Altria Group Inc MO
Q1 2013 Earnings Call Transcript
Transcript Call Date 04/25/2013

Operator: 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. 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.

Brendan J. McCormick - IR: Good morning, and thank you for joining our call. I'm 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 statement 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 reports its financial results in accordance with U.S. generally accepted accounting principles. Today's call will contain various operating results both on a reported and adjusted basis, which excludes items that affect the comparability of reported results. Descriptions of these measures and reconciliations are included in the 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, result of the financial services business and the alternative products business are combined in 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.

Martin J. Barrington - Chairman and CEO: 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 in 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 product 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 Southern Cut nationally. Marlboro Southern Cut part of the Marlboro Gold family has a uniquely rich and smooth flavor. Each of Marlboro product families has exciting activities planned for the year to enhance brand strength.

Earlier this month, PM USA received $483 million credit against this 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 product segment, U.S. STC and PM USA increased adjusted operating companies income and margins while growing Copenhagen and Skoal retail share and volume. U.S. STC is supporting both Copenhagen and Skoal with equity building initiatives.

In the first quarter U.S. STC expanded Copenhagen Southern Blend into additional states. In February, Skoal began to refresh its packaging to better reflect the brands contemporary premium qualities and differentiated product offerings.

In the Wine segment Ste. Michelle delivered strong operating company's income and margin growth by expanding distribution of its premium wines. As we've 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, U.S. STC 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 alternative to traditional tobacco products.

Today, we're 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 and 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 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’re 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’re 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.

Howard A. Willard III - EVP and CFO: Thank you, Marty. Good morning, everyone. In the smokeable product segment, first quarter reported operating company's income increased 33.4%, largely due to PM USA settlement of the NPM adjustment dispute with certain states and higher pricing, partially offset by lower reported shipment volume.

Excluding special items, first quarter adjusted operating company's income for the smokeable product segment increased by 1.3% to $1.4 billion. Adjusted operating company's 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 categories 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 company’s 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 company's 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 partially offset by declines for other portfolio brands.

USSTC grew Copenhagen's and Skoal 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 in year-over-year calendar differences. USSTC and PM USA estimate that their combined 2013 first quarter adjusted smokeless product shipment volume grew that 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 continue to have a positive impact on the brand's retail share.

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

Ste. Michelle’s reported and adjusted operating company’s income $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 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 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 categories 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 it's 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 it's 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 in 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?

Transcript Call Date 04/25/2013

Operator: Judy Hong, Goldman Sachs.

Judy Hong - Goldman Sachs: First, so just in terms of the industry consumption declined in the quarter, so, 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 volume. So, if you could just comment on what you think is kind of driving a bit of a moderation in terms of the overall cigarette industry shipments?

Martin J. Barrington - Chairman and CEO: I guess I'll begin by observing, Judy, that this is best scene overtime. I think to take one quarters worth of data and to try to extrapolate too much is probably a bit dangerous. If you look overtime, you see that the cigarette deploying rate has been about 3% to 4%. Our estimate on an adjusted basis for the quarter is about 4.5%, will go PM USA was less than that and about 4%. We saw in 2012 that was about 3%. When we look at it, we don't see any big drivers in the first quarter that would argue for us sustained kind of acceleration in the volume decline. And folks have pointed out various factors in the quarter, the end of the payroll tax holiday, some referred to gasoline prices and other factors. So, you know, I think we'll have to see is the answer. But, again, we're informed, I think, generally by the fact that the historical decline rate has been in that 3% to 4% zone.

Judy Hong - Goldman Sachs: Then just in terms of your decision to launch your own e-cigarette plan in the second half, I know we'll get more details about your meeting, but just in terms of kind 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 you think that you've got kind of the product that you're really to go in with the differentiated positioning, just kind of rational for why now?

Martin J. Barrington - Chairman and CEO: Sure. I mean we've observed previously that we were monitoring the category carefully of course. It's obviously relevant to consumers that we know quite a lot about. We had devoted significant product development work to it and we think that for all those factors, the reasons that we're announcing that we'll be out in the second half is we have a product and we have plans that I think will allow us on to compete effectively in this area that's emerging. It's small, of course, relative to traditional tobacco products, but there's no denying that adult tobacco consumers have shown some interest in it. So for us at Altria, that's spot on our mission. We're about providing adult tobacco and wine consumers superior branded products and that's our intention here. We'll learn our way in smartly.

Judy Hong - Goldman Sachs: Then just lastly on pricing, so if you look at smokeable, you're pricing was up pretty nicely both kind of year-over-year and sequentially. So, maybe if you can talk about kind of your promotional activity in the first quarter versus the year ago or the fourth quarter? Then is there any impact in terms of the cigarette – sorry – the cigar either pricing or the volume decline that's causing the smokeable pricing to up more or is it just really consistent with more of the cigarette pricing?

Martin J. Barrington - Chairman and CEO: Yeah, I mean if you look at smokeable – you know, if you look at net effective pricing, actually it's quite nice wasn't it, call it, I don't know 4.5% give or take, but we had a significant volume decline year-over-year for the reasons that you've asked about and we've pointed out and others have pointed out. So, basically, it's driven by the volume. The cigar numbers, if you look at cigar shipments, obviously, year-over-year they were distorted a bit by a trade inventory factors and we've got pretty highly competitive dynamic in the cigar space with people bringing in kind of low-priced offshore made product. In terms of the cigarette competitive space, I would say, is pretty much in line with what we've seen before. It's competitive out there, but it's been competitive for some time. We didn't see any particular change in the first quarter.

Operator: David Adelman, Morgan Stanley.

David Adelman - Morgan Stanley & Co. Inc.: First, let me ask you about your cigarette promotional activity during the quarter. Was that recalibrated at all because of the weaker volumes?

Martin J. Barrington - Chairman and CEO: No, I think in line with what I just said that our plans, as you know, in the smokeable segment we're trying to maximize income or making sure that getting modest share momentum on Marlboro. And I think that's what you see play out in the quarter if you look at Marlboro share growth year-over-year. It's about two-tenths. So, I think we stuck pretty much to our plan, which is what we intend to do.

David Adelman - Morgan Stanley & Co. Inc.: Okay. Then on e-cigarette, I think it's sort of a philosophical question. It's certainly legal to advertise those products much more broadly than other tobacco products or tobacco deprived products, 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?

Martin J. Barrington - Chairman and CEO: We're looking at all that now is the honest answer, David. That's why we'll have more on that in June. Our intention is to do this, to do it responsibly. Of course, as you well know and everyone else who follows us know, a lot of that will be defined by what the FDA has to say about how they intend to regulate these products. So our intention is to compete and to compete effectively. We'll work through all those particulars which…

Operator: Ladies and gentlemen, please standby. The conference will resume momentarily.

David Adelman - Morgan Stanley & Co. Inc.: Let me go on to a different question. I was able to hear your response with respect to e-cigarette. The only other 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 been pretty much in line with volume growth. You've taken list 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 a little bit better? Is that – are you overdoing some of the price positioning of your line extensions, or is that just a function of the competitive reality in that market?

Martin J. Barrington - Chairman and CEO: I wouldn't be too concerned about that. If you look at the mix of the products in smokeable, they are overwhelmingly premium. We've discussed previously having to manage a brand in 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 intention, because we’re trying to maximize income. I'm sorry, if I said smokeless, I misspoke. I meant to say smokeable.

Operator: Vivien Azer, Citi.

Vivien Azer - Citi: Just go back on cigarette industry volume trends. I hear you loud and clear on an adjusted basis; not the end of the world, but down 4.5. But can you comment on the sequential trends that you saw intra-quarter to month-to-month?

Martin J. Barrington - Chairman and CEO: I guess I will go back – I just hate to suggest that one quarter’s worth of data really provide us with a lot of insight. I can tell you that, 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’s not intended to be a comment on the second quarter. But again, it's just a cautionary note about trying to read too much into one quarter’s worth of data on this.

Vivien Azer - Citi: Do you guys have an estimate perhaps on potential volume impact from e-cigarette consumption in the quarter?

Martin J. Barrington - Chairman and CEO: No, I think it’s too small to read. It’s probably – we know there is some interest, so it’s probably having some effect, but it’s really too small to read and extrapolate from at this time.

Vivien Azer - Citi: Lastly, could you comment on your outlook for both state excise tax and federal excise taxes?

Martin J. Barrington - Chairman and CEO: Let’s take them one at a time. In terms of state excise taxes, Howard gave you the numbers year-over-year. We’re 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 legislatures 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 to persuade legislatures 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'll 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's incredibly disruptive. These taxes are regressive. They are 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 than to put it on the back of adult tobacco consumers. So we'll see how it goes. It's dynamic in Washington, but we're hopeful that that won't come to pass and we're certainly advocating against it.

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

Martin J. Barrington - Chairman and CEO: No, we don't forecast that.

Operator: Bonnie Herzog, Wells Fargo.

Bonnie Herzog - Wells Fargo: I have a question on your decision to enter the e-cig 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? Then could you give us some color on any test markets you've had or focused groups you've conducted for your e-cig?

Martin J. Barrington - Chairman and CEO: Well, look, it always starts with the consumer, and that's where we began our mission, as I just mentioned a moment ago, is to provide adult tobacco consumers with superior branded product. So we wanted to make sure we understood the consumer dynamic, and as we've discussed previously, there is some interest out there, there is some trial, the 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 interested in that will work in the marketplace, and that's 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's the process that we followed. Then when we have something that meets those standards, we'll put it into a test for a lead market to see if the consumer reacts to it the way we predict he or she will, and that's what we're about to do in the second half. So that's a bit of an overview and I know it's at a high-level, but we can talk about that some more when we're ready to say more about our plans.

Bonnie Herzog - Wells Fargo: I understand. That was really helpful. I appreciate it. Then I'd love to hear your thoughts and reaction to some of the comments made recently by Mr. Zeller while he was on a panel at the NATO Show, specifically as it relates to three priorities, menthol, substantial equivalence, and then deeming regulations on e-cigs, and then I'd be curious to hear if you've had much dialog recently with Mr. Zeller?

Martin J. Barrington - Chairman and CEO: Well, we engaged 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 the staff and the various groups that work in our strategy, has been and continues to be in full compliance with the regulations to 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'll do that again. I wasn't particularly surprised about the topics that Mr. Zeller referred to as being his priorities, because as we all 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 equivalence 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.

Bonnie Herzog - Wells Fargo: Then my final question is on your Marlboro special blends. I was hoping you could talk further about, any progress you have made to narrow the relative price gap between your special blend line and then regular Marlboro. And as you are lowering promos on MST, what has been the consumer reaction and then the retention?

Martin J. Barrington - Chairman and CEO: We don't 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 are trying to maximize income or maintaining modest share momentum on Marlboro, we deployed special brands – 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 referred to our strategy of – again, 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 reduced the promotions for special blend over time as we have been able to do that. So, overall, I think we are pretty happy with how that’s come together. You see continued margin growth in 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 and get some traction and adult tobacco consumers are feeling better, and we have higher consumer confidence, those promotional platforms can be further modified.

Operator: Chris Growe, Stifel Nicolaus.

Christopher Growe - Stifel Nicolaus: Two questions for you, the first one, forgive me if I missed this, but there are some questions around promotional spending. I'm just curious sequentially in the cigarette business if you could talk about promotional spending and did that actually tick down in Q1 from Q4?

Martin J. Barrington - Chairman and CEO: I think I'll refer to what I said before Chris, which is in terms of the competitive environment in the smokeable segment, it's about kind of where we have been, it's competitive out there, it's been competitive and our plan is to take all that into account.

Christopher Growe - Stifel Nicolaus: And then 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 all a factor in your volume performance in the first quarter especially with Marlboro Black launch in a year ago this time?

Martin J. Barrington - Chairman and CEO: No, I don't think that’s the way to see it, it looks thus like it's industry volume performance and again you can see the PM USA actually performed better on an adjusted basis against that volume than the industry.

Christopher Growe - Stifel Nicolaus: If I could just ask one more, there was a recent update by the FDA, the Congress had some mentions and obviously the discussions of modified risk tobacco products. Is that something that – obviously it's an opportunity for the industry, there has been no application for an MRTP, do you have any plans or you can speak about in that regard or any update on modified risk tobacco products and how PM USA or other businesses may perceive that.

Martin J. Barrington - Chairman and CEO: I can certainly comment on why we supported the FDA which included this protocol to get modified risk tobacco products approved, and we've advocated to the agency, as we have for some time now and you can see these papers on, that we believe that's 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's 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 is all this activity at FDA. It's an important component of its mission to regulate tobacco products, so we support that.

Operator: (Phillip Gayson, Mitsubhishi Securities).

Phillip Gayson - Mitsubhishi Securities: Two questions, if I may. The first one, you have about $1.4 billion in debt coming due on 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're not willing to take the hit on the P&L?

Howard A. Willard III - EVP and CFO: Yeah, I'd rather not talk about our future plans for that debt. Certainly when you look at our historical pattern in some cases we've – when our debt is matured, we've issued new debt and we did do a tender refinancing last year. But I'm not in a position to share kind of what our plans are through the end of this year.

Phillip Gayson - Mitsubhishi Securities: Just a follow up on Bonnie's question with regard to e-cigarettes. As you know one of your competitors yesterday kind of estimated that the impact of e-cigarettes on volumes for cigarettes may have been somewhere around 1%. I understand it's very early on, it's a small category, but more holistically my question is, the way that you see the category potentially evolve overtime. What do you see the margin potential to be and how do you make sure that you are going to protect the profit pool from the traditional cigarettes as there could be more cannibalization down the road?

Howard A. Willard III - EVP and CFO: I understand your question, it's just so early to make any predictions about that. I don't that I'd be giving you any help. I replied in response to a question a bit earlier about, it's very hard to even understand these small numbers, the volume impact or not. So, to be predicting about future rates and margins and cannibalization just a bit ahead of where we are.

Operator: Michael Lavery, CLSA.

Michael Lavery - CLSA: Just looking at your share repurchase pacing, you've had comfortably over $1 billion each of the last couple of years and now you have got 300 million authorization for this year plus the little bit from Q1. With MPM cash communion, it seems like you would 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?

Martin J. Barrington - Chairman and CEO: I think as you pointed out we have done over 2 billion since 2011, and 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 kind of our various needs and decide what the appropriate amount of share repurchases. And I think at this point we feel comfortable with the $300 million, but certainly we'll keep an eye on that as the year evolves.

Michael Lavery - CLSA: And then just looking at e-cigarettes, does today's announcement imply or suggest that you wouldn't do – that you're only moving organically or would you still consider an acquisition in that space as well?

Martin J. Barrington - Chairman and CEO: Well our announcement today is that we have developed a product that we intend to launch in the second half and we don't comment on acquisitions.

Michael Lavery - CLSA: And then I realize you'll obviously give us a lot better detail in June, but is there something you would consider using the Marlboro brand for would it be a separate brand that you'd go to market with?

Martin J. Barrington - Chairman and CEO: I know it's tempting Michael. I'm just going to ask everybody to hold on under we roll out our plans. Good try.

Operator: Ann Gurkin, Davenport.

Ann Gurkin - Davenport: Wanted to switch to cigars. I wondered if you could comment a little bit about your strategy for the cigar business. Is there a need for innovation, repositioning the brands, can you comment on the loss at retail? Can you just give us an update on cigars?

Martin J. Barrington - Chairman and CEO: Yeah, it's pretty competitive out there in the cigar space. You have our strategy, which is we're trying to, just as we are with cigarettes, we're trying to maximize income there. We have, as you know Ann, a large percentage of tipped segment there and the profitability there remains pretty good. It's in the cigarillo space where we're 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. And so we would like to have greater exposure in the cigarillo space, but we're 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've seen this, it's just mighty competitive on price, and we of course prefer to compete on equity.

Operator: (Theilo Reid, Jefferies).

Theilo Reid - Jefferies: Martin, 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?

Martin J. Barrington - Chairman and CEO: I would say it's a combination of a number of factors that we track closely. We certainly track unemployment. We're mindful of underemployment. I remind people that the labor participation rate continues to drop, which really if the unemployment rate were corrected for that, unemployment would be even higher than it's being what's reported. We watch housing starts pretty carefully and that's actually a bit of an encouragement, isn't it, that housing starts are doing better than they were a year ago. We've 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 those data.

Theilo Reid - Jefferies: And then the other question I had for you, for five of the last six quarters, at least in 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 calculated where I look at the reported numbers that you have in your income statement. Can you help me understand philosophically how this continues to – this retail price on the performance continues to drag on this?

Martin J. Barrington - Chairman and CEO: Well, again, I'd go back if we start with 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 trade programs, some of them are retailer strategies about how they chose to compete at the C-store and what you've seen I think during the period that you've referenced is a number if those strategies coming to bear in the retail market. So, as you know, we offer a variety of Marlboro programs, MLP, (indiscernible) intended to offer retailers the opportunity to align their strategies as best they think they can with Marlboro. I think that 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.

Operator: Chris Ferrara, Bank of America.

Chris Ferrara - Bank of America: I just wanted to follow-up real quick on the buyback question I know you said $300 million is the number and you're comfortable with it. But can you just give a little color as to why you're comfortable with because I think you recognized the question which is you had a lot of buyback, you had more cash coming in and now the buyback projection is lower. So any color you can give on why would be fantastic?

Howard A. Willard III - EVP and CFO: Sure. I hesitate to give forecast on what we're going to use our cash flow through throughout the rest of the year. But it's 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 pre-regular basis and I think for now we feel that the $300 million number is the right number Certainly there will be greater color as to the cash usage as the year progresses.

Operator: Vivien Azer, Citi.

Vivien Azer - Citi: Thanks for the follow-up. I just wanted to circle back on the 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?

Martin J. Barrington - Chairman and CEO: Well, that's a bit of a complex topic. What I was trying to convey to Michael was as we're thinking about the product that we intend to launch in the second half, Vivien, that we will have our plans rolled out as they become more final. Maybe that's best handle offline. I can get Brendan or someone to walk you through the complexities of using cigarette brands in various spaces.

Operator: Thank you. At this time I'd like to turn the call back over to Mr. Brendan McCormick for closing comments.

Brendan J. McCormick - IR: Thanks everyone for your interest in Altria. If you have any additional questions, please call us today at Investor Relations.

Operator: Thank you. This does conclude today's conference call. You may now disconnect.