Good day, and welcome to the Altria Group 2014 Third Quarter Earnings Conference Call. Today's call is scheduled to last approximately 1 hour, including remarks by Altria's management and a question and answer session. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Call.
Representatives of the investment community and media on the call will be able to ask questions following the conclusion of the prepared remarks. I would now like to turn the call over to Ms. Sarah Nokness, Vice President, Investor Relations for Altria Client Services. Please go ahead, ma'am.
Thank you, Laurie. Good morning and thank you for joining us. We're here this morning with Marty Barrington, Altria's Chairman and CEO and Howard Willard, Altria's CFO, to talk about Altria's 2014 business results for the Q3 and 1st 9 months. During our call today, unless otherwise stated, we're comparing results to the same period in 2013. Earlier today, we issued a press release regarding our Q3 and 1st 9 months results.
For a detailed review of Altria's business results, please review the earnings release on our website at altria.com. Our remarks contain forward looking and cautionary statements and projections of future results. Please review the forward looking and cautionary statements section at the end of today's earnings release for various factors that could cause actual results to differ materially from projections. Future dividend payments and timing of share repurchases remain subject to the discretion of Altria's Board. Altria reports its financial results in accordance with U.
S. Generally Accepted Accounting Principles. Today's call will contain various operating results on both a reported and adjusted basis, which excludes items that affect the comparability of reported results. Descriptions of these measures and reconciliations are included in today's earnings release, which is available on website. Now I'll turn the call over to Marty.
Thanks, Sarah. Good morning, everyone, and thanks for joining our call. Our companies are delivering well against their strategies and our business results are on track. In the 1st 9 months of 2014 Altria delivered solid adjusted diluted EPS growth of 5.5%. During the Q3, the Board increased our dividend by 8.3% and authorized a new $1,000,000,000 share repurchase program.
And earlier this morning, we reaffirmed our adjusted EPS guidance of 7% to 9% for the full year 2014. Here are the highlights for the Q3 and the 9 months of 2014. The Smokeable Products segment performance this year has been outstanding. We delivered strong adjusted operating companies income growth of 9% in the 3rd quarter and 6.3% year to date driven by solid pricing. Adjusted operating company's income margins also improved both in the quarter and the 1st 9 months.
Marlboro continues to show modest share momentum as it gained 1 tenth of a share point in both the Q3 year to date in line with our strategy in the Smokable segment. It's apparent that the investments made in the Marlboro architecture are paying dividends and we're excited about the brand's strong equity and momentum. In Smokeless, USSTC continues its strategy to grow income by growing volume at or ahead of the category and maintaining modest share momentum on Copenhagen and Skol combined. In the 1st 9 months, the Smokeless segment delivered 4.4 percent adjusted OCI growth in a competitive environment with lower industry volume growth. USSTC strengthened its leadership position behind combined performance of Copenhagen and Skol.
For the Q3 of 2014, these two premium brands achieved their highest combined share since the acquisition of UST at 51.3 share points. Turning to innovative tobacco products. Newmark continued its national expansion of Mark 10 e vapor products and is developing a robust product pipeline. Mark 10 achieved distribution in nearly 80,000 retail stores. As of September 30, 2014, Mark10 continued to be ranked in the top 3 e vapor brands in the Western U.
S. Based on retail market share. Newmark plans to further expand Mark10 in the eastern half of the U. S. And complete its national expansion in the 4th quarter.
Our diverse business model and strong balance sheet support our strong and growing dividend and our ability to enhance shareholder returns through share repurchases. In August 2014 Altria's Board increased the regular quarterly dividend by 8.3% to $0.52 per share. Altria paid shareholders almost $1,000,000,000 in dividends in the quarter and nearly $3,000,000,000 in the 1st 9 months. We remain focused on our target dividend payout ratio of 80% of adjusted diluted EPS. And we expect to continue to raise the dividend in line with adjusted diluted EPS growth.
In the Q3 Altria completed the prior $1,000,000,000 share repurchase program. In July 2014, the Board authorized a new $1,000,000,000 program, which Altria expects to complete by the end of 2015. During the Q3 of 2014 Altria repurchased approximately 6,400,000 shares of its common stock at an average price of $42.87 for a total cost of approximately $275,000,000 As of the end of the Q3 of 2014, Altria had approximately $778,000,000 remaining in the current $1,000,000,000 share repurchase program. In summary, we're very pleased with our year to date business performance and strong execution. Our core tobacco businesses are performing well and we are making disciplined investments in innovation for the future.
Together, we are managing our diverse business model and strong balance sheet with the objective of delivering consistent earnings growth and shareholder returns year after year. Howard will now provide additional details on the quarter and for the 1st 9 months.
Thank you, Marty. Good morning, everyone. Altria grew 3rd quarter adjusted diluted EPS by 6.2% and today we reaffirmed guidance for both adjusted and reported diluted EPS. Altria expects to deliver adjusted diluted EPS growth of 7% to 9% in a range of $2.54 to $2.59 off an adjusted base of $2.38 per share in 2013. We expect stronger adjusted diluted EPS growth in the 4th quarter driven by several factors, including a significantly lower 4th quarter effective tax rate on operations resulting from Altria's 2013 debt tender offer and lower 4th quarter costs in the Smokeable Products segment due to the end of the federal tobacco quota buyout payments.
Turning to the Smokeable Products segment. We delivered strong adjusted O key and adjusted O key margin growth in the 3rd quarter and 1st 9 months of 2014, primarily through higher pricing. Adjusted Okey margins expanded 2 percentage points in the 1st 9 months of 2014. PM USA grew Marlboro's and its total cigarette category retail share in the 3rd quarter 9 months year to date. After adjusting for trade inventory fluctuation and other factors, PM USA estimates that its 3rd quarter and 1st 9 months cigarette shipment volume declined approximately 3% and 3 point 5%, respectively and that total industry volumes declined approximately 3.5% and 4% respectively.
The 2014 year to date industry cigarette decline of 4% continues to be in the range of the decline rate we've seen in the last few years. Middleton's reported cigar shipment volume increased 8.4% for the 3rd quarter and 6.8% year to date, driven by Black and Mild's strong performance in the Tipped Cigars segment, including Black and Mild Jazz. In the Smokeless Products segment, adjusted Oke grew 0.7% in the 3rd quarter and 4.4 percent year to date. Adjusted operating margins grew 3.1 percentage points in the 3rd quarter to 64.9 percent and 2.4 percentage points to 64.6 percent year to date. After adjusting for calendar differences and trade inventory changes, USSTC and PM USA estimate that their combined domestic smokeless product shipment volume grew approximately 2.5 percent in the 3rd quarter and 3% in the 1st 9 months of 2014.
USSTC and PM USA estimate that the smokeless products category volume grew approximately 3% over the last 12 months, reflecting slower industry volume growth in the past two quarters. Copenhagen and Skol delivered 3rd quarter retail share of 51.3 share points, up 0.4 from last year, driven by Copenhagen's retail share growth of 1.4 share points. USSTC is investing both in Skol's equity and to narrow price gaps on Skol Classic. These investments are designed to enhance the long term combined performance of Copenhagen and Skol. The wine segment continued to deliver solid results.
Saint Michel grew OCI by 10.7% for the 3rd quarter and 11% for the 1st 9 months. Shipments increased 4.2% in the quarter and 2.5% year to date. That wraps up our operating results. Marty and I will now take your questions. While the calls are being compiled, let me cover a few housekeeping items.
As a reminder, comparisons when made are against the Q3 of down 1 percentage point. Marlboro's net pack price was $5.98 up $0.12 The lowest effective price cigarette was $4.51 up $0.15 dollars The cigarette discount segment's retail share was 24.9%, down from 25.3%. Wholesale inventory changes are one factor PM USA uses to estimate adjusted PM USA and industry volumes. PM USA estimates that for 2014 wholesale inventories were approximately 2,300,000,000 units at the end of the 3rd quarter and 2,100,000,000 units at the end of the second quarter. Last year, PM USA's wholesale inventories were estimated to be approximately 2,500,000,000 units at the end of the third quarter and 2,200,000,000 units at the end of the second quarter.
The estimated weighted average cigarette state excise tax was $1.48 per pack, up 0 point 0 $1 Copenhagen's price gap versus the leading discount brand was 30%, down 6 percentage points. Copenhagen's retail price was $4.15 up 0 point 0 $8 The price of the leading discount brand was $3.19 up $0.20 In the 3rd quarter, CapEx was $56,000,000 and ongoing depreciation and amortization was $49,000,000 Operator, do we have any questions?
Thank you.
Our first question comes from the line of Judy Hong of Goldman Sachs. Thank you. Good morning, everyone.
Good morning, Judy.
So Marty, I guess you had a very strong cigarette profitability or the smokeless division had very strong profitability with very strong pricing, margin expansion. Just curious if you can talk about the competitive landscape and the ability to sustain this kind of very profitable growth in this segment and especially as you get into the Q4 where you obviously will have another favorable tailwind in terms of your cost standpoint?
Well, thanks for your question and thanks for your comment. There was very strong smokeable segment. When you look at the numbers that we've reported this morning, you see income growth 9% and margin expansion, very good pricing realization, very good steady momentum on Marlboro in line with our strategy. And then of course the volume declines have moderated below what the industry estimate is from us. So that's a very strong performance.
I think what it represents Judy is the coming together of some of the work that we've done. The Marlboro architecture is clearly paying back dividends. Our strategy is to maximize income. That's how we're trying to execute our plan this year and that's what we should expect going forward. They change a little bit over time quarter to quarter.
But over time that's the strategy and we're trying to be consistent in that regard.
Okay. And then, Howard any help you can give us just in terms of just really dissecting a bit more on the All Other segment performance from a sales and profitability perspective? Understand there's a lot of noise around the Financial Services business, but you're also making investments on the Mark 10. So just curious how we should think about that business? And then are we done in terms of all the investments related to the Mark 10 national launch?
Does this step up again in the Q4 or is this sort of the peak investment quarter as we think about that business?
Yes. I think as we've indicated previously, we're not going to break down the detail in that other segment any more than is indicated in the release. But as we've said since the beginning of the year, our results this year are impacted by the fact that we are both making investments in Newmark throughout the year. And at the same time, the comparisons of our PMCC operating company's income are affected by lower asset sales this year than last year and both of those create a negative year over year comparison in the other segment.
Okay. But sequentially, is there anything you can talk about just in terms of how much the national expansion of the Newmark would have helped the revenue line? Just to get a sense of if we're actually seeing progression on the Mark 10 sales side, I understand there's a lot of investment that's going on. But just trying to sort of reconcile with what we're seeing from a Nielsen market share data perspective and sizing the Mark 10 number from that data to kind of what you're actually reporting from a shipment perspective?
Yes. I'm not going to provide any further detail on a quarterly comparison basis.
Okay. All right. And then just my last question Marty, just the smokeless tobacco segment, I mean clearly you had the one less shipping day that impacted the reported shipments. The category seems a little bit slower though if you adjust for the shipment days. So just can you talk about what's happening from a category perspective?
And obviously, you've had some investments you're making to tweak some of the pricing around Skol. How do you think that that's going in terms of the context of your market share performance?
Sure. Let me talk about those in turn. As you know, we try to estimate the category growth in smokeless on a 12 month trailing basis. And using that metric over the last several years, I guess I would say it's been in the range of about 5%. And then you see that our estimate today is about 3% because it slowed down in the last two quarters which has that effect.
We're analyzing what's going on with the growth rate right now carefully. It goes I think without saying that as categories get bigger the growth gets harder as they get bigger. And I think everyone also recognizes that tobacco consumers have choices today as they choose their products. So we're looking at that carefully. I think it's important probably to say what we've said with respect to that growth rate, what we say with respect to the cigarette decline rate which is it's really best measured over time.
And so we have 2 quarters of data here which are taking us in this direction, but we'll look at it carefully over time. With respect to Skol, I always start out by reminding folks that while Skol has its challenges, it is a top 3 brand with 20 share points in a segment for us that has 65% operating margins. So it's a big brand with good profitability. Its challenge though is that it competes both with its competition, but it competes with Copenhagen, which is the iconic brand in the category of ours that continues to grow very strongly. So we're trying to work on that.
As you know, this takes place over time. Howard's already made reference to the fact that we've worked on its equity positioning. We have a new equity campaign. You've seen the ads in print I'm sure. We have very good new equity based promotions for Skol in the marketplace that have been very well received.
And then with respect to Skol Classic, which remember is at the premium price point, we're trying to get that price point adjusted for price cap management purposes so that it can compete more effectively against this principal competitor. And we've been able to do that. We do that tactically by state because it makes a difference in terms of the excise tax rates. So it takes place over time, but we are encouraged by where we're going with Skol. We manage our premium brands for the long term and we are patient.
Okay. Thank you.
Judy, thanks for calling
Your next question comes from the line of Vivien Azer of Cowen and Company. Good morning.
Hi, Vivien.
So Marty, you called out the success of the Marlboro architecture and that's clearly evident in the continued momentum that you have on the Marlboro brand. I know you guys don't like to talk about individual product lines within the Marlboro family, but maybe could you talk about Marlboro Black in totality where you've called that out as a good share gainer over time in previous discussions?
Yes. I do think that the Marlboro architecture is best understood in context of the 4 families. But it is true that the addition of the
Marlboro Black flavor family has been a terrific
boost for Marlboro. That brand continues to perform very well. I think we're now in our 15th consecutive quarter of growth for that. And it's highly relevant to adult competitive smokers. It's a terrific product in a great pack.
But I do think that apart from black, the best understanding of the Marlboro architecture as we've discussed previously as you know is to understand that it has opened up the marketing freedom to speak to people who are in the franchise and adult competitive smokers in different ways and to market to them in different ways. And I think in totality that's why you see Marlboro performing as well as it has done. That and many other things by the way Marlboro.com has been improved. How we go to market has improved. So I think the team's done a really great job with Marlboro.
That's terrific. Thank you. In terms of the cigarette industry volume declines and I heard you loud and clear on the work that you're doing on MST and I'm sure there's some cigarette analysis involved there as you think about kind of the cross elasticities of demand. But I know you guys also focus a lot on the health of the consumer. And can you give us just an update on how you're seeing your consumer trending in particular in light of lower gas prices?
Can you talk about the economic conditions?
Yes, please.
Yes. We had in our 2014 plan that while the U. S. Economy was improving that we assumed that it was not going to show up quite as strongly for our adult tobacco consumers. And I think that has proven to be the case throughout the year.
Unemployment rates obviously are down, but they're not down where they should be. Underemployment is down, but it's not down to where it should be. And on those two measures in particular are adult tobacco consumers over index. There's pretty tepid year over year wage gains. But then you do see these shoots of other good economic activity.
Housing starts are up. Consumer confidence some months are up. And then we have seen lower gas prices although that's less of a factor in our view. So I think for 2014 while we're encouraged and we hope that it gets traction our continuing assumption is that our adult tobacco consumer is going to be under some pressure.
That's very helpful. And Howard just one last one for you. As we think about the Q4 anything that we should kind of keep in mind in terms of SAB because the SAB number came in higher than I had been anticipating given I guess the casino sale?
Yes. I mean I think that's the only thing I would point out is that the Q3 was impacted by an extra gain related to the sale of their casino business in Africa. And I think that's the only thing I would point out from a SABMiller perspective.
Terrific. Thank you very much.
Thanks for calling in.
The next question comes from the line of Michael Lavery of CLSA.
Good morning.
Good morning, Michael.
When you give your market share updates, is that on the adjusted category numbers that you mentioned or on just the unadjusted sort of pure number?
Yes. I mean, I think our market share comes from our syndicated panel that essentially measures market share at retail. So I think there's obviously a relationship between shipments and retail, but it really comes out of a different system that we've invested a fair amount in to get an accurate read of the mainstream retail outlets.
Okay. Yes, that's helpful. And do you have a sense of what I guess if you cited the adjusted shipment category number, do you know what the retail number for the category is that you look at for the Q3? Just for context of what that share gain is against?
Yes. I don't think we really look at it that way. I mean, if you think about it, when we look at our shipments, we're shipping out to wholesale. And obviously, when we read retail market share, there's a bit of space between our shipments to wholesale and what happens at retail. So that is why we provide both the actual and adjusted shipment numbers to give you perspective on that as well as then going further downstream and providing you with retail share figures that allow you to understand how we're doing in the overall retail market.
Okay. That's helpful. And then just looking back a little bit actually just for context, when you look at your 2,009 market share loss of about a percentage point or slightly more, do you know do you have an ability to estimate how much of that might have been related to your integration of UST as sort of a disruption? Or was it in your view more related to economic pressures or trading down or other things like that?
I'll be honest with you. I'm a bit uncomfortable analyzing the 2,009 numbers at this stage. But certainly if you want to have some conversation about 2,009, you can speak to the IR group.
Well or I guess maybe let me put it a different way. You have experience with integrations of your own that obviously are a major effort. How much of a distraction do you feel like that could have been in that particular timeframe, I guess, or just in terms of focus or managing through that?
Yes. I mean, I think our experience in the UST integration was that given the size and professionalism of our sales force, certainly there was some incremental work placed on the sales force when we took over UST. But remembering back to that time, I think it went pretty smoothly. So I don't have a recollection that there were significant disruptions in the cigarette category related to that.
Okay. No, that's helpful context. And then just last question on PMCC. Obviously, the finance assets is down pretty dramatically from where it would have been even just a couple of years ago. Is it still kind of your approach to do opportunistic sales?
Or is there some degree of plateauing that the sales you think make the most sense to make have probably been done? Or what's kind of the run rate looking ahead? This quarter, the asset balance there didn't change very much from 2Q. Is it leveled off? Or what should we expect looking ahead in that segment there?
Yes. I mean, I think, as you know, we're trying to wind that business down completely. And so essentially looking at the cash flow impact and the profit impact of selling assets in any given year, Our bias is towards selling them if we can sell them for a reasonable financial outcome. But we've been in that mode for quite some time. So I would say that we are probably reaching a period where we're going to see a slowdown in some of those asset sales.
Certainly, that is what is driving the negative year over year comparison at PMCC this year compared to last year was we had very good asset sales last year. Now that said, in the leasing business, there is a sweet spot at which it becomes more favorable to sell assets in the life of the lease. And so in any given year, I think we do expect to have some asset sales that could potentially occur as we get closer to the end of some of those leases. So we're managing through that. But I think the most important point was the one you made, which was the net finance receivable on that business has come down tremendously.
We're now down below $2,000,000,000 and so we're well on our way to completely exiting that business.
That's helpful. Thank you very much.
Thanks for calling in, Michael.
Your next question comes from the line of Bonnie Herzog of Wells Fargo. Good morning.
Hi, Bonnie.
I have a follow on question from an earlier one asked a little differently. In terms of how you're balancing your business in the short and long term, Marty, as you mentioned, you're generating strong volume and pricing and then your smokable margins have expanded quite a bit. So if you back out your other segment, which includes Mark 10, you would have reported double digit EPS growth in the quarter. So I guess I'm trying to understand why you believe the e cig or vapor category, 1, the level of spending right now and how big this opportunity can truly be in the long term and essentially how you're balancing this versus rewarding shareholders right now?
Yes. Good question. Let me try to give you some context about how we think of that at the strategic level. And I think you and I have discussed this previously, which is we've tried to maximize our core business while we innovate for our future. And we have tremendous core businesses.
We have the leading positions. We have the leading brands. We have high margins. They generate enormous amounts of cash most of which we give back to the shareholders through the dividend. Periodic share repurchase, we keep those businesses relevant and growing by investing them appropriately.
I think that's how to think about the core. However, we also know that consumers change and businesses change and markets change. So you always have to be looking ahead about what you need to be doing today to be ready for tomorrow. That's how we think about innovation in e vapor and other categories for example heat not burn, which as you know we have the license from for PMI. As consumers evolve, we want to have products for them.
We want them to be premium. We want them to be branded. And of course, we aspire to have the good margins that we do in our tobacco businesses today. The way to do that in our view is with discipline. You learn your way in.
You do it wisely and you do it over time. And I think you can see that's the approach we're trying to take in e vapor. So I hope that context may be helpful about how we think about that.
Very much. I appreciate that. And then speaking of heat not burn, the IQOS platform is on the process? And have you filed for substantially equivalent time frame? Where you're at with this in terms of eventually rolling that out here in the U.
S? Yes. I'd refer you to the comments that PMI has made about this for further context. But obviously, you know that the deal is we struck an arrangement with PMI where we will sell them our e vapor products for sale through their distribution network internationally and we continue to work with them on that and we're excited about that. And then on Heat Not Burn, we're cooperating with PMI as it goes through the process at the Food and Drug Administration in pursuit of a reduced harm claim.
You might expect that we would be working on ideas about how to commercialize that project when it becomes successful. These are longer term projects, but our strategy is to offer consumers alternatives for those who want them. And we're very excited to be working with BMI on that. I think it's I think they would say and I would certainly say it's going quite well.
Okay. And then I just have one final quick question on MARC 10 and the consumer behavior. How this has been? What are you seeing in terms of repeat purchases? We've seen maybe some share losses on a sequential basis in Nielsen.
So maybe you could that. And then I'd be curious to hear your robust product pipeline behind Mark. And you mentioned that. So how soon would you be able to roll out your next generation product?
Sure. So I'll start I guess by talking about shares and it's just a word of caution about in the e vapor category. I think if you look back over the last 3 years, you've had at least 5 brands at one time or another have claimed share leadership. And what in fact you see is a lot of dynamism among the shares as consumers continue to try products. You've heard us speak about this before.
Consumers are continuing to shop for the product that they want in the e vapor space. Brands have sort of come and gone and up and down and it continues to evolve. Our long term aspiration our long term aspiration is leadership in the category, which means we will offer consumers in this space superior products. We will build brand equity and we'll grow share over time. With respect to Mark 10, we're very happy with the start that we have.
We believe we have a very good product. It's differentiated by its technology. But there's no denying that consumers are continuing to shop for our products and others. We'll continue to roll products out as we have them. I'm obviously not going to tip my hand about what's coming, but I can tell you that Newmark has a lot of great ideas and we're working very hard on a whole range of products to offer to consumers in this space.
Makes sense. Thank you so much Marty.
Thanks for calling by.
Our next question comes from the line of Owen Bennett of Nomura.
Good morning, guys. Hi, Owen.
Thanks for taking my question. I was just hoping for a bit more commentary on price mix in smokeable. And I guess I'm really just playing devil's advocate on this one. Although strong in the quarter, it was below that of one of your competitors. I was just wondering if you were seeing any ongoing specific mix pressures especially as you continue to see strong share momentum with L and M?
Thank you.
Okay. Thanks for your question. I wouldn't characterize small table performance for the quarter and certainly for the year to date, we've got income up 9 percent and margin growth and strong pricing realization and the volumes are below the estimated industry decline. Again, we look at this over time. But when you look at the year to date for PM USA in the smokeable segment, it's nothing short of an outstanding performance and we're very happy with it.
Okay. Thank you.
Thanks for falling in.
Our next question comes from the line of Chris Growe of Stifel.
Hi, good morning.
Hi, Chris.
Hi. Just two quick questions if I could. I wanted to ask, you gave some data I believe it was at the back to school conference about the vapor category and you have a better tracking mechanism for that. So I'm just curious in relation to the cigarette category, have you seen any slowdown in vapor? Is that in part what's driving better volumes in cigarettes?
Or do you have some other explanation for what has been a better category growth condition here in the quarter?
Again, Christy, if you look at it over time, we've got a model that we use that's a secular decline rate of about 2% to 3%. And then you've got of course your pricing elasticities. And our secular model includes adult consumers trying other kinds of products including vapor. So we don't see anything remarkable there to call out.
Okay. And then just one other question on Mark 10 and the way that product has gone at least where I've seen it, it's within your cigarette shelf set. Is that what you expect for new products going forward? And would you be careful to talk about new products? But are you trying to fit those within your existing shelf set?
Are you looking for space on the back counter or on the counter at the convenience store? Just curious how we should think about new products as they reach the shelf.
Yes. That's an excellent question. I think that the merchandising of innovative products into the traditional categories is going to have to be resolved over time. I think clearly in the short run what you're trying to do is you're trying to get awareness of your product to the adult consumer at retail. And because PM USA has space that it could provide a new mark on appropriate terms.
That's the approach we took. It will depend I suppose on how large the categories get to be. What we would expect is for retailers to adjust their merchandising approach and their scale with the size of the category. And we're working closely with retailers to try to help them in thinking through that. I think that's the best way to think about it.
Okay. Thank you for the time.
Thanks for calling.
Your next question comes from the line of Matthew Granger of Morgan Stanley.
Hi. Good morning, everyone.
Hi, Matt.
Hi. So, a couple of questions. Marty, first just to revisit Vivien's earlier question about the economic health of the smoker. You echoed what others in the industry have talked about this quarter with cigarette volumes with the decline in cigarette volumes moderating from down 4%, 4.5% during the first half to down only perhaps 3.5% or a bit less in the Q3. And you commented that you have not seen a material improvement in economic conditions or behavior among core smokers.
So I'm just curious if it's not macro driven what other factors would have played the most meaningful
decline rate that we're estimating for the quarter, it's spot in the middle of the range that we've been estimating for some time now. So I don't think it represents a deviation from curve as much as it represents a data point best understood over time. So I guess that's the first thing I'd say. The second thing I'd say to be clear about the macro environment is that it simply is uneven. It clearly is improving at a macro level for the reasons I called out.
It's just that it's uneven over time and it also appears to be somewhat uneven in its distribution. And so the adult tobacco consumer is not participating in the recovery to the same degree in many instances as is the general public. So we'll have to see going forward. But I think that's honestly the answer which is we're trying to be mindful of what the macro environment is and in particular for our consumer set.
Okay. And just to be clear, you wouldn't necessarily attribute changes in cigarette volumes to sequential changes through the year in cross category dynamics or retailer working capital dynamics? Anything along those lines?
No, I don't think we would.
Okay. Thanks. And Howard just on SABMiller, last quarter you addressed some of the speculation there and how you might evaluate a cash transaction from the perspective of shareholders. Just to take the other side of that hypothetical, I'm just curious how you would assess the potential impact or attractiveness of taking on a less than 20% stake in another publicly traded company in an equity transaction? And whether you felt in that circumstance it might be possible to justify the continuation of equity method accounting?
Yes. I think the answer to a detailed scenario is probably best answered in the moment when the details are available. I think our view though has been that we continue to view the SABMiller asset as an attractive asset that has contributed strongly to our earnings growth into cash flow through dividends. And at this point, our view hasn't changed, which is we think it's in the best interest of our shareholders to retain that asset. But as always, we're doing a lot of analysis.
We're doing a lot of future scenario planning to make sure we're prepared for whatever the future brings. And I think we're open minded, but we continue to view the asset as a positive contributor to the business.
Okay. Understood. I had to give it a shot. And you answered it last quarter. And then lastly, just on the interest expense.
I believe you I think you exercised a make whole provision on one of your outstanding bonds during the quarter. Should we expect to see some sequential favorability on interest expense? And do you see additional refinancing opportunities going forward over the next 12 6 to 12 months?
Yes. We did call some bonds. It was about $300,000,000 worth of UST debt. It was actually the only debt we had that wasn't at the parent level. And so we thought to clean that up not only helped our maturity towers, but had some compliance and some operational benefits.
It will have some positive impact on interest in this quarter. It actually was the impact will really be felt in the 4th quarter and certainly will have some impact next year. But the scale of that was actually quite small compared to some of the activity we've done in the past. And I think as indicated by this transaction, we're always looking at how to best manage our debt load. And I think we're opportunistic going forward.
But I have to say that I think the significant activity that's occurred over the last couple of years is probably going to represent the biggest opportunity there.
Okay. Thanks everyone.
Matt, I'm glad you joined us. Thank you.
Your next question comes from the line of Steve Marascia of Capital Securities.
Good morning, everyone.
Good morning.
Quick question. Can you guys sort of outline your plans for expanding into the Eastern U. S? And what do you foresee as being the total amount of retail outlets you might like to be in as you complete the or as you move into the Eastern area of the United
States? Sure. We are expanding into the Eastern United States. That's been the plan. We're going to be national.
We hope to have that completed by the Q4. I'm sure that we can you with an estimate of the total stores. I just don't have that in front of me. If you'd like, I'll
have someone give it to you.
Okay. Thank you very much.
Thanks for calling in.
Thank you. At this time, I'd like to turn the call back over to Ms. Sarah Nokomis for closing remarks.
Thank you everyone for joining our call this morning. If you have any follow-up questions, please contact us at Investor Relations.
Thank you. This does conclude today's conference call.