Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Altria Group Inc. (MO)

Q2 2010 Earnings Call Transcript

July 21, 2010 9:00 am ET

Executives

Cliff Fleet – VP, IR

Mike Szymanczyk – Chairman and CEO

Dave Beran – CFO and EVP

Analysts

Nik Modi – UBS

Tyler Walling – Goldman Sachs

David Adelman – Morgan Stanley

Chris Growe – Stifel Nicolaus

Christine Farkas – Banc of America/Merrill Lynch

Thilo Wrede – Credit Suisse

Karen Lamark – Federated Investors

Ann Gurkin – Davenport

Todd Duvick – Banc of America/Merrill Lynch

Operator

Good day and welcome to the Altria Group 2010 second quarter earnings conference call. Today's call is scheduled to last about one hour, including remarks by Altria's management and a question-and-answer session. Representatives of the investment community and media on the call will be able to ask questions following the conclusion of the prepared remarks. I would now like to turn the call over to Mr. Cliff Fleet, Vice President, Investor Relations for Altria Client Services. Please go ahead, sir.

Cliff Fleet

Good morning and thank you for joining our call. This morning, we will only be discussing Altria's 2010 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 the smokeless tobacco and wine subsidiaries on January 6, 2009, U.S. Smokeless Tobacco Company's and Ste. Michelle Wine Estates financial results from January 6 through June 30, 2009 are included in Altria's 2009 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 at 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, 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 Officer of Altria Group Inc.

Mike Szymanczyk

Good morning, everyone and thanks, Cliff. We are very pleased with the performance of Altria and its operating companies in the second quarter and the first half of 2010. Our business results over both of these time periods exceeded our expectations coming into the year. The fundamentals of our business remain strong and the premium brands of our operating companies performed very well in what continues to be a challenging business environment. As anticipated, the second quarter of this year was challenging for an income growth comparison point of view, due to the FET related trade inventory movements in the prior-year period.

Altria's adjusted earnings per share for the quarter were the same as the second quarter of 2009. Last year's first and second quarter income results were impacted by trade inventory movements related to the FET increase. Because the FET increase included a floor tax on cigarettes and smokeless tobacco products, the trade depleted these inventories in the first quarter of last year prior to the increase and then rebuilt them in the second quarter. 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 2009 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 one quarter prior to and one quarter after the April 1, 2009 FET increase. For the first half of 2010, Altria grew adjusted earnings per share by 3.4% 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 companies' income decline of $143 million, due to lower gains on asset sales.

Strong adjusted operating companies' 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' income grew 5.3% versus a year ago. We are further encouraged that the premium brands of our operating 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 second quarter, 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 $0.7 of a share point versus the second quarter of last year to 50.2%. Cigarette segment income performance was also strong. The cigarette segment grew second quarter adjusted operating companies' 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 2009, 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%, 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 second quarter grew by 1.8 share points versus the prior year period to 56%. Copenhagen and Skoal's combined retail share of the smokeless category grew by 1.3 share points versus the comparable year ago period to 48.1%.

The smokeless products segment second quarter adjusted operating companies' income declined 5.2% versus the comparable year-ago period, primarily due to costs associated with the national expansion of Marlboro Snus. On a six-month basis, however, adjusted operating companies' income is up by a strong 15%. Given the solid first half adjusted operating companies' income performance from the smokeless product segment and the cost savings realized, as a result of the acquisition, across the Altria family of companies, we remain confident the UST acquisition will be accretive to Altria's 2010 adjusted earnings per share.

In the second quarter, Black & 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 second 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 2010 appears to have returned to the pre-recessionary levels of about 3%. 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 second quarter wine segment adjusted operating companies' income increase by 13.3%, versus the prior year period and 20.8% for the first half of 2010 versus the comparable year-ago period.

Altria's continuing progress against the $1.5 billion cost savings program contributed to these solid operating companies' income results. In the second quarter, $129 million of savings were achieved across the Altria family of companies and $172 million were achieved through the first half of the year. We realized a total of $1.2 billion in cost savings since the program's inception off the 2006 cost base and remain confident that we will realize the $290 million in additional cost savings by the end of 2011.

The second quarter of 2010 is the first one that can be compared to a post FET increase quarter in 2009. Although the second quarter volume comparisons for the tobacco categories were impacted by trade inventory movements around this increase, after adjusting for these movements and other factors, we are pleased with the underlying volume trends of the tobacco categories.

PM USA reported second quarter cigarette shipment volumes declined 10.2% versus comparable year-ago period, 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 second 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% versus the prior year period, which is in line with historical price elasticity.

Reported second quarter smokeless products 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 US STC and PM USA's new product launches and other factors. The companies estimate that the smokeless category continued to grow at a rate of 7% in the second quarter versus the comparable year-ago period. Finally, Middleton's second quarter cigar shipment volumes grew 19.7% versus the prior year period. After adjusting for trade inventory changes, Middleton estimates its second quarter shipments were down moderately versus the prior year period and that the machine-made large cigar category's 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 continued 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 2010 full-year adjusted diluted earnings per share, to the 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 2009.

I will now turn the call over to Dave Beran, Altria's Executive Vice President and CFO, who will discuss Altria's business segment results in more detail.

Dave Beran

Thank you, Mike. In the second quarter of 2010, reported operating companies' income for the cigarette segment exceeded our expectations and increased by $24 million to $1.5 billion, due primarily to higher list prices and lower promotional spending, partially offset by lower volume and higher FDA user fees.

Marlboro had a record retail share result of 42.8% in the second quarter as the brand grew 1.6 share points versus the prior year period. Marlboro's retail share results in the comparable year-ago period were impacted by the marketplace pricing dislocations following the FET increase. Retail share growth was particularly strong for Marlboro non-menthol products, which grew 1.3 share points versus the second quarter of last year.

The Marlboro Special Blend line extensions launched earlier this year were important contributors to this strong retail share performance. PM USA expanded both Marlboro's and overall adjusted cigarette segment margins in the second quarter. Adjusted cigarette segment margins grew by a strong 2.9 percentage points versus the comparable year-ago period.

The smokeless products segment reported operating companies' income increased $21 million versus the prior year period to $198 million. Excluding restructuring and acquisition-related costs, adjusted smokeless segment operating companies' income decreased by $11 million to $202 million. Year-over-year income results were impacted by the trade inventory dynamics and costs 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.

Second quarter reported smokeless product shipments increased 9.2% versus the prior year period. Combined second quarter shipments for Copenhagen and Skoal, which grew 7.1%, helped drive these results. We are very pleased that overall smokeless products segment retail share grew in the second quarter on a year-over-year basis. Our primary driver of this retail share performance was Copenhagen and Skoal's combined retail share performance, which grew a very strong 1.3 share points in the second quarter on a comparable year-over-year basis.

Product initiatives contributed to Copenhagen and Skoal's strong combined retail share performance. Copenhagen Long Cut Wintergreen, Long Cut Straight and Extra Long Cut Natural helped drive the brand's strong second quarter retail share growth up 2.6 share points. Skoal introduced brand building programs on Wintergreen, Straight and Mint variants in the second quarter, which in conjunction with the Skoal up to Summer equity building campaign, helped strengthen the brand's retail share performance as the second quarter progressed.

The national launch of Marlboro Snus, which occurred at the end of the first quarter of 2010, was also an important contributor to the smokeless products segment's volume and retail share results. Marlboro Snus, which is available in four 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 second quarter operating companies' income increased $20 million versus the prior year period to $56 million. Black & Mild's second quarter retail share of the machine-made large cigar category declined by 2.4 share points, versus the prior year period to 27.9%. Black & Mild continued to meet evolving adult cigar consumer's preferences for variety by introducing Black & Mild Royale in both plastic and wood tip variants.

Middleton intends to strengthen the brand's position in the marketplace through additional brand-building activities. Ste. Michelle reported strong business results in the second quarter of 2010. Reported operating companies' income for the wine segment increased $3 million versus a prior year period to $12 million. When adjusted for restructuring and acquisition-related costs, second quarter adjusted operating companies' income increased by 13.3% versus the prior year period to $17 million.

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 Nielson 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 2010 versus the year-ago periods. Ste. Michelle's second quarter and first half retail unit volume grew faster than the industry's at 5.7% and 5.5% respectively.

The financial services segment's reported second quarter operating companies' income decreased $44 million versus the prior year period to $39 million, due to lower gains on asset sales. In the second quarter, Altria executed a closing agreement with the IRS with respect to its 2000 to 2003 federal income tax returns. In this closing agreement, we agreed to pay approximately $945 million in taxes and related interest associated with disallowance of certain leveraged leasing transactions entered into 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 previously disclosed, if the IRS in the future similarly disallows the tax benefits from these transactions for the period from 2004 until the end of 2010, the net additional tax and interest due would be approximately $1.0 billion, excluding any potential penalties. The closing of the 2000 to 2003 federal income tax audit, as well as other state income tax matters, impacted the reported tax rate for Altria in the second quarter.

Altria's reported tax rate for the second quarter was 22.9%, due to the following. The closing of the federal audit resulted in a tax benefit of $47 million, 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 million, due to the reversal of tax reserves and interest related to Altria's former subsidiaries, Kraft and PMI. This $169 million tax benefit was completely offset by a reduction in receivables from Kraft and PMI, resulting in no impact on Altria's reported net earnings for the second quarter. This tax event is similar to the one which occurred in the third quarter of 2009.

And finally, there was an $11 million 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 2010, Altria's income tax rates for the three and six month periods are consistent with its 2010 forecasted full-year effective tax rate on operations of approximately 35.4%.

In the second quarter, Altria issued $800 million in 5.25 year notes with a coupon of 4.125%. This opportunistic financing enabled the company to take advantage of historically low interest rates and tightening corporate credit spreads. In the second quarter, we also paid off $775 million in notes with a coupon of 7.125%. This refinancing is consistent with our strategy of reducing the company's overall financing cost. Mike and I will now be happy to take your questions.

While the calls are compiled, let me cover a few housekeeping items. Marlboro's price gap versus the lowest effective priced cigarette was 34% in the quarter. Marlboro's net pack price was $5.50 and the lowest effective priced cigarette pack price was $4.09. The cigarette discount category's second quarter retail share was 26.9%, a decline of 0.4 of a share point versus the year-ago period. The estimated weighted average cigarette state excise tax at the beginning of the third quarter was $1.36 per pack and includes the five states that increased their excise taxes on July 1.

Copenhagen's retail price was $4.12 and its price gap versus the leading discount brand was approximately 41% in the second quarter. At the end of the second quarter, the District of Columbia and 18 states used a weight-based excise tax system, representing about 27% of the smokeless category's volume. CapEx was $31 million in the quarter and ongoing depreciation and amortization was $68 million. Operator, do we have any questions?

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Investors, analysts and media representatives are now invited to participate in the question-and-answer session. If we – We will take questions from the investment community first. Our first question comes from the Nik Modi of UBS.

Nik Modi – UBS

Hi. Good morning, everyone.

Mike Szymanczyk

Good morning everyone.

Nik Modi – UBS

Just a couple of quick questions, if I can. Mike, in terms of the volume growth for smokeless and cigarettes, how 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 has officially accelerated its growth curve. Any thoughts around that would be helpful.

Mike Szymanczyk

Well, I think the way to look at the cigarette business is it remains on track with historical price elasticity calculations. And so we tend to – kind of used that as the curve because it is where we have some evidence that we're probably going to see a continuation of that kind of a trend. So whether it is 4.5% 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 is fair to say that it has begun to stabilize post the FET into kind of a more normalized level. And we will kind of 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 smokeless, it looks our recent history, it has been growing at about 7% and that's what it did this quarter. I think that is a pretty healthy growth rate. And so we don't see anything new or different occurring that would cause us to believe the differences are going to occur moving ahead. But that again is based on whatever outside factors influence it. So we can't project it, but pretty stable 7% right now.

Nik Modi – UBS

Okay. And then quickly, you addressed the promotional environment in cigars in the press release. Just curious, any changes in the smokeless or cigarette categories in terms of promotional activity? Is it stable? Or are we starting to see some small skirmishes break out in certain pockets of the country in certain categories?

Mike Szymanczyk

All of these markets tend to be very competitive. Cigarettes and smokeless 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 is 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 is nothing new about that. That tends to be the basic market dynamic that exists 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 FET which really disrupted marketplace pricing quite a bit.

And much is true of smokeless. It is a competitive marketplace. But I can't point out to any -- point out any particular anomalies relative to what would be a normal competitive marketplace for you. What is a bit different in the cigar business is that there has been some very aggressive activity in the cigar business in the first half of the year from some competitors. That's I would say more aggressive than we have seen at least in the time we have owned the business and so there has been some impact based on that and that's okay. We know how to address that. But I think that is what we are trying to point out in our press release.

Nik Modi – UBS

And lastly, in terms of the wine assets, it has been almost two years now that you've owned the UST business and the wine assets and just curious if you are 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?

Mike Szymanczyk

We don't have any plans to shed it. We're operating it. It is operating well and we see opportunities for it to grow additional income. And those are the things that we're pursuing related to this business at this point in time.

Nik Modi – UBS

Okay. Thank you very much.

Operator

Your next question comes from Judy Hong of Goldman Sachs.

Tyler Walling – Goldman Sachs

Hey, 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 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….

Mike Szymanczyk

I'm sorry you got cut off right there at the end. Maybe you went away all together. I guess that's what happened. I didn't get the finish on the question. So I can't answer it.

Operator

Okay. His line is still open.

Mike Szymanczyk

I can't. We can't hear him.

Operator

Okay. Your next question comes from David Adelman of Morgan Stanley.

David Adelman – Morgan Stanley

Hi, good morning.

Mike Szymanczyk

Hi, David.

David Adelman – Morgan Stanley

Mike, I wanted to ask you three things. First, on Skoal, 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?

Mike Szymanczyk

Well, I would describe Skoal as something that we haven't fully addressed yet. We tend to look at Copenhagen and Skoal together in terms of volume and income results. And we know that as is the case with any big brand, there is a good high percentage of the consumers that are very loyal to that brand and then there is always a proportion of the brand that is moving between some other – That brand and some other brands based on other factors, promotion factors and things like that.

And so the amount of activity that we've had on Copenhagen has had some impact on Skoal, so we recognize that. We have some plans for Skoal. We haven't executed them yet. We do have what I would describe more as defensive measures that we have in place on Skoal to help it support its business while it competes with our own activities on Copenhagen, but ultimately, we will address Skoal in a more strategic way. It's there's 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.

David Adelman – Morgan Stanley

Okay.

Mike Szymanczyk

We think Skoal 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.

David Adelman – Morgan Stanley

Okay. Secondly, are you willing to quantify or maybe approximate how much of the UST $300 million in cost savings are accruing to divisions other than smokeless tobacco, whether it is corporate expense or PM USA? That would help outsiders understand and sort of triangulate on your characterization that the transaction is going to be accretive to earnings. And it would also help to understand the extent to which PM USA's results are benefiting from those discrete savings.

Dave Beran

Yes. David, let me take that. Not only we bought UST, but when we moved Altria down to Richmond, we basically went in and restructured the whole business and we set up the operating companies which were basically brand and manufacturing. We set up these service companies and we set up those service companies in order to provide services to the three 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 UST and also reduced our internal costs here at Altria in the operating companies. And it benefited each operating company and Altria in total. It is in the results, but we don't break it out separately. It is within the segments, it is within corporate expense. But we don't break it out separately.

Mike Szymanczyk

It is pretty hard to get at that, the way you're asking it. The reason why is because we accrue the 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 costs, the services that are provided, the sales and distribution and all of the other services, the consumer engagement services to the various operating companies. But then the whole realizes the savings, okay? And then there is an allocation backup cost. So it is kind of hard to go directly from, here is how much of the cost savings winds up being attributed to each place, because that is 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&A expense out of the system and put together a more efficient system to deliver the services with. So it is 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 is an explanation.

David Adelman – Morgan Stanley

Okay. Thank you very much.

Operator

Thank you. Your next question comes from Chris Growe of Stifel Nicolaus & Company.

Chris Growe – Stifel Nicolaus

Good morning.

Mike Szymanczyk

Good morning.

Chris Growe – Stifel Nicolaus

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 and next, they really stepped up quite a bit in Q2. I guess I'm just trying to get area better sense of if they are going to be a little heavier this year than next, because of the closing of the North Carolina plant for the manufacturing optimization, will that continue to step up through this year, or is that more likely to hit in 2011?

Dave Beran

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 the system, the same thing with the synergies that we got through the UST acquisition.

Chris Growe – Stifel Nicolaus

Okay.

Dave Beran

That was building, as the year went on, so we get more benefit as the year goes on, in 2010.

Chris Growe - Stifel Nicolaus

Okay. And then my other question, this is related to Marlboro and the very strong market share gain there. I know there is a bit of a comp issue there as well, but my point – My question would just be that if you were looking at the strong market share position for Marlboro, would you attribute that, if there is a factor or two to attribute it to, is the relative price gap in your view a factor helping support – the major factor supporting the market share gain for Marlboro?

Mike Szymanczyk

Well, certainly the price gap needs to be correct for the environment that we're in order for the other parts of the equation, the brand to work. The price gap hasn't changed much over the quarters. So it is in the mid-30s. It has been pretty stable. I would attribute it more to things like new products like Special Blend. I think it has had a good impact to the brand. It has 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 move 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 and 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 can get wrong and then it becomes an impediment to your ability to build your business with other things. That's more of the way we look at it. It is not a business building technique. It is just something that has to be right, relative to the economic circumstances and other circumstances in the marketplace, so that then the other things that we do relative to the brand and its equity have the opportunity to work with the consumer.

Chris Growe – Stifel Nicolaus

That makes sense. Thank you. And 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 would say uniquely to the channel performance within the cigarette category?

Mike Szymanczyk

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.

Chris Growe – Stifel Nicolaus

Okay. Thank you.

Operator

Your next question comes from Christine Farkas of Banc of America/ Merrill Lynch.

Christine Farkas – Banc of America/Merrill Lynch

Thank you very much. Good morning, everyone.

Mike Szymanczyk

Good morning.

Christine Farkas – Banc of America/Merrill Lynch

A 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?

Mike Szymanczyk

Well, I think you see a little bit of a difference in terms of what you have to do to manage your gap where unemployment is higher. That is 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 is how it plays out.

Christine Farkas – Banc of America/Merrill Lynch

Okay. That makes sense. Can you comment on the Marlboro Snus based on your national efforts and what you're seeing with that product?

Mike Szymanczyk

Well, it is early, distribution has ramped up. I always like to remind people, we view Snus as a long-term play, although it is – Now that you have two major players out there in the marketplace, it is actually pretty decent level of share in Snus relative to the whole smokeless category. And I think that it has had some impact on category growth rates. So, it's so far, so good. But this something where we will be for a while, giving cigarette smokers the opportunity to engage with Snus, give it a try, try it a second time, because it is a very different experience than smoking a cigarette.

So I think we have to have patience with our expectations of the Snus business. But we're out there now. We've got good distribution on the product. We're getting good consumer feedback. And really now it is just kind of doing the general marketing work that has to take place over time to engage with consumers.

Christine Farkas – Banc of America/Merrill Lynch

Okay. Great. And then moving to packaging on the cigarettes, I know it is early days with respect to the changes there on descriptors and moving to the gold line. What are retailers telling you, or what kind of changes, if any, are you seeing with customers?

Mike Szymanczyk

Nothing that I can note. I think that that was handled in a pretty seamless and straightforward way. We diverted a lot of our sales force efforts to making sure that that got converted at retail properly and I believe we've done that. And I think everybody has kind of moved on.

Christine Farkas – Banc of America/Merrill Lynch

Okay. And last one for you, Mike, with respect to inventories, in cigarettes in the third quarter. Going into the quarter or year-over-year factors, is there anything there to note?

Mike Szymanczyk

I'm not sure what you're asking me.

Christine Farkas – Banc of America/Merrill Lynch

Well, the year-over-year factors of trade inventories and how this quarter shaped up, is there anything to note with respect to the third quarter?

Mike Szymanczyk

Okay, I would say you never know exactly what is going to happen with inventories. 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 at wholesale and retail. Now, I don't know if that will stay that way, but that's where they are right now. Okay?

Christine Farkas – Banc of America/Merrill Lynch

Okay. That's helpful. And Dave, just if I can get your perspective. First half earnings growth of about 3%, or three 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 is more broad-based?

Dave Beran

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 of 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 is behind us and the – Across the operating businesses, without picking out any one in particular, but across all of our operating businesses, we expect to get solid business results.

Christine Farkas – Banc of America/Merrill Lynch

Great. Thank you very much.

Operator

Your next question comes from the line of Thilo Wrede of Credit Suisse.

Thilo Wrede – Credit Suisse

Good morning, gentlemen.

Dave Beran

Good morning.

Mike Szymanczyk

Good morning.

Thilo Wrede – Credit Suisse

Dave, you pointed out the record market share that Marlboro had in the second quarter. At one point would you expect the Marlboro market share to max out? Or to ask the question differently, how could Marlboro be able to avoid the life cycle that consumer products usually have?

Mike Szymanczyk

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 in 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 spans 38 years and Tide is still number one, so I don't buy that premise. I would say the brand is doing fine. It is strong. We don't put a cap on its growth. You hear stories about that, when it was 22 share, would it be, maxed out at 25 and so on and so forth. I don't buy that as a theory. So I think it is 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.

Thilo Wrede – Credit Suisse

Okay. And then Mike, you pointed out that the growth for Marlboro is possibly coming from line extensions like the Special Blend. Can you break down for us how Marlboro Red and Marlboro Gold did versus these line extensions in the second quarter?

Mike Szymanczyk

No. We don't break it out that way.

Thilo Wrede – Credit Suisse

Would you say the majority of the growth came from the line extensions or came from the core business?

Mike Szymanczyk

Well, we don't break it out that way. So we don't provide that information.

Thilo Wrede – Credit Suisse

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 underlying business seems to be better than you thought?

Mike Szymanczyk

There is no change there. We have not made a change there.

Thilo Wrede – Credit Suisse

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?

Mike Szymanczyk

Well, I don't think that is the kind of thing, we're going to jerk around. I think we still have 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 we have evidence that's resolved yet.

Thilo Wrede – Credit Suisse

Great. Thank you.

Mike Szymanczyk

Okay.

Operator

Your next question comes from Karen Lamark of Federated Investors.

Karen Lamark – 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.

Dave Beran

Yes. We don't break out individual spending behind our national launches. But the Marlboro Snus was launched nationally in the second quarter. We have a plan to get trial and awareness throughout the year, we just don't break those numbers out.

Karen Lamark – Federated Investors

Would Q2 be the peak in terms of the spending? Is that fair?

Mike Szymanczyk

I think you got the best answer you're going to get.

Karen Lamark – Federated Investors

Okay. Thank you.

Operator

Your next question comes from Ann Gurkin of Davenport.

Ann Gurkin – Davenport

Good morning.

Mike Szymanczyk

Hi, Ann.

Ann Gurkin – Davenport

My questions were asked. Thank you.

Operator

Your next question comes from Todd Duvick of Banc of America.

Todd Duvick – Banc of America/Merrill Lynch

Yes. Good morning.

Mike Szymanczyk

Hi, Todd.

Todd Duvick – Banc of America/Merrill Lynch

I had a question on the balance sheet. If you can talk a little bit about the $970 million payment that was made after the close of the quarter, you had about $845 million 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 if you that if you did, does that mean that you will likely tap the market to term out that debt?

Dave Beran

Yes. At the end of second quarter, we actually went into the commercial paper market for $200 million. And we used the commercial paper market on a variable basis, typically, if you will go back over time, it will be in the first and second quarter time periods. Sometimes it bleeds over into the third quarter, but we actually went out by the end June and had raised $200 million in commercial paper.

Todd Duvick – Banc of America/Merrill Lynch

Okay. So that sounds like there is nothing really that you need to term out there.

Dave Beran

That's correct.

Todd Duvick – Banc of America/Merrill Lynch

In the markets. 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 note that matured. Can you just update us on your thinking for going forward, since you do have a number of notes that are high coupons, at this point, how you're thinking about lowering your interest expense going forward? Are you still considering things such as debt tender? Or are you just waiting for notes to mature and then will refinance those at that time?

Dave Beran

If I just go back and just talk about what our overall objectives are and philosophy, with regards to our balance sheet, we want to remain investment grade credit rated and part of our stated goal is to lower our financing costs. But that's over time. And structurally, if you go back 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 it is 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 4.125. We replaced money at 7.125, so our overall interest costs or financing costs on an annualized basis is less. Last year, market conditions were different as the debt matured, we paid it off. So it really is on both the market and the business needs at a particular point in time.

Todd Duvick – Banc of America/Merrill Lynch

Okay. Very helpful. Thank you.

Operator

At this time, I would like to turn the floor back over to Cliff Fleet for any closing remarks.

Cliff Fleet

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.

Operator

Thank you for participating in today's conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Altria Group Inc. Q2 2010 Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts