Good day, and welcome to the Altria Group 20 12 Second Quarter Earnings Conference Call. Today's call is scheduled to last about 1 hour, media on the call will be able to ask questions following the conclusion of the prepared remarks. I would now like to turn the call over to Mr. 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 Chief Executive Officer and Howard Willard, Altria's Chief Financial Officer. Morning, we will only be discussing Altria's 2012 business results for the Q2 and 1st 6 months and will not be discussing the status of tobacco litigation. Our remarks contain forward looking and cautionary statements and projections of future results.
And I direct your attention to the forward looking and cautionary statements section at the end of our earnings release with a 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 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.
Thank you, Brandon. Good morning. Altria delivered excellent financial results for the Q2 and 1st 6 months, reflecting the strength of our diverse business model. Altria grew its adjusted diluted EPS by 9.3% for the Q2 and 10.2% for the 1st 6 months of 2012, while its tobacco companies pursued initiatives to grow their premium brands for the long term. These brand building activities contributed to adjusted operating companies' income and margin growth in both the smokeable and smokeless product segments.
Exceptionally strong gains from our investment in SABMiller and our Financial Services business complemented these results. Innovation continues to contribute to the strong business results of our tobacco companies. Products introduced in recent years have enhanced their product portfolios, supported adjusted operating companies' income growth and contributed to retail share gains in cigarettes, cigars and smokeless tobacco for the Q2 and first half of twenty twelve. Our companies continue to make progress on product development in the second quarter with activities related to Marlboro 83s, Copenhagen Southern Blend and Black and Mild Summer Blend. In June, Altria's subsidiary Newmark introduced BERVE Discs into a lead market to begin to understand adult tobacco consumer acceptance of this product.
In the Smokeable Products segment, strong retail share performances benefited cigarette and cigar shipment volumes. Philip Morris USA continued to invest behind Marlboro's new brand architecture with 2nd quarter activities across its 4 brand families red, gold, green and black. In April, our sales force began updating retail fixtures to reflect the new Marlboro architecture and highlight the 4 brand families. In June, PM USA introduced Marlboro 83's box in modern updated packaging. And PM USA continued to support Marlboro Green and Marlboro Black with promotional offers intended to generate trial by adult competitive smokers.
These activities contributed to Marlboro's strong 2nd quarter retail share performance. Marlboro's 2nd quarter retail share increased 3 tenths of a share point to 42.9%. Marlboro has a pipeline of brand building programs planned for the rest of 2012 and into 20 13 across its brand families. Marlboro's retail share growth in the 2nd quarter was complemented by gains for PM USA in the Discount segment, where L&M has regained some of the retail share lost by Basic as that brand has increased its price and margins. Block and Mile delivered strong retail share gains in the 2nd quarter behind the growth of untipped cigarillos introduced in 2011.
The brand also benefited from a new seasonal offering Black and Mild Summer Blend, which Middleton introduced during the Smokeless product segment delivered strong adjusted operating companies income growth for the Q2 and first half of twenty twelve. In the smokeless product segment, U. S. STC aims to maximize the combined performance of Copenhagen and Skol. These brands grew their combined retail share and volume for both periods.
Copenhagen drove this growth as products introduced in recent years continue to gain share. In May, U. S. STC expanded distribution of Copenhagen Southern Blend into select geographies. Copenhagen Southern Blend delivers a mellow taste in a manageable long cut form.
Skol's retail share share decreased for the Q2 and first half of twenty twelve, primarily due to share losses from SKUs delisted in the Q2 of In the wine segment, Ste. Michelle continued to focus on expanding distribution of its premium wines. Wine shipment volume grew for the Q2 1st 6 months. Higher shipment volume, improved premium mix and higher pricing contributed to strong adjusted operating companies income growth for the 2nd quarter and first half. Finally, Altria's 2012 first half adjusted diluted EPS results exceeded our expectations.
We're pleased with the solid first half performance of our tobacco businesses. Altria's results also benefited from higher equity earnings from its investment in SABMiller and gains from asset sales at PMCC. As a result of this strong first half performance, Altria revised its 2012 full year guidance for adjusted diluted EPS from a range of $2.17 to 2.2 $3 to a range of $2.19 to 2 $0.23 This represents a growth rate of 7% to 9% from an adjusted diluted EPS base of 2 point 11. We anticipate adjusted diluted EPS growth to moderate in the second half compared to the first half of twenty twelve with stronger adjusted diluted EPS growth expected in the 4th quarter compared to the 3rd. I'll now turn things over to Howard Willard, who will discuss Altria's business results in more detail.
Thank you, Marty. Good morning, everyone. In the Smokeable Products segment, 2nd quarter and first half reported operating companies income grew by 3.6% and 4.3% respectively, primarily due to higher list prices, management and lower tobacco and health judgments. These factors were partially offset by higher promotional investments to support Marlboro's new brand architecture, unfavorable mix due to L and M's volume growth and higher net restructuring charges related to our current cost reduction program. 2012 first half results were also negatively impacted by lower volume.
Excluding special items identified in our earnings press release, 20 twelve second quarter and first half adjusted operating company's income for the Smokeable Products segment increased by 2.8% to 1 point $7,000,000,000 and 3.3 percent to $3,100,000,000 respectively. The Smokeable Products segment delivered strong adjusted operating companies income margin growth for both periods. Adjusted operating companies income margin grew 0.6 percent to 41.4 percent for the Q2 and increased 1 percentage point to 41.2 percent for the first half. PM USA's reported cigarette shipments were essentially unchanged for the Q2. The trade built more inventory during the Q2 of 2012 versus the prior year period, benefiting comparisons of our reported shipments.
Following PM USA's list price increase on June 18, 2012, PM USA believes the trade depleted inventories through the end of last month and into July. Reported shipments declined 1.2% for the 1st 6 months of 2012 as trade inventory dynamics impacted results. In the first half of twenty twelve, the trade built less inventory versus the prior year period, which negatively impacted the comparisons of our reported shipments. When adjusted for trade inventory dynamics and other factors, PM USA estimates that its adjusted cigarette shipment volume down approximately 1.5% for the 2nd quarter and 0.5% for the first half. These results outperformed the total cigarette category.
PM USA estimates that the total cigarette category's adjusted volume declined approximately 3% for both the 2nd quarter and first half, which is consistent with historical price elasticity and the secular rate of decline. PM USA increased its retail share by 0.8th of a share point to 50.1% for the 2nd quarter and by 0.6th of a share point to 49.7 percent for the 1st 6 months of 2012. Marlboro gained 0.3 percent of a share point to 42.6 percent for the first half. PM USA's discount share increased 0.8 percent to 3.7 percent for the first half driven by L and M. Marlboro and L and M's 2nd quarter and first half retail share gains were partially offset by share losses on other portfolio brands.
Cigar shipment volume was up 0.6 percent for the Q2, primarily due to volume growth as a result of retail share gains, mostly offset by changes in trade inventories. For the first half, cigar shipment volume increased 7.1 percent driven primarily by retail share gains, changes in trade inventories and one additional shipping day. Black and Mild's retail share increased 1 share point to 29.8 percent for the 2nd quarter and was up 1.3 share points to 30.3 percent for the first half, primarily driven by the success of its classic sweets and wine untipped cigarillas. Turning to smokeless products. Reported operating companies income for this segment increased 8.1% to $240,000,000 for the 2nd quarter and 4.1 percent to $432,000,000 for the first half of twenty twelve.
2nd quarter results were driven by higher volume and pricing, partially offset by unfavorable mix due to growth in products introduced in recent years at a lower popular price and higher promotional investments. First half results benefited from higher pricing, effective cost management and lower promotional investments, partially offset by growth in products introduced in recent years at a lower popular price and higher restructuring charges related to our current cost reduction program. When adjusted for special items, primarily related to restructuring charges, operating company's income increased 7.1 percent to $240,000,000 for the 2nd quarter and 7.9 percent to $451,000,000 for the first half of twenty twelve. Reported smokeless product shipment volume increased 7.6% for the Q2, driven by Copenhagen's strong 12.6 percent volume growth as well as Skol's 6.6% volume gain. Shipment volume for the first half of twenty twelve was essentially unchanged as volume growth on Copenhagen was offset by volume declines on the balance of the portfolio.
Last year's introduction of Skol Extra and the delisting of certain Skol SKUs impacted Skol's volume comparisons. When adjusted for changes in trade inventories and other factors, USSTC and PM USA estimate that their combined 20 12 second quarter adjusted smokeless products volume grew approximately 5%. USSTC and PM USA also estimate that the smokeless products category grew by approximately 5 percent over the 12 months ending June 2012. USSTC and PM USA's retail share of the smokeless products category increased 1 tenth of a share point to 55.2 percent for the 2nd quarter and 6 tenths of a share point to 55.4 percent for the first half of 2012. Copenhagen and Skol delivered strong combined retail share growth of 1.4 share points for the 2nd quarter and 1.8 share points for the first half of twenty twelve.
Copenhagen grew its retail share by 2.1 share points for the 2nd quarter and 2.4 share points for the first half. Skol's share declined 0.7th of a share point for the 2nd quarter and 0.6th of a share point for the first half of twenty twelve. St. Michel's 20 12 second quarter reported and adjusted operating company's income both increased 15.8 percent to $22,000,000 For the first half of twenty twelve, reported operating company's income grew 19.4 percent and adjusted operating company's income increased 8.8%, excluding acquisition related costs from last year. St.
Michel's shipment volume increased 2.1% for the 2nd quarter and 4.2% for the first half. The Financial Services segment's reported operating company's income increased by more than 100% for both the Q2 and first half of twenty twelve, primarily due to PMCC's leverage lease charge of $490,000,000 in the second quarter of last year. Excluding leverage lease charges, the Financial Services segment's operating company's income grew by 55.6 percent to $42,000,000 for the 2nd quarter and 95.8 percent to $94,000,000 for the first half of twenty twelve, driven by higher asset sales and a $10,000,000 reduction in the allowance for losses. This adjustment to the allowance for losses is largely due to the reduction in net finance receivables as a result of asset sales. As a result of the closing agreement with the IRS related to certain PMCC leveraged lease transactions, Altria recorded a one time net earnings benefit of $68,000,000 during the Q2 of 2012, primarily due to lower than estimated interest expense on tax underpayments.
In addition, Altria paid $456,000,000 in federal income tax and related estimated interest from available cash in June and expects to pay an estimated $50,000,000 in state taxes and associated later this year related to the closing agreement. Earlier this month, UST paid off $600,000,000 in debt. These notes reached maturity and had a coupon rate of 6.5%. Our current cost management program remains on track and we have recorded net pre tax charges of $253,000,000 over the past three quarters. We expect to incur approximately $47,000,000 in pre tax restructuring charges in the balance of 2012 related to this program.
These 2012 restructuring charges are reflected in our full year diluted EPS guidance that we updated in today's press release. 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 2nd quarter. Marlboro's net pack price in the 2nd quarter was $5.71 while the lowest effective price cigarette was $4.20 The cigarette discount category's retail share was 27.1% for the 2nd quarter.
The estimated weighted average cigarette state excise tax as of July 1, 2012 was 1.41 dollars per pack, an increase of 0 point excise tax increase of $1 per pack in Illinois and the July 1 increase of $0.04 per pack in Rhode Island. Copenhagen's 2nd quarter retail price was $4.07 and its price gap versus the leading discount brand was approximately 40% in the quarter. CapEx was $23,000,000 for the 2nd quarter $39,000,000 for the first half of twenty twelve. We revised our 2012 full year CapEx forecast from $150,000,000 to a range of $100,000,000 to $125,000,000 based on current plans. Ongoing depreciation and amortization was $57,000,000 for the 2nd 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. Our first question comes from the line of Bonnie Herzog with Wells Fargo.
Hi, good morning. Good morning. I had a question on L and M. It's growing quite rapidly and you had talked about in your commentary, your mix has been if not, what strategies are you putting into place to stem this? And could you talk a little bit more about some of the promotional activity behind the brand?
Because I know that that started to step up last year and just kind of walk us through that again please.
Sure. Thanks for your question. The answer is we are business. That said, there is a the premium end of the business. That said, there is a discount segment and we want to have an offering there.
Our retailers in particular like for PM USA to have an offering there and there's some business there. So that's L and N's job. L and N really grew its share basically by picking up share that basic had shed as it increased its price and its margin. So there's no shift in strategy there. I think L and M has done a nice job.
Certainly helped from a volume point of view. I don't see any need to change the strategy with L&M at all. With respect to L&M's promotional activity that varies a bit over time. It is a bit different in 2012 than it is in 2011. But again that depends sort of on how it's performing in the marketplace and we adjust as we adjust most of our promotional allowances when the moment is right to do that.
Okay. And then my next question is just in terms of your innovation pipeline. Could you talk about your plans for innovation? Is it going to step up in the second half and possibly next year? And then can you talk a little bit about your plans to pursue next generation products, especially since mine are saying is you do have some of the rights to part of Philip Morris' technology?
Sure. We've spoken about this previously and I think we pointed out that innovation is one of the ways that one grows. And particularly we know that in the tobacco business now that there's a group of adult tobacco smokers in particular who are looking for and are open to innovative products. Innovation cuts across several sort of axes if you will. You saw that we rolled out Marlboro 83s and we've got a new Copenhagen blend.
Black and Mild rolled out another blend. So on the conventional side, I think we've got good pipeline of products. We stay close to the adult tobacco consumer. We watch what their needs are either articulated or unarticulated, do a lot of consumer research there. We try to make sure that we're offering products that they want and that for us are premium of course.
We also as you know rolled out. We have exciting development with respect to a different kind of product called Verb. And Verb is a non combustible product. It has nicotine and a flavor system and it's a chewable disc and it's really a very different kind of product. We put that product in about 60 stores in Virginia in June.
This is part of our journey as we explore how adult tobacco consumers may migrate to products of sort. That I would say is a learning experience. We want to get it in the hands of consumers. We've built robust consumer research around that product. We want to learn whether they like it.
They like its shape or its taste for example. And the way to think about this Bonnie I think is innovation is really an iterative process. It is not a great big one day that we find the next thing. It's about putting out experiments, putting out tests, developing products, asking consumers, getting that feedback and then continuing to develop the next generation. With respect to your question about next generation products, you made reference to PMI.
I think it's probably worth pointing out that as I think everyone knows, we do have an agreement with PMI as a result of the spin off in which certain intellectual property is jointly owned and separated by market and that we have agreements in place with respect to the commercialization of technologies that may come out of that. I would also point out though that in addition to PMI, PM USA has robust R and D and we were able to marry that with the really terrific R and D resources of the smokeless company we acquired. So we're very proud of our research and development team. We believe we've got lots of opportunity to innovate there. So innovation continues to be a focus area for us.
Okay. That's very helpful. Thank you.
Thanks for calling in.
Your next question comes from
the line of Nik Modi with UBS.
Good morning, everyone.
Good morning, Nik.
Just a quick question on the Marlboro architecture. You talk about making further investments. Can you just kind of contextualize those investments? Is it more point of sale? Is it more support behind some of the SKUs that you've been launching?
That's the first question. And the second question is, the I guess the Marlboro share incentive program ended in the June quarter. So just curious if that has created some kind of inventory bloat at retail as lots of retailers were probably aiming to make some of their targets? Any thoughts on that would be very helpful.
Okay. Thanks for your questions. Look, the way to think of Marlboro architecture is obviously it's the way that we're going to continue to grow Marlboro over time as it has grown in the past. And that allows us now across these 4 brand families to have a variety of initiatives product, programmatic, retail executions. And you see some of that playing out obviously in the Q2.
The sales force in April consumer for the consumer there and it makes it easier actually from an SKU point of view to see them. You saw Marlboro 83's box being rolled out to bring news to the Red franchise. We have promotional plans in place to generate trial from adult competitive smokers on Marlboro Black. So those are some examples Nick of the way I think that we think about putting the architecture together in a way that it comes alive for the Marlboro consumer and it allows it to continue to grow as it would like. With respect to the Marlboro share incentive, as you know those are retail trade programs that evolve over time.
There is a share growth component there. I don't think that we've noticed anything unusual at inventory as a result of the program.
Great. Thanks, Marty. Appreciate it.
You bet. Thanks for calling.
Your next question comes from
the line of Vivien Azer with Citi.
Hi, good morning.
Good morning, Vivien.
My first question has to do with inventory levels at wholesale. You mentioned destocking in the back half of June and into July. Is that largely done? Are inventories kind of back to normal levels? Or should we expect more destocking through the quarter?
Well, I think Howard made reference to this in his remarks. Just to maybe to start one level up from that. For PM USA, it's true of course that there are changes in inventory levels quarter to quarter or intra quarter even. But for PM USA that actually tends to kind of wash itself out over the course of the year. I think that what Howard pointed out in his remarks is the trade inventory increased in the Q2 of 2012 compared to the Q2 of 2011, which did benefit PM USA's volume performance a bit.
Then you had a build in the Q2 and then those inventories were reduced after PM USA's announcement of its price increase on June 18. We saw some of that reduction continue a bit into July. I think that's a fair description of wholesale right now.
Okay. Fair enough. In terms of the consumer, I know it's early days since the pricing didn't pass through, but I think there's kind of increasing concern about the health of the U. S. Consumer.
Have you seen anything in the trade in terms of response to the price increases a little bit more trade down? Because I was actually surprised to see over the last two quarters discount losing about 100 basis points a share?
We haven't seen that. Of course, the price increase just went in on June 2018, right? And then we price protected in our MLP stores through June 30. But no, we haven't observed that.
Fair enough. And my last question has to do with Skol. I recognize that the year over year compares were skewed a little bit because of the launch of Extra and the SKU discounting. But can you give us a sense of how the underlying business is doing?
Sure. Remember the strategy is to grow Copenhagen and Skol together. So if you look at the numbers really since the acquisition and over time, USSTC has done a great job with that. Skol has a tough challenge, doesn't it? Because it has to compete not only with other competitive brands, but also with Copenhagen.
And Copenhagen has really been growing. Copenhagen wants to grow a lot. They've got some of the product offerings that it needed to compete more effectively. And so the combined share growth is spot on target for our strategy. And so we're pleased with that.
We've said I think previously, Vivian, that those brands will move at different speeds. 1 will move faster at one time than another. So as long as the combined retail share growth goes, that's our strategy because we want to grow income by growing volume in this category. But there's work to do on Skol. We've got its positioning I think better.
And now we're really seeing if we can get Scholes growth accelerated. But together as long as they grow we're pretty okay with that.
Fair enough. Thank you very much.
Thanks for calling in.
Your next question comes from the line of David Adelman with Morgan Stanley.
Good morning, Marty.
Good morning, David.
It looks to me that the net price mix for PM USA this quarter was maybe 1% plus or minus. And do you agree with the characterization that that business is going through a period of time where it's putting a greater relative emphasis on market share growth?
No. I think that the strategy remains constant. The strategy for PM USA is to maximize income while maintaining modest share momentum on Marlboro and I think that's exactly what you see playing out. Look, here's what I would say about understanding kind of So it's not as if it's gone the wrong direction. What So it's not as if it's gone the wrong direction.
One can argue about the relative growth, but it continues to grow and its margin grew. I think the other thing to point out is pricing obviously as you well know occurs in a context and the economic context in which that business currently competes is, we're in the middle of a really anemic recovery from the greatest recession in decades and consumers are under pressure. And pricing for most consumer packaged goods in this category is no exception have been more restrained than previous periods of economic health. And then the final thing I guess I might say just on PM USA is, it's time of investment in Marlboro. And the reason we do that is Marlboro is the long term engine of PM USA's premium growth and the way it grows its margin and the way it contributes to income.
So I think if you put all those factors together and remembering listen pricing is obviously important in the cigarette segment. Everybody recognizes that. But it's not the only way for PM USA to contribute to income growth. It can moderate its promotional plans. It can reduce its cost structure.
It could become more efficient about the way it delivers products to the marketplace and they've been very attentive to all of that. And then of course at the Altria level, we have other income contributors. So we've got a growing smokeless business and we've got a great wine business and so forth. So that's kind of how we think about it David, which is putting all of those factors together. You point out that pricing has slowed a bit in the on that one axis.
But really overall, I think we're pretty okay with how we're doing on income.
Okay. And then secondly, Marty, how much of an impact do you think this growth of roll your own volumes because of the what was going on with retail with these small manufacturing equipment? How much of that how much of an impact do you think looking backwards that may have had on total cigarette category volumes? And how much of a benefit do you think from this legislation you may see going forward
from that? Yes. It's a good question. I think that it's hard to measure is the honest answer. You have a secular decline rate that's made up of a number of factors including people smoking fewer cigarettes per day or switching smokeless products.
Actually I think in that group are people who have gravitated to these kinds of products focuses on premium, I don't think there's a belief that it's focuses on premium, I don't think there's a belief that it's going to be a significant contributing factor. Some folks who are using something else. So we something else. So we'll see. It's a good development of course that everybody who's manufacturing cigarettes is playing by the same rules.
I just don't think at this moment we see it having a significant impact on volume.
Okay. Thanks a lot.
You bet. Thanks for calling.
Your next question comes from the line of Tilo Reddy with Jefferies. Hi. This is fair can we expect price to accelerate anytime soon?
Well, I guess I would just refer you back to PM USA strategy, which is to maximize income while maintaining modest share momentum on Marlboro and we'll just have to see how that plays out over time.
Okay. Thank you.
Thank you for calling.
Your next question comes from the line of Judy Hong with Goldman Sachs.
Thanks. Good morning. I guess you're sort of following on kind of the Marlboro share and pricing dynamics. Marty, just maybe you can give us some perspective on how you get comfort around the fact that some of these price driven investments are actually or the investments that you're making behind Marlboro's building brand equity, particularly among kind of the legal age to under 30 smoking group and that it's not coming solely because of really the price investments that you're making?
Sure, Arwad. Thanks for calling in. There's a number of metrics we follow around Marlboro of course. But when you put them all together, I think we feel quite confident that Marlboro's health is good and that the investments we're making are wise. It has great brand equity.
It has high share. It commands premium pricing. Its price caps have been stable throughout this terrible economic period. In fact, if you look back from the period 2007 to 2011, it both grew share and it improved its margin. And we know listen this is how Marlboro grown, right?
If you go back to Marlboro in 1954 with RED or when menthol was launched in the 60s or gold in the 70s. We know that Marlboro has that kind of equity. It's that kind of a big brand. And when you invest in it and it's got all these benefits, we know that consumers will choose Marlboro. So we have a lot of experience about both investing in and measuring the power of those investments in Marlboro.
We have every reason to think that's the case today.
Okay. And then Marty or Howard just in terms of your guidance, so just the commentary that the second half sort of moderates from the first half. Just wondering, is it just really more a comparison issue? Are there any other factors that we should consider just in terms of a bit of a slowdown you're expecting for the back half? And then in terms of taking the low end of the guidance up today, I know you've had strong performance in the first half from the equity income from SABMiller and then the PMCC.
So I'm just wondering how much of that is those factors as opposed to the tobacco business?
Well, I think that you point out that the comparison is probably the principal reason for that. Listen, the businesses are performing extremely well. We're very pleased. The execution of our plans is going fine. But as we pointed out in the release, gosh, Capital Core's adjusted OCI was up 56% for the quarter and 96 percent for the half.
As you know Judy those are transactional kinds of contributions from the leasing was up nearly 25%. And it does was up nearly 25%. And it does great, but it hasn't performed historically at that level. So we just think that when you do that and compare it to the first half, it's likely to moderate a bit in the second. I think that's the way to think about that.
Okay. And then for the cigarette category, the industry declined the 3% in the first half. Is that sort of reflective of the underlying consumption decline number? And do you think that that's kind of a reasonable rate of decline to think about for the full year?
Well, as you know, I mean, over time, the decline rate has been a function of both the secular decline rate and then some decline when prices go up with historical elasticity of about minus 0.3. Actually that's been constant for some time. I mean we don't see much change in that in the current environment.
Okay. Thank you.
Thank you for calling.
Your next question comes from the line of Michael Lavery with CLSA.
Good morning. Hi, Michael. Just back on Smokeless, I wonder if you could give us a little more color there. And I guess part of what I'm getting at is I know there's some trade issues and comparisons that skew some of it, but it certainly looks like Skol is accelerating and that some of the things that I think you're trying to do in that business look like they may be working. Is there a corner you might be turning there?
I think it's probably as I described it just a couple of moments ago, we focus on growing Copenhagen and Skol together. The brands have different places in the marketplace. They have different propositions. Copenhagen has really had very, very strong growth. Skol has to compete with that growth as well as compete against its competitors in the marketplace.
We're making progress on Skol I think. And as long as the retail shares are growing together and we're participating in the industry volume growth, we're able to grow our income in accordance with our plans. And we have brand managers for Copenhagen and we have brand managers for Skol and they're both trying to out compete the other as well as the competition and we think that's the right way to attack that category.
No, that's great. Thanks. And then on the cost side, obviously, you have the benefit of relatively benign input costs. But has the drought this year put any pressure on leaf costs for this year or for next year?
Yes. I think, there's nothing really out of the ordinary on our cost this year. We are tracking the drought's impact on tobacco growers and there's I would say there's some modest impact today although they've recently gotten some rains in some key areas. So while that's on our watch list, we don't see any unusual impact at least to date.
That's great. Thank you very much. You're welcome.
Your next question comes from the line of Thomas Russo with Gardner Russo Gardner.
Hi, good morning. I'm curious as to whether you found any steps to take in the context of these unusually low interest rates either regarding your pension fund and its funding status or work that you might be able to do on your capital structure?
Sure. I think we've been in a low interest rate environment for some time now although as you accurately point out they've continued to head further south. And I think we're pursuing the strategy we have over the last couple of years, both in our pension plan and with our focus on seeking to reduce our effective interest rate. And as you know, we've done that by allowing some of our high interest debt to mature. And then we've been going into the market periodically and getting quite advantageous rates.
And I think that the latest low rates just indicate that that opportunity is likely to be with us for some time.
Thank you. Thanks, Don.
Your next question comes from the line of Ann Gurkin with Davenport.
Good morning.
Morning, Ann.
I wanted to return to the smokeless tobacco segment. And I was just curious if that business your business is more in a position to grow in line with the overall industry now. Have you gotten Copenhagen and Skoll kind of to a position where that growth rate could be more in line with the industry?
Well, I think on an adjusted basis, we think that it did grow in line with the industry. Our strategy is to grow in line with the industry rate or a little bit better than that. And you're correct to point out that if you take a bigger piece of the share that does help grow your volume there. But we're I think well on the way to doing that and I think the numbers from the quarter reflect that.
That's great to see. And then just returning to Marlboro and the discussion, if you back out the architecture and back out the innovation and the stepped up brand assessment like the organic growth is that meeting your target the underlying performance of that brand?
Well, as you know, we don't back out that way. But I guess I just return to what I said before, which is Marlboro's health is really very good. It's up 3 tenths versus year ago, up 2 tenths for the half. We have our new Marlboro architecture that's being put in place. We have some new products that are in the marketplace.
So I think we're really pleased with how Marlboro is performing here.
That's great. Thank you.
Yes, ma'am. Thank you.
Your next question comes from the line of Chris Farah with Bank of America.
Hey, thanks guys. I guess a couple of
quick cash questions. First, I understand you paid down debt this quarter, right? But is that why the share repurchase slowed down to I guess its slowest rate since you guys started buying back again maybe 5 quarters ago? And then on CapEx, can you just give a little color on why that outlook is changing down to $100,000,000 Sure.
Yes, I think you're pointing out that we had $600,000,000 in debt that matured not in the Q2, but early in July and we did pay that off. I won't go into the details of how we calculate how much stock to repurchase, but I would I won't go into
the details of how we calculate how much stock
to repurchase, but I would point out that 3 quarters into that 5 quarter share repurchase program, we've purchased 700 dollars about worth of stock. So we think we're on a decent run rate and expect to finish that by the end of the year. Did you have a second question?
Yes. On the CapEx.
Yes. On CapEx, I would say that there's nothing unusual going on there. We forecast our capital expenditures at the beginning of each year. But then as we put together more detailed plans, we scrutinize those capital expenditures more carefully. And if there's an alternative way to achieve the results or if we can drive some incremental efficiencies, we seek to do that.
And so as we pointed out, we've now taken our capital expenditure forecast for the year from 150 down to somewhere between $100,000,000 $125,000,000 And we think that that's plenty in order to maintain the infrastructure we need in each of our businesses.
Great. And then just one question on the guidance. I know you guys said that EPS growth I guess would be easier in Q4 than Q3. And consensus is kind of there, but not quite. Can you just remind us of the puts and takes and why Q4 growth will be better than Q3?
No. I think I just rely on the remarks we made before Chris that it's going to moderate a bit in the back half compared to first half for the reasons I articulated.
Okay. Thanks.
Your next question comes from the line of Andrew Keay with Deutsche Bank.
Hi, good morning.
Good morning, Andrew.
Marty, just wanted to go back to in terms of your satisfaction with the promotional investments on Marlboro, particularly on special blends at Marlboro Black. Could you talk a little bit about the decision to ease back on the promotions in May or June? And how that speaks to the traction you're getting on those SKUs?
Yes. Well, look the promotional levels on these SKUs obviously are very carefully monitored over time. And special blends of course have a different role to play than black. So it's worth just taking a second to make sure that's clear. On special blends obviously their role is to offer SKUs at price points for some of the more promotion sensitive smokers that are in the franchise.
I think we've spoken before about 90% of Marlboro smokers choose the brand 100% of the time, but that leaves you 10% or so like in other competitive franchises that are more promotion sensitive. Special blend is a way to keep them in the franchise. All the while we manage our margin at the Marlboro level and they've been very effective in that regard. But of course, you don't want to offer more promotion than is needed. And so we're able to warrant.
Barbara Black on the other hand, it's a new product offering. And so what we're trying to do is to generate the trial among adult competitive smokers. And given the marketing restrictions in the industry, you have to do that principally at point of sale. And you do that with some promotional offers and that's been the role of promotions for Marlboro Black. And as soon as we get some trial there that meets our goals obviously it's the same issue, which is if you don't have to spend more promotional money there than need is and you're able to back it off.
And I think that's been what we've observed both with respect to special blend and Marlboro Black.
Okay. Thanks. And then just second question. If you could just talk broadly about the promotional and pricing environment in cigarettes in terms of what you're seeing from the premium competitors and the price gaps and the discount tier. You've got a little bit of reaction now to the pricing you took in July.
Just how that's sticking? And maybe if lower gas prices are helping at all in terms of trade down within the category?
Well, I think it's fair to say that the industry's been competitive. It is competitive. It's likely to be competitive. And we don't see a big significant change one way or the other in that. And PM USA's plans take that into account.
Okay. Thank you.
You bet. Thanks.
Your next question comes from the line of Chris Barrett with Bloomberg
News. Hey, good morning. Thanks for your time. I want to ask you first, did you disclose how much pricing helped revenue? Is that something that you give?
Yes. I think you can certainly calculate that from what is included in our press release.
Okay. And secondly, as you introduce new products, can you describe whether you're hitting the wall so to speak with the FDA? I gather that they that the agency simply is not considering or at least not considering promptly requests by the cigarette manufacturers for new and modified products. Could you talk about that a bit and what impact that's having on the company? Yes.
There's a couple of things in your question maybe we should separate out just to be clear. That's right. There was a major filing of so called substantial equivalence application some time ago, which was the principal filing. And what we've observed is that FDA is pretty methodically through those. There were a lot of them that were filed at the agency.
And it's worth remembering that the agency obviously is in its first kind of couple of 3 years of staffing up and putting process process and procedure in. It's a pretty deliberate agency anyway. And so they have some work to do in that regard. So that's actually been think pretty much what we expected, which was they would work their way through that. After that date of course to introduce regulated products into marketplace, you do have to file applications for substantial equivalents and the products can't be launched cannot be launched until approval.
And I think most majors have applications that are pending there. I think that's just more of the same. They're trying to work through their structure and process about approval. I would distinguish that from the last part of your question, which was modified risk products as opposed to for example more conventional products. There the agency is really just building out its science and policy base about how they're going to think about that.
And as you know they've conducted several hearings. And if you're interested in what we have to say about that we have them on our website. But I would distinguish that situation, which is likely to take place over some period of time. They have to get the science right before they're going to permit claims and that's what they're working through right now on that. Well, thank you.
So on the first half of the question, you're not kind of tapping your fingers and are urging the FDA to get moving on that. You seem to have some patience. Well, we planned for what was coming I think. And so everyone would like their regulator to move promptly on matters. But we have found actually FDA to be pretty okay about how it's going about its work.
And I'm sure that the speed will improve as they staff up over time. Thank you. Yes, sir. Thank you.
Your next question comes from
the line of Tilo Reddy with Jefferies.
Hello, Tilo? Operator, we don't seem to have a question.
That question has been withdrawn. I would now like to turn the floor back over to management for any closing remarks.
Thanks everyone for joining our call today. If you have any follow-up questions, we'd be happy to help you in Investor Relations. That concludes today's call.
Thank you. This does conclude today's conference