Altria Group, Inc. (MO) Q1 2012 Earnings Report, Transcript and Summary

Good day, and welcome to the Altria Group 2012 First Quarter Earnings Conference Call. Today's call is scheduled to last about 1 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. Thank you for joining our call. I'm joined this morning by Mike Szymanczyk, Altria's Chairman and CEO; and Howard Willard, Altria's Chief Financial Officer. This morning, we will only be discussing Altria's 2012 business results for the first quarter, 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 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 is available on our website, altria.com. Altria reports its financial results in accordance with U.S. Generally Accepted Accounting Principles. Today's call will 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. As part of Altria's cost reduction program, on January 1, 2012, John Middleton became a subsidiary of PM USA, reflecting management's goal to achieve efficiencies in the management of these businesses. Beginning this quarter, we are reporting the financial results for the new smokable products segment, which includes cigarettes and cigars. Now it gives me great pleasure to introduce Mike Szymanczyk.

Thanks, Brendan, and good morning to everyone. Altria delivered strong financial results in the first quarter, growing its adjusted diluted earnings per share by 11.4%. Behind the strength of our diverse business platform, our business model generates income streams from the largest and most profitable tobacco categories, as well as from our alcohol assets and financial services business. Our smokable and smokeless products segments grew their adjusted operating companies income and margins behind the strong performance of our tobacco companies' premium brands and effective cost management. All of our tobacco companies grew retail share of the categories in which they compete. PM USA, Middleton and USSTC are pursuing initiatives to build their premium brands for the long term. As we discussed at the CAGNY conference in February, PM USA has evolved Marlboro's brand architecture to support its future growth. This new architecture is focused on 4 product families: Red, gold, green and a new product family, black. In the first quarter, PM USA made investments in Marlboro Black, which builds on Marlboro's rich heritage of adventure and ruggedness. Marlboro's cigarette retail share benefited from the investment in this new architecture. Marlboro delivered strong 2012 first quarter sequential share growth of 0.7 of a share point versus the fourth quarter of 2011 and grew its year-over-year share by 0.1 of a share point. We launched non-menthol and menthol versions of Marlboro Black last year in bold modern packaging, fitting with the personality of the Marlboro Black family and are pleased with its first quarter results. The Marlboro Black family is off to a great start, has generated trial among competitive adult smokers as intended and gained retail share. However, some of Marlboro Black's retail share gains were driven by trial-generating activities that are likely to moderate in 2013. Marlboro will continue to focus on the introduction of its new brand architecture throughout 2012 and plans a number of brand-building and equity-enhancing products and programs across all 4 of Marlboro's brand families during this year and 2013. In the second quarter, PM USA is introducing Marlboro EIGHTY-THREES Box that provides the Classic Marlboro flavor in modern updated packaging in the red family. Black & Mild delivered strong retail share gains for the first quarter, driven by its continued leadership in tip cigarillos and the success of new untipped cigarillos introduced in 2011. Our smokeless products segment continued to deliver strong adjusted operating companies income growth behind Copenhagen and Skoal. These brands grew their combined first quarter adjusted volume and retail share versus the prior year, as Copenhagen continued to show strong momentum. Skoal's retail share was stable on a sequential basis versus the fourth quarter of 2011. Skoal's year-over-year retail share losses, including those attributable to the 7 SKUs delisted last year, were partially offset by share gains for Skoal X-tra, which was introduced at the end of the first quarter of 2011. In the wine segment, Ste. Michelle delivered strong volume growth as it continued to expand distribution of its premium wines. Adjusted operating companies income was flat for the first quarter, as Ste. Michelle had a higher cost in certain wine vintages investments to build its sales force and other items. Gains on asset sales by PMCC and earnings from our equity investment in SABMiller also contributed to Altria's strong adjusted earnings per share growth. Altria continued to return cash to shareholders through dividends and opportunistic share repurchases. In the first quarter, Altria paid more than $835 million in dividends and bought back 9.9 million shares at a total cost of $294 million. Subject to the discretion of the board, the company plans to repurchase additional shares worth $378 million by the end of 2012, representing the balance remaining under the $1 billion share repurchase program authorized by the board in October of 2011. We are pleased with Altria's financial results for the first quarter, which were consistent with our expectations. Altria reaffirms that it expects its 2012 adjusted diluted EPS will increase by 6% to 9% to a range of $2.17 to $2.23 from an adjusted basis of $2.05 to -- per share in 2011. Altria anticipates more modest adjusted diluted EPS growth through the middle quarters of the year. Finally, I am happy to report that our Chairman and CEO transition is proceeding smoothly. Marty Barrington will succeed me when I retire as Chairman and CEO, following Altria's annual meeting with shareholders on May 17. And Dave Brand will become President and Chief Operating Officer. Marty will join Howard Willard for our second quarter earnings conference call in July. As this is my final earnings conference call as Chairman and CEO of Altria, I want to thank our shareholders and analysts for your interest in our company. I have appreciated the support and confidence that many of you have offered as we have transformed Altria following the spin off of Philip Morris International. I believe that Altria has many strengths that position our company to continue increasing value for shareholders. These include the strong premium brands of our tobacco operating companies, which hold leading positions in the largest and most profitable tobacco segments. A deep knowledge of adult tobacco consumers and a focus on innovation, growing alcohol assets, well-developed capabilities to manage external challenges and a strong balance sheet that supports superior cash returns to shareholders. As I prepare to retire, I am excited about Altria's prospects for the future and have great confidence in the leaders that will guide the company to its next phase of growth. Now I'll turn the call over to Howard Willard, who will discuss Altria's business results in more detail.

Thank you, Mike. Good morning, everyone. In the smokable products segment, first quarter reported operating companies income grew by 5.1%, primarily due to higher list prices and effective cost management. These factors were partially offset by lower reported shipment volume and higher promotional spending to support Marlboro's brand-building and equity-enhancing products and programs. Excluding the special items, first quarter adjusted operating companies income for the smokable products segment increased by 3.9% to $1.4 billion, behind higher pricing and cost savings. Adjusted operating companies income margins increased 1.5 percentage points to 41%, driven by Marlboro. PM USA's reported cigarette shipments decreased 2.6% for the first quarter, primarily due to trade inventory dynamics. Trade inventories were lower in the first quarter of 2012 compared to the fourth and first quarters of 2011. The impact of lower trade inventories was partially offset by retail share gains on L&M and Marlboro and one additional shipping day. When adjusted for trade inventories and one extra shipping day, PM USA estimates that its cigarette volume was essentially flat for the first quarter of 2012 compared to the prior year period. PM USA estimates that the total cigarette categories adjusted volume declined approximately 2.5% in the first quarter, which is consistent with historical price elasticity and the secular rate of decline. On a sequential basis, PM USA had strong 2012 first quarter retail share results, increasing 0.6 of a share point versus the fourth quarter of 2011 to 49.4%. This sequential share gain was driven by Marlboro, which grew 0.7 of a share point, partially offset by a 0.1 of a share point loss on other premium brands. Our discount portfolio was unchanged on a sequential basis versus the fourth quarter of 2011. PM USA's first quarter retail share on a year-over-year basis increased 0.4 of a share point to 49.4%, as Marlboro share was up 0.1 of a share point to 42.3% and discount share gains on L&M more than offset share losses for other portfolio brands. Cigar shipment volume increased 14.3% for the first quarter, driven primarily by retail share gains, changes in wholesale trade inventories and one extra shipping day. Black & Mild's retail share increased 1.4 share points to 30.7%, driven by the success of its Classic, Sweets and wine untipped cigarillos and continued strength in its core tipped cigarillos. Turning to smokeless products. Reported operating companies income for this segment decreased 0.5% to $192 million for the first quarter, due primarily to higher restructuring charges and lower reported volume, mostly offset by higher pricing and lower cost. When adjusted for restructuring charges, operating companies income increased 8.8% to $211 million. Reported smokeless products shipment volume decreased 7.5% in the first quarter of 2012. Volume gains for Copenhagen were more than offset by declines for Skoal and other brands, which both faced difficult comparisons versus the prior year. In the first quarter of 2011, Marlboro and Skoal each introduced 2 new Snus products, and Skoal introduced 8 new Skoal X-tra products late in the quarter. Skoal's volume was also impacted by the delisting of 7 SKUs in the second quarter of 2011. Our adjusted smokeless volume is difficult to estimate on a quarterly basis. USSTC and PM USA believe that their combined 2012 first quarter adjusted smokeless products volume grew more than the recent category trends due to strong retail share gains. USSTC and PM USA estimates that the smokeless products category grew by 5% over the 12 months ended March 2012. USSTC and PM USA's retail share of the smokeless products category increased 1 share point to 55.5%. New products introduced by Copenhagen in the recent years continued to have a positive impact on the brand's retail share. Copenhagen's first quarter retail share grew by a strong 2.7 share points to 27.8%. Skoal's share declined 0.4 of a share point to 22.1% as share losses, including those related to last year's delisting of 7 Skoal SKUs, were partially offset by gains on Skoal X-tra that was introduced last year. Ste. Michelle's reported operating companies income of $15 million was up 25% for the first quarter, but adjusted operating companies income was flat, excluding the impact of restructuring costs in 2011. Ste. Michelle has made investments in its sales force to support its goal of expanding distribution of its premium brands. These investments, along with higher costs for certain wine vintages in the first quarter of 2012, offset the impact of revenue gains from higher volume. Ste. Michelle's shipment volume increased 6.6% for the first quarter, driven by the growth in certain premium brands. The financial services segment's reported operating companies income increased by more than 100% to $52 million for the first quarter, driven by gains from asset sales. Our 2011 cost management program remains on track, and we have recorded net pretax charges of $228 million over the past 2 quarters. We expect to incur approximately $70 million in pretax restructuring charges in the balance of 2012 related to this program. These 2012 restructuring charges are reflected in our full year diluted EPS guidance that we've reaffirmed today. 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 GAAP versus the lowest effective price cigarette was 35% in the first quarter. Marlboro's net pack price in the first quarter was $5.71, while the lowest effective price cigarette was $4.23. The cigarette discount category's retail share was 27.5% for the first quarter. The estimated weighted average cigarette state excise tax at the end of the first quarter was $1.37 per pack, unchanged from the fourth quarter and up $0.01 versus the first quarter of last year. Copenhagen's first quarter retail price was $4.10 and its price gap versus the leading discount brand is approximately 41% in the quarter. CapEx was $16 million for the first quarter. We estimate capital expenditures for the full year will be approximately $150 million. Ongoing depreciation and amortization was $56 million for the first quarter. On April 16, PM USA made its annual MSA payment for 2011 of approximately $3.5 billion. This amount includes approximately $206 million that was paid into the MSA's disputed payment account, reflecting the amount that PM USA disputes those as a result of 2009 non-participating manufacturer adjustment. Operator, do we have any questions?

[Operator Instructions] Our first question comes from Nik Modi of UBS.

A quick question I had. First is just curious on your thoughts on the e-cigarette category just in lieu of what Lorillard announced yesterday, that's question number one. And the second question is if I understand the architectural correctly, it's going to be fully implemented at retail by the end of the second quarter. And I'm just curious if you've tested this and kind of if you have what some of the early context you got from those test markets? Those 2 questions, any context will be helpful.

Well, I'm not sure what the first question was, Nick, relative to e-cigarettes. Is there a specific question?

Yes. Just curious on your thoughts on the category. I mean is this something you think Altria should get involved in? Is it a category you think is viable? I mean certainly, there's a lot of different viewpoints on Snus. I'm just curious on your views on the category.

Well look, we pay attention to all of these, I guess, emerging segments and watch what's going on and do some research. And so we've been monitoring this one for some time. It's been around for a while. There's a pretty high awareness, but it represents still a pretty small business proposition. And so we're mindful of it. We pay attention to it. And that's about all I can say about it. And then relative to your second question, what was it?

Yes, just on the architecture. I guess it's going to be helpful if...

On the architecture. Well, we did some very specific consumer research relative to this architecture. It's not the kind of thing that you would market test because it would be pretty hard to read it among all the noise that exists in the market. But you really rely more on the consumer research relative to communication around the segments and the particular audiences that each segment's designed to appeal to. And yes, we did research that before we decided to move to this architecture. I hope that answers your question.

Yes.

Your next question comes from Vivien Azer of Citi.

Curious about the share gains from Marlboro Black. Could you quantify the contribution from that line extension to the quarterly share gain from Marlboro?

Well no, we haven't. We don't usually break out the individual segments of Marlboro. But as I said in my remarks, we're pretty pleased with Marlboro Black so far. We recognize that some of that was driven by introductory support. But that's okay, that's part of introducing a new product. And we're pretty pleased with the rest of the franchise as well.

Absolutely. And then in terms of the introductory support that you're offering for Marlboro Black, on a percentage basis, is it roughly in line, the kind of level of discounting your promotion that you're putting behind that line extension? Is it in line with the prior Marlboro line extensions?

I don't know if I'd quantify it, but I would say there's nothing unusual about it, okay? It's not an abnormally high level. I mean, we have a promotion level and we have trial events for adult smokers that are more limited in terms of their quantity and duration. So both of those things are typical as part of a new product launch. So there's nothing really I would say that's exceptional or meaningfully different about Marlboro Black's introductory plan from things that we've done in the past.

Understood. And lastly, could you just comment on inventory levels at wholesale? That was certainty a big topic of discussion over the last 2 days and where you guys feel like settle down at the end of the quarter?

Well, there were some inventory movement downward -- wholesale inventory movement and a little bit of retail inventory movement downward in the first quarter; not wholly unexpected. So we kind of, I think, said at the end of the year in the fourth quarter that our inventory levels for the fourth quarter of '11 were pretty much in line with where they were in the prior year. And then they've dropped a bit as we've gone to the first quarter. You expect some permanent inventory loss relative to the cigarette business because the business has a decline rate associated with it that's ongoing. And then there are movements in inventory that are driven by various wholesaler activities and needs that are less predictable. It's hard to quantify how much of this is permanent and how much is kind of sporadic movement. But I think most of it's probably sporadic movement. I don't think we're expecting to see any real changes in wholesale inventory levels beyond what you predict just from the normal industry change.

Your next question comes from Chris Ferrara of Bank of America.

So thinking about the cadence of, I guess, the quarterly flow of Marlboro Black, can we think about Special Blend as, I guess, a good model for that, right, where you come out in the first couple the full quarters out there you kind of peak and then you see it kind of move off. And I guess I ask in the context of some of the stuff you said around expecting a moderation into 2013 on some of the trial-building stuff. I guess can you just talk about how that flow might be relative to market share, how you'd expect it to go?

Well, I think that's kind of competitively sensitive information. So I could be somewhat reluctant to talk about that in any detail. We will -- because Marlboro Black is 1 of the 4 core segments for Marlboro going forward, we have initiatives and activities planned for it. So that will be ongoing. We won't run introductory trial levels on the product at the same level we've done early on as a continuum. But the objective will be to build that franchise over time. So we will have ongoing activities there and we'll have activities in the other 3 segments as well, so all the focus won’t be on Black. Part of the limit to this architecture is it really allows each one of these areas to pursue the consumer group that it matches up to best in its own way. So you can expect to see ongoing activity on Marlboro Black.

And as a follow-up, I guess, to one of the other questions. You're saying there was nothing unusual at all in the promo. I mean, you didn't run introductory levels spending any longer from Black in duration than you did for previous launches. Is that fair?

We're not finished with Black yet. So I can't speak to some finality on Black. We're still in the introductory phase of Marlboro Black. And we'll have activities going on in Marlboro Black all year.

Your next question comes from Judy Hong of Goldman Sachs.

I guess maybe if you could talk a little bit more about the promotional environment. Obviously, your competitors sort of called out a pretty intense promotional activity that they saw in Q1. And it looks like if I look at Marlboro's pricing per pack, perhaps down sequentially from Q4 by a couple of pennies? So is that really sort of that trial-driven initiative that you put in into the marketplace? It looks like L&M also gained share. So just sort of talk about the competitive landscape and your spending to see some of the share gains and how we should think about sort of your ability to balance share and profit as we stand today?

Yes. Well, I didn't think that we saw a real meaningfully different competitive environment in the first quarter versus the fourth quarter. And I also don't think we saw any dynamic change in key segments in the category. I mean, the discount segment declined a little bit in favor of the premium segment. But all 3 of the major premium brands grew some shares, so you would expect to see a little bit of that. There was continued interplay in the discount level as pricing changed on various brands and retailers had activities focused in the discount area where there's less equity and the shifting between brands is more driven by price. Most of L&M's year-over-year share gain occurred in 2011 at a modest share increase, the first quarter versus the fourth quarter, and that continues to really represent some recovery from basic share that we lost. So I just can't tell you that we saw lots of dynamic change. Now look, we're installing a major equity initiative on Marlboro that will continue for a while. And it's established some of the new architecture. The launching of an element of that architecture. And so we made some investment relative to that, which is to be expected. That's part of what we've said all along is the way we'll run the business. And I'll remind you of what our goals are here. We've said we want to maximize income and maintain modest share momentum over time. And I think we've been pretty explicit about saying we really don't want to chase share with pricing. We want to spend money to build long-term equity initiatives. And so the architecture on Marlboro and Marlboro Black, those things are long-term equity initiatives and they're worthy of investment because that's the way we'll be able to accrue increased revenue over time from the brand and grow overall profitability. So that's kind of the way we see it. I don't see it as a particularly unusual thing, nor do I see the kinds of introductory activity or the way we're approaching it to be in any way out of sorts versus what you'd expect in the packaged goods business on big brands and the way they're run.

Okay. And so then on pricing, so I know you don't break out PM USA anymore, but can you give us any color just in terms of cigarettes revenue per unit kind of year-over-year change?

No, I'm not going to give out those specific numbers. But once again, I think if you look at the overall smokable business what you're going to see, Judy, is that hey, we had some nice margin expansion in that business. And we had what we would say for a period of time where we had inventory depletions and we had investment behind new brand architecture, we had nice income growth. And I think that's really what we're looking at.

Okay. And then at the industry level, for the rate of decline 2.5% adjusted for inventory, so certainly a much better number that we've seen in the last couple of years. So anything that you think is driving that improvement? And do you think that's sort of now a run rate that we should think about for the foreseeable future for the industry as a whole?

Well, I don't know. We can't predict the future and this stuff ebbs and flows based on market conditions and based on taxes and all kinds of things like that. So there's also some, I think, interplay between the smokable segment and the smokeless segment. And so we're seeing a little more moderate growth rate in the smokable segment. At the same time, we've seen more modest declines in the smokable segments, so all of that seems to tie together pretty well. I don't think there's much that's new here relative to the behaviors among consumers related to these tobacco segments.

Okay, got it. And good luck, Mike.

Thank you.

Your next question comes from Christina McGlone-Hahn of Deutsche Bank.

Just following on the previous question, if we think about Marlboro and the Black introduction and then follow up with EIGHTY-THREE and, I guess, introductions in the brand families over the next 2 years, I guess I wanted to get a sense what -- to what extent are these activities added to brand equity so that when promotion is pulled back, share will still be up versus 2011.

Well, we do audit them as part of our brand equity study, and I think we shared with you in February at CAGNY that when you look at Special Blend as an example, it actually gets higher equity scores than the already high scores that the Marlboro franchise gets. So we pay pretty close attention to those things, because ultimately, our objective is going to be have the whole platform be able to continue to grow and have value over time. So we do keep a pretty close eye on that.

And as promotional spending is pulled back when you're past the introductory phase, you think -- I mean all this activity, to what extent can we be confident that it really augments total Marlboro share?

Well, you get with any of these things you get some slippage. So you're going to get some incremental share growth just like we got behind special blend, and then you're going to have some of it that is simply promotion sensitive consumers that shift around between promotional products that are available on our brands and on competitor brands. And so that slippage kind of will go away. But net out of that is we typically get a gain in both share and revenue and profit growth when we do these kinds of things.

Okay. And then in terms of the competitive response, given the promotion on each of the Black launch, which is typical, but the pricing, which we estimate about 2%, was kind of the lowest rate of growth since '08. And we're just curious what you've seen in terms of competitive response or what you anticipate to see.

Well, I can't anticipate what the competitors are going to do, but I think that the market remains competitive. But you may recall we showed you a chart at the CAGNY presentation that showed net effective price and the relationship between Marlboro and its key competitors, including some key discount competitors. And I can tell you that through the first quarter, those relationships didn't change at all. So that factors in all promotion, and there just wasn't any movement there in terms of the relationship between those products.

Okay. And on smokeless, we saw pricing much better than we expected, but volume lower. And as we lap fiscal X-tra the delisting -- I'm sorry, the Skoal delisting, in the second quarter, should we expect to see volume rebound in the second half, or is there something else that needs to be done on Skoal to help with volume?

Well, volume in the first quarter is a little bit difficult to read because there are several factors that affected the quarterly volumes. So I wouldn't get too caught up in it. When we look at it on an adjusted basis, we think that the volumes were on a little bit ahead of the industry volume or the industry growth rate for the smokeless business. Just a word about Copenhagen and Skoal; we look at these 2 brands together. And I think over time, both of these brands are going to be successful. They -- actually having 2 of them with some significant scale gives us some good opportunities from a competitive point of view to strategically approach the marketplace. But we're looking at the total between these 2 brands. And I think you can expect over time to see one or the other being more active and growing more because we will be doing things on these brands differently over time. And they won't necessarily both grow at even rates. And in the end, it will be the total that will be most interested and that's the way we're looking at the business. Skoal has been pretty stable here and it's still facing headwinds from the discontinuation of some SKUs. And I think Copenhagen is growing really quite nicely, and Skoal is having to compete with that, but Skoal's time is going to come as well and I think the collective performance of these 2 brands is going to be quite good.

Your next question comes from David Adelman of Morgan Stanley.

Two things I wanted to ask you. First, given the efforts in the spending on Marlboro Black in the quarter, did you hope for or plan or expect more than 10 basis points of year-on-year share growth for Marlboro?

No, I don't think so. I think we felt like Marlboro performed pretty well in the first quarter. It was up. I mean, you have to really look at where it landed for the year and it was in pretty good position relative to that. After the launch period of Marlboro Black and this architecture activity is just getting started really in terms of playing out with the consumer. So I think we feel pretty good about Marlboro and where we're headed with it. I mean remember, the goal here is to maximize income and get modest share momentum over time. So we're not looking for huge share gains in short periods of time on this brand. And as I mentioned a minute ago, it's difficult to launch things and go into the marketplace without having some slippage due to spinning in the marketplace and getting some business that really isn't going to be long-term business. But that's part of what you have to do in order to build a franchise for the long-term. So we accept that we've got some of that going on. I feel few pretty good about Marlboro, and I think we're just getting started with our architecture. I think we're very optimistic about Marlboro's prospects for the future.

Okay. And I wanted to ask a financial question on the remaining of the residual potential SILO/LILO income tax exposure. Given what must be a fairly high statutory rate of interest that you would ultimately have to pay, how keen are you on trying to quickly resolve the remaining issue?

Well as you know, that's been an issue that's ongoing. But if you look of the impact of our financial statements, really the impact of the charge was really reflected in the second quarter of last year. And through the end of this quarter, we estimate that the future cash outflow for that is about $600 million. With regard to the timing, obviously we've got a lot of activity going on with regard to that litigation. I think the timing of that cash outflow is going to depend on a number of future activities.

At this time, we would like to invite the media to join the question-and-answer session. [Operator Instructions] Your next question comes from Thilo Wrede of Jefferies. Thilo Wrede - Jefferies & Company, Inc., Research Division: Could you give us a little bit more background on Marlboro EIGHTY-THREES? How are they different from this regular king-sized Marlboro Red?

Well, they're 83 millimeters. Thilo Wrede - Jefferies & Company, Inc., Research Division: So 1 millimeter difference?

No, no, no. Marlboro Red is not 80 millimeters, okay? So it's a different sized cigarette. Thilo Wrede - Jefferies & Company, Inc., Research Division: And I understand it comes in different packaging?

It does. Thilo Wrede - Jefferies & Company, Inc., Research Division: Okay. So what gives you confidence that this won't be a massive cannibalization of Marlboro Red?

Well, we obviously research these things and Marlboro Red has a very loyal franchise that likes that product. So we wouldn't anticipate that we're going to get a large amount of cannibalization. Thilo Wrede - Jefferies & Company, Inc., Research Division: Okay. And I assume there will be introductory project for EIGHTY-THREES as well?

Well, we got an introductory program for EIGHTY-THREES, it's a bit different. I'm not going to describe it because I'd rather -- my competitors have to figure it out. But it's a bit different than, for example, the Black launch. Thilo Wrede - Jefferies & Company, Inc., Research Division: Okay. And then last question on pricing. I'm just following up on a question that Judy asked. You've introduced or you announced price increases of $0.15 over the last 12 months, yet the retail price from Marlboro moved by $0.01. Was it driven by increased promotions, was it driven by more retail spending on Marlboro? Can you elaborate on that a little?

Well, I think it's a lot factors. I think what retailers decided to do from a pricing point of view is certainly a factor. The competitive marketplace is a factor. So I think that it's influenced by a number of things.

Your next question comes from Michael Lavery of CLSA.

Has Special Blends role changed at all with the new Marlboro architecture, or is that basically the same?

Well, in the context of the Marlboro architecture, there are -- there's a Special Blend in the Red line, there's a Special Blend in the Gold line of this proposition. So if you look at these 4 families in the Marlboro architecture, Special Blend exists within those families as a part of the architecture. It doesn't exist as a singular line of products.

And have you thought about the pricing any differently? I know you said you've got these higher than the base equity scores. Have you been able to price that up since the introduction?

Yes, absolutely. Marlboro Special Blend has been subject to the same list price increases that everything else in the Marlboro line.

I'm sorry, I guess I mean on like a net pricing, like have you been able to promote it less? I mean, what kind of trajectory has the promotions been on that?

Well, the answer to that question is the answer I just gave you. We're taking these price increases and we always realize part of those price increases to the company's profitability.

That's helpful. And then on your corporate unallocated cost, they were roughly flat year-over-year. Have any -- should we expect to see any of the restructuring savings coming through that line or is it just in the operating segments? How should we think about that one?

Yes. I think you'll see some of the savings flow through that line, but a lot of the savings are really going to flow through the costs that are allocated to the various tobacco businesses, particularly the smokable business because that's where a lot of the activity is focused. And that will unfold as the year progresses.

Yes, that's what I was going to -- and so you've realized some of that, but there's still more of those savings you would expect to be coming?

Yes. Some of that has come through in the first quarter in a number of the different cost elements in selling, general and administrative. But you should expect to see more as the year unfolds.

Your next question comes from Bonnie Herzog of Wells Fargo. Your next question comes from Chris Growe of Stifel, Nicolaus. Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division: I just have a couple of questions for you, a bit of a follow-up. I wanted to ask a question regarding Marlboro, regarding the MLP program and some of the variations. So that changed a little bit earlier in the year, as I understand. Just to be clear on how that is playing out at retail and how that could be a factor or is that a factor in the retail price change year-over-year. I guess the question being, are you seeing that program lead to lower retail prices for Marlboro at retail?

Well, I think what we see our trade programs do is they certainly have many retailers competing aggressively using Marlboro as a vehicle to compete with. And sometimes, that has some bearing on pricing. Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division: Okay. I wanted to ask also relative to the level of discount growth in the quarter, and particularly the performance of L&M. Was that a function of increased promotional spending and/or, I guess, an increase in distribution, geographic push for that brand? I'm just curious what's driving that growth.

It's really kind of lacking what occurred in 2011 where we had some distribution expansion of L&M throughout the year of 2011, as we were kind of replacing some of the lost basic shares. So it built out a pretty good level by the -- into the fourth quarter, and it picked up a 0.10 in the first quarter. But not with any real change in anything that we were doing. Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And my last question is relative to the smokeless category and just what you expect in terms of growth for the category for the year. Should we expect the sort of 5% increase in volume for the year? Is that a good run rate you believe for the category?

Well, that's what it's running at. I mean, we can't predict the future. But this category has kind of run in 5% to 6% range and you're always estimating these things will dip, and there's some interplay between it in the smokable segment. But that seems to be a reasonable range to think about, I guess. Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And I wish you all the best, Mike, in your retirement.

Thank you very much.

Your next question comes from the line of Ann Gurkin of Davenport. Ann H. Gurkin - Davenport & Company, LLC, Research Division: I was wondering if you could talk about within the Marlboro family, are you seeing consumers move from the discount category into the Marlboro family under the new architecture? And if so, is that movement in line with expectations?

Well, I think that we see some competitive consumers that have some interest in Marlboro that may have been buying competitive products, not necessarily discount products, but competitive other premium brands. Finding some of these SKU expansions that we've done to be products that they like and that's how we sustain share growth on the brand. That's one of the reasons why we've articulated this past -- in the past, why we think some of the SKU work that we've done over time is important to the brand because it allows us to reach out to a broader universe of adult tobacco consumers. Because essentially, your mainline products get of sufficient size and have had broad base trial and some consumers are not buying them because they don't like those particular products. And so maybe they like the Marlboro franchise, they just don't like that set of products and so you try and reach out to them with something that they find more appealing. Ann H. Gurkin - Davenport & Company, LLC, Research Division: Okay. And then with regards -- you all had a nice quarter, double-digit volume growth, some of that due to trade inventory movement. Can you help me with how I should think about volumes for the cigar business for the year?

Well, I don't know how to predict just going forward in the future what it's going to be. So it's kind of something I would hesitate to try to comment on. Ann H. Gurkin - Davenport & Company, LLC, Research Division: Fair to say it should grow there?

We hope it does.

[Operator Instructions] Your next question comes from the line of [indiscernible] Alexander of Basel Associates [ph].

As you look at the smokeless category, can you give us any feel as to your profitability trend over the next few years? I know you had a lot of restructuring, you've had a lot of positioning. Is there -- can you give us any feel as how much the operating profit margins can increase or what you'd like to have happen?

Well, I think our objective is we've said before is to have volume growth in this growing category that's slightly ahead of the category and that will be driven by modest share growth and we already have very nice margins in this category. And so if you put all that together, what you should expect is to see, we'd like to see income growth in the category that is kind of running a bit ahead of the overall category growth rate. And so far, we feel pretty good about what we've been able to achieve in this business. And I think sometimes, it's difficult for people outside it to understand this, but we've gotten really substantial synergy to have in this business and that has benefited our other businesses. And we also have substantial R&D opportunities related to this business that we believe long term also will add growth to the company. So I think that we look very favorably on the prospects and contributions from our smokeless business.

Good luck on your retirement and have fun.

Thank you very much.

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

Thank you, everyone, for joining our call this morning. If you have any additional follow-up questions, please give us a call at Investor Relations.

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