Altria Group, Inc. (MO) Q4 2011 Earnings Report, Transcript and Summary

Good day, and welcome to the Altria Group 2011 Fourth Quarter and Full Year 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. [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 business results for the fourth quarter and full year and will not be discussing the status of tobacco litigation. Our remarks contain forward-looking and cautionary statements and projections of future results, and I direct your attention to the forward-looking and cautionary statement section at the end of today's 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 is available on our website, altria.com. Altria reports its financial results in accordance with U.S. generally accepted accounting principles. Altria's management also reviews operating companies income, operating margins and EPS on an adjusted basis, which excludes certain income and expense items that management believes are not part of underlying operations. Last month, Altria announced that it would also include charges for tobacco and health judgments from adjusted financial calculations. References to adjusted financial calculations on today's call reflect this redefinition. Today's call also contains 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, everyone. Altria has delivered strong returns for its shareholders in 2011 in a challenging business environment, while taking steps to continue creating shareholder value into the future. Altria grew its adjusted diluted earnings per share by 7.9%, which is consistent with adjusted EPS results over the past few years. Altria delivered total shareholder return of 26.9% in 2011, outperforming the return of the S&P 500 for the 12th consecutive year. Dividends remain an important component of Altria's shareholder return. The company paid out approximately 80% of its adjusted diluted EPS in dividends and increased its dividend by 7.9% in August. Altria also repurchased $1.3 billion of its shares in 2011 at an average price of $26.91 per share. Altria intends to complete the balance of the October 2011 $1 billion repurchase program by the end of 2012, subject to the discretion of the Board. Altria completed its previously announced $1.5 billion cost-savings program ahead of schedule in the third quarter of 2011. Following the completion of this program, we announced a new program that we expect to deliver annualized cost savings of $400 million versus previously planned spending by the end of 2013. Altria continues to focus on developing lower-risk products that appeal to adult tobacco consumers. To support this goal, Altria Client Services has entered into an agreement with Okono, an affiliate of the Danish company, Fertin Pharma, to develop innovative noncombustible-nicotine-containing products for adult tobacco consumers. Fertin is a global leader in the development and manufacture of nicotine gum with additional capabilities and other products and technologies. This new product initiative combines the expertise of the Altria family of companies with Okono and its affiliates, product development and manufacturing capabilities. Altria's operating companies delivered strong 2011 profitability. Adjusted operating companies income and margins grew in cigarettes, smokeless products and wine. These gains were partially offset by declines in adjusted operating companies income in cigars and financial services. Earnings from our equity investment in SABMiller also contributed to Altria's profitability. PM U.S.A. continued to focus on maximizing income from its cigarette business while maintaining modest share momentum on Marlboro over time. In 2011, higher pricing and effective cost management helped PM U.S.A. grow its adjusted operating companies income and margins, which exclude the impact of restructuring charges and tobacco and health judgments. Marlboro retained some of its strong share gains that contributed to a record retail share performance of 2010, as its full year share in 2011 is higher than its 2009 share. Marlboro's retail share gains 2010 were exceptionally strong due to an attractive introductory offer on Marlboro’s Special Blend. Marlboro share decline in 2010 versus 2010 reflects PM U.S.A.'s focus on growing income and margins and not building the brand on price promoted share. Marlboro's underlying brand equity remains strong. Price gaps continue to be stable, and retail share deviations that Marlboro experienced in 2011 were driven by short-term, year-over-year changes in promotional spending in the marketplace that influence promotion-sensitive adult consumers. PM U.S.A.'s income and margins benefited from our continued focus on equity-driven premium brands. Premium brands represented over 93% of PM U.S.A.'s cigarette shipments last year, a much higher premium mix than its competitors. Marlboro plans to continue to focus on brand-building initiatives and equity-enhancing new products and programs in 2012. PM U.S.A. recently launched Marlboro Black with packaging in non-menthol and menthol varieties to distinguish the product's bold flavor. Marlboro has other exciting plans for 2012 and 2013, some of which we will share at the CAGNY conference. In the smokeless products segment, USSTC and PM U.S.A. delivered strong full year adjusted operating companies income growth behind Copenhagen and Skoal. On a combined basis, Copenhagen and Skoal grew their volume faster than the category and gained retail share in 2011. Copenhagen had a very strong volume and share performance last year, as the brand benefited from continued momentum from new products introduced over the past few years as well as Wintergreen Pouches introduced in 2011. Skoal grew its volume behind the launch of Skoal X-tra varieties and 2 new Skoal Snus products. The brand's full year retail share declined as share losses, including those from 7 SKUs delisted in the second quarter of 2011 offset gains from Skoal's new products. This SKU delisting will continue to impact Skoal's retail share performance comparisons in the first half of 2012. However, we believe that the actions taken on Skoal during 2011 have stabilized the brand and positioned it for growth. In the cigar segment, Middleton made significant progress during the year to improve its competitive position in a marketplace where low-priced imported cigars continue to grow. Middleton's income and margin performance was much stronger in the second half of 2011 compared to the first half, driven by more efficient promotion of Black & Mild. New products and packaging enhanced Middleton's competitive position in the untipped cigarillo segment where it is not historically focused. Black & Mild introduced untipped Sweets, Classic and Wine varieties last year, as well as a new Aroma Wrap foil pouch packaging. Middleton also began shipping cigars manufactured under its overseas contract manufacturing arrangement during the fourth quarter of 2011. In the wine segment, Ste. Michelle delivered excellent full year operating companies income growth while expanding its adjusted operating companies income margins. Wine shipment volume growth was also strong, as Ste. Michelle expanded the distribution of its premium products. Altria forecasts its 2012 adjusted diluted EPS will increase by 6% to 9% to a range of $2.17 to $2.23 from an adjusted base of $2.05 per share in 2011. We also expect to achieve reported diluted EPS in the range of $2.14 to $2.20 per share. Today, we also announced that I have informed our Board of my intention to retire as Chairman and CEO, effective immediately following this year's annual meeting of shareholders on May 17. It has been an extraordinary experience to lead the reshaping of Altria, following the completion of the Kraft and Philip Morris International spinoffs. I believe the company is well positioned to continue to prosper. As I near retirement, now is the time to transition leadership to people of an age to guide the company through its next phase of growth. I am very pleased that our Board has elected Marty Barrington to succeed me as Chairman and CEO upon my retirement. And I am equally pleased that they have elected Dave Beran to work with Marty as President and Chief Operating Officer, effective at the same time. Marty has held various roles in the Altria family of companies since 1993, including Vice Chairman and Chief Compliance Officer and as General Counsel of both PM U.S.A. and Philip Morris International. And these and other roles, he has participated in the work of virtually every business function of the Altria family of companies through direct business responsibility for regulatory and external affairs; research and development; human resources and compliance, as well as working closely with marketing, sales, strategy and business development and operations. This unique background gives the Board and me, personally, great confidence in his ability to lead Altria's businesses going forward. Moreover, I believe the combination of Marty's expertise, Dave's extensive operations, marketing and financial background and the talents of the rest of the Altria leadership team will create the strongest executive team among consumer packaged goods companies. I will now turn the call over to Howard Willard, Altria's Chief Financial Officer, who will discuss Altria's business results in more detail.

Thank you, Mike. Good morning, everyone. The cigarette segment's reported operating companies income results for the fourth quarter were negatively impacted by higher restructuring charges related to the cost reduction program we announced in October and adverse judgments in the Bullock and Williams cases that we announced in December, partially offset by higher list prices. Reported operating companies income for cigarettes decreased 5.4% for the fourth quarter. Cigarette segment operating companies income for the full year increased 2.3% to $5.6 billion on a reported basis, primarily due to higher list prices partially offset by lower volume, higher restructuring charges associated with our new cost reduction program, charges related to adverse judgments in the Bullock, Scott and Williams cases and higher FDA user fees. Excluding charges for restructuring and tobacco and health judgments, adjusted cigarette segment operating companies income grew 13.7% for the fourth quarter and 5.2% to $5.9 billion for the full year. PM U.S.A.'s focus on margin expansion helped drive these results. PM U.S.A. grew its 2011 adjusted operating companies income margins by 3.2 percentage points for the fourth quarter and 1.8 percentage points for the full year, bringing its adjusted margin for the full year to 40.2%. PM U.S.A.'s reported cigarette shipment volume declined 4% for the full year and was also down an estimated 4% when adjusted for trade inventories and one less shipping day. PM U.S.A. estimates that the total cigarette categories adjusted volume declined 3.5% in 2011, the lowest decline rate since 2006. PM U.S.A. believes that the historical price elasticity estimated at negative 0.3 remains unchanged and that the secular decline rate, which reflects societal trends in adult consumers shifts from cigarette to smokeless and other tobacco products, has been stable for several years. PM U.S.A.'s volume in the fourth quarter increased by 0.2%, primarily due to trade inventory dynamics and retail share gains for L&M, partially offset by retail share losses on Marlboro and its other brands as well as one less shipping day. Marlboro's fourth quarter and full year retail share declined 0.7 and 0.6 share point, respectively, from its strong retail share performance in 2010. PM U.S.A.'s decision not to build Marlboro share on price promoted share is reflected in both PM U.S.A.'s strong margin performance and Marlboro's retention of some but not all of the 0.8 share point that the brand gained in 2010. Marlboro's full year retail share of 42% continues to reflect the brand's strong position across multiple flavor segments. PM U.S.A.'s fourth quarter retail share decreased 0.4 share point, as share losses from Marlboro and other premium brands were partially offset by discount share gains driven by L&M. PM U.S.A.'s full year retail share declined 0.8 share point. The smokeless products segment reported fourth quarter and full year financial results were negatively impacted by higher restructuring charges associated with our new cost reduction program. Fourth quarter income, margin, volume and retail share comparisons were also impacted by higher 2011 fourth quarter promotional activities versus lower levels of promotions in the fourth quarter of 2010 due to the rollout of an enhanced retail platform. Reported operating companies income for the segment decreased 8.3% for the fourth quarter primarily due to higher restructuring charges and higher promotional costs, partially offset by higher pricing and volume. For the full year, reported operating companies income increased 7% to $859 million primarily due to higher pricing and volume, partially offset by higher restructuring charges. Excluding restructuring and acquisition-related charges, fourth quarter adjusted operating companies income for the smokeless products segment increased 3.6%. Fourth quarter operating companies income margins decreased 1.9 percentage points to 59.3%, reflecting a difficult comparison to the fourth quarter of 2010 when lower promotional activity boosted margins. Adjusted operating companies income for the smokeless products segment grew a strong 7.7% to $896 million for 2011. Adjusted operating companies income margins also grew for the full year, increasing 1.5 percentage points to 59%. Copenhagen and Skoal's combined shipment volume grew 6.5% for the full year. Copenhagen benefited from new products introduced over the past few years including Copenhagen Long Cut Wintergreen, Long Cut Straight, Extra Long Cut Natural and Wintergreen Pouches. Skoal's volume also benefited from its new products: Skoal X-tra and Skoal Snus, partially offset by the delisting of 7 SKUs in the second quarter of 2011. Total smokeless products volume for the full year increased 1.4%, as gains for Copenhagen and Skoal were partially offset by declines in other portfolio products including non-focused brands and Marlboro Snus. Marlboro Snus' volume was negatively impacted by significantly lower levels of promotional support compared to its national launch in 2010 and the shift in mix from packages with 6 pouches to tins with 15 pouches. Fourth quarter smokeless products shipment volume comparisons were favorably impacted by reduced promotional activities in 2010. Copenhagen and Skoal increased their combined shipment volume by 13% for the fourth quarter, while total smokeless products volume increased 9.7%. After adjusting for changes in trade inventories, USSTC and PM U.S.A.'s 2011 fourth quarter and full year combined smokeless products shipment volume was estimated to be up 6% and 4%, respectively. USSTC and PM U.S.A. believe that the smokeless category's full year volume grew at an estimated rate of 5%. Retail share comparisons for the fourth quarter were favorably impacted by the promotional dynamics I discussed earlier. Copenhagen and Skoal's 2011 combined retail share increased 2.4 share points to 49.9% in the fourth quarter and grew 1 share point to 49% for the full year. Copenhagen's 2011 fourth quarter and full year retail share increased 2.4 and 1.5 share points, respectively, as the brand's retail share results continued to benefit from new products. Skoal's retail share was flat for the fourth quarter and down 0.5 share point for the full year, as share losses including the impact of SKUs delisted in the second quarter of 2011 were partially offset by share gains on new products. Fourth quarter retail share for the total smokeless products segment increased 1.1 share points, as gains for Copenhagen were partially offset by losses on other portfolio products. Segment share for the full year decreased 0.1 percentage point, as declines on other portfolio products in Skoal were mostly offset by gains in Copenhagen. Middleton's fourth quarter operating companies income and margins improved significantly versus the same period in 2010 when Black & Mild made promotional investments to defend its competitive position in the marketplace against low-priced imported cigars. Reported operating companies income increased 85.7% for the fourth quarter primarily due to lower promotional spending and higher list prices, partially offset by lower volume and higher restructuring charges in connection with the new cost reduction program. Excluding the impact of restructuring charges, fourth quarter adjusted operating companies income grew 95.5%, and adjusted operating companies income margins grew 16.8 percentage points to 47.8%. As Mike mentioned earlier, Middleton's income and margins were stronger in the second half of 2011 compared to the first half. Full year reported operating companies income decreased 2.4% primarily due to costs related to manufacturing infrastructure upgrades and new product costs, partially offset by higher list prices. Adjusted operating companies income decreased 1.2% for the full year to $167 million, and adjusted operating companies income margins decreased 2.2 percentage points to 46.4%. Middleton's 2011 full year reported cigar shipment volume was unchanged, while fourth quarter volume decreased 5.6% primarily due to changes in trade inventories. Middleton believes the wholesalers depleted Black & Mild cigar inventories built in the third quarter following Middleton's December list price increase. Black & Mild delivered strong retail results for both the fourth quarter and full year. Fourth quarter retail share of machine-made large cigars increased 0.9 share point to 30.8%, and full year share increased 0.5 share point to 29.5%. Black & Mild's retail share benefited from the introduction of new untipped cigarillos that Mike mentioned earlier. The wine segment reported strong operating companies income and volume results in 2011. The wine segment's reported operating companies income increased by 23.3% for the fourth quarter and by 49.2% to $91 million for the full year. Excluding restructuring and acquisition-related costs, adjusted operating companies income for the wine segment was unchanged for the fourth quarter and up 14.5% to $95 million for the full year. Ste. Michelle's 2011 wine shipments grew by 10.9% in the fourth quarter and 9.6% for the full year, as the company continued to focus on expanding its distribution of its premium products. The financial services segment's 2011 fourth quarter operating companies income was $10 million, reflecting a $60 million increase in the allowance for losses related to the bankruptcy filing by American Airlines. For the full year, the segment reported an operating companies loss of $349 million primarily due to the 2011 second quarter charge of $490 million related to certain leveraged lease transactions and a $25 million net increase in the allowance for losses, partially offset by higher lease revenues, which included gains on asset sales. Full year adjusted operating companies income for the segment, which is calculated excluding the impact of the leveraged lease charge decreased $16 million to $141 million. 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 35% for both the fourth quarter and the full year of 2011. Marlboro's net pack price was $5.73 in the fourth quarter and $5.70 for the full year, while the lowest effective price cigarette was $4.24 in the fourth quarter and $4.22 for the full year. The cigarette discount categories retail share was 28.1% for the fourth quarter and 27.8% for the full year. The estimated weighted average cigarette state excise tax at the end of the fourth quarter was $1.37 per pack, unchanged from the third quarter and up $0.01 from the fourth quarter of 2010. Copenhagen's retail price was $4.18 for both the fourth quarter and full year, and it's brand's price gap versus the leading discount brand was 42% for the fourth quarter and 43% for the full year. CapEx was $30 million for the fourth quarter and $105 million for the full year. Ongoing depreciation and amortization was $69 million for the fourth quarter and $253 million for the full year. Operator, do we have any questions?

[Operator Instructions] Our first question comes from Christina McGlone-Hahn with Deutsche Bank.

I guess, first question, just in terms of the wording with regard to the 2012 Marlboro strategy, it seems like you've been trying to balance share with profit growth, and it looks like, just from hearing the comments, that 2012 may be more tilted towards share growth. And I just was wondering if you could comment on that and then maybe talk about some of -- when you talked about Marlboro Black, is that nationwide? Is that positioned like Special Blends? Or is it positioned differently?

Well, Marlboro Black is nationwide, and it's positioned as Marlboro Black. Relative to plans for Marlboro in 2012, from a forward-looking point of view, we've provided EPS guidance. We don't like to get into the detail of how we're going to deliver what we think we're going to deliver for competitive reasons, but at CAGNY, we will provide some additional context regarding our thinking about Marlboro when some of the things that we're looking at relative to the brand as we go forward through 2012 without providing too much information from a competitive point of view.

And when I think of -- about cash flow, if -- with the $500 million pension contribution -- and I'm sure -- I think that there will be a LILO/SILO payment this year. I don't know if that's definitive or not, if we should be building something like that in. But given the 2 of those, would that basically limit your ability to go beyond the $1 billion share repo already announced?

Yes, I think as you look at our balance sheet, we continue to have a strong balance sheet and strong cash flow. With regard to our share repurchase program, I'm not going to comment on an activity beyond the program that we've currently announced.

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

My first question has to do with the portfolio mix. I mean, to be sure, the fact that you've held onto as much of the 2010 share gains from Marlboro is certainly a good thing. But from my perspective, I'm a bit encouraged by the discount volume growth. As we look out to 2012, can you talk a little bit about how you see your portfolio mix in cigarettes evolving?

Well, I think nothing's changed from a strategic point of view for us. We're focused on premium brands. This year, L&M recovered a bit of the share that basically got lost. Our objective there is to kind of hold our position in the discount segment and transition it to L&M as a brand. So some of that occurred, but our absolute share of the discount business has remained pretty constant over the past few years, as we've kind of ceded some share on basic and recovered some of that on the L&M. You shouldn't read any into that, any suggestion of strategic change.

Understood. In terms of the new partnership that you announced this morning, can you give us any color on when we might see some new product innovations come out of that and whether that you would be Marlboro branding or branding under any other brand in your portfolio?

Well, I'll tell you what, I don't think I'm going to comment on it any further right now. At CAGNY, we'll talk a bit more about our relationship and the whole subject of alternate [ph] products for tobacco consumers. And so I'd suggest that you wait until that point before we communicate any further on the subject.

Okay that's great. And just last -- one last more if I could. Could you offer some color on your outlook for SET and FET increases in 2012?

Well, we always view that as a risk to the business, and so it's an area where we have to be prepared to participate and we do. It's an election year. Sometimes that makes it a little bit more difficult to call. So we'll see. Right now, we're just watching to see what kind of activity might emerge so that we can be prepared to deal with it appropriately.

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

There's 3 things I wanted to ask you. First, do you think Marlboro can profitably grow share? And what's your response to, I think, the concern in the investment community that if the brand doesn't grow, you'll resort to higher levels of promotional spending?

Well, look. We've been pretty clear with our position relative to the cigarette business. We believe that the appropriate strategy in the cigarette business is to maximize profitability but maintain modest momentum on Marlboro because we want to have sustainable profit growth. So I believe that our cigarette position is very good in that regard that as I explained in my remarks, I think share deviations on Marlboro this year really have more to do with differences in promotion spending and timing, both ours and competitive activity and that it's to be expected to have some of those kinds of share deviations particularly in this kind of economic environment where you have a certain segment of your consumer base that is more price sensitive and is more volatile relative to shopping and relative to promotion activity you see in the store. I think Marlboro's held up very well in that environment. Price gaps have remained stable throughout that environment. The brand was able to contribute to expanded margins at Philip Morris U.S.A. And I think it's well positioned, as I said in my remarks, to go into 2012. So we look at this on a long-term basis. We think that based on the guidance we provided that we can continue to deliver a solid growth rate in EPS to our shareholders and that Marlboro will be a part of that proposition.

Okay. Secondly, let me ask you about the prepared comments you made about no change in elasticity, no change in the secular volume decline rate. How do you reconcile those 2 beliefs with the fact that year-on-year, there's been very little retail price increases to consumers? As an example, I think Marlboro's pricing year-on-year is up 1%, and yet consumption is down 3.5%.

Well, David, this is Howard. I'll address that question. I mean, as we look over the last 3 or 4 years and we calculate the decline rate, we calculate it as a combination of the secular decline rate and a price elasticity impact. And as we've looked over the last 3 or 4 years, as I said in my remarks, we've seen a very consistent secular decline rate, and frankly, we've seen the price elasticity hold up pretty well. And that applied even during the large FET increase here. So again, we study this pretty carefully, and we're seeing quite a bit of consistency there.

Okay. And then lastly, just a question on the FDA, and it's a big picture question. There have been now some instances. I guess, they've had control going on for 2 years over tobacco, some instances where the FDA's had some freedom to operate, some capacity to provide indications of its sort of underlying approach to regulating tobacco. And I guess there are 2 potential extremes. One is that they'd be non-science based and extremely hostile, and the other one would be that they'd be cautious and science based. And I'm just curious. To this point to the extent, Mike, that you have a read, where do think the FDA is coming out on that spectrum with respect to its philosophical approach to regulating tobacco?

Well, I think so far what we've seen has been about what we would have expected, a methodical approach to applying the legislation that was passed, that the FDA has the obligation to do that. And that legislation calls for the FDA to use science and evidence to do things that are in the interest of public health related to tobacco. And while I still think it's early in the process, I think the FDA has followed the legislation and is moving right along relative to the legislative imperatives that it's been given. And I think is from our perspective, it's been appropriate in the way it's been moving forward. So it remains to be seen what the outcome will be on some of the issues. And I'm sure there will be places, and there have already been some places where you may see industry disagreement with conclusions that have been drawn or regulations that have been issued by the FDA. But I think that's always to be expected in a regulatory environment.

Your next question comes from Michael Lavery of CLSA.

I just wanted to see if you could give a little more color on the restructuring savings and how you think you might use some of that. How much would you reinvest in marketing or brand building? And how much would drop to the bottom line?

Well, once again, we provide guidance, as the forward-looking way for investors and analysts to have some idea of what we're thinking and what we anticipate will be the outcome for the year, but we don't like to get into breaking down the internals because it does have a bearing on competition and how people view or try to determine what our competitive positions might be and what we might do. So I'm going to decline to break it down any further than the guidance that we've provided.

Okay. And then looking at consumer sentiment and in C stores specifically, we've seen some trading up to things like better beer and energy drinks that have been strong there. Have you seen that be a tailwind for Marlboro in that channel as well? And do you feel like you might be getting some trading up coming back from people who have been switching to cheaper brands?

Well, look, the premium discount mix in the cigarette category has remained pretty much in the range that it's been in over the last number of years. So any activity in shifting between premium and discount -- and remember, this is largely a premium business -- is really driven by short-term activity in the marketplace. So we haven't seen any trend outline changes. We see actually a lot of promotion activity between the leading premium brands and some trading of volume back and forth and share back and forth between those premium brands, once again, based on levels of shorter-term promotion spending. And there -- everybody has to understand that in any category and on any brand, even the most premium of premium brands, there is always a segment of that brand's consumer population that's more price sensitive and promotion sensitive and does in fact switch from time to time between other brands that they've found to be satisfactory when they can buy them on promotion. And so we have a segment of that business on the Marlboro brand, even though the brand has a very high loyalty factor of people who buy the brand 100% of the time. So I don't see any underlying trend changes right now in the category between premium and discount. I just see promotion-driven shifting that is short term. And in our view, again, we're managing this category to maximize profitability and maintain longer-term strength of position for our brands so that they can continue to deliver good profit growth.

That’s helpful. And then lastly on Black, I know it's just launched and so I don't know how much you've seen actually in market yet. But where is that sourcing volume from or where do you expect that to be sourcing volume from?

Yes, it's a bit early for us to talk about that. We'll talk a bit more about it at CAGNY.

Your next question comes from the line of Chris Growe of Stifel, Nicolaus. Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division: I just had a quick one and actually a bit of a follow-up to the last question. Based on kind of the current economic outlook for 2012 GDP, consumer confidence, that's where things should all sort of modestly improve through the year. I'm just curious, just for perspective, do you believe that would be enough to -- or would the industry respond with less aggressive promotions in an improving economic environment? Or do we need a real step-up in improving the economy to see maybe more pricing or less -- and/or less promotion?

Yes. Well, generally, unemployment and consumer confidence have been factors that have been associated with the ability for brands to sustain a wider gap between a premium brand's price and the lowest price in the marketplace. But that generally -- that outcome generally follows those things occurring. And we're still at high levels of unemployment, and we're still at low levels of consumer confidence. Okay? So I think that I can't predict the future on how fast or when that's going to change. I might just say that if it does, then it could have some positive impact. But I don't know when that will be. Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division: Sure. And then I wanted to ask a question about the MLP program, since we have to ask one of those every quarter. But my question being there's been some adjustments to that program and reflecting some of the guidance you've gotten from retail. And so I'm just curious if -- it's a bit early, I realize. But is there any sort of increase in participation rates or anything like that, that you can speak to that you think the new program will allow for?

Well, once again, I think I'll defer to CAGNY, I think, when we talk about the business in a little more detail and a little more time has passed. Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then one final one if I could. The -- do you regard the cigarette inventory levels today as -- at good levels here? And are there -- and then I guess related to that, any shipping day differences in 2012 we should be aware of?

Well, the third quarter ended with really low inventory levels. Inventory levels on cigarettes grew a bit in the fourth quarter, and then toward the end of the fourth quarter after pricing activity in the marketplace, they declined again. So it was kind of a complex quarter from the point of view of inventory movement. Probably the easiest way to understand it is that we began 2012 with inventory levels that are pretty equivalent to how we began 2011. Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division: And that'd be considered a good level for you?

Yes, that's a reasonably normalized level. I mean, there's always some movement in these things that are driven by particular wholesaler or retailer motivations at any point in time. But I think the easiest way to understand where we are as we began 2012 with inventory, wholesale inventory levels that were pretty equivalent to where we began 2011.

[Operator Instructions] Your next question comes from Chris Byrd [ph] with Bloomberg News.

Mike, wanted -- it seems appropriate to ask you since you're leaving in a few months. I wonder whether you could take a look back and just offer some sense of how the company has managed volatility in the business and its share price. I'm just wondering whether conditions are such now where volatility is less of a risk than it was, say, 10 years ago.

Well, that's kind of a hard question to ask -- answer because oftentimes volatility is driven by external factors rather than what we're actually doing and how we're actually performing in the business. I do think it's fair to say that in the cigarette business, we've gone -- in my career, we've gone through really 3 downturns with this last one, I mean economic downturns, with this last one being probably the most severe. And I think that the cigarette brands or Marlboro in particular has been most successful in the way its business has been performing and its ability to grow profitability in this last one, which is the longest, and probably the most difficult. And I think to some degree that's a reflection of what we learned from the other ones. So I'd say that we've gotten better at dealing with that particular area where from time to time, there are economic situations that develop that aren't particularly attractive for consumers and kind of knowing how to run premium brands in that kind of environment and continue to give stable, consistent returns to shareholders, I think, is one of the things that the company is good at.

Marty, if I may ask quickly, obviously you're taking charge. Do you have a sense of look...

I'm sorry. Are you asking a question to...

Just looking ahead, Marty, what are the biggest challenges going forward in terms of the company managing the volatility that goes with your business? Is it FDA regulation? Is it...

I'm sure Marty has an excellent answer to that question except he's not here.

Oh, I'm sorry. Well, Mike can I ask you that question?

And he doesn't get to be CEO until May 17. Okay? So between now and then, you're stuck with me.

How about giving me a little forward look then, Mike, if you don't mind?

Well, I think that the issues remain pretty much what they have been. I think the risk to the business are always competitive risks, marketplace risks, economic risks. We have regulatory risks. We have legal risks. They're not new news, nor are they unknown. They're pretty much the same ones that have been around for a bit now and that we have had pretty successful track record in managing. But they continue to be the risks that I believe that the company faces.

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

Mike, just maybe taking a step back here in the last couple of years. If we look at the company's performance, obviously the profit growth, the earnings growth have been pretty healthy. But if you look at just the revenue growth, you haven't really seen any growth in revenues just if -- even if we just take the -- all of your tobacco businesses, so certainly, a bit of a different algorithm than, I think, what you've laid out at the time of the spinoff. So as you go forward, is top line growth even a consideration for Altria? Can you continue to get pretty healthy profit and earnings growth really without getting top line growth? And if so, sort of what's changed on the cost side or other factors that are driving better profit growth as opposed to top line growth as we think about the next few years?

Yes. Well, if you're getting a -- what you're primarily referring to is the cigarette business because the other businesses are growing categories. But I think in the cigarette business, the answer to the question is that given the complexity of the math model, it actually isn't a necessity to have top line revenue growth in order to have profit growth. And that continues out, I think, into the future. It's nice to get it when you can get it, but it's not a necessity to get it in order to have profit growth. And I think we've demonstrated that.

Okay. But if you take the total tobacco portfolio as a whole now that you're going to put cigar business with PM U.S.A. -- obviously smokeless tobacco is growing, but it's still relatively smaller portion of your total tobacco business. So when you look at in totality, is your point that you can still get to the profit growth algorithm without really getting the top line growth? And then maybe then talk a little bit about the cost savings opportunity. You've laid out the $400 million. But beyond that are there a lot of opportunities to really get continued cost savings out of different businesses that you operate?

Yes. Well, just once again, as growth the businesses grow, the cigarette business becomes less of a percentage of the total profit pool. But we continue to expect that our cigarette profitability is going to grow out to the future. And my point is it's not really necessary to actually get top line growth in order to get profit growth out of the cigarette business. Relative to cost, we lay those things out as we get to them rather than provide a lot of forward-looking information, so I'm not going to report on that. We have a program we've announced, and as we accrue those savings, we'll be talking about that.

Okay. And then just in terms of the competitive landscape, you've seen now some of the price increases coming up either from Newport, [indiscernible] or at the discount segment. So as you think about 2012, do you feel better about the competitive backdrop today than maybe a year ago where you did have a lot of introductory promotions going on behind Newport and some of the discount brands that were pretty heavily promoted?

Well, again, I would describe the cigarette industry right now from a pricing point of view as pretty stable. I mean, if you look at price gaps, across the key brands, it's pretty stable, but it's very competitive. So there's still a lot of ebb and flow of short-term promotion activity. There are no fundamental trend changes that seem to be taking place in the industry, so I expect it to continue to be competitive. But within that, it's pretty stable overall industry, and the profit pool continues to expand.

Okay. And then just clarification on the inventory comment you made, so the gap in the Q4 numbers to your shipments coming in, up 0.2 and your underlying volume being down 3% or 4%. So all of that difference was attributable to just really the low level of inventory at the end of 3Q and then just to catch up to getting to a normal level in Q4?

No, I don't think I spoke to that nor am I going to try and reconcile it. My comment was simply that inventories at the beginning of 2012 were about the same as they were at the beginning of 2011.

Okay. Should we think anything differently about Q1 in terms of whether any inventory movement could impact shipments?

Well, we can't predict what the inventory movement's going to be by wholesalers, so I'd decline to comment on that.

Your next question comes from Michael Felberbaum of Associated Press.

In regards to the agreement that you announced today for -- as far as noncombustible nicotine products, does that -- other companies have previously announced agreements and ventures into this area. Do you have confidence that the FDA will ultimately make it possible for companies to market some of these products as less harmful than or safer than cigarettes? And do you think that consumers will ultimately be interested in these alternatives?

Well, to answer your -- first part of your question is I have confidence that the FDA is going to study this issue and make a determination about it because it's a part of what's in the legislation. And I think that they'll -- they've already begun to look at the subject. So I do have confidence that it's going to be reviewed. And relative to how consumers react, I think that's going to be depending upon the products.

Your next question comes from Ann Gurkin of Davenport. Ann H. Gurkin - Davenport & Company, LLC, Research Division: I just wanted to return to the Marlboro franchise. And I know you talked about this a little bit, but in '10, we focused on gaining volume; '11, improved profitability for the franchise, and kind of as we move through '12, can you give us any kind of metrics we could track as to how the Marlboro franchise is performing versus your expectations?

No, I'm not going to do that. Ann H. Gurkin - Davenport & Company, LLC, Research Division: I have to try. And then secondly, do you care to comment at all on the timing of an FDA decision on menthol by any chance?

No, I can't. I think that process continues along, and I don't know that there's any decision for the FDA to make. I just think they have a mandate to study the issue, and they've continued to move through a process that meets their legislative mandate. So I don't know what the outcome of that will be.

Your next question comes from Ben Smith of UBS.

Actually, it's Nik. So just 2 quick questions for me. On the smokeless side, it looks like you're having some good volume gain on the premium end. I'm just curious, American Snuff put out a new contract, looking to get more space [ph]. Just curious how you've seen the competitive interaction there at least at the shelf, what kind of impact it has had. And then the second question is I continue to pick up kind of a dissatisfaction at the retail level on broader execution. This has been a concern of mine for 1.5 years now. Just curious, do you see it? And what is Altria doing to help address that? That would be very helpful.

Well, to answer your first question is I don't really know the answer at this point. I mean, there's always some movement in the trade programs, and we have had some in ours, and we've seen some recent activity from some competitor, competitive activity. And it's kind of hard at this point to gauge what the outcome is because some of that's still in motion. Relative to our retail organization, we've been continuing to work through the integration of all these businesses into one sales organization, and one of the impediments that we had was we had to take the different systems that existed and take these 3 categories and put them into our system, which at the time, was really designed to accommodate one category. And over the course of the last couple of years, we've built a new system and installed that system in December and trained the entire organization on that system. And so they're just now getting up and running. We also will complete a reconfiguration of the organization based on how the business development is with the totality of these businesses from a geographic point of view versus the way it was originally designed, which was around the cigarette business. So that has implications for coverage and the amount of coverage and then having your coverage in the right places. And so all of those things are a continuation of the completion of these acquisitions that we made and kind of beginning to tune up some of the places where you have some residual effect. So I think that as we come to a close on that kind of disruptive activity in the sales organization that we'll be in a better position. Now we haven't really seen, I don't think, an impact on the business from that, but it is difficult for our people sometimes when they're having to work with less-than-optimum systems for example to get their work done.

Your final question comes from Priya Ohri-Gupta of Barclays.

Priya Ohri-Gupta. Just wanted to get a sense from you as we sort of model out the forward year. What sort of core cash balance should we be baking in? And for example, I'm just talking about the amount of cash needed to address your day-to-day ongoing business requirements.

Yes. We don't provide forecasts on what our cash balances are expected to be. If you want to understand our needs, you can certainly look at the historical financial statements, and there's a pattern there that you could probably take a look at.

Okay. That's very helpful. And then just as we sort of think about your debt refinancing needs over the coming year, should we sort of continue to think that you would manage to existing balances? Or would you continue to look at potentially refinancing just given where rates are?

Yes, I'm not going to make any comments on our future plans in the debt markets.

At this time, I would like to turn the floor back over to Mr. Brendan McCormick for closing remarks.

I want to thank everyone for joining our call today. We will be webcasting our presentation at the Annual Consumer Analyst Group of New York Conference on February 22, where Mike and our Altria leadership team will make a presentation, so we look forward to having you join us there. If you have any follow-up questions, please contact us today and the investor relations group at Altria. Thank you very much.

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