Good morning, everyone. I'm Marty Barrington, Chairman and CEO of Altria Group. On behalf of our management team, I'd like to welcome you here today and those listening on the webcast of our presentation this morning. Before we begin, please review the Safe Harbor statement in today's presentation and the forward looking and cautionary statement section in today's press release for a description of the various factors that could cause our actual results to differ materially from projections included in today's remarks. Reconciliations and further explanations of the non GAAP financial measures discussed today are available on altria.com.
Our focus this morning is on Altria's plans to continue creating value for shareholders. We'll start with an overview of Altria's business model and strengths. We'll then discuss our tobacco company's investment in premium brands followed by a question and answer session. Then we'll take a break and give those of you in the room a chance to explore the creative brand materials and technologies we've set up next door. When we return, we'll discuss the external environment, Altria's financial strategies and cash returns to shareholders and then we'll finish our morning with closing remarks and another question and answer session followed by lunch.
You'll have the opportunity to hear from and meet members of our management team. Most of you know Dave Buran, our President and Chief Operating Officer Howard Willard, our Chief Financial Officer and Marie Garnick, Senior Vice President and Associate General Counsel for Altria Client Services. This morning, you will also hear from Jim Dillard, Senior Vice President, Regulatory Affairs and Bruce Gates, Senior Vice President, External Affairs, both with Altria Client Services. We also have with us Billy Gifford, President and CEO of Philip Morris USA and Brian Quigley, President and CEO of U. S.
Smokeless Tobacco Company. Everyone will be available throughout our time together today. Each of these executives has significantly contributed to Altria's results for shareholders over the years and each will play an important role as we work to continue Altria's track record of success. Our management team is supported by talented employees who drive our business performance. We believe that Altria offers a compelling investment proposition with the opportunity for strong total returns consisting of solid adjusted diluted earnings per share growth and a significant dividend.
Altria's goal is to grow its adjusted diluted EPS at an average annual rate between 7% 9% over time. We also have a goal to return approximately 80% of our adjusted diluted EPS to shareholders through dividends. Altria's strengths support our ability to achieve these goals and continue to create value for shareholders. These include the most diverse business model among our U. S.
Tobacco peers, leading premium tobacco brands, a systematic approach to innovation including new products, well developed capabilities to address legislation, regulation and litigation challenges, proven cost management and a strong balance sheet that supports excellent cash returns to shareholders primarily through dividends. We'll discuss each of these strengths this morning. I'll begin with a discussion of our business model and innovation. We believe that Altria's diverse and successful business model provides the foundation for future growth. Our Our tobacco companies Philip Morris USA, John Middleton and U.
S. Smokeless Tobacco Company are the core of this model. These companies have grown income from smokeable and smokeless tobacco products by satisfying adult tobacco consumer preferences with premium brands. In the Smoke Bowl Products segment, PM USA and Middleton's strategy is to maximize income, while maintaining modest share momentum over time on Marlboro and Black and Mild. In the Smokeless Products segment, US STC and PM USA seek to increase income by growing volume at or ahead of the category growth rate, while maintaining modest share momentum on Copenhagen and Skol combined.
Our tobacco companies are complemented by growing alcohol assets that include our ownership of 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. Altria also seeks to maximize the contribution of our equity investment in SABMiller to Altria's total shareholder return.
The tobacco space in the United States is an attractive place to do business with an estimated combined profit pool of nearly $14,000,000,000 in 20.12, which includes cigarettes, cigars, smokeless tobacco and other tobacco products. Cigarettes generated the majority of these profits followed by smokeless tobacco products and machine made large cigars. The diversity of Altria's tobacco businesses and the successful execution of their 2012. We estimate that the profit pool grew at a compounded annual rate of 4.5 percent from 2,007 through 2012. And this growth happened during a time of economic challenge, the largest federal excise tax increase on tobacco products in history and new comprehensive regulation of tobacco products by the Food and Drug Administration.
There are approximately 56,000,000 adult consumers across all tobacco product categories according to government data. This number has declined modestly in recent years as declines in adult tobacco use have been partially offset by population growth. Total tobacco volume declines have also been moderate as declines in cigarette volume have been partially offset by increases in smokeless tobacco products and machine made large cigar volume. Total tobacco volume based on pounds decreased approximately 2% annually from 2,009 through 20 12. Altria's tobacco companies are well positioned in the U.
S. Tobacco space to have the leading positions in the largest and most profitable tobacco product categories. And in each of these categories, our companies compete with premium brands that enjoy strong equity and higher margins than most of their competitors. Dave will update you shortly on how we're managing these brands to deliver income growth in our core businesses over the long term. I'll focus now on our company's efforts to develop innovative tobacco products for adult tobacco consumers.
Our tobacco companies have built their leadership positions over the years by evolving their product portfolios to meet the changing preferences of adult tobacco consumers. Our companies develop adult tobacco consumers. Our companies develop a deep understanding of adult tobacco consumers and their preferences and work to create superior products to meet them. Of the estimated 56,000,000 adult tobacco consumers in the United States approximately 44,000,000 are cigarette smokers and smokers say they are interested in trying innovative types of tobacco products according to our research. USSTC and PM USA worked to meet this interest by offering new tobacco forms from their leading brands.
These offerings include pouches from Copenhagen and Skol, preformed portions like Skol Readycut and Snooze and smokeless tobacco sticks from Skol and Marlboro. Our smokeless tobacco product development is supported by the intellectual property we obtained through the UST acquisition. Altria's subsidy Newmark focuses on responsibly developing and marketing innovative tobacco products for adult tobacco consumers. In 2012, the company introduced Verb Discs, a mint flavored chewable tobacco product that contains tobacco derived nicotine in approximately 60 stores in Virginia. Newmark used the Verb launch to gauge adult consumer acceptance of the product and we're pleased with the brand's initial results.
Newmark now plans to expand distribution of VERVE discs to approximately 1200 new stores in Virginia in the second half of twenty thirteen. The expansion plans include an improved product and enhanced marketing communications that incorporate the learnings we gained over the past year. Adult smokers are also expressing more interest in e cigarettes. According to our research, the e vapor category is growing, but off a small base. Category growth appears to be driven by increased awareness and trial as well as expanded retail distribution.
Although there are over 200 brands available in many forms, sizes and taste blends, our research shows that adult smokers are aware of only a few brands. Moreover, the existing products that they have tried often do not meet their desires. In our view, the category is in its early stages and time will tell how it will evolve. We've now spent a good deal of time studying the category and the business opportunity. Altria's market research and product development teams have been researching adult smoker preferences and Newmark has developed what we believe is a superior product.
Accordingly, now is the appropriate time for Newmark to enter the category. This August, Newmark plans to introduce Mark 10 e cigarettes into a lead market in Indiana. Newmark's objective is to responsibly market and sell a premium product that delivers a superior sensorial experience to adult smokers and vapers. There are opportunities to compete regulatory environment. Newmark possesses significant capabilities that we believe will provide a competitive advantage as the category evolves.
Mark 10 E Cigarettes are designed to offer adult smokers and vapers a familiar draw with an appealing taste. Its unique 4 Draw Newmark believes its technology provides an experience that closely resembles the draw of a cigarette. Unlike many other e cigarettes, Mark 10 e cigarettes can be used either as a disposable or rechargeable device. To use the product as a rechargeable, adult papers just need to purchase replacement cartridges and an accessory kit that includes charging devices. The product will be available in 2 varieties classic and menthol.
Retailers will set the consumer pricing, but we believe that the device will sell for about 9.50 dollars Newmark plans a number of activities in the lead market to build Mark 10's brand awareness and equity among adult smokers and vapers. FDA has stated its intention to regulate e cigarettes and other tobacco products. In addition, several states and localities have enacted or proposed legislation related to the sale use or taxation of e cigarettes and Jim and Bruce will share our views on these proposals later this morning. In addition to internal research and development, our companies are working with 3rd parties to develop and commercialize innovative new products for adult tobacco consumers. Last year Altria Client Services entered into an agreement with Akono, an affiliate of the Danish company Ferten Pharma to develop innovative non combustible nicotine containing products.
Acono and another Altria subsidiary also formed a joint venture Richmark to market and sell these kinds of products outside the United States and Canada. This summer, Richmark plans to introduce Chew, chewing tobacco gum into a test market in Denmark. This product contains tobacco and is an alternative for adult cigarette smokers who wish to continue to enjoy tobacco, but in a smokeless form. It will initially be offered in 2 varieties summer blend and dark blend. Haltria's companies take a systematic approach to innovation including the development of new products to meet consumers' evolving preferences.
This approach combines a deep understanding of adult tobacco consumers, product development expertise, intellectual property acquired through the UST acquisition, intellectual property rights owned jointly with Philip Morris International and partnerships with others. These efforts have contributed to our business results and we believe they position our companies well for the future. In recent years, Altria's tobacco companies have introduced or expanded cigarettes, cigars and smokeless tobacco products that have evolved their product portfolios, strengthened their brands and contributed to retail share gains. They support these products with initiatives that build their brand equity. Products introduced by Altria's tobacco companies in the last three years have outperformed those of their leading competitors in cigarettes, cigars and smokeless tobacco in terms of retail share.
We're using the same adult consumer focused approach to developing and marketing innovative new tobacco products and we expect our innovation strategies to contribute to Altria's revenue and income growth in the future. Dave will join us now to discuss our investments in our premium tobacco brands in more detail.
Thanks, Marty. Our tobacco operating companies invest in premium brands in the largest and most profitable tobacco product categories. We believe that these investments position our companies to deliver superior business performance over time creating long term marketplace advantages. Disciplined innovation is at the heart of our brand building. We start by working hard to understand adult tobacco consumer preferences.
We use what we learn to enhance our brands' connections with them, both in segments where our brands are strong and where they are less developed. And for us, brand innovation is broader than just developing products. It includes finding creative and engaging ways for our brands to connect with adult tobacco consumers. Our companies are committed to marketing their products responsibly by taking steps designed to limit reach to unintended audiences. Each limits its 1 to 1 communications, which include direct mail, e mail, consumer websites and event marketing to their age verified tobacco consumers 21
or older.
Marlboro is the most profitable cigarette brand in the U. S. And it's the engine that in large part drives the business performance of our segment. Therefore, we're always working to improve Marlboro's marketplace position with equity building activities that position the brand for future success. Marlboro is an iconic position as the brand men's smoke for flavor, rest on a foundation of innovation.
In 1954, PM USA repositioned Marlboro with a number of groundbreaking innovations. A new Richmond recipe formulation with a cork tip filter launched into a marketplace dominated by non filtered cigarettes. A new pack design with a red roof and a flip top box launched into a marketplace largely made up of soft pack products and a new positioning as a flavorful cigarette for men. These and many other innovations contributed to almost 60 years of retail share growth and Marlboro's development into the largest cigarette brand in the U. In 2012, Marlboro innovated again with its new architecture.
This architecture provides a broad platform to communicate with adult smokers, while staying true to the brand's essence as the most flavorful match flint premium cigarette. Each of the brand's 4 flavor red, gold, green and black expresses Marlboro's positioning and values in its own unique way allowing Marlboro to expand the breadth of its equity building offerings. The architecture has inspired new thinking about Marlboro and the brand has been busy connecting with adult smokers in innovative and exciting ways. Let's look at how the brand is doing this starting with the recently expanded Marlboro Black to navigate the unknown where bowl flavor is. Marlboro Black reinforces this message by regularly sending direct mail to adult smokers on our mailing list.
These communicate the flavor family's core equity and include a coupon that an adult smoker can redeem at retail. When he enters the store to redeem the coupon, he'll see that PM USA has reset the fixture, giving Marlboro Black its own home. And when the consumer purchases a Marlboro Black product, let's say a pack of Marlboro NXT, he'll see the brand's bold packaging and then experience its capsule technology that allowed him to switch from non menthol to menthol taste. The direct mail piece as well as 1 pack communications also invites the consumer to the new Marlboro website. Once on the site, promotions like Marlboro Black's Capture the Unknown Sweepstakes, during which participants submitted over 80,000 photos of their own stories of Bold Adventure or he can engage in conversations with adult other adult smokers about the spirit of Marlboro Black as communicated in the articles, interviews and videos.
The brand also goes on the road with its adult only facility, the Marlboro Black Lounge. Inside this mobile marketing unit, adult smokers have opportunities to interact with the brand and win prizes. They can also explore all 4 of Marlboro's flavor families with the brand's new interactive technologies. You can see some of these at the break and at lunch. In 2012, the Marlboro Black Lounge hosted almost 200,000 adult smokers at events across the nation.
Marlboro Black is off to a strong start. And while we are supporting Marlboro Black with a number of equity building activities, we are doing just as much with Marlboro's other flavor families. Here are a few highlights. Marlboro Green embodies Marlboro's flavor heritage in a way that brings spontaneity to a classic campaign. The brand brings Marlboro Green to life with its flavor makes the night campaign in direct mail, e mail, on pack and online.
For example, Marlboro Green engages adult smokers with the flavor makers on marlboro.com. This series highlights venues such as restaurants and bars where flavor makers create special experiences. Adult smokers have posted thousands of comments on marlboro.com, engaging in conversations with the flavor makers themselves and each other. Through its flavor makes the night campaign, Marlboro Green interacts with adult smokers at different bars across the country. These promotions build brand awareness and allow smokers to register for Marlboro's mailing list.
In addition, the flavor finder on the website directs adult smokers to those bars with Marlboro Green promotions. Marlboro Gold features the Marlboro man in a different moment, one of relaxation that can only be found serenity of the American West. Marlboro Gold makes good on a promise of flavor and enjoyment unique to and truly worthy of Marlboro Country. Its equity campaign is built on the tagline, flavor is golden. Marlboro Gold's communications showcase its unique personality.
As part of its teen Marlboro promotion, over a 500,000 adult smokers pledged to help reduce cigarette litter. And Marlboro Gold has provided them with over 400,000 portable litter devices. Adult smokers can join other teen Marlboro projects as part of the Help Preserve the Land campaign. For example, team members are getting ready to explore and clean up Arizona's Scenic Verde River. Marlboro Red is the foundation upon which the architecture rests.
This family established Marlboro as the most flavorful the Cowboy. In 1964, Marlboro first invited adult smokers to come to where the flavor is, come to Marlboro Country. And Marlboro Red keeps this timeless message at its core today. Marlboro Red invites adult smokers to forge their own brand with a stand for your brand feature on marlboro.com. Over 1,500,000 adult smokers have their own brand and it becomes their signature when they create content on the website.
Marlboro Red's Rock the Ranch promotion invites adult smokers to experience 18,000 acres of adventure at the Marlboro Ranch in Montana. While each flavor family has created equity building activities designed to highlight its unique personality. All the flavor families are part of one great brand Marlboro. And PM USA designs promotions to reinforce this point. The brand's wide open flavor promotion invited adult smokers to explore the American West and Marlboro.
This promotion connected them with 80 locations across the West, capturing the essence of Marlboro's 4 flavor families with videos and pictures. During Wide Open Flavor, the brand generated 14,000,000 adult smoker interactions. Brand equity is an important metric we use to evaluate brand health over the long term. Although, it's a bit early to evaluate the impact of the architecture and supporting activities on brand equity, we're confident these as the brand continues to have excellent brand equity and demographics. According to a TNS brand equity study completed in March, Marlboro's brand equity scores among adult smokers remain far higher than any other brand in the cigarette category.
Also Marlboro's equity score among smokers who are 21 to 29 is much higher than any other major cigarette brand and equals its overall equity score. Marlboro also has strong demographics at its share among 21 to 29 year old smokers exceeds both its overall share and those are the 2 largest competitive premium brands combined. Turning to Black and Mild. It is the premium machine made large cigar brand positioned as the best any day cigar adults enjoy for its smooth taste and pleasant aroma. Black and Mild is innovating with a variety of new product offerings.
Over the last several years, the brand has strengthened its leadership position in the tip Cigurillo segment with additional varieties including Royale, Jazz and Seasonal blends. The brand is also competing in the untipped Segrillo category with varieties such as black and mild classics, sweets and wine. While the machine made large cigar category continues to experience heightened competitive activity and Black and Mild's retail share has declined as a result, Black and Mild is a great brand with strong brand equity scores, both overall and among 21 to 29 year old cigar smokers. Black and Mild will remain focused on its strategy of maximizing income while maintaining modest share growth over the long term. The investments we've made in our company's premium Smoke Bowl brands are paying off.
In 2012, the smoke bowl product segment increased adjusted operating company's income 4.2 percent to $6,300,000,000 and expanded adjusted operating company's income margins, 0.9 percentage point from 40.3 percent to 41.2 percent. PM USA also grew Marlboro's retail share 0.6 manufacturing process. It takes 4 years to make a can of Copenhagen and every can of Copenhagen is made from 100 percent American grown tobacco. While staying true to Copenhagen's essence and values over time, the brand is innovating by profitably expanding its forms and taste profiles to appeal to more adult dippers. Copenhagen Snupp is the center of the brand with its classic packaging including the fiberboard can and tin lead.
The brand has a long history of leading in the natural segment with its fine cut Copenhagen stump, Copenhagen long cut natural and Copenhagen straight. More recently, Copenhagen has offered additional products to reach adult dippers with different taste preferences. With the launch of Copenhagen Long Cut Wintergreen, positioned as the most flavorful wintergreen MST product, the brand entered the largest and fastest growing segment of the category. Since 2010, Copenhagen Longcut Wintergreen has delivered 10 consecutive quarters of share growth. Copenhagen Southern Blend also addresses different preferences.
It has a mellow taste in a manageable long cut form. In 2012, the brand expanded Copenhagen Southern Blend to 27 states. And in February of this year, the brand began shipping Southern Blend to the North Men of Copenhagen from across the country the opportunity to join projects to improve their communities. For example, in 2012, the men of Copenhagen restored a riverfront park in McKeesport, Pennsylvania. Copenhagen also uses creative packaging to engage adult dippers and grow the the 18/22, while incentivizing repurchase with money off the next purchase.
Copenhagen uses new underlay communications to reinforce its core equity, provide attractive offers and encourage adult dippers to visit the new Copenhagen website freshcope.com. It reinforces equity, executes promotions, delivers value and generates awareness about Copenhagen's products. In the barrel room, adult dippers connect with Copenhagen's legendary stories. In 2012, the brand also revamped the Copenhagen workshop. This mobile marketing unit is used at events across the products and purchase a can at a great price.
Skol is a contemporary MST brand that provides a smooth smokeless tobacco experience. Skull's products offer great taste in forms that are easy to manage. While Copenhagen is the original MST brand, Skull has historically been the innovation leader, helping expand the forms and blends of MST. Skol was the first to introduce Wintergreen in 1934, pouches in 1983 and mint in 1985. Today adult dippers can find Skol in every major MST form including fine cut, long cut, pouches and snooze.
They can also find Skol in many varieties such as wintergreen, mint, straight and other blends. This tradition continues. In 2012, the brand expanded Skol Ready Cut offering adult dippers preformed portions that provide great taste and are easier controlled than conventional MST products. Skol Ready Cut is now available in 21 states in mint, wintergreen and straight at a premium price. Skol has evolved its traditional product portfolio as adult dipper taste preferences have changed.
Now adult dippers can choose between the big smooth flavor of Skol Xtra products and the balanced smooth taste of Skol Classic products. In February this year, the brand began to refresh Skol's packaging to better reflect the brand's contemporary premium qualities and to better communicate the attributes of Skol Xtra and Skol Classic. Last month, the brand introduced a new retail look that features both a Skoal Classic Zone and a Skoal Extra Zone. Skoll is also engaging adult dippers on the web and at events. On Skoll's updated website adult dippers can view brand news and explore Skol offerings in the lineup section.
Inside the Skull zone, which the brand takes on the road, adult dippers can try Skull products, compete in interactive games and take home some new gear complements of the brand. USSTC's investments in Copenhagen and Skol have delivered strong results. These premium brands have the highest brand equity scores in the MST category. In 2012, the Smokeless Products segment grew adjusted operating company's income by 7% to $959,000,000 and grew adjusted operating company's income margins by 1.8 percentage points to 60.8 percent. Copenhagen and Skol grew their combined domestic smokeless product shipment volume by 6.2 percent for the full year of 2012 and grew their combined retail share by 1.5 percentage points during the same period as measured by our new tracking service.
Turning to the wine segment. Ste. Michelle has complemented our tobacco operating company's performance with strong income growth. Ste. Michelle's strategy is to grow income by expanding its share and distribution of premium wines.
Currently, it is the 3rd largest premium wine producer in the U. S. And is among the fastest growing of the top 10 premium wine producers according to the Nielsen Company. St. Michel's Estates include Chateau Ste.
Michel, Columbia Crest, 14 Hands and Stags Leap Wine Cellars. Also, Ste. Michelle Imports and Markets Antinori, Champagne Niccolo Foyotte and Villa Maria Estate Products in the U. S. In 2012, 14 Hands broke the 1,000,000 case mark and was named Leaders Choice Wine Brand of the Year by MarketWatch Magazine.
14 Hands was also the wine sponsor of the Kentucky Derby and was a featured wine at various events throughout Derby Week. St. Michel's strategies enabled it to grow its adjusted operating company's income by 9.5% for the full year of 2012. In summary, our operating companies are focused on investing in premium brands. Each uses disciplined innovation to strengthen their premium brands.
These investments are delivering positive results and we believe they position our companies for future growth. Now Marty and I will take your questions.
Okay. One note before we get started. As a courtesy to those both in the room and on the webcast, if you could please wait for a microphone before asking your question, we appreciate that. Thank you. And let's begin who would like to start first, Vivien.
Thanks. Vivien Azer, Citigroup. I wanted to talk a little bit more about your expectations for the e vapor category please in terms of the size of the pie, the potential impact on traditional cigarette volumes and whether you have a margin target in mind once you get a broader distribution there?
Okay. Let me take a whack at those. It's early days obviously in the category. So almost anything we talk about with e vapor we have that understanding I guess. I think the question really is you've seen the published reports including some of your own about what the size of the category is today.
I think the open question is what's the category going to be tomorrow. And because it's so early I think hard to know that. What we do know is that there are some adult smokers who are interested in innovation. Our research tells us that. And you see really kind of for the first time adult cigarette smokers really trying these products.
So it's hard know. I think it's also early on margin. The tobacco space generally enjoys nice margins as you just saw from Dave's presentation and we would aspire to have good margins in any business we operate there. But there's so many unknowns right now about what's going to be the excise tax structure if any, how many consumers are actually going to migrate to the product, what's going to be the regulatory much. That was 2.
What was your 3rd? I'm sorry.
The potential impact on traditional cigarette volumes. I think you kind of answered that.
I do. Yes. I think it's just depending on how many really switch.
If I could just have one follow-up. In terms of the consumer work that you've done around the interest in e cigarettes, are there any standouts in terms of demographics? Does it skew a little bit younger, more urban, more educated?
It's just hard to read right now. We have done some work in that regard, but I think it's early. And rather than to guess at those numbers, I think it's fair to say that there is some widespread interest in the product among a certain cohort of adult cigarette smokers. Okay. Thank you.
Who's next? One
here. Who is the target consumer for Mark 10? Is it only geared towards smokers also non tobacco users? And how important would it be to you that you would be able to make a differentiated health claim or risk claim on this product?
Okay. So our target audience for Mark 10 is adult cigarette smokers and adult vapers. And we're not making a health claim with Mark 10. In fact, we'll have a warning on it which is appropriate for the category. We'll just have to see over time what FDA has to say about these products.
But would you see it as a benefit if you could make a health claim at some point in the future assuming the FDA would let you do that?
Well, I won't talk about these e vapor products particularly in that regard because we're not making a claim about it. But I think we've talked at other times about our desire. I mean, it's one of the reasons why we supported FDA. We think that harm reduction
harm
harm and if FDA could approve claims in that regard that are accurate, they're non misleading, but that tells adult tobacco consumers that there is some relative risk. We support that policy and any products that would meet that test we would support them too. Why don't we go over it this way David?
Marty, two questions. First on Marlboro's demographics in the past when you've shown those graphics you've had actual numbers. Here it's hard for an outsider to peg exactly. In general, could you talk about Marlboro's demographic profile today with the young adult smokers versus when you ran those analyses and had 3rd parties assess the brand attributes say 2 years ago?
That's my first question. Dave why don't you take that one?
Yes. We look at Marlboro's both the brand equity that's the TNS study. What we've seen over time is that the brand Marlboro has remained okay basically has remained very strong with not a lot of movement okay both in its equity status. And the reason for that, it's been around for a substantial period of time 60 years. So it remains strong and its equity scores among 21 to 29 aged smokers remains about equal to its overall share.
So not a lot of movement, but remains high.
And then secondly on a different topic, could you talk about your approach to price and mix management within the smokeless tobacco category? Because in the recent past although you've taken wholesale price increases, revenue growth pretty much tracked volume growth because of the nature of the new products and their price points. Is that sort of what you had envisioned 2 or 3 years ago that you wouldn't be getting net pricing? Are you underperforming what you would have hoped? Or is that sort of just a reflection of the programs you're putting into the market?
And just for clarity, you're talking about smokeless, Dave. On smokeless, yes. You want to start Dave? I'll one.
Yes. When we look at the smokeless category, first we start with our overall strategy, which is to grow Copenhagen Skol combined at or greater than the overall category, so modest share growth in the category that's growing. And if we do that and we continue to invest in those 2 brands, we should get income growth that exceeds the category growth of that segment. And mix you described mix, we describe it as looking at the consumer those brands through the lens of the consumer. So over time whether it's Skol Extra or Copenhagen Wintergreen versus Fine Cut or Skol Classic, I am less concerned on what products they choose.
I am more concerned that we have products out there that they find appealing and more satisfying than competitive products. And if we do that then income should follow.
And I guess the only thing I would add to that is obviously margin enhancement proves I think that strategy is on track for us. Maybe I'll switch to another side of the room. Anne?
Thank you.
I wanted to return to the e cigarette topic if I may. I wanted to know if you'd share your insights on consumer trial and retention and conversion in that category and what your thoughts are on that topic?
Sure.
And then you highlighted activities you have planned around Mark 10. But can you elaborate a little bit on how to build awareness behind Mark 10 and how to reach out to the consumer? And then 3rd, when you launch in Indiana, how do you get on the shelf? Like do you take something off? Or can you just comment on where you'll place that product on the shelf?
Yes. Let me take the first two and then I'll ask Dave to comment on our distribution approach. We've talked about this before. I think there's obviously very high awareness of e cigarettes. There is some considerable trial, but conversion I think everybody agrees is low.
So that's going to be a function of the products technology evolving. We like very much for example our fraud for draw technology. One of the insights that we have we believe is that the draw of the product is a significant contributor to the experience from a sensorial point of view and we've worked very hard on trying to get that draw to be closer to what someone who's interested in such a product might like. So ultimately, I think you've got to have a superior product. And then we'll go to work in the same way on our branding and our equity campaigns to try to communicate that to the brands the same way.
But I think it's early there in terms of people converting. But that's our business. So we're in the business of trying to provide superior branded products to adult tobacco consumers. And so we want to get in. And also I would tell you we're the market leader.
We intend to act like a market leader. And there's some things that need to be sorted out in the category. There's regulatory issues to be sorted out. There's excise tax issues to be sorted out. And we want to act like the market leader and be at the table as those issues are sorted out for the consumer.
Dave, you want to say a word about the approach in Indiana to distribution?
Yes. Well, it first starts with AGDC Altria Group distribution company. And over the past 4, 5 years that group has had a great deal of experience in whether it's selling in expanded space in the MST, it's selling in the concept of resetting Marlboro's fixtures from the 4 flavor families concept. So they will take the same approach. They are in most of those stores on a monthly basis sometimes twice a month.
And so each store depending on its setup will require probably something that's not completely unique, but a little bit different than maybe some other store. So they know how to do that and they will be doing that over the next couple of months as we speak.
Thank you. Judy?
Artie, you showed a chart that total tobacco volumes have been declining about 2%. And I think that was in pound terms. I'm wondering if you think about it on a cigarette equivalent terms if that number would be comparable. And as some of these other tobacco categories whether it's smokeless growing at 5%, 6%, cigars growing at 2% and now you've got the e cigarette category that's exploded. Do you think that the underlying cigarette category decline is going to be worse going forward from 3% to 4%?
And so just wanted to get that dynamic, total consumption?
Yes. Well, I mean cigarette volumes have been going down now since 1982 right? And if you look at them over time, they've been going down about 3% to 4% over time. And so I think that's the best measure if you will of what cigarette volumes have been doing. Of course, it's not a prediction for the future.
But I think I mentioned during the Q1 that we didn't see anything including e cigarettes by the way that we thought was going to be a significant step change in terms of cigarette volumes. What you do see in terms of total tobacco volumes as we explained is you see people that are moving. They're moving within the tobacco space. And so some people are using cigarettes, some cigars, some smoke. As I suppose if the e vapor category turns out to be what some think it may be you'll have that as well.
But it's really moving and then of course you have population growth underneath that for adults who participate in the category. So that's how we think about it. We don't see any big step function change in that at least as of now.
And then just somewhat related to that. When you think about the total tobacco profit pool then going forward, I think historically you've said it's about 4.5% in the last 4, 5 years. How do you think about that profit growth algorithm in the context of the growth in some of these other categories as well? And then just in terms of how you would replicate your margin structure, not just in e cigarettes, but just broader categories, obviously, there are tax differences and MSA differences, but just kind of thinking about the underlying margin structures and how does that impact the overall Altria margins going forward?
Yes. Well, we start with trying to have strong operating companies that have premium brands that can command premium prices in the marketplace and have strong margins. I think the best example is the smokeless business. So you see there the operating margins that Dave just showed us were above 60% there. And so that's always been our way.
We invest in premium brands. They have equity to command premium pricing. And I point out to people, they've been able to do that by and large through some pretty difficult economic times. For emerging categories like e vapor products, the March
And I just think it's too early to speculate on
what that would be. But I And I just think it's too early to speculate on what that would be. But I can tell you we're interested obviously in having a good manufacturer's margin on those and other innovative products of the kind we pointed out this morning. Does that help you? Okay.
Let me just try to be fair about going over here. Maybe I will go left to Dan.
Thanks. Two questions back on the cigarette side of the business. And I apologize because I've kind of flitted in and out over the past 15 years of tracking the company. But the slide that shows the kind of main purpose for the smokeable products has language of maximizing income while maintaining modest share momentum to distinguish it from the the strategic goals of the smokeless category and the other division. And I just wanted to know question 1, is that formulation that phrasing, we all kind of try to pick apart these words very precisely.
Is that new or at least by my standards relatively new in the last 2, 3 years? And the second question which is related to that in effect is that as Marlboro goes from being a brand to a portfolio of brands to address the facts that many in the community feel that there are demographic issues associated with it and part of the response has been making it into a portfolio of brands. We see the outcome of that portfolio of brands currently kind of color coordinated and descriptors. But how much more thoughts or how radical has the thought been in terms of making it into a portfolio? Would you consider even in effect moving forward with the colors and the descriptors to the extent that the word Marlboro begins to recede that it becomes morphs in that direction.
That is how what's the range of opportunity for making taking Marbo from a single brand to a wide ranging portfolio of brands? Thanks. Okay.
Thanks for your question. Maybe I'll start with the first part of it and Dave I'll ask you to handle the second. That articulation actually has been relatively constant that you identified. We do want to maximize income in the smokeable segment. But as Dave pointed out in his remarks, Marlboro is the driver of that profitability by and large.
And so we want to be attentive to making sure that Marlboro continues to be a strong brand that can command those premium prices and can command those margins. So that has been relatively constant for many years. I don't think you're I wouldn't want you to take away Dan if there's anything new there.
And if I could just follow-up, we still consider the brand Marlboro one great brand not 4. We have 4 flavor families, 4 product families that have really allowed the brand teams and our agency to kind of explore different communication vehicles. But if you look at the history, there was a chart that showed the 60 year history of Marlboro. And very soon within a decade it's Marlboro Red, Marlboro Green, Marlboro Gold was the 2nd decade. So very within 20 years of the creation of Marlboro, it had already, okay, started to satisfy different consumer preferences through different products.
We have basically over the last year and a half, basically more freedom to our brand people and the agency brand Marlboro and that will be our approach going forward. Okay. Grand Marlboro and that will be our approach going forward.
Looks like we have time for perhaps one more before the break and then we'll have another Q and A. Maybe Michael's upfront and we'll try this see how the clock goes.
Just looking at the brand equity score comparisons and the age split that you gave, the Marlboro has the advantage versus the unnamed competitors there. But the gap is not as big as the market share advantage that you have. Can you explain what some of the drivers are that keeps your market share above the gap bigger there than just in the equity scores?
I guess what I would say about all these metrics is just to provide some context before we talk and Dave may want to talk about the TNS score in particular. But I think it's useful to remember that the way we look at Marlboro's strength is through a variety of metrics, right? We're looking at its scale. It's bigger than the next 10 brands combined the next 10 brands combined. We're looking at its ability to command premium pricing.
The price gap hasn't hardly moved including through the worst economic period we've been through in decades right at about 35%. We do look at the demographics. We do look at brand equity scores. We have qualitative feedback from Marlboro smokers and adult competitive smokers. So I know it's tempting to try to zoom in on one metric and try to extract perhaps more insight than it suggests.
That's how we look at it. That's not to discount the question that you're asking which I understand. It's just that when we look at it, Michael, we look at it through a variety of lenses to make sure that Marlboro is headed in the direction it needs to continue to head Do you want to say more about that Dave?
No. That's basically it. And the both that the equity component, it's actually made up of numerous, numerous questions such as brand awareness, what do you think about the brand quality. So it's a lot of different components that then get ratioed up to one number. So but I would second what Marty has said.
We look at that as but one feature of lots of different elements around the strength of the brand.
That's helpful. And then lastly just one quick question on the e cigarette rollout. Do you have a time line for an expected national launch?
No. I think we're not going to make any announcements in that regard today. We're pleased to be able to announce our significant step forward in Indiana. And what we'll do obviously is learn our way in. We'll talk to the consumer and find out how we're doing.
And if we haven't announced that more, we'll make it at that time. So thanks for your question. Thank you all for your questions. There's plenty of time for Q and A. I promise we'll be around, but I do want to keep us on schedule for the webcast
Good morning, everyone, and welcome back. I'm Jim Dillard. I'm responsible for leading the Altria Regulatory Affairs Department. And I've been with the Altria family of companies for 4 and a half years. Before joining Altria in the acquisition, I spent 7 years at UST where I was Senior Vice President of Manufacturing, Science and Technology.
Prior to joining the tobacco industry, I held various positions at the Food and Drug Administration for over 14 years, including Director of the Division of Cardiovascular and Respiratory Devices. My current role allows me to combine my FDA and tobacco experience to help Altria address federal tobacco regulation for our businesses and their adult tobacco consumers. We have structured our regulatory affairs team into 4 key areas: regulatory advocacy and engagement, quality compliance, regulatory sciences and regulatory reporting. In the broadest terms, we think of our regulatory work in 2 primary areas compliance and engagement. Early on in the establishing of the regulatory affairs function for Altria, we developed core principles for interacting with the agency.
Our aim is to be informative, science and evidence based, balanced and constructive. We also seek to provide strong support for our positions by drawing on our company's deep knowledge of tobacco product development, manufacturing, marketing, sales and distribution. Finally, we advocate for accurate and non misleading product communications to adult tobacco consumers. We believe we're making progress in establishing a positive long term relationship with FDA. We want the agency to expect thorough and complete analysis from Altria and we hope to be in a position over time to increase our interactions and engagements with FDA on specific regulatory issues and the underlying science.
FDA regulation is a marathon not a sprint. So we are taking a long term and methodical approach to the work that we do. For example, we have submitted over 70 papers to the agency covering a range of important issues. We participated in 30 meetings with the FDA and presented multiple times at the Tobacco Product Scientific Advisory Committee. We also make appropriate FDA submissions available on our website.
In fact, we encourage you to visit altria.com, specifically the Federal Regulation of Tobacco section of the site. You'll find these regulatory submissions there searchable by subject and by year. Some of our tobacco operating companies also hosted FDA at their facilities to share information on how they manufacture tobacco products. Over the past 4 years, the principal focus for FDA and tobacco product manufacturers has been on implementing the statutory requirements of the Family Smoking Prevention and Tobacco Control Act. In recent public comments, FDA has described its near term priorities, emphasizing decisions on substantial equivalents, deeming of other tobacco products and of course menthol.
While the timing of FDA action on these topics is unclear, these priorities are consistent with our expectation and with Marty's remarks at CAGNY in February. Given FDA's stated focus on these priorities, let's discuss each one of them briefly. With respect to substantial equivalence, we've had ongoing scientific engagement with FDA on our submissions. We have a dedicated team working to timely respond to all FDA information requests. We have regular ongoing dialogue with the Office of Science as they review the substantial equivalent submissions.
We expect FDA to make additional progress on this topic in 20 the FDA has stated that it intends to regulate cigars, e cigarettes and other tobacco products. While we expect FDA to issue proposed deeming regulations soon, it is important to consider these proposals in the context of the broader vetting process for proposed regulations like these. As this organizational chart illustrates, we expect that deeming regulations will be reviewed by several parts of the agency. First, we'd expect draft regulations to be reviewed by multiple departments within the Center For Tobacco Products, including the Office of Science, the Office of Policy, the Office of Regulation and of course by the CTP Director, Mr. Zeller.
Once the CTP reviews have been completed, we'd expect the proposed regulation to be reviewed at the agency level by FDA's Office of the Chief Scientist and the Office of the Commissioner. And after that, we'd expect review by the Department of Health and Human Services and finally the Office of Management and Budget. All of this and potentially more likely is happening on an issue as complicated as extending
FDA
the potential business implications and share our perspective with FDA through the public comment process. In the meantime, we have been working very closely with John Middleton and Newmark preparing them for eventual regulations. Importantly, we expect that FDA will not issue a final regulation until after interested parties have had a chance to participate in the notice and comment rule making process. As Marty shared, Newmark is entering the e vapor market and expanding its lead for VERVE discs. We have shared our perspective with the FDA regarding appropriate regulation of these types of products.
And at the principal level, we believe FDA regulation of these types of products should be appropriate for the category, permit continued access for adult cigarette smokers interested in alternatives to smoking, while limiting reach to unintended audiences provide for accurate non misleading product communications to adult tobacco consumers, encourage research and monitoring, establish product evaluation guidelines and good manufacturing practices that enable consistent product performance and reduce variability and provide a reasonable transition period to comply with the regulations. Let's turn to modified risk tobacco products or as we call them MRTPs. As you may know FDA issued draft guidance for MRTP applications in March of 2012. We have encouraged the agency to focus on harm reduction and acknowledge a continuum of risk. The potential role that modified risk tobacco products may play in reducing the harm caused by tobacco use.
In recent comments, FDA has expressed interest in this topic, recognizing that different products may well present different risks to individual users. They also raised important questions related to population harm and the role that this will play in the agency's analysis of any MRTP applications perspectives and proposed principles on MRTPs with the agency. We continue to believe that Congress created the MRTP regulatory pathway, so that FDA could have the broad tools available to reduce tobacco related harm. FDA has the potential to significantly advance its mission of promoting and protecting public health by successfully implementing a regulatory framework for MRTPs and applications. Let me briefly touch on menthol.
As you may know, once the act completed its work on menthol 2 years ago, the CTP began to review the available science related to the impact of menthol in cigarettes on public health. It then submitted its independent review of the science to an external peer review. We submitted 2 substantial sets of comments on the available science and the impact of unintended consequences. Our continued analysis of the science and evidence related to menthol affirms our perspective that menthol added to cigarettes does not increase the inherent risks of cigarette smoking. Any future action taken by FDA to regulate the sale or distribution of menthol cigarettes or establish a tobacco product standard for menthol cigarettes will require rulemaking that includes public notice and the opportunity for public comment.
FDA is also required to consider other issues including illicit trade, contraband and counterfeit. To sum up, Altria supported the enactment of federal legislation granting FDA regulatory authority over tobacco products. We believe that FDA regulation can play a significant role in reducing the harm caused by tobacco products. This is a goal that we share with the public health community and society and we believe it is good for our company and information with FDA and other key stakeholders about the regulatory issues important to our businesses. Now let me turn the podium over to Bruce Gates, who will discuss external affairs.
Bruce?
Thank you, Jim. Good morning and thank you for the opportunity to speak with you today. As Jim mentioned, I'm Bruce Gates and my role at Altria Client Services is to lead our external affairs efforts, which includes our government affairs and corporate affairs functions. Among other things, we provide legislative advocacy and communication services to our operating companies and to Altria Group. And we maintain a lobbying presence at the federal state and local levels.
We also work with Jim and his regulatory affairs team to support our engagement with the FDA. An important component of Altria's mission is to align with society by actively participating in resolving societal concerns relevant to our businesses. To support this goal, we seek input about our business practices from a broad range of stakeholders. Our engagement with them helps inform practices, assists in identifying emerging issues and improves our stakeholders' understanding of our companies. This engagement has informed our support of programs to help reduce underage tobacco use, our advocacy for reasonable regulation that can reduce the harm associated with our products and our support for legislation to help combat illegal trade in tobacco products.
There are times however when legislation or regulation is proposed that would have a negative impact on our business. In these instances, we advocate our positions by engaging responsibly with government officials, our business partners, consumers, employees and many other stakeholders. I'd like to focus on one of these issues, taxes, to illustrate how we approach public policy issues. Tax increases both excise and income present risks to our company. And maintaining appropriate tax policy and rates is an important objective for our businesses.
Altria's strong business performance in the face of recent economic and external challenges speaks in part to the value of our effective engagement in the legislative and political processes. Today, tobacco taxes are high by almost any measure. When combined, the federal and state excise taxes on a pack of cigarettes amount to 2 $0.43 on a weighted average basis. All in payments to governments comprise about 55 percent of the price of a pack of cigarettes. Not only are tobacco excise taxes high, but they are aggressive and unfairly burdened tobacco consumers.
And when they are too high or increased dramatically, they can create significant financial incentives for criminals to engage in illicit activity that undermines tax revenues and hurts law abiding businesses. Tobacco consumers should not be asked to disproportionately bear the cost of large scale government spending programs asserted to benefit many. As you know, the administration recently proposed a near doubling of the federal cigarette excise tax and a similar increase for other tobacco products, all to pay for a broad based federal program. We oppose this increase and will closely monitor this issue. High excise tax rates and large tax increases also encourage smuggling, contraband activity and counterfeiting.
Ultimately, these activities deny the government revenue and deny income to the law abiding members of the distribution chain. The U. S. Alcohol and Tobacco Tax and Trade Bureau estimates that the federal revenue losses alone from illicit cigarette trade could be $5,000,000,000 annually. Some studies show that here in New York State where a pack of cigarettes may carry as much as $8 in taxes and fees, more than half of cigarettes consumed are brought in through illegal channels or from consumers buying their cigarettes out of state.
An important emerging issue is if or how to tax new forms of nicotine containing products like those we have discussed this morning. We think that initially governments would be wise to avoid taxing products like these altogether until we've seen where the consumers ultimately land and to allow regulators fair opportunity to better understand how these products might fit into an effective harm reduction strategy. From 2010 through 2012, we saw a relative moderation in the number of large increases in state excise taxes on tobacco products. Over that 2 year period, the year end weighted average state cigarette excise tax increased at a compounded annual rate of 2% as compared to 10% from 2,004 to 2010. Last year, we engaged in 16 states where increases were proposed.
Of those, only 2 were successful. As of July 1, the weighted average state excise tax will increase approximately 0 point $3 due to the $1.60 per pack increase in Minnesota. The weighted average state excise tax as of that date will be about 1 $0.45 $0.04 higher than at the end of 2012 based on increases enacted to date. We are opposing large increases proposed in several states where legislatures remain in session. To conclude on excise taxes, when we think that government is overreaching, vigorously defend our consumers.
A recent example was our participation with a broad coalition of tobacco companies, taxpayers, small businesses, law enforcement and labor that successfully opposed the tobacco tax increase that was on the ballot last year in California. We also encourage our consumers to participate in the legislative process. Our companies launched Citizens for Tobacco Rights, a website that offers information, tools and resources to help them get involved in tobacco issues. Now I'd like to spend a few minutes on federal income taxes. As a high dividend paying company, we understand the importance of maintaining a low federal personal income tax rate on dividends.
In 20,223, we advocated to lower the dividend tax rate and bring it into parity with the capital gains organizations in support of keeping the tax rate as low as possible. Our engagement included advocating with policymakers and activating our employees, retirees and other shareholders to weigh in with Congress and the administration. We are pleased that Congress and the President agreed on a permanent change to the tax code, maintaining a lower tax rate for dividends and on ordinary income and parity between the tax treatment of dividends and capital gains. Finally, a word on corporate income tax. We believe that America's corporate tax rates are too high, the code too complex and the entire system not competitive.
For these reasons in 2011, we helped form
the
30,000,000 employees advocating for sound and equitable reforms to the tax code. It has been more than quarter of a century since comprehensive tax reform was last enacted. We were pleased that both presidential candidates advocated for lower corporate rates during the campaign and we will continue to actively engage with Congress on this important issue. To close, our companies have developed a comprehensive approach to understanding and proactively addressing many of these risks. We've also built significant capabilities and expertise to responsibly advocate on issues of importance to our businesses and
to our shareholders.
Thank you for your time. Murray will now take us through a litigation update.
Thanks, Bruce. We have continued to achieve substantial success in managing the tobacco and health litigation, notwithstanding significant challenges. A comprehensive discussion of the tobacco related litigation can be found in Altria's 2013 Q1 Form 10 Q filing. This morning, I will touch on 2 categories of tobacco litigation: lights class actions and individual cases including Engel Progyny cases. Finally, I will briefly update the current status of non participating manufacturer proceedings.
With respect to the lights class actions, the overwhelming majority of federal and state courts have refused to certify these cases. However, state courts in California, Missouri and Massachusetts have certified 3 lights cases. In California, the Brown class action trial is currently underway before the state court without a jury. In Missouri, the Larson case is scheduled to be retried in January 2014 and in Massachusetts, the Aspinall case is active, but does not have a trial date. Although outcomes of these cases remain uncertain, we believe we have substantial defenses in all of them.
Other lite cases are pending in federal and state courts, but courts in those cases have yet to decide whether these should be certified as class actions. In federal court, no lights case is currently certified as a class action and no class certification in federal court has ever withstood appeal. In the Miles Price case, the plaintiffs continue to try to reopen the judgment that dismissed their claims and reinstate the original verdict that was vacated by the Illinois Supreme Court. Most recently, plaintiff's petition was dismissed for the 2nd time by the trial court and plaintiffs are appealing that dismissal. With respect to individual cases outside of Florida, we continue to see a clear downward trend.
In 2012, only 2 new individual personal injury cases were served on PM USA, while 10 such cases were dismissed. Since 2011, other than retrials or trials of derivative claims, PM USA tried 4 individual cases in New York, Massachusetts and Alaska, winning all 4. Regarding the Anglo Progyny cases, events in 2012 and the first half of twenty thirteen demonstrate that these are challenging cases, but that PM USA is aggressively defending itself and has strong legal and factual challenges to these suits. By way of background, the original Engel case was a class action brought by smokers in Florida that resulted in a punitive damages verdict against the industry in 2 1,000. On appeal, the Florida Supreme Court vacated the punitive damages award and decertified the class.
At the same time, however, the court allowed class members to file individual suits by January 2008 in which they could use certain general jury findings regarding company conduct. Exactly how these findings could be used, however, has been and continues to be a critical legal issue of constitutional magnitude that cuts across all of these cases. Although earlier this year, the Florida Supreme Court in Douglas rejected our due process challenge, we will shortly be asking the
the
Reynolds Tobacco Company. We look forward to the 11th Circuit decision and the possible opportunity to present our arguments to the U. S. Supreme Court. In the meantime, in the federal and state trial courts, we receive defense wins in approximately half the Anglo Progyny cases tried to verdict.
Furthermore, in the last year, state appellate courts reversed several compensatory and punitive damage awards on a variety of state law grounds. PM USA will continue to defend these cases vigorously and appeal any loss, though it is possible that we will have to pay some judgments this year depending on if and when the U. S. Supreme Court accepts review. We also have recently finished a trial in West Virginia in a unique case that was a consolidation of hundreds of individual personal injury actions filed against the major cigarette companies.
After over 15 years of litigation, the jury rejected virtually all of plaintiff's claims including for punitive damages. The plaintiffs prevailed only on the narrow and unique claim that ventilated filtered cigarettes between 1964 July 1, 1969 should have included instructions such as how to hold the cigarette without covering up the ventilation holes. To the extent any plaintiff chooses to prosecute such a claim, he or she would have to prove a trial that the absence of such instructions somehow led to his or her injuries. Obviously, we would have substantial defenses in such a lawsuit. To sum up, we have had success in managing litigation, although we continue to face significant challenges as we have for many years.
Our goals remain to protect the interests of our shareholders by vigorously defending these claims. Finally, let me bring you up to date on the status of the NPM adjustment. Pursuant to the settlement of the 2,003 to 2012 NPM adjustment disputes with certain states, PM USA received a credit of $483,000,000 against its April 2013 master settlement agreement payment. In late May, 2 additional states joined the settlement and as a result PM USA expects to receive another $36,000,000 credit against its MSA payment obligations. A number of states that have not joined the settlement have actions pending in their state courts to vacate or modify the stipulated award.
The arbitration with the states that did not join the settlement concluded in late May and we are awaiting the panel's decision as to the 2,003 diligent enforcement claims of those states. Proceedings to determine state diligent enforcement claims for 2004 and subsequent years have not yet been scheduled. Now, I'll turn the presentation over to Howard.
Thanks Murray. Good morning everyone. My remarks this morning will focus on our four strategies that we believe will generate strong returns for our shareholders for the long term generating operating income growth from our businesses, focusing on controlling costs, maintaining a strong balance sheet and delivering excellent cash returns to shareholders primarily through dividends. Let's start in the Smokeable Products segment. PM USA and Middleton's objective is to maximize income while maintaining modest share momentum on Marlboro and Black and Mild over time.
And we have a track record of delivering Smokeable Products segment grew revenues net of excise taxes per 1,000 units at a compounded annual rate of 5.5 percent grew adjusted operating company's income at a compounded annual rate of 4.7 percent to 6 point expanded adjusted operating company's income margins from 33.8 percent to 41.2%. Pricing has been and will continue to be an important contributor to income growth in the smokeable products segment. From 2008 through 2012, the Smokable Products segment led its principal competitors in revenue growth excluding excise taxes on a per 1,000 basis. And in the Q1 of 2013, the segment grew same metric by 4.5%. At the same time that PM USA and Middleton realized this net pricing, we have also been very mindful of managing costs as controllable costs per 1,000 were essentially flat over that same 2,008 to 2012 period.
Our smokeable products segment has performed very well in a challenging environment and has consistently grown its income, which helps support our strong returns to shareholders over the last 5 years. Let's move to our smokeless products segment where USSTC and PM USA's goal is to increase income by growing volume at or ahead of the category growth rate, while maintaining modest share momentum on Copenhagen and Skol 2012, the Smokeless product segment delivered excellent results against these objectives. Copenhagen and Skol grew their combined volume at a compounded annual rate of 7.6 percent, which is over 2 percentage points higher than the category. Copenhagen and Skol's combined retail share was up approximately 3 percentage points. USSTC and PM USA grew their adjusted operating company's income in the Smokeless Products segment at a compounded annual rate of 14.9 percent and adjusted operating companies income margins were up 11.3 percentage points.
Turning to our premium wine business, Ste. Michelle grew its adjusted operating company's income at a compounded annual rate of 12.5% from 2,009 through 2012. Our operating companies generate a significant amount of cash. Their strong performance has helped grow our operating cash flow from continuing operations from $3,200,000,000 in 2,008 to $3,900,000,000 in 2012. Cost management is also an important part of the algorithm to deliver strong profit growth, particularly in the smokeable products business where cigarette volumes continue to decline.
We have been very successful in reducing our costs over the past 5 years. This cost reduction was as a result of the multiyear $1,500,000,000 cost reduction program that was finished in the 3rd quarter of 2011. After completing that program, we launched another cost reduction initiative to achieve an additional $400,000,000 in annualized cost savings versus previously planned spending by the end of 2013. This program remains on track. Although this program ends this year, cost management remains an important part of our culture and our continuing efforts to grow shareholder value.
Let's briefly touch on capital expenditures. We currently project our future internal uses of cash to be relatively modest. We anticipate capital expenditures across the Altria family of companies to be less than 2% of revenues net of excise taxes over the next several years. For this year, we anticipate capital expenditures will be in the range of $125,000,000 to 150,000,000 dollars Altria's strong balance sheet is the 3rd element that helps sustain our ability to reward shareholders. A strong balance sheet secures the cash flow generated by our operating companies, protects Altria's investment grade credit rating and supports Altria's approximately 80% dividend payout ratio target.
Our investment grade credit rating is key to our capital structure, because it allows us to competitively access the capital markets. It has allowed us to issue over $6,000,000,000 of senior notes over the past 3 years at attractive rates. Altria's credit rating provides us access to the commercial paper to cover short term cash needs, such as during months immediately preceding and following MSA tax and dividend payments that occur each April. We also have a revolving credit facility of $3,000,000,000 that backstops our commercial paper borrowings. In the Q3 of 2012, Altria completed a tender offer that repurchased high coupon debt and replaced it with new lower cost debt.
The key benefits of the refinancing included the ability to reduce our 2018 2019 debt maturity towers, lower future interest expense and reduce our weighted average coupon rate. Last month, we issued $1,000,000,000 of senior notes in 10 year 30 year maturities with a weighted average coupon rate of 3.96%. These and other actions decreased our weighted average coupon rate from 9.1% at the end of 2,009 to 7% as of May 31, 2013. From now through the end of the Q1 of 2014, we will have approximately $2,000,000,000 of debt coming due with associated annual interest payments of approximately $160,000,000 From now through the end of the Q1 of associated annual interest payments of approximately 160,000,000 dollars Our decision to refinance or retire this debt as it comes due depends on the conditions in the capital markets, interest rates, Altria's business needs and other factors. Our debt to EBITDA ratio of approximately 1.7:one as of March 31, 2013 is well within our credit agreement debt covenants of not more than 3:one.
In January of this year, Altria made a voluntary $350,000,000 contribution to its pension plans, increasing our funding position to approximately 82% on a projected benefit obligation basis. Altria's economic interest in SABMiller strengthens our balance sheet, provides income diversification and helps grow our EPS in dividend, while helping to sustain our investment grade credit rating. This position allows us to participate in the estimated 32,000,000,000 dollars global beer profit pool, where SAB Miller has an estimated 20% share. The market value of Altria's interest has increased nicely from $3,400,000,000 in July 2002 to nearly 21,800,000,000 dollars as of May 31, 2013. The dividend income that Altria has received from our equity investment in SABMiller has grown from $112,000,000 in 2,003 to $402,000,000 in 2012, a compounded annual growth rate of 15.3%.
This asset has a low tax basis of under $500,000,000 and any sale would be taxed at our corporate tax rate of approximately 35%. We regularly evaluate our economic interest in SABMiller and currently believe maintaining the investment is in the best interest of our shareholders. Altria's income growth, cost control and strong balance sheet enable us to return a large amount of cash to shareholders, primarily through dividends. Altria has a long history of dividend payments and dividend increases, having increased its dividend 46 times in the last 44 years. Future dividend payments remain subject to the discretion of Altria's Board of Directors.
Since the spin off of PMI in early 2008 through May 31, 2013, has paid shareholders $15,300,000,000 in dividends and increased its dividend 6 times for a compounded annual growth rate of 8.7%. In August 2012, Altria increased its dividend by 7.3% to an annualized rate of 1 point is an important part of why we believe that Altria is an attractive investment in any environment. Finally, Altria also has repurchased stock when we have concluded that it is the best use of cash to maximize shareholder value. Since the PMI spin off through March 31, 2013, Altria has repurchased approximately $3,700,000,000 of shares. In 2012, Altria repurchased shares worth $1,100,000,000 and completed our $1,500,000,000 program in the first quarter of 2013.
In April 2013, we announced the new $300,000,000 share repurchase program that we expect to complete by the end of this year. The timing of share repurchases depends upon marketplace conditions and other factors. To sum up, we are focused on strategies that have consistently delivered strong returns for shareholders. Together these strategies allow maximize the value of our assets while positioning the company for long term growth. Altria has revised its guidance for 20 13 full year reported diluted EPS from a range of $2.49 to 2.55 $0 to $2.56 to reflect the impact of an additional $36,000,000 credit to be applied against PM USA's MSA obligations as a result of 2 more states joining the previously disclosed settlement of the NPM adjustment disputes for 2,003 to 2012.
Altria reaffirms that it expects its 2013 full year adjusted diluted EPS to increase by 6% to 9% to a range of $2.35 to 2.41 dollars from an adjusted diluted base of $2.21 per share in 2012. Thank you. And now I'll turn it over to Marty for closing remarks.
Okay. Thanks Howard and thank you all for listening this morning. Altria is a great company with diverse strengths. We have leading businesses driven by premium brands. We have broad capabilities that help us drive innovation and manage external challenges.
And we have committed employees who work every day to successfully execute our strategies. Altria's strengths and the successful execution of returns to shareholders. From the end of 2007 to the end of 2012, Altria's total shareholder return was 84.2%, outperforming the S and P 500's total return for the same period of 8.6% and the S and P Food, Beverage and Tobacco Index's return of 54.9%. These strong returns have been driven by Altria's consistent delivery of solid annual adjusted diluted EPS growth and its dividend. Altria's goal is to grow adjusted diluted EPS at an average annual rate of 7% to 9% over time.
From 2,007 through 2012 Altria grew its adjusted diluted EPS at a compounded annual rate of 7.9 percent as compared with the S and P 500's operating EPS growth of 3.2% which excludes corporate and unusual items in a manner similar to our adjusted diluted EPS measure. Our dividend payout ratio of approximately 80% of adjusted diluted EPS was the highest the S and P Food, Beverage and Tobacco Index and was among the highest in the S and P 500 in 2012. Our dividend yield of 4.9% as of May 31 exceeds the 2.1% yield of both the S and P 500 and 10 year treasuries. We're proud of this track record and we believe that the strengths we outlined today position us to create shareholder value over the long term. So I now invite Dave to rejoin us and we'll be happy to take any additional questions.
If you please direct your questions to me, I will try to get them to the right person and facilitate our conversation. Who would like to begin? We have one there David please. Okay. We'll come back to you Eric I promise.
Hi Chris. Hi.
How are you? So I just wanted to ask Howard in relation to share repurchase. You have obviously very strong cash flow this year and you have some benefit from the NPM settlement if you will from a cash flow standpoint. 3 $100,000,000 for the remainder of the year would seem very easily accomplished for the company. What would keep you from buying stock more aggressive?
I You could extend this for the Board approved. You can do more share repurchase through the year, but $300,000,000 at this point seems quite low relative to your cash flow.
Please.
Yes. I think as you pointed out, we announced a $300,000,000 program. And I think we're pleased with that right now and we haven't made any further decisions to increase that. I would point out that we have some debt coming due later this year and in the Q1 of next year. And so we're kind of balancing what our cash needs are going to be going forward.
David, let's go back and pick up Eric's question.
Thank you. Thanks. Eric Blumquist, Berenberg. Two questions. One is with respect to the regulatory environment and the evolution of tobacco harm reduction approach.
I was wondering if you could discuss what you see as the markers in development of that and what we can expect in terms of adoption of that approach by both the regulators, but also folks involved in tobacco control?
Yes. Maybe I'll begin and then I'll toss it over to Jim. I think at its most simple level, what one marker will be when manufacturers bring products to the FDA and seek their approval. And that's how we see it, which is we're in the business of trying to develop products for adult tobacco consumers. So we're working very hard in that regard.
And I think another marker is when the agency has those and what it does with respect to those applications when they have them. It's a complex situation. It's emerging and we'll see over time. But I remind everyone that in the United States, this is probably the only tobacco control regime that has expressly in its statute this notion of harm reduction and the idea that it could advance public health by reviewing products that are claimed with appropriate science and evidence to reduce harm from tobacco use. Jaime, do you want to comment?
Yes. I think I agree with everything you said Marty. The only other thing that I would add and maybe this isn't the marker that you're looking for, but I take it as very positive the fact that tobacco harm reduction continues to be elucidated in who's going to do this type of work. So the fact that we continue to who's going to do this type of work. So the fact that we continue to make progress and it's front and center and it's being discussed by the agency.
And very recently, Mr. Zeller, the new Center Director also mentioned that modified risk tobacco products were on his agenda. So I think all of that is leading to a very positive outlook for that particular harm reduction agenda.
Did you have another question? Yes. Sorry just a follow-up then. It struck me that the requirement around the population effect in evaluating MRTPs is quite a robust hurdle. Could you comment on that and how you see the industry and Altrient specifically able to satisfy that quite onerous requirement?
Jim, why don't you start maybe off
the chin? Sure. I think broadly about the population effects. It is the newest part this statute. Within the other regulated products industry, it's a safety and effectiveness standard.
The population effects is the new part to the tobacco control standard. And I think we're all working through what that means to us currently as we speak. The agency has taken a shot at it in terms of putting forward a modified risk tobacco product guidance document. We've had an opportunity to comment on that guidance document. Those comments are on our website.
I could see us depending on the next step of that particular guidance document. What that might entail for us, we would provide subsequent comments. But I think we're in that time where the industry and the agency are working very closely to try to figure out what exactly that population standard is going to mean and what is the data requirements for satisfying those both within MRTP context as well as Section 910 new product context as well.
I would just supplement that to say that another way of thinking about this perhaps would be that the agency would adopt an approach where they actually do test markets for lack of a better phrase. You could imagine that rather than getting sort of caught in this didactic of you must know before we launch a product versus why don't you let us launch a product and then surveil and make sure that there aren't these negative population effects that one could imagine a scenario in which a market was chosen to roll out a product with the belief that it will be harm reducing that those population effects are controlled for with a robust surveillance program to find out whether that proved to be true as opposed to for example approving a product for national launch. So it's another idea that's being kicked around. I'm sure that and other ideas will be discussed as we go forward. Hani?
Okay. Maybe just a follow on to that. Next generation products, can you talk a little bit about your thoughts on that and the potential opportunities for you considering you have the rights to Platform 1 and partial rights I believe to Platform 2 in terms of what Philip Morris has discussed. Is this something that you guys consider still an opportunity for you to introduce here in the States?
Well, I won't comment on our internal plans about perhaps other products that may be down the road beyond what we've spoken about today. But if I take the thrust of your question, which is are we interested in a broad range of innovative products that we're trying to develop that are satisfactory to adult tobacco
Okay. And
Okay. And then my second question is on the lines of innovation. As a company in the last couple of years, the innovation levels have increased across all your different businesses, different products, which is good. And I'd like to hear from you how you are balancing the increased levels in innovation and how you're prioritizing with maintaining focus on your core?
Yes. I think that's an excellent question. And I can tell you at the top level the way we talk about it internally and we have done quite a lot of work to make sure our organization understands this which is maximize the core innovate to the future. Maximize the core and innovate to the future. That's how great companies do it.
And we never take our eye off the ball about our core businesses, which I think Dave did such a job of laying out and Howard showed you the financial results from them. So we understand that we are the stewards of those businesses. We pay a great deal of attention to them every day to make sure that they're won responsibly and that we're returning our returns to shareholders. At the same time, no business or industry remains static. And you have to be prepared to take wise bets forward in a financially disciplined way, in a responsible way so as to move to your future.
And I think that's how our organization works on that. And that's a balance. Balance is the right word. And we use a variety of techniques allocation of resources, looking at potential scenarios. You heard Jim and Bruce talk about engaging with people who will be important drivers of how that world emerges.
But that's how we think about it. We have this terrific business. We continue to run it as best we can. But we are trying to open up our minds, our product development, our brands, our regulatory affair strategies possibilities of the new. And I think that's what that balance is that we're trying to strike.
And so we'll see. Maybe I'll do ladies first David with Judy and I'll come right to you.
So two questions. First just on the cost savings as you come to the end of the program the current program, how are you thinking about the future program? Is this going to be just really more of an ongoing productivity initiative? Or are there any restructuring that you can talk about today just in thinking about the big buckets of cost savings opportunity? And then I guess just remind us in terms of how you're thinking about SABMiller, because obviously every year we have I think this discussion about what's the right timing and what's sort of the economic value that it brings to the table.
So when you think about the criteria and evaluating whether it's right to keep the business, does the criteria change what are the criteria number 1 and does that change as that part of your business gets too big or depending on your value of the SABMiller stake or what any other factors that go into that equation?
Okay. Good questions both. Just to keep things interesting, I'll invert the order. Howard, why don't you talk about SABMiller? And then Dave I'll move to you on how we think about cost generally.
Sure.
I think with regard to SABMiller, as you pointed out, we evaluate that every year. I would say there's some common criteria, but we're also evaluating it fresh each year. And really we're asking ourselves do we think that it's going to provide greater value to shareholders in holding onto it or in doing something different. And we review that with management. We review that with our Board.
And I think we again this year have concluded that for now we continue to believe that holding on to that position continues to make sense from a shareholder value perspective.
Dave, you want to talk about costs?
Yes. And from a cost side, let me step back for a second. The first two programs the 1.5 the 1.2, 1.5, the 0.4 over the last 5 years. That was basically the result of external events happening and also a combination of some internal events. We spun off Crafts, spun off PMI, moved the headquarters to Richmond and basically restructured our business model.
So that basically addressed the first program. The second program was basically a remnant that was left over after the doubling of the federal excise tax that took place in 2,009, which had a one time impact to the size of the SITREP business. So it required us to think differently about our business. Ongoing, we're always looking to reduce cost, especially in the business where volume industry volume continues to come down, we like to stay ahead of that. And even in our other businesses that are growing with the industry, the industry volume is growing, what we're trying to do there is change business processes to get efficiencies that will then trick to margin improvement.
So as we look out to the future, it's basically reexamining our processes. How can we do things better that will result in margin expansion.
I'd just like to supplement that with one last thing, which doesn't get a lot of airtime, but it's worthy of mentioning, which is the business model itself. When you look at AGDC, which is our sales company or you look at Altria Client Services, which delivers services of the sort that you heard about from the panelists up here right now, this is very efficient. This is very efficient. So you've moved from having the Philip Morris USA sales force basically distributing cigarettes to now having the AGDC sales force, which distributes all the products you saw this morning and is now at least in Indiana about to take on yet another one. So the model has we've really refined that.
They do an excellent job. And we're also especially on the services side, we're able to deploy those resources to where the growth opportunities are and it allows us to control our headcount and our costs in a pretty efficient way. So I think if you add all that up, that's how we think about it. There may not be these big chunks anymore, but everybody comes to work every day thinking about how we can make the model a little bit tighter to watch our costs. So let's go to David now.
Thank you.
Two questions Marty. First on Mark 10 and e cigarettes. I'm going to make the assumption you're not going to advertise the product on television. And the follow-up to that premise is, do you think you're putting yourself at a significant competitive disadvantage?
Well, we haven't said today. We gave a lot of information out about Mark 10 today. But you're right to point out we didn't lay out the marketing campaign. And the reason is that's being finalized now. So we know where we're going and what the product is and the price and all.
Here's how we're thinking about that as we work through those issues. And I think Dave had a slide on this in his presentation. Our target audience is adult smokers and adult vapers and we will have robust marketing campaigns, communication campaigns, product information campaigns, so that they're aware of Mark 10. At the same time, we do want to be mindful of taking steps not to extend our reach to audiences that are not the target of those effects. I think that over the several years that we've been doing this data, we've demonstrated our ability to be quite successful without putting ourselves at any kind of a competitive disadvantage with that approach.
And that approach is just fundamental to the way we believe tobacco products should be marketed. And I believe in the long run it has inured significantly to shareholders' advantage to have us in the industry largely to be viewed that way. So stay tuned for more. I know it's a matter of some acute interest about exactly how we're going to do it. But the executions that I've seen so far leave me no doubt that we'll be successful in reaching the people we want to reach with our communication platform.
Thank you for that. And then secondly, I wanted to ask about cigarette pricing. Last year particularly in the middle of the year there was a lot of concern in the investment community as your price realization moderated at PM USA. In the Q4 it was better. It was even better in the Q1.
And I'm curious, Marty, is that a function of the fact that volumes have been a bit weaker? So is it offsetting lever? Or is it more a reflection of a variety of other dynamics?
I just think it flows from the fundamental strategy we're pursuing. Both Dave and Howard and I have all spoken to this, which is we're trying to maximize income in the smokeable segment and pricing is and continues to be an important part of that algorithm. To be sure there are other elements. We talked about some of them cost management for sure. But pricing look the volumes go down.
The master settlement agreement payments go up. This is just the math of the dynamic. And so we have a desire to maximize our income and the cost increases are rather the price increases are a part of that. Dave, anything you want to add to that?
We look at it. 1st and foremost maximize income with moderate share momentum on Marlboro. 1 quarter and 1 year, one the long term in 1 quarter and 1 year, one component might have a higher weight than the other. But it's actually looking at all five components of the value equation over the long term to go to maximize income.
Who else has a question? I have a question over here Mike to your left.
Priya O'Rigutta from Barclays. Thank you for taking the question.
Good morning.
Was hoping that you could talk a little bit more about your philosophy around debt issuance. How do you think about the trade off between refinancing versus paying down debt? And then sort of how does that flow over to your share repurchase activity from a debt funded basis? And then secondly, could you also just talk about further managing your interest expense line? Do you have a targeted amount of maturities in any given year that you look to manage to?
And do you have an interest rate target?
Howard sounds like you. Sure.
I think from with regard to kind of managing our debt, I don't think it's as formulaic as you may have laid out there. I think it starts with a commitment to our current investment grade credit rating. We think that served us well and I think we continue to reinforce that. And then I think with regard to what we do when we have maturities or considering other actions, I think we tend to make those decisions in the moment based on again this overall broad strategy. So you've seen us take some actions over the last couple of years.
And certainly with some maturities coming up, we'll be making some decisions in the back half of this year.
Other questions?
Nick?
Yes. The question is on since the TIPSAC came out with its report on menthol, can you just share kind of your views on some of the incremental science that's come out? I guess this is a question for Jim, but in kind of what your assessment is of that? Because I know there have been quite a bit of study that has been done since TIBC.
Yes. Excellent question. We've actually been tracking it very closely. And the science that has emerged has been either in line with I would say or even stronger supporting the conclusions that we and others put in front of the FDA on that question. Would you agree, Jim?
I would agree. The only other thing I would just mention is maybe
a little bit on
the process on menthol too. A lot has happened. I've gotten questions about is it odd that menthol seems to be going through this process at the FDA. And the FDA I think is taking a very measured approach to looking at the science. I think they've taken the tips at report, the industry reports as well as other information on menthol.
And I think they are doing a fulsome and thorough job at looking at all the data associated with menthol and it's a large amount of information. So I think that on top of our ability to review that data, I agree with the conclusions that Marty came out with. They're supported with the data that's been going on. And we also know there's additional data that is likely to come from the government as we move into the future through studies like the past studies and some other NIH funded studies
as well. Are there other questions? We have one in the front row. Mike?
Yes. Two questions. With the Chu launch in Denmark that's possibly the more niche type product. But if it did well, would you consider bringing that here? And the converse is if you had something like success with Mark 10, is that something you would consider taking internationally?
And then second on PMCC, I know that on the cash flow and financials does not split separately anymore. But what kind of activity should we expect from that going forward? There was a good amount of sales last year, but what would that look like down the road?
Okay. Howard, you want to start with PMCC and then I'll pick
up the innovation. Sure. On PMCC, we've been unwinding that business for some time. And I think what you should expect to continue is to see a decreasing contribution from PMCC over time, although there will continue to be asset sales as we unwind that business. I think the biggest element of that was we had a dispute with the IRS.
That has now been resolved. And I think it should be a relatively smooth unwinding there. And it's gotten to be a smaller and smaller part of our Choo, which is
of course part Chu which is of course part of a joint venture as I described it is if we met success there in that test market or in Denmark, we certainly of course would want to leverage that success elsewhere. So we'll see how that test turns out. I think the same holds true for any new technology that we might deploy that we own the rights to which is if we could prove it out to adult cigarette smokers in the United States and particularly if there were positive signals from the FDA on that you could imagine that would be of interest in other parts of the world and we would certainly look at that in that regard. Are there other questions? Yes, Vivien.
Hi. My question has to do with the Marlboro positioning. Dave in your comments, you indicated the strategy around reinforcing excuse me the masculinity of the Marlboro brand. And while smoking incidents in the U. S.
Is much higher for men than it is for women, there are probably still 20,000,000 females smokers in the United States. So I'm curious with respect to the Marlboro Black piece of it. Can you give us some color on how that skews male versus female versus the broader Marlboro portfolio?
Yes. When we look at the total brand, given its size in the marketplace, there is one can assume and it's true that Marlboro is not only the leading has the leading share among men, has the leading share among women. And when we look at the various flavor families and Marlboro Black is the most recent introduction into the Marlboro family of flavors. The jury is still out on the long term view. But the brand is actually or that flavor family is actually gathering up pretty good demographics both among men and women.
But at this point, it's skewing more male. But we look at things over the long term. So that's a great question not only today, but it's a great question really 3 to 4 to 5 years out.
And just to follow-up on that from an age profile perspective is Black and or NXT skewing higher with 21 to 29?
Percent? Once again, when we look at the demographics, we are look at Marlboro Black is adding to the overall share and it has a good strength among smokers 21 to 29 at this point. But there again, we're looking 3 to 4 years out.
Okay,
to see more from I would call breakthrough innovation in the U. S. Cigarette market? Or is it going to be just more new flavor blends? Does the U.
S. Smoker care for products that are more innovative than just new blends?
Well, we maybe have two elements of your question. One is what do adult cigarette smokers in particular want which is a consumer preference and separate that out from the SE process itself, the substantial equivalents process itself. I'll ask Jim to comment on the insights that he has into substantial equivalence. Just like we talk about innovation with respect to the new kinds of products, we continue to look at innovation in the core business of course. And that means different packaging.
It means different taste profiles. Basically the way we think about it is we can look at the space for these products whether it be cigarettes, smokeless or cigars. And if we can find a space where there's an unmet need or it's underserved or we're underserving our franchise, we can bring products there to try to see if the consumer reacts to them. What's new these days of course is that you have to take that process now to the FDA so that they can review it from a substantial equivalence point of view. But yes, we continue to look as hard as we ever did about innovating within the core business as we do with the New.
And Jim with that maybe I'll ask you to comment on that process.
Sure. I'll talk a little
bit about the process. I think we've heard from the center on a number of occasions that they believe they are making progress. They believe that they're going to be coming to some conclusions in the very near future. Mr. Zeller has talked a number of times about that.
And our experience would be that it feels like that in fact is true. There are a lot of interactions on substantial equivalents. I think they've heated up as well over the last 2 or 3 months. So at least from an internal continual progress in 2013. And so I think from all indications both from what the center is talking about and what it feels like they seem to be making progress.
So we're encouraged by that.
Tom? Hi, Marty. Good morning. I'm intrigued by your advocacy for the corporate tax reform and what motivates it and what has been your appraisal of your effectiveness on going forward with that plan for both on corporate income tax rates and also the tax rate on dividends? Okay.
Good question. Howard maybe you should start with the corporate tax rate that we pay and Bruce can talk about he can self assess himself about how well he's doing.
Sure. I think I'll let Bruce talk more broadly about corporate tax rates in the U. S. Compared to internationally. Competitiveness issues.
But the other issue in the U. S. Is that corporations pay a pretty broad range of different tax rates. We tend to be at the higher end of that range at about 35%. And so as we look at corporate tax reform, we think there's an opportunity to make companies in the U.
S. More competitive more competitive. And we also think there's an opportunity for us to reduce our tax rate with a lot of the different types of reform that are being considered.
Bruce? Yes.
I would add that we recently became distinguished as the highest corporate tax rate in the OECD countries. So there's a serious competitiveness issue that's recognized by fortunately by members of both parties, leaders in both parties, both Chairman of the relevant tax writing committees in Congress have recognized the need for corporate reform. The trick is getting it done. As I mentioned in my remarks, it was obviously helpful that both presidential candidates put a stake in the ground on corporate reform. Trick.
Are there other questions? Okay. Just want to say one last time, we really appreciate all of you taking the time to be with us today whether you're here in the room or those on the web. Thank you again for your interest in Altria Group. And for those of you who are here, the reward is lunch, which is in the next room.
We are adjourned.