Altria Group, Inc. (MO) Q4 2010 Earnings Report, Transcript and Summary

Good day, and welcome to the Altria Group 2010 Fourth Quarter and Full Year Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Cliff Fleet, Vice President, Investor Relations for Altria Client Services. Please go ahead, sir.

Good morning, and thank you for joining our call. This morning, we will only be discussing Altria's 2010 business results for the fourth quarter and full year, 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 section at the end of our earnings release for the review of the various factors that could cause actual results to differ materially from projections. Since Altria acquired UST and its Smokeless Tobacco and Wine subsidiaries on January 6, 2009, U.S. Smokeless Tobacco Companies, Ste. Michelle's Wine Estates financial results from January 6 through December 31, 2009, are included in Altria's 2009 consolidated and segment results. For a detailed review of Altria's business results, please review the earnings release that is available on our website, www.altria.com. Altria reports its financial results in accordance with U.S. Generally Accepted Accounting Principles. Today's call may contain various operating results on both a reported and on an adjusted basis, which excludes items that affect the comparability of reported results. Descriptions of these measures and reconciliations are included in the earnings press release or are already available on our website. In addition, comparisons discussed in this conference call are to the same prior-year period, unless otherwise stated. Now it gives me great pleasure to introduce Mike Szymanczyk, Chairman and Chief Executive Officer of Altria Group.

Thanks, Cliff, and good morning to everyone. Altria delivered strong results to its shareholders last year in a challenging business environment. Adjusted diluted earnings per share grew by 8.6% to $1.90 per share, which exceeded our original 2010 guidance for adjusted diluted earnings per share growth. We increased our dividend twice last year for a total increase of 11.8%, and Altria's total shareholder return in 2010 was 32.9%, significantly outpacing the S&P 500's total return of 14.8%. Solid operating companies' income results from the Cigarettes, Smokeless Products and Wine segments, as well as growth in earnings from our SABMiller equity investment were partially offset by lower operating companies' income results from the Cigar and Financial Services segments. In the Cigarette segment, PM U.S.A. successfully grew operating companies' income by expanding margins, while also maintaining share momentum on Marlboro. The brand continued to perform very well in the marketplace, as both the Marlboro non-menthol and Marlboro Menthol components of the brand had solid retail share gains last year. In addition, careful management of Marlboro's value equation helped the brand expand its operating margins, while also supporting strong retail share growth. A variety of new products continue to help build Marlboro's marketplace position. The successful launch of the two Marlboro Special Blend non-menthol products in the first quarter of last year, and the introduction of Marlboro's Skyline Menthol in the fourth quarter of 2010 helped build the brand's position. In the first quarter of this year, Marlboro is launching two new special blend products, one non-menthol and the other menthol, to round out this portfolio. Marlboro Special Blend products give the brand new flavor profiles, designed to appeal to competitive adult smokers and offer its existing adult smokers equity building news on the brand. In the Smokeless Products segment, USSTC and PM U.S.A. successfully grew their combined 2010 full year retail share, which enabled their combined adjusted volumes to grow faster than the category. This adjusted volume growth contributed to strong adjusted operating companies' income growth for the Smokeless Products segment in 2010. Copenhagen performed particularly well in 2010 as the new product launches of Copenhagen Long Cut Wintergreen, Long Cut Straight and Extra Long Cut Natural helped drive strong retail share gains and volume growth for the brand. In the fourth quarter, the brand also offered Copenhagen Black as a unique offering, specially blended with a rich dark character for a limited time only. USSTC is now beginning to roll out a comprehensive set of the brand building initiatives to enhance Skoal's position in the marketplace. These include the national launch of 10 new products for Skoal in the first quarter of 2011, including eight new Skoal Extra products that build on Skoal's heritage as an innovative smokeless brand that delivers smooth taste. USSTC and PM U.S.A. also continued to build their businesses in the emerging Snus segment of the smokeless products category. In the first quarter of last year, PM U.S.A. expanded Marlboro Snus nationally to build awareness and trial among adult cigarette smokers for these innovative smokeless tobacco products. This month, PM U.S.A. began shipping two new Marlboro Snus varieties and a bigger and bolder format for adult cigarette smokers looking for a more flavorful experience. Also this month, Skoal began shipping two new Snus varieties for adult smokeless tobacco consumers seeking a spit-free smokers tobacco alternative. We're pleased with the business and financial results achieved since we acquired UST a little more than two years ago. The strong 2010 adjusted operating companies' income results of our Smokeless Products and Wine segments, when combined with the cost savings realized across the Altria family of companies resulting from the acquisition, made it accretive to our 2010 adjusted diluted earnings per share. In our Cigars segment, 2010 adjusted operating companies' income, adjusted shipment volume and retail share were all down due to increased competitive pressures that forced Middleton to invest in promotional initiatives to defend its position in the marketplace. Some manufacturers are reportedly sourcing untipped machine-made large cigars from overseas locations, because the federal excise tax on cigars is calculated as a percentage of the product's price rather than per unit. Companies that are importing cigars may be structuring their import transactions in such a manner intended to reduce their tax payments below a comparable product manufactured domestically. Although we believe these discrepancies will ultimately be resolved, in the short term, Middleton plans to balance its operating companies' income results with Black & Mild's retail share performance, while determining the best approach to deal with the post FET increased challenges. Middleton launched Black & Mild Royale last year to address adult cigar smokers' preferences for different blends and tastes in cigars. This launch, in conjunction with Black & Mild's other initiatives, restored the brand to sequential retail share growth in the back half of 2010 compared to the first half of 2010. Black & Mild has a strong pipeline of new products and initiatives planned for this year, including two new untipped cigarillo products currently in test markets. Altria's Sales & Distribution made significant progress in the back half of 2010, creating an enhanced retail platform to support future initiatives in the Smokeless Tobacco and Cigar businesses. Over the last four months, we have announced the national launch of 13 new smokeless products that are expected to build USSTC's and PM U.S.A.'s Smokeless Products businesses in 2011. In the Wine segment, last year, Ste. Michelle achieved strong volume growth, which contributed to strong operating companies' income performance. Ste. Michelle drove this volume performance with continuing efforts to build distribution of the wines it owns or represents, and by continuing to produce high-quality premium wines. Last year, wines at Ste. Michelle either produced or represented, received more than 150 ratings of 90 or higher. Altria and its operating companies delivered $317 million in cost savings in 2010. We have now delivered over $1.3 billion of cost savings across our companies against the $1.5 billion cost reduction program off our 2005 cost base. We are confident that we will successfully complete this program by the end of the year. Altria remains committed to returning a large amount of cash to shareholders in the form of dividends, as evidenced by last year's increase in our adjusted earnings per share dividend payout ratio target of 80%. We are also pleased to announce that Altria's Board of Directors has authorized a $1 billion share repurchase program as an additional way to return cash to shareholders. Altria intends to repurchase these shares in 2011, but the timing of such purchases depends upon marketplace conditions and other factors. We also remain committed to reducing our financing costs over time and have made progress against this objective. In 2009 and 2010, we paid off $1.7 billion of debt coming due. And in 2010, we took advantage of the low interest rate environment to issue $1 billion in new debt. These actions reduced our long-term weighted average coupon cost and helped lower the company's debt-to-EBITDA ratio. As additional debt comes due over the next few years, Altria will decide whether to refinance or retire this debt in whole or in part, depending upon the marketplace, business needs and conditions, and other factors including our desire to maximize cash returns to our shareholders. The business environment for 2011 is likely to remain challenging. Adult consumers remain under economic pressure and face high unemployment. We are also cautious about the competitive promotional environment, and mindful of uncertainties facing our tobacco businesses as they enter the year. In the Cigarette business, PM U.S.A. is continuing to see significant competitive activity, and is also cautious about the outlook for excise tax increases, given the budgetary situation in many states. In the Smokeless Products business, while we are very pleased with our business results, USSTC is just beginning to execute its plans for Skoal. And in the Cigar business, Middleton faces an especially challenging competitive market, which we believe will be resolved over time. Our guidance for 2011 is thus appropriately prudent in light of these uncertainties. Altria forecasts that adjusted diluted earnings per share will increase by 6% to 9% to a range of $2.01 to $2.07 from an adjusted base of $1.90 per share in 2010. Due to inventory movements in the Cigarette business and the timing of new product launches in 2010, we anticipate 2011 adjusted diluted earnings per share to build and accelerate as the year progresses. I will now turn the call over to Altria's new Chief Financial Officer, Howard Willard, who will discuss Altria's business segment results in more detail.

Thank you, Mike. Good morning, everyone. Before I begin, let me take a moment to introduce myself. I have been with the Altria family of companies since 1992, and have held leadership positions across the organization in finance, sales, information services, compliance and corporate responsibility. Most recently, I led our Strategy and Business Development group, where I had responsibility for the acquisition and integration of Middleton, USSTC and Ste. Michelle. I look forward to meeting many of you at our investor day next week. The Cigarette segment reported solid operating companies' income results in 2010. Last year, the Cigarette segment's reported operating companies' income increased by 7.8% to $5.5 billion, due primarily to higher list prices, lower restructuring costs and promotional spending, as well as higher cost savings from its manufacturing optimization program. These factors were partially offset by lower volume and higher FDA user fees. Excluding restructuring charges, adjusted Cigarette segment's operating companies' income grew by 4.5% to $5.6 billion. PM U.S.A. grew 2010 adjusted operating companies' income by expanding its adjusted Cigarette segment's operating margins by 1.6 percentage points to 38.3%. PM U.S.A.'s reported cigarette shipment volume decline 5.3% for the full year, but was down an estimated 6% when adjusted primarily for trade inventory changes. PM U.S.A. estimates that the total cigarette category's adjusted volumes decline 5% last year, which is in line with historical price elasticity of negative 0.3%. The Cigarette category's estimated volume decline rate was 7% in the first half of the year, as the category lapped the FET related pricing actions, which occurred in the first half of 2009 and 4% in the second half of 2010. Marlboro performed very well last year, as it grew its full year retail share of the Cigarette category by 8/10 of a share point to 42.6%. Marlboro had balanced retail share growth, as its non-menthol business grew half a share point to 36.6% and its Menthol business grew 3/10 of a share point to 6%. Marlboro's strong retail share growth largely offset retail share declines from the balance of PM U.S.A.'s brand portfolio. PM U.S.A.'s 2010 retail share of the Cigarette category was down 1/10 of a share point, 49.8%. The Cigarette segment's operating companies' income, shipment volume and retail share results in the fourth quarter were impacted by trade inventory changes and differentials in retail pricing around the list price increases taken by some cigarette manufacturers in the quarter. In the fourth quarter of 2010, reported Cigarette segment's operating companies' income was up 7.4% to $1.2 billion. Excluding restructuring costs, the cigarette segment's fourth quarter adjusted operating companies' income grew by 1% to $1.2 billion. PM U.S.A.'s reported fourth quarter cigarette shipment volume declined by 7%, but when adjusted primarily for changes in trade inventories, declined an estimated 6%. This volume decline rate exceeded the estimated fourth quarter cigarette category decline rate of 4% due to moderate retail share losses in the quarter for PM U.S.A.'s cigarette brand portfolio. Marlboro's fourth quarter retail share grew by 6/10 of a share point to 42.3%. Continuing momentum from the Marlboro Special Blend products launched earlier in 2010, as well as the introduction of Marlboro Skyline Menthol in the fourth quarter contributed to these strong retail share results. Marlboro's retail share gains largely offset retail share declines in the balance of PM U.S.A.'s cigarette portfolio. PM U.S.A.'s retail share in the fourth quarter of 2010 was down 2/10 of a share point to 49.2%. The Smokeless Products segment had strong financial results for both the full year and fourth quarter of 2010. Reported Smokeless Products segment's operating companies' income for 2010 grew over 100% to $803 million. Excluding restructuring and acquisition related costs, 2010 adjusted operating companies' income for the Smokeless Products segment grew 30.9% to $827 million. In the fourth quarter, USSTC and PM U.S.A. reduced promotional activities, and allowed trade inventories to adjust and stabilize as ALS&D implemented its enhanced retail platform in about 60,000 stores. These activities impacted the adjusted operating companies' income margins, shipment volume, and retail share results for the Smokeless Products segment in the quarter. Reported Smokeless Products segment's income for the fourth quarter grew over 100% to $217 million. Excluding restructuring and acquisition-related costs, fourth quarter adjusted operating companies' income for the Smokeless Products segment increased 63.5% to $224 million. In 2010, USSTC and PM U.S.A.'s adjusted smokeless products volume growth exceeded the Smokeless Products category's estimated growth rate of 7%. Reported Smokeless Products shipment volume increased by 12.2% last year, but when adjusted primarily for trade inventory changes and new product pipeline volume, was estimated to be up 8%. In the fourth quarter, reported Smokeless Products shipment volume increased by 2.5%, but when adjusted primarily for trade inventory changes and new product pipeline volume, was estimated to be up 7%. USSTC estimates that the Smokeless Products category grew 6% in the fourth quarter 2010. USSTC and PM U.S.A. grew their combined full year retail share of the Smokeless Products category by 7/10 of a share point to 55.3%. Copenhagen's strong retail share gains of two share points for the full year more than offset Skoal's retail share declines, and was a principal driver of overall retail share growth. In the fourth quarter, USSTC and PM U.S.A.'s retail share of the Smokeless Products category declined 1/10 of a share point to 54.5%. Copenhagen grew its fourth quarter retail share by 1.1 share points to 25.7% behind the continuing marketplace momentum from its new product launches. Skoal's fourth quarter retail share declined by 1.6 share points to 21.7%. USSTC expects Skoal's performance to improve in 2011 due to planned brand building initiatives and new product launches. Reporting Cigar segment's operating companies' income, for the full year and fourth quarter, declined by 5.1% to $167 million and 43.2% to $21 million, respectively. When adjusted for integration costs, adjusted Cigar segment's operating companies' income for the full year declined by 8.6% to $169 million and 43.6% to $22 million for the fourth quarter. Adjusted Cigar segment's operating companies' income declined in both periods largely due to promotional investments made by Middleton in response to competitive dynamics in the marketplace. Middleton's 2010 reported cigar shipment volume declined by 1%, and when adjusted for changes in trade inventories, declined by an estimated 4%. In the fourth quarter of 2010, reported cigar shipment volume was essentially unchanged and when adjusted for changes in trade inventories, declined by an estimated 1%. The primary driver of volume declines in both periods was retail share losses on Black & Mild. Middleton estimates that the machine-made large cigar category grew by 2% in 2010 and approximately 4% in the fourth quarter of 2010. Black & Mild's full year retail share of the machine-made Large Cigar category declined by 1.3 share points to 28.5%. For the fourth quarter of 2010, Black & Mild's retail share declined by 1.5 share points to 29.1%. Black & Mild's retail share declines in both periods were driven primarily by increased competitive activity. Black & Mild's successful brand building efforts, which included the launch of Black & Mild Royale last summer, helped the brand return to sequential retail share growth. The brand's second half of 2010 retail share was 1.2 share points higher than the first half of 2010. The Wine segment reported strong operating companies' income and volume results in 2010. The Wine segment's reported operating companies' income increased by 41.9% to $61 million for the full year of 2010 and by 42.9% to $30 million for the fourth quarter. Excluding restructuring and acquisition-related costs, adjusted operating companies' income for the Wine segment increased by 13.7% to $83 million for the full year, and by 23.3% to $37 million for the fourth quarter. Ste. Michelle's 2010 wine shipments grew by 10.8% in the fourth quarter and 11.3% for the full year. The Financial Services segment's reported operating companies' income for 2010 declined by $113 million to $157 million, due primarily to lower gains on asset sales. For the fourth quarter of 2010, the Financial Services segment's reported operating companies' income increased by $60 million to $70 million, due primarily to higher gains on asset sales and asset impairment and exit costs in 2009. 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 35% in the fourth quarter and 34% for the full year. Marlboro's net pack price in the fourth quarter was $5.66, and for the full year was $5.55, while the lowest effective priced cigarette was $4.20 in the fourth quarter and $4.14 for the full year. The cigarette discount category's fourth quarter retail share was 27.9%, and was 27.4% for the full year. The estimated weighted average cigarette state excise tax at the end of the fourth quarter was $1.36 per pack. Copenhagen's fourth quarter net retail price was $4.25, and its price gap versus the leading discount brand was approximately 39% in the quarter. For the full year, Copenhagen's net retail price was $4.20, and its price gap versus the leading discount brand was 41%. As of January 1, 2011, 20 states in the District of Columbia used a weight-based smokeless tobacco excise tax system, representing approximately 32% of the Smokeless Tobacco category's volume. And CapEx was $52 million and $168 million for the fourth quarter and full year of 2010, respectively. And ongoing depreciation and amortization was $68 million and $276 million for the fourth quarter and full year time periods, respectively. Operator, do we have any questions?

[Operator Instructions] Our first question is coming from Christine Farkas of Bank of America Merrill Lynch.

Mike, I'm wondering if I can ask you, regarding your opening remarks, you talked about a competitive promotional environment as you enter the year, yet your cigarette pricing in the fourth quarter, the net pricing to Altria was strong over 7% as per our calculations. Were your comments really about cigars or broader tobacco?

Well, I think the answer is yes, yes, yes. All of these categories are competitive, and continue to be competitive. And so that's not a new thing in particular to the business. And so I would say that yes, the Cigarette category continues to be competitive. There continues to be competitive activity out in the marketplace, but the other two categories are competitive as well.

Moving to Smokeless, also you mentioned trade inventories were adjusted or you allowed trade inventories to adjust is in the fourth quarter, and this is a factor in your smokeless share. Would you say that we're at normal levels now and of course, with the new products in January, do you expect load in the first quarter?

Well, we mentioned in our remarks that we've been busy, really, getting the space right for the category in a large number of stores. We worked on that through the entire back half of the year. I think we accomplished that in about 60,000 stores that represent a good percentage of the smokeless volume in the U.S. Part of what we did was we reduced significantly in the fourth quarter the amount of promotion activity in our Smokeless business in order to be able to let the inventories get stabilized in light of a change in the shelf space that had occurred over the back half of the year. So I can't speak to whether or not that's fully balanced out in retail stores right now, because I don't know. I just can tell you we wanted to just give it a chance to occur. And you're right, there will be a number of new items tat go into the category. All of these products are shorter shelf life products, Christine, so they don't tend to have a large amount of inventory to go in when they are launched, because you have to be mindful of the limited shelf life.

Okay, that's helpful. Can you just describe what the changes in the shelf space was just in summary in terms of more or less or different?

Well, post the FET, you had a pretty good decline in overall cigarette volumes in the industry, and you continue to have growth in the Smokeless category, and you've continued to have growth in the Cigars segment, and so much of this was really a rebalancing of the space in these stores in order to get the room right for cigarettes and to get the inventories right sized for cigarettes relative to the changes in overall industry volume. And then take that space and use it to accommodate the growth because the Smokeless category was behind relative to its growth rate in terms of how space was being allocated, just wasn't being focused on the way it should have been. So it really is, I think, the best way to describe it is a reallocation of space within the total sector to accommodate the trends that have been going on for a while in those sectors.

Great, that makes sense. And finally, for Howard if I could, on CapEx, the guidance for 2011 is $200 million as per your press release. And I'm just wondering why that would tick up from 2010.

Well, I think there's a number of factors. But when you look at our capital expenditures, you have to look at what's occurring across, not only cigarettes, but also our other tobacco businesses. And then of course in the Wine business, that's a bit more capital intensive as well.

Your next question comes from the line of Christopher Growe with Stifel, Nicolaus. Christopher Growe - Stifel, Nicolaus & Co., Inc.: When you talked about kind of the phasing of earnings in the first half of '11 versus second half, you mentioned cigarette inventories and some of the interest in the smokeless products, I guess I just want to better understand, do you foresee some inventory adjustments to cigarettes here early in the year? And is there any follow on from what you're doing in the smokeless side to the cigarette inventories? Have we seen inventory levels of cigarettes come down because of the space allocation changing?

Well, I can't suggest to you that I think you're going to see retail cigarette inventories come down because of the space changing in retail stores, because I think much of that's been reflected in 2010. But I think the comment that we made was that we expect to see our earnings growth build and accelerate as the year progresses in 2011, both because we don't run the same set of plans in each year. We are putting out things in the marketplace based on what we think is best for the business and that coming year relative to the competitive environment. And there are other factors that influence inventories during the year, things like timing of pricing and so on. So what we're saying is that when we're looking at the year as it appears to us, that's how it will unfold based on what we know today. Christopher Growe - Stifel, Nicolaus & Co., Inc.: Okay. And then I have a question regarding the, I guess, really, in regard to promotion behind the Smokeless Tobacco business. There was a pullback here in the fourth quarter. It sounds like it may have accomplished most of what you want to do, maybe there's some lingering there. But with 10 new products behind for Skoal, I guess I'm trying to understand is from a promotional standpoint in 2011, do you see any material change year-over-year for the full year? Could we see that pick up a little bit here around the product activity? Do you expect to back off a little bit on Copenhagen? Is there any color you can offer there?

No, I think that would be competitively sensitive information, so I don't think I'll go into any detail on that. Christopher Growe - Stifel, Nicolaus & Co., Inc.: Okay. And then my final question is going to be you did discuss the state excise taxes as, I guess, a bit of a risk factor for 2011. Do you have an estimate of what you believe today? I know it's hard to predict that, but what sort of increase we could expect of this coming year and I guess it all depends on the state budgets and that kind of thing, but any sort of early indication?

Well, we make estimates, and they're part of our planning process and that would be included in the guidance. But beyond that, I wouldn't provide any specific detail. Christopher Growe - Stifel, Nicolaus & Co., Inc.: It sounds like you would start with a conservative estimate for the year, given what you know today, is that right?

Well, we'd start with an estimate.

Your next question comes from the line of David Adelman with Morgan Stanley.

Mike, first, let me follow up on the Skoal effort. These 10 new product launches, how much or approximately what percent of Skoal's volume do you think those products will ultimately be? I'm just trying to understand the magnitude of what you're doing. 10 products is obviously a lot to introduce on any brand.

Well, not so much when you see the variations of styles that exist in the Smokeless business. It's really four flavors in a line of products that have multiple forms. So that's the bulk of these product launches. But no, we wouldn't give out what we would estimate to be the volume. I mean, it's just not being announced. So it's a little early to start predicting how they're going to perform in the marketplace.

And could you comment on where those products are likely to be priced versus discount competition? Because obviously, Copenhagen Wintergreen is essentially priced as far as I understand, in line with discount Wintergreen products.

Well, they'll be launched with some introductory pricing and then beyond that, we won't speak to what we're going to do with them.

Okay. And then are you willing to comment on what you envision as a reasonable rate of decline of the U.S. cigarette category during 2011?

No, I wouldn't say anything other than, I guess, the way we look at it is there's no evidence that we have from history that the category decline rate based on normal price elasticities is going to show some deviation from that history. So I don't have any reason to believe that it will.

Okay. And then lastly, what is the intent or the capacity for material cost reductions through the organization upon the completion of the existing program this year?

Well, as you know, over the last three years, we've done a major restructuring of the corporation and made a couple of acquisitions and taken out factories as a part of that restructuring. And so we've announced what it would produce when we did that, how long it would take, and we've been getting that work done. I think looking ahead, as we look at cost saves, we believe that we'll continue to see declines in volume in the cigarette industry and in our Cigarette business, and so we're focused on continuing to methodically reduce cigarette infrastructure. We don't have major factory locations that will be affected by that decline because we only have one major manufacturing facility now. But we do have other areas in the operation of cigarettes that we can have decline in terms of cost as the volume comes down. So that will be a primary component. And then in the growth businesses, particularly the Smokeless business, but also the Cigar business, but primarily in the Smokeless business, we want to realize that growth in a way that we're not adding a lot of cost, so we can have an impact that's positive on our cost per unit because the volume will grow, and we won't have to expand capacity or take on major costs. So we're looking for ways to really be more efficient in the way we operate our smokeless operations as the volume grows, so we can absorb that volume growth and get a positive impact on our cost structure. And that also is the case in some of the service areas like Sales & Distribution and the Altria Client Services operation. We're looking for ways to be able to absorb Smokeless growth, sometimes we'd be able to in those service organization, transfer assets that have been applied to the Cigarette business over to the Smokeless business. Sometimes we won't and we'll be taking some of those assets out. But that's really the fundamental approach as we look at how we're going to get productivity out of the business at least over the next few years.

Your next question comes from the line of Judy Hong with Goldman Sachs.

Mike, just looking at your cigarette performance in the fourth quarter, it looks like your net pricing per unit actually was down sequentially from the third quarter, yet your Marlboro share was also a little bit weaker just compared to the third quarter performance. So I'm just trying to understand whether you think that the line extensions and some of the promotional activity that you're putting to place along these line extensions are actually benefiting the Marlboro trademark enough. And then just broadly longer term, the implication on the Marlboro trademark with these line extensions.

Yes. Well, first of all, I wouldn't get too focused on quarter-to-quarter comparison because we really don't run the business that way. We really do have an approach that's longer term than that. We're looking for modest growth on the Marlboro brand in terms of share and maximizing profitability out of our Cigarette business. That's the way we run the business, and we make decisions based on what we think is best for that outcome, and it can have a negative – those decisions can have a negative impact on the comparison of one quarter versus the previous year at any point in time. So we don't worry too much about that. We feel like Marlboro had a nice share growth in the fourth quarter versus the previous year and that the equity remains strong. We'll talk some about that on Monday in our investor day in more detail. But no, I don't see anything there to be particularly concerned about.

Okay. And then just in terms of broadly, I guess, just going back to my question about these line extensions and the strategy that you're using these line extensions to really help the Marlboro trademark, are they going after different consumer segments? Would the price points come up over time as you get more traction on these line extensions? I guess I'm just trying to understand sort of the broader...

Well, I wouldn't generalize on any of this. It's a big country. It's got lots of different markets within it, lots different states, lots of different pricing variables that exist all over the place, and there are different kinds of development on different products and competitive products in the marketplace. I think what you have to recognize is that Marlboro's a big brand and that in a declining category, the way that brand grows is it has to get competitive smokers to join its franchise, and it needs to keep its adult smoker consumers that are in that brand that are continuing to participate in the category. So the kinds of extensions that we do are designed to reach out to competitive adult smokers, and give them an opportunity to join the brand franchise called Marlboro. At the same token, we get an additional benefit on the brand because it provides equity news. And so even if an existing consumer for the Marlboro brand on mainline SKUs isn't interested in the new SKU, it does in fact bring news about the brand to them. So that's the reason why we do them, because this brand is a brand that continues to show the equity strength to grow out into the future. But to grow, it has to reach out to competitive adult smokers.

Okay. And then the $1 billion share buyback program, I guess I'm just curious in terms of how you come up to a decision to buy back stock rather than maybe using more money to pay down the debt or just reduce the financing cost even more than what you've done so far.

Well, I think what we've said in the past on this subject is that when it comes to our balance sheet, our objective is to maintain a strong investment grade credit rating, and it's to support a strong dividend payout ratio targeted at 80%, and then it's to make progress on reducing our financing cost relative to the debt that we took on from the UST transaction. We made good progress in all three of those fronts in 2010 and as the board looked at the circumstance, we feel like we'll continue to make progress there, but we have the capability to buy back $1 billion worth of stock in 2011. And so our interest is in doing things that are in interest of our shareholders, and we think that is.

Your next question comes from the line of Ann Gurkin with Davenport. Ann Gurkin - Davenport & Company, LLC: I guess I'm still wrestling with the greater PM U.S.A. cigarette volume decline versus the industry, and how to think about that for 2011. Is there some more trade inventory adjustment, or how should we think of volume loss versus share loss gain? Can you just help me better understand that relationship?

Well, I actually think that when we look at the year for our overall cigarette volume that it was in line with what we would've expected. And as I said before, I wouldn't get too caught up with the quarter-to-quarter change, given all the moving parts that can have impact on the quarter and relative to comparison with the previous year's quarter. Ann Gurkin - Davenport & Company, LLC: As we look out to 2011, should we see PM U.S.A. cigarette volume track more like the industry? Is that a fair assessment?

Well, I can't predict the future, but we don't see anything that's out of line relative to the way our volume is performing.

Your next question comes from the line of Vivien Azer with Citigroup.

I was wondering if we could circle back to the retail reset, it sounds like you guys had a ton of heavy lifting in the back half of 2010 in terms of reconfiguring the MST category. Is there more work to be done in 2011?

Well, there's always work to be done in the new year, but the initial phase of what we wanted to get accomplished in 2010 got completed so that's on track. I mean, we'll continue to work on improving the segment's retail presentation, but what we set out to accomplished in the back half of 2010, we accomplished.

Okay, fair enough. And then on the margin given that reconfiguration, does that give you increased confidence in the outlook for the category growth, given kind of a new phasing structure?

I'm sorry, I didn't quite get all of that.

Where does that leave you in terms of your outlook for the MST category in terms of the volume growth?

Well, I don't think we see any fundamental change in the trend line in that category. If you look at it, it's been pretty steady at 7% growth rate. So I'm not anticipating any significant change in that.

Fair enough. And my last question has to do with the new Marlboro Snus direction. Are those incremental, or are those replacing what's existing in the market today?

No. Those are new products, incremental products. They are of a different format, so they offer as you study the consumer in this segment and the development of the segment, you see different people have different kind of preferences relative to these Snus products. So these products have a different pouch size, for example, and there are different set of flavor profiles, and that's all based on continuing consumer research.

Your next question comes from the line of Philip Gorham with Morningstar.

A question on menthol. I think you said in the last quarter that you are building your share in menthol. And obviously, the Special Blend launch is part of that. Could you update us on how that's going and just talk about what other opportunities you see there? I'm particularly curious because of the FDA overhang and the timing of that launch.

Well, first of all, the initial launches on Special Blend that took place at the end of 2009 were both non-menthol products. The launches that are taking place, just beginning to be announced actually at retail and really, won't really impact the marketplace until March, one is a non-menthol product and the other one is a menthol product. So there hasn't been really any impact on our menthol business by Special Blend thus far. Okay, we did launch in the fourth quarter a product called Skyline, Marlboro Skyline, which is a different blend of Marlboro that has a different appeal to competitive menthol smokers to the brand. And that's off to a good start, but it's early for that product. But it's a continuation of us reaching out to competitive menthol smokers with good products that they might enjoy. And then beyond that, relative to FDA, that process continues. And sometime here, I think, over the next couple of months, we ought to see whatever recommendations come out of the TPSAC [Tobacco Products Scientific Advisory Committee] committee. We'll talk about that in a little more detail on Monday.

Okay. And could you update us as well on the roll out of a new retail platform in Smokeless? So how many markets are you in with that, and how much of the incremental shelf space are you able to...

Well, it's approximately 60,000 stores. They're spread around the U.S., focused really on the more highly developed smokeless tobacco marketplaces in the country. And the space variation is really by store, so it's really based on how the business has developed in a particular store. Averages don't mean much in that regard.

Your next question comes from the line of Priya Ohri-Gupta with Barclays Capital.

I was just wondering if you can elaborate on your plans to fund the $1 billion share buyback programs?

If I can elaborate on what?

Your plans for funding of the billion share buyback program?

Our plans for funding it?

Yes, the excess cash…

Well, assets does seem to have [ph] on our balance sheet.

Yes, we have numerous sources of liquidity, and we're not going to comment further.

Your final question comes from the line of Todd Duvick of Bank of America Merrill Lynch.

Quick question for you on the balance sheet again. Can you just give us any updated thoughts in terms of whether or not you're still looking at your high coupon debt, potentially taking out some of that or refinancing any of that?

No. We wouldn't make any comment on what our plans are there.

That was our final question. I'll now turn the floor back over to management for any closing remarks.

I want to thank everyone for joining us here today. If you have any follow-up questions, feel free to give us a call at Investor Relations. We also hope that you will participate in our Investor Day presentation on Monday, January 31, 2011, which we webcast on www.altria.com. Have a good day.

Thank you. This does conclude today's conference call. You may now disconnect.