we see housing starts are coming back, we see very good consumer confidence numbers, so I think all of that is a positive -- those are positive factors.

On the other side of the ledger, you have labor participation rates maybe not where they should be.

And then year-over-year wage gains are still modest.

But I think on balance, our view is that the adult tobacco consumer is feeling better about their economic situation and their economic future and we expect some modest improvement in that over 2015.

Okay.

Do you have any industry volume outlook that you're willing to share at this point?

No, we don't do that, as you know.

But I think -- especially if you look out over the last three to four years, which includes, of course, this very difficult recessionary period, you see it, Matt, really 3% to 4% and you call it maybe 3.5% on average over the last four years.

PM USA has done better than that, at about 3%, because of its strong portfolio and its share gains.

So we don't see any big disruptors in that, but we don't forecast volume going forward.

Okay.

Thanks, Marty.

And Howard, if I could just follow up on smokeable products.

The 8% adjusted OCI growth in the quarter, obviously it's a very strong number, but I guess I'm almost surprised that it wasn't even stronger, given the absence of quota buyout costs during the quarter.

Can you just talk about the increase that we saw in per-pack costs year on year, excluding the quota buyout?

And where within the cost architecture of smokeable products you are seeing places to reinvest back in the business?

Sure.

Yes, I would tell you that, as you note, the cost per pack in the smokeable segment was up quite a bit in the fourth quarter.

I have to tell you I think that is primarily driven by timing.

If you looked, we had less expense in the third quarter and we don't tend to manage our expenses and our project execution quarter to quarter.

We are really managing to a full year.

And I think if you look at the trend of expenses in the full year, it was at a much more normal level.

But certainly, we felt good about the fourth-quarter performance.

We had strong increases in net revenue per pack, up around 5%.

And of course, we did receive the savings in the FETRA payments in the quarter.

Okay.

Thank you, both.

Vivien Azer, Cowen and Company.

So to follow up on Matt's question, clearly, the cigarette industry volume dynamics are easing, but we've got a deceleration in MST.

So can you talk about the interplay?

I know we talked about this a little bit last quarter and it's something that you will watch over time, but with another quarter of deceleration, I was hoping you could opine on what is causing that deceleration and whether there's a dynamic that involve cigarettes as well?

I think we will have to see.

Obviously -- let's will start with smokeable.

It really had a strong -- Howard has already described the strong quarter and the strong year and we are very happy with the smokeable performance.

And actually, you see USSTC had a very good year; it grew its income at about 3%.

But we've observed this volume deceleration now over the last three quarters and that's at odds with what we've seen for the prior several years.

So Vivien, they have more choices today and so there's some movement there, but these things best are evaluated over time.

So I'm not sure I have any big insights to share with you this morning on that, except to say that it speaks first to the wisdom of having a total tobacco platform.

So as adult tobacco consumers move within these categories, that Altria is well positioned to offer them premium brands with great margin structures.

So that's how we think about the business.

And we will have to study the volume, I think, for some time yet to know the answer to the question you're proposing.

Fair enough.

For our modeling purposes, if you will, is this a deceleration that you guys are planning for to continue internally as you think about 2015?

Well, I'd like to say we try to help you guys as much as we can with your modeling, but I can't -- and I applaud your courage for trying to get me to tell you -- but I really, honestly -- the answer I gave you was the honest answer, which is we're going to have to see.

And we've set up our year with our operating plans, I think, which is all embedded in our full-year guidance, which is quite strong at 7% to 9%.

Fair enough.

On the cigarette side, as we look across to 2015, can you provide an update on the outlook for the state excise tax environment, given how the NYMEX has been over the last few years, please.

I missed what you said, Vivien.

You faded out right at the end, I'm sorry.

Oh, I apologize.

Can you provide an outlook for the 2015 state excise tax environment?

Yes.

Well, we're always cautious at the beginning of the year, aren't we.

And we have all seen that the state excise tax environment has been more moderate in the last several years than it has been previous.

But we going to each year prepared to answer the call, because as you've observed and others have observed, as soon as the legislatures come back in January, we see the proposals start to roll in and there are a number of them that are out there.

We have very good government affairs people that point out that this is unfair to tobacco consumers and these products already highly taxed, but we will have to see how the year plays out.

It's been a fairly moderate environment over the last several years and we hope that plays out in 2015.

Terrific.

Thank you very much.

Bonnie Herzog, Wells Fargo.

So in terms of your EPS growth guidance of 7% to 9% for this year, it is in line with your historical trends and seems very conservative, given the strong pricing and tremendous cost savings you have this year.

So I assume you will be fully reinvesting these savings into your different businesses.

So my first question is why not let some of the strength flow to the bottom line?

And then second, could you give us a sense of what the different investment buckets are -- for instance, 70% of the savings will be invested in e-cig's vapor, 30% in combustible?

Just again, trying to get a sense of your priorities.

Sure.

Let me offer you a slightly different perspective.

In previous years, we've come out, I think, for the last several years at 6% to 9%, not at 7% to 9%.

And the factors that went into our judgment this year about how to guide includes some of the things we've already spoken about on the call, which is a modestly improving situation for our adult tobacco consumer.

Obviously, we have the benefit of some FETRA payments, but we I think pointed out in our release we have some pension and healthcare cost changes due to long-term assumptions.

And so every year, you put your guidance together and you have puts and takes about what you're going to do.

Some years, we invest; some years, we have factors which are flowing in the other direction.

I think 7% to 9% in the current environment is a strong signal about the confidence we have in our business and our operating Company plans.

Howard, you might want to supplement that answer.

Yes, no, I think you covered it, Marty.

The only other thing I would point out -- and this has been with us for some time and I think has been quite orderly -- but we are continuing to unwind the PMCC business and as that progresses, there are fewer and fewer asset sales that are available.

So that's another element that plays into the overall Company performance.

Okay.

That's really helpful, guys.

I think it also highlights the consistency of your business as well, with all of the different puts and takes, as you mentioned.

And then I do have a broad question on the consumer and uptrading.

So I'm certainly hearing from a lot of the retailers that consumers' greater disposable income is leading to up trading.

So is this, too, what you've seen in your Marlboro franchise and has there been a mix shift to premium Marlboro, if I could call it that?

And also you generated the strong net price realization in cigs, but I'd be curious to hear from you what happens when gas prices go back up.

In other words, how sustainable do you think the strong pricing in cigs will be, especially if and when gas prices rise?

Okay, let me try to comment on a couple of those to try to help you.

I think gas prices for us -- historically, we have not called out gas prices as one of the principal drivers of consumer behavior, although we acknowledge that it had some effect.

To us, it was really more about the unemployment rate, consumer confidence, and housing starts.

Now the way that gasoline prices have gone down so precipitously has obviously had a bigger effect on the consumer, right?

The C stores, as you and others have pointed out, are seeing better traffic.

And I don't think there's any question that it is contributing to consumers feeling better about their economic situation.

But historically, Bonnie, we have not called that out as one of the big three drivers.

So I don't know what people here are expecting for gasoline prices, but it probably will not have that much more of an effect.

We did have very good pricing.

And the way that we achieve pricing, as you know, is we took list pricing in 2014, combined $0.13 a pack.

And then as always, we can moderate our promotional allowances and we did so last year.

We moderated our allowances on Special Blend -- Marlboro's Special Blend and on Black.

And as you know, we are able to do that quite tactically by state by using our SVP tools.

So we did see a year in which we think we could take some pricing and I think you see that in the numbers for 2014.

Okay, that's very helpful.

Thank you.

Judy Hong, Goldman Sachs.

So one follow-up and another question.

So on a follow-up perspective, how are you -- you have talked about the fourth quarter being impacted by some timing of expense items.

Just on a full-year basis, though, your marketing and R&D expenses were up over $200 million.

So I just wanted to get a bit better sense of where that spending was allocated in 2014, how much is that sustainable into 2015, and thinking about the guidance for 2015?

Yes, I think with regard to marketing and R&D, I really don't feel that there's been any dramatic departure this year versus prior years that I would call out, with probably the one exception being that this was the year that we made some significant investments through Nu Mark in the e-vapor category.

And obviously, that's had an impact on our R&D investments as we build that product pipeline and certainly, there's some marketing that supports that as well.

But that's really the primary impact there.

Okay.

And then maybe on the e-vapor category itself, if you look at some of the measure channel data, the category has slowed.

You've obviously expanded the MarkTen distribution.

I'm just wondering if you could talk about your assessment about the category generally at this point?

And then you also talked about more of a disciplined approach to building MarkTen.

So can you just elaborate on that and in light of the dynamics, how you're thinking about the performance that you are seeing from MarkTen?

Sure.

Well, let's start with the category.

Our estimate is that the consumer spending in 2014 increased by about 50% to about $2 billion.

And that is compared to a year before, which I think you've seen in the numbers are roughly of a 160% increase.

So you can see that it has slowed, although it's a -- 50% increase is still fairly large.

It's growing in both traditional trade channels and it's also growing in vape shops, which are harder to get a line of sight into.

To dimensionalize that spend, though, $80 billion is spent on conventional tobacco products versus the $2 billion that we estimate.

So just to put it in its proper context, with respect to Nu Mark, our belief is that that is an interesting enough category for us to participate in and to aspire to have leadership in.

That is a leadership that will be achieved over the long term and for the long term, which is why we use these words about financially disciplined and over time.

We want to participate there.

We believe Nu Mark had a very good year.

Gosh, we got the MarkTen product in 130,000 retail stores and that's easy to say and that's hard to do.

And so our sales force at Nu Mark did a great job there.

They rolled out, as we mentioned in our remarks, the 2.5% product.

Consumers continue to look for their product and so I think a lot of what's going to happen with vapor is about manufacturers trying to bring out products that better satisfy their consumers.

And that's what Nu Mark is doing.

It's for the long term.

It will be for the long term.

And we are learning our way in with our consumer and using a disciplined approach, but with the acquisition of Green Smoke and their people and their technology in addition to Nu Mark, I am very encouraged about what we have in the pipeline for MarkTen.

Okay, that's helpful.

And then lastly, Howard, just in terms of 2015 guidance, can you tell us how much share buyback is incorporated?

Yes, I'm not going to guide at that level.

I think we have previously talked about the fact that we have an existing share repurchase program in place.

It's got a little over $500 million left.

And we had communicated we expected to finish that by the end of the year, so that hasn't changed.

And certainly any share repurchase plans we have are incorporated into the 7% to 9% guidance.

Got it, okay.

Thank you.

Owen Bennett, Nomura.

Just following on the e-vapor question, then, I guess, have you got any update on potential timescale and for commercialization of PMI's heat-not-burn?

No, we are working on it.

That has to go through the FDA process, as you know, and we are working closely with them on it.

And I think we feel like we're making good progress and I think PMI would tell you the same thing, but I can't give you a date, because it's subject to the FDA's processes.

Okay, cool.

Thanks very much.

Chris Growe, Stifel.

I have two questions.

I think a bit of a follow-up from earlier questions.

The first one would be, Marty, in relation to Marlboro and the discount products on the market today, that price gap is quite narrow, at 32%.

It's been there for several years.

You talked about -- I think to an earlier question, the improving consumer environment.

Could we see that price gap expand?

So therefore, are economic conditions in such a place that it would allow for premium products to take a little bit more pricing than discount products?

That would be our hope, of course, as we try to maximize income in the smokeable segment, which is -- the price gaps have been higher at times in its history and -- but you have to be thoughtful about how you do that and when.

But certainly, that would be in our interest of maximizing income.

Okay.

And then another question on the -- call it the other division, where you have PMCC and Nu Mark.

And I know it's hard -- if you can characterize each of those businesses and how they perform.

But you had a large investment and a huge national launch in MarkTen in 2014 and the investments, so that operating loss in that division obviously expanded.

I'm just curious, is it such that you've got a full pipeline that that operating loss couldn't come down?

Or has the Nu Mark business, which has obviously generated some decent sales now, gotten to a point to where we should see less operating loss in the coming year?

Yes, I know that everybody is trying to get under the all other, but we've really got two things operating there.

We are investing in Nu Mark, which makes sense for the long term.

And then Howard has pointed out that as we wind down PMCC, we have fewer asset sales and they tend to be lumpy from time to time.

So that's what's going on over there.

And we're just not going to guide down too much deeper than that, Chris, if you'll allow me.

I understand.

Maybe -- I think you made a mention earlier, just to follow on, about a strong pipeline of products at Nu Mark.

Should we expect some more activity behind product launches this year in 2015?

Is that a fair question?

Well, it's a fair question.

And I am going to reserve my answer so that I don't hand out my competitive plans on the phone.

But yes, you should be thinking about this, I think, in terms of the category.

We expect to have products that will be launched that will be better and better, as I expect that other people are planning similarly.

I think that's exactly the nature of the category right now.

We've got good plans for that.

Okay.

Thanks so much for your time.

Michael Avery, CLSA.

Can you just give a sense of what some of the investments -- what type of investments would be ideal for the savings that you've got coming from the buyout, just in terms of equity building.

Obviously, you have some relatively limited options in some of your marketing capabilities.

Can you just give a sense of what the tools are that would be highest priority for how you would think about applying some of those extra funds?

Well, again, I'm not going to lay that out to tell everybody exactly how we're going to spend our assets to improve our business.

But you've seen us over time do such things as develop the Marlboro architecture, to improve our Marlboro digital site, to roll out new products, like Rich Blue and Black, and so forth.

So there's lots of places for us to invest in our businesses.

Our goal is to keep our brand franchises strong and relevant and there's lots of tools to do that, even, as you point out, in a category which has higher regulation.

And then we have obviously, as has previously been described, some investments to make in our innovative products.

So that's how I would think about it, Michael, at a high level.

I'm just not going to lay it out in detail, as I'm sure you can understand.

Sure, that's fair enough.

Thanks.

And just looking at the 4Q market share numbers, even with the improving consumer health, you had the discount segment really driving the share gains, with Marlboro flat.

Is that a focus for 2015 to try do -- obviously, I'm sure you enjoyed getting the lift in the discount share.

But is there a way you want to try to manage that to bring Marlboro further ahead or is a steady state also -- how do you think about Marlboro versus the total portfolio and what the priorities are in terms of just how you approach that?

Yes, it's a good question.

Our aim is modest share momentum on Marlboro.

And we previously characterized, I think, that as if we get 1/10 or 2/10s a year, that's great for Marlboro.

Listen, our focus is on premium.

Over 90% of our shipments are premium, but there is a discount segment and so we try to participate there.

And L&M is a great offering at that price point.

Okay, great.

Thanks.

And then just lastly on Green Smoke, it's been the MarkTen rollout you've taken nationally.

What's the next step for Green Smoke?

Would that follow it?

Well, we're working on that.

I mentioned, I think, to someone else that we've been integrating Green Smoke.

They've really helped us quite a lot on the front end with supply chain.

They had a well-established supply chain and we've been relying on them quite heavily to help us in that regard.

They had very good people and they do have a good technology pipeline.

We've been integrating all that in 2014.

Remember, we closed on this, I think, in April, if memory serves.

And so we've now been integrating that and we have an integrated pipeline of products as well, as we become more efficient with those two organizations.

So yes, I would expect to see more from the combined Nu Mark/Green Smoke assets.

Great.

Thank you very much.

Nik Modi, RBC Capital Markets.

Good morning, everyone.

First, I want to just say congrats to Howard, Dave, and Billy on the all-new roles.

So congrats to you, guys.

Two questions from my end.

The first one is on the Marlboro architecture.

It's been a couple years now since it's been implemented.

And I was wondering if maybe you had some context perspective you can share in terms of brand equity scores or any kind of indicator -- quantitative indicator on what the effect has been?

Clearly, we've seen the Marlboro franchise do well over this time frame, so I just wondered if you had some more granularity on some of the quantification behind Marlboro.

And the second question is -- and this is I guess more strategic.

It seems like the superpremium cigarettes segment is doing fairly well and has been doing fairly well and there is really not that many players in that market.

I just wondered from a strategic standpoint how PM USA really thinks about that?

Yes, let me tackle those in turn.

Good questions, both.

You're right; Marlboro architecture has been a terrific boost for our business.

We've talked previously about having the flavor families and allowing different marketing approaches in the families and what it's done for marlboro.com has been great.

I think that's shown up in the performance of Marlboro.

With respect to any quantitative brand equity data, we may talk about that some in Cagney.

So if I could just ask you to hold tight on that, I think we'll have some further information for you in that regard.

With respect to superpremium, the way -- let me just mention a strategic approach to this, which is we are always looking for places in the market where there is business, where we either are underindexed but we don't have an offering.

And so we look at things all the time.

And while I don't have anything to announce about that, I can assure you we look at places to build our business, both there and elsewhere.

Great.

Thanks, Marty.

(Operator Instructions) Michael Felberbaum, Associated Press

I was wondering if you could give a little bit more color more broadly on the strength of the Marlboro brands and how it's been able to sort of stave off some increased competition as well as whether that the economic -- the recovering economic situation?

Well, Marlboro is a fantastic product for adult smokers that comes with decades of leadership, with lots of innovation, and with lots of offerings for people who are in the category and it has consistently grown its share over decades.

We are the stewards of this brand and we pay a good deal of attention to Marlboro.

It speaks both to the product's function and to its equity and that's been Marlboro's story.

I commented earlier on the call about -- we see that the economy is strengthening a bit, hopefully for our adult tobacco consumers.

We certainly hope that's going to be the case in 2015.

Thank you.

(Operator Instructions) Thank you.

At this time, I would like to turn the call back over to Ms. Sarah Knakmuhs for closing comments.

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

If you have any follow-up questions, please contact us at investor relations.

We look forward to seeing many of you at our CAGNY presentation on February 18.

Thank you.

This does conclude today's conference call.

You may now disconnect.