Good day, and welcome to the Altria Group 20 12 Third Quarter Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by Altria's management and a question and answer session. Prepared remarks. I would now like to turn the call over to Mr. Brendan McCormick, Vice President, Investor Relations for Altria Client Services.
Please go ahead sir.
Good morning. Thank you for joining our call. I am joined this morning by Marty Barrington, Altria's Chairman and CEO and Howard Willard, Altria's Chief Financial Officer. This morning, we will only be discussing Altria's business results for the Q3 and 1st 9 months of 2012 and will not be discussing the status of tobacco litigation. Our remarks contain forward looking and cautionary statements and projections of future results.
And I direct your attention to the forward looking and cautionary statements section at the end of our earnings release for the review of the various factors that could cause actual results to differ materially from projections. For a detailed review of Altria's business results, please review the earnings release that is available on our website altria.com. Altria reports its financial results in accordance with U. S. Generally accepted accounting principles.
Today's call will contain various operating results on both a reported and on an adjusted basis, which excludes items that affect the comparability of reported results. Descriptions of these measures and reconciliations are included in today's earnings press release and are available on our website. In addition, comparisons discussed in this conference call are to the same prior year period unless otherwise stated. Now it gives me great pleasure to introduce Marty Barrington.
Thanks, Brendan. Good morning, everyone, and thank you for joining our call. Altria delivered solid financial results for the Q3 and 1st 9 months of 2012, while taking steps to strengthen its ability to create shareholder value in the future. Our tobacco businesses grew adjusted operating company's income and expanded their margins for both the Q3 and 1st 9 months of 2012. Each of our tobacco companies also grew their retail share for the same time periods, while investing to develop their brands for the long term.
Products introduced in recent years continued to support these income and retail share gains. Our tobacco companies remain focused on developing and commercializing innovative new products to meet the evolving preferences of adult tobacco consumers. The business performance of our operating companies enabled us to increase our already strong cash returns to shareholders. Altria increased its dividend by 7.3% in the 3rd quarter, our 46th dividend increase in the last 43 years. We also returned cash to shareholders by repurchasing over $260,000,000 of our stock during the quarter.
Earlier today, we announced a $500,000,000 expansion of our current $1,000,000,000 share repurchase program. We also took steps to enhance our capital structure during the quarter. We purchased high coupon debt and issued new lower cost debt. These actions reduced our 2018 2019 debt maturity towers, lowered our future interest expense and reduced our weighted average coupon rate. Altria grew its 2012 adjusted diluted EPS by 3 point 7.8% for the 9 months.
These results were consistent with our expectations and include the negative impact of an increase in Altria's 2012 full year effective tax rate on operations related to the debt tender offer. The Smokeable Products segment delivered solid adjusted OCI growth and adjusted OCI margin expansion for the Q3 9 months through higher list prices and effective cost management. We coupled this solid OCI growth with retail share gains on Marlboro. Marlboro's new brand architecture has contributed to the brand's results. Marlboro's brand building initiatives across our 4 product families have included the successful expansion of new products, equity building promotions that engage millions of adult smokers and promotional offers intended to generate trial and conversion by adult competitive smokers.
In addition, PM USA expanded Marlboro NXT, a product in the Marlboro Black family into 27 states at the end of the Q3. Marlboro NXT contains capsule technology that allows adult smokers to switch from non menthol to menthol taste. Marlboro's growth was complemented by retail share gains by L and M in the discount segment. PM USA's strong shipment volume outperformed the industry and its principal competitors on both a reported and on adjusted basis. Black and Mild also delivered strong retail share growth for the Q3 9 months behind products that were introduced in recent years.
Black and Mild's results also benefited from the 2012 Q3 introduction of Black and Mild Jazz in mild jazz income through volume growth, primarily by focusing on Copenhagen and Skol. USSTC aims to maximize the combined performance of these 2 leading premium brands by focusing on the strengths of each brand. Copenhagen and Skol grew their combined reported shipment volume and retail share for both the Q3 and the 1st 9 months. This performance helped the Smokeless Products segment grow its 3rd quarter and 9 month adjusted OCI and adjusted OCI margins. Copenhagen continued to be the primary driver of volume and retail share growth as it benefited from new products introduced in recent years including the recent expansion of Copenhagen Southern Blend.
Skol's volume and retail share comparisons were impacted by competitive activity and Copenhagen's strong performance. Skol's 9 month comparisons were also impacted by last year's SKU delisting and the introduction of Skoll Extra. U. S. SKU is taking steps to improve Skoll's performance and recently announced the 4th quarter expansion of Skol Ready Cut into over 20 states.
Skol Ready Cut offers adult dippers an easier to control long cut product. In the wine segment, Ste. Michelle delivered strong adjusted OCI results for the Q3 9 months through higher pricing, higher shipment volume and improved premium mix. We're pleased with our business results through the 1st 9 months of 2012 and reaffirm that we expect to deliver adjusted diluted EPS growth of 7% to 9% for the full year, representing a range of $2.19 to $2.23 per share. We also expect to deliver full year reported diluted EPS between $2.03 $2.07 per share.
I'll now turn things over to Howard, who will discuss our business results in more detail.
Thank you, Marty. Good morning, everyone. In the Smokeable Products segment, 3rd quarter reported operating company's income grew by 3.9%, primarily due to higher list prices, effective cost management and higher reported shipment volume. These favorable factors were partially offset by higher promotional investments behind Marlboro's new brand architecture, increased resolution expense and unfavorable mix due to L and M's volume growth in discount. For the 1st 9 months, reported operating companies income increased 4.2%, primarily due to higher list prices, effective cost management and lower charges related to tobacco and health judgments.
These favorable factors were partially offset by higher promotional investments behind Marlboro, increased resolution expense, unfavorable mix due to L and M's volume growth and lower reported shipment volume. Excluding special items identified in our earnings press release, 2012 adjusted operating company's income for the Smokeable Products segment increased by 4.3 percent to $1,600,000,000 for the 3rd quarter and 3.7 percent to $4,700,000,000 for the 1st 9 months. Adjusted operating company's income margin grew 0.4percentage point to 42.4 percent for the 3rd quarter and increased 0.8percentage point to 41.6 percent for the 1st 9 months. PM USA's reported cigarette shipment volume increased 1.2% for the 3rd quarter, primarily due to retail share gains and changes in trade inventories, partially offset by the industry's rate of decline and one less shipping day. PM USA believes the trade depleted less inventory during the Q3 of 2012 versus the prior year period, benefiting comparisons of reported shipments.
For the 1st 9 months of 2012, reported cigarette shipment volume declined 4 10ths of a percent, primarily due to the industry's rate of growth, partially offset by volume growth as a result of retail share gains. When adjusted for trade inventory dynamics and other factors, PM USA estimates that its adjusted cigarette shipment volume was down approximately 1% for the 3rd quarter and 0.5% for the 1st 9 months. Total cigarette category volume was estimated to be down 3.5% for the 3rd quarter and 3% for the 9 months. PM USA increased its retail share by 1.2 share points to 49.9 percent for the 3rd quarter and by 0.8th of a share point to 49.8 percent for the 1st 9 months of 2012. Marlboro gained a share point to deliver a 42.7 percent retail share for the 3rd quarter and was up 0.5 a share point to 42.6% for the 1st 9 months.
For the Q3 and the 1st 9 months, PM USA's discount portfolio increased its retail share by 6 10ths of a share point to 3.9% and 3.8% respectively, as L and M share gains were partially offset by basic share losses. Reported cigar shipment volume was down 14% for the 3rd quarter, primarily due to the timing of promotional shipments and other changes in trade inventories and one less shipping day, partially offset by volume growth from retail share gains. Middleton believes the trade built inventory in the Q3 of last year prior to Middleton's December 2011 price increase announcement, which impacted volume comparisons. For the 1st 9 months, Middleton's reported cigar shipment volume declined 0.6 percent, primarily due to changes in trade inventories, partially offset by retail share gains. Black and Mild's retail share increased 0.8th of a share point to 29.9% for the 3rd quarter and was up 1 share point to 30.1 percent for the 9 months, primarily driven by the success of its classic sweets, wine and jazz untipped cigarillos.
Turning to smokeless products. 3rd quarter reported operating company's income was up slightly to $246,000,000 and grew 2.7 percent to $678,000,000 for the 1st 9 months of 2012, primarily due to higher pricing, higher volume and effective cost management. These favorable factors were partially offset by growth in products introduced in recent years at a lower popular price, higher restructuring charges related to our cost reduction program and higher promotional investments. When adjusted for special items primarily related to restructuring charges, the Smokeless Products segment's operating income increased 3.3 percent to $254,000,000 for the 3rd quarter and 6.2 percent to $705,000,000 for the 1st 9 months of 2012. USSTCs and PM USA's reported smokeless product shipment volume increased 5.9% for the 3rd quarter driven by Copenhagen's strong 12.1% volume growth as well as Skol's 2.8% volume gain, partially offset by volume declines in the balance of the portfolio.
Shipment volume for the 1st 9 months of 2012 increased 1.9% as volume growth on Copenhagen was partially offset by volume declines on the balance of the portfolio. When adjusted changes in trade inventories and other factors, USSTC and PM USA estimate that their combined 20 12 3rd quarter adjusted smokeless products volume grew approximately 5%. USSTC and PM USA further estimate that the smokeless product category grew by approximately 5% over the 12 months ended September 2012. USSTC's and PM USA's retail share of the smokeless products category increased 4 tenths of a share point to 55.5 percent for the Q3 and 0.5 a share point to 55.4 percent for the 1st 9 months of 2012. Copenhagen and Skol delivered strong combined retail share growth of 1.6 share points for the 3rd quarter and 1.8 share points for the 9 months.
Copenhagen grew its retail share by 2.3 share points for the 3rd quarter and 2.4 share points for the 9 months. Scholes retail share declined 0.7 of a share point for the 3rd quarter and 0.6 of a share point for the 9 months as comparisons were impacted by the factors mentioned earlier. In the Wine segment, St. Michelle grew its 3rd quarter reported operating company's income by 13% to $26,000,000 When adjusted for the impact of 2011 costs related to the UST acquisition, 3rd quarter operating company's income increased 8.3%. For the 1st 9 months of 2012, reported operating company's income grew 16.7% and adjusted operating company's income increased 8 point 6%, excluding acquisition related costs from last year.
St. Michel's shipment volume increased 3.7% for the 3rd quarter and 4% for the 9 months. The Financial Services segment's 3rd quarter reported and adjusted operating company's income decreased 4.8 percent to $79,000,000 primarily due to a $35,000,000 decrease in the allowance for losses that favorably impacted operating company's income in 20 11. This which filed for bankruptcy in November 2011. For the 1st 9 months of the year, the Financial Services segment's reported operating company's income increased by more than 100 percent, primarily due to PMCC's leverage lease related charge of $490,000,000 in the Q2 of last year, higher gains on asset sales, recoveries related to American Airlines and a decrease in the allowance for losses that favorably impacted operating company's income earlier this year.
These favorable factors were partially offset by lower lease revenues in 2012 and a 2011 decrease in the allowance for losses that favorably impacted operating company's income last year. Excluding the leverage lease charges, the Financial Services segment's adjusted operating companies' income grew 32.1 percent to $173,000,000 for the 9 months. PMCC's allowance for losses at the end of the Q3 was $99,000,000 versus $188,000,000 at the end of the Q2 of 2012. This reduction reflects write offs related to the American Airlines bankruptcy. Altria repurchased 7,700,000 shares of its common stock in the 3rd quarter for a total cost of $262,000,000 Earlier this week, Altria's Board authorized the expansion of our current share repurchase program by $500,000,000 to $1,500,000,000 Altria has $550,000,000 remaining in this expanded program that it intends to complete by the end of the Q2 of 2013.
This program remains subject to the discretion of the Board and market conditions. During the Q3, UST repaid $600,000,000 of debt that matured in July. Altria also purchased 2,000,000,000 of notes due in 2018 2019 with coupons of 9.7% and 9.25% respectively. In connection with the debt tender offer, the company issued $1,900,000,000 in new 10 year notes with a coupon rate of 2.85 percent and $900,000,000 in new 30 year notes with a coupon rate of 4.25 percent. Our current cost management program remains on track and we have recorded net pre tax charges of $264,000,000 over the past 4 quarters.
We expect to incur the remaining pre tax restructuring charges in the Q4 of 2012. Charges related to this program are reflected in our full year diluted EPS guidance. Marty and I are now happy to take your questions. While the calls are compiled, let me cover a few housekeeping items. Marlboro's price gap versus the lowest effective price cigarette was 36% in the 3rd quarter.
Marlboro's net pack price in the 3rd quarter was $5.79 while the lowest effective price cigarette was 4 27.4 percent for the 3rd quarter. The estimated weighted average cigarette state excise tax as of the end of September was $1.41 per pack, an increase of $0.04 per pack versus the prior year. Copenhagen's 3rd quarter retail price was $4.08 and its price gap versus the leading discount brand was approximately 37% in the quarter. CapEx was $38,000,000 for the 3rd quarter and $77,000,000 for the 1st 9 months of 2012. We estimate that our 2012 full year CapEx will be between $100,000,000 $125,000,000 Ongoing depreciation and amortization was $56,000,000 for the 3rd quarter.
We estimate that 2012 full year ongoing depreciation and amortization will be approximately $230,000,000 Operator, do we have any questions?
Thank you. Investors, analysts and media representatives are now invited to participate in the question and answer session. We will take questions from the investment community first. Our first question comes from Judy
couple of days, obviously, we've heard from your competitors about the promotional environment and sort of their view that you as a price leader is pressuring the pricing environment and basically putting pressure on the overall industry profit pull. So maybe just if you can just give us your perspective on your promotional strategy and how would you sort of defend against those comments from your competitors?
Well, good morning, Judy. Thanks for calling in. Listen, I'm not going to comment on what other folks are saying. I will tell you what we're trying to do. What we're trying to do in the smokeable segment is to maximize income, while maintaining modest share of momentum on Marlboro.
That has been the strategy for some time. That strategy remains constant. We have I think a good plan in place for 2012 to execute against that strategy and that's what you see playing out in the marketplace. We're implementing a new Marlboro architecture, which is part of our investment in Marlboro. What I would say is that, it's a competitive industry.
It's always been competitive. It's competitive today, likely to be competitive as we go forward. I don't see anything that's particularly unique about it. Marlboro is investing in its new architecture and that's a wise thing to do because Marlboro has been the engine of income growth in the smokeable segment for Altria Group. So that's how we look at it and we're pretty happy with how that's playing out this year.
Okay. And if I sort of look at your income growth this year on the smokeable segment, So you're sort of down kind of 0.5% to 1% volume. You're getting pricing sort of 2% to 3%. Your operating profit up 4% to 5 percent. And then if you look at the last couple of years, you had volume down sort of 4% to 5% pricing up 5%, 6%.
Getting to a similar operating profit growth of sort of 4% to 5%. So if you can kind of take us through your thought process and one versus the other in more price driven strategy as opposed to more share and volume driven strategy. From your perspective, kind of how you think about which is maybe the more appropriate strategy either in the near or on a longer term basis?
I just would return to what I said, which is that the strategy is to maximize income while maintaining modest share momentum on Marlboro. It's not a question of choosing different strategies as much as it is there are ways to grow income. We've talked about cigarette pricing. Pricing is of course important in the cigarette category, has been important, will remain important. But of course, you can grow your income through other ways and we've spoken about this previously.
We're trying to manage our cost structures as efficiently as we can. You saw that PM USA took list prices up in the middle of the year. We've reduced our promotions actually our promotional allowances on Marlboro as we've gone through the year. We'll recall that on Marlboro Special Blend, we had geographies where it was being promoted at $0.75 other geographies where it began at $1 and within the year those allowances have come down not once, but twice first to $0.90 and then to $0.85 We've spoken about Marlboro Black. We had promotional allowances to generate trial and conversion among adult competitive smokers.
We've produce those allowances as well similarly to Marlboro Special Blend. So for us and we've talked about this previously, right? It's a balance between maximizing income while never taking your eye off of Marlboro, which is after all the driver of all that success. So from time to time and we don't look at this necessarily quarter to quarter as much as we look at it over time, because if you look how Marlboro has grown over time that's how it's happened. Whether it was Marlboro red in the 50s or menthol in the 60s or gold in the 70s or now black, we grow it over time.
That's how we think about it over time. And guess what? It's been a great contributor to the growth in adjusted EPS that is our long term goal. So that's kind of how we think about it, Judy. And I guess the last thing I would say on it for context is, the macro environment is a factor, right?
We continue to be in an environment out of the Great Recession where the recovery has been modest at best. Consumers remained under pressure. Tobacco consumers remain under pressure. We have to meet the consumers where they are. And so and in that environment, it's hardly surprising that pricing may be a bit more restrained than in periods where housing is booming and unemployment is low and everybody is feeling good and consumer confidence is high.
That is not the situation. The data tell us otherwise. So that's not to be discouraged about it and there are some signs that it may be improving and we sure hope so. But that's how we've been thinking about it, which is trying to be sensible in that environment, following our strategy, maximizing income and keeping Marlboro healthy.
Okay, great. Thank you.
Thanks for your question.
Your next question comes from David Adelman of Morgan Stanley.
Marty. Hi, David.
I also wanted to ask you a couple of pricing based questions in the cigarette category. That probably doesn't surprise you.
Glad to have your question in any event, Dave.
The whether it's the economy or the competitive set or the equity category Marlboro share doesn't grow like last year? Or if you take category Marlboro share doesn't grow like last year? Or if you take less pricing than the category Marlboro share does grow which is this year?
Well, I think it's our job to manage that balance. Honestly, David that's the short answer, which is, if you're trying to maximize income like we are, we want to of course try to do that as best we can. At the same time, you want to make sure that Marlboro is healthy. Marlboro is one fantastic brand, right? It's got high equity.
It can command premium pricing. It has high loyalty, but it's not the only brand in the marketplace. And we try to be cognizant of both the macro environment and the competitive environment. And our job is to balance that equation. If you look at it, it's tempting again to look at it sort of within the quarter.
But if you look at Marlboro share growth, what do we see? Sure, it's up in the Q3, but actually for the 9 months what's it up? It's up 5.5. If you look at it over a longer period of time, if you look at it say from, I don't know, let's call it the end of Q3 of 2,008 to the end of the Q3 of 2012, Marlboro share
is up
0.8. So 0.8 over 4 years, I think we would characterize that as moderate share momentum. And I think it shows in the equity in the brand. There shouldn't be any mistake that pricing is important. It will continue to be important.
But it is a balance and we're trying to be sensible about how we do it. I think that's how we think about it.
Okay. And then as a follow-up question Marty both in both with Marlboro but also Copenhagen and Skol if you look at the smokeless business the growth and the brand initiatives have been principally at price points below the traditional full price premium brand, whether it's Copenhagen Wintergreen or Skol Extra or the bulk of the extensions. And clearly you've managed that from a price mix perspective and a profit delivery perspective.
But the
question I wanted to ask you in that context is what's the risk that 2 years from now or 3 years from now that those efforts have in effect eroded the premium brand equity? But they do account for a lot now of those brands' respective market shares.
Yes. I think we're quite confident in the equity of those brands David and there's good reason to be confident in those brands. If you look at Marlboro again just to take Marlboro before we go to smokeless. Remember Marlboro all sells at the same list price, right? So what you see in the marketplace though is the implementation of different promotional allowances to achieve different aims.
And we've spoken about this previously with you and others on the calls, but just to take one second, Special Blend role for example is to make sure that for more price sensitive consumers in the franchise that they have a place to go during this difficult economic period. Your strategic choices obviously are you cannot meet them where they are in your franchise with a big huge brand like Marlboro and you can let them go. We think the better strategy is to have a price point for them within the franchise and retain their business. And I think that makes good sense. And by the way, you see that the margin increases at the Marlboro level again.
So we're managing the margin there. If you look at the brand equity components of Marlboro, they continue to be extremely strong, right? We shared the TNS scores over time. It has high brand loyalty. The price gaps were so constant during the worst recession you would have thought that
you would have
seen if there were an erosion in equity that they wouldn't command those price gaps. They've been absolutely constant during the period. The smokeless business, David, of course, is a different situation, right? Because we're trying there to grow income by participating in the growth in the category. It's a growing category unlike cigarettes, which is a declining category as you well know.
So if we can participate in the volume growth there and with Copenhagen and Skol together gain some share, we can grow our income quite nicely. And I think you see that actually over the 1st 9 months in the smokeless business. To be sure, we do have SKUs in the smokeless franchise that are at popular price points as well as having price points there that are mainline. And the reason for that is, again, that's where of the business is. So, we have a competitor that has an offering at a popular price point.
We believe that Copenhagen and Skol can compete there and should compete there. All the while, we want to manage the margin at the franchise level, if you will. And guess what? We've been pretty successful in doing that Copenhagen and Skol have grown together very nicely. I mean if I look at it from again call it the Q3 of 2009 after the acquisition to Q3 2012, their combined retail share growth is about 4 points and the margins have expanded all the while.
So that's a bit more complex I suppose, but we think that the strategy is right there. And again just to return I guess to the core of your question, while we're trying to manage through that environment, we are not concerned about the equity of those brands.
Okay. Thank you very much.
Thanks a lot for calling in.
Thank you. Your next question comes from Chris Growe of Stifel Nicolaus.
Hi, good morning.
Good morning, Chris.
Good morning. I had a question for you in particular with Marlboro Black as an example. I know certainly the measure of success for a new product in this category is the degree to which you can reduce promotion and the time which you can do that. And so perhaps our expectation was a little high that promotion would come down. I do characterize still the Marlboro Black promotion as a bit high.
It has come down for the year no doubt, but still a bit high. So I'm just curious as you look at the brand and the way it's positioned today, is it the economy? Is it an attempt to retain some of those Marlboro consumers that will shift? That's it's resulting in a requirement for you to keep promotions at a relatively high rate? Or do you see this as part of the natural progression of kind of building this brand and it will keep rushing down?
The latter. I think it's part of the natural progression of building the brand. Remember Chris, brands aren't built in 3 months. Marlboro Black was launched earlier this year. This is a category in which there are relatively high loyalty rates.
People who are in the category like their brands. There are some who participate more in the price value equation. But for premium brands, you have to have an offering that persuades someone not to buy the pack that they've been buying and to try yours. And that's the purpose of those promotions because we believe we've got a terrific product. It's in a terrific pack.
It's in a terrific franchise. But we have to offer we have to raise awareness to begin with. Then we have to incent trial and hopefully we'll get some conversion. But again, I would point out as you know, the promotional allowances have come down. And I think what one might conclude from that is that those allowances are doing their job.
We've said previously, we don't have any desire to have promotional allowances any higher than they need to be to achieve their purpose. I think you should probably read into that that Marlboro Black is achieving its purpose. We're very happy with that product. We think it's a great addition to the Marlboro franchise. It's got great demographics.
It's contributing to the equity. It's a long term play. And the ultimate success of Marlboro with Black, I think it will be measured over years not over a quarter or 2.
Sure.
Did you suggest that margins for the Marlboro brand were up this quarter?
For the smokeable segment, I said that margins were up.
In the smokeable segment. Okay, sure. All right. Got you. And then just one final question is in relation to inventory levels.
Just to kind of get a base where we are today on inventory and that's been jumping around quite a bit and certainly could in the Q4. But where do we stand today on sort of your inventory level? I know you mentioned that it was less de loading that occurred in the prior year. Where would you characterize how would you characterize inventory today?
Yes. It doesn't make for us it's kind of washed out over the last 9 months, Chris. As you know, it does that over the course of the year. There's just not a lot of difference over the 9 month period. Howard referred in his remarks to the fact that there was less depletion in the Q3, which flattered the results a little bit, but it's not really significant for the 9 months.
Okay. That's helpful. Thank you.
Thanks for calling.
Thank you. Your next question comes from Thilo Reid of Jefferies.
Good morning, everybody.
Good morning.
Marty, given your comments about the macro environment and price sensitive smokers, is it fair to assume that as long as the economy doesn't pick up, there's limited chance that promotions for some of these line extensions will be dialed back much more significantly?
Well, we'll see over time. I guess, Tilo is the answer. Like you and everyone else, I'm sure everyone hopes that things are going to improve. And if they do, obviously, we'll all take that into account as we look at our promotional allowances. I just don't know how to predict that going forward.
What's your best assessment of how much Marvel market share would be at risk if you took away the promotions altogether?
We don't think about it that way. We're managing the brand in a very different kind of way. We're trying to maximize income in the category while making sure that Marlboro is healthy. So that's just a completely different way of looking at it which isn't ours.
But market share is part the equation, right?
Sure. We're trying to maintain modest share with that at Marlborough.
Okay. And then Howard, question for you. Given the market share losses for Skol and some of the smaller UST brands since you acquired UST, At what point will you have to seriously consider asset impairment tests? And at what point do we have to get concerned about write offs for some of these brands? Yes.
Well, as you know that's a calculation we do on a pre regular basis. We certainly revisit that in any case in the Q4. So I think we'll wait and see. I think when you look at Copenhagen and Skol, they've had quite nice growth over the time since the acquisition. But obviously Copenhagen had the stronger share growth than Skol.
So we're certainly doing those kinds of calculations. An accounting perspective, is it just the volume growth you have to look at?
Or do you an accounting perspective, is it just the volume growth you have to look at? Or do market shares play a role in that determination as well?
Well, the primary driver of the impairment test is really income. And it's looking at what the expected income is out into the future and comparing that to the valuations that were used in valuing the trademarks at the time of the acquisition. So income is the bigger driver than either share or volume.
Great. I appreciate the comments. Thank you.
Thanks for calling, Tayla.
Thank you. Your next question comes from Vivien Azer of Citigroup.
Hi, good morning. Good morning, Vivien. Just to circle back on the competitive landscape, sorry to belabor the issue. As I think about the growth in the total tobacco profit pool, which is something you guys have pointed to in the past, over the last 4 years, it's been fairly volatile ranging from anywhere to 2% to 8 percent. As you think about the total U.
S. Tobacco profit pool growth going forward, can you give us an indication of what you think the right growth rate is?
Well, I'm not going to comment on profit pools. I'd just comment on how we think about running our business, which is as you know we have the company positioned to participate as a total tobacco company. We have this terrific business at PM USA. We have a cigar business at Middleton. We have a great UST Smokeless business.
So as those companies follow their plans and maximize their income and participate in the way that we've described earlier in the call, we expect obviously that we'll do just fine with that. So I guess I'd limit my comments to what our plans are Vivien as opposed to anything else.
Understood. I'd just like to turn to NXT for a second. I know it's definitely very early days given the rollout that you've done in late September. But can you give us any indications of early consumer response to that brand?
I weeks. So I just don't have anything to give you there. I'm sorry.
Okay. Any color on kind of future plans for the rollout?
Well, I mean, we've announced our plans I think for what we're going to do with Marlboro NXT. I think it's a terrific product. I think it's a nice offering. I think it's going to be a nice addition to the Marlboro Black family. Everyone has high hopes for it.
But again, as you correctly point out, you have to
see what it does in
the market. We've got a good plan for it, good support plan. So I think it will do fine. We'll just have to see the data.
Understood. And just lastly, can you comment on what your share of menthol looks like today? And whether it's up kind of relative to the end of 2011 given the success you've seen from Marlboro Black?
I don't know that I have a comment on that. I'd have to maybe Brendan and we'll get back
to you. I just don't have
that number in front of me. Sorry.
Okay. That's fine. Thank you very much.
Thanks for calling.
Thank you. Your next question comes from Bonnie Herzog of Wells Fargo.
Good morning.
Hi, Bonnie.
Hi. So I guess I also have a question on Marlboro maybe asked a little differently and it's related to innovation. I'm curious how much of your share gains in the quarter do you estimate were being driven by the new line extensions? And I guess I'm trying to understand if you have comfort with how much incremental growth you're getting from these versus growth from your underlying core Marlboro brand? And then I'd be curious to hear how full your pipeline is next year for Marlboro and then overall?
Okay. Well, innovation is a great topic. Thanks for raising it. We don't break out at the sub segment level as you know. But we can observe right that if you look at innovation in Marlboro, it's going through a period really I think of accelerated innovation isn't it?
We've got Marlboro Black which we're very happy with. We've got Marlboro NXT. You'll remember we have the packaging innovation on Marlboro 83s. And while we don't disclose our pipeline of course, we have excellent brand management teams. This is actually part of the power of the architecture I think which is we have I think we've explained previously we have our brand management structure now aligned against the 4 product families within Marlboro and each of them is developing excellent plans I think not just for this year and next year, but beyond which includes a variety of product ideas, programmatic ideas and the like.
So we're pretty happy about how Marlboro architecture is rolling out and innovation is a key component of that.
Okay. Thanks for that. And then I guess the last question would be on your discount cigarettes segment, which has sustained pretty strong momentum this year. So could you talk a little more about your strategy for this segment? And then in terms of L and M and its share gains, is the brand taking share do you think from other discount brands?
Or is it is the growth maybe being driven by down trading from some of the premium brands? Or are you seeing both?
Good question. Our strategy of course is while we focus on premium and again more than 90% of PM USA shipments are premium. There is a discount segment in the category of about call it 27%. We want to make sure we have an offering there and the offering that we have is L and M and it's doing a very nice job there I think. In some respects, it's taking share that our former discount brand basic sheds as it raises its price and its margins.
Our strategy is obviously to just to have an offering there. Our retailers like for us to have an offering there. There is some business there. We have a competitor obviously. It's got a significant offering there.
We want to make sure that we've got a competitive offering. So our strategy on L and M is to have that offering there for that purpose. And as you've seen this year certainly it's been a contributor to volume which is nice.
All right. Thank you.
Thanks for calling.
Thank you. Your next question comes from Michael Lavery of CLSA.
Thank you. Good morning.
Hi, Michael.
As you talk about maximizing income, I guess, I'd love for you to give a little color there because this year certainly has been helped by the restructuring, the cost savings that you've got. And those are what you said skewed towards this year. As you move into next year, do you think about maximizing your income on an operating basis or on a net income basis? And by that I mean how much would the interest expense savings become a part of that equation?
Well, we got a couple of different questions in there. Let me try to unpack them to do justice to it. Certainly, I'm not in a position to talk about what we're going to do going forward. But I when we talk about maximizing income, I would refer to the comments I made earlier, Michael, which is you can do that through a variety of ways, right? Pricing is important, has been important, will continue to be important.
We do manage our cost structures carefully because they can contribute. We watch the promotional allowances very carefully. So, constant without commenting on what we may do in the future. Do you want to talk about interest expense, Howard?
Sure. I mean, I think Marty just referred to the smokeable business. I think when we look at the overall company, we've talked about our longer term objective of growing our EPS 7% to 9%. And certainly there we have multiple levers. Certainly the biggest contributor is the smokeable business.
But we've also seen nice contributions from our investment in SABMiller as well as the smokeless business and some of the other areas. And you importantly point out that as a result of the tender and refinancing we did this year, we expect to see a reduction in interest expense. But when we think about our overall EPS growth, I think we look at really all of those levers as opportunities to increase EPS over time.
That's helpful. But just to be clear, so you're saying when you talk about the cigarette business and maximizing income there, you don't necessarily mean operating income?
No, I don't think everybody said that. What we said is there's a number of ways that you can within the PM USA business, the smokeable segment to maximize income. There's pricing, there's cost management and the like. So I wouldn't take that from the comments. And then Howard is correct in pointing out that the Altria business model, which is diversified and I would already differentiate it from our principal competitors is that there are multiple levers for us to achieve our long term goals of adjusted diluted EPS including our smokeless business and our wine business and our exposure to the SAB alcohol assets and the like.
And it's provided us with a number of levers in order to achieve those goals. I think that's what we're trying to communicate if that wasn't clear.
No, that's helpful. And then on the market share side, do you have specific objectives there? And how significant is the 50% share mark psychologically? Is that an internal objective? Because obviously you reached that again last quarter.
It's I guess just barely below it right now. Is that something that you focus on?
You're talking about PMEO say Michael?
Right, sorry.
Yes. I think it's best explained by the overarching strategy of maintaining modest share momentum on Marlboro, while maximizing income out of the smokeable segment. And I think that there's no magic numbers anywhere. You have look at this competitive set. You have to look at the environment at any point in time.
As long as we're following that strategy, maximizing income and delivering to our shareholders what they expect. That's how we think about it.
Okay. Thanks. And then just one last question back on the introductory pricing. I know you've explained how valuable that is for FIN trial. But is there an expectation that those would like a black or special blend would become at parity with the rest of the portfolio given the stated list prices?
Or could they permanently have a discounted profile? What's the right way to think about how those compare?
Well, I would refer to the explanation I gave earlier, which is those each of those SKUs has a role to play. We have promotional strategies designed to help them achieve the objectives for those roles. And obviously, as you know, we don't want to spend more promotional dollars than we have to achieve them because we're trying to maximize our income there. So I wouldn't think of it as any one moment in time as much as it is promotional allowances that support the strategy of growing those brands.
Well, I guess what's making me wonder a little bit is that the Black strategy with a sort of a premium value almost mid price point in a little bit of a way is reminiscent of something like Grizzly's done and Smokeless. But are you suggesting that it's not meant to permanently be in that sort of a new lower tier, but that it's just a gradual process to get that drifted back closer to what you're bringing in price?
Yes. I think we've explained that it's a promotional allowance designed to raise awareness and generate trial and conversion of adult competitive smokers and that's its purpose.
All right. That's great. Thank you very much.
Thanks for calling.
Thank you. We would now like to take questions from the media. Your next question comes from Thomas Russo of Gardner Russo and Gardner.
I switched over to the media. Marty, thank you for being on the call. And a couple of quick questions for you. The first has to do with whether you and Murray might be spending any particular amount of time down in Madison County and the general look across the developing aspects on the litigation side, specifically to the price miles case that might be revisited. What's your sense there?
Well, we haven't heard anything as I think we've got updates out on the price case. But I think that the issue has been brief there Tom and it's sitting with the judge and I don't think we've heard anything as of this morning.
Okay. Great. Howard, congratulations on refinancing so much high cost debt. That was terrific. Do you have the capacity to keep going back to the market like you did with the longer dated paper and taking advantage of these remarkably lower rates for the for prefunding in a sense the future pay downs of other blocks of debt?
Yes. I think if you're asking, do we have the ability to do what we did this year into the future? And I would say that that's certainly an option. But it's just one of many options we have in thinking about how to use our cash and how to reduce our effective interest rate. And I think we'll make those decisions as the year progresses.
Congratulations on that move though. It's just fantastic. And what about the role of the lower interest rates as it impacts your pension obligations and your funding requirements? And how you might be rethinking the overall pension asset liability exposure in light of the high net present value is caused by particularly low rates?
Yes. I think you raised an important point, which is as the discount rate has continued to trend downward this year, that does have an impact on our pension costs. And that's something we're looking at quite carefully. I'm pleased to say though that as you look at the overall market performance this year, the market performance has been a bit more positive than it's been in some years in the past. So there's some offset there, but that's certainly something we're looking at quite closely, because both of those factors are going to have an impact on pension expense going forward.
Right. Thank you. And then again terrific on the call Marty and great bond buyback.
Thanks a lot for calling in.
Yeah.
Thank you. Your next question comes from Nik Modi of UBS.
Good morning, everyone. Hi, Nick. Just a
couple of quick questions. On the architecture, if I have the strategy right, I mean, it seems like you've been really focused on the black portion of the architecture so far this year. Is it fair to assume that you're going to work your way around the architecture over the following quarters years? Is that kind of the way we should be thinking about it?
Yes. I think what we've said Nick is that we'll be rolling out our investments in that architecture through 2012 and 2013.
Okay, perfect. And then just following up on Bonnie's question on the innovation. You said your folks are working on a lot of stuff. But in terms of what's already approved by the FDA, I mean, is the pipeline still relatively full? Because it seems like you guys have a lot of stuff in the marketplace before the proper date.
So I just I'm curious on how full your existing approved pipeline is? That would be really helpful.
I understand your question. We were, I would say, planful about the substantial equivalent state. And so I think we're in pretty good shape. Obviously, the other dimension to your question is, you'd like for the FDA obviously to start moving on substantial equivalents because people have applications that are pending and I think that's a fair request. They're building out their structure over there and they've made comments about how they're going about that.
I would expect that over time you're going to see the FDA start to rule. So I just wouldn't want to leave anyone with the impression. I don't think that there's going to be some sort of a magic date. And if you're in before you're okay and after that you're not, I think that that will probably resolve itself over time.
Yes. And then the last question Marty is just kind of a bigger picture question. The Austria business model has been kind of moderate share gains and balancing with profit growth. And this quarter, I mean, obviously, 100 basis points of share gains from Marlboro is a pretty big number for a pretty large brand. And you're a new CEO and I know I've been getting a lot of questions and I'm sure your folks have been getting the same about strategy and if it's changing.
I mean, it's very clear from what you've been saying that it's not changing, but certainly the numbers would suggest otherwise. So I just I was hoping you can just give kind of your viewpoint, so you can help clarify for people exactly kind of what's different about the strategy? What's not relative to prior years, which has obviously been very good for the stock price? Thanks.
Yes. Thanks for asking that question. The strategy is not changing. We've been very successful doing what we're doing. I think again as I mentioned once or twice this morning, I think it looks it depends in some respect about how you look at the time period.
Sure enough, if you look at the quarterly comparison, it's 100 basis points. If you look at it over the 9 month period, it's 5 tenths. If you look at over a 4 year period, it's 8 tenths. I think that's consistent with how we've been thinking about that over time. And we have no intention of changing that.
It's been enormously successful for Altria.
Excellent. Thank you very much, Marty.
Thanks for calling.
Thank you. Your next question comes from Karen Lamarc of Federated Investors.
Good morning. Unless I missed it, did you keep the comparable estimated market share for discounted brands in the prior year? I think you suggested 27.4 percent, but I wondered if you could give the year over year comparison? And that's the first question.
Yes. I mean if you look at the discount share that we spoke about was 27.4%. In the prior year quarter, it was 27.9 percent. So it's come down modestly.
Okay. And not to be obtuse, but how do you define discount? Is it simply by brand and known brand positioning? That is it does not include premium discounted premium brands or line extensions. Is that true?
Yes. The way we define discount is we have a set of brands that we identify as discount brands and it does not include promoted premium brand volume.
Has that changed over time over let's say the last year or so?
No. It's been largely consistent for some time.
Okay. And is it fair to assume that if the macro pressures and price sensitive smokers persist that you would not change that definition. In other words, you would not include anyone's line extension promoted premium brands. Is that true?
Well, I hesitate to make a statement about what we might do in the future on something like this. But I can tell you it's certainly not something we've considered. This has been the way we've defined discount for quite some time. And to me at the time it seems quite logical.
Okay. Thank
you. Thanks, Karen.
Thank you. Your next question comes from Andrew Keeley of Deutsche Bank.
Hi, good morning.
Hi, Andrew.
Marty, I just want to ask the last question on promotion. If the cigarette competitors are adjusting their promotion programs as well in response to the economy or other factors, how do you think about compatibility of that kind of situation with the profit pool and your sort of long term income objectives?
Well, I'm going to go back to
what I said Andrew, which is we've got good plans in place. We take everything into account when we put them in place and we're going to execute against our plans, which are consistent with the strategy that I've outlined. And I certainly wouldn't comment on what we might or might not do going forward. We're going to stick to our knitting.
Okay. On Marlboro, would you say at this point that the brand has, I don't know somewhat more attractive opportunity in menthol than in non
menthol? I think Marlboro has got a big reach. It appeals to lots of adult smokers. It's proven that not just recently, but over decades. As you've seen the charts where the how the brand grows first with red and menthol and gold and black.
It's a big brand. It's got a lot of room for a lot of flavor segments. It's got a room for a lot of adult smokers and that's how we think about it as opposed to one
if the dollar amount accelerated sequentially or sort of where we are, if the dollar amount accelerated sequentially or sort of where we are on the status of the program?
Yes. We continue to make progress on the cost reduction program and we're really on track for $400,000,000 in savings by the end of next year.
All right.
Thanks very much.
Yes. Thank
you. Your final question will be coming from Michael Silberbaum of Associated Press.
Good morning. Thank you for taking my question. Actually, I have two questions. First, can you talk a little bit more broadly about the Marlboro brand architecture and how that plays into your ability to maintain and gain market share and for the top selling brand? And then secondly, you would your competitors have made some investments in electronic cigarettes and other next generation type products.
And wondering if you can comment at all about any of your plans in that area?
Sure. Thank you for your questions. We've explained previously, I think that the Marlboro architecture is the next evolution really and how that brand, which has grown over time can continue to grow into the future and we have product families in it red, green, gold and black. They we've set up our SKUs at retail so that it's much more evident to an adult smoker when they walk in what Marlboro architecture looks like. We have our brand teams arranged around that.
It actually provides some room for the brand to operate. Remember it's about a 42 share brand. So it's really a if you will, while they're all Marlboro and they all stand to where or come to where the flavor is, they do have slightly different positions and we want to give Marlboro the license if you will to reach out to all the smokers who want to be in the franchise. It's a terrific brand with great equity and great premium pricing. And we believe that the architecture is the next logical step about how to grow that brand over time.
And you'll see that played out in the marketplace through products and programs and at retail and the like. We're aware of the developments in e cigarettes. Look it probably represents what we already know, which is that there are some adult smokers who are looking for alternatives in the tobacco space and some of them have gone to e cigarettes as an exploration at least about whether that's going to be for them. That's a situation obviously that we monitor closely and we'll keep an eye on that.
Thank you. At this time,
I would like to turn the call back
over to Mr. Brendan McCormick for closing remarks.
Thanks everyone for joining our call this morning. If you have any follow-up questions, please contact us in Investor Relations and we look forward to talking to you soon.
Thank you. This does conclude today's conference call. You may now disconnect.