Morning, everyone, and thanks for being with us. For those of you I have not met, I'm Sarah Nachmus, Vice President of Investor Relations. Welcome to all you here today and listening on the webcast. Before we start, a few reminders. Our remarks today contain certain forward looking statements and reference non GAAP financial measures.
Please direct your attention to the forward looking and cautionary statements for a description of the various factors that could cause actual results to differ materially from projections included in today's remarks. Reconciliation and further explanations of the non GAAP financial measures discussed today are available on altria.com and on the Altria Investor app. Future dividend payments and share repurchases remain subject to the discretion of Altria's Board of Directors. The timing of share repurchases depends on marketplace conditions and other factors. Comparisons to tobacco competitors are made prior to their recently completed transaction.
Let's review the agenda and who we have joining us. First, our CEO, Marty Barrington will begin with a reminder of our financial objectives, strategies and track record of strong performance. Billy Gifford, our CFO will then provide an update on our diverse income streams, strong balance sheet and productivity efforts. Craig Johnson, CEO of Altria Group Distribution Company will explain our strong consumer engagement, sales and distribution capabilities. We'll have some time for questions and answers and take a break.
After the break, 3 key leaders will discuss how Altria navigates the external environment: Denise Keane, our General Counsel Jim Dillard, who heads our Regulatory Affairs and is our Chief Innovation Officer and Bruce Gates, who leads will participate in a panel discussion and take your questions. We'll then hear from Howard Willard, our Chief Operating Officer on how we invest in premium brands. In particular, Howard will focus on Marlboro, its evolution and key results. Again, we'll take questions and embrace for a special lunch for those joining us in New York. In addition to these speakers, we're joined today by the Presidents of our operating companies and our sales leadership and key members of the Marlboro brand team.
Again, thanks for being with us. And I'll now turn the program over to Marty.
Thanks,
Sarah. Good morning, everyone and welcome. We're excited to spend the morning with you and we have a great lineup planned. This morning, we'll highlight 3 themes: heritage, talent and innovation. Great brands and great companies are built and sustained over time through vision, execution and stewardship.
So we'll reflect on the strong heritage of our companies and of our brands. We've long believed our emphasis on and investment in developing people sets us apart and drives our business results. We were delighted recently when Forbes named Altria among its top 100 list of America's best employers. Our focus on people development supports a strong and deep management bench and effective succession planning. Today as Sarah said, we brought many on our team, so you can see firsthand the difference our great people make.
We'll also be reminded of the many ways innovation has driven our success over time and is fueling our performance today, particularly during our focus on Marlboro later this morning. So let's begin. Our long term financial goals are unchanged. We seek to deliver adjusted diluted earnings per share growth at an average annual rate of 7% to 9% over time and maintain a target dividend payout ratio of approximately 80% of adjusted diluted EPS. And from 2,009 through 2014, we produced adjusted diluted EPS growth of 8% on a compounded annual basis despite a persistently weak economy during most of this period.
And our 80% dividend payout ratio at the end of 2014 was the highest in the S and P Food, Beverage and Tobacco Index. We remain focused on returning cash to shareholders, principally through a strong and growing dividend. Our attractive 4.4 percent annualized dividend yield as of June 15 was well above key benchmarks and higher than virtually all S and P food, beverage and tobacco peers. We've increased our dividend on a compounded annual basis by almost 9% from 2,009 through 2014. A growing dividend is an important part of our heritage, having raised our dividend 48 times in the past 45 years.
For illustrative purposes, a $3.60 investment in 10 Altria shares in 19.70 would have grown to more than $500,000 through the Q1 of 2015 with dividends. That's a total shareholder return of more than 16 times that of the S and P 500 over this period, including the value of shares in Kraft Foods Group, Mondelez International and Philip Morris International you would own. In fact, earlier this year, several financial media outlets called Altria America's most successful stock in modern history. From 2010 through 2014, Altria delivered total shareholder return of 2 30%, which far outperformed both the S and P 500 and S and P Food Beverage and Tobacco Index. So our track record of delivering outstanding shareholder returns is Altria's financial heritage and all of us remain focused on continuing to create long term value.
We continue to pursue 3 strategies to deliver against our long term financial objectives. 1st, to maximize our core tobacco businesses for the long term 2nd, to grow new income streams through innovative tobacco products and third, to manage our diverse income streams and strong balance sheet to deliver consistent financial performance. Let's briefly examine the strength of the core tobacco businesses. Together, our cigarette and cigar businesses form our smokeable product segment. From 2011 through 2014, the segment produced 4.4% adjusted operating company's income growth on a compounded annual basis to almost $7,000,000,000 and achieved adjusted OCI margins of over 44%.
In the Q1 of 2015, that momentum accelerated with adjusted OCI growth of 12.6% and margin expansion of 2.3 percentage points. The cornerstone is Marlboro, With a retail share of 44% for the Q1 of 2015, Marlboro remains larger than the next 10 largest cigarette brands combined. Together with the balance of the portfolio, PM USA has more than half of the retail share in the highly profitable U. S. Cigarette category.
Smokeless products provide our 2nd largest earnings source. Between 2011 2014, adjusted OCI increased almost 6% to over $1,000,000,000 Copenhagen and Skol are the 2 leading premium brands with more than 51% share of the smokeless category for the Q1 of 2015. With the balance of the smokeless portfolio, they command category leading adjusted OCI margins of over 60%. These many advantages of our smokeable and smokeless products businesses including leading premium brands that are generating strong profit and margin growth make clear why we're maximizing the value of these businesses for shareholders over the long term. At the same time, many adult tobacco consumers are seeking innovative alternatives to traditional tobacco products.
So our second strategy is to grow new income streams with innovative tobacco products. Howard will speak about our product portfolio later, but let's look briefly at the broader opportunity before us. For many years, we've embraced the vision of developing lower risk tobacco products that appeal to adult tobacco consumers. That's one reason we supported FDA regulation of tobacco and today real progress is being made. Importantly, FDA now provides the regulatory framework to bring such products to market.
New technologies portfolio including Newmark's e vapor products and the exclusive U. S. Rights to commercialize 2 of PMI's heat not burn products hold the promise for harm reduction. Further awareness of e vapor is very high and more than 60% of adult smokers have tried an e vapor product. So with adult tobacco consumer interest and established regulatory construct and technology development, many of the essential elements are in place to make this vision a reality.
To seize this opportunity, we are taking a portfolio view of tobacco products and technologies and applying substantial capabilities to succeed in the long term. Products are an important first step as our distribution and brand building. So we began by introducing Newmark's Mark 10 e vapor products, acquiring Green Smoke and establishing a national brand and distribution platform to enable future growth. We're optimizing our supply chain to support our evolving product portfolio. Newmark has invested in a robust quality system and improved supply chain efficiency and cost in particular through the Green Smoke acquisition.
We've also aligned with a strong partner in PMI to bring heat not burn products to the U. S. We're pleased with the progress being made on both clinical research and testing of marketing concepts and we're working well with PMI to support application to the FDA for a modified risk tobacco product designation during the course of 2016. We're also developing the science needed to succeed in the regulatory arena such as the recent data we presented to FDA on secondhand vapor. And we are fully engaged in the modified risk tobacco product application process in order to take advantage of the opportunities it offers for our businesses and adult tobacco consumers.
So we're bringing capabilities we've built over many years to bear on this important opportunity for the future, while maintaining disciplined pursuit of adjusted diluted EPS growth in a range of 7% to 9%. A final introductory word given recent changes in industry structure. Marketplace change is of course constant. The recent transaction involving our competitors marks another one. It's important to remember that we faced change before lots of it and we believe our leadership position today is stronger than ever.
Consider for example the signing of the master settlement agreement, the 2,004 consolidation of 2 competitors, a massive increase in the federal excise tax on cigarettes and cigars and institution of FDA regulation of tobacco products. During this period of change over 15 years, TMUSA grew Marlboro's retail share almost 7 points. Altria evolved to offer a total U. S. Tobacco platform, while delivering TSR of more than 1,000%, more than 5 times the S and P 500's return.
As I hope we'll make clear today, we manage our businesses for the long term, which has allowed us to grow through change and deliver consistent performance. We do so because of our company's extraordinary brands, superior execution and talented people. So with that context, I'll turn things over to Billy.
Thanks, Marty. Good morning, everyone. Our third strategy is to manage our diverse income streams and strong balance sheet to deliver consistent financial performance. So my remarks this morning will focus on 3 areas: our diverse business model our strong balance sheet and our ongoing productivity annual rate of 7% to 9% over time and maintaining a target dividend payout ratio of approximately 80% of adjusted diluted EPS. To begin, Altria has the most diverse business model amongst their U.
S. Peers. Our core tobacco businesses operate within the attractive domestic tobacco industry. Over the past 5 years, we estimate that U. S.
Tobacco manufacturers' profits grew at a compounded annual rate of 5.5% to nearly $15,500,000,000 In 2014, Altria gained more than half of that profit pool through our tobacco company's leading positions across cigarettes, cigars and smokeless tobacco products. It's a total tobacco platform. Altria's core tobacco companies are complemented by our wine and beer assets, which includes Ste. Michelle Wine Estates and our equity investment in SABMiller. In the wine segment, Ste.
Michelle's goal is to grow income by expanding its share and distribution of premium wines. Ste. Michel has a strong portfolio of premium brands and a widely respected leadership team. Wine and Spirits Magazine has honored Ste. Michelle 20 times as a winery of the year, more than any other American winery.
Since joining the Altria family, Ste. Michelle has produced solid business and financial results. From 2,009 through 2014, St. Michel grew adjusted operating company's income approximately 13% on a compounded annual basis and expanded adjusted OCI margins by 2.7 percentage points to almost 22%. It's a great business, if small for Altria.
As you know, Altria also holds an approximate 27% equity investment in SABMiller. This allows us to participate in the roughly $36,000,000,000 global beer profit pool, which grew approximately 4% annually over the past 3 years. Equity earnings from our SAB from our investment in SABMiller Miller have been a nice contributor to Altria's earnings per share over time. From 2,009 through 20 14, equity earnings from our investment in SABMiller have grown at a compounded annual rate of approximately 11 percent. In 2014, Altra recorded pretax earnings of more than $1,000,000,000 As of June 15, the market value of our SABMiller investment was approximately $22,000,000,000 As we said at CAGNY, we regularly evaluate our SABMiller investment.
And at this time, we believe maintaining the asset is in our shareholders' best interest. We're also well aware of speculation respecting global beer consolidation and how that might affect our investment in SABMiller. Our goal always has been and remains to manage this investment in a way that delivers the best value for Altria shareholders. Regarding our Financial Services business, Philip Morris Capital Corporation also has contributed to our diverse business model. However, as PMCC winds down, we expect the income contribution to be uneven as underlying lease income continues to decline and the opportunity for asset sales diminishes.
Let's now turn to our commitment to maintaining a strong balance sheet. Over time, the strength of our balance sheet has allowed Altria to weather difficult capital market conditions, make acquisitions, proactively manage our debt maturity towers and return cash to shareholders. Additionally, our strong BBB plus credit rating allows us to competitively access the capital markets to cover short term cash needs as we often do in April around income tax, dividend and MSA payments. Our debt to EBITDA ratio of 1 point 7 to 1 as of March 31, 2015 was well within our credit agreement debt covenants of not more than 3 to 1. From now through the end of the year, we will have $1,000,000,000 in long term debt coming due.
Our decision to refinance or retire this debt will depend on capital market conditions, Altria's business needs and other factors. Our strong balance sheet and cash flow allow us to return large amounts of cash to our shareholders, primarily through dividends. Over the past 5 years, we've raised our dividend 6 times for a compounded annual growth rate of almost 9%, reflecting dividend increases in line with adjusted earnings growth and our 80% target dividend payout ratio. In 2014, we paid shareholders $3,900,000,000 in dividends. Altria has also repurchased stock when we've concluded it's the best use of cash to maximize shareholder value.
From the end of the Q1 of 2011 through the Q1 of this year, we reduced our outstanding shares by approximately 6%. During this period, we repurchased shares at a weighted average price of approximately $33 per share, compared to approximately $50 at the end of the Q1 of 2015.
At the
end of the Q1, we had 3.20 $6,000,000 remaining in our current $1,000,000,000 share repurchase program. In total, from January 2010 through March 31, 2015 Altria has returned more than $22,000,000,000 in cash to shareholders through dividends and share repurchases. Lastly, a word on our ongoing productivity and cost management efforts. As you know, our track record on cost management is strong. In fact, Altria reduced costs by approximately $2,000,000,000 through 2 productivity programs between 2,007 2013.
Today, our focus on increasing productivity and managing costs is stead fast. We've established an enterprise wide simplification initiative to streamline processes and eliminate low value work. For example, we have improved efficiency of PM USA's manufacturing machinery, standardized their technology systems across our companies to reduce maintenance costs and through recent efforts by our employees, redesigned more than 100 large and small processes, eliminating more than 18,000 hours of work and freeing up time for more valuable work. Managing cost is a key part of our long term algorithm for delivering strong profit growth, especially in the smokable products 2014, our controllable costs have been essentially flat on a compounded annual basis, below the rate of input cost inflation. Additionally, we are benefiting from the expiration of the federal tobacco quota buyout payments, which reduces our cost of goods sold in the smokeable product segment for 2015 by approximately $300,000,000 versus 2014.
Our financial goals and strategies of course require a balance between improving productivity and disciplined investment. From the end of the last productivity program through March 31, 2015, headcount in our manufacturing facilities has declined over 7%. As we are saving in our core business, we're investing for our future. In addition to investments in product development, distribution and brand building for innovative tobacco products, we're also funding the regulatory science needed to advance our harm reduction goals. We expect these investments to ultimately produce a diverse set of new tobacco products.
Finally, our culture and organizational strategy make the balance I've described possible. As you'll hear from Craig, our shared services model allow us the flexibility support our businesses as they change. For example, when we created Newmark, we easily aligned the sales, financial and regulatory services needed to support the business, because those services were already in place. It's a model that has served us well, allowing us to efficiently evolve in a changing tobacco industry. To sum up, we believe Altria is well positioned for continued success.
Our diverse business model allows us to provide consistent performance through all business environments and our strong balance sheet and focus on productivity allow us to return large amounts of cash to our shareholders. Therefore Altria reaffirms its guidance for 20 15 full year adjusted diluted EPS in a range of $2.75 to $2.80 representing a growth rate of 7% to 9% from an adjusted diluted EPS of 2 point 57 in 20.14. Thanks for your attention. I'll now turn the meeting over to Craig.
Thanks, Billy, and good morning, everyone. Altria Group Distribution Company provides superior services to adult tobacco consumers and our customers on behalf of Altria's 4 tobacco companies. This shared services model allows the operating companies to focus on brand building and manufacturing. While we efficiently execute their plans in the marketplace with scale and quality. AGDC as we call it focuses on 2 areas.
1st, we connect the operating company's brands with tobacco consumers aged 21 and older through 1 to 1 experiences. 2nd, our sales and distribution system connects these brands to adult tobacco consumers in retail stores across the United States. Let's begin with highlights from our consumer engagement work. Our consumer engagement team develops and executes our robust one to 1 marketing programs. This includes managing our database of nearly 20,000,000 adult tobacco consumers and using this tool to deliver the right message to the right adult tobacco consumer using various channels.
AGDC's leading digital capabilities help the operating companies engage age verified adult tobacco consumers and strengthen their brands. For example, the Marlboro, Copenhagen and Skol websites that we support all ranked in the top 10 among 100 benchmark websites in a 2014 third party review for user satisfaction. Nobody in our industry does digital like we do. We also immerse tobacco consumers 21 and older in the equity of our brands through experiences like Marlboro Black Lounge, bar nights, music festivals and once in a lifetime trips to the Marlboro Ranch in Montana. In total, our consumer engagement system delivered a remarkable 250,000,000 interactions with adult tobacco consumers in 2014, up 20% from the previous year.
As you'll hear later, these interactions further our tobacco company's strong brand equities. Of course, as you can see from the fixture, retail stores provide the principal way we reinforce and position our company's brands with adult tobacco consumers as they make their purchasing decisions. AGDC's efforts result in broad distribution of our tobacco company's offerings in the marketplace with extraordinary speed and quality of execution. Today, I'll focus on 4 competitive advantages of our sales and distribution system: our efficient and adaptable model the innovative tools and resources we offer our highly skilled and talented people and the effective alignment we've achieved with our trade partners. Our sales and distribution system is designed so that our brands and offers are visible, available and priced competitively in a broad universe of retail stores across the U.
S. This includes expanding existing brands and launching new innovative products, executing price and product promotions, communicating brand equity and news, and promoting responsible retailing of tobacco products. To consistently achieve our success, we follow a proven strategy. Our goal is to gain alignment and support from our trade partners by promoting and demonstrating mutual business success. It begins with our world class distribution system, which efficiently delivers products from our company's manufacturing facilities to our direct buying customers.
Using the cigarette model as an example, cigarettes manufactured in Richmond, Virginia are shipped to a bonded warehouse, which provides inventory to meet demand throughout this warehouse, we ship product to 21 public warehouses, allowing us to reach approximately 600 direct buying locations within just 3 days. And from there, it goes to retail. As part of this highly efficient model, PM USA collects advanced payments for its products before shipping to direct customers. Last year, we distributed approximately 125,000,000,000 cigarettes through this system at a cost of less than a nickel per pack. When compared with U.
S. Distribution benchmarks, our distribution cost as a percentage of net revenues are far lower than what's considered most efficient. We complement this streamlined distribution model with breadth and scale of retail coverage. AGDC covers approximately 240,000 retail stores representing over 95% of tobacco industry volume. Our talented Territory Sales Managers or TSMs maintain regular contact with most of these stores, while a third party call center supports and offers brand resources for lower volume stores.
This system allows us to achieve breadth in the marketplace for our brands. Over the past several years, we've sharpened our shared services model. We've expanded the responsibilities of AGDC and reduced infrastructure costs. In 2007, for example, AGDC supported only PM USA. Today, we represent 4 of Altria's operating companies with an organization about 20% smaller.
At the same time, we've generated capacity and expanded retail coverage, primarily by improving our processes and systems. Tobacco products are offered in multiple U. S. Trade channels. We emphasize broad coverage and build relationships across these channels, which differentiates us from our key competitors.
Because convenience stores drive around 70% of the volume sold, let's take a closer look at this trade class. The C store trade class is robust and relevant. Roughly 150,000 C stores across the U. S. Generate approximately $700,000,000,000 in annual revenues including gasoline.
Each and every day, 160,000,000 consumer transactions take place in a convenience store. Almost half of all C store shoppers are in the important 21 to 39 age demographic. Now while convenience stores are important to us, tobacco is also important to them. The tobacco categories lead in revenue at 36% of inside sales and deliver the 3rd highest gross profit dollars at 17%. Importantly, about 50% of the time, the average adult tobacco consumer purchases other items inside the C store.
And that's almost 20 points higher than the average for C store consumers of other product categories. Those other items round out the market basket. The average adult tobacco consumer spends just over $25 per trip compared to roughly $6 for non tobacco C store purchases. So many C store retailers rely on tobacco to increase foot traffic and boost in store sales. We use these insights in achieving trade alignment and support for our offerings.
Of course, retailers have options to consider when aligning with the manufacturer. And we believe there are 3 important reasons why we enjoy great customer relationships. 1st, leadership brands that allow retailers to appeal broadly to adult tobacco consumers. 2nd, innovative tools retailers can use to build their tobacco and overall business. And finally, our talented people who are trained to identify opportunities and provide solutions.
Howard will discuss our leading brands later this morning. I'll address the tools we offer and our outstanding team. The tools we design help retailers drive foot traffic and expand their margins. As an example, through PM USA's Retail Leaders Trade Program, retailers receive incentives and promotional resources to help them grow their business. In return, PM USA achieves acceptance of new offerings and product promotions in these stores.
At the same time, we receive best in class visibility and product placement, connecting adult smokers with Marlboro's brand architecture. Through retail leaders, PM USA has achieved the desired retail look in more than 90% of its volume. This year, PM USA enhanced its retail program to provide more options to trade partners and trade feedback has been very positive. These options include increased funding on Marlboro, resources to drive volume and improve retailer margins, integration with store loyalty programs and incentives for supplying scan data. Trade programs like Retail Leaders enable us to achieve outstanding speed and breadth of our offerings, Regardless of the category, brand or promotional offer, our sales force consistently achieves distribution in over 85% of targeted stores within 2 weeks of an execution.
And while we use PMESA as an example, our other tobacco companies offer similar trade and incentive programs. To complement these programs, we offer flexible high impact merchandising solutions to achieve visibility, consistent brand placement and inventory management for our retailers and our brands. Retail store space is at a premium and our job is to help our customers understand how space investments in tobacco may contribute to their profitability. Our merchandising solutions are creative and allow AGDC to quickly integrate new categories or brands like Mark 10 e vapor products. For example, we achieved strong product visibility for the Mark 10 launch.
AGDC developed curb to counter promotional visibility for Mark 10, achieving distribution in over 130,000 stores with an overwhelming majority of the stores meeting our visibility targets. Our ability to provide category and market analytics to our customers also give our tobacco companies a competitive advantage. Our customers tell us that actionable insights are more important than ever. For example, retailers may understand the volume and share for the brands they sell, but not how their store performs against the local market. Our proprietary reporting system provides relevant store level data for the tobacco categories.
We can show customers how many stores are gaining or losing market share at an aggregate and store level. Then our sales team consults with retailers on how to capitalize on these insights to build their business. Let me show you an example. Our TSM starts with a review of the category such as this to help a store manager understand how their store is performing against other stores in the marketplace. In this example, the store is growing their Marlboro volume.
However, the account isn't growing as fast as other stores in the market and that's an opportunity for the stores business. So our TSM is trained to dissect the opportunity. In this example, Marlboro Gold Pack is underperforming compared to the balance of Marlboro, contributing to Marlboro's softness and the overall performance of the store. With this insight, the TSM will work with the retailer to identify store or market specific solutions like pricing, visibility or availability to help get the store back on track. This is just one example of many that demonstrates the unique capabilities we've built to allow our talented sales force to help our trade partners make better decisions.
The true strength of this system however is our people and the leadership they provide. The quality of our people not only provides for tremendous marketplace performance, but also enables the efficiency I've described. Creating a truly outstanding sales team starts with acquiring the best talent. Now given that we're a tobacco company, we're used to working hard to recruit top talent. We've built a leading recruiting program at major universities throughout the U.
S. Ranging from the University of Virginia to the University of Southern California that have successfully delivered strong talent for our organization. We're extremely active on campus building interest in an AGDC sales career. Then we bring in over 100 interns annually to experience AGDC prior to their final year of school. Last year 85% of these interns accepted the full time offers we extended.
And often these efforts result in leaders who rise rapidly through our organization. Lauren Dougherty is a great example. We recruited Lauren from the University of Virginia's McIntyre School of Commerce into our intern program. She graduated in 2011 with a marketing and management degree and a 3.9 GPA. Lauren demonstrated outstanding leadership on campus, having served as a judge on the university's judiciary committee and as a senior resident, leading a team of 12 resident advisors.
After graduation, she joined AGDC as a TSM, quickly rose to manage multiple territories and is now working on our sales training team. In fact, we've recruited and developed many leaders like Lauren across Altria's companies. And as we think about the next generation of leaders, I'm proud to be joined by my team today from both consumer engagement and sales and distribution. I hope you'll have a chance to meet them. These same leaders are responsible for the terrific relationships we have with our customers to achieve the alignment we want.
We engage at all levels from store associates to CEOs to understand their business needs, share industry insights and gain feedback on our We work hard to know where we stand with our customers and take their feedback seriously. For the past 3 years, we've conducted a 3rd party customer satisfaction survey across all metrics for our national and regional chain customers, AGDC outperforms tobacco competitors. For example, our customers confirm they are most likely to recommend working with us to a colleague. And our customers place AGDC at the top of consumer goods sales teams including our tobacco competitors. In conclusion, AGDC provides a significant competitive advantage for Altria in 4 important areas.
We have a remarkably efficient and adaptable model for an ever changing environment. Innovative tools and resources for our companies and our customers highly skilled people who are true category experts and effective alignment with our trade partners. Now, I'll turn the program back to Marty and invite Billy to join me in answering your questions.
Okay. Thank you, Craig. Thank you, Billy. Well done. Wow, that didn't take long.
We have hands up already. Let me tell you how we're going to do this. We're going to do about 15, 20 minutes leading into the break. And my job is to be fair minded to everyone. Can you stick them up again one more time?
Nick, maybe I'll start with you since you shot up first.
Is it fun? Yes. Usually the short guys like to put their hands up first.
I knew
you were going there.
Just two questions. So on actually one question. I'll save the you said question for later. Okay. You talked a lot about Marlboro, not a lot about the other brands.
And I guess we're in an environment now where visibility on the back bar is really what matters in terms of how you build a brand. And given all the M and A and changes in competitive environment, I'm just wondering, do you think this hypothesis is correct? Over the next couple of years, basically all the major players will just consolidate their own portfolios. So almost like eating their own tail, because that kind of strategy would reduce a lot of the competitive friction on the shelf. So just curious on your thoughts on that kind of thesis.
Okay. Well, let me make a comment about how we're thinking about this. I think maybe the best example Nick was the retail shot that we had up there in the middle when Craig was talking. So you can see our objective obviously is get our best brands and the best visibility we can and we're entitled to our share and that's how we do that. It's where consumers make their point of purchase.
I think it's hard to predict what the others are going to do in light of the industry consolidation. But there's no question that there will be I think robust competition at the category at the point of sale. The other thing we always remember is and I think Altria has actually been the leader in this regard is to make sure that this is done responsibly. And Craig may want to expand on this in a moment about how well our trade partners have worked with us. The products need to be on the back bar as you say.
And I think that's true also for innovative tobacco products as we bring them there. We want to make sure that it's done responsibly, which is the way forward in the category. Now Craig, do you want to say a word about how you're seeing retail in light of the transaction?
Well, No, I agree with what you're saying Marty. And I think ultimately regarding space the retailer is making that decision. And manufacturers are the ones that are presenting their case for how space ought to be allocated. And of course trade programs and the right brands help enable that. But I think the way Marty summed it up is really right.
I'll also give a credit to our retail trade partners and the responsible approach that they take to the category. They take it very serious and they have in-depth training programs. And I think that's good for the industry overall. So
Do you want to answer the second part of your question, Nick?
No. That's You
want to hold that? Okay. We'll have more on your paper. Let me go to the lady and then I'll come to Vyvyan. Vivien?
Thank you. My question has to do with your consumer engagement initiatives. I mean the 20,000,000 adult tobacco consumers that you in your databases is quite a brief number. Can you give us some color around the demographics around that database? Does it skew towards adult smokers under 30?
Are they engaging more if they are younger consumer? Any color you can give us on the database itself would be helpful.
Yes. Probably not as much as you want Vivien. And Cliff might be able to do a better job of that than me later on. But what I would say, it's a pretty broad spectrum. We certainly work hard at having that spectrum.
We also work hard at 21, 29 year old engagement. I think you saw in presentation. And I know you'll hear later from Howard this afternoon about the work we're doing with our consumer engagement with regards to digital and our websites and the work there. So that's all good opportunity for us to enhance that database.
Just a follow-up on that question. How does that tie into some of
your retail initiatives at store?
Well, certainly the one of the things you'll hear more about is the mobile coupon work that we have had in a number of states and we're going to be expanding that. That is something that we work with our retailers on because those mobile coupons are redeemed in their stores. So I would tell you that the alignment of our consumer engagement work with our retail work is becoming closer every day. And I think that's a really positive thing and takes advantage of our shared services model very completely.
Good. Matt? Thanks, Billy. I just wanted to come back to your comments on cost management, sort of longer term. You talked about magnitude of productivity, headcount reduction.
We heard about the efficiency of the distribution model and you've had stable controllable costs. But we can see from your competitors' expectation of merger synergies that there probably is an opportunity to not just keep costs stable to actually move them materially lower over time if the circumstances necessitated that. So I mean, I guess from your perspective, what accounts for that potential gap? Where do you see over the very term still substantial opportunity to take costs out of
the business? Yes. Thanks for the question, Matt. I think when you look at costs over a
longer period of time
time, you've seen us take out $2,000,000,000 of costs through those 2 programs I mentioned earlier. You see the quota buyout payment just cost savings or cost reduction coming out $100,000,000 last year $300,000,000 this year. But we're constantly combing the business for opportunities to reduce costs and keep costs under control. I feel like I should say, mentioned a few times.
So, for example, if you take the manufacturing base, one of the mentioned a few times, so for example, if you take the manufacturing base, one of the reasons we've consolidated cigarette manufacturing in in Richmond is because of the demographic profile of that hourly workforce. So when we made that decision between closing our North Carolina facility and the Virginia facility, The profile there Matt was that our workforce in Richmond was really going to a trip out at about what we expected the rate of volume decline to be. Our overall philosophy on this is we would like to continue to reduce the costs in our business. We're really focused on it. We mentioned simplification.
We have a productivity initiative underway in that regard without having to do big expensive announced programs. They're very disruptive. They're hard on our people and they take money out of the system that you would otherwise like to put back in the business. So having sort of gotten the new Altria to the footprint we have, what it now means is sharpening our pencil all the time every year. And I will tell you that I have been very pleased like for example during the budgeting process at the risk of going back in time.
Maybe you worked at a place where you had to kind of encourage people to find the Our line people and our staff people bring cost reduction in with their budgets. They know it's expected and we're making good progress. Did you have a follow-up on that or?
No, not a follow-up on that. Actually, if I could ask one slightly different question. Sure. You have the mic. So Marty, just on the state of the dialogue with the FDA on MRTP designation.
Yes. I was wondering if you could add any anecdotal color to that. Just how you feel it's progressing, your level of confidence that the data would support a designation based on what you know about their expectations today? How optimistic should we be that this is not a formality that's going to end in a long drawn out sort of endless process and actually have a favorable outlook?
I think it's a terrific question. Let me separate out content from timing. I am optimistic and confident that we are going to have reduced harm products on the market in the United States. And I'll tell you why is because that's what the FDA bill requires that they do. And there are now technologies available that look like they will do it.
And everybody is doing the science on it and the science is promising. Now and so I'm bullish that we will have them. We're working very hard on that. I can tell you very hard on that because our mission is to satisfy adult consumers and it would be good for public health if those products were brought to the market of course. Now timing.
This is not going to happen overnight. The science has to be there. It requires clinical studies. So I know that there is this pent up demand to see something in marketplace with a claim on it. But it's remember the FDA bill was just passed in 2,009.
We've had decades of traditional products in the market. These take place over time. So my answer to your question is, we're investing in it because we believe in it and we believe it's going to happen. It's just going to take sort of stay in the course to do the work and prove it out. Our job is to put the products in front of the FDA and make the case for it.
The FDA's job is to evaluate the science and if the case is there to approve those products and let adult tobacco consumers decide. They are entitled to that information. Okay. Let me do Judy and then I'll go to Matt Michael, sorry.
Thank you. Two questions. So first, just in terms of the total tobacco industry, I think you've shown the profit pool growing at about 5.3% over the last 4, 5 years. In terms of the consumption of cigarette equivalent units or how you look at the consumption, where do you think that that number is? And I know you've seen a little bit of movement between smokeless tobacco to maybe alternative tobacco products and cigarettes volume declined moderating a little bit.
So just in terms of shift within the tobacco industry.
Yes. I guess we
can break those numbers out for you. I don't have them in my head, but I think it's fair to say that the entire category, if you look probably the best way to look at this is total pounds, which is what the government data are. Total pounds decline is about 1% to 1.5% over time. And because of it's kind of hard to break it out by category because you do have some people who are using multiple products. I would say though it seems that at this moment in time in 2015 that the industry dynamics are as strong as they've been in some time.
Okay. And then the second question is just in terms of your reinvestments and maybe just thinking about the payback from some of the reinvestments you've made, just quantify what you think and how we should think about some of those reinvestment decisions particularly in the context of other companies also making investments in brand equity, some of the e vapor products. So how do you think about the payback? And as you think about the your portfolio of brands and products, you've highlighted that you're one of the more diversified companies in the industry. How do you think the diversification really shifts over time from your portfolio perspective?
Yes.
You're talking mostly about reduced TARN products? You're talking about the conventional side or both? Yes. Well look and Bill you may want to talk about this in terms of the investment style we use. We have an offering to the marketplace.
Our offering is that we are what we just took you through. We are large. We are mature. We have the leading brands. We have Golly in sales and distribution.
I think Craig's done a magnificent job of showing what a competitive advantage. So we have all these competitive advantages. Shareholders expect for us to get a return on that. That's why 7% to 9% is our aspiration and 80% of the cash through the dividend is top of mind with us all the time. That said, there have been on the shoals of business many companies who were so arrogant to think that things would never change and no technologies would come to market and no competitors would bring things to the market that could disrupt that model.
We are not that vain. And we believe that our obligation is to steward our brands for today while investing in tomorrow. The way we have described that Judy really is maximizing our core business while investing for our future and innovating for our future. And I think we've been doing that. And I would say Billy can correct me with the numbers, but over the last several years, we've been investing in our future and we've been growing underlying EPS at 8% and we've been giving back 80% of the cash to the shareholders.
So we have the people I think in the platform to do that. There are challenges in doing it of course. You have to balance every year. There are puts and takes. But on if you look at it over the long term that's the aspiration, that's the way forward for Altria and I think we've done a pretty good job of it.
Bill you want to say something about the numbers?
Yes. I think Marty you
hit it dead on. We really look at
it in the context of our long term financial goals. You can go back a couple of years and you saw us invest in Marlboro with the new architecture and that's now paying dividends. So we really look at it in the context of that overall financial objective of 7 to 9 through time. Michael?
Thank you. A follow-up on that and then I have one other one. Just near term in terms of spending maybe for rest
of the year, what are
some of your priorities? And specifically, if category and pricing momentum continue and obviously there's the Fetra savings, Is there upside to some of your current spending plans? And if so, what do you see as the best incremental opportunities in terms of waiver, base business, promotions, equity building? What kind of equity what would equity building look like? Just some color on that.
Yes. I'm loathe to get into too much detail for competitive reasons of course. And of course we're in the middle of the quarter. So you forgive me if I don't get to the level of detail you'd like. The best way to look at it probably Michael's slide that Billy put up there about how we're harvesting our savings in the core business and we're investing them in various things.
So on the innovative side of the business, we've got a lot of product development going on, on paper. We built national sales distribution. You have to keep investing in distribution obviously to be relevant there. We're doing a lot of the regulatory science and reply to the question about how are you going to take it forward on reduced arms. So there's a lot of work to do there.
As you know, we also invest in our core brands over time. I think the best way to understand that is the way we described it when we offered our guidance. So I just don't want to get into too much detail on this kind of a setting if you forgive me.
Okay. And then just second on the NPM savings. You got a nice one time boost about 3 years ago from a settlement with the state. And obviously that was presumably the lowest lying fruit. But 2 part question I guess.
First is, is it reasonable to assume any other settlements would be across the whole industry like that one was? Or could you do anything individually? And then if so, in either case, what do you see as the prospects for something else maybe coming?
I'm pleased to say that Billy Gifford and Denise Keene manage our NPM portfolio. So I would invite Billy and then if Denise wants to say a word as well if you could. Billy what do you see?
Yes. I think Michael we constantly go through the arbitration process. That's what's designed in the MSA. You saw the settlements take place with the number of states that you just recently you saw in the recent period. I think we continue down the arbitration pathway.
It's prescribed in the MSA and we'll see as that proceeding takes place.
Can we turn this mic on here please?
The only thing I would add to that is we always remain open to settle with those states who have not chosen to settle here to 4. That having been said, as Billy indicated, we're getting ready to start the 2,004 arbitration. How long that's going to take and when it's going to get off the ground is slightly unclear. But that is the process dictated by the MSA and that is what we're doing.
Thank you. Maybe I'll try to go to the are there any over here or here? Bear before I leave people out. We have one in the back Bonnie and then I'll come back Chris to you.
Thank you. I have a question on your innovation pipeline. Could you talk about how full it is especially for Marlboro? And then how much further could you extend Marble while retaining the strong brand equity that you have behind the brand? I guess I'm thinking of Marble 2.0 possibly.
And then put that in context for us given the limited shelf space at retail and how that might shrink in the future as e cigs and vapor products continue to take more of that space?
Okay. Thanks for your question. I'm going to not steal a lot of Howard's thunder, because Howard's going to talk about this this afternoon I promise in detail. And he's going to I think show you all of the innovation that has happened on Marlboro. And I can assure you that we have such a talented Marlboro team.
Our job at Altria is to restrain how many ideas they can go after as opposed to trying to ask them to generate more. They have tremendous ideas for Marlboro. The brand is the kind of brand that can do really big things that no one else can do and so there's lots of that. We're always looking on how to grow Marlboro, but we want to do that deliberately. We never want to dilute its equity.
And I think that while there have been some questions over time about whether Gee does it have too many SKUs or not, I think when you look at the fixture that was behind Craig and you look at the growth of the brand and you look at its share growth and you look at the margin growth that smokeable segment, I think you'd have to concede probably that Marlboro really continues to have vitality and energy. I don't
know Craig do you want to say anything about limited shelf space? I would just kind of offer this perspective about from the retailer standpoint. As they think about how they allocate the space in their store, they want to do what's in their best interest, what generates the most income for them. So in the tobacco category, as I mentioned, foot traffic is a really big deal. And category provides terrific foot traffic.
The market basket information I referred to certain brands really do a better job than other brands and retailers understand that. But ultimately as long as a brand is delivering from a revenue standpoint from generating foot traffic, they're going to have a place in the store and Marlboro is a leader in that area. So I know things will evolve over time, but we feel that retailers and working with Okay. Chris, I think you have the last question before the break. Okay.
Chris, I think you have the last question before the break.
Okay. Just one question and then really a follow-up and then one question if I could. So I think for Craig, the consumer engagement that you have and all the web sites and the digital and the direct mail, is that helping, I'm going to say down age the Marlboro brand? Like are there statistics that show how you're showing more 18 to 30 year old smokers are engaged with the brand from that engagement activity?
Yes. The way I would answer that and at the break we could maybe talk to Cliff and Jen Campbell about more about that. But the way I would say that is that, I think the more we do through our websites, through our digital, through our the app work. There's broad appeal to that. But obviously, the 21 plus is finds that keenly interesting because that's kind of how they live their life.
And but it's not limited to that group. So it's a broad appeal, but there is a focus on that that I think is helpful to the overall demographics
of the brand. Howard's going to have a little bit more data on that in his presentation as well.
And maybe related to and Vince maybe I don't want to take away from Howard, but just in relation to MLP program, which you've started years ago and there's been multiple changes. I'm sure that program probably kept up with all of them. But that program is that how is that changing? The brand has gained share over the time which has been put in place. Are the resources devoted to that growing still?
Are they being reduced? I'm really thinking more about from like a promotional standpoint. Yes. What I
would say about the MLP piece of our trade program work, when we first launched it, it was sort of here it is, here's the offer. Over time, we've expanded options around that. We have the margin we have MLP 2. And so it has changed and evolved. There is still very strong interest in utilizing MLP.
But the beauty of these programs is that a chain for example doesn't have to make a decision for the entire chain. They could say these stores in this market in this state we can use this option. For these stores in this area we use a different option. So we try to give them variability and
certainly to cut into any of that. How wonderful Altria is and we don't want to certainly to cut into any of that. We'll be back at 10:30. We have a webcast obviously start, so we'll be 10:30 sharp. Thank you everyone for your attention and there's a break outside.
Ladies and gentlemen, our webcast
Welcome back from the break, everyone. During the next session, we're going to have the chance to talk to 3 people who lead teams that focus externally. We have about 30 minutes, 35 minutes. I'll start us out with a few questions and then open it up to you all for some questions. So with me today on the far end of the stage is Bruce Gates, who leads our External Affairs organization.
Next to Bruce is Denise Keene, our General Counsel. And immediately next to me is Jim Dillard, who leads our Regulatory Affairs Practice and is our Chief Innovation Officer. So we often talk to investors about our strong external capabilities. And today we've had the chance to learn a little bit more about our people. So Bruce, I'm going to start with you.
And could you tell us a little bit more about your background and the
experience and expertise that your team
has in external affairs? Sure. Thank you, You've heard several speakers
this morning already reference the importance You've heard several speakers this morning already reference the importance we place on our people as a significant part of how we deliver the results that we have committed to deliver. And you heard Craig mention specifically the investments we make in developing people along with our commitment to occasionally seasoning our talent pool with external recruits. An external affairs organization is a great example of that. By example, I was brought into the company a little over 7 years ago after a 25 year career in politics and legislation working our Corporate Affairs Organization and the Head of our State Government Affairs Organization are long time Altria employees each with 20 plus years experience at Altria. And then finally, the Head of our Federal Government Affairs Organization came to us through the UST acquisition after a long career at UST and brought the perspective of that company.
And combined the 4 of us have about 100 years experience in the external engagement world. Similarly, the rest of the team is diverse and skilled in the way they approach the work and we deploy them as appropriate geographically. A number of state government affairs folks deployed in various capitals around the country where they work every day. I should mention just how we organize the work in external affairs. So external affairs includes both the corporate affairs, traditional corporate affairs functions, community relations, corporate responsibility, communications, research, societal research and then our government affairs organization that includes federal and international government affairs and state and local government affairs.
The 2 teams though work quite closely with one another in developing the strategies that we use to effectively guard the perimeter within which our companies do the work that they do. So taken all together, it's a great team and a lot of experience and a lot of success.
Thanks, Bruce. Denise, I'm going to come back to you with a similar question, but a little bit different. But Jim, same question for you. Could you tell us a little bit about experience and expertise of you and your team please?
Yes, absolutely. So much like Bruce, I've got a very diverse team and I'll sort of spend more time on the regulatory affairs team. I think as most people know, it's 6 years old.
Passage of the statute is just right at
6 years. And so we Passage of the statute is just right at 6 years. And so, we had regulatory capability within Altria at the time, but it was focused in very different areas. We had various state and other national requirements from a regulatory perspective and we certainly had a quality organization as well. And 6 years ago, I was one of the people that was working at UST.
I headed up the operations group at UST. And just before that, I had spent 13 years at the Food and Drug Administration approving medical devices. So I have a bit of a circuitous background. But amazingly when you start going down a roster as how I understand I got this role, you take a look at who might have a little regulatory experience and who might have a little tobacco experience. And I think Marty looked and said, okay, that guy.
Let's go get him. And let's start creating a department. And so for the last 6 years, I've had the benefit of really building a team that is really spectacular. We really approached building the organization with 3 strategies. The first strategy was take a look at what the FDA is building and try to mirror that.
So they have a big compliance organization, a big science organization and a big policy organization. And we have likewise constructed teams in order to be able to engage very directly with the people at the agency. Our second strategy was to use the existing talented tobacco infrastructure that we had that already had quite a bit of regulatory experience, bring them in, and to continue to develop that capability with the tobacco expertise. At the same time, looking outside to pharmaceutical and medical device industries where people have had that sort of training. So we've supplemented much of our hiring with people who have that external perspective.
And then the third was to take a look at the areas that were going to be new from this statutory perspective. So population effects, we were very skilled and very talented in individual health effects. But now with this new population standard, we needed to look towards new expertise in the behavioral sciences, in the epidemiologic sciences. Extremely talented group. We've developed terrific relationships with the agency.
We participated in things like site programs, site tour programs. We present at the Tobacco Product Scientific Advisory Committee. And we take a long term perspective, which we think is in the best interest of the businesses and our shareholders.
Great. Thanks, Jim. So, Denise, same question for you, but could you also add on some insight of using the diversity and inclusion and why that's important when putting together your team?
Okay. Thank you, Sarah. I'm really so proud to be here to talk about the law department because I think it's a really great story. It's a function that truly partners with the business. Quite honestly, it is a partnership that has been developed and has become enriched over time.
If you look at the model that we follow, we have experienced, versatile, diverse lawyers. And sometimes we develop them in house and sometimes we retain them externally. I had the benefit of hiring most of them. And I can say that I believe our law department can be benchmarked against any major CPG company or any major law firm in the country. The other thing I want to talk about is about kind of the work that we do.
I mean most of it is work that you would find in a CPG or regulated industry. But as you know, we do litigation. And as was mentioned earlier, we really manage relationships with the MSA. And another group that we have is called brand integrity and trade channel integrity that works on kind of coordinating with law enforcement and our trade partners to protect the integrity of our distribution system. In terms of myself, just to give you a little bit of a perspective, I've been GC of Altria since 2,008.
And before that, I had a wide range of responsibilities and experiences in Altria and Philip Morris Companies. So I've worked through some of the very significant events in our history and I've seen challenges, but many, many In terms of diversity, that's really an important place to kind of pull this all together because diversity is very important to Altria. But I have to say, I think it's really critical to the law department. In fact, I would even say it's a business necessity for us. You know, impeccable skills are given when you have a law department, that's what you need.
But you really need people with diverse perspectives and inclusive behaviors because when you think about it, we really need to partner with a really wide range of stakeholders. It starts at one end with our clients, but quite honestly, we talk to jurors, we talk to AGs, we talk to legislators, we talk to prosecutors. And I think those are the talents that brought together do the best to represent the company and our shareholders. So thank you.
Great. Thanks, Denise. So another theme in addition to people that we've heard about today is innovation and the role it plays across our businesses. Jim is our Chief Innovation Officer. Can you give us some insight into kind of how those efforts are going at the enterprise level?
Yes, absolutely. The innovation is certainly not new to Altria. We have been looking at innovative products now for well over a couple of decades. But I think at the broadest level, what we've tried to do is think of innovation in a way that really is a rallying cry for the organization. So thinking about how can we set aside a vision that really people will understand that, yes, we've been in the tobacco space, but what are we evolving into?
So we've really put the rallying cry out to imagine what our future would look like, identify opportunities and then develop and deliver flexible infrastructure to accelerate the pace at which we are delivering both products and experiences for the adult tobacco consumer. The adult tobacco consumer clearly at the center of the plate. But at a broader level, enterprise and Billy mentioned this a bit is that we have an initiative to look at all of our internal processes and internal infrastructure and really take an innovative and a simplifying approach to that infrastructure, so that it enables all the work that we do within innovation, so that we're breaking down the barriers inside as well as developing the opportunities for the adult tobacco consumers. I use the analogy because I think it's appropriate here that we're in a bit of a transition. We've had analog if you will traditional tobacco businesses now for centuries.
And these analog tobacco businesses were very successful in. But we have a digital revolution consumer is at the center of that. They're looking for innovative products and innovative experiences and we need to develop those And we're taking many approaches that other industries have taken when they've made the transition from analog to digital. We use connect and develop. We use other expertise outside of our business to be able to take advantage of the technologies that are going to accelerate and enhance our capability to compete in the new digital world.
That puts us at a point where the adult tobacco consumer and the digital types of experience we think are going to be good for the businesses, good for new revenue streams and good for obviously our overall sets of experiences.
Great. Thanks, Jim. So we heard from Jim kind of at the enterprise level beyond product. Denise, can you give us a couple of specific examples innovation efforts by your team? Absolutely.
There's a great deal of innovation that goes on in the law department. And let me start in the litigation area. An important example is the way in which we've chosen to use technology to really enhance the way in which we handle document related issues. Documents are a core aspect of litigation and I think we've really taken steps to position the company to be both efficient, effective and really very cost conscious in that area. Also when you talk about the Engle cases, truly the Engle cases are a one off and they are very unique, but they change the velocity of our litigation.
And so we needed to take a step back and say, how can we deliver comparable quality? How can we make sure that we have the same rigorous, what I would call A plus ability to defend the company? But how do we do it in a more effective and cost efficient manner? And so we've really looked at some of our case management strategies and we've deployed them for ENGLE and we've deployed them for other cases. In addition, we've really invested in training because going back to the theme I mentioned earlier, diversity is very important to us.
And so when really focusing on our trial teams, we've invested in identifying, training and developing diverse trial I mentioned ever so briefly called brand and trade channel integrity. I think that's an important service that is provided for the organization because it represents a way to protect not only the integrity of the trade channel, but also our brands. Because what we do is we protect them against illicit trade, which is basically contraband and counterfeit. And it forms an ability for us to truly network with law enforcement, with prosecutors, with our legitimate trade partners. And I think that we have brought technology, we've brought systems and we have brought tools to enable us to do that on a pretty broad scale.
Great. Thanks, Denise. Bruce, can you give us an example or 2 of the innovation efforts by external affairs and how they add value to the business?
Sure. One that comes to mind is responsive to the question that Vivien asked Craig about the database. Our team has been working with the sales and marketing organization for the last several years in developing a separate consumer website for external engagement purposes. And through the work that they've done, they've signed up more than 150,000 consumers who have opted in to receive information about legislative work that may be going on in their state or local area. And several 1000, tens of 1000 of them have already activated just this year in various legislative battles around the country.
And we think it's a significant addition to our toolbox in managing the issues particularly at the state and local level where consumer engagement can really have an impact on the outcome. Another example is an example of the power that Jim mentioned of combining simplification and innovation, our corporate affairs organization, which has responsibility for managing our corporate responsibility effort across the company has done a terrific job with the altri.com website and the work that goes into feeding the data into that website for our corporate responsibility report, streamlining the collection of the data, which takes work out of the Opcos that have to produce it and refining the report reducing it from 100 plus pages to 37 pages, while improving the transparency and the quality of the information they're providing as evidenced by the recognition that we get external organizations including on the card that you have in your folder here today. So I think 2 great powerful examples of how innovation can not only streamline but improve results.
Great. Thanks, Bruce. I'm going to ask one last question for the panelists before I'm opening it up to the audience. There continues to be a lot of interest by investors, consumers, FDA, scientific community about potential reduced risk tobacco products. Our company has a long history of working towards reducing the harm of tobacco products.
Denise, I'm
going to start with you, but could you share with the audience the role your team has played, highlighting any challenges or successes? Sure. Well, I
mean this is a topic that has been a huge focus for the organization and it's also been one for the law department. In fact, you can go back to the 90s when a cord was introduced, when it really became apparent that there was a huge interface between regulation and reduced harm. And in fact, at that point in time, we started to really seriously think about product regulation and the way in which a science based approach could really form a framework for reduced risk. So that became very much a focus and an exploration for the law department. Then we really became involved when the FSP TCA was first being proposed.
And we started studying and trying to understand both as the process started and as the law was enacted. And quite honestly, there was a compliance lens that we brought to it. There was kind of an effort to dig deep to understand some of our product issues. And I think quite honestly, there was also an effort to look for huge opportunities. And I think we were partners in having that happen.
And so in reality, this has really been a process. But there's one other thing that I just would like to mention and it really relates to the First Amendment because I think that that's an area where in the law department we really have somewhat of a keen perspective. And I do believe that it is very important for this whole reduced harm discussion because we're in a place where the First Amendment guarantees an ability to have truthful communication and guarantees the ability to be able to connect with our adult tobacco users. And so in the context of regulation with the support of some of these protections that we have, I really think we have a very important platform. In addition, we have such an integrated approach.
So I'm going to turn it over to Bruce who's worked extensively in the same areas.
Yes. Well, as you will recall Denise, a lot of the work that was done during that decade or so long effort working with Congress to develop the statute was around a focus on the need for a national framework for regulating the category, not only to reduce underage use of traditional products, but for a framework for potentially offering to consumers reduced risk products with potentially with claims. But it was our belief in this national framework that was so critical to defend through that process. Come forward now 10 years or 15 years actually with 5 years experience with the statute. And we still consider that national framework really paramount ultimately to the success in delivering these products to consumers.
So my team has since the enactment of the statute been working particularly at the state and local level to discourage state and local governments from sort of knee jerk regulating these innovative categories allowing the FDA allowing the FDA and its more science and evidence based approach to have the opportunity to evaluate these products and they'll allow the steaming regulation to come into fruition. The reality is these state and local governments don't have I say a knee jerk reaction. So we're trying to stop that from happening. Okay. And then I say a knee jerk reaction.
So we're trying to stop that from happening.
And I think that with regulation at the federal level, which I'm fairly familiar with and comfortable with and you put the responsibility in an agency that understands science and evidence and also processes. And the opportunity for modified risk tobacco products is really a unique asset here in the United States. We're the only country that has both the framework and an agency that has the capability to assess obviously this type of product. And so I think it provides not only unique opportunity here in the United States, but a unique opportunity to set a worldwide standard, which has certainly been the case in other regulated product spaces where you see the world change based on the way in which the United States approaches the scientific side and on the timing side that might help to frame this out a little bit. 1 on the science side, certainly our relationship with PMI and looking at the IQOS device is probably the most developed that we have moving forward in the modified risk tobacco product space.
It's by no means our only effort, but it's probably the most advanced at this point. And it just shows that when you bring scientific collaboration together with engagement with the agency, questions like how do you answer population risk questions start to become elucidated when you work with a federal regulator as well as good scientists in industry and in academia. So there's a lot positive that's happening not only about advancing a modified risk tobacco product application, but to really establish the science that is likely to be the benchmark as we think about moving forward in these particular categories. The other comment on timing is one that for me just on a very recent experience, I think the agency is making quite a bit of progress. We were just notified last week by the agency that they had granted 23 marketing orders to PM USA for various cigarette products that we've had in the substantial equivalents pipeline.
Substantial processes like substantial equivalents. We also have engagement with the agency. At that same time, we were granted 23 orders. We had some orders that were not granted as well. So we continue in the process of learning from the agency.
We think these are a bit more on the procedural area and we think we'll work through those with the agency as well. But net net what that's telling me is the agency is understanding their processes, they're understanding the science and they're starting to move forward to make decision. I think that bodes well for the modified risk tobacco product process as well. And I think the tips act is learning too. So I'm rather bullish both on the science and I think the timing is going to be as Marty stated some time, but the agency is moving forward.
Thanks, Jim. So with that, let's open it up to the audience for questions for any of the panelists. Vivien?
Thank you. My question is for Bruce, please. Hawaii just became the 1st state in the United States to raise the minimum tobacco purchase age to 21. So can you please offer, number 1, some color on how you engaged with regulators in Hawaii? And more importantly, number 2, your view of similarly proposed legislation that is being contemplated in other states?
Yes. That's an excellent question. We support 2018 as minimum age for the purchase of all tobacco products. We've made that clear across the country. We made it clear in Hawaii.
As you probably know, Hawaii County had already raised the minimum age to 21 a year ago. So the state action was more or less a fait accompli, but we had engaged there. Hawaii is an interesting jurisdiction which to operate. The legislature has some unique characteristics about the way they do their work. A lot of work gets done behind closed doors in Hawaii.
But we've engaged across the country. There have been several states where it's been proposed and ultimately not enacted over the last few years. And we support the federal statute statutory minimum age of 18. As you know the FDA has been charged in that statute to evaluate that. They referred that work to the IOM earlier year and received a report.
And ultimately, it's up to the FDA and the Congress ultimately to determine whether the age should be changed.
Thanks. Let's go to Chris and then we'll go over to Bill.
A question for Jim. The tough standards the FDA has set for modified risk tobacco product level population risk assessment, just be curious on your views on that. And if there's is there any product that would seem to meet what I regard as a very high standard? And if I could add to that, I would contend that Altria has been very deliberate about new productivity historically. And with this framework with the FDA, it would seem like there's a real advantage to being the primal mover here.
So, is the organization in a place where you can start moving on some of these new products at least attempting to get them through the FDA rather than kind of being more deliberate waiting for the categories kind of develop?
Yes. Thanks, Chris. Let me start with the first question. The standard for modified risk tobacco products when you think about it, I think all the way back working with the legislation in the very beginning, it required a higher standard. Obviously, we're talking about a claim.
We're talking about communication to adult tobacco consumers, science and evidence based perspective. And so the standard should be higher than say substantial equivalents. A product is equivalent to something else on the market. So we anticipated that the standard would be high. We knew that the population based standard would be something that would be new both for industry, academia and obviously the government.
And it's not surprising that what we're seeing is the evolution of science that I think is going to set the standard for how we're going to execute against modified risk tobacco products. And part of that. We're part of determining what that standard is. And so we think the necessary science can be done. We're doing it.
We're doing it with PMI on IQOS device, but it's evolving. On the second question, Tell me again what the second part was, sorry.
It's just that Altria has been more delivered on new products and just it seems like there's a reason to move more quickly now.
Thank you. Thank you. Yes, I would say we've been very deliberate on new products today as well. We have a number of applications before the agency, not just these 23 that have come out. We understand the process.
Remember, any change we make to existing products that are on the market today have to go through the substantial equivalence process. So I would say we have been urgent and we have been disciplined on those products certainly as well. And I would say that sense of urgency is coming around to the innovation products too. But as you know, we don't have a deeming regulation yet. So we don't have the framework to be able to go to the agency and present products until that deeming regulation comes out.
But I think that's coming probably
Prior to 2 you. Prior to 2,009, I think the general perception was that the communication between the tobacco industry and the government was fairly combative. And then with the FDA regulation and Jim you spoke to it, it at least theoretically opened the framework for a two way dialogue. So I'm curious in other areas where you communicate with the government, if you've noticed any change since 2,009 as far as the tone or just how the government maybe looks at the category with FDA regulation?
Yes, sure. That's a thoughtful question. And I think the answer is yes. I think the more separation there is in time from the environment of the 90s, the MSA and the wrangling over how this statute would ultimately look. And now, there has been an improvement in the way we've communicated that hasn't eliminated the need to communicate and particularly at the state level and on taxes in particular, we have to be in there constantly to remind them why they shouldn't raise taxes on the products.
But the quality of the dialogue certainly has improved. And I think our ability to respond with data driven answers has improved and that's always good for dialogue. So yes, I think it's an excellent observation. Has in fact improved.
Can I take a stab at that also? Because I would even go back before 2,009. I'm someone who's worked on the MSA and I think that was a perfect example of a very sort of adversarial exchange that really did lay the foundation if handled properly to start a dialogue. And quite honestly, that was our strategy. And it wasn't necessarily successful day 1 or day 2 or day 3, but the approach we brought was to be consistent, to be upfront, to try to establish credibility, to deliver against what we said we were going to do.
And we have not had compliance issues under the MSA because that has been a priority for the organization. And the fact that we can talk across the table to the states, the fact that we were even able to get to the point of resolving some of our NPM settlements, I think is part and parcel the strategy that we have brought to try and understand our stakeholders and meet them in a place where we need to work together hopefully in the process really build some credibility.
Do you want to add on that Jim?
No. I think really it's more of a question outside FDA. I mean it's certainly improved at the FDA.
Okay, great. Michael?
Thank you. I wonder if you could just elaborate a little bit on the SC approvals you were referring to. And specifically the ones
that you said weren't granted, are
those ones that are finally resolved as NSE or ones that are still kind of back and forth? And is
there any risk of you
having to take products off the shelf?
Yes. So just to set the context again real quickly. These are products that weren't on the market. They were for changes to existing cigarette products that are currently on the market. And what we submitted them for was changes in cigarette paper for supply security reasons.
And so of these, total was 31. 23 were granted and then 8, we had some NSE decisions that we're going back and forth with the agency on. As you all probably know, SE decisions are made public by the agency, NSE decisions are not and there are various procedures for administrative review and we're currently in that process with the agency. But they were all submitted for the same And really we think there are technical issues associated with the findings on the not substantially equivalent products.
And so you mean those same specific ones you think can still become can still end up getting granted an ASC approval?
We do. I won't go into all the detail of all the different procedural options that we have. But the government has many procedural options based on decisions and particularly unfavorable decisions. So we'll be in that process now for some time.
Great. Thanks. I'm going to start with Judy then we'll go over to Nick.
Question for Jim. Just in terms of the FDA priorities over the next 12 to 18 months, how do you envision that perhaps shifting as we get into the election year especially? And then I know we talk a lot about kind of the FDA's impact in the industry, the delayed in timing and a lot of the decisions. But from your perspective, what positives has really come out from the FDA regulating the industry over the last several years?
So I think the place we go over the next 12 to 18 months are certainly in the area of what the agency's priorities are and what they're focusing on. And clearly, they focused on deeming regulation. I think we're likely to see that before the end of the year. They recently announced that they will be looking at the tobacco product manufacturing process regulations. They don't call them GMPs.
I guess they believe that you can't have good manufacturing practices for tobacco. So the TPMPs are looking to be published sometime beginning of the year. And I think beyond that, I get asked a lot about menthol. Menthol seems to be something that is in process. The agency is analyzing data.
They're still analyzing the comments, but there doesn't seem to be a sense of urgency on moving forward with anything with menthol. So I would say catching up on the backlog on substantial equivalents, I think is a pretty high priority for Mr. Zeller as well. And one of the other mentions that he made at the NATO conference, I sat on a panel with him and he said they're working towards a proposed rule on a continuum of nicotine regulatory policy that he had mentioned they're trying to get published before the end of the year. So I would call those at least on my radar screen the ones that seem to be pretty much top priority in addition to obviously the science they're doing and the work that they're doing with NIH.
And then you asked about what have I seen that's been positive over the 1st 6 years? If I had to step back, what I would say that the agency has moved with precision. They haven't moved too fast in a lot of areas, which I think is good. They've had to learn how to number 1 hire people, train people, prop up a center, learn what sort of regulatory processes they have, and then understand tobacco science. And we and other manufacturers have been very planful about how to teach the regulators about what we do in the tobacco
while they've been planful and very
scientific and very disciplined,
I think we're
getting to a point where while they've been planful and very scientific and very disciplined, I think we'd all like to see a little bit more speed for decision making come out of that. But I think it set the framework and the standard for us to work in for years to come. And I think they've done that in a methodical deliberative way, which I applaud them for.
All right. Nick, we've got time for one more quick question.
And it is quick. Denise, on angles and settlement, I'm just curious how much how many resources were being dedicated
to those particular cases just
to get a sense of the kind of relief that the company will see going forward now that it's been settled fully at the federal level?
Okay, sure. As you know that there are 2 tranches of cases. There are the ones on the state level, the on the federal. The ones that we settled on the federal level, there were about 4 20 cases left. And it was really the result of a whole variety of factors that were somewhat unique to the federal process.
And the court has approved the settlement. We're waiting for the plaintiffs to come back and communicate whether or not their clients are in fact accepting the settlement.
Can you give us any context on the burden that was placed on Altria while these cases were going on?
It kind of goes back
to my conversation about infrastructure. Without a doubt, the federal cases presented some velocity because as you may know, there was a huge case activation process that was started by the administrative judge in charge of the federal cases. But we had really anticipated the fact that we're going to have to be able to deploy numbers and be able to manage a volume of cases. And we felt that we were able to do that. Without a doubt, not having 12 cases a month is a nice thing.
It gives you a little bit more flexibility. But I have to say that I felt we were able to manage it. And nonetheless, I think the federal settlement was in the interest of everyone because of its real uniqueness. Does that answer your question?
Kind of.
You can find her later, Megan. I'm afraid to ask the 3rd question. Well, thank you very much
to our panelists. Thank you all for the thoughtful questions. And I'm going to now turn the program over to Howard.
Thank you, Sarah, and each of our panelists. As we've been reminded throughout the day, Altria has evolved considerably over time. Our 2,007 and 2,009 acquisitions of leading cigar 7 2013 entry into the e vapor category and acquisition of Green Smoke in 2014. Today, our tobacco companies own leading premium brands across the most profitable tobacco segments. We'll provide a brief update on smokeless and cigars performance as well as the evolution of Newmark's e vapor portfolio.
And we'll spend the balance of our time understanding progress and results on Marlboro. Beginning with Smokeless, our 2,009 acquisition of US Tea brought Altria instant access to premium brand leadership in the growing smokeless category and the exciting challenge of returning Copenhagen and Skol to retail share growth. At the time, Copenhagen had over 22% retail share and adult dippers considered it to be the most masculine, premium and gap and a taste profile that some competitive dippers did not prefer. Since then USSTC has revitalized the value equation, including enhancing the equity campaign and product portfolio. A new choose Copenhagen campaign focused on the brand's essence, authentic masculine craftsmanship.
Copenhagen also entered the fast growing wintergreen which enhanced its appeal to competitive dippers. Thanks to innovation and equity enhancing efforts, the brand stands strong today with a remarkable 8 percentage points of share growth from 2,009 through 2014. Importantly, during this period, Copenhagen improved its demographic position by growing almost 10 retail share points among dippers aged 21 to 29. USSTC has also pursued greater stability on Skol to strengthen the combined performance of its 2 premium brands. Beginning last year, USSTC invested to enhance Skol's equity and improve price gaps on Skol Classic.
Thus far Skol's A Pinch Better campaign is resonating with adult dippers. Our research shows that adult dippers are increasingly associating Scholes A Pinch Better tagline with the brand. And that Skol's image is improving among the roughly 1 third of adult dippers who recall seeing a campaign ad. While these things take time, we are encouraged by the moderation we've seen in Skol's retail share decline. These steps have been guided by USSTC's strategy to grow income by growing volume at or ahead of the category growth rate, while maintaining modest share momentum on Copenhagen and Skol combined.
USSTC is performing well against these objectives. 1st, when adjusted for trade inventory changes and other factors, USSTC grew volume approximately 5% on a compounded annual basis from 2,009 through 20 14. This is in line with our estimates for category volume growth over this period. 2nd, Copenhagen and Skol grew combined retail share almost retail share almost 4 percentage points from 2,009 through 2014. And finally, the combination of volume and share helped deliver solid adjusted operating companies income and margin growth.
Adjusted operating companies income increased on a compounded annual basis by almost 11% from 2,009 through 2014 and grew 5% in the Q1 of 2015. Likewise, over the past 5 years, adjusted operating company's income margins improved almost 14 points ending 2014 at over 63%. So we've made great progress strengthening our smokeless business and believe Copenhagen and Skol are well positioned for the future. Since our 2007 acquisition of John Middleton, the machine made large cigars category has changed significantly. The category consists primarily of 2 segments, tipped and untipped cigarillos.
Over the past few years, low priced untipped Middleton also focused on delivering the variety adult cigar smokers seat with the 2012 launch of Black and Mild Jazz and the recent expansion of Black and Mild Casino. Through these efforts and other equity investments, Middleton grew Black and maintaining more than 90% share of the tipped segment. So we're very pleased with Middleton's performance in a dynamic environment. The past couple of years have also seen fast paced evolution in the U. S.
E vapor category. We aspire to establish long term leadership in e vapor and other innovative tobacco products. And we're moving forward with purpose and discipline, always learning from adult tobacco consumers. For example, we've learned that adult smokers and vapers are still searching for a product that meets their range of preferences. So Newmark is focused on delivering a portfolio of products to address these preferences.
Expanding on the merchandising and distribution platform Newmark built last year, the company introduced Mark 10 XL into lead markets in specific chains in April. A new campaign, full on vapor highlights Mark 10 XL's improved performance features, twice the liquid and battery life as the current Mark X along with the familiar form, weight and draw that many adult smokers and vapers prefer. Mark 10 XL also responds to their desire for more flavor variety with classic, menthol, fusion and wintermint. Our 2014 acquisition of Green Smoke brings additional dimensions to Newmark's portfolio. The Green Smoke brand adds a solid position in the online channel and enjoys some unique product features including FlavorMax technology, which creates consistent full bodied flavor and a rich vapor.
Green Smoke cartridges are also triple sealed to enhance product quality, battery and cartridge performance. Starting this week, Newmark is expanding Green Smoke's retail distribution into specific chains in several lead markets with new packaging and advantaged retail presence and new promotional tools. As a result in select markets, adult smokers and vapers will find a retail focus on either Mark 10 XL or Green Smoke, allowing Newmark to learn which products and promotions are most effective. Also as part of our agreement with PMI, we began providing our e vapor products to PMI for international markets in the Q1 of this year. Today, the e vapor category is still developing.
Current products have performance gaps. The pace of category growth has slowed somewhat and manufacturers are awaiting regulatory guidance. However, we remain convinced that the desire adult smokers have for innovative tobacco products could one day be met with the right technology, whether it's e vapor, heat not burned or something yet to be developed. So we're not betting on a single technology. Now let's turn to Marlboro.
We've cultivated Marlboro as the most premium flavorful and masculine cigarette for many years. In fact, Marlboro's heritage is built on decades of bold and innovative actions. Marlboro as you know it began in 1954 with its repositioning as a man's cigarette with a robust Richmond recipe for a flavorful experience, a unique filter tip and a one of a kind flip top box. The launch of the Marlboro Country campaign in 1963 firmly rooted the brand in the allure of the American West. Innovate Marlboro line extensions emerged known today as Marlboro Menthol and Gold Pack.
Print and billboard advertising unique pack. Print and billboard advertising unique in its day featured the campaign and Marlboro soon became the best selling cigarette in the world. PM USA continued to make long term investments to strengthen Marlboro, including building 1 of the largest catalog programs in the world through the Marlboro Miles consumer rewards the foundation for the brand's adult smoker outreach today. The foundation for the brand's adult smoker outreach today. In 1998, PM USA and other manufacturers signed the MSA, forever changing the way cigarette brands would be marketed and sold.
So we innovated again. PM USA built a groundbreaking direct marketing platform for smokers 21 and older, reaching tens of millions of adult smokers in ways only Marlboro could. PM USA also invested in experiential marketing activities, including a PMUSA launched marlboro.com to provide a secure age verified platform to efficiently and responsibly connect Marlboro to adult smokers in the digital era. Thus long term vision, innovation and equity building investments helped Marlboro to become and remain the leading U. S.
Cigarette brand since 1976. Since that time Marlboro has more than doubled its share and grown in 31 of the past in new ways. In 2012, a new brand architecture featuring 4 flavor families provided the answer and opened exciting doors for Marlboro. Let's take a closer look at the evolution of Marlboro and results since then. The architecture created new ways to express Marlboro's brand values, which include masculinity, freedom and adventure.
These timeless values with universal appeal are the foundation for all of Marlboro's marketing activities. Marlboro Red is the most authentic, flavorful and masculine of Marlboro's flavor family. It grounds the brand in its rich and strong heritage. Marlboro Gold reflects the relaxation and harmony with nature found in Marlboro Country. Marlboro Greens flavor makes an adventure and Marlboro Black embodies freedom and limitless opportunity in a bold modern take on Marlboro.
The architecture not only expanded our thinking about Marlboro, unlocked innovative ways to build the brand and connect with adult smokers. For example, the interactive 2013 Wide Open Flavor digital promotion introduced adult smokers to the full breadth of Marlboro's flavor family. And adult smokers submitted more than 13,000,000 comments and likes on marlboro.com, demonstrating new engagement possibilities. Comments and likes were just the beginning, as picture uploads, video submissions and user generated content promotions are now core to our brand building activity. Since PMUSA launched the current marlboro.com platform the end of 2012, user engagement activities have grown substantially to over 20,000,000.
Dollars The brand also embraced modern articulations that even without the iconic cowboy were definitely Marlboro. Take Marlboro Black's Open Road for example, when PM USA first showed this imagery to adult Marlboro and competitive smokers, they immediately identified it as Marlboro. Marlboro also enhanced its appeal to a diverse base of adult smokers. A range of marketing activities are now fully integrated across the 4 families that reflect the changing nature of American society and have opened new ways for Marlboro to express flavor that are reflective of today. Marlboro Greens Flavor Makers campaign for example highlights individual unique flavor to nightlife across the U.
S. The architecture logically supported an expanded product lineup, 1st through Marlboro Black, Regular and menthol followed by NXT and Marlboro Edge to grow the Black family. Marlboro also expanded Southern Cut in the Gold family and Menthol Rich Blue in the Green family. These offerings help strengthen the brand's retail share by broadening its flavor offering. In addition, PM USA systematically updated Marlboro Packaging to reinforce its premium position and keep the brand contemporary and progressive.
In total Marlboro enhanced packaging on more than half its volume since 2011. Earlier I described the evolution of Marlboro's marketing. PM USA focuses its direct one to one marketing on smokers age verified as 21 and older, while taking steps to limit the reach of its marketing among unintended audiences. PM USA primarily uses direct mail, email and marbledot com to reach adult smokers. Further, PM USA only engages with smokers 21 and older who have confirmed that they want to receive communications.
This is the foundation for our direct marketing today. Digital engagement has enhanced Marlboro's relationship with adult smokers and further unlocked value from our adult smoker database. For instance, marlboro.com took on the more personal voice of the flavor family of choice for adult smokers visiting the site. PM USA further invested to build mobile functionality and as technology never stops evolving recently rolled out its 3rd generation platform. Today, Marlboro dotcom is among the leading consumer packaged goods mobile sites in the U.
S. According to Com Core. Most recently Marlboro is expanding its pioneering mobile coupon approach. Let's see how easily this works. Within the age restricted marlboro.com website, a mobile user selects a coupon and a participating store.
Then a countdown begins, so the retailer knows the coupon is active. Many mobile experts told us that a single coupon system could not be integrated with our retailers' many point of sale systems, but Marlboro is doing it. Further, this new technology provides useful real time data for PM USA and rewards adult smokers more cost effectively than coupons by mail. Thus far in a relatively small test, adult smokers have redeemed approximately 100,000 mobile coupons and rates of repeat usage are high. You'll have the opportunity to try it out during lunch.
Marlboro also entered the world of mobile apps in 20 14. Thus far, we've introduced 2 temporary test apps that exceeded expectations for both downloads and engagement among age 21 and older. In total, mobile logins have grown more than 1,000 percent since 2011, thanks to digital investments we've made. Further, the sum of our 20 14 equity building efforts resulted in 1 $400,000,000 total interactions, including on pack coupons, mobile, direct mail and more, a 20% increase since 2012. Of course, Marlboro anchors our smokeable product segment.
Our strategy for smokeable products is income, while maintaining modest share momentum on Marlboro and Black and Mild over time. While building equity is critically important, so too is pricing and how we balance income and share results for the long term. In May, PM USA increased Marlboro's list price by $0.07 per pack, bringing its net pack price through May 31 to $6.06 When compared with Marlboro's average pack price in other developed countries, we continue to believe Marlboro has long term pricing flexibility. We use several tools to achieve our pricing objectives. PM USA seeks to maintain competitive Marlboro mainline pricing in the marketplace.
And we monitor Marlboro's price gap versus the lowest price cigarette brand at the national and state level. PM USA also offers special price promotions, allowing the company to manage the mix of full price and promotional product in the marketplace on a state by state basis. As economic conditions have improved, PM USA has moderated these promotions in some areas, resulting in a net price increase of 0.20 dollars per pack on Marlboro Special Blend in 20 14. Additionally, through Additionally, through bonus product, PM USA can deliver value on specific products at the store or geographic level. Through 2014 and the Q1 of 20 15, PM USA maintained relatively constant bonus product rates that were much lower than its key competitor.
Composition of these various tools enables us to grow income and share, respond to economic and competitive dynamics and grow revenues per pack. From 2011 through 2014, net revenues per 1,000 units for smokeable products grew almost 4% on a compounded annual basis, while through the Q1 of 2015, net revenues per 1,000 units grew almost a retail share point over the past 3 years. Pricing flows from a brand's vitality. So we monitor the effectiveness of the investments PM USA makes in Marlboro across various measures of brand leadership performance. Since 2010, we've been measuring the strength of our leading brands using an annual third party review of key brand equity measures by the market research firm TNS.
In a study of thousands of adult smokers, TNS considers the respondents view of the measures Marlboro has strengthened its already high equity scores since 2010. Further adult smoker perceptions of taste and quality each jumped substantially during this time, important measures for Marlboro. And while other competitors have improved their equity scores over this period, no major competitor comes close to Marlboro scores on any of these equity measures. PM USA also measures changes in purchasing behavior using a continuous tracking survey of 1,000 As of March 2015, Marlboro adult smokers were the most brand loyal among key competitive brands. Almost 90% of Marlboro regular brand adult smokers did not purchase an alternate brand in the past week.
Finally, Marlboro share demographics are strong. When looking at adult smoker share trends since the introduction of the architecture, overall Marlboro share has grown and Marlboro share among smokers 21 to 29 and 30 to 39 both exceeded its share among smokers $21,000,000 to $29,000,000 which was in decline prior to 20 12 has changed. In fact Marlboro share among smokers 21 to 29 was significantly larger and over the past few years relatively more stable than key competitive brands. In particular, Marlboro's Green and Black families have helped strengthen its demographics. Over the past 2 years, Marlboro has grown its share of the menthol category and Marlboro Black has grown retail share in each of the past 17 consecutive quarters.
So Marlboro is indeed a rare brand. Its history and its present are defined by innovation and vision. Bold steps forward into new spaces through the Marlboro architecture and mobile engagements have strengthened its position and expanded future opportunity. And through careful stewardship, always focused on the long term, Marlboro continues to define cigarette category leadership. With that, I'll turn the microphone over to Marty and ask Billy and Denise to join us on the stage to take your questions.
Okay. Thank you, Howard. Welcome back everyone. So we're now in our final Q and A session. Who's got a question?
And Matt can you indulge me just one second? I just want to make sure that if someone has a question that they haven't had a chance to ask yet that we give them a moment. Anybody want to raise a question? Hearing none, I go to you.
No takers. So Howard, just to focus on Marlboro a little bit more. Price mix across your portfolio has been very strong. And when we look at the data understanding that sort of syndicated data has limitations, but it seems that you're less focused on promoting some of the more value oriented product styles on the brand. So I mean, I guess, is that something you are actively trying to manage in the portfolio?
And do you think the current consumer environment gives you the opportunity to sort of work people back up to the core red and gold styles?
Yes. I think we are absolutely focused on maximizing profitability. And certainly with the strengthening economy, I think we really have had the opportunity to do that. And I pointed out in my presentation, the fact that price realization on Marlboro overall, which has averaged over the last several years 4 plus percent is now at the higher end of that range at 5 plus last year and this year. And on Marlboro Special Blend, which I think was important to maintaining our franchise in the tougher economic times, we've actually taken significantly more pricing there through promotional adjustments than we have on the total portfolio.
So clearly, the opportunity you raise is something we're focused on and we're having some success with.
Okay. And thanks. Just a follow-up then on Black. So I mean I think of it as enhancing the value proposition for the overall brand in 2 ways. 1, because it does better among ASU-thirty and also because it has more of a value sort of slant to it.
So how do you manage the relevance of Black sort of across those two attributes in an operating environment where there is less focus on pushing the value aspect of those brand styles?
I think when you refer to the promotional allowances that we've been moderating, that moderation has also impacted black. So you've got better price realization on black. However, I think we continue to believe that from a promotional perspective, black still deserves a bit more promotional investment than some of the more mature parts of the Marlboro franchise, because as I indicated in the presentation, it clearly demonstrates that it wants to grow. And I think that we want to encourage that in this environment.
Okay. And just one last to sort of round it off. All the line extensions you showed sort of things within the Black brand family, do you see those being part of the product assortment sort of consistently going forward? Or do some of those have the potential to come and go from shelves going forward?
No. I think all of them have demonstrated that they've got a place in the Marlboro portfolio. One of the things we do within Marlboro is we are very discriminating before we launch a brand. We make sure that that brand think is going to contribute positively to the overall equity of the brand and that it's going to have appeal in the marketplace. And we've been quite pleased with the black offerings that we've put into the market over the last couple of years.
Questions? Judy?
So on smokeless tobacco actually, so the last few years the strategy has really been more about volume growth and growing share or at least stabilizing share in the category. With the broader category slowing a little bit, is that strategy shifting? Is there more opportunity to really grow per unit profitability in that business?
Judy, I think I'd say that it's too soon to say that that strategy is shifting. You are right to point out that after 5 plus percent growth over quite a number of years, the category growth slowed down quite a bit last year. But I think our view is that we ought to give it a couple more quarters to see how that develops. But I think to the extent that the category growth does slow down, I think it'll clear to everybody in this room that we have a cigarette category that declines historically and has quite nice profit growth. So I think to the extent we need to shift from more of a volume growth strategy on smokeless to more of a pricing driven strategy on smokeless.
I think the opportunity certainly exists. I think it's just a bit early given that the slowdown really only happened in kind of the last 3 quarters of last year to shift hard on that yet.
And then secondly just in terms of the e vapor strategy and you've got XL going into the stores and Greensville going into more channels. So what do you want to accomplish in the next 6 to 12 months with those efforts? And is it still more about learning process and trying to understand where the consumers are going? Or do you think that perhaps you've got the right product and it's really more building up by distribution and investing in the brand?
Yes. Let me pick up on that because that's I think exactly what we were talking about before. That's about moving forward with dispatch, but with discipline and always placing the consumer in the middle. And if you're a CPG company and you place the consumer in the middle and you're bringing products out in an emerging category, that's a critical question to answer, which is do you have the products that satisfy needs? You saw the chart that we put up about the variety of needs that they have in the space.
So that's the way to do it. You can go out obviously and promote Heavenly and get some share if you'd like. It may be rented share if you don't have the right package and you want to make sure that you have the total bundle the way you want it. There's always time to ramp up once you know that. So I think that's the way that I would suggest Judy you think about both the green smoke putting it in the retail space.
It's got a great online presence. But of course with Mark 10 XL bigger battery, more vapor, we believe that's what the consumer is asking for. We'll prove that out. If it turns out to be the case, we can always scale from there. I think it's about discipline and dispatch.
You have a certain amount of urgency, but you don't want to waste money while you're doing it. That's how we think about category. Makes sense? Michael?
Just given the margins in Smokeless and how attractive those are, is there any even if the categories had a few slow the related to that, even though it's tiny and it hasn't had traction with the Marlboro brand in the past, would you make another push in something like snus or try to push investment and innovation there or see kind of what that could do for you?
It's a fascinating question. I'll tell you when we're out and we talk to people unlike many
of the people in
the room who don't follow tobacco so closely and we tell them that we're in a category that has 65% operating margins. Those of you who follow other categories have this like wow 65% operating margin. Inevitably someone will ask where is the way that you can expand your margins in Smokeless? And we tell them well, it's a pretty good margin business. And so we're really focused on for us premium brands, premium margin, growing volume.
Howard's already explained the volume dilemma. But the smokeless business has of plans as you might expect about how to move forward with the smokeless business. But from the time we got it, I think Howard has eloquently told the story of how we've turned it around since the acquisition. It's a $1,000,000,000 contributor. It's got 2 really terrific brands.
That's kind of how we're thinking about it. And meanwhile, our smokeable business is going terrifically and we're making a step forward in innovation. I think that's the way to understand the Altria platform going forward. Always room for improvement of course. Other questions?
Bill? And then we'll go Chris. You can hand the mic over to Chris. Thank you.
So the Marlboro brand has done very well trading, the economy seems to be a bit on better footing. It's you can make the case that Marvel will continue to do very well in the near to intermediate term. But there was a thought process during the most recent recession that a 2 brand strategy high low price type of strategy made sense from an income perspective. So I'm curious eventually the economy will probably roll over. So I'm curious, first, do you agree with that premise that a high level strategy does make sense in more challenging economic times?
And if so, is it something that you can adjust to pretty quickly once you start to see a little bit tougher economic data come through?
Yes. Let me take that. I think the way we look at it is not so much as a high low, but as a value equation. The way we look at our brands is what's the value equation to the consumer? So that's a combination.
You've heard us describe this before build up price and product and positioning and so forth and so on. But it wasn't so much a high low strategy. You're talking about special blends for example as it was that what did we know during the recession? What we know was that the Marlboro consumer wanted to be in Marlboro. They wanted to be in the Marlboro franchise.
But when the recession hit, there was so much cost pressure on them and so much economic pressure on them that they could be tempted to try someone else's low priced brand. We thought it was the superior product because of our value equation to offer them value at that time and say you are still welcome in the Marlboro family. We have a place for you. We understand what you're going through. And oh, by the way, it's a terrific product.
And we didn't do it today, but we've shown in previous presentations that when we did that with special blend, it enhanced the equity score of Marlboro overall because the consumer told us you understand me. You understand what I'm going through. I would say the high low strategy is more built in the nature of having an appropriate entry in the discount or the value segment and that's L and M. And we didn't spend a lot of time on L and M today either. But as you know L and M is doing terrifically.
And so that's the way we think about it, which is we're in the premium business. Gee, Billy more than 90% of shipments at PM USA are premium. That's where we make our money. But you can have SKUs in a premium segment like that particularly during a difficult time that says to the consumer, we still want you. I'll tell you, if they leave the franchise and you have to go out and promote them back in, you spend way more money than offering special blind.
Bill, do you want to supplement? Bill is running the company at the time. I'm telling you his story. So, okay. Who else has a question you'd like to ask?
I said Chris and then we'll go to Vivien I guess.
I just want to ask a quick question I guess Howard in relation to what has been maybe the opposite of the recession, but marked improvement in volume right now in the category. I know we can't assume that's going to continue. I understand. But it sure seems like we're heading for less than a 3% to 4% decline in volume this year. And when you couple that with the fact that the Marlboro price versus the lowest priced product in the market is quite narrow, just what that means to you in a year like this?
Maybe it's not a long term change, but can you flex pricing a little bit more, reduce promotion a little bit more? How do you look at that throughout 2015 given the volume improvement?
Go ahead. I think you point out something that's exactly right, which is starting in the back half of last year and certainly in the Q1 of this year, we saw I think really better volume performance on the smokeable segment. And I think as we look at it, it was really driven by 2 things. Finally, a modestly improving economy. And I think combined with gas price declines, putting more money back in the pockets of our consumers, it surely has led to a much stronger volume performance in smokeable.
I think we'll see how the year unfolds, but clearly it was a good start to the year. And then I think at the same time, if you look at really all the fundamentals that we track in the smokeable segment, they all look quite strong. We've got strong share performance on Marlboro. We've got frankly strong share performance on L and M. Price realization is at the high end of the range.
And we've got good volume dynamics. So I think as we look at the smokeable category, it's in quite a strong place at this stage.
That's why we keep talking about levers over the long term. When Billy took us through the diverse platform, businesses move at different rates at various times Chris, but the way we set up the system, it allows us to be pretty consistent depending on what investments we're making where or what the industry dynamics are to allow us to be so consistent. So it's a good story and we'll see about the volume. I guess we're going to go to Vivien, right?
Thank you. Marty, when we were at CAGNY, I think you laid out pretty clearly that you were taking a very long term and deliberate approach as you looked at the e vapor opportunity, which seems perfectly reasonable given that the category remains incredibly challenged. But if we think ahead to the next 12 to 18 months, what does the picture of success look like for you guys with the combined efforts behind Greensmoke and Merck Tim?
Yes. I think it's a couple of things. One is our continuing efforts on the product development side. I've already just described those. I won't repeat those.
But we've got a lot of work underway there. I think there's some sorting out to do about understanding what is attracting vapers to the open category? What are the attributes of open vaping that can be discerned by us and placed into product development and products that will help satisfy those consumers as well? That's a complicated regulatory question around open systems as you know. I think we've built Craig did a nice job I think of showing how we built distribution in 130,000 stores.
We want to make sure that we continue to work hard with our trade partners to make sure that our offerings get good awareness and good visibility. And over time, we're going to be developing more robust marketing and advertising tools when we think we have the bundle that it justifies that investment. We're making very good progress. We've made very good progress. But I would say if you looked on 12, 18, 24 months then I would say the last thing is deeming.
So we're going to get a deeming regulation if Brother Dillard is correct and he usually is. So we'll have to see what that says and that's going to inform our judgment significantly I think about several aspects about vapor. So there's plenty of work to do in vapor. I do think it's worth reminding people though that it's a very long term play. It's a very long term play.
The chart that Howard showed us about what Marlboro share was back in 1974, 76, 1980 is a good reminder that if you know who you are and what you offer and you play long, look at the benefits that it pays over time. That's how we think about the business. Nick? Are you third question to Denise? I was almost offered it to you.
So just I'm curious on a scale of 1 to 10 with all the digital engagement, how where would you rank yourself 1 being the worst, 10 being the best on promotional efficiency?
I don't know. Billy or Howard, you want to I don't know that you need to put a number on it, but you can try to be responsive to Nick.
Yes, Nick. I think from a precision standpoint, right, we have the special price promotions we can do down at the state level. You heard Howard talk about promotional packs. That's the ones with the sleeve. And we can do that down to the store ZIP code level.
And then with the couponing and mobile couponing will make it even more efficient, allows you to do it down to the individual level. So I'm not going to place it on the scale of 1 to 10, but know that we have very precise tools to be able to deliver value where it's necessary.
That sounds like a 7 to me.
We had one other analyst who used to paraphrase things we said and I always resisted the paraphrasing, so I'll do it here too. The other thing I might your question prompts me to say because some people don't know this, but I was explaining this to some investors that we read the business every Tuesday morning. Our executive team gets together and we're able actually to read the businesses on a weekly consumer information and market research group. Naturally, we've been at this quite a long time. We have pretty robust tools.
So things don't get too far out of wobbly before we see what's going on and we're able to adjust really much faster than it used to be true just 10 years ago. The data collection is better and the tools are better. Yes, sir.
Just coming back to the question of e vapor developments and your products. When you think about the consumer of those and how that maybe has changed over
the last 5 years, who do
you see as the consumer of those products? And how does that match up with your combustible consumer? And are those an overlap between the consumers you're targeting? Obviously, a lot of them are sourced from tobacco. But is it are they kind of discrete consumer groups as they age and
as they develop over time? I wouldn't say that's true so far. What we do know about the people who try vapor products is that, of course, they are overwhelmingly smokers. I mean, the studies we've seen say that 98% of the people who are trying vapor or higher are smokers. Why?
Because even though people like to smoke there are things about the experience that are not solved for. It's a product that doesn't have puff on demand for example. Vapor has puff on demand. It's a lid end product that has ash and it has risks with respect to that. The vapor product doesn't have that.
We know that people are concerned about the health risks of smoking and there is a belief yet to be proved out. But that because it doesn't combust that this is likely to be a less hazardous product proven over time. We know that all of those things tend to be pretty universally held. If you talk to smokers, I think smokers would tell you if you could solve for that that would improve my product experience. Is a wide interest among both male and female smokers and there is a wide interest among almost all of the demographic groups.
So it looks to be pretty broad right now. Bonnie?
Thanks. There's a lot of momentum right now on Marlboro. So if the competitive landscape changes, I'd like to get a sense from you how disappointed you would be if Marlboro share stays flat yet pricing remains pretty solid or strong? And then does your long term model work in that scenario in your view? Yes.
I think that it's tempting I
think every time there's a change to think that particularly good job in telling the Marlboro story about we've managed through lots and lots and lots of change including when people say that it couldn't be done, master settlement agreement and FDA and so forth and so on. And golly, you just see that we're able to move the business forward responsibly, but profitably at the same time. I think that if you look at the brand portfolio comparisons and I have seen some commentary about new brand portfolios and their relative strength, it is very I don't mean for this to sound arrogant or prideful, I really don't. But it's very hard for me to understand how anybody can think you have a superior brand portfolio if you don't have Marlboro in it. It has 44 share points.
It has the highest equity scores. It has the highest shares in every state. It commands price premiums and so forth and so on. So again that's not to sound arrogant. It's just a brand that's been built over time.
So we are fully confident about the ability of Marlboro to compete with brand portfolio. I've also learned that when someone starts to question by if and what would you do, that's a good area to steer clear of. So this will play it will play itself out over time. But honestly, mentioned this a couple of times already this morning. The fact that there are there's a new competitive structure didn't come as a surprise.
We've had a long time to anticipate that that possibility might occur. And I would tell you Cliff and the gang and Howard and the gang, we're fully ready. Looks like last chance time. Any? All righty.
So with that, that concludes our second Q and A. They're leaving the stage for a reason which will become clear in a moment. So thank you to Billy, Denise and Howard. So I want to conclude by saying that I hope we've convinced you that Altria is as strong today as ever. It's a position we've achieved on the strength of our people, our company's terrific brands and our long term vision.
I want to thank you all for taking the time to be with us today and for your interest in Altria.