Good day, welcome to the Altria Group 2013 second quarter earnings conference call. Today's call is scheduled to last about one hour, including remarks by Altria's management and a question and answer session. In order to ask a question, please press star followed by the number one on your touch-tone phone at any time. Representatives of the investment community and media on the call will be able to ask questions following the conclusion of the prepared remarks. I would now like to turn the call over to Mr. Michael Neese, Director, Investor Relations for Altria Client Services. Please go ahead, sir.
Thank you, Jackie. Good morning, thank you for joining our call. I'm joined this morning by Marty Barrington, Altria's Chairman and CEO, and Howard Willard, Altria's Chief Financial Officer. This morning, we will only be discussing Altria's 2013 business results for the second quarter and first six months and will not be discussing the status of tobacco litigation. Our remarks contain forward-looking and cautionary statements and projections of future results, and I direct your attention to the forward-looking and cautionary statements section at the end of our earnings release for the review of the various factors that could cause actual results to differ materially from projections. For a detailed review of Altria's business results, please review the earnings release that is available on our website at altria.com. Altria reports its financial results in accordance with U.S. GAAP.
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 and are available on our website. In addition, comparisons discussed in this conference call are to the same prior year period, unless otherwise stated. Now I'll turn the call over to Marty.
Thanks, Mike, and good morning, everyone. Altria delivered solid financial results for the second quarter and first six months of 2013. The company's diverse business model delivered adjusted diluted earnings per share growth of 5.1% for the second quarter and 7.4% for the first half of the year. All three of our reportable segments delivered adjusted operating companies income and margin growth in the second quarter and first half. This growth was complemented by lower interest and other debt expense and fewer shares outstanding for both periods. Lower earnings from Altria's equity investment in SABMiller negatively impacted Altria's second quarter adjusted diluted EPS while, on a first-half basis, higher earnings from the investment had a positive impact. In the smokable product segment, higher pricing drove adjusted operating companies income growth for both the second quarter and first half. Marlboro continued to perform well.
Its retail share was unchanged for the second quarter and up one-tenth of a share point for the first half versus its strong retail share performance last year. PM USA continues to support Marlboro's brand architecture with brand building initiatives. In July 2013, PM USA expanded distribution of Marlboro NXT to an additional 23 states, primarily in the Eastern U.S. PM USA gained retail share for the second quarter behind share gains for L&M and Discount. For the first half, PM USA grew retail share due to gains from both L&M and Marlboro. Comparisons of reported cigarette shipment volume for the second quarter and first half were impacted by trade inventory changes. After adjusting for changes in trade inventories, PM USA estimates that its second quarter 2013 domestic cigarette shipment volume was down approximately 3.5% and that total cigarette category volume was down approximately 4% for the same period.
After adjusting for one less shipping day and trade inventory changes, PM USA estimates that its cigarette volume declined approximately 4% for the first half, in line with the estimated decline rate for the cigarette category. Black & Mild's retail share of machine-made large cigars was down for the second quarter and first half versus the prior periods due to competitive activity. On a sequential basis, though, the brand's 2013 second quarter retail share was up 1.4 share points versus the first quarter of 2013. In the smokeless segment, higher volume and higher pricing drove strong adjusted operating companies income and margin growth for the second quarter and first half. USSTC increased volume and retail share for Copenhagen and Skoal on a combined basis for both reporting periods. In wine, Ste. Michelle delivered strong operating companies income and margin growth through higher shipment volume.
Altria's companies continue to deliver growth in their core businesses while continuing to innovate with new products for adult tobacco consumers. As we've announced, Nu Mark will enter the e-vapor category by introducing MarkTen e-cigarettes into a lead market in Indiana next month. Nu Mark is also expanding distribution of Verve Discs to approximately 1,200 stores in Virginia in September of this year. Richmark, a joint venture between an Altria subsidiary and Okono, has introduced chew, chewing tobacco gum into a test market in Denmark. We're pleased with Altria's results for the first half of the year. Based on that performance and our expectations for the second half of the year, we're revising our guidance for Altria's 2013 full year adjusted diluted EPS from a range of $2.35-$2.41 to a range of $2.36-$2.41.
This represents a growth rate between 7% and 9% from an adjusted diluted EPS base of $2.21 in 2012. I'll now turn things over to Howard, who will discuss Altria's business results in more detail.
Thank you, Marty. Good morning, everyone. In the smokeable product segment, second quarter and first half reported operating company's income grew by 5.2% and 18.4% respectively, primarily due to PM USA's settlement with certain states of the NPM adjustment disputes for 2003 to 2012, higher pricing, and lower selling general and administrative expenses, partially offset by lower reported shipment volume. Excluding special items identified in our earnings press release, adjusted operating company's income for the smokeable products segment increased by 1.5% to $1.7 billion for the second quarter and increased by 1.4% to $3.1 billion for the first half. Adjusted operating company's income margin grew 1.6 percentage points to 43.0% for the second quarter and 1.3 percentage points to 42.5% for the first half.
PM USA's reported cigarette shipments declined 6.7% for the second quarter, primarily due to the industry's rate of decline and changes in trade inventories, partially offset by retail share gains. PM USA believes that the trade built more inventory during the second quarter of 2012, which negatively impacted the comparisons of PM USA's second quarter 2013 reported domestic cigarette shipment volume. Reported cigarette shipments declined 6% for the first six months of 2013, primarily due to the same factors that impacted the second quarter and one less shipping day. PM USA increased its retail share by three tenths of a share point to 50.7% for the second quarter and by four tenths of a share point to 50.6% for the first half of 2013. Marlboro's retail share for the second quarter was unchanged at 43.7% and grew one tenth of a share point to 43.6% for the first half.
PM USA's discount share was 3.9% for both periods, as share gains for L&M contributed to share gains of five tenths of a share point for both the second quarter and the first half. These share gains were partially offset by share losses on other portfolio brands in both periods. Cigar shipment volume decreased 8.0% for the second quarter and 12.4% for the first half, primarily due to changes in wholesale inventories and retail share losses. Black & Mild's retail share decreased five tenths of a share point for the second quarter and 1.8 share points for the first half.
Turning to the smokeless product segment, second quarter 2013 reported and adjusted operating company's income increased 12.5% to $270 million versus the prior year period, driven by higher volume and pricing and lower selling general and administrative expenses, partially offset by higher promotional investments and unfavorable mix due to growth in products introduced in recent years at a lower popular price. Reported operating company's income increased 13.9% to $492 million for the first half, primarily due to the same factors I just mentioned and restructuring charges in the first quarter of 2012 related to the cost reduction program. When adjusted for special items related to restructuring charges, operating company's income increased 9.1% to $492 million for the first half of 2013. Reported smokeless product shipment volume increased 4.6% for the second quarter and 4% for the first half.
Volume growth for Copenhagen and Skoal was partially offset by volume declines for other portfolio brands. Copenhagen and Skoal grew their combined shipment volume by 5.8% for the second quarter and 5.4% for the first half of 2013. Copenhagen's volume grew 8.8% for the second quarter and the first half as the brand continued to benefit from products introduced in recent years. Skoal's volume increased 1.8% for the second quarter and 0.8% for the first half. USSTC and PM USA estimate that the smokeless products category grew by approximately 5% over the 12 months ending June 30th, 2013. Adjusted smokeless products volume is difficult to estimate on a quarterly basis. When adjusted for changes in trade inventories and year-over-year calendar differences, USSTC and PM USA estimate that their combined 2013 first half adjusted smokeless product shipment volume grew at a rate similar to the 12-month category growth rate.
Copenhagen and Skoal delivered combined retail share growth of six tenths of a share point for the second quarter and first half of 2013. Copenhagen grew its retail share by 1.6 share points for the second quarter and 1.5 share points for the first half. Skoal's retail share declined one share point for the second quarter and nine tenths of a share point for the first half, primarily due to competitive activity and Copenhagen's strong performance. USSTC and PM USA's retail share of the smokeless products category was unchanged at 55% for the second quarter, as retail share gains by Copenhagen were offset by losses for Skoal and other portfolio brands. For the first half, USSTC and PM USA's retail share decreased two tenths of a share point to 55%, as retail share losses for Skoal and other portfolio brands were mostly offset by Copenhagen gains.
Ste. Michelle's 2013 operating company's income increased 13.6% to $25 million for the second quarter, and increased 21.6% to $45 million for the first half of 2013. These results were primarily driven by higher shipment volume. Ste. Michelle also expanded its operating company's income margins by one percentage point to 18.9% for the second quarter, and by 1.9 percentage points to 17.8% for the first half. Ste. Michelle's shipment volume increased 7.7% for the second quarter and 8.6% for the first half. In May 2013, Altria issued $1 billion of new senior unsecured notes, comprised of $350 million of 2.95% notes that mature in 2023, and $650 million of 4.5% notes that mature in 2043. During the second quarter, Altria paid $883 million in dividends and purchased shares valued at $135 million. Marty and I will now take your questions.
While the calls are compiled, let me cover a few housekeeping items. As a reminder, the tobacco product pricing and retail share figures are from the tracking services we introduced in the first quarter of 2013. We'll also provide you with restated figures from the second quarter of 2012, so you'll be able to compare the periods. Marlboro's price gap versus the lowest effective price cigarette was 34% in the second quarter of 2013 and 35% in the second quarter of 2012. Marlboro's net pack price in the second quarter of 2013 was $5.78, while the lowest effective price cigarette was $4.30. For the second quarter of 2012, Marlboro's net pack price was $5.70, while the lowest effective price cigarette was $4.22. The cigarette discount category's retail share was 25.2% for the second quarter of 2013, up one tenth of a share point versus the second quarter of 2012.
The estimated weighted average cigarette state excise tax as of July 1st, 2013, was $1.45 per pack, an increase of $0.04 per pack versus the second quarter of 2012. This includes the $1.60 per pack tax increase that took effect on July 1st in Minnesota. For the second quarter of 2013, Copenhagen's retail price was $4.04, and its price gap versus the leading Discount brand was approximately 36%. For the second quarter of 2012, Copenhagen's retail price was $4.03, and its price gap versus the leading Discount brand was approximately 41%. CapEx was $26 million for the second quarter and $41 million for the first half of 2013. Ongoing depreciation and amortization was $52 million for the second quarter. We estimate that 2013 full-year ongoing depreciation and amortization will be approximately $215 million. Operator, do we have any questions?
Thank you. Once again, as a reminder, if you would like to ask a question, please press the star key followed by the number 1 on your touch-tone phone at this time. Investors, analysts, and media representatives are now invited to participate in the question and answer session. We will take questions from the investment community first. Our first question comes from the line of Vivien Azer with Citi. Please go ahead.
Hi. Good morning.
Good morning.
My first question has to do with the menthol report that the FDA submitted to the OMB this morning. I'm sure you guys haven't had a chance to go through it, neither have we. I was hoping you could just remind us from a procedural standpoint, where do we go from here and what the timing of that would look like?
Yeah, you're right, Vivien. I heard about the headline when I walked into the room and was focused on the call. I haven't looked at any of it, so I don't want to comment on it because I haven't seen it. You're right. From a process viewpoint, what the FDA has said so far all along was that it was reviewing the science. It took the TPSAC report. It conducted its own scientific review. It's our understanding they sent that out for peer review, that they got the peer review back, then they've been working on the scientific assessment. Subject to what's happened this morning, that's our understanding of the process. Of course.
FDA being an agency that's driven by the science and the evidence, we would expect for the process then to discuss FDA scientific views, before any policy implications or the like would be discussed. We'll have to see what issued this morning.
Fair enough. In terms of the cigarette business, was there a benefit to your shipments from the expanded distribution of NXT, or is that going to hit in the third quarter?
Well, we launched NXT really in July, so it'll be mostly in the third quarter, I think.
Do you have an estimate for whether the e-cigarette category had any impact on traditional cigarette industry volumes this quarter, and if so, by what magnitude?
Yeah, no, I really don't. I know everyone is acutely interested in this. I continue to believe what I've said previously on this, which is it's having some effect, obviously, because the people who are trying e-vapor products are adult smokers, so you would expect for there to be some effect. We just can't tease out what it is off of the small base. Actually, I think the question to be focused on is as much what is the size of that category today as what might it be down the road. That's obviously part of the motivation for us to make sure that we've got competitive products and why we're so excited about our MarkTen launch in Indiana.
That's fair enough. Do you have an estimate for what the size of the category might be down the road?
No, we worked out various scenarios. It all depends what you put in your model, and it depends what your assumptions are. As we've discussed previously, there's a lot that's yet to be resolved regarding e-cigarettes. We currently don't have a regulatory structure for them, and depending on what that regulatory structure looks like, it could have an impact on the size of the category. We don't know yet about excise taxes, for example. We're probably on the early part of the technology curve of the product itself. All of those factors, Vivien, I think, are the way that we're looking at it, and you can run various models with various assumptions. That's how we're looking at it to make sure that we've got all of them covered.
Terrific. Thank you.
Thanks for calling in.
Your next question comes from the line of David Adelman with Morgan Stanley.
Good morning, everyone.
Morning, David.
Marty, just as a follow-up to that, if you have three buckets of uncertainty regarding the trajectory of the e-cigarette category being regulation, excise taxes, and then the capacity to improve the product to meet current smokers' needs, realistically, would you agree that it's probably that third item that will have the biggest long-term impact on whether e-cigarettes are sort of a small or a somewhat larger segment over time?
I sure think that consumer acceptance of the product is central. The other factors, and there are other factors beyond what I mentioned, but you're right, David. You have to have a product that adult consumers find acceptable, and that's what we're working on.
Okay. On a different topic, Marty, given the gap between your shipments this quarter and where you think on an underlying basis, both your performance and the category was, the -3.5%, -4%, what's your confidence in that forecast, in that assessment?
Yeah. We're pretty confident in our assessment, I would say. When you look at the inventory changes from Q2 2012 to Q2 2013, they're pretty apparent. As I know you remember, the trade built inventory in the quarter last year versus this quarter where it was built and then really shed. Some of that's probably driven by the timing. You may remember the price announcements came at different times relative to those quarters. When we do the math and we look at the inventories that we're able to track, we're pretty confident that it explains the difference between reported and adjusted.
Okay, that would be consistent with your cigarette shipments in July of this year being fairly strong, correct? You would have entered the quarter with lower trade inventories than last year.
Well, as you know, we don't talk about the quarter until the quarter's over, I won't say anything about the third quarter. I do think it's fair to point out as people are thinking about this, which is, if the adjustments are as we believe them to be, remember there's one more shipping day in the third quarter, and inventories really were pretty lean at the end of the second quarter. Those are all factors I think to take into account.
Okay. Marty, is it fair to say that sort of collectively, the competitive dynamic has allowed for better pricing in the cigarette category essentially because of the weaker volumes that the competitive dynamics resulted in a business algorithm that still allowed for profit growth despite the weak volumes because in effect, there was a collective effort to solve for weak volumes?
I might describe that just a little bit differently. I think the category is competitive. It's been competitive. It's likely to be competitive. Our strategy is to maximize income, as you know. We stay focused on that in this segment. When we look at revenue per thousand, for example, net of FET, we've got nice numbers there. That's how we look at it, which is we're trying to maximize income while making sure that we've got modest share momentum on Marlboro.
Okay. Thank you.
Thanks a lot for calling.
Your next question comes from the line of Judy Hong with Goldman Sachs.
Thanks. Good morning, everyone.
Morning, Judy.
Marlboro kind of flat year-over-year, up a little bit in the six months of the year, you actually had a pretty good gain from L&M. Maybe just give us your perspective on the Marlboro's performance, maybe not just in the quarter, but just kind of a year-to-date. How do you think the brand's performing relative to your spending level? From an L&M perspective, can you just talk about where the share gains are coming from? As you think about the strategy with L&M, would we continue to see a pretty strong gain from L&M going forward?
Sure. Let me take those in turn. We're really happy with Marlboro. I think Marlboro's doing terrific. The investment that we've made in the Marlboro architecture, the products that we've been able to bring, our work at retail to get everything reset, the work that we've done on marlboro.com, our interactions with our adult consumer franchise. Remember, we tend to sometimes go past this, but it's worth everyone remembering, of course, Marlboro remains, with more share than the next 10 brands combined. It's got premium pricing. It's got the highest brand equity. It's the largest brand in every state, and so on and so on. Marlboro continues to perform fine. As I just discussed with David, as you know, in terms of its share, we try to have modest share momentum on Marlboro.
That's one of the measures we use to make sure that its brand strength remains where we want it to be, because it's largely the engine of our profit growth. L&M's role is different, of course. It plays a role in the discount segment. The discount segment, as Howard just reported to you, is relatively flat. Especially for some of our trade partners who'd like for us to have an entry in that segment, L&M is a terrific choice. It gathers share from various players that are participating in that segment. Our focus is on premium, and in particular, it's on Marlboro. L&M has a role to play in the portfolio about what you've seen for the quarter, I think is fair to say.
Okay. Just in terms of the competitive environment going forward, just curious with Newport Gold being launched in the back half, do you see that as a risk in terms of the competitive environment heating up? Just in terms of thinking about, broadly speaking, the new product pipeline for your products, obviously, and how much of that is still kind of dependent upon the FDA coming up with substantial equivalence applications? Any lessons that you've learned on the heels of them approving a couple and then also rejecting several.
Okay. Let me see if I can unpack that a little bit. Our planning, as you might expect, at PM USA and our other operating companies, takes into account most all competitive scenarios, including the one on Newport Gold that you've just described. We have plans for that, and all of that is rolled up into our guidance. I think that we have good plans. We have a strong franchise there. PM USA will do what it needs to do, I'm sure, and do it well. In terms of new product pipeline, we've discussed this previously, I think with others, about how we were pretty planful about having products as the new regulatory system came online, and we continue to have a pretty good pipeline.
We had also pointed out that we had expected FDA, once it had built out its infrastructure, once it had hired its staff, and once it had worked through the protocols on substantial equivalence, we had fully expected that it would start to rule on applications. Indeed, that's what we see happening. That's a good thing, frankly. Some people were predicting that the FDA would never approve another tobacco product, or certainly not in the cigarette category. We were urging people to be mindful that the statute contemplates innovation in the category. It's just a process you have to go through, and FDA is a part of that process. I think that's, on balance, a good thing that FDA now has that infrastructure up and working. They're working through applications. To be sure, there's a lot to do.
I think the latest estimate I saw, you may have seen it, is in terms of provisional applications, those that are already in the market, there's more than 3,000 of those, and then there may be another 500, I think FDA said, with respect to new products. They've got some work to do. For our part, we continue to work with them. We talk to them every day about substantial equivalents and other matters, and we try to do that professionally and constructively, and so far, so good.
Okay. Lastly, Howard, SABMiller equity income was down pretty significantly in the quarter. If there's anything you can help us just kind of think about why it was down so much. Then, I guess in terms of your guidance, I guess it is a driver of how the rest of the year kind of play out. Any help on how we should think about the back half in terms of the equity income?
Sure. Well, certainly our guidance reflects what we expect to occur for all of our businesses, plus our contribution from SABMiller. SABMiller's contribution to our earnings was up in the first half, but you're correct that it was down in the second half on an adjusted basis. I would point out, I think that there are a number of adjustments that we make to their financial results, both to convert from IFRS to GAAP and some other things. Probably the best way to understand their underlying earnings is to listen in on their trading statement update, which will come later this week. I do think for the rest of the year, we expect SABMiller to be a contributor to our earnings growth.
Yes, got it. Thank you.
Thanks for calling, Judy.
Your next question comes from the line of Thilo Wrede with Jefferies.
Good morning, everybody.
Morning, Thilo.
Just wanted to follow up on David's question for the volume adjustments that you laid out because of the inventory movement. If I recall correctly, I think last year, second quarter, you talked about a 1.5% tailwind. The adjustment you talk about today seems to be much bigger than that. Was there additional volume or inventory reductions by wholesalers on top of just offsetting what they did last year?
I guess I'm not sure how to explain it other than I explained it a moment ago, which is it's just the comparison, I think, between the build and the second quarter last year, and then the build and the shed in the second quarter this year. When we look at the numbers relative to what's at wholesale and our estimate at retail, it seems to us that that's the explanation.
Okay. Smokable revenue has been down for two quarters in a row now, and the comps in the second half of the year are getting a little bit more challenging. What's the outlook for this segment? Do you expect growth in the segment for the full year?
Well, you know our strategy, which is we're trying to grow income in the smokable segment. We do that obviously through the operating plans of Philip Morris USA. If you look at it over time, I'd refer back to some of the charts we showed perhaps at the Investors Day meeting in June, that the smokable segment has really had pretty nice growth there over time. That's how we look at it, Thilo. We look at it over time. In some quarters, it's up a bit more, in others it's down, and in others it's someplace else. Over time, that's our strategy. I must say, it seems to have worked relatively well, and that's the strategy that we're pursuing.
Okay. Last question I have for you. If I recall correctly, I think you described the strategy for L&M in the past as you want to offset the share losses that you have had with Basic over the last few years. When I look at the share data for your discount portfolio, it looks like those Basic losses are offset by now. What's the plan going forward for L&M?
Well, I think the plan is what I described a moment ago, which is it's got a role to play in our portfolio in the discount segment. You're right, we have described how it gathered up some share of that Basic shed as we made that brand more profitable. It's also gathered up some competitive share, as you might expect for a great brand in that segment. That's its role, and our focus, again, remains on the premium end of the business. We're trying to make sure that Marlboro and our other premium brands do great, all the while making sure L&M is effectively executing the role it has in its place in the portfolio. I don't think that's going to change going forward.
Okay. Thank you.
Thanks for asking.
Your next question comes from the line of Bonnie Herzog with Wells Fargo.
Hi, good morning.
Morning, Bonnie.
Hi. I just wanted to ask maybe another question on L&M. Just trying to understand if you see any cannibalization between L&M or your discount portfolio and non-premium Marlboro line extensions. I'd also like to hear how you're balancing the growth of your discount segment with margin expansion. How will you do that going forward?
Well, we're mindful of executing against the entire portfolio strategy, of course. Just as we are very mindful of Marlboro and our other premium brands, we watch to make sure that L&M is playing the appropriate role. We're not trying to grow the discount segment. Our focus is on premium. That's always a balance of how we manage our brands, as anybody does in their portfolio, and that's how we think about it. We're a premium company. We sell premium brands. We get higher margin because of doing that. That's our strategy, and that's what we'll continue to do.
Okay. That helps. Marty, I would like to drill down a little further on some of your Marlboro line extensions. I'm hearing Southern Cut is performing well, so I'd like to hear more color from you on this. A question on Marlboro NXT expansion. As you roll this out to more states, are you able to secure incremental shelf space, or is this displacing existing shelf space for other Marlboro brands or possibly something else in your portfolio?
Okay, let me take those in turn. We're happy with Marlboro Southern Cut. It's a terrific product. It's got in a terrific pack. It's been well received. I think it's been a great addition to the Marlboro family. Same thing with Marlboro NXT. You'll remember we launched that in two of our sales regions last year.
Right.
It looks great. It's a terrific product. It's got a nice innovation on it with the capsule. It's been very well received. It's a nice addition to the Marlboro Black family. The space to share issue is always worked out by the trade programs, and our trade programs take all of that into account as we work through the available space. We haven't had, really, I wouldn't think, any difficulty in getting space for Marlboro NXT.
Okay. Just my final questions on e-cigs and MarkTen. Given the tremendous success and the continued robust growth of the e-cig category, how concerned are you that you don't have a greater presence with your MarkTen e-cig yet? I guess, meaning have you missed an opportunity, or do you feel you can essentially play catch up?
Well, I think the answer to that is that it's early days in the e-vapor category. I think that MarkTen is a terrific product. It's a great brand. We've got a crackerjack sales force that'll get us distribution where we need it, and we'll learn. I think when we discussed this previously, that's how we think about innovation generally and e-cigarettes in particular, which is very exciting when these new products come along, and they get a lot of attention.
Our strategy is to maximize our core business while we take appropriate steps forward with innovation, and that's a balance as well, but we have a big, profitable, mature business that does great. We have tremendous brands. In the e-vapor category, we want to learn our way in. I have no doubt that if we can get that product in the hands of consumers and get distribution and work the brand the way we've done over decades, that we'll ultimately be very successful. I think this is a long game.
Right. You can leverage your existing sales force, as you mentioned, and you're willing to roll this out quickly if your test performs well. Is that fair?
Well, we'll take the appropriate steps once we learn our way in. Certainly, if it's well-received, we always want to expand products that are well-received by the consumer. As we discussed a moment ago, as I'm sure you heard, there's some other reasons to be in, which is-
Right
There's issues to be sorted through, regulation and excise taxes and the like, and we want to be at the table as they're being sorted out.
Okay. Makes sense. Thanks so much.
Thanks, Bonnie.
Your next question comes from the line of Chris Growe with Stifel.
Good morning.
Hi, Chris.
Hi. I just had a couple of follow-up questions for you, please. The first would just be that, I know you don't like to give quarterly guidance, but would you expect the profit growth in your smokable division to be up at a rate faster than the first half growth? I guess what I'm coming down to is you've had very good per pack growth in the first half. You've had relatively soft, kind of absolute dollar profit growth in the first half, however.
Well, you're right. We don't give quarterly guidance and we're not about to start this morning. I just had this conversation a moment ago about our strategy, which is to maximize income, and we do that over time. You're pointing out that the comparisons for this quarter or the quarter previous were a bit lower on that metric than they had been over the last several years. I think we showed during the investor day, again, the history over time of how the income growth has been nice in smokable. That continues to be our strategy. We've just given a revised guidance document. All that is taken into account in our revised guidance.
Okay. Fair enough. Just two quick ones then. The first one being, the likelihood of an FET looks relatively small today. I guess, at least that would be a higher risk factor going forward, given it was proposed, at least. Do you have any comments on an FET, like the likelihood and how you see that going forward?
Well, we're opposed to it. There's been talk about its relative movement or lack thereof. We've spoken previously. Gee whiz, we just took an FET increase of 158% or something in 2009. We saw what happened to the volumes and what happened to the trade. These are programs that are supposed to be for the benefit of everyone, but they're proposed to be financed on the back of tobacco consumers, and we just think that's fundamentally unfair to say nothing of how regressive these taxes are. We're being very mindful of that. We advocate strongly on behalf of our companies and our consumers on that. You would hope that there's not much traction on it. There doesn't appear to be today, but we're very careful about that.
Okay. My final question, just in relation to your capacity for MarkTen and for e-cigarettes, are you in the process still of building capacity to be able to make that product? I'm just thinking ahead to, say, a national launch. Is there still some period of time that you need to build capacity to be able to handle a larger launch across the country?
Yeah. You'll forgive me for saying some of that's proprietary, I'm not going to talk about much of that. We certainly have capacity to execute what we intend to execute in Indiana and to do it well.
Okay. Thank you.
Thanks for asking.
We now welcome questions from media representatives on the call. In order to ask a question, please press the star key followed by the number 1 on your touchtone phone. Your next question comes from the line of Todd Duvick with Wells Fargo.
Yes. Good morning.
Morning.
Quick question for you on the balance sheet. You mentioned tapping the debt capital markets this past quarter.
Yeah.
You have another $1.4 billion of debt maturing in November. Can you tell us if the issuance from this past quarter was to partially refinance that, or should we expect to see you either back in the market or look to issue commercial paper to take out this November maturity?
I'm not going to comment on our future debt plans, but I think you did point out that I alluded to the billion-dollar issuance in the second quarter. I think that gives us a fair amount of flexibility with regard to what actions we take for the billion and a half dollars due later this year, then we've got about $2 billion due between now and the end of the first quarter. I think when we determine exactly what we're going to do there, we'll announce it at the time.
Okay. I guess just a follow-up question to that, you still have a fair bit of very high coupon debt related to, I think, the UST acquisition in 2009. Do you continue to look at that to see if that's something you might want to address, or are you just planning to reduce your interest expense over time?
Well, I think certainly our goal is to work to reduce our interest expense over time, which we've been successful in doing. As you know, we did tender for some of our high-interest debt once before, and I think we continue to look at all options, but we haven't made a definitive decision with regard to what we're going to do going forward.
Okay. Thank you.
Your next question comes from the line of Chris Barrett with Bloomberg News.
Hey, good morning. Thank you for your time. Marty, I was going to ask you if you could talk about your marketing plans for MarkTen. Can you help explain how you plan to balance selling the product with responsibilities that come with nicotine in a product that's not regulated, that sort of thing? How hard will you push your e-cig in this lead market, and what constraints will you take?
Thank you. That's an excellent question. We're working through all those details now. Let me take it in two parts, perhaps. The first is, you're right, because for products that contain nicotine, you have to be responsible about how you do that. We've thought deeply about that, including putting an appropriate warning on that product, which it will bear, despite the fact that it's not currently regulated by FDA. The marketing mix is another matter altogether. Our target audience is adult smokers and adult vapers, and we want to get good reach to them. We want them to know about the product. We want to have good awareness to them, but we'll also take steps to make sure that we're not having unintended reach to audiences we're not trying to reach, and that's always a balance about how you do that.
We're working through those marketing details now, and I think when you see the execution, you'll see that we've been quite thoughtful about that.
Thank you.
Thank you for your question.
Your next question comes from the line of Tim Miller with BlackRock.
Hi. Do you have any sense when the arbitration panel might release their decision regarding diligent enforcement?
Any day. That's what we're told. It's mature and it's ripe, so it could come at any time.
Great. Thank you.
You're welcome.
Your next question comes from the line of Thomas Russo with Gardner Russo & Gardner.
Hi, good morning. A question on the wine business. I'm wondering, just back from travels abroad, Chateau Ste. Michelle and others of your brands have been gaining a presence in Asia. I'm wondering just to what extent the division is prepared to invest behind that, what they see as the future there for the returns on their capital.
Sure. Tom, I think your observation is accurate, which is we have had greater volume of our key brands sold in Asia. Given the affordable premium positioning of our brands, I think they're well-positioned for the Asian market. That has been an initiative that the wine company has focused on, certainly over the last couple of years, and I think will continue to. Because certainly wine is becoming more popular amongst the middle class in China and other Asian countries.
Thank you.
Thanks for calling, Tom.
Once again, if you'd like to ask a question, please press the star key followed by the number one on your touch tone keypad. At this time, we have no further questions. I would now like to turn the floor back over to Michael Neese for his closing comments.
Thank you for your time today. The IR team is available for any additional questions that you may have. This concludes our call.
Thank you. This does conclude today's conference call. You may now disconnect.