Altria Group, Inc. Q1 2009 Earnings Call Transcript

Apr.22.09 | About: Altria Group, (MO)

Altria Group, Inc. (NYSE:MO)

Q1 2009 Earnings Call

April 22, 2009 9:00 am ET

Executives

Clifford B. Fleet – Vice President Investor Relations

Michael E. Szymanczyk – Chairman of the Board and Chief Executive Officer

David R. Beran – Chief Financial Officer and Executive Vice President

Analysts

David Adelman – Morgan Stanley

Ann Gurkin – Davenport

Christine Farkas – Bank of America Merrill Lynch

Thilo Wrede – Credit Suisse

Erik Bloomquist – J. P. Morgan

Chris Burritt – Bloomberg News

Judy Hong – Goldman Sachs & Company, Inc.

Thomas A. Russo – Gardner Russo & Gardner

[Adam Spillman] – Citigroup

Operator

Good day and welcome to the Altria Group first quarter 2009 earnings conference call. Today’s call is scheduled to last about one hour including remarks about Altria’s management and a question and answer session. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer session. Media representatives on the call will be able to ask questions following the conclusion of questions from the investment community.

I would now like to turn the call over to Mr. Cliff Fleet, Vice President Investor Relations for Altria Client Services.

Clifford B. Fleet

This morning we will only be discussing Altria’s 2009 first quarter business results and will not be discussing the status of litigation. Our remarks today will 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 with the review of various factors that could cause actual results to differ materially from projections.

As a result of the spinoff of Philip Morris International in the first quarter of 2008, our reported results reflect PMI as a discontinued operation for the first quarter of 2008. Revenues and operating company income for PMI are therefore excluded from Altria’s continuing results. Since Altria acquired UST and its smokeless tobacco and wine subsidiaries on January 6, 2009, US smokeless tobacco companies and St. Michelle Wine Estates financial results from January 6th through March 31, 2009 are included in Altria’s 2009 first quarter consolidated and segment results.

Additionally, Altria has revised its reporting segments as a result of this acquisition. Beginning in the first quarter of 2009 Altria’s reporting segments are cigarettes, smokeless products, cigars, wine and financial services. For a detailed review of Altria’s first quarter 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 basis and on an adjusted basis which excludes items which 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 Szymanczyk, Chairman and Chief Executive Officers of Altria Group, Inc.

Michael E. Szymanczyk

This is an earnings release with lots of moving parts in a year with still change to go in it. But, I think it’s fair to characterize our first quarter performance as so far so good. Our business results, we think are on track with our plan, our cigarettes, cigars and financial services segments delivered strong profit growth. Cigarette infrastructure costs are declining ahead of schedule and the UST integration is proceeding as planned.

We’re also encouraged by the initial results from our special price promotion on USSTC’s premium brands in the southeast where their premium MST retail share has stabilized and begun returning to retail share growth. Altria delivered adjusted earnings per share growth from continuing operations of $0.39, up 5.4% from the first quarter of 2008 in line with our expectations.

These results were driven by higher operating companies income growth from our continuing businesses as well as the operating companies income contribution from US Smokeless Tobacco Company and St. Michelle’s Wine Estates partially offset by higher interest expenses. We delivered these results despite a challenging economic environment. Economic conditions remain weak with high unemployment, low consumer confidence and the federal government significantly increased the excise tax on tobacco products as of April 1st as you all know.

The FET increase impacted wholesale and retail trade inventory levels on our tobacco businesses and thus volumes for the quarter. Dave will go in to more detail on trade inventory movements that occurred during the quarter when he reviews our business segment results. In addition the FET increase changed cigarette pricing dynamics in the marketplace in the second half of March and in to April 2009 as manufacturers used different strategies to deal with the FET increase.

[Inaudible] is closely monitoring these changing dynamics and will make adjustments to its plans as appropriate as the quarter progresses. In early 2009 in January we successfully completed the acquisition of UST which included its premium MST brands Copenhagen and Skoal and we’re pleased to have completed all financing related with this acquisition in the first quarter of 2009. As you know in February, Altria issued $4.2 billion in long term notes with an average weighted coupon rate of 9.4% to refinance its bridge loan facility and previously towards the end of 2008, Altria had issued approximately $6.8 billion in long term notes with an average weighted coupon rate of 9.2%.

In 2009 one of our key priorities is successfully executing the UST integration and that’s proceeding very well. Earlier this month USSTC relocated its corporate headquarters to Richmond, Virginia and in the second quarter we plan to combine the USSTC and PM USA sales forces in to a new entity, the Altria Sales & Distribution Company. This new sales organization will service all of Altria’s tobacco businesses with an organization of approximately the same size of PM USA’s sales force before the UST acquisition. We plan to absorb substantially all of the costs related to the integration of UST in 2009 and remain on track to deliver an estimated $300 million in integration cost savings.

USSTC already has taken a number of important steps to enhance the value equation on their leading premium brand. In February USSTC implemented a special price promotion in the high volume southeast region on Copenhagen and Skoal and as I mentioned, we are encouraged by their retail share performance. In March, USSTC announced a national loss price reduction of $0.62 per can on Copenhagen and Skoal.

These actions require upfront investment spending which are a drag on near term profitability but will be offset by cost savings that are realized later in the year. We believe these actions position the company well for future volume and moderate retail share growth in the MST category. Altria’s operating company’s cost management program continues to add value to shareholders. Across the Altria family of companies we achieved $140 million in cost savings in the first quarter. Altria expects to achieve approximately $720 million in additional cost savings by 2011 bringing the total projected cost reductions to $1.5 billion versus the 2006 cost space.

PM USA continues to focus on reducing cigarette infrastructure ahead of volume declines and the company announced earlier today that it plans to cease production at its Cabarrus North Carolina cigarette manufacturing facility by the end of July, 2009. PM USA first announced in June, 2007 that it would be closing the Cabarrus facility to address manufacturing over capacity resulting from ongoing declines in US cigarette volume and reduced contract manufacturing.

PM USA is taking today’s action to address ongoing cigarette volume declines including the projected impact of the recently enacted federal exercise tax increase. The company plans to complete decommissioning the facility during 2010. The Cabarrus facility closure is part of the manufacturing optimization program at PM USA which is expected to deliver ongoing annual savings of $188 million by 2011.

Before I turn the call over to Dave, I want to reaffirm Altria’s 2009 EPS guidance. We remain confident of delivering 2009 adjusted EPS growth of 3% to 6%. 2009 is turning out to be a difficult year for most companies but we believe Altria’ is well positioned to continue delivering strong shareholder returns. Appropriately managing the value equation on our brands combined with Altria’s aggressive cost management programs and the successful integration of UST should allow the company to continue growing earnings.

Now, I’d like to turn the call over to Dave Beran, Altria’s Executive Vice President and CFO who will discuss Altria’s business segment results.

David R. Beran

Let me start with the cigarette segment which delivered strong operating companies income in a challenging environment. Reported cigarette operating companies income increased 9.9% versus the prior year period to $1.1 billion due to list pricing increases, lower promotional allowance rates, decreased promotional volumes and lower SG&A spending partially offset by lower volumes as well as charges primarily related to the Cabarrus facility closure.

Excluding these charges the cigarette segment operating company income increased by 10.7% to $1.2 billion. First quarter results were impacted by the April 1st increase in the federal excise take. The FET increase lead to significant wholesale and retail inventory depletions to minimize floor tax payments when they’re inventories. PM USA believes that these inventory depletions disproportionately impacted Marlboro has the trade focused on that brand due to its higher sales velocity.

PM USA cigarette shipment volumes declined 14% in the quarter but were estimated to be down approximately 5.7% when adjusted for changes in trade inventories and calendar differences. In April, PM USA saw higher out-of-stock levels at retail particularly on Marlboro as well as evidence of wholesalers and resellers rebuilding PM USA’s cigarette inventories. PM USA estimates that total cigarette industry volume declined 5% in the first quarter of 2009 when adjusting for those same factors.

Marlboro continued its strong retail share growth as it gained 5/10ths of a share point versus the prior year period to 42.4%. Marlboro achieved these results despite lapping last year’s very strong first quarter retail share performance. Marlboro’s price cap versus the lowest defective priced cigarette was 43% in the first quarter. Marlboro’s net pack price was $4.50 and the lowest defective price cigarette was $3.14. Additionally, the discount segments first quarter share remains stable at 25.4% versus the year ago period.

At the end of March and just prior to the FET increase, Marlboro’s price gap versus the lowest defective priced cigarette widened to approximately 50% due to price increase timing differences and competitive promotions. By the second week of April, 2009 this price gap has narrowed to 47% as marketplace prices continue to adjust to the FET increase. PM USA believes the percent price gap will continue to fall to the extent the full FET impact is realized on the lowest priced brands in the second quarter.

Marlboro’s strong share growth was more than offset by share declines on Virginia Slims, Parliament and Basic. PM USA’s strategy is to maximize the long term profitability of these brands with focused regional investment spending. These brands continue to perform well in their respective areas of strength. PM USA’s total cigarette retail share declined 3/10ths of share point versus the prior year period. For perspective, PM USA’s retail share was unchanged versus the [inaudible] quarter of 2008. Overall, we are very pleased with their first quarter cigarette segment results. Marlboro continued its strong retail share performance and profitability growth was very strong.

Now, let me turn to the smokeless product segment. During the quarter USSTC took investment spending actions which laid a strong foundation for future profit growth but impacted segment profitability. USSTC quickly moved to enhance the value equation when the leading premium brands in the first quarter with the special price promotion and list price reductions on Copenhagen and Skoal.

In the first quarter Copenhagen and Skoal’s national net price gap versus the leading discount brand was approximately 80%. In the southeast region where USSTC implemented its special price promotion, Copenhagen and Skoal’s net price gap versus the leading discount brand feel from approximately 105% in January 2009 to approximately 58% in March. Copenhagenand Skoal’s national retail shares were each sequentially down 2/10ths of a share point versus the fourth quarter of 2008 to 24% and 24.9% respectively.

However, USSTC’s premium retail share responded well to the actions taken in the southeast region. Its premium retail share at the end of March increased versus early February 2009. While not predictive of future results we are encouraged by this information. In the first quarter of 2009 USSTC domestic MST shipment volume declined 5.3% to approximately 152 million cans but was estimated to be flat when adjusted for the following: first, the trade reduced inventories on USSTC products to minimize for tax payments and in anticipation of the price reduction of Copenhagenand Skoal; second, USSTC discontinued its multipack deals in favor of everyday low prices; and finally, USSTC incurred increased product returns from retail as the PM USA sales force assumed retail responsibilities in a broader store set then USSTC’s sales force resulting in an inventory clean up.

USSTC believes MST industry volume continued to growth an estimated 6% to 7% in the quarter. As a result of charges related to the acquisition of UST, actions taken by USSTC to enhance the value equation on its MST brands and costs associated with Marlboro smokeless products, the smokeless products segment reported an operating company’s loss of $2 million. This loss was primarily due to pre-tax charges of $128 million related to the UST acquisition, consisting of employee separation costs as well as inventory adjustments and other integration costs.

First quarter operating company’s income results were further impacted by special price promotion spending in the southeast and costs for the wholesale incentive program that lowered the price of some of USSTC’s brands. As the year progresses costs for this spending will be offset by cost savings. Excluding the exit, integration and acquisition related charges, adjusted smokeless products operating company’s income was $126 million.

Now, let’s turn to cigars which reported very strong results in the first quarter. Unlike cigarettes and MST there was no floor tax in the federal excise tax increase for large cigars. Consequently, trade inventories increased in advance of the April 1st federal excise tax increase. Middleton’s cigar shipment volume increased 10.4% versus the prior year period to 345 million units. Middleton’s volume growth reflects wholesale inventory accumulation in advance of the federal excise tax increase and new product pipeline volume for Black & Mild wood tip.

Middleton believes that total machine made large cigar industry volume continued to grow at an estimated rate of 4%. Excluding integration costs, operating company’s income for cigars increased 32.6% versus the prior year period to $57 million due to higher pricing and volume growth partially offset by costs relating to the introduction of new wholesale and retail trade programs. Black & Mild had another strong quarter of retail share growth as its share increased 9/10ths of share point to 27.9%. The brand benefited from the introduction of Black & Mild wood tip as well as its new brand equity campaign enjoy Black & Mild.

Now, let’s turn to our new wine segment. We are pleased with the fundamentals with St. Michelle’s underlying business performance though there were some short term events impacting first quarter results. St. Michelle suspended shipments during the first week of January to take inventory prior to the closing of the acquisition of UST by Altria. Wholesalers purchase wine in advance of this suspension and also further reduced their inventories in the first quarter of 2009.

As a result, total St. Michelle wine shipments declined 7.2% in the first quarter of 2009 to approximately 1.2 million cases. However, St. Michelle’s volume from wholesale to retail was up approximately 6% during the first quarter of 2009. In addition, St. Michelle’s retail volume as measured by Nielson and Food & Drug was up approximately 11% in the first quarter of 2009 versus the prior year period.

Net revenues for the wine segment were $75 million and reported operating company’s income was $1 million. Excluding the $8 million in acquisition related charges adjusted operating company’s income was $9 million for the 12 weeks that Altria owned the company. Let me conclude with financial services; reported operating company’s income increased $46 million to $120 million primarily due to higher gains on asset sales.

Additionally, all [SE’s] are current on their lease obligation and there were no changes to the $304 million allowance for losses. Management believes that the amount is prudent based upon the underlying credit quality and collateral value of its existing portfolio. Mike and I will now be happy to take your questions. While the operator compiles the calls I want to cover a few housekeeping numbers.

The average weighted cigarette state excise tax at the end of the first quarter of 2009 was approximately $1.13 per pack. To date three states and Puerto Rico have increased their cigarette excise taxes with an average increase of $0.56 per pack. Cap ex was $43 million and ongoing depreciation and amortization was $78 million. Our first quarter MSA and quarter buyout accruals were approximately $1.1 billion or $0.67 per pack. Of the $0.67 MSA represents $0.61 per pack and the quota buyout represents $0.06 per pack.

Additionally, on April 15th PM USA made its full 2008 MSA payment of approximately $4 million and finally, we anticipate that our 2009 full year effective tax rate on operations will be approximately 37.1%. However, our first quarter tax rate was 38.7% due to certain non-deductable costs related to the UST acquisition.

Operator, do we have any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from David Adelman – Morgan Stanley.

David Adelman – Morgan Stanley

Mike, first a question for you, I’m curious at PM USA over the next couple of quarters and the cigarette business given the FET dynamics I’m curious are you thinking any differently than you might have in a more normal environment with respect to how you’re going to balance market share dynamics versus profitability?

Michael E. Szymanczyk

Well, that’s a good question and let me talk about that for a couple of minutes. Look, when you have something like the FET event, that’s a dynamic that impacts every single cigarette product that’s on the marketplace in the country. It’s a pretty significant event and it unfolds over time, it just doesn’t happen all at once so we anticipated as we went in to the year and thought about if an FET did occur that there would likely be a dislocation in the marketplace that would take place over probably a couple of months as the market moved, as retailers moved and they moved at different paces and some tried to take advantages by winning some shares during that period and some responded in a defensive way during the period.

So that, we would see generally a pretty dislocated marketplace and in this case given the timing of the FET that’s probably from the back half of March given when some of the pricing began to occur through call it the middle of May. I think that’s where we are now. Dave’s comments relative to gap movements are an indication of that. You see in the market it kind of work its way through this period of time.

Our philosophy here is to not get too excited about the period of dislocation. We like to have kind of a static base line and not find ourselves trying to respond to temporary market conditions as the market moves around. Once it settles in we can see where we are and we’ll go back to doing what we normally do which is we look at the market, we identify areas where we may have gap problems and we correct those and we build our brand based on equity enhancing activity.

Gap management for us is not how we build the market of our brands, it’s really making sure that’s not an impediment to the other kinds of things that we do in the marketplace to build the brand. So, I think as we go on through the second quarter we’ll see the market settle out and then as it does that and we move on through the back half of the quarter you’ll see more normalcy but we’re kind of, of the mind to be thoughtful about monitoring what’s going on and know what the situation is in terms of how the market settles out before we do too much from a resource point of view.

David Adelman – Morgan Stanley

In other words you’re not unduly concerned by if you were to lose some market share for a short period of time as long as the low end the market is moving up over time with pricing?

Michael E. Szymanczyk

I think the key here is to let the market settle out before you decide what you are going to do. Otherwise, you’re moving in to a moving playing field and that doesn’t allow you to know what you are doing. That’s the way to look at that. Actually, I think what’s more important than market share during this period is really volume. We have forecast for the year on volume and I think importantly we’d like to see volumes show at a level that’s equal to or better than our forecast regardless of where shares are on, on the short period of time.

It is really where is the overall volume circumstance going to be. I think so far so good is a good description of the circumstance. That’s how we’re looking at it so it’s kind of a I think you have to be reasonably pragmatic here otherwise you can waste a lot of money on things and we don’t see that as the right way to do it.

David Adelman – Morgan Stanley

Then one other quick cash question, at UST, you’re saying that adjusted for anomalies in the quarter shipments were essentially flat. I’m just curious, with higher levels of promotional spending shouldn’t volume trends be better than that?

Michael E. Szymanczyk

Well, I think you’ve got to look at the smokeless market in a similar way to the cigarette market in the first quarter. Keep in mind we changed a number of things. We did have some investment spend in the southeast region but in other markets around the US towards the end of the quarter we were extracting what has been the normal promotion vehicle in the marketplace, these multipack deals in anticipation of overall price reduction approach that we announced that went in to affect at the beginning of April so that was, yes some investment in the southeast but there was also an extraction of promotion activity in the marketplace as well.

Then, you had to add to that the fact that trade took the opportunity to reduce inventories because they had a for tax situation in MST just like they did in cigarettes compounded in our piece by the fact that we were reducing our price and we announced that ahead of time because we have to, to get the trade prepared. Well, they actually buy as little as they can going in to that circumstance because we give them a limited amount of price protection and they want to see if they can make a profit on that.

I wouldn’t again get too caught up in trying to read anything in to the volume in the first quarter in MST because there is so much that moved around it’s kind of impossible to read. But, our best estimate of it is that it was pretty flat when you factored in all of those things and it will be easier to read it once we get to the end of the second quarter and look at the whole half. In fact, all of these business from a quarterly point of view.

Right now the quarterly numbers aren’t going to mean a whole lot. For example, looking at the half we’ll see how things washed out in terms of inventory and so on. The cigar business, the same way only the reverse, there was no for tax so we had inventory builds that as provided probably an overstatement of volume and income growth for the first quarter and that will wash out in the second quarter. I think that’s how we’ve looked at it. But, when we do adjustments and we try to do adjustments so we can understand whether or not we think we’re on track, when we do adjustments we feel pretty good about it. It looks fine.

Operator

Your next question comes from Ann Gurkin – Davenport.

Ann Gurkin – Davenport

I wanted to just start with UST, just the mix of the business the Skoal and Copenhagen as a percentage of the volume dropped more than we would have thought versus the fourth quarter? Could you just help me understand those numbers? Is there anything unusual in those volumes?

Michael E. Szymanczyk

Well again, it’s the items I mentioned a minute ago Ann. It’s really the trade reduced their inventory of retail and wholesale because of the FET and because of our price decline we pulled the plug on multipack deals. And, that we subtract returns from our volumes so we did kind of a clean up in the marketplace as we expanded coverage in to the USA sales force and so there was a higher than normal level of return activity than we anticipated in the quarter because of that. But, it impacts the numbers. Those are really the items.

Ann Gurkin – Davenport

Should we expect the mix to move back towards that 84% or so Skoal and Copenhagen as a percentage of the total volume?

Michael E. Szymanczyk

Well, I would expect to see with our value equation actions in the marketplace that we would see Skoal and Copenhagen to be a strong part of our portfolio.

Ann Gurkin – Davenport

Secondly, if you could just give us an update on the likelihood that the senate may take up the FDA bill? It’s passed the house. You’re outlook, if you care to comment and is there any change in Altria’s position of potential FDA regulation of tobacco?

Ann Gurkin – Davenport

Well, we supported the bill in the house and I think the situation in the senate remains a bit unclear as to exactly when and what the senate will take up. But, no our position hasn’t changed relative to the bill that we supported in the house.

Operator

Your next question comes from Christine Farkas – Bank of America Merrill Lynch.

Christine Farkas – Bank of America Merrill Lynch

I’m going to start with cost savings if I could in the quarter, these were quite strong, certainly above what we were looking for and I’m just wondering if you’re surprised at the pace at how this is coming through or is this just accelerated or pulling forward or do you see perhaps the program in cost savings getting bigger in the end?

Michael E. Szymanczyk

Well, right now what you have is what we’ve announced in terms of cost savings and I would say we’re pulling it in at a good rapid rate so I wouldn’t attribute it to higher levels of cost savings at this point. I’d attribute it to speed that we’re moving along pretty well both from a cigarette infrastructure point of view and from the perspective of the UST integration. Both of those things are going if not on schedule, a little bit ahead of schedule. That’s what we’d like to have happen. That doesn’t mean in the end we may find ourselves with a better performance relative to costs but I wouldn’t attribute it to that at this juncture.

Christine Farkas – Bank of America Merrill Lynch

Just to be clear, you haven’t actually realized any UST synergies in the quarter, is that correct?

Michael E. Szymanczyk

Well, no I don’t think that’s entirely correct but I think the way I would look at that is I would say yes, we’ve begun to reduce staffing in UST but at the same time there are one-time costs that we incur at the time we reduce the staffing. So the fact is yes, we realized some synergies but no they didn’t show up as a positive from a cost savings point of view yet. But, they will though once we get past the one-time charges.

Christine Farkas – Bank of America Merrill Lynch

Secondly, on this second quarter I think you’re pretty clear about the disruption around March and April, the deloading and the loading and of course it sounds to me as your comments about so far so good means demand elasticity is so far probably running along as you’ve expected. I’m just wondering, in looking at the second quarter would this be the quarter that we see the greatest sticker shock from consumers in the sense that this is where we might see the sharpest decline in category volumes and then it moderates? Or, could we see as people understand the pricing or see the level could we see that actually decelerate as we go through the year?

Michael E. Szymanczyk

Well, I think relative to us, our products, because we were up it started in early March and it’s probably important for people to understand what’s different about us, we started in early March, earlier than anybody else. Because of that the trade had more time to deload inventory on us than they had on anybody else. Because of that pricing on us probably moved the fastest in the marketplace so I would say for us we’ve probably seen pretty much what is going to wind up being the peak. Probably not, in fact, the marketplace dynamics and the gap movements would indicate that we haven’t seen all of it reflected in other places in the marketplace.

So, I don’t think for us there’s anymore sticker shock really of any significance for the consumer. There may be in some other things. Because, there are folks who lag, there are folks who actually spin in to it. We have some major competitors that actually spun in to the increase and that, eventually the tax man gets his money. So eventually, that’s going to come home to roost but it hasn’t fully happened yet.

Christine Farkas – Bank of America Merrill Lynch

My last question if I could just touch on minority interest. There was quite a decline year-over-year and I’m just wondering if there’s anything else in that number aside from the contribution from SAB Miller, etc., anything else in that number that would account for the 26% decline?

David R. Beran

No, there’s not. We look at the SAB Miller investment as a good long term investment. They have great brands, they have great management and just like the recession is impacting business this year and worldwide, we’re seeing some impacts there. But, for further questions I would direct those questions to SAB Miller. But, we feel good about our investment.

Christine Farkas – Bank of America Merrill Lynch

Dave, when you describe this as a good long term investment, should we read in to that if any changes in your views of how you see SAB Miller or that stake fitting in to your long term plan?

David R. Beran

No, as we said back in [Cagney], we’re spending 2009 to evaluate our total alcohol strategy. We’re doing that in 2009 and we’ll be back to you so don’t read anything in to my comment.

Operator

Your next question comes from Thilo Wrede – Credit Suisse.

Thilo Wrede – Credit Suisse

Mike, you just mentioned at the beginning of the call, that different manufacturers had different strategies to deal with the FET increase. Could you elaborate on that a little bit and tell us why you think you have the right strategy there?

Michael E. Szymanczyk

Well, I think it will remain to be seen whether or not we have the right strategy. But, as a practical matter I think you saw different people take different approaches to it and some of them have different structures in their pricing and they approach it from a reduction and promotion, some would increase list price, some with combination of activities. Then coupled in to that you saw some spending strategies, we’ve seen some spending strategies unfold. They look like they were timed with the FET, in other words they represent changes in the strategies going in to the FET and appear to be opportunistic situations where people will give [inaudible] a try to see if some of it sticks.

That’s what we’ve seen. I wouldn’t comment on any of them specifically but I do think there’s been a number of different approaches and there have also been a number of different approaches by retailers too. That has an impact on pricing and price gap. You have some retailers who will hold back, hoping to build some share and you have other retailers who go very quickly and you have some test the market in terms of how high they can go and then gage the competitive situation and have to adjust accordingly.

You have lots of different approaches going on and that’s why I say I think it takes a couple of months for all of that to settle out and then that gives you a kind of read of what kind of marketplace you’re dealing with and then you can make decisions about how you want to go forward on a longer term basis.

Thilo Wrede – Credit Suisse

The adjusted volume number for the industry as a whole is down 5%. Is that just reflecting all the distortions in the quarter or should we read in to that that there’s maybe a change in consumer behavior and the volume decline is accelerating now?

Michael E. Szymanczyk

I think remember you had this adjustment that started at the beginning of March so we really had an adjustment that impacted about 30% of the quarter so I think there was some elasticity that affected the quarter.

Thilo Wrede – Credit Suisse

But that would presumably be taking care of when you adjust the number down to just 5% decline for the industry rather than 14%?

Michael E. Szymanczyk

Well the elasticity remember, the 14% is more driven by inventory change okay. So, inventory change wouldn’t be part of your elasticity curve. But, pricing could impact drastically elasticity.

Thilo Wrede – Credit Suisse

Then one last question, New York State put out a proposal to ban cigarettes sales in grocery stores and [inaudible] stores which follow similar actions by San Francisco and Boston. Is that at trend that is accelerating across the country? Are you seeing more proposals like this cropping up in cities or states and what’s your take on that?

Michael E. Szymanczyk

Well, I’m not aware of a grocery store situation but yes, you’re right there’s a pharmacy situation in San Francisco. I wouldn’t call it a trend but, certainly you’ve seen some proposals in that regard. I think that I don’t know that from our standpoint they make a lot of sense but nonetheless you’ve seen some of that.

Thilo Wrede – Credit Suisse

But it’s nothing you’re concerned about right now?

Michael E. Szymanczyk

Well, you know look, you have a broadly distributed product and it’s predominate channel is really C stores and C gas and volumes in some of these other channels have declined over the years so I don’t think there’s a shortage of retail distribution in that category.

Operator

At this time we will begin taking question from the media. (Operator Instructions) Your next question comes from Erik Bloomquist – J. P. Morgan.

Erik Bloomquist – J. P. Morgan

I just wanted to follow up then on the smokeless promotion in the southeast. I was wondering what kinds of competitive responses you saw to that within that promotional period? Then secondly, I was wondering if the share stabilization that you saw in that region in that period if there was a benefit from an easier comp because you had both Swedish Match and Reynolds American launching new products in the same period last year so if that made the comparison slightly easier for the USSTC brands?

Michael E. Szymanczyk

Why would it be easier? There’s a lot of activity last year in the first quarter which actually would make the comp probably more difficult. But, I don’t know that I would say that there was something there that made it easier.

Erik Bloomquist – J. P. Morgan

Could you comment then on competitive activity then in response to the $1 off promotion?

Michael E. Szymanczyk

Well, I don’t know how to do that for you. I mean, we don’t necessarily try to make comparisons on competitive activity.

Erik Bloomquist – J. P. Morgan

So you’re not willing to discuss any kind of competitive response?

Michael E. Szymanczyk

I would decline to answer it because we generally don’t try to make comparisons on competitive activity.

Erik Bloomquist – J. P. Morgan

Moving to the cigarette division could you quantify the size of the deload? Is it far to think that’s around a $3 billion stick event and it sounded like from your previous answers and the commentary at the beginning of the call that we could expect that to come back then in the second quarter as things begin to normalize? Is that a fair way to think about things?

Michael E. Szymanczyk

Well, I think we’ll have to see what happens but I think what we’ve said is we’ve seen some evidence of that taking place.

Erik Bloomquist – J. P. Morgan

Then again, and this was alluded in one of your earlier questions, is there any indication that consumer behavior has changed? It sounds like the pricing elasticity has stayed about the same and moreover there doesn’t appear to be any meaningful change in terms of consumer down trading. Is that also a fair way to characterize things?

Michael E. Szymanczyk

Well, I’m not going to characterize the second quarter at this point. As I already mentioned to you that you saw some expansion of the gap that took place and there will be some disruption in the marketplace I think from the latter part of March through probably the middle of May. That’s how we’ve looked at it so we’d expect to see some movement taking place because gaps are going to be variable around the country in different marketplaces. So, I’m not going to try and predict exactly how that comes out during that period of time.

My point earlier was that I’m not sure that’s really meaningful. What’s going to be important is once it settles in, where does it settle in and then where do we go from there? I don’t think we’re really going to know the net result of that until we get on through the second quarter. But, at this juncture, the market is still moving around and to draw conclusions about it at this juncture I think is a bit misleading. It doesn’t tell you much because it’s point in time data and the next point in time you look at it, it is different.

Operator

Your next question comes from Chris Burritt – Bloomberg News.

Chris Burritt – Bloomberg News

A couple of quick questions, Mike can you explain PM USA’s strategy as it goes to state legislators in places like North Carolina where tax increases are on the table. What argument is the company making to hold the line on those proposed tax increases?

Michael E. Szymanczyk

Well, I think that varies based on what the tax proposal is so they’re not all the same, they’re different and so I think you have to look at them individually. But, I also think that tobacco users have been burdened by a high tax increase by the federal government this year and so I think that states need to be judicious and thoughtful about what they do on the taxes because there’s already been a significant tax increase put on the consumer.

Chris Burritt – Bloomberg News

Dave, if you could offer me a little bit more explanation on the average price of Marlboro. I believe you said $3.50 a pack, is that the average in convenience stores?

David R. Beran

It was not $3.50 a pack. That was the lowest priced products in the store. For the quarter the average pack price was $4.50 for Marlboro. That’s the average pack price in C stores.

Chris Burritt – Bloomberg News

Can you tell me how that compared to the year earlier quarter?

Michael E. Szymanczyk

We’d have to get back to you on that. We don’t have the answer to that question right here.

Operator

Your next question comes from Judy Hong – Goldman Sachs & Company, Inc.

Judy Hong – Goldman Sachs & Company, Inc.

On the industry volume down 5% in the first quarter of 2009 when adjusted for the inventory changes and the calendar differences, Mike can you tell us what that number was before the March price increases and after?

Michael E. Szymanczyk

Which business are we talking about Judy?

Judy Hong – Goldman Sachs & Company, Inc.

On the cigarette side you said the total cigarette volume was down 5% for the first quarter if you adjust for the inventory changes. I’m just wondering what that number was running kind of before the price increases in March and then post price increases?

Michael E. Szymanczyk

I don’t have that off the top of my head but I think you can look at the yearend information for 2008. I don’t think there was any meaningful difference.

Judy Hong – Goldman Sachs & Company, Inc.

I guess I’m just trying to understand the price elasticity here in terms of what happened after the March price increases at the underlying consumption level.

Michael E. Szymanczyk

I don’t think you can calculate that yet. You’ve got a month in March where it was all moving so it’s really pretty hard to draw that conclusion because these are estimates and you’ve got lots of moving parts so I wouldn’t try to do that at this point.

Judy Hong – Goldman Sachs & Company, Inc.

Just to clarify, your volume being down 5.7% adjusted for the inventory versus the inventory down 5% so you lost shipment share but you gained retail share and the difference really is because you guys have taken price increases earlier than the industry so that impacted your shipment numbers more?

Michael E. Szymanczyk

We loss a little retail share. We loss 3/10ths total USA versus previous year in the first quarter. We were flat to the fourth quarter but we loss 3/10ths of a share point total USA between the first quarter versus the prior year.

Judy Hong – Goldman Sachs & Company, Inc.

Then as you saw some of the dislocations happening in the marketplace with the price gap widening towards kind of the later part of the quarter, the share trends were also negatively impacted if you look at the retail numbers and the full quarter number would suggest.

Michael E. Szymanczyk

I’m not sure I understand your question.

Judy Hong – Goldman Sachs & Company, Inc.

You’ve talked about the price gaps widening after some of these prices increases.

Michael E. Szymanczyk

You’re looking for share information in to the second quarter?

Judy Hong – Goldman Sachs & Company, Inc.

Not necessarily in the second quarter but what’s been happening to share post some of the price adjustments that you saw from a competitor perspective and from your perspective?

Michael E. Szymanczyk

Again, I don’t know that we have enough data at this point to draw any conclusions about that Judy. That’s why I continue to say that you’ve got a period of dislocation here. It runs from around the middle to the latter part of March and it will likely run on through the beginning of May where you’re going to see things sort themselves out and to draw any conclusions about share trends during that period of time is probably misleading because they’ll move around.

One week they’ll be different than they are another week depending on how the markets move and what kind of activity goes in to the marketplace. So, I just think trying to hone in on that and draw conclusions about it at this point doesn’t give you much that’s worth operating with.

Judy Hong – Goldman Sachs & Company, Inc.

I wasn’t asking for a conclusion I was just asking what color you have from a share perspective. You talked about the price gap movements and not to really give any color on the share movement which is pretty factual from my perspective.

Michael E. Szymanczyk

No color because color would be misinterpreted.

Judy Hong – Goldman Sachs & Company, Inc.

On the interest expenses Dave, it looks like the first quarter just seems to be running ahead of kind of the run rate?

David R. Beran

In the first quarter we had the additional charges related to the financing of the UST transaction. One time charges in the first quarter.

Judy Hong – Goldman Sachs & Company, Inc.

Can you quantify how much that was?

David R. Beran

It was approximately $85 million.

Judy Hong – Goldman Sachs & Company, Inc.

Then on the tax rate, when you say 37% or 37.1% for the full year, that’s including some of the charges that you’re taking this year?

David R. Beran

No, that 37.1% is on the underlying business. The difference in the tax rate in the first quarter is not in that 37.1%. But, it’s a one-time event in the first quarter that will as a percentage of the total will go down over time. But, 37.1% on the underlying business.

Judy Hong – Goldman Sachs & Company, Inc.

So the 37.1% compares to the 38% in the first quarter?

David R. Beran

No, 37.1% is the effective tax rate on the business. In the first quarter there were some items associated with the acquisition that aren’t tax deductable. Those items happened in the first quarter and then starting in the second quarter our effective tax rate should be 37.1%.

Judy Hong – Goldman Sachs & Company, Inc.

So on the full year basis, because if I calculate the tax rate adjusting for the one-time items in the first quarter I get much lower tax rates of 33%.

David R. Beran

We’ll follow up with you Judy on that. Cliff will get back to you.

Operator

Your next question comes from Thomas A. Russo – Gardner Russo & Gardner.

Thomas A. Russo – Gardner Russo & Gardner

Dave, there are a couple of just balance sheet oriented questions, when you unwind positions at Philip Morris Capital and take gains like you mentioned in the quarter, where do the proceeds from those sales go? That’s the first question. Second, what will be the cash flow consequences of the pension fund do you think for ’09 or 2010? How much will that consume cash would you expect? Then third, what is your flexibility to return whatever free cash flow you might generate to the debt pay down of your highest coupon longest term debt?

David R. Beran

First question, when we sell assets at PMCC, the cash comes in to the business. It’s reported in the income statement but the cash comes in and we have if you look at the asset portion of the balance sheet, the net finance assets which are approximately $5.1 billion, that number would go down which is the total financial services assets. The second question, right now we look at 2009 from a funding standpoint on pensions.

We’re still in the neighborhood of approximately $20 million which represents the non-qualified piece of our plan that we can’t fund. So, that could move around slightly but at this point in time we’re not seeing any large movement there. The third question, as we look at our balance sheet and we look at when debt comes due and our ability to generate cash, yes we will be looking at our overall debt structure. We have some debt coming due this year that’s short term of approximately $875 million in the next couple of quarters and we look at our liquidity and our access in the commercial paper market and the amount of cash that we have. Currently, we don’t need to go back in to the longer term bond market. There again, we could just based on the overall rates but we are looking at our overall tranches going out in to the future but right now we’re comfortable with where we are.

Operator

Your final question comes from [Adam Spillman] – Citigroup.

[Adam Spillman] – Citigroup

One quick question, you said very clearly that at the moment it’s too early really to judge the impact either of the elasticity or the market share trends. But, I was wondering when you think it would be reasonable for both yourselves and investors to actually come to a firm conclusion about how these things are behaving and whether I guess at the time of the second quarter results we can reasonably expect to have some degree of clarity or whether it’s really going to be something we don’t really know about until the third quarter results?

Michael E. Szymanczyk

Well, I think as I’ve stated that probably by the middle of the quarter we should have a market that has digested the FET and then we’ll return to a more normal, competitive circumstance. Then, we’ll get to see what happens in that circumstance and how people respond to the new market that exists over the back half of the quarter. So, I would say probably what will be most important to us will be the trends in the back half of the quarter, not the front half of the quarter. We’ll want to see how things are progressing at that point in time.

And, because I mentioned a minute ago, volume will be important. So, what’s the volume trend appear to be as in particular we get the inventory adjustment completed and we return to kind of more of a normal volume flow. So that as we get towards the end of the second quarter, we should begin to have a volume trend that’s more predictive of what we will see. Although I say to you that when we see these large increase take place in a state level we normally see a pretty good spike down immediately after the increase and then we see volume return sharply although not completely.

Then, the curve begins to extend out and it can take six months or so before you finally have the markets settle back in to its adjusted level. So, a good portion of it is likely to happen in the second quarter relative to volume but probably it will extend on in to the third quarter before its complete.

[Adam Spillman] – Citigroup

Will you five us, when you announce your second quarter results sort an indication of how things have moved through the last month of the quarter?

Michael E. Szymanczyk

Well, we’ll see when we get there but we’ll try and give you information that’s useful to you so you’ll understand how the market is shaping up. That’s our objective.

[Adam Spillman] – Citigroup

Can I ask another question, you said a couple of times that the cost savings are if anything, ahead of schedule, which is great. But, you’ve obviously left your EPS guidance unchanged. Can I read anything in to the fact about the underlying business excluding cost savings from that, that maybe it’s not quite as strong as you were expecting?

Michael E. Szymanczyk

Our guidance is 3% to 6%. So, as I said we reaffirmed our guidance. We continue to feel like we’re going to fall within that guidance range.

[Adam Spillman] – Citigroup

Yes, but you’ve also said your cost savings are ahead of schedule. That means to say that if I look at the business excluding cost savings, maybe I’m reading too much in to this, maybe [inaudible].

Michael E. Szymanczyk

I think you’re reading too much in to it. I mean there’s a lot of pieces to the puzzle and they all come together with the guidance range and I don’t think we have any reason to change our guidance range at this point.

Operator

At this time I would like to turn the floor back over to Mr. Cliff Fleet for closing comments.

Clifford B. Fleet

Thank you all for joining us today. I invite you to listen to Altria’s webcast of its 2009 annual meeting of stockholders on May 19th. If you have any follow up question after today’s call, please call us at investor relations. Thank you and have a good day.

Operator

Thank you. This does conclude today’s Altria Group first quarter 2009 earnings conference call.

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