奧馳亞 (MO) 2016 Q2 法說會逐字稿

Good day and welcome to the Altria Group 2016 second-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)

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.

Thank you. Good morning and thank you for joining us. We are here this morning with Marty Barrington, Altria's CEO, and Billy Gifford, our CFO, to discuss Altria's 2016 second-quarter and first-half business results. Earlier today we issued a press release providing these results, which is available on our website at Altria.com or through the Altria investor app.

During our call today, unless otherwise stated, we are comparing results to the same period in 2015. 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 your repurchases depends on marketplace conditions and other factors. Altria reports its financial results in accordance with U.S.- 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 non-GAAP financial measures and reconciliations are included in today's earnings release.

Now I will turn the call over to Marty.

Thanks, Sarah. Good morning, everyone, thanks for joining us. Altria Group delivered strong 2016 second-quarter and first-half results, growing adjusted diluted earnings per share by 9.5% in the second quarter and by nearly 11% for the first half. Our core tobacco businesses continued to produce very strong results with yet another solid quarter of income and retail share performance.

Marlboro matched the record retail share it set in the first half last year, and Copenhagen and Skoal produced excellent share results on a combined basis. And we continued to reward our shareholders, paying out more than $2.2 billion in dividends to shareholders thus far in 2016.

So here are some of the operating highlights from the quarter and the first half. The smokeable products segment continued to produce excellent results. Despite difficult year-over-year comparisons, it grew adjusted operating companies income by 4.5% in the second quarter and nearly 7% for the first half. You will recall that last year the smokeable segment grew adjusted OCI by nearly 16% in the second quarter and over 14% for the first half.

This growth in 2015 benefited from higher reported volumes at PM USA, driven by stable industry volume and a trade inventory build influenced by upcoming cigarette excise tax increases. In the second quarter of 2016, the trade depleted inventory levels. So when adjusted for these inventory movements, PM USA estimates its second-quarter cigarette volume declined 3%, in line with PM USA's estimate for the total industry decline rate. For the half, PM USA estimates that its adjusted cigarette volume declined 1.5%, in line with the industry.

For the first half of 2016, Marlboro's retail share was unchanged at 44.1%, matching its record share level set a year ago. Marlboro's second-quarter retail share also was 44.1%, down 0.1 of a point from the year-ago period. We are extremely pleased with the smokeable segment's performance in both the second quarter and first half of 2016.

Our smokeless products segment continued to deliver excellent income performance, robust volumes, and strong share growth on Copenhagen and Skoal combined. USSTC grew adjusted OCI by nearly 14% in the second quarter and more than 15% for the first half. USSTC estimates that its volume after adjusting for trade inventory movements and other factors grew approximately 5% in the second quarter and 4% for the first half, while estimated smokeless industry volume grew approximately 3% for the past six months.

Copenhagen and Skoal increased their combined retail share by 1.5 points in the second quarter and by 0.9 of a share point for the first half. Copenhagen's retail share gained nearly 3 points in the quarter, benefiting from the first full quarter of Copenhagen Mint's national expansion at retail. Copenhagen Mint has performed extremely well, bringing excitement to the brand for both adult dippers and for the trade.

Skoal's retail share declined 1.3 points in the second quarter, reflecting in part USSTC's portfolio strategy to invest behind Copenhagen and expand Copenhagen Mint. And as you know, part of USSTC's strategy is to grow the combined share of Copenhagen and Skoal.

In innovative tobacco products, Nu Mark continues to invest with discipline in developing a portfolio of products to meet the evolving preferences of adult tobacco consumers. In e-vapor, market results for MarkTen XL remain encouraging, as Nu Mark has now distributed the brand into stores representing approximately 50% of e-vapor category volume in mainstream retail channels, including C-stores.

On the heated tobacco platform, our work with Philip Morris International on its FDA applications for pre-market authorization and a modified risk tobacco product designation remains on plan. And we are making excellent progress on commercialization strategies for the U.S. market.

As you know, in May the FDA published its final deeming regulations, extending its regulatory authority to all tobacco products, including cigars and e-vapor. We believe we are well prepared for these regulations, and Nu Mark and Middleton are working now to comply with them. Our companies also continue to engage with FDA and other stakeholders to advocate for changes to the regulations where we believe appropriate.

So, in summary, we are very pleased with our first-half performance. Based on these results and our expectation that our businesses will deliver solid results over the balance of 2016, we now expect to deliver 2016 adjusted diluted earnings per share in a range of $3.01 to $3.07, representing a growth rate of 7.5% to 9.5% from our 2015 adjusted diluted EPS base of $2.80.

As a reminder, this guidance does not include any impact from the proposed AB InBev/SABMiller business combination, as the transaction remains subject to certain approvals and the closing date has not yet been determined.

Speaking of our beer investment, we are pleased with the significant progress AB InBev has made securing regulatory clearances. AB InBev has announced that it has obtained approval in 22 jurisdictions, including approvals in the United States, North America, Asia Pacific, Africa, Europe and Latin America. And AB InBev continues to pursue the remaining regulatory clearances that are necessary to close the transaction.

In addition, as you know, on July 26 AB InBev announced its revised and final offer to SABMiller. This offer, among other things, would increase the pre-tax cash that Altria expects to receive to $3 billion from the previously estimated $2.5 billion. The other material terms related to Altria remain the same.

Internally, our teams are preparing to transition our investment from SABMiller to the new combined entity. One such area of preparation is coordinating how our accounting teams will share information. And through this preparation, we now expect a timing difference between how we currently report results for our SABMiller investment and how we will report for our investment in the new combined company. Once the proposed transaction closes, we expect to record our share of results from the new Company on a one quarter lag.

Billy will provide you with more detail in his remarks. We remain excited about the proposed transaction and look forward to supporting the combination of these two great companies.

Now I will turn things over to Billy for more detail on our performance.

Thanks, Marty, and good morning, everyone. I will start with some more color on the smokeable products segment. Adjusted OCI margins expanded by 2.6 percentage points in the second quarter to over 50%, primarily driven by higher net pricing and lower SG&A costs, partially offset by higher resolution expenses. For the first half, adjusted OCI margins in the segment expanded 2.2 points to 49.2%, primarily driven by the same factors.

PM USA's reported domestic cigarette shipment volume declined 5% in the second quarter, primarily driven by the industry's rate of decline and trade inventory movements. In the second quarter last year, the trade built inventory ahead of excise tax increases in several states that went into effect in the next quarter. For the first half, PM USA's reported cigarette shipment volume declined 2.1%.

At retail, PM USA's overall share was unchanged in the second quarter and grew 0.1 of a point for the first half. In cigars, higher shipment volume contributed to the smokeable products segment's performance in both periods. Middleton grew Black & Mild's volume by 7.5% in the quarter and nearly 8% for the first half, by focusing on the brand's strength in the more profitable tipped segment.

In the smokeless products segment, adjusted OCI margins expanded in the second quarter by nearly 3 percentage points to 69.3%, and by 2.6 percentage points to 67.5% for the first half, primarily driven by higher net pricing, partially offset by mix due to higher popular price product volume.

The smokeless segment's reported shipment volumes increased 4.3% in the second quarter and 6% for the first half of 2016, primarily driven by the industry's rate of growth and retail share gains.

In wine, Ste. Michelle continued to deliver strong income by growing volume of its premium wines. During the second quarter and first half, Ste. Michelle grew adjusted OCI by nearly 6% and 5% respectively. Ste. Michelle's reported wine shipment volumes grew more than 3% in the second quarter and 5.5% for the first half.

Altria reported equity earnings from its SABMiller investment of $199 million in the second quarter and $265 million for the first half.

So let me close with some more information on the accounting of our beer investment that Marty mentioned. For context, Altria currently records results for its SAB Miller investment concurrent with Altria's reporting calendar. Because NewCo's results will not be available to us in time to record them in the concurrent period, we expect to report our share of NewCo's results using a one-quarter lag.

This means that after the transaction closes, there will be a one-time three-month transition when no earnings from our equity investment in NewCo are recorded in our income statement. For example, Altria's share of NewCo's results in the quarter in which the transaction closes will be recorded in the subsequent quarter. The precise periods affected will depend on when the transaction closes.

It is important to understand that this lag will not affect our cash flows or quarterly dividends per share. But we do expect it to impact our year-over-year comparability of our reported and adjusted diluted EPS in the short term, and could also affect 2016 adjusted diluted EPS guidance.

As noted in our earnings release, our guidance does not yet include the impact of the expected lag because the transaction remains subject to certain approvals and the closing date has not yet been determined.

That wraps up our results. Marty and I will now take your questions. While the calls are being compiled, I will direct your attention to Altria.com. Along with today's earnings release, for your reference we posted our usual list of quarterly metrics, including pricing, inventory and other housekeeping items.

Operator, do we have any questions?

(Operator Instructions) Chris Growe, Stifel.

Nice report here. I just had two questions for you, if I could. There was a comment in the release about higher promotional spending in both smokeable and smokeless. And I know you have had, certainly in smokeless, a good number of some new product activity helping there, and I imagine that is the main item that is driving that.

But I was curious within the smokeable division how you see the promotional environment, and if there was an area you got more aggressive on and where that promotional spending was rising.

Sure. Maybe I will start, and then I will ask Billy to comment on how it flowed through. I think that the environment remains relatively constant, Chris, is the short answer. It is competitive out there, it always has been, but we haven't seen any material changes.

Billy, do you want to say more about it?

No. I think the only thing I would add is, Chris, you know from a timing quarter to quarter in a short period, you will have timing fluctuations. You will recall as part of our productivity initiative, one of the areas we said we would reinvest in was brand building. So this is reminiscent of that.

Okay, got you. Then just a question overall on the category. Down 3% is a little different from what Reynolds had indicated, but either way we are moving back towards more of a normalized rate of decline. I know you don't like to give guidance on volume.

So in this quarter with the gas price down, the consumer still in better shape, it looked like volumes did weaken a little bit sequentially more than I expected. Anything you would offer in relation to that; and if you could speak at all about the second half, that would be great as well.

Sure, Chris. Listen, we don't see anything in the quarter that causes us to call it out for you. I do think it is consistent with what we have said, and you and others I think have said over time, that you would expect for the long-term trends to revert back to their trend line.

If you look at 2015, we ended the year up 0.5%, the quarter before was down 0.5%, and now for the year so far, the first half we are down about 1.5%. So 1.5% obviously is lower than the long-term trend line, but it is higher than it was in 2015 when we had these interruptions because of the gas prices and all. So I think it is consistent with how we see it, Chris, which is just slowly reverting back to the long-term trend line.

Okay, that is very helpful. Thanks for your time.

Okay, Chris. Thanks for calling in.

Russ Miller, RBC Capital Markets.

Good morning, this is Russ Miller on for Nik. Just a philosophical question for you guys. How does Altria think about innovation within the context of the new deeming regs and the FDA's more stringent view on substantial equivalence?

And more specifically there, should we assume innovation will be delayed from hitting the market? And if so, how should we think about volumes in that context? Thank you.

Okay, thanks for the question. You know, for a thorough summary I think of our views, I might refer you and others to the comments that we filed -- I am sure you have seen them -- in which we picked up this very point. We do think that innovation in the category is important. We are working very hard on our innovation system and on innovative products for the adult tobacco consumer. And we believe that it would be good public policy for the FDA to encourage that.

Our comments have pointed out to the FDA that some of what is in the deeming regulations does not seem to be particularly friendly to that concept. So we continue -- I think we mentioned in our remarks this morning, we are both complying with the regs and we are trying to influence and advocate where we think the regs could be improved.

And I think in the area of innovation, I think you have picked up on an area where they could be improved. I think it is too soon to tell what the effect will be on volumes. I hope that is helpful to you.

That is excellent. Thank you, Marty.

All right, thanks for calling.

Judy Hong, Goldman Sachs.

So I just wanted to clarify the industry volume numbers and understand there may be some differences in how you adjust for inventory adjustment. But it still seems like a pretty big gap in terms of what you are reporting as an adjusted industry volume decline versus Reynolds.

So is a 3% decline just purely sort of industry shipment that you estimate and then adjusted for your estimate of the inventory movement? And when you think about sort of the true consumption decline, whether you look at wholesale shipment to retail or retail takeaway, is that 3% you think is the more representative of the true consumption decline?

Let me make a comment and then I will ask Billy maybe to talk about how we do the estimate so as to try to help you. Remember, it is a tough comp because the industry was stable for the second quarter of last year. So in terms of the underlying, I think that is the way to understand it. And I am sure you heard the conversation we just had with Chris about the reversion to the trend over time.

I don't know, Billy, we can't comment on how other people estimate, but maybe you could help Judy with how we estimate it.

Sure. Judy, basically the way we approach estimating that industry decline is we take total shipments that are reported, and then we look at inventory movements and we adjust for those inventory movements so that we get towards a more true consumption offtake, to your point. And then the only other difference in this period is a calendar day difference. So those are the major factors that we would adjust for to get to a more consumption offtake.

Got it, okay. That is helpful. Then, Billy, just I mean the press release talks about the accounting of SABMiller transaction and some of the quarterly lag. So maybe just help us frame what we should expect. And I know you are not necessarily talking about the updated guidance, but just broadly speaking how does that impact potentially the full-year guidance and just more from a timing standpoint?

Sure. A really kind of reference, I will give you an example. So if this transaction were to close in the fourth quarter, SAB would be recorded as we currently record it. All of those results from NewCo would be picked up and recorded in the first quarter of 2017. So that is how that one-quarter lag affects from a go-forward basis.

So the accounting of the equity income based on the 27% still holds, even if the transaction closes beginning of the fourth quarter, for your impact?

That is correct. It continues until NewCo comes into existence, and then those results are on a quarter lag.

Got it. Okay, thank you.

Thanks for calling, Judy.

Matthew Grainger, Morgan Stanley.

I had -- I guess I just had two questions, follow-up questions on deeming. First, this may be pretty straightforward, but could you give us a reminder of where you stand on the challenge that you have filed to the descriptor ban included in the cigar deeming portion? Do you have an injunction? Do you expect to have an injunction by August 8, or would you have additional flexibility to continue marketing your products beyond that date?

Good question, and I am pleased to tell you the matter has resolved. So we had objected to that, as you know in our comments, and FDA put it in the deeming regulations. We filed suit, and FDA has informed us that that do not at this time intend to enforce that against Black & Mild. And in consideration for that, we have withdrawn our lawsuit. The parties have reserved their rights, but we will continue to use Black & Mild unless something changes.

Okay, that is good to hear, thanks. And just another one. Even though the published regulations didn't make any immediate changes in your ability to market products with characterizing flavors, the redline draft that was made public afterward indicated that the FDA had initially intended to take a more rigid position on flavored products, and voiced some concerns around their impact on youth consumption.

So the end outcome was favorable, but I am just curious how you interpret the implications of the redline draft and what that might mean for their orientation toward menthol going forward?

Yes, we will have to see going forward. I mean, I think menthol stands on its own merits and I won't repeat what we both know, Matt, on that. You know the science on that and we put in our papers on that, so I am not sure it has a big effect on menthol.

I do think that there have been instances in which some in tobacco control have argued to take flavors away from adult tobacco consumers in the name of trying to prevent youth consumption. Our view on that is that there is so much that can be done to prevent youth consumption, most of which we have worked on and the numbers are trending in the right direction, that we want to defend the flavors for our adult tobacco consumers who have enjoyed it.

And the cigar category is a perfect example where flavors have been in that category for, gosh, decades and decades. So we will have to see how the FDA approaches that, but we think that they are actually very separate issues about youth consumption and flavors.

Okay. Thank you, Marty, I appreciate it.

Thanks for the questions.

Aaron Grey, Cowen and Company.

Good morning, it is Aaron Grey on for Vivien. After benefiting from a benign excise tax environment over the last two years, I was hoping to get an update on the state excise taxes, given we saw three states pass tax increases in the first half of the year and have open legislation as well as notable proposed ballot initiatives. How should we think about that look for the weighted average SET over the course of the year?

Yes, we have a little bit of information in that in the housekeeping. But you are right, we have had three increases so far in 2016: Louisiana, West Virginia, and most recently Pennsylvania. We also had the phase-in effect of a few that were passed previously that came into effect: Connecticut, Minnesota and Oregon, if I recall correctly.

The weighted average I think is $1.56 as we stand, but we will have Pennsylvania coming online obviously after August 1. So it has heated up a little bit. It is a good question. We continue to resist these. We think they are unfair to adult tobacco consumers. But state budgets being what they are, we just have to go through this every year.

The one that I would recommend that you be watchful of, of course, is California where the ballot has qualified. So that is a proposed $2, which will be on the ballot in California in November.

Okay. All right, great, thank you. And with MarkTen XL distribution representing 50% of volume coverage in traditional retail, what can we expect as it relates to the cadence of XL's rollout going forward?

Well, we are trying to step into it with discipline. We are trying to go where the business is. The stores that we have chosen have good e-vapor business. We had a very good marketplace response. We have had very good consumer response.

So you know our strategy there which is we have aspirations to be the long-term leader, but we want to proceed with financial discipline, always learning from the consumer. And I am very pleased with the progress that MarkTen XL is making in that regard. So I would expect more of the same kind of an approach.

All right, great. Thank you very much.

Thanks for calling in with your questions.

Michael Lavery, CLSA.

Just curious if you could talk a little bit about how you think about some of the resource allocation. Just looking at margins in smokeless now, they are a hair shy in the quarter at least of 70%. So do you give a disproportionate amount of R&D resources there or -- to some extent, I recognize the need to follow the consumer, but how much can you also try to maybe lead them a little bit; versus say vapor? That is a different margin profile, certainly at least at the moment and some different competitive dynamics. How do you think about all of that?

Of course, price is a lever as well, and we saw that in the quarter, too. How do you think about balancing all of those to take advantage of the opportunity in that segment?

Yes, we have a process to do that, of course. Actually, have two processes; we have a strategy process and it is tightly linked to our budget process. So our operating companies come in with their plans. We have talked about this previously. We have one-year plans and three-year plans and longer-term plans, and they make the case for investment. And then Altria Group decides on how to allocate resources about where the best opportunities lie for our shareholders.

The good news is all of our operating companies have lots of good ideas. So it is always a good discussion about where best to go. But that is the process we use, Michael. We look at it and then when we put our strategy and our budget together for both one, three, and longer plans, we try to put the resources where we think the greatest opportunities lie, including in margin enhancement.

Okay, thank you. And then looking at the other segment and PMCC, your finance assets on the balance sheet certainly have been coming down. Obviously, you have been not investing in that business and essentially unwinding it. Can you give a look ahead at what the trajectory is on that? Certainly, some of these leases have long lives, but you have been doing some sales opportunistically. What should we expect for what that contributes near-term and maybe medium-term?

Sure, I think Billy can help you with that.

Yes, you are right, Michael. From a standpoint, the net financial receivables are down to $1.2 billion, and we have been unwinding that business for quite some time now. We look at those leases and when it makes sense to sell those, we do. As you recall at CAGNY, we talked about a three- to four-year wind-down period that we would have before we are completely out of that.

And is there anything that might accelerate that, or is that pretty likely to stick? What is the variance for that possibly?

Yes, the leveraged leases is kind of complex, but in the life of a leveraged lease for both the counterparty and us there is a, if you will, a nice period of time when those sales make sense to both parties. So that is really what drives the unwinding of that business.

Okay, thanks. And then just lastly on iQOS, obviously there is a long process in terms of potentially commercializing that here. And needless to say, the FDA application is one of the nearer term and bigger pieces of that.

What is the right way to think about some of the costs and investments, and to what extent would that be offset by some of the reinvestments from your productivity savings from this year?

Yes, I think we talked about this when we announced the productivity initiative, which is that we do want to make some continuing investments in -- of area of long-term value to the shareholder. And clearly, an investment in innovative tobacco products, particularly those with the potential to reduced harm, are high on our list for investment.

So we haven't given much detail below that, not to preempt your next question, Michael, but those are the areas. And I think when you think about vapor and iQOS and other innovative products for consumers, that is a good place to invest for the long term proposition of both the Company and for our consumers.

Have you been able to get any -- have you had an ability to engage with the FDA yet, and have any sense on how receptive they might be to a heat-not-burn platform?

Well, I think we talked about this last time, right, which is that I didn't want to comment and in too many particulars about an application that involves obviously PMI, because it is their product that they are trying to get qualified. But we did talk about the process, and the process is there is typically a high degree of engagement between the manufacturer that is trying to bring that product to market and the FDA staff.

I think we talked previously about, for example, you don't want to design and execute clinical trials which are lengthy and expensive without knowing that the FDA, I think, is thinking that you are asking the right questions.

I would also point to comments that Director Zeller has made publicly about understanding there is a continuum of harm among tobacco products, and that the Agency has to be thoughtful about how they encourage manufacturers and consumers to migrate to these kinds of products. So these things aren't done until they are done. But I continue to be optimistic that this is the way forward by bringing innovation to consumers which may reduce harm. It is a good idea for everyone.

Okay, thank you very much.

Thanks for calling, Michael.

Bonnie Herzog, Wells Fargo.

I just had a quick follow-on question from an earlier one on your level of spending behind brand building. Just hoping to get a sense of how much this might accelerate in the second half, or should it be more evenly spread throughout this year?

And then any thoughts on where, you know, your spending levels behind brand building will need to increase in the future. Just kind of want to get a sense of will levels stabilize, or do you think you need to keep increasing spending to maintain some of the share gains you have been getting?

Billy, do you want to take that?

Sure. Bonnie, when you think about brand building, it will fluctuate from time period to time period, but I would not expect material fluctuations as we move forward. You will always have fluctuations in a shorter time period compared to others.

From a standpoint of on a go-forward basis, you will recall the strategy here is to maximize income and keep Marlboro healthy, to share momentum there. So that is what we invest towards, that is what the top-line strategy is for that segment, and that is the way we think about that segment of the business.

Okay, that is helpful. Then I had a question on Marlboro. I was hoping to get a sense of what Marlboro volume was during the quarter if you can adjust for the inventory fluctuations. And then could you drill down a little bit further on some of the different styles, such as special blends and their performance; that would be really helpful?

I can try to help you a little bit. I know that we have had this conversation before. There is a desire, I know, to get under that. We just don't break them out. I mean, we have the tables in the earnings release which shows as much as I think we are willing to disclose.

Look, the way to think about this, Bonnie, I think is that overall, Marlboro continues to perform terrifically. Because most of our shipments in the cigarette segment are Marlboro, naturally you would expect for the volume to track, but we don't report at that level.

But Marlboro is doing great. It continues to have, as we mentioned, record share if you measure it against the half. Its equity is doing great. The Marlboro architecture continues to perform well. You and I have spoken previously about the exciting digital marketing for adult tobacco consumers, and we have improved the app even further, and we have got exciting promotions on there.

So I think the way to think about Marlboro is it is doing exactly what we want it to do, and it is doing it well.

Yes. Speaking of that, I was going to ask you a little bit more on that because I do keep hearing positive feedback on your Marlboro app. So give us a sense for the rollout and where or how many stores that app is being used in and where that can be by, say, the end of this year?

Yes. Well, we are working it at two levels. One is directly with the consumer, obviously, because adult consumers once they are age verified can get the apps and participate that way. But another big area for us, and we are very grateful for the partnership with our trade partners. Our trade partners are increasingly excited about the ability to use their loyalty programs with our digital marketing and our apps and the like. So many of our trade partners are working with us on that. So we are getting very good distribution on that.

I would like to say that I think that we are ahead on this. And I think that our trade thinks we are ahead on this, and our consumer reception has been nothing short of terrific. So it is very efficient and it is very responsible, and we are reaching the people we want to reach in a responsible kind of a way. And I think it is the way forward.

Okay. One final question, which I know you are probably not going to want to answer this, but I am going to bring it up. The pretax cash proceeds from the sale of SAB; certainly $3 billion is a lot of money. I would love to hear a sense from you of where these proceeds will be used, but if you can't say that, maybe just update us on your priorities for free cash flow.

All right, out of courtesy to you, I am going to hand it to Billy to see if he will accommodate you, Bonnie. How about that?

All right.

Hey, Bonnie, thanks for the question. Yes, we have not made decisions around the $3 billion, but I can walk you -- let's step back from that. So absent that $3 billion, here is the way we think about allocating our capital, the excess cash. So we think about, of course, dividends first, and that is that 80% dividend target payout ratio.

And then when we have the excess cash, you have seen us do a multitude of things with that. Certainly we do share repurchases. You have seen us do debt tenders and you have seen us do debt tender refis. So this being excess cash, we would assess it based on market conditions at the time and make the appropriate decisions.

All right, thank you.

Thanks for the question, Bonnie. We will see you.

Thanks.

Steve Powers, UBS.

Maybe another question on sort of ABI/SAB, that you probably won't want to answer, but I will give it a shot. From a different angle, and it is one -- the updated outlook which aside from the $2.5 billion going to $3 billion is pretty much consistent outlook on that deal. It assumes a pretty high degree of confidence or it implies a high degree of confidence in very limited, if any, kind of proration risk.

Given the value gap between the PSA and the cash offer for SAB shareholders, I am just trying to get a sense for how confident you really are in that proration risk being minimal or what kind of insight you have to the SAB shareholder base, and how to assess that risk as you look forward?

Well, Steve, I appreciate the question and I know there is a lot of interest in this, but I think it is probably best this morning that we kind of limit our remarks to what is in the earnings release and in our prepared remarks. We tried to give you as much color as we thought was appropriate under the circumstances, but some of those questions I think are really best directed at the two principal parties to the transaction and I want to respect that. So I am going to be careful about this, as you can appreciate.

Okay. Billy, anything you want to add?

No, I think Marty covered it.

All right. Then I guess from another angle fundamentally, everything seems to be pretty solid up and down the P&L, across the business lines. So I guess is there anything, sort of focusing on things within your control, are there areas where you are more focused; more risk that you see, whether it is implementing the productivity initiative or any of the go-to-market initiatives you have got in place? Anything that you are more focused on where the fundamentals, not to say they are weak but just more where they are more in question?

No, I don't think so. Listen, we don't want to sound for a moment arrogant about it, but the business is really performing well. I think the strategies are the right ones, and I have to commend the people at our operating companies and our service companies. They are executing with high fidelity to the strategies, with high focus and high alignment, and I think that is why the results are what they are.

So look, there is always risks to the business; you know what they are. I mean you've got regulation and taxes and the like, but I wouldn't call out anything of the sort that you are asking about, Steve.

Great, thank you very much.

All right, thanks for the questions.

Adam Spielman, Citi.

If I can come back to the deeming regs, and in particular two questions. First of all, you said you are in conversation about trying to change aspects of them. And I wonder if you could just highlight what you are most keen to change that you think was a realistic chance that the FDA will listen to what you are saying and actually change how they are approaching deeming.

And the second question is this; Reynolds has said that they believe, based on Mitch Zeller's comments about continuum of risk, that actually in some ways they might take a more relaxed approach to premarket approvals for e-vapor products than they have done, it would seem, with cigarettes. And I guess the related question to that is, do you agree with that? And do you think there will also will be a difference in degree of, let's say, harshness of interpretation of cigars and e-vapor products? Thank you.

All right, thanks for the questions. I will give you an example on your first question, which is predicate date. We had argued to the FDA and advocated to the FDA as did many others that it made little sense to go back and use a cigarette predicate date of 2007 for products that basically came into the marketplace after 2007.

So there continues to be a lot of dialogue about that. It is not limited to the FDA. You know that there are legislative proposals pending. So I think a lot of people think that it would be wise to revisit that question. We certainly do, and you may have heard the conversation we had earlier about encouraging innovation. Using that predicate date to us does not seem to do that. So that is one area.

With respect to PMTAs, I am not familiar with the conversation you referenced with someone else, but I can tell you that it would seem to make sense that for premarket approvals, you certainly if you were the regulator ought to be taking into account the degree of harm of the products. So cigarettes, as we all know, bear a high degree of risk. And while the evidence is not completely in, it appears to be that because they don't burn, e-vapor probably has a lower risk.

That, of course, ought to be taken into account in approving whether they should come to market. So that would seem to be a sensible approach. I think that is a development that would be good for consumers and for manufacturers and for public health.

Thank you very much. Can I just come back; I do understand that Congress may change the predicate date. But assuming they don't, do you think there is any realistic chance that a dialogue, other than by Congress or maybe through litigation, would actually alter that date?

I hope so. Listen, FDA has a job to do. We have found them to be open to listening to reasonable arguments. But at the end of the day, Adam, it is up to them. But we have not found them to be immune from listening to points of view and hopefully coming to some reasoned judgment on it, particularly if other stakeholders besides us weigh in on it, as I understand is the case.

Okay, thank you very much.

All right, thanks for those questions.

(Operator Instructions) We will now also open the call for media questions.

With no further questions, I would like to turn the call back over to Ms. Sarah Knakmuhs for closing remarks.

Thank you, everyone, for joining our call this morning. If you have any follow-up questions, please contact us at investor relations.

Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.