Good day, and welcome to the Altria Group 20 10 First 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. Representatives of the investment community and media on the call 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 Q1 business results and will not be discussing the status of 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, 6, 2,009 are included in the 2,009 Q1 consolidated and segment results. For a detailed review of Altria's Q1 business results, please review the earnings release that is available on our website, www.altria.com.
Altria reports its financial results in accordance with 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 as well as reconciliations are included in the earnings press release. Now it gives me great pleasure to introduce Mike Symancic, Chairman and Chief Executive Officer of Altria Group.
Thanks, Beth, and good morning to everyone. We're very pleased with the performance of Altria and its operating companies in the Q1 of 2010. Altria delivered strong adjusted earnings per share growth of 7.7%. In addition, we increased dividend by 2.9 percent to an annualized rate of 1 $0.40 per share, reflecting our new dividend payout ratio target continuing challenges of high unemployment and low consumer confidence as well as an intensely competitive environment, Altria's operating companies continue to perform well. The cigarette segment's adjusted operating companies income increased by 6.7% over the comparable year ago period to $1,300,000,000 Marlboro achieved record retail share results as the brand grew its quarterly retail share both sequentially and on a year over year basis.
We're particularly pleased with the cigarette segment results considering that the prior year comparison period included cigarettes segment's adjusted operating companies income growth of 10.7 percent and a previous Marlboro retail share income growth of 49.2 percent to $188,000,000 Copenhagen and Skol's combined retail share increased both on a sequential and comparable year over year basis and the brand's combined shipment volume grew faster than the smokeless category's growth rate for the 2nd straight quarter. Importantly, Copenhagen reestablished itself as the largest smokeless brand as measured by retail share in the quarter. The Cigar segment's adjusted operating company's income declined by 15.8 percent to $48,000,000 Middleton had a very difficult income comparison against the Q1 of 2,009, when its adjusted operating company's income grew by a very strong 32.6 percent due to the timing of trade purchases around the 2,009 FET increase. The wine segment's adjusted operating company's income grew 33.3 percent to $12,000,000 St. Michel reported strong volume growth versus the prior year period, led by the 44.9% shipment growth of its Chateau Ste.
Michel wines. Ste. Michel continues to be recognized as a producer of a broad portfolio of high quality wines as wine industry publications had given over 30 of its wines ratings of 90 or better already this year. The 4 premium brands of Altria's tobacco operating companies performed well in a challenging environment. Marlboro had a particularly strong performance as I mentioned.
The brand launched 2 special blend non menthol products in the quarter, which contributed to the brand's strong retail share performance. The strength of these two new products helped Marlboro grow its retail share one share point from the Q4 of 2,009 to Q1 of this year, despite continued heavy competitive spending on non menthol discount products. PM USA plans to broaden the availability of 2 more variants of special blend in 100s length in the Q2 of 2010 to build on this success. Marlboro also launched Marlboro Snooze nationally as a spitless smokeless tobacco alternative. Since the products did not ship nationally to wholesale until late in Q1 of 2010, it is premature to talk about retail share and adult consumer feedback.
However, based on our test markets, we believe Marlboro Snooze has a good opportunity Cut Wintergreen, which was successfully launched in the Q4 of 2,009. USSTC began shipping Copenhagen Long Cut Straight and Extra Long Cut Natural at the end of the Q1 of 2010, and we anticipate that these products will contribute to Copenhagen's growth this year and beyond. Skol showed solid momentum as it grew its Skull Up to Summer campaign later this quarter, which its Skol Up to Summer campaign later this quarter, which is an integrated program of enhanced products and marketing activities to strengthen the brand's position in the marketplace. Black and Mild continued growing its retail share versus the Q1 of last year, despite a challenging environment due to an increase in competitive promotional activities. Middleton is monitoring the competitive environment and plans to respond appropriately to defend Black and Model's marketplace position.
New products have played an important role in the brand's strong retail share growth. And in the Q2, Middleton plans to introduce Black and Mild Royale to continue building its strong position in the machine made large cigar category. As expected, trade inventory changes last year caused by the April 1, 2009, FET increase impacted shipment comparisons across all the tobacco segments for the Q1 of 2010 versus the comparable year ago period. Last year, the trade significantly reduced cigarette inventories in advance of the from the beginning to the end of the quarter. Due to these inventory dynamics, PM USA's reported 20 10 Q1 cigarette shipment volume was down only 0.7% when compared to the in line with historical price elasticity.
Smokeless product shipment comparisons were also impacted by trade inventory depletions in the Q1 of 2009 in advance of the FET increase, as well as the timing of PM USA and USSTC's new smokeless product launches in the Q1 of this year. Reported 1st quarter smokeless shipments were up 21.9% versus the comparable year ago period. But when adjusted for the timing of new product launches, trade inventory movements, the discontinuation of rooster and other factors, smokeless shipments were up estimated 5%. Copenhagen and Skol's combined first quarter adjusted shipment volume increased an estimated 11% when adjusted for the new product pipeline volume and trade inventory changes as well as other factors. The company's estimate that the smokeless category continued to grow at a rate of about 7% in the Q1 of 2010.
Cigar shipment comparisons were also impacted by events in the Q1 of 2009. The trade increased cigar inventories in advance of the FET increase since there was no floor tax on machine made scars. And the initial shipments of black and mild wood tip also occurred in the Q1 of last year. For the balance of 2,009 and into the Q1 of 2010, the trade reduced inventories of Middleton's machine made large cigars. The combination of all of these year over year dynamics had a substantial impact on Middleton's Q1 reported shipments.
Middleton's reported shipments were down 18% versus the Q1 of last year, but when adjusted for trade inventory changes, were estimated to be essentially flat. Middleton believes that when adjusted for FUT related impacts, the machine made large cigar category was essentially flat. The Altria family of companies continued to make excellent progress on its $1,500,000,000 cost reduction program. $43,000,000 in cost savings were achieved across the enterprise in the Q1 of 2010 for 1,100,000,000 dollars in total savings since the program's inception of the 2,006 cost base. We remain confident that will realize the $419,000,000 in additional cost savings by the end of 2011.
We continue to believe that the UST acquisition will be accretive to Altria's adjusted diluted earnings per share in 2010. First quarter financial results for the Smokeless Products segment are in line with our year to date expectations. These segment results are not comparable to USSTC's reported results prior to Alky's acquisition, as they now include smokeless product results for PM USA. In addition, we remain on track to realize the $300,000,000 in cost savings resulting from the acquisition. The impact of these cost savings is reflected partially in the Smoker's Products segment operating more efficient corporate structure.
We expect the Q2 of this year to be particularly challenging for income growth comparison purposes due to different trade inventory dynamics in 2,009 versus 2010. We continue to expect adjusted diluted earnings per share growth to build in the second half of this year. For the full year, Altair reaffirms that its guidance for 20.10 adjusted diluted earnings per share is expected to be in a range of 1.8 $5 to $1.89 which represents a 6% to 8% growth rate from an adjusted base of $1.75 per share in 2,009. Now I'll turn the call over to Dave Brand, Altria's Executive Vice President and CFO, who will discuss Altria's business segment results.
Thank you, Mike. I will begin by discussing our cigarette segment results. During the quarter, PM USA successfully executed its objective of maximizing income while maintaining Marlboro's strong position in the cigarette segment. For the Q1 of 2010, reported operating company's income for the cigarette segment increased by 7.6 percent to $1,200,000,000 due primarily to higher list prices and lower pre tax charges related to the previously announced closure of its Cabarrus manufacturing facility, partially offset by lower volume. When adjusted for restructuring charges, 1st quarter adjusted cigarette segments operating company's income grew by a strong 6.7 percent to $1,300,000,000 versus the same year ago period.
Trade inventory increases in the Q1 of 2010 helped cigarettes segment volume and income results for the period. We expect that the trade will return inventories to more normal levels, which will have a corresponding impact on PM USA's business results when it occurs. After adjusting for trade inventory changes, PM USA's 1st quarter cigarette shipment volume declined by approximately 11%, which is greater than the estimated industry decline rate of approximately 10%, primarily due to retail share losses when its portfolio brands of 1 point. PM USA profitably reset the retail share positions of these brands after the FET increase last year. And we therefore expect that PM USA's comparable year over year retail share results will improve over subsequent quarters as we begin to lap these reset retail share positions.
Marlboro had a record retail share of 42.7% in the Q1 of 20 10. Marlboro achieved this result with sequential retail share growth on both the menthol and non menthol components of the brand. While grew its margins in the Q1 of 2010, grew its margins in the Q1 of 2010 versus the Q1 of 2,009. We are also pleased that Morro Menthol achieved record retail share results in the Q1 of 2010 with
a
segment. Income growth was strong and Marlboro displayed great strength in a challenging environment. Similarly pleased with the Smokeless Products segment results in the Q1. Reported operating company's income was $178,000,000 an increase of $180,000,000 from the comparable year ago period. When adjusted for exit and integration cost and acquisition related charges, adjusted first quarter operating company's income was $188,000,000 an increase of 49.2% from the prior year.
This strong income performance occurred despite cost associated with 3 national new product introductions in the Q1 of 2010. Smokeless product shipment volume in the Q1 increased 21.9% versus the prior year period, driven primarily by Copenhagen and Skol and the national expansion of Marlborough Snooze. Both Copenhagen and Skol had solid underlying shipment performances. After adjusting for the timing of new product launches, wholesale inventory changes and other factors, both Copenhagen and Skol grew their 1st quarter shipment volumes versus the prior year period. On a year over year basis by 0.8 and 1 share point respectively.
Copenhagen's 1st quarter retail share of 25.6% was particularly impressive as the brand share grew 1 share point on a sequential basis and 1.9 share points on a year over year basis. Now that Copenhagen and Skol's combined retail share has been growing sequentially for the past couple of quarters, we expect that total smokeless products retail share will also return to growth on a year over year basis as the year progresses. The Cigar segment reported 1st quarter operating company's income of $47,000,000 down 13% from the prior year period. When adjusted for integration cost, adjusted operating company's income declined 15.8 percent to 40 $8,000,000 As Mike noted, Middleton's 1st quarter income and volume comparisons were were cigar category by 0.3 of a share point versus the Q1 of last year to 28 0.2% behind the continuing momentum of last year's new product launches. Has a strong pipeline of new products for 2010 including black and mild Royale and plans to respond as appropriate to the competitive dynamics in the marketplace.
St. Michel also reported solid business results in the Q1 of 2010. Overall reported operating company's income for the wine segment increased 6,000,000 cases versus the year ago period. Overall, the wine industry's retail unit volume as measured by Nielsen
quarter of
2010 and St. Michelle's retail unit volume grew faster than the industry at 6.1 percent. Reported operating company's income for the Financial Services segment in the Q1 of 2010 decreased $99,000,000 versus the prior year period to $21,000,000 due primarily to lower gains on asset sales. At the end of the first quarter, the allowance for losses was $202,000,000 reflecting a net decrease of 64,000,000 dollars due primarily to write offs on leases with General Motors. Mike and I will now be happy to take your questions.
While the calls are compiled, let me cover a few housekeeping numbers. Marlboro's price gap versus the lowest effective price cigarette was 33% in the quarter. Marlboro's net pack price was $5.42 and the lowest effective price cigarette pack price was $4.08 The cigarette discount categories 1st quarter retail share was 20 7.5%. The estimated weighted average cigarette state excise tax at the end of the first quarter was $1.26 per pack. There were no state excise tax increases in the Q1 of Additionally, legislatures in Washington State and Hawaii sent bills to respective governors that include cigarette excise tax increases.
Copenhagen's retail price was 4 point $1.5 and its net price gap versus the leading discount brand was approximately 45% in the Q1. At the end of the first quarter, the District of Columbia in 18 states used a weight based excise tax system representing 27% of the smokeless categories volume. Our 2010 reported 1st quarter tax rate was 36.5%. We anticipate that Altria's 20 10 full year effective tax rate on operations will be approximately 35.5%. On April 15, 2010 PM USA made its full 2,009 MSA payment of approximately $3,600,000,000 The MSA payment included approximately 2 0 $9,000,000 that PM USA disputes to those as a result of the 2,007 non participating manufacturer adjustment.
In the Q1, Altria recognized a one time 12,000,000 dollars non cash charge due to the elimination of tax deductions for retiree prescription drug subsidies under the 2010 healthcare legislation. And CapEx was 38,000,000 dollars in the Q1 and ongoing depreciation and amortization was $69,000,000 Operator, do we have any questions?
Thank
Thank you very much. Firstly, a clarification, Dave, if I could. The profitability on Marlboro was said to be higher year over year, but I'm wondering about the pricing for Marlboro. You did have cost savings in the quarter. Was the pricing up similar to other brands?
Or was it more moderate? Or was it in fact down year over year with added promotions?
The overall profitability of Marlboro as well as there are other brands increased this quarter over last quarter. And it represents the strategy that we used in the market place that includes our promotions and our new product launches. So I hate to split out individual components of the brand marketing plans, but it was the totality of both the new product launches and our promotional activity in the quarter that enhanced Marlboro's
margin. Okay. That's helpful. And then just a broad question on smokeless. If you can look at the regions around the U.
S. That were troubling given some high unemployment, if you look at where price gaps are now and Coke's performance, can you talk about how that performance might have changed in the quarter? Or is it are there some regions that are surprising you? Thank you.
Well, hi, Christine, it's Mike. I would say that in general, Copenhagen is doing very well and that pretty much across the board. As you know, we look at price gaps pretty much by state. And I would say that there's any particular areas right now where we would describe it as trouble significant trouble spot. And on average, the gaps remain about where we thought they would be, which is in the kind of high 40s mid to high 40s.
So there's nothing unusual going on. Copenhagen's business is really being driven by getting the gap right pretty averagely across the board and buying new products, in particular the wintergreen product at this juncture. The other ones are so early in the marketplace, we really don't have any basis on which to read them.
Okay, great. That's helpful. Thanks, Mike.
Your next question comes from Chris Growe of Stifel Nicolaus.
Hi, good morning. Good morning. Good morning.
Hi. Just had I had two questions for you. The first would be that following on a bit to the question about price gaps here in cigarettes. It's been at a pretty comfortable level Marlboro versus the lowest effective price around 33%. That's a good percentage relative to history.
Do you foresee upward pressure on the discount packs as whether it's FDA costs or state tax increases that kind of to where that gap actually could narrow a bit this year. Would that be a reasonable assumption for the year?
Well, I don't know. I can't predict the future on that. We kind of respond to what's out there in the marketplace. And as I've said before, we've had periods of time where the gap is wider than it is right now when the economy is healthier. And the 2, I think, primary factors there are unemployment rates and consumer confidence.
And so I think as unemployment rates come down and confidence goes up, then there may be some opportunity there. But I think the way we look at it is we watch the market and then we take advantage of opportunities in the market as they unfold. We don't try to guess where it's going. We wait till it gets there and then we respond to it.
Okay. And then I had a question for you on Marlboro overall. And could you say within your market share for Marlboro this quarter, how much new products like Special Blend would benefited the market share overall?
Well, I just say to you that Marlboro actually exhibited strength in both the menthol and non menthol side. And so we got some positive benefit on both those sides. And certainly, the new products were a part of that contribution. But Marlboro was pretty healthy overall and kind of across the board.
Okay. And then just one final one for you. You suggested that inventory levels are at maybe coming down from where they are today overall. Is that just an expectation for the rest of the year? Do you foresee that happening in 2Q, for example?
Or is that just an expectation given the levels they're at today that they come down?
Well, I think that our view of it is that inventories, particularly at the wholesale level, won't stay where they are. I'm not going to speculate on when they come down. I think that that will be based on what wholesalers do. But when you look at them compared to the prior year activity where you had an unusual circumstance in the prior year where inventories really went to exceptionally low levels where we knew they were going to come back up, it sets up a comparison that I've tried to explain because it's a bit artificial. It overstates I think what the real volume is.
But I can't tell you exactly what's going to happen because I don't know, but I would
Your next question comes from David Adelman of Morgan Stanley.
Good morning. Hi, David.
Hi, Mike and Dave. First on this, the inventory dynamic in the Q1 in cigarettes, how much would your shipments have been down in Q1 if trade inventory levels did not increase during the quarter approximately?
Well, I think I gave you an adjusted number in the earnings release, which was 11%.
But that's taking into account both the anomalies last year and this year. If you told us how much the Q1 benefited from trade loading this quarter, I think it would help us understand how much of a negative variance there would be later in the year if things reverted to where they were entering the year?
Well, I don't know that it's necessary. I think you have a comparison that's adjusted. So that's the best I think I'm going to be able to give you at this point.
Okay. And then in April, Mike, now that you've lapped the excise tax increase, what's your sense of the year on year consumption decline that the category is reverting to?
I'm not sure I know what you mean.
In other words, it's been an unusual period for
You have a quarter where as I mentioned in the earnings release and in my remarks, you have a quarter where when we adjust out the factors what we see is shipments, our estimate is that shipments in the industry are off about 10% when you adjust and that's consistent with normal price elasticity. I don't know how to translate that into consumption.
No. All I'm saying now in April, you've lapped the impact of the federal excise tax increase. So 2nd quarter to date, do you have an initial read of what it appears that underlying consumption declines are reverting to?
We'll look at the Q2 when we get to July. We generally don't start talking about the quarter until it's over.
Okay. And then with the pending substantial potential increase in dividend taxation, is that going to cause the Board to reconsider it all or reevaluate the relative preference of dividends versus share repurchases as a way of returning cash?
Both of those remain speculative issues. We don't know what's going to happen exactly until we get there relative to tax rates and the Board makes those decisions when it thinks it has appropriate information on which to make them. Them. So I would say it's probably premature for us to be discussing. Okay.
And then last thing, Mike, the historically Marlboro could grow share presumably with a price gap in the mid-40s. Do you think as the economy improves and unemployment rates get back to maybe where they had been 2, 3 years ago, Is that still a realistic benchmark? Or do you think with significantly higher pricing in the category that sort of more on a secular basis, the brand wouldn't be able to gain share with that magnitude of pricing
gap? Well, I can't predict the future, but I can tell you a history would say that in a stronger economic environment where we have low much lower unemployment and we have higher consumer confidence that we've seen the brand able to withstand broader gaps. And that's true pretty much across varying state tax levels. So there's significant difference between state tax levels and therefore retail pricing. So that's history.
Now I can't predict the future for you, but I would indicate that those kinds of environments gaps have been wider and the brand has been able to grow.
Okay. Thank you.
Your next question comes from Judy Hong of Goldman Sachs. Thanks. Good morning.
Good morning. Good morning.
Mike, just going back to David's question about the trade inventory movement. Last year, you did quantify that your shipments were negatively underlying shipments of 11% and assume that 800 points underlying shipments of 11% and assume that 800 points of sorry, 800 basis points of inventory got rebuilt this year. I mean, is it really just sort of 2 points of boost that you got from the quarter as the trade builds from beginning of the quarter to the end of the quarter? That how we should think about it?
I don't know. I'm not sure I understood exactly your equation there. Look, I think the basic thing to understand here is that we saw inventories in the Q1 of this year build through the quarter. And last year, what we saw is as we got into March was a inventory forever. So that's what I think is important for people to know.
We can't predict exactly when that's going to occur. But I think it's important for people to know it's there. Beyond there, trying to quantify it precisely is not something I'm going to do.
And Mike, was that more of lot higher this carrying costs are a lot higher this year compared to history because of the tax issue? And is it any indication that they feel pretty comfortable with the underlying trends maybe going back to the historical trend line as we are lapping the tax increases?
Yes. I'm not going to comment on that. I think that's for wholesalers and for competitors to answer rather than for us to answer.
Okay. And then on the smokeless side, again, as we think about the shipment number outpacing the underlying number, is there any way to quantify how much of that was specific to new product launches?
Well, I can't tell you that off the top of my head. But what I would say to you is that what we saw on our 2 premium brands was pretty strong shipment performance throughout the quarter. So that wasn't driven by tail end shipments. It was driven by pretty strong performance on those brands and share performance throughout the quarter. And some of that was driven by Copenhagen Wintergreen.
So I wouldn't attribute it simply to our pipeline on the 2 SKUs that we launched on Copenhagen at all. It was pretty good shipment supported by share performance and with good margins as well. So I would say that those two brands are doing a nice job right now.
Okay. And then just broadly speaking on the Smokeless side, I mean, clearly, you've set up the goal of achieving share gains on the premium brands and sequentially, it's gotten better year over year as their shipments are outpacing this broader category. So it seems like from a share perspective, you've achieved the goal of really gaining the share momentum back behind the brand. As you think about your spending level behind the brands and your investment that has gone against the 2 premium brands, are you comfortable now just in terms of the overall, the pricing promotional levels? And at what point do you sort of start to think about maybe focusing a shift a little bit back towards profitability and price growth on these brands?
Well, first all, the brands are highly profitable. So I don't think there's a question of focusing on profitability. They're highly profitable in the way we run them today. And I think that it's a growing category. And so it's appropriate when you have brands that look they want to grow and you're in a growing category that, of course, you want to have healthy margins, but you also want to take advantage of the growth potential that you have in front of us.
So we balance those two things. And I think we're doing a pretty good job of that.
Okay. Thanks.
Thank you. Your next question comes from Teilo Reid of Credit Suisse.
Good morning, gentlemen.
Good morning.
What's the expectation for the MST category growth for this year now that we're 1 quarter behind this?
Well, I think we quoted what looks to be the our estimate of what the growth rate is in the category. I'm not going to speculate on what it will do going forward, but it seems to be running around 7%.
And so if you are expecting to grow share for the full year, does that mean that the adjusted OCI growth that you had for the smokeless products, is that sustainable
for the full year? Well, once again, I'm not going to speculate what's going to happen for the remainder of the year. We give guidance for the total business and we've reaffirmed that, but we don't do it by segment. And so I think you're going have to wait and see how the quarters unfold just like we do. Okay.
The Marlboro Special Blends, where did the smokers for those line extensions come from?
It's got kind of a pretty broad appeal. So it's coming some of it comes from some of the Marlboro franchise, but some some of the more branded oriented discount smokers and it also comes from other competitive premium brands. So its inflow is pretty broad.
But were the special blends, were they, let's say, accretive during the quarter given the discounted price that you offered them at?
Well, we haven't put an aggressive pricing structure on it. So, I mean, it's been promoted, but not at a level that exceeds what would be the level we use on other promotional SKUs. So, special blend is doing its job. It's nice addition to the portfolio. And I note for you that Marlboro's margin improved during the Q1 as we launched that product.
So it hasn't had a negative impact on the overall brand's product performance.
So not only the PM USA margin improved, but the Marlboro margin as well?
Yes. The Marlboro margin was improved as well.
Okay. Thank you.
Thank you. Your next question comes from Nik Modi of UBS.
Good morning, everyone.
Good morning. Good morning.
So just quickly want to clarify. So on the special blend promotional, is it a fair characterization to say that you reallocated some money from perhaps Marlboro Mediums onto the special blend for this launch for the synergy?
I'm not going to discuss our spending strategies that we have.
Okay. Second question, Dave, can you just talk about the raw material environment? Are you still seeing pressure or has that abated somewhat from a leaf cost perspective?
I would say that it's moderate. That when you look at the overall marketplace with the unemployment recession, there have been a number of raw materials where price have gone up, a number where they've stayed somewhat steady. So overall, I would say that it's been pretty moderate.
Moderate inflation, you're saying?
Yes.
Okay. And then the last question for you, Mike, is just with a year now behind you with the UST integration and some new leadership at the UST division, Just looking back on the integration and your plans and the strategy, is there anything you see different going forward in terms of what you originally expected in terms of the plan? Any changes you're making? And from a cost savings perspective, are you searching? And do you have any comfort with perhaps finding some excess upside in terms of the synergy number?
Well, I would say that we adjusted that number up a bit after we bought UST and we've had a lot of success in implementing the changes we wanted to make and getting a different structure that was more efficient in place, not only as it related to U. S. STC, but also relative to our other tobacco businesses. And I think we're pretty comfortable with how that's working. But we're always looking for ways to continue to refine these things and see if we can do them better and do them more efficiently.
So I wouldn't take that off the table. That's just part of how we operate. Overall, I think that transition was handled about as well as you could expect something like that to be handled. It was done quickly. It's been fully integrated into places like our sales force and our other consumer engagement activities and we're collecting the savings that have been accrued from that process.
So I think we feel very good about that platform and we also feel very good about opportunities that we've been able to identify to use to grow these businesses going forward into the future. So we see plenty of opportunity there. This is not an acquisition where the gains were simply short term opportunities. This is one where there's an opportunity to build and grow and continue to get momentum out of this business going forward for an extended period of time. That's what we expect to happen and we're on the way to do that.
Great. Thank you very much.
Your next question comes from Adam Spielman of Citigroup.
Hello. A lot of questions I have have been asked. And but there's one other question that I hope you can answer. You mentioned a couple of times you've seen increased promotional activity in the machine made cigar category. And I was wondering if you could say you could be a little bit more specific about which brands have been competing in this way?
I'd rather not be specific. It's been a competitive marketplace and I think it will continue to be competitive. So, but I'd rather not
Okay. Can I ask a question about Smokeless in a slightly different way than before? You've obviously, as always, you're balancing market share profitability as all companies do. Is it fair to say now that you're pretty comfortable with the trajectory of your market share? And it's time to start focusing more about on the profitability side of particular balance?
Well, again, I'll point out that these brands in this business is already a highly profitable business. And so we haven't while we had to go through a transition of getting it reconfigured, as you can see by the Q1, it makes a lot of profit and it makes a lot of profit in the way we're running it now with the adjustments that we've made. So, I don't think we ever have not had a focus on profit. We've had a focus on getting the system in place in order to be able to maximize the potential of the business. We're going to continue now that we've got that system built to run the brand both to make money for our shareholders and to sustain the ability to do that over the long term by building the brand equities that we have.
So both of those things have to remain important.
Thank you. At this time, we will now take questions from the media. Your next question comes from Chris Burrett of Bloomberg
News. Hi.
Good morning. Actually, you folks have run through the answers to my questions. So thanks for the time though.
Good. You bet.
Your next question comes from Michael Selberbaum of Associated Press.
Good morning. My question was whether you can say that or whether you're seeing that consumers are more comfortable paying for premium brands like Marlboro considering its strength this quarter? And also how much if you could quantify or give some detail as to how important the Marlboro menthol and the special blends were to Marlboro's success this quarter?
Well, I would say just kind of difficult for me to give you an answer to your first question. I would say that probably the fact that gaps are being sustained at the level that they're at, which is a good indication of what people are willing to pay for in the cigarette business. And that the share is growing on premium brand like Marlboro. I would say that the status of things right now seems to be acceptable to consumers. That are looking for the Marlboro brand.
Whether that's changing or not, it's hard for me to speculate on. Beyond that, I don't think we really would make a comment on your second question.
Thank you.
Your next question comes from Ann Gurkin of Davenport.
Good morning.
Hi, Ann. Hi, Ann.
Hi, Ann. Hi. With gas prices increasing, are you seeing any change in consumer purchase patterns at convenience stores?
What do you mean by gas prices?
At the pump, gas prices going up.
Oh, gas prices. Oh, I thought you said GAAP. I'm sorry, gas prices. Now, and they've been this high before and frankly, we tried to do a correlation between gas prices and cigarette purchase behavior once before and we couldn't find a correlation. So I don't suspect there'll be one this time either, but we haven't seen it to this point.
Okay. And then second regarding leaf purchases or contracting volume with farmers, are you reducing that contracted volume with farmers for lease this year? And if so, are you reducing your duration levels of your lease
inventory? Well, we pretty much manage our duration levels based on our blends and then also based on volumes. So we make appropriate adjustments and what our leaf inventory is kind of as we go. And then that has implications on the quantity that we contract for to purchase. So as cigarette volumes have come down, we've adjusted where our purchases are and we also create adjustments in our inventory going forward.
That's kind of an ongoing process.
Great. Thank you.
Your final question is coming from Thomas Russo of Gardner Russo and Gardner.
Hi, Tom. Good morning, Mike and Dave. I have a question first for Dave on the equity income from Altria's investment in SABMiller and the recent increase in the quarter seem to relate to a issuance of common stock by SAB Miller. I'm curious how that worked out.
They just they issued stock from their treasury. We assume that's going to be used for employee grants and options going out in the future. There's an accounting rule that says you have to treat that as a sell, which we did, which resulted in a profit for this quarter.
I see. And Mike, can you just take a look at the extent of the benefit from the efforts to rein back counterfeit and the contraband trade? You're active around the country and we read about your launches to go after certain retailers. And broadly speaking,
would say that there was a time where you'd have the kind of price changes that we saw in the market last year and then you'd see this stuff pop up in a lot of different places. Since we've put a stronger infrastructure in place, worked closely with law enforcement on this subject. It seems that while it still will pop up, it gets identified more quickly and gets back down again. So, it doesn't have as much of an impact on the overall business as it did a number of years ago. So it's one of those things where you have to invest and pitch on it on an ongoing basis in order to have some impact on the system that keeps it from occurring more broadly.
And that's why we do it. We have the infrastructure and we sustain it. And that's why I think we didn't see as much of it in this last
like money well spent. The last question for me has to do with the lessons learned as you look across the category across the markets for the rollout of snus, either your early lessons or just looking across to the competitors' experience in snus as a category. Any early lessons you can share with us or we're still too soon on Marlboro's rollout?
Well, it's very early. So we're just in the stage of gaining distribution and getting it positioned on the shelf probably. We do have some learnings from our test markets relative to engaging cigarette smokers on this subject that we will be putting in place as part of this expansion of snus. As I said in my comments, we feel pretty good about the potential for snus. We've said for a long time, we think this will be a kind of a methodical development of a business rather than something that happens rapidly.
And so based on the fact that I think we have a better understanding of that now than
we did when we went into test markets, we should see some more positive results from this
as it kind of