Altria Group, Inc. (MO) Q2 2011 Earnings Report, Transcript and Summary

Good day, and welcome to the Altria Group 2011 Second Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Brendan McCormick, 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 2011 second quarter and first half business results and will not be discussing the status of tobacco litigation. Our remarks contain forward-looking and cautionary statements and projections of future results including earnings guidance. I direct your attention 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. For a detailed review of Altria's business results, please review the earnings release that's available on our website, 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 today's earnings press release and are 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 Inc.

Thanks, Brendan, and good morning to everyone. Altria delivered solid financial results from the second quarter and the first half with adjusted diluted EPS growth of 6% and 5.4%, respectively. Our premium tobacco brands performed well in a highly competitive environment marked by continuing economic pressure on adult consumers. We are pleased with our business results and remain on track to achieve the 2011 full year adjusted diluted EPS we forecast in our guidance. In the Cigarette segment, PM U.S.A. reported solid adjusted operating company’s income growth and margin strength for both the second quarter and first half as Marlboro grew its retail share sequentially and PM U.S.A.'s premium mix continued to improve versus the prior year. PM U.S.A. grew its adjusted operating company’s income 2.8% for the second quarter and 4.8% for the first half. Adjusted operating company’s income margins, which include the impact of a $36 million charge for the Scott case were down 3/10 of a percentage point in the second quarter and were up 1 percentage point for the first half. In the cigarette industry environment where premium share has remained relatively stable in recent years, Marlboro's retail share increased sequentially and performed well when compared to last year's record share in the second quarter. Marlboro's second quarter retail share grew by 4/10 of a share point versus the first quarter of 2011 to 42.6%. This represented a share decline of 2/10 of a share point compared to last year's record retail share. Marlboro's performance was driven in part by growth in Marlboro Menthol and the continued success of Special Blend, which launched 2 new packings last quarter. We are pleased with Marlboro's performance for the first half of 2011 from both a share and profitability standpoint. PM U.S.A. second quarter cigarette shipment volume benefited from trade inventory movements as the trade continued to build inventory levels through the quarter. We believe that the trade has already begun to deplete some of its inventory in July, and expect trade inventory depletion to impact shipment volume in the third quarter. PM U.S.A.'s reported cigarette shipments in the quarter declined versus the comparable year-ago period and after adjusting for trade inventory changes were estimated to be down 4.5% compared to the total cigarette categories estimated decline rate of 3.5%. Shipments of premium products represented 94.3% of PM U.S.A.'s total shipments, an increase of 1 percentage point from last year. PM U.S.A.'s results were delivered in an intense competitive environment marked by high unemployment and low consumer confidence. Despite these challenges, PM U.S.A. improved its premium mix, delivered strong adjusted operating income margins and achieved solid share results from Marlboro. In the Smokeless Products segment, our companies delivered excellent adjusted operating companies income growth driven by the share performance of Copenhagen and Skoal and strong margin growth. Adjusted operating companies income for the Smokeless Products increased 10.9% for the second quarter and 7.2% for the first half. Adjusted operating companies income margins increased 3.8 percentage points for the second quarter and 3 percentage points for the first half primarily due to higher pricing, the shift to volume and to the more profitable Copenhagen and Skoal brands and lower SG&A costs. Copenhagen's momentum continued in the second quarter as the brand increased its retail share 1.1 percentage points versus the prior year and 7/10 of a share point sequentially. Copenhagen share results continue to benefit from recent product introductions, as well as strength in its core natural business. Skoal has responded to brand building initiatives. The brand gained sequential retail share for the second consecutive quarter as it benefited from the 2011 first quarter introduction of Skoal X-tra products and Skoal Snus. Gains from these new products fully offset retail share losses, which resulted from USSTC's portfolio rationalization that delisted 7 Skoal SKUs that individually had limited distribution. Combined shipment volumes for Copenhagen and Skoal increased 2.4% in the second quarter and 3.2% for the first half. USSTC and PM U.S.A.'s combined shipment volume for the first half decreased due to trade inventory changes and a negative comparison on their portfolio brands including Marlboro Snus partially offset by volume growth on Copenhagen and Skoal. Overall, USSTC and PM U.S.A. delivered excellent financial results in the Smokeless Products segment in the first half of 2011. We are pleased with the way Copenhagen and Skoal are performing and with the momentum they carry into the second half of the year. The Cigars segment continues to be affected by increased levels of low-priced imported machine made large cigars following the 2009 federal excise tax increase. Middleton has taken a number of steps to improve its business performance including efficiently investing in promotional resources to defend Black & Mild's retail share and launching new products to expand the brand into new segments, where it has not competed widely. In addition, Middleton has entered into a contract manufacturing arrangement to source a portion of its cigars outside of the United States. Middleton's second quarter adjusted operating companies income of $47 million was down versus the prior year but more than doubled sequentially, while Black & Mild's retail share grew 9/10 of a share point versus last year, supported by new products and brand-building initiatives. In the Wine segment, Ste. Michelle's adjusted operating companies income increased 11.8% in the second quarter and 17.2% for the first half. Wine shipment volume increased 6.3% in the second quarter and 3.5% in the first half. We believe that our business results through June put us on track to achieve our 2011 full year guidance for both reported and adjusted diluted EPS. We expect to deliver adjusted diluted EPS growth of 6% to 9% for the full year in a range of $2.01 to $2.07, off an adjusted base of $1.90 per share in 2010. We also expect to achieve reported diluted EPS in the range of $1.70 to $1.76. Since our second quarter and first half results benefited from trade inventory dynamics and as cigarette trade inventories are depleted in the third quarter, we expect Altria's 2011 fourth quarter adjusted diluted EPS growth to be stronger than the third quarter of 2011. I will now turn the call over to Howard Willard, Altria's Executive Vice President and CFO, who will discuss Altria's business segment results in more detail.

Thank you, Mike. Good morning. In the Cigarette segment, second quarter reported operating companies income increased by 5.9% to $1.5 billion, primarily due to higher list prices and lower restructuring costs partially offset by lower volume, higher FDA user fees and a $36 million charge for the Scott case. Adjusted second quarter operating companies income, which is calculated excluding restructuring costs but including the charge for the Scott case, increased 2.8% to $1.5 billion. Adjusted operating companies income margins were 39.7% including the Scott case. PM U.S.A. grew at second quarter sequential retail share 0.3 share points versus the first quarter of 2011, primarily due to Marlboro's share performance. On a year-over-year basis, PM U.S.A.'s second quarter Cigarette segment retail share declined by 0.9 share points to 49.3% due to retail share declines of 0.7 share points on its portfolio brands and 0.2 share points on Marlboro, as the brand faced a difficult comparison versus its record retail share performance last year. Reported Cigarette segment shipments declined by 0.7% but after adjusting primarily for the trade inventory changes Mike discussed, declined by an estimated 4.5%. PM U.S.A. estimates that the overall cigarette categories adjusted volume declined by approximately 3.5% in the second quarter, which is in line with historical price elasticity. The Smokeless Products segments reported second quarter operating companies income increased by 12.1% to $222 million primarily due to higher pricing, lower SG&A and lower restructuring costs, partially offset by lower volume. Adjusted operating companies income, which is calculated excluding restructuring costs, increased by 10.9% to $224 million. Copenhagen and Skoal demonstrated sequential share momentum in the second quarter, gaining that combined 0.9 share points. Skoal's second quarter retail share declined 0.3 share points year-over-year but increased 0.2 share points sequentially versus the first quarter of 2011. Skoal has gained 0.5 share points since the fourth quarter of 2010. USSTC and PM U.S.A.'s second quarter combined retail share decreased by 0.7 share points versus the year-ago period to 55.1%, as Copenhagen share gains were more than offset by share declines in the rest of the portfolio. Marlboro Snus volume and retail share comparisons were impacted by 2 factors. First, the brand had significantly lower levels of promotional activity compared to last year's national expansion. Second, new Marlboro Snus products launched earlier this year contained 15 pouches per tin compared to 6 pouches per foil pack in Marlboro's other 4 Snus packings. This makes volume and retail share comparisons more difficult since the tin with 15 pouches is considered equivalent to a foil pack with 6 pouches. Reported second quarter Smokeless Products shipments decreased by 2.1% but when adjusted primarily for new product pipeline volume, trade inventories and discontinued SKUs, adjusted volume grew by an estimated 4%. USSTC and PM U.S.A. estimate that the Smokeless Products category grew about 5% in the first half. Middleton saw a sequential improvement in adjusted operating companies income and margins. Adjusted operating companies income margins increased sequentially by 16.2 percentage points to 49.5% as Middleton more efficiently allocated Black & Mild's promotional investments. Black & Mild's retail share performance in the second quarter benefited from brand building initiatives and the launch of untipped cigarillo varieties in both Classic and Sweets Blends. Middleton shipment volume was essentially flat in the second quarter. Ste. Michelle delivered strong financial results in the second quarter as adjusted operating companies income, which is calculated excluding restructuring in UST acquisition related costs, increased by 11.8% to $19 million. The Wine segment shipment volume in the second quarter benefited from higher off- and on-premise channel volume partially offset by changes in trade inventories. The Financial Services segment reported an operating companies loss of $463 million in the second quarter, resulting from the previously announced onetime charge related to the tax treatment of certain leverage leases. Second quarter adjusted operating companies income, which is calculated excluding the onetime charge was $27 million. Altria continued to manage its cost structure, delivering $80 million in cost savings this quarter. We expect to achieve at least $30 million in additional cost savings by the end of the year and are on track to exceed our goal of $1.5 billion in cost reductions versus 2006. Altria also delivered value to shareholders by returning cash to them through dividends and stock repurchases. Altria paid almost $800 million in dividends in the second quarter and $1.6 billion in the first half, reflecting our intention to return 80% of adjusted diluted EPS to shareholders in the form of dividends. Also in the second quarter, Altria repurchased $616 million of its common stock at an average price of $27.07. We intend to complete our previously announced 2011 1 billion share repurchase program by the end of this year but the timing of any share repurchases depends upon marketplace conditions and other factors. Dividends and share repurchases remain subject to the discretion of our board. 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 price cigarette was 34% in the second quarter. Marlboro's net pack price in the quarter was $5.63 while the lowest effective price cigarette was $4.20. The cigarette discount category second quarter retail share was 27.3%. There were no cigarette excise tax increases effective in the first half of this year. Effective July 1, 3 states: Connecticut, Hawaii and Vermont increased their excise taxes, while New Hampshire lowered its excise tax by $0.10 per pack. As a result of this activity, the estimated weighted average cigarette state excise tax at the beginning of the third quarter was $1.37 per pack. Copenhagen second quarter retail price was $4.17, and its price gap versus the leading discount brand was approximately 44% in the quarter. As of June 30, 2011, 20 states in the District of Columbia used a weight-based smokeless tobacco excise tax system, representing approximately 31% of the Smokeless Tobacco categories volume. CapEx was $27 million in the second quarter, and we anticipate that our 2011 full year CapEx will be approximately $160 million. And finally, depreciation and amortization was $61 million in the second quarter, and Altria anticipates that its 2011 full year ongoing depreciation and amortization will be approximately $250 million. Operator, do we have any questions?

[Operator Instructions] Our first question comes from David Adelman with Morgan Stanley.

Mike, on UST, now that you've owned that business for 2.5 years. Can you put into context the overall performance, the margin structure, the market shares and market share trends versus where you had forecasted it in the acquisition plan?

Well, I would say in general, the trends are in line with what our expectations were, although a lot of things have changed since we put together the initial acquisition model, not the least of which was we entered into a pretty significant recession. But I think that in general, what we were looking for was a focus on the premium brands, Copenhagen and Skoal, cost reduction, significant cost reduction to fund it, getting in line the price gaps, so that these premium brands could grow. And then kind of a Phase 2 approach, which includes looking at efficiencies, rationalizing the total portfolio, so that it can become more efficient. So that over time, we're really focused on what we think are the key growth levers in that business. And I would say we're making progress in line with what our expectations were. We did Copenhagen first and now we've moved to Skoal, Copenhagen remains on a nice growth trend. And I think while it's early on Skoal, the signs are right. We still have some remodeling to do with that franchise. It has a lot of SKUs and so we're -- as we adjust the franchise, we’re also pruning some of that, so we'll continue to have some effect from that kind of activity and we're also migrating share a bit from the discount portfolio that had been built up in USSTC before we acquired it. I think on top of that, you have this Snus phenomena, which is -- kind of adds a bit of complexity to reading the data on the overall Smokeless business and that's still evolving. And I don't know exactly where that's going to go longer term at this point. I tend to see more interaction relative to total pouch segment of the total Smokeless business, which would include Snus and MST pouches. As time goes on, more so than seeing Snus as kind of a separate business relative to the MST pouches business, which is larger. So that's still going to shake itself out. But all in all, we're trending in line with where we expected to trend and the margins are performing well. The business is performing well. The shares are moving in the right direction on Copenhagen and Skoal, and the cost side of that business has come in the line quite nicely with some more opportunities, I think, in front of us. So I'd say that's where it stands right now.

Okay. And then if I could do one other quick question, Mike. What are the factors that lead you to expect stronger earnings per share growth in the second half of the year, particularly given the fact that you're obviously coming into a period with higher trade inventory levels in cigarettes?

Well, inventories are always complex to look at. You have to look at them -- you have to look at what occurred in the prior year, as well as look at what's occurring in the current year to understand the effect. But we also went up against a pretty good hill relative to comparisons last year when we introduced Marlboro Special Blend. So we had a lot of activity on Special Blend and we had some tough comparisons this year on the Smokeless business. So I think when we look at the year originally, it appeared to us that the first half comparisons would be more difficult than the second half, and that's why I think we're feeling pretty comfortable that we're in line with what our guidance spells out.

Our next question comes from the line of Nik Modi with UBS.

Just a couple of quick questions. I just want to get some thoughts on the Marlboro leadership price program, since you launched that during the quarter, how is that kind of played out? And was it a net price, a boost for a net price drag in the quarter? And any perspective on that would be helpful.

Well, as I said before, this is kind of an evolution of a program approach that we've had for a decade or more now. So what happens when we make evolutionary changes in these programs is we always have a group of customers that jump on them immediately, and then we have other customers who don't see that program as a strategic fit for their business, and then we have customers who watch what happens in the marketplace and come on to the program over time. I would say in this particular case we've had broad acceptance and participation in this program and that, that's occurred pretty rapidly. The program that we currently have, as well as the ones in the past have always been created to help retailers use Marlboro as a competitive tool, and so that's what this does and so we've seen some competitive increase, competitive activity increase, relative to Marlboro leadership. I think that we saw some margin creep on Marlboro in the back half of last year, as some retail margins expanded more on Marlboro than it did on other brands in the category. It looks to us like in the second quarter that it came back in line with where it was prior to that creep occurrence. So the gap for Marlboro versus the lowest in the second quarter of this year was identical to where it was in the second quarter last year. And so that's been the impact. I mean this is something that we're always paying attention to. We evolve these programs. We'll evolve this one as time goes on. But so far, it's pretty much in line with what we would have expected it to do and it's pretty consistent with the way these programs have functioned in the past.

And then just on the revenue per pack impact, was this -- in the quarter, was it a help or a drag on the net pricing?

Well, I would say, relative to the cost side of our business, really, it didn't have any impact. So it's transitioned from one program to another. And when you look at our total value spend, as a percentage of our total revenue, that's remained pretty flat as well both for the quarters relative to previous year. So I can't tell you that, that carves out a significant impact. More the impact is really in how retailers have chosen to compete in the marketplace.

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

My first question has to do with the Other Premium segment of your cigarette portfolio. Admittedly, it is small. But we saw some evidence in the quarter of increased promotion, and it piqued my interest that you guys are calling out the percent of your cigarette shipments that skew to premium. Does that mark at all a slight change in the way that you guys are thinking about managing your total cigarette portfolio with an emphasis not only on Marlboro but also on other premium brand?

No. I don't know what you're referring to, but no, I wouldn't suggest that to you at all.

Okay. Fair enough. The second question that I have is with respect to the Skoal destocking that occurred in the quarter. When was that announced to the trade, please?

Well, what we did was we launched some new SKUs and then after we launched those new SKUs, we went about delisting some SKUs that we had planned on delisting, so we kind of let one pick up the slack for the other. We have some SKUs that -- and if you look at them collectively, they had reasonable distribution. But if you look at them individually, they don't. So they're not very efficient. And some of that is due to the way the Skoal portfolio had been developed over time. So we're doing a remodeling of that. All of that took place at the beginning of April but it unfolds over a little bit of time in the marketplace, as you might expect.

Absolutely. And my last question on a related note is, if you look at the Marlboro portfolio, are there any individual SKUs that you would characterize kind of look similar to the full SKUs that you delisted, i.e., are there any opportunities to sort of rationalize the portfolio on Marlboro?

Well, we look at that all the time in the Cigarette business. That's a regular cycle of analysis and the brand always has that on its agenda every year. I can’t speak to any particular SKU. In that business, all of these SKUs tend to be pretty profitable. So I can't suggest to you one that's a target, but it is a subject that we review regularly not just for Marlboro but across the portfolio, and we have done some delisting over time but like I said, most of them are profitable. So we only do that when it doesn't -- when it makes good sense to do it.

Your next question comes from the line of Bonnie Herzog with Wells Fargo.

I just have a couple of questions. Just first in terms of the inventory trade distortions that you mentioned, can you give us an idea of how much Marlboro shipment volumes would've been down in the quarter if you make the same adjustment to it for the trade inventory building?

I can't. Not off the top of my head.

All right. Then let's talk about the Marlboro sequential retail share gains in the quarter. Can you give us an idea if the majority of these gains were primarily from new line extensions on the brand or styles that might be promoted more heavily? Do you have a sense of what was driving your retail share gains?

Well, I think that, if you look at the brand's portfolio, what you'll see is that we've experienced growth in menthol. That's been going on for a while. We also, over time, launched some new blends on Marlboro that are designed to appeal to competitive adult smokers, non-menthol competitive adult smokers and we would expect to get some growth from that portfolio as well. And so because menthol is a place where we're underdeveloped and because to attract competitive premium smokers, you have to give them an offering that they find appealing. We use some kinds of promotion activity on these brands to -- on these SKUs, to go ahead and reach out to those folks. But I might point out to you -- so we'd expect to see growth from those particular areas. But I might point out to you as I said before, in the context of all that, the mix and Marlboro hasn't changed, its percentage of that business in terms of value spend of its revenues remains relatively low versus most competitive brands and in fact, is pretty constant. So this isn't a big mix shift for us because we don't promote all of these things, all the time. We use some strategically. So I don't know if that specifically answers your question, but I think that's the appropriate way for you to think about it.

Okay. Now that's helpful, I appreciate it. And then just one final question on your MLP program. I was just curious, if you can tell is approximately what percentage of your Marlboro volume is part of this program?

We don't give out that information.

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

Mike, just in terms of the cigarette category, the Premium segment, as you pointed out has been pretty resilient in this difficult economic environment. Can you foresee that changing in any way and is there a risk that the price gap between Premium and the Discount segment, which is I guess already at a below the historical level need to be at even there or to kind of sustain the Premium segment momentum?

It seems to be sustaining just fine where it is, so I think that actually the stability between premium and discount, if you go back and look at it is pretty consistent for about a 15-year period now. So I think that there's no trend there. It's a pretty solid ratio, and we've been consolidating. If you look at our long-term growth trends, I know people have some difficulty looking at short-term comparisons and trying to figure out what the long-term growth trends are but we do figure them out. What you see is that Marlboro has been consolidating share in the Premium segment, so it's -- business comes from people who are more inclined to smoke a high-quality premium product. And I don't see anything changing that. I do think that particularly in tough economic times, you have to be thoughtful about how you manage your value equation and that includes how you manage your gap relative to the market. And keep in mind the reason why the gap percentage is lower now than it was is because of the FET. That FET is a mathematical adjustment that took a mid-40s gap down to a mid-30s gap, just do to the math, okay? So I think that, that all occurred at the same time that we went into some tough economic times. But nonetheless, that's how that gap got to the mid-30s from the mid to lower-40s. So no, I think that, that's something that you have to pay attention to, but the Premium segment looks pretty healthy and Marlboro is very healthy within it.

Okay. And then on the Smokeless side, so it looks like category growth slowed down a little bit to about 5%. I guess the last couple of years, it's been running up 6%, 7%. Just wondering what's driving a bit of a moderation in terms of the category growth there?

Well, I sometimes hesitate to even include quarterly category growth trends because, frankly, category growth trends don't operate on quarterly curves. They tend to be much longer term in their movement. So I wouldn't get too caught up with it. I think you saw some moderation in the decline rate in the Cigarette business. You also saw a comparison versus a period where you had a high degree of activity, introductory activity on Snus. So all of those are little factors in the quarter's numbers but they aren't by any means indicative of any long-term trend issue. So I wouldn't get too caught up in that.

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

I have a couple of clarifications for Mike. First thing on your guidance. Just to understand, your guidance is unchanged for the year despite greater debt now taken on in the second quarter and also includes the Scott charge, as well as the expected inventory depletions in the third quarter. Is that fair?

That's correct.

Okay. The second clarification on the Marlboro Snus. Your press release indicated that the brand saw some tough comps against promoted volumes, as well as the national rollout but your commentary also suggested the volumes in the pack, the greater pouches per tin versus the foil, which also had an impact on the volumes. Is that right?

That's correct. We moved from a pack or we actually introduced some new SKUs that actually have 15 pouches, which is consistent with competitive pouches and consistent with Skoal Snus, while all of the packings on Marlboro Snus to that point had 6 pouches in them, they were smaller packets. The smaller packets are still out there but the introductory activity and much of the business is shifting to the 15 pack or 15 pouch package.

Okay. So the underlying trends or maybe just some commentary on the brand and the category, the level of spending required. How do you see the Snus category here evolving relative to your expectations?

Well, as I mentioned, I think it's increasingly difficult to segment out the Snus segment from pouches in general and the Smokeless business. And so as we get more time on this business, we're beginning to understand it in greater detail and understand the consumer dynamics, and who the consumers are for these products and recognize that whenever there's a lot of promotion activity of the type that is taking place on Snus, you'll have some transference of consumption that takes place simply because of the level of the deal activity that is there and I think we saw some of that between MST pouches, which were the largest player relative to the Snus business, which is all pouch business. So we'll continue to monitor this. I have some thoughts about whether or not we ought to really just be paying attention to pouches in general, and then there are different types of pouches in the marketplace but we're still evaluating that.

Okay, got it. Then a question on cigars. It looks now that you're certainly being proactive in looking at overseas contract manufacturing. What's the timing on this? When do you expect this to kind of show up in your business and what kind of impact could that have on the profits?

Well, I'm not going to try and project the impact on the profits but we should be realizing shipments and impact on the offshore manufactured Cigar business prior to the end of the year.

Okay. And then just last question on cost savings, which came in pretty nicely in the quarter. Was this accelerated purposely or not purposely, and where would a lot of those cost savings have found themselves in the business? It's just across tobacco or in one segment in particular?

Yes. I think they were really across the business, and a big part of the cost savings in the second quarter was related to SG&A expense, which then gets allocated across all the businesses. And you're correct in that we had quite a significant reduction here in the second quarter. But if you look at history, the cost savings tend to come through a bit unevenly by quarter, and we continue to feel we'll be on track and we'll probably even exceed a little bit our $1.5 billion cost reduction target by the end of this year.

Your next question comes from the line of Chris Growe with Stifel, Nicolaus. Christopher Growe - Stifel, Nicolaus & Co., Inc.: I had just a question for you, a bit of a follow-up on Marlboro Menthol, it seems like -- it sounds like it performed well in the quarter, obviously menthol has been advantaged overall. Do you think that you gained share in menthol in the quarter?

Well, we gained share on menthol in the half and I think we did in the quarter, yes. Christopher Growe - Stifel, Nicolaus & Co., Inc.: Okay. And then I was curious -- and as a bit of a follow-up to Christine's question on your offshore production for cigars. Is there a certain percentage of your production, maybe you don't want to give that or is it -- maybe this is more related to new products or just trying to get a scale of how much this could really shift your production?

Well, we're going to have some production offshore for some SKUs in our volume lineup. We're not certainly not getting our production here in the U.S. We continue to have strong production up in Pennsylvania. So it's a portion. We will have some offshore capacity variability that we can use based on what we think is appropriate. But it's a portion of our business. Christopher Growe - Stifel, Nicolaus & Co., Inc.: Okay. And then the final question I had for you, just to understand for the Skoal business, the Skoal brand, how much of that business is sold in pouches, maybe that is being a little bit more negatively affected by the success of Snus?

Well, I can't give you the number off the top of my head but Skoal has the largest pouch business in the Smokeless business overall, so it does have a large pouch business.

Your next question comes from the line of Ann Gurkin with Davenport. Ann Gurkin - Davenport & Company, LLC: I was just wondering if there any additional takeaways you can share with us on results from the increased brand building behind the MST business in Q1. I know you touched on a little bit but any -- we saw sequential improvement in volume but were the programs in line with expectation, do you need to change on and can you give us any color?

No, I think it's pretty much doing what it's supposed to do. I think it's still early on Skoal X-tra, so it's a little bit tough to reach Skoal X-tra, while we're washing out the delisted SKUs. But we're optimistic about it at this point, and Copenhagen is doing very well. So it's pretty much in line with what we expected. Ann Gurkin - Davenport & Company, LLC: Great. And then secondly, as you think longer term for the business, Mike, are there any opportunities out there that you could add to your portfolio? Are there any areas where you could build the business? How can we think about gross longer term for Altria? Can you help me at all with that question?

I'm sorry. Give me your question again. Ann Gurkin - Davenport & Company, LLC: As you think longer term for the business, are there any areas or any opportunities that you think you could add to Altria? Any areas where you could build the business?

Beyond smokeless cigars, wine and cigarettes? Ann Gurkin - Davenport & Company, LLC: Or within those categories.

Well, as I said before, we continue to work in the area of alternative products for cigarette smokers, so we do think that's an opportunity and we do have several projects underway in that particular area.

Your next question comes from the line of Edward Santevecchi with Nomura.

Now that the revolver has been taken care of and the share buyback program is underway, could you comment on your plans for the capital structure going forward, and just how you guys plan on balancing debt repayment with share repurchases?

Well, I think we've communicated about this before. We are focused on reducing our interest costs but I think as we've looked at some of the maturities we have coming up here over the next couple of years, we entered the debt market this year really to be opportunistic in taking advantage of low rates. And right now, I think our plans had been communicated for this year. We're well into our $1 billion share repurchase program and certainly the debt we've taken on this year and last year is at a substantially lower rate than the debt that was issued around the UST acquisition.

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

Well, I just wanted to ask, Mike, a follow-up question with respect to the FDA and menthol. Are you surprised or what do you read into the fact that the FDA intends to have its own assessment of the menthol science both peer reviewed and then published in the Federal Register? Was that what you had envisioned that they would do?

Well, I don't know that we envisioned what they would do. But I would say that, that is not an unusual process in the FDA and other areas. So it is not without precedent that the FDA does, in fact, sometimes go out and have work peer reviewed and published as a part of being thorough in terms of their scientific analysis on a particular subject. So it wasn't a surprise to see that. We knew that was a methodology, a process that's used sometimes by the FDA to make sure that they are happy with the science and evidence that they're utilizing to make regulatory decisions.

[Operator Instructions] Your next question comes from the line of Graig Saloom with Citigroup.

I'm actually not a media representative. I work in our municipal securities division. I would like to ask 2 questions. First, do you see any meaningful positive or negative impact to shipment volumes from New York's recent enforcement of its August 2010 sales tax laws with respect to certain tribal sales? And 2, can you comment at all on the status of the NPM dispute under the MSA and the recent draft memorandum of understanding that was out in the market at the end of May?

Well, on first question, just for perspective, we had ceased shipping actually to wholesalers that were the primary supply chain that you're referring to relative to New York back in 2008. So we didn't really have any impact on our shipments because of that. I can't tell you longer term as that systemic change takes hold to what the impact might be, but we had operated outside of that system for a while. So it didn't really have any short-term impact on us at all. Relative to the other question, the NPM dispute, that's been going on for a long time. We've now entered into arbitration on the first year of that, which is in 2003, which is a by-year arbitration that takes place sequentially. So some point, 2003, you'll get completed and then we'll move on to 2004 and so on. There have been conversations with the states on this subject for a long time. So I would say it's probably going to continue to play out over an extended period of time. I can't provide much other insight than that.

You cannot comment on the draft MOU?

What's the MOU?

The memorandum of understanding.

The memorandum of understanding, I can't. I just don't -- I don't know that, that's got a lot of bearing on this situation. A complex situation with lots of different states with different issues, different motivations, and it's a complex issue. I suspect, played out over an extended period of time thus far. It wouldn't surprise me if that continues to be the case.

[Operator Instructions] At this time, we have no further questions. I would like to turn the floor back over to Mr. Brendan McCormick for any closing remarks.

Thanks, everyone, for joining the call this morning. This concludes today's call.