Good day, and welcome to this Altria Group 20 10 Second 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. I would now like to turn the call over to Mr. Cliff Fleet, Vice President, Investor Relations for Altria Client Services. Please go ahead, sir.
Good morning and thank you for joining our call. This morning, we will only be discussing Altria's 20 10 second quarter and first half business results and will not be discussing the status of tobacco litigation. Our remarks contain forward looking statements and projections of future results, and I direct you to the forward looking and cautionary statements at the end of our earnings release for the review of the various factors that could cause actual results to differ materially from projections. Since Altria acquired UST and its smokeless tobacco and wine subsidiaries on January 6, 2009. U.
S. Smokeless Tobacco Companies and Saint Juste Wine Estates financial results from January 6 through June 30, 2009 are included in Altria's 2,009 first half consolidated and segment results. For a detailed review of Altria's business results, please review the earnings release that is available on our website, www.altria.com. Altria reports its financial results in accordance with U. S.
Generally accepted accounting principles. Today's call may 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
the performance of Altria and its operating companies in the second quarter and the first half twenty ten. Our business results over both of these time our operating companies performed very well in what continues to be a challenging business environment. As anticipated, the Q2 of this year was challenging from an income growth comparison point of view due to the quarter were the same as the Q2 of 2009. Last year's 1st and second quarter income results were impacted by trade inventory movements related to these inventories in the Q1 of last year prior to the increase and then rebuilt them in the Q2. Since the FET increase did not include a floor tax on machine made large cigars, the trade built these inventories prior to the increase and depleted them in the second quarter of last year.
Due to these FET related volume impacts, separate first and second quarter income comparisons for 2010 versus 2,009 are not particularly meaningful. A look at our first half performance offers more insight into the underlying strengths of our businesses. Last year's first half results included 1 quarter prior to and 1 quarter after the April 1, 2009 FET increase. For the first half of twenty ten, Altria grew adjusted earnings per share by 3.4 percent and this growth occurred against last year's strong first half adjusted earnings per share growth of 8.5%. This solid adjusted earnings per share growth also occurred despite PMCC's first half operating company's income decline of $143,000,000 due to lower gains on asset sales.
Strong adjusted operating company's income growth from our adult consumer product businesses more than offset PMCC's income decline. Through the first half of the year, our adult consumer product businesses combined adjusted operating companies companies are maintaining strong positions in the marketplace in what remains a very challenging economic environment. We thus feel very good about the fundamentals of our adult consumer product businesses. We are pleased with the progress towards our objective of maximizing cigarette income while maintaining momentum on Marlboro. Marlboro reached a record retail share in the Q2 as it grew its overall share by an impressive 1.6 share points versus the comparable year ago period to 42.8%, while also continuing to expand its margins.
Marlboro's strong retail share performance also enabled PM USA's overall cigarette segment retail share to return to growth as it grew 7 tenths of a share point versus the Q2 of last year to 50.2%. Cigarettes segment income performance was also strong. The cigarette segment grew 2nd quarter adjusted operating company's income by 1.5% versus the year ago period and 3.8% for the first half of this year. We are very pleased with this first half income result since in the first half of twenty nineteen adjusted cigarette segment operating companies income grew by a strong 8.8% versus the comparable prior year period. Adjusted cigarette operating companies income margins expanded 1.7 percentage points to 38.6 percent for the first half of the year versus the comparable year ago period.
The Smokeless Products segment also reported strong results. Overall Smokeless Products segment retail share for the 2nd quarter grew by 1.8 share points versus the prior year period to 50 6%. Copenhagen and Skol's combined retail share of the Smokas category grew by 1.3 share points versus the comparable year ago period to 48.1%. The Smokeless Products segment's 2nd quarter adjusted operating company's income declined 5.2% versus the comparable year ago period, primarily due to costs associated with the national expansion of Marlboro snus. On a 6 month basis, however, adjusted operating company's income is up by a strong 15%.
Given the solid first half adjusted operating company's income performance from the Smokush product segment and the cost savings realized as a result of the acquisition across the Altria family of companies. We remain share. In the Q2, Black and Mild's retail share of the machine made large cigar category declined versus the year ago period as it faced a challenging environment due in part to an increase in competitive promotional spending. However, the Cigar segment's income growth has been solid as Middleton's 2nd quarter and first half adjusted operating companies income grew by 40% and 7.2% respectively versus comparable prior year periods. In the wine segment, we are encouraged that the wine category's volume growth rate for the first half of twenty ten appears to have returned to the pre recessionary levels of about 3 percent.
Ste. Michelle grew its volume faster than the category behind the strong shipment results of Chateau Ste. Michelle and Columbia Crest. This volume performance helped 2nd quarter wine segment adjusted operating companies income increase by 13.3% versus the prior year period and 20.8% for the first half of twenty 10 versus the comparable year ago period. Elfia's continuing progress against the $1,500,000,000 cost savings program contributed to these solid operating companies' income results.
In the 2nd quarter, dollars 129,000,000 of savings were achieved across the Altria family of companies and $172,000,000 were achieved through the first half of the year. We have realized a total of $1,200,000,000 in cost savings since the program's inception cost savings by the end of 2011. The Q2 of 2010 is the first one that can be compared to a post FET increase quarter in 2,009. Although adjusting for these movements and other factors, we are pleased with the underlying volume trends of the tobacco categories. Hum USA's reported 2nd quarter cigarette shipment volumes declined 10.2% versus comparable year ago periods, but when adjusted primarily for the FET related trade inventory build last year and the reductions in trade inventories this year following PM USA's 2nd quarter cigarette list price increase, volume was estimated to be down approximately 3.5% versus the prior year period.
PM USA estimates the overall cigarette category declined about 4.5% the prior year period, which is in line with historical price elasticity. Reported second quarter Smokas product shipment volume was up 9.2% versus the year ago period and was estimated to be up approximately 9% when adjusted for trade inventory changes, as well as the timing of USSTC and PM USA's new product launches and other factors. Companies estimate that the smokeless category continued to grow at a rate of 7% in the second quarter versus the comparable year ago period. And finally, Middleton's 2nd quarter cigar shipment volumes grew 19.7% versus the prior year period. After adjusting for trade inventory changes, Middleton estimates its 2nd quarter shipments were down moderately versus the prior year period and that the machine made large cigar categories volume grew slightly.
We are very pleased by the performance of Altria and its operating companies through the first half of the year. Adjusted earnings per share continue to grow, driven by solid income performance across all of our tobacco and wine businesses. It is primarily because of these first half results that Altria is increasing its guidance for 20 10 full year adjusted diluted earnings per share to a range of $1.87 to $1.91 which represents a 7% to 9% growth rate from an adjusted base of $1.75 per share in 2,009. I'll now turn the call over to Dave Moran, Altria's Vice President and CFO, who will discuss Altria's business segment results in more detail. Thank you, Mike.
In the quarter of 2010, reported operating companies income for the cigarette segment exceeded our expectations and increased by $24,000,000 to $1,500,000,000 due primarily to higher list prices and lower promotional spending, partially products, which grew 1.3 share points versus the Q2 of last year. The Marlboro special blend line extensions launched earlier this year were important contributors to the strong retail share performance. PM USA expanded both Marlboro's and overall comparable year ago period. The Smokeless Products segment reported operating companies income increased $21,000,000 versus the prior year period to $198,000,000 Excluding restructuring and acquisition related costs, adjusted Smokeless segment operating company's income decreased by $11,000,000 to 202,000,000 dollars Year over year income results were impacted by the trade inventory dynamics and cost associated with the national launch of Marlboro snus that Mike discussed, as well as activities to restructure and integrate USSTC's business into the Altria family of companies. 2nd quarter reported smokeless product shipments increased share performance was Copenhagen and Skol's combined retail share performance, which grew a very strong 1.3 share points in the 2nd quarter on a comparable year over year basis.
Share performance. Copenhagen Longcut Wintergreen, Longcut Straight and Extra Longcut Natural helped drive the brand's strong 2nd quarter retail share growth of 2.6 share points. Skol introduced brand building programs on Wintergreen, Strength and Mint variance in the 2nd quarter, which in conjunction with
the
The national launch of Marlboro Snooze, which occurred at the end of the Q1 of 2010 was also an important contributor to the smokeless product segment's volume and retail share results. Marlboro snus, which is available in 4 different variants, has had good initial awareness in trial and is meeting our expectations. We have an integrated marketing plan for the balance of the year to continue building awareness and trial among adult tobacco consumers for these new products. The Cigar segment reported 2nd quarter operating company's income increased $20,000,000 versus the prior year period to $56,000,000 Black and mild tip variants. Middleton intends to strengthen the brand's position in the marketplace through additional brand building activities.
St. Michel reported strong business results in the Q2 of 2010. Reported operating companies income for the wine segment increased $3,000,000 versus the prior year period to $12,000,000 When adjusted for restructuring and acquisition related costs, dollars Wine segment shipment volumes versus the second quarter and first half of last year increased by 10% and 15.4%, respectively. Overall, the wine industry's retail unit volume as measured by Nielsen Total Wine database for U. S.
Food, drug and liquor increased by 2 in the second quarter and 2.7% in the first half of twenty ten versus the year ago periods. St. Michelle's 2nd quarter and first half retail unit volume grew faster than the industries at 5 point 7% and 5.5 percent respectively. The Financial Services segments reported 2nd quarter operating company's income decreased $44,000,000 versus the prior year period to 39,000,000 dollars due to lower gains on asset sales. In the second quarter, Altria executed
a
in by PMCC in 1996 through 2003. We made this payment to the IRS yesterday and we intend to contest these disallowances vigorously. The tax component of this payment represents an acceleration of taxes that Altria otherwise would have paid over the lease terms of these transactions. As we have As we have previously disclosed, if the IRS in the future similarly disallows the tax benefits from these transactions for the period from 2 1004 until the end of 2010, the net additional tax and interest due would be approximately 1,000,000,000 dollars excluding any potential penalties. The closing of the 2000
and
in the second quarter. Altria's reported tax rate for the 2nd quarter was 22.9% due to the following. The closing of the federal audit resulted in a tax benefit of $47,000,000 primarily attributable to the reversal of tax reserves and associated interest related to Altria and its current subsidiaries. The closing of this audit also resulted in a tax benefit of $169,000,000 due to the reversal of of This tax event is similar to the one which occurred in the Q3 of 2009. And finally, there was an 11,000,000 dollars tax benefit due primarily to the reversal of tax reserves and interest associated with the resolution of several state income tax audits.
Excluding the net tax benefits recorded during the first half of twenty 2010 forecasted full year effective tax rate on operations of approximately 35.4 percent. In the 2nd quarter, Altria issued 800,000,000 dollars in 5.25 year notes with a coupon of 4.1 and oneeight percent. This opportunistic financing enabled the company to take advantage of a historically low interest rates and tightening corporate credit a coupon of 7.18%. This refinancing is consistent with our strategy of reducing the company's overall financing pack price was 5 $0.09 The cigarette discount category's 2nd quarter retail share was 26 point 9%, a decline of 0.4 The estimated weighted average cigarette state excise tax at the beginning of the 3rd quarter was $1.36 per pack and includes the 5 states that increased their excise taxes on July 1. Copenhagen's retail price was $4.12 and its price gap versus the leading discount the percent of the smokeless categories volume.
CapEx was $31,000,000 in the quarter and ongoing depreciation and amortization was $68,000,000 Operator, do we have any questions?
Thank you. Will take questions from the investment community first. Our first question comes from Nicky Modi of UBS.
Good morning, everyone. Just a couple of quick questions, if I can. Mike, in terms of the volume growth for smokeless and cigarettes, should we think about that? Or how are you thinking about that in the back half of the year? And perhaps, are we do you think this is now the normal run rate with cigarettes down in the 4%, 4.5% range?
And do you think smokeless helpful.
Well, I
think the way the whole tip of the iceberg is
helpful. Well, I think the way to look at the cigarette business is it remains on track with historical price elasticity calculations. And so, as the curve because it's where we have some evidence that we're probably going to see a continuation of that kind of a trend. So whether it's 4.5 percent or not, I think depends somewhat on factors outside of our control like state excise taxes and so on and so forth. But certainly, I think it's fair to say that it's begun to stabilize post the FET into a more normalized level.
And we'll see how that maintains itself as we move on through the balance of the year. But it looks pretty normal. It looks pretty normal at this point in time. Relative to Smokas, it looks our recent history that's been growing at about 7% and that's what it did this quarter. I think that's pretty healthy growth rate.
And so, we don't see anything new or different occurring that would cause us to believe that difference is going to occur moving ahead. But that again is based on whatever outside factors influence itself. We can't project it, but pretty stable 7% right now. Okay.
And then quickly, you addressed the promotional environment in cigars in the press release. Just curious, out in certain pockets of the country in certain categories?
All of these markets tend to be very competitive. Cigarettes and smokers have been historically particularly competitive. And they went through a lot of pricing disruption last year and have kind of settled down from that disruption, but they remain competitive. And there are some states where it's more competitive than it is in other states. And some areas of the country where some brands that have more development are more competitive than they are in other areas of the country.
There's nothing new about that. That tends to be the basic market dynamic that exists in in cigarettes. So I would say we're seeing a pretty normal competitive environment in the cigarette business versus what we would have historically expected to see and that the exception was the period during the change in the marketplace pricing quite a bit. And much is true of smokeless. It's a cigar business is that there's been some very aggressive activity in the cigar business in the first half of the year from some competitors.
That's, I'd say, more aggressive than we have seen at least in the time we've owned the business. And so there's been some impact based on that. That's okay. We know how to address that, but I think that's what we are trying to point out in our press release.
And just lastly, in terms of the wine assets, it's been almost two years now that you've owned the UST business and the wine assets. And just curious if you're thinking about this business differently in terms of perhaps shedding it or do you think that this business is kind of a
longer term keep for Altria? We don't have any plans to shed it. We're operating it. It's operating well and we see opportunities for it to grow additional income. And those are the things
This is actually just Tyler filling in for Judy. I just have kind of one question again, kind of more on the smokeless side. I think you started to talk a little bit about it, but I guess we're just still looking at a lot of these price declines year over year are clearly moderating. I guess I'm just trying to get a better understanding of your confidence that given some of the new product initiatives, the new marketing programs, how confident you are that you think these are?
I'm sorry, you got cut off right there at the end. Maybe you went away altogether. I guess that's what happened. I didn't get to finish on the question, so I can't answer
it. Your next question comes from David Edelman of Morgan Stanley.
Hi, good morning. Hi, David.
Mike, I wanted to ask you three things. First on Skol, do you think you have enough programs and efforts in the marketplace for that brand to from here gain share or does more need to be done?
Well, I would describe Skol as something that we haven't fully addressed yet. We tend to look at Copenhagen and Skull together in terms of volume and income result. And we know that as is the case with any big brand, there's a good high percentage of the consumers that are very loyal to that brand. And then there's always a proportion of the brand that is moving between some other that brand and some other brands based on other factor promotion factors and things like that. And so the amount of activity that we've had on Copenhagen has had some impact on Skol.
So we recognize that. We have some plans defensive measures that we have in place on Skol to help it support its business while it competes with our own activities on Copenhagen, but ultimately will address Skol in a more strategic way. There is somewhat of a sequence to the activity though that we're putting in the marketplace and we're just not ready to do that one.
Okay.
We think Skol has got a lot of potential, but you don't want to do everything at once. You want to do things in an order that makes good sense for the marketplace. And that's what we're trying to do.
Okay. Secondly,
are you willing to quantify or maybe approximate much of the UST $300,000,000 in cost savings are accruing to divisions other than smokeless tobacco, whether it's corporate expense or PM USA. I mean, that would help outsiders understand and sort of triangulate on your characterization that the transaction is going to be accretive to earnings. It would also help to understand the extent to which PM USA's results are benefiting from those discrete savings?
Yes. And David, let me take that. When not only when we bought UST, but when we moved Altria down to Richmond, we basically went in and restructured the whole business. And we set those service those service companies in order to provide services to the 3 operating companies and to Altria Group. So the individual operating companies benefited because we were able to get synergies with people doing providing the same sorts of services to these various operating companies.
And in doing that, we got the cost out of USG and also reduced our internal cost here at Altria in the operating companies and it results, but we don't break it out separately. It's within the segments. It's within corporate expense, but we don't break it out separately.
Yes, it's pretty hard to get at that the way you're asking it. And the reason why is because we accrue the soft cost savings in one place, but then the costs for the services that are provided to the operating companies take place somewhere else. So, we have a way to allocate the cost of the services that are provided to the sales and distribution and all the other services the consumer engagement services to the various operating companies. But then the whole realizes the savings, okay? And then there's an allocation back at the cost.
So it's kind of hard to go directly from here's how much of the cost savings climbs up being attributed to each place, because that's not how we do it. We don't dole out the cost savings to the operating companies. We charge the operating companies for services. The cost of the overall services that we provide today is less because we've added UST to the equation, taken a whole bunch of SG and A expense. Services.
So, it's pretty complicated.
I guess, that's a long way
to services with. So it's pretty complicated. I guess that's a long way of answering your question by saying, no, I can't do it, but at least that's an explanation.
Okay. Thank you very much.
Thank you. Your question comes from Chris Growe of Stifel Nicolaus.
Hi, good morning. Hi, Chris. Hi. I just had a question for you. Two questions actually.
The first one would just be that, as you look at the cost savings that are remaining for this year next, they really stood up quite a bit in Q2. And I guess I'm just trying to get a better sense of if they're going to be a little heavier this year than next because of the closing of the North Carolina plants for the manufacturing optimization. Will that really continue to step up throughout this year or is that more likely to hit in 2011?
That will continue to step up this year because if you remember, we actually ceased production in the second half of last year. So we're just starting to see that build through our system. Same thing with the synergies that we got through the UST acquisition. That was building as the year went on, so we get more benefit as the year goes on in 2010.
Okay. And then my other question just is related to Marlboro and the very strong market share gain there. I know there's a bit of a comp issue there as well. But my point would just or my question would just be that, if you were looking at the strong market share position for Marlboro, would you attribute that if there's a factor to attribute to is the relative price gap in your view a factor helping support the major supporting the market share gain for Marlboro?
Well, certainly the price gap needs to be correct for the environment that we're in, in order for the other parts of the equation of the brand to work. The price gap hasn't changed much over the quarters. So it's in the mid-30s. It's been pretty stable. I would attribute it more to things like new products like Special Blend, I think has had a good impact for the brand.
It's been a good place for people to go who have found some of the other premium brands to be priced more than they want to pay. They moved to a nice premium brand like Marlboro. And during the period of time that we've been launching that, there have been some promotion offers on it and some news related to it. And also, we've seen just some, I think, general health in the Marlboro brand in terms of the strength of its business in various geographies. And that's just indicative of, I think, the fact that we've been pretty much on target the way we've managed price gaps and the brand as we've been going through an economic recession.
So it's not one factor. Most of the time, I think price gap really is something you get wrong and then it becomes an impediment to your ability to build your business with other things. That's more the way we look at it. It's not a business building technique. It's just something that has to be right relative to the economic circumstances and other circumstances in the market place.
So that then the other things that we do relative to the brand and its equity have the opportunity to work with the consumer.
That makes sense. Thank you. And then just a quick follow-up would be that, as you look at like the performance of in the cigarette division in particular across different channels. Are you seeing an improvement in C store trends? We've heard that from some other companies or is there anything you'd say uniquely to the channel performance for the in the cigarette category?
No. I think the channels are pretty stable. The C store channel continues to be the predominant channel for cigarettes and this continues to be healthy.
Okay. Thank you.
Your next question comes from Christine Farkas of Bank of America Merrill
Lynch. Thank you very much. Good morning, everyone.
Good morning.
Couple of
questions for you, Mike, and then one for Dave. Firstly, when you look at these states or the I guess the improvements in the cigarette trends across states, do you see a difference in those states where unemployment is higher?
Well, I think you see a little bit of a difference in terms of what you have to do to manage your GAAP where unemployment is higher. That's really the answer to the question. You have to do a little bit more where unemployment is higher than you have to where unemployment isn't so high. That's how it plays out.
Okay. That makes sense. Can you Distribution is ramped up.
I always
like to remind people we've used snus distribution is ramped up. I always like to remind people we view snooze as a long term play, although it's now that you have 2 major players out there in the marketplace, it's actually pretty category. And I think that it has had some category. And I think that it has had some impact on category growth rates. So, it's so far so good, but this is something where we'll be for a while giving cigarette smokers the opportunity to engage with snus, give it a try, try it a second time because it's a very different experience than smoking a cigarette.
So, I think we have to have patience with our expectations in the snooze business. But we're out there now. We got good distribution on the product, getting good consumer feedback and really now it's just kind of doing the general marketing work that has to take place over time to engage with consumers.
Okay, great. And then moving to packaging on cigarettes, I know it's early days with respect to the changes there on descriptors and moving to the gold line. What are retailers telling you or kind of changes if any are you seeing with customers?
Nothing that I can note. I mean, I think that that was handled in a pretty seamless and straightforward way. We diverted a lot of our sales force effort to making sure that that got converted to retail properly. And I believe we've done that. And I think everybody's kind of moved on.
Okay. And the last one
for you Mike with respect to inventories in cigarettes in the 3rd quarter going into the quarter or year over year factors. Is there anything there to note?
I'm not sure what sure what you're asking me.
Well, the year over year factors of trade inventories and how this quarter shaped up, is there anything to note with respect to the Q3?
Okay. I would say, you never know exactly what is going to happen with inventory. So we don't know exactly how wholesalers are going to manage their business in one state to another and there are other factors like state excise tax increases and things like that that can influence inventories in the marketplace. But I would say a pretty good description of inventories at this juncture is that they're pretty normalized inventory levels, both in wholesale and retail. Now, I don't know if that will stay that way, but that's where they are right now.
Okay. That's helpful. And Dave, just if I can get your perspective, first half earnings growth of about 3% or 3% and change, full year guidance of 7% to 9%. Can you just highlight broadly where you see the acceleration happening in the second half of the year or if it's more broad based?
Well, we've said all along that the first half would be more challenging than the second half due basically to all the disruptions that were caused by the inventory dislocations surrounding the FET increase across all the categories. And I remind you that in the first half of last year, we had accelerated income growth and we grew off that rate. So when I look at the second half of the year, that's behind us and the across our operating businesses without picking out anyone in particular, but across all of our operating businesses, we expect to get solid business results.
Great. Thank you very
much. Your next question comes from the line of Tilo Reid of Credit Suisse.
Good morning, gentlemen. Dave, you pointed out the record market share that Marlboro had in the second quarter. At what point would you expect the Marlboro market share to max out? Or to ask the question differently, how would Marlboro be able to avoid the life cycle that consumer products usually have?
Well, I don't first of all, I don't agree with the premise. I don't think that consumer products have a life cycle. I've been involved with a lot of products have a life cycle. I've been involved with a lot of brands in my career in a number of categories. And these major brands tend to last a long time if they're managed properly.
So my career has been 38 years and Tide is still number 1. So I don't buy that premise. I would say the brand is doing fine. It's strong. We don't put a cap on its growth.
You $0.22 share would it be maxed out at $0.25 and so on and so forth. I don't buy that as a theory. So I think it's going to continue to grow and that's part of our responsibility is to try to do the kinds of things on that brand to keep it relevant with consumers and cause it to continue to grow its equity and be able to earn a good return for our shareholders.
Okay. And then Mike, you pointed out that the growth for Marlboro partially coming from extensions like the Special Blend. Can you break down for us how Marlboro Red and Marlboro Gold did versus these line extensions in the Q2?
No, we don't that way.
But would you say the majority of the growth came from the line extensions or came in from the core business?
Well, we don't break it out that
way.
We don't provide that information.
Okay. And then you increased the guidance for the full year because of the better underlying business, are you still keeping the medium term growth expectation, EPS growth expectation at 7% to 9% or would you be will that come up as well given that the underlying business seems to be better than you thought?
No change there. We have not made a change there.
So the fact that down trading is maybe slowing down or reversing the fact that the underlying business is better than you thought at the beginning of the year doesn't have any impact on your medium term outlook?
Well, I don't think that that's kind of thing we're going to jerk around. I think we have still an unresolved economic environment. So that goal is really more based on the feeling that that economic environment was going to be with us for a while than anything else. So I don't think that we have evidence that's resolved yet. Great.
Thank you. Okay.
Your next question comes from Karen Lamarc of Federated Investors.
Hi. I think you indicated that in Smokeless, the adjusted operating income was down primarily because of the costs associated with the national rollout of snus. Can you quantify that spending? And also how much of that might be carrying into the rest of the year? Thanks.
Yes. We don't break out individual spending behind our national launches. But the Marlboro snus was launched nationally in the Q2. We have a plan to get trial and awareness throughout the year. We just don't break those numbers out.
Was Q2 be the peak in terms of the spending? Is that fair?
I think you got best answer you're going to get.
Okay. Thank you. Your next question comes from Ann Gurkin of Davenport.
Good morning. Hi, Ann.
My
Your next question comes from Todd Duvink of Bank of America.
Yes, good morning.
Hi, Todd.
I had a question on balance sheet. If you can talk a little bit about the $970,000,000 payment that was made after the close of the quarter. You had about $845,000,000 cash on the balance sheet at the close of the quarter. So I assume you either tapped your credit facility or issued commercial paper to make that payment. If you could confirm that and tell us that if you did, does that mean that you will likely tap the market to term out that debt?
Yes. At the end of second quarter, we had actually went into the commercial paper market for $200,000,000 And we use the commercial paper market on a variable basis. Will go back over time, it will be in the 1st and second quarter time period. Sometime it bleeds over into the Q3, but we actually went out by the end of June and had raised $200,000,000 in commercial
paper. Okay. So that sounds like that there's nothing really that you need to term out there?
That's correct.
Okay. And then I guess just a follow-up question related to that. I heard you make the comment about the issuance of notes in June at a lower coupon rate than the notes that matured. Can you just update us on your thinking for going Are you still considering things such as debt tender? Or are you just waiting for notes to mature and then we'll refinance those at that time?
If I just go back and just talk about what our overall objectives are and philosophy is with regards to our balance sheet. We want to remain investment grade credit rated. And part of our stated and look at how we put debt onto our balance sheet, we did it over various tranches with different durations. So we make determinations on how best to meet both our balance sheet objectives and lowering our financing cost objectives based on a point in time. And that's based on business needs, based on market conditions and our actions in June just reflected this process.
We saw a great opportunity to get money at a rate of 4% to 8%. We replaced money at 7% to 8%. So our overall interest cost or financing cost on an annualized basis is less. Last year, market conditions were different as the debt matured, we paid it off. So it really is based on both market and the business needs at a particular point in time.
Okay. That's very helpful. Thank you.
At this time, I would like to turn the floor back over to Cliff Leekt for any closing remarks.
I want to thank everyone for joining us today. If you have any follow-up questions, please feel free to give us a call at Investor Relations. Thank you.
Thank you for participating in today's conference call. You may now disconnect.