Altria Group, Inc. (MO) Q1 2013 Earnings Report, Transcript and Summary

Good day, and welcome to the Altria Group 2013 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, and thank you for joining our call. I am joined this morning by Marty Barrington, Altria's Chairman and Chief Executive Officer; and Howard Willard, Altria's Chief Financial Officer. This morning, we will only be discussing Altria's 2013 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'll 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 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 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 previously announced, effective January 1, 2013, Altria's reportable segments are smokable products, smokeless products and wine. In connection with this revision, results of the financial services business and the alternative products business are combined in an all other category. Prior period segment data have been recast to conform to the current period segment presentation. It gives me great pleasure to introduce Marty Barrington.

Thanks, Brendan. Good morning, everyone. Altria's diverse business model delivered strong financial results for the first quarter, as the company increased its adjusted diluted earnings per share by 10.2%. Higher pricing contributed to adjusted operating companies income and margin growth in all 3 of our reportable segments. Higher earnings from our equity investment in SABMiller and lower interest expense also drove adjusted EPS growth. In the smokeable products segment, PM USA grew adjusted operating companies income and margins, while increasing retail share for both Marlboro and PM USA. PM USA continued to support Marlboro's new brand architecture, with brand-building activities that contributed to Marlboro's retail share gains for the first quarter. Earlier this year, PM USA expanded distribution of Marlboro's Southern Cut nationally. Marlboro's Southern Cut, part of the Marlboro Gold family, has a uniquely rich and smooth flavor. Each of Marlboro's product families has exciting activities planned for the year to enhance the brand's strength. Earlier this month, PM USA received a $483 million credit against its master settlement agreement payment to the states as a result of the settlement of NPM adjustment disputes with certain states. The credit increased the smokeable products segment's reported operating companies income, but we excluded it from adjusted operating companies income. Middleton's volume and retail share of large machine-made cigars decreased for the first quarter. The quarter was marked by heightened competitive activity, including high levels of low-priced imported machine-made cigars. In the smokeless products segment, USSTC and PM USA increased adjusted operating companies income and margins, while growing Copenhagen and Skoal's combined retail share and volume. USSTC is supporting both Copenhagen and Skoal with equity building initiatives. In the first quarter, USSTC expanded Copenhagen's Southern Blend into additional states. In February, Skoal began to refresh its packaging to better reflect the brand's contemporary, premium qualities and differentiate its product offerings. In the wine segment, Ste. Michelle delivered strong operating companies income and margin growth by expanding distribution of its premium wines. As we've explained in the past, our tobacco operating companies remain very focused on understanding the evolving preferences of adult tobacco consumers and creating superior new products for them, and our 4 tobacco businesses: PM USA, USSTC and Middleton are making disciplined investments in innovation to expand the reach of their premium products to segments in which they are underrepresented. We applied the same disciplined approach to developing innovative tobacco products for adult consumers who are interested in alternatives to traditional tobacco products. Today, we're pleased to announce another step in our efforts to address these changing preferences. In the second half of this year, Altria's subsidiary, Nu Mark, plans to introduce an electronic cigarette into elite market. As you know, awareness and trial of e-cigarettes have increased over the last year, a subject to which we have been devoting attention and product development resources. We believe that Nu Mark should now enter the eBay per category, and we expect to provide more detail on these plans at our Investor Day in June. Altria remains focused on cost management. Our current cost reduction program remains on track, and is expected to deliver $400 million in annualized savings versus previously planned spending by the end of 2013. During the first quarter, Altria paid $886 million in dividends and purchased shares valued at $57 million. We're also pleased to share with you today that our Board of Directors has authorized a new $300 million share repurchase program that we expect to complete by the end of 2013. We're pleased with Altria's results for the first quarter. Altria reaffirms that it expects its 2013 full year adjusted diluted earnings per share to increased by 6% to 9% to a range of $2.35 to $2.41 from an adjusted diluted base of $2.21 per share in 2012. Howard will now discuss Altria's business result in more detail.

Thank you, Marty. Good morning, everyone. In the smokeable products segment, first quarter reported operating companies income increased 33.4%, largely due to PM USA's settlement of the NPM adjustment disputes with certain states and higher pricing, partially offset by lower reported shipment volume. Excluding special items, first quarter adjusted operating companies income for the smokeable products segment increased by 1.3% to $1.4 billion. Adjusted operating companies income margins increased 0.9 percentage points to 41.9%. PM USA's reported cigarette shipments decreased 5.2% for the first quarter, primarily due to the industry's rate of decline and one less shipping day, partially offset by retail share gains and changes in trade inventories. PM USA believes that the trade depleted less inventory during the first quarter of 2013 compared to the first quarter of 2012. When adjusted for 1 less shipping day in trade inventories, PM USA estimates that its cigarette volume was down approximately 4% for the first quarter of 2013 compared to the prior-year period. PM USA estimates that the total cigarette categories adjusted volume declined approximately 4.5% in the first quarter. PM USA's first quarter retail share increased 0.5 share points versus the prior year as measured by its new tracking service. Marlboro grew its retail share by 0.2 percentage points and L&M drove a 0.5 percentage points share gain in discount for the first quarter. These gains were partially offset by a 0.2 percentage point share loss on other premium brands. Cigar shipment volume decreased 16.8% for the first quarter, primarily due to retail share losses and changes in wholesale inventories. Black & Mild's retail share, as measured by its new tracking service, decreased 3.1 share points, primarily due to heightened competitive activity, including high levels of low-priced imported machined-made large cigars. Turning to smokeless products. Reported operating companies income for this segment increased 15.6% to $222 million for the first quarter due primarily to restructuring charges in the first quarter of 2012 related to the cost-reduction program and higher pricing in volume. These factors were partially offset by higher promotional investments and unfavorable mix due to growth in products introduced in recent years at a lower popular price. Adjusted operating companies income increased 5.2% to $222 million. USSTC and PM USA's combined reported smokeless products shipment volume increased 3.4% in the first quarter. Strong volume gains for Copenhagen were partially offset by declines for other portfolio brands. USSTC grew Copenhagen and Skoal's combined volume by 4.9%. USSTC and PM USA estimate that the smokeless products category grew by approximately 5% over the 12 months ended March 31, 2013. Adjusted smokeless products volume is difficult to estimate on a quarterly basis. However, after adjusting for changes in trade inventories in year-over-year calendar differences, USSTC and PM USA estimate that their combined 2013 first quarter adjusted smokeless products shipment volume grew to rates slightly below the 12-month category growth rate. USSTC and PM USA's combined first quarter retail share of the smokeless products category decreased 0.4 share points as measured by the new smokeless tracking service. Copenhagen and Skoal grew their combined retail share by 0.5 share points. Retail share for other brands decreased 0.9 share points. Copenhagen grew its retail share by 1.3 share points, as products introduced by Copenhagen in recent years continued to have a positive impact on the brand's retail share. Skoal's retail share declined 0.8 share points, as the brand was negatively impacted by competitive activity and Copenhagen's strong performance, partially offset by share gains for Skoal X-tra. Ste. Michelle's reported and adjusted operating companies income of $20 million was up 33% for the first quarter, driven primarily by higher shipment volume and higher pricing. Ste. Michelle's reported shipment volume increased 9.5% for the first quarter, driven primarily by the growth of certain premium brands and the timing of the Easter holiday. Marty and I will now be happy to take your questions. While the calls are compiled, let us cover a few housekeeping items. Keep in mind that the tobacco product pricing and retail share figures are from the new tracking services. We'll also provide you with restated figures from the first quarter of 2012 so you will be able to compare the periods. Marlboro's price gap versus the lowest effective price cigarette was 34% in the first quarter of 2013. Marlboro's price gap versus the lowest effective price cigarettes was 35% in the first quarter of 2012. Marlboro's net pack price in the first quarter of 2013 was $5.79, while the lowest effective price cigarette was $4.32. In the first quarter of 2012, Marlboro's net pack price was $5.71, while the lowest effective price cigarette was $4.24. The cigarette discount categories retail share was 25.5% for the first quarter of 2013, unchanged versus the first quarter of 2012. The estimated weighted average cigarette state excise tax at the end of the first quarter was $1.42 per pack, up $0.01 versus the fourth quarter and up $0.05 versus the first quarter of last year. Copenhagen's first quarter retail price was $4.07 and its price gap versus the leading discount brand was approximately 37% in the first quarter of 2013. In the first quarter of 2012, Copenhagen's retail price was $4.07 and its price gap versus the leading discount brand was approximately 42%. CapEx was $15 million for the first quarter, and we estimate capital expenditures for the full year will be in the range of $125 million to $150 million. Ongoing depreciation and amortization was $54 million for the first quarter, and we estimate depreciation and amortization will be approximately $215 million for the full year. Operator, do we have any questions?

[Operator Instructions] Our first good comes from the line of Judy Hong of Goldman Sachs.

First, so just in terms of the industry consumption decline in the quarter, so I think your competitors have commented on some of the factors that may have caused a little bit of a softness in terms of the industry volume. So if you could just comment on what you think is kind of driving a bit of a moderation in terms of the overall cigarette industry shipments.

Yes, thanks for the question. I guess I'd begin by observing, Judy, that this is best seen over time. I think to take one quarter's worth of data and to try to extrapolate too much is probably a bit dangerous. If you look over time, you'll see that the cigarette decline rate has been about 3% to 4%. Our estimate on an adjusted basis for the quarter is about 4.5%, although PM USA was less than that at about 4%, and we saw in 2012, it was about 3%. When you look at it, we don't see any big drivers in the first quarter that would argue for a sustained kind of acceleration in the volume decline. I mean, folks have pointed out various factors in quarter: the end of the payroll tax holiday, summary [ph] for the gasoline prices and other factors. So I think we'll have to see is the answer, but again, we're informed, I think, generally, by the fact that the historical decline rate has been in that 3% to 4% zone.

Okay. And then just in terms of your decision to launch your own e-cigarette brand in the second half, I know we will get more details at your meeting. But just in terms of kind of why now, are you more comfortable with the potential regulatory environment for e-cigarettes? Do you think that the category is starting to have a bit more of an impact on the cigarette consumption? Or do you think that you've got kind of the product that you're really ready to go in with a differentiated positioning, just kind of rationale for why now?

Sure, I mean, we've observed previously that we were monitoring the category carefully, of course. It's obviously are relevant to consumers that we know quite a lot about. We have devoted significant product development work to it, and we think that for all those factors, the reason that we're announcing that will be out in the second half is we have a product and we have plans that I think will allow us to compete effectively in this area that's emerging. It's small, of course, relative to traditional tobacco products, but there's no denying that adult tobacco consumers have shown some interest in it. And so for us at Altria, that's spot-on our mission. We're about providing adult tobacco and wine consumers superior branded products, and that's our intention here, and we'll learn our way in smartly.

Okay, and then just lastly on pricing, so if we look that smokable, your pricing was up pretty nicely both kind of year-over-year and sequentially. So maybe if you could talk about kind of your promotional activity in the first quarter versus the year ago or the fourth quarter. And then is there any impact in terms of the cigarette -- sorry, the cigar either pricing or the volume decline that's causing the smokable pricing to be up more? Or is this really consistent with more of the cigarette pricing?

Yes, I mean, if you look at smokable, if you look at net effective pricing, actually, was quite nice. It was in, call it, I don't know, 4.5%, give or take, but we had a significant volume decline year-over-year for the reasons that you've asked about and pointed out and others have pointed out. So basically, it's driven by the volume. The cigar numbers, if you look at cigar shipments, obviously, year-over-year, they were distorted a bit by trade inventory factors, and we've got pretty highly competitive dynamic in the cigar space with people with bringing in kind of low-priced offshore-made product. In terms of the cigarette competitive space, I would say it's pretty much in line with what we've seen before. It's competitive out there, but it's been competitive for some time. We didn't see any particular change in the first quarter.

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

First, let me ask you about your cigarette promotional activity during the quarter. Was that recalibrated at all because of the weaker volumes?

No, I think in line with I just said that there -- our plans, as you know, in the smokable segment, we're trying to maximize income while making sure that we're getting modest share momentum on Marlboro, and I think that's what you see play out in the quarter. If you look at Marlboro's share growth year-over-year, it's about 2/10, and so I think we stuck pretty much to our plan, which is what we intend to do.

Okay, and then on e-cigarettes, I think it's sort of a philosophical question. It's certainly legal to advertise those products much more broadly than other tobacco products or tobacco-deprived products, including television and some of the leading brands in that category are on TV. Is that something in the current regulatory environment you'd be willing to do?

We're looking at all of that now is the honest answer, David. That's why we'll have more on that in June. Our intention is to do this, to do it responsibly. And of course, as you well know and everyone else who follows us knows, a lot of that will be defined by what the FDA has to say about how they intend to regulate these products. So our intention is to compete and to compete effectively. We'll work through all of those particulars [Audio Gap] [Technical Difficulty]

David, I apologize for that. We had a technical difficulty that apparently caused the line to dropout. Apologies to everyone.

No, no. No problem. I hope it wasn't something I said.

No. I was just about to say to you, it was nothing you said at all. I'm not quite sure where we're dropped. So let me know what you heard, and I'll try to pick back up without repeating unduly.

No, no, let me go on to a different question. I was able to hear your response with respect to e-cigarettes. The only other thing I wanted to ask was about your management of the -- your product mix within the smokeless tobacco business. Both this quarter and really all of last year, revenue growth's been pretty much in line with volume growth. You've taken list price increases, but the mix within the portfolio has really offset the net pricing, and I'm wondering is that what you envisioned and hoped for? Or can you do a little bit better? Is that -- are you overdoing some of the price positioning of your line extensions? Or is that just a function of the competitive reality in that market?

Yes, I wouldn't be too concerned about that. If you look at the mix of the products in smokable, they're overwhelmingly premium. We've discussed previously having to manage a brand in the size and scale of Marlboro and having some price points for people during a tough economy, so I won't repeat all of that. But the overwhelming amount of the products in the smokeless segment are premium, and that's our intention because we're trying to maximize income. I'm sorry if I said smokeless, I misspoke, I meant to say smokable.

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

Just go back on cigarette industry volume trends. I mean, I hear you loud and clear on an unadjusted basis. It's not the end of the world, they're down 4.5%, but can you comment on the sequential trends that you saw intra-quarter, kind of month-to-month?

Well, again, I guess I'd go back -- I just hate to suggest that one quarter's worth of data really provide us with a lot of insight. I can tell you, Vivien, that there was a slow start in the quarter and then it got stronger as we went through the quarter for the first quarter. We obviously don't comment on intra-quarter, so that's not intended to be a comment on the second quarter. But again, it's just a cautionary note about trying to read too much into one quarter's worth of data on this.

Understood. And do you guys have an estimate, perhaps, on potential volume impact from e-cigarette consumption in the quarter?

No, I think it's too small to read. It's probably -- we know there's some interest so it's probably having some effect, but it's really too small to read and extrapolate from at this time.

Understood. And lastly, could you comment on your outlook for both state excise taxes and federal excise taxes?

Yes. Let's take it one at a time. In terms of state excise taxes, Howard gave you the numbers year-over-year. We're watchful, of course. There's a fair amount of activity. This is the peak time, as you know, during this period of the year when state legislatures are in. We have some activity in Massachusetts and Minnesota. There's been a proposal in California. We and others are obviously doing our best advocacy to try to persuade legislatures that that's not the way to go, as consumers are already very heavily taxed in this area. But there is a fair amount of activity in the states, and we'll have to see how she goes. If we switch to the federal excise tax, as you know, the President raised this issue in his budget proposal. We are strongly opposed to that. As you know, federal excise tax was raised 158% just a few years ago. It's incredibly disruptive. These taxes are regressive. They're unfair. And to the extent that programs are proposed that are for the benefit of everyone, we think that there are better ways to finance them than to put it on the back of adult tobacco consumers. So we'll see how it goes. It's dynamic in Washington, but we're hopeful that, that won't come to pass and we're certainly advocating against it.

And do you have a specific number in terms of your outlook for the weighted average state excise tax increase for the full year?

No, we don't forecast that.

Your next question will come from the line of Bonnie Herzog of Wells Fargo.

I have a question on your decision to enter the e-cig category. I was hoping you could give us a little more color on the process you undertook to evaluate your options for entering. And then what other options do you consider? And then could you give us some color on any test markets you've had or focus groups you've conducted for your e-cig?

You just don't want to wait for June, do you, Bonnie? You want me to...

I don't. I do not...

I can understand and I appreciate your interest. Well, look, it always starts with the consumer, and that's where we began. Our mission, as I've just mentioned a moment ago, was to provide adult tobacco consumers with superior branded products. So we wanted to make sure we understood the consumer dynamic. And as we've discussed previously, there is some interest out there. There is some trial. The awareness is high. So we started by trying to understand those dynamics and to understand them well. And of course, you have to do product development to try to find products that are interesting to them, that are going to have interest to them, that will work in the marketplace, and that's the basic process that we follow. We have a robust center for research and development. We have robust product development capability. We have good insight into this consumer. We have great brand building capability, and so that's the process that we followed. And when we have something that meets those standards, we'll put it into a test or elite market to see if the consumer reacts to it the way we predict he or she will, and that's what we're about to do in the second half. So that's a bit of an overview, and I know it's at a high-level, but we can talk about that some more when we're ready to say more about our plans.

No, I understand. That's was really helpful, I appreciate it. And then I'd love to hear your thoughts and reaction to some of the comments made recently by Mitch Zeller while he was on a panel at the NATO show, specifically as it relates to 3 priorities: menthol, substantial equivalence and then deeming regulation on e-cig. And then I'd be curious to hear if you've had much dialogue recently with Mr. Zeller.

Well, we engage with the FDA regularly up-and-down the agency at the Center for Tobacco Products, and that includes at the director level, as well as with all of the staff and the various groups that work at, our strategy has been and continues to be in full compliance with the regulations that govern our businesses, as well as to engage and to try to be thoughtful and constructive about the issues that face the industry, and we did that before and we'll do that again. I wasn't particularly surprised about the topics that Mr. Zeller referred to as being his priorities because, as we all know, these are the topics that have been the subject to some discussion. The agency had said, for some time, that it was working on deeming. So I'm not surprised that he will continue to work on deeming. Substantial equivalence has been much discussed and the agency, I think, is working hard to try to move those along. So I think those are the topics we would expect, and we would expect to -- for Mr. Zeller to come in and do a professional job in accordance with the statute as did his predecessor.

Okay, and then my final question is on your Marlboro Special Blend. I was hoping you could talk further about your progress you've made to narrow the relative price gap between your Special Blend line and then regular Marlboros. And as you're lowering promos on MSB, what has been the consumer reaction and then the retention?

Well, we won't break it out at that level of detail, but I would remind everyone what our strategy is here. Overall, for the smokable segment, because we're trying to maximize income while maintaining modest share momentum on Marlboro, we've deployed Special Blends for the purpose of making sure we have a price point for some price-sensitive consumers in the franchise. They want to be in the Marlboro franchise. They like Marlboro, but the consumer macro economy has been hard on them. So we want to make sure that we have a place for them. You correctly referred to our strategy of -- I'll begin, I guess, with list price, reminding everyone that Marlboro sells for the same list price everywhere, and then we have different promotional platforms within the franchise and we reduced the promotions for Special Blend over time as we've been able to do that. So overall, I think we're pretty happy with how that's come together. You see continued margin growth in the smokable segment. So all in all, we're pretty happy with that. I think we've also discussed previously if and when the economy really begins to improve and get some traction and adult tobacco customers are feeling better and we have higher consumer confidence, those promotional platforms can be further modified.

Your next question comes from the line of Chris Growe of Stifel. Christopher R. Growe - Stifel, Nicolaus & Co., Inc., Research Division: I just had 2 questions for you. The first one, and forgive me if I missed this, but just in -- and there were some questions around promotional spending. I'm just curious, sequentially in the cigarette business if your -- if you could talk about promotional spending. Does that actually tick down in Q1 from Q4?

I think I'll refer to what I've said before, Chris, which is in terms of the competitive environment in the smokable segment, it's about kind of where we've been. It's competitive out there. It's been competitive and our plans take all that into account. Christopher R. Growe - Stifel, Nicolaus & Co., Inc., Research Division: Okay, and then I was also curious on a year-over-year comparison basis. You had a lot of new product activity in the year-ago period and heightened promotional levels. Is that at all a factor in your volume performance in the first quarter, especially with Marlboro Black launching a year ago at this time?

No. I don't think that's the way to see it. It looks to us like it's the industry volume performance and again, you can see that PM USA actually performed better on an adjusted basis against that volume than did the industry. Christopher R. Growe - Stifel, Nicolaus & Co., Inc., Research Division: Okay. If I could just ask one more and -- just there was a recent update by the FDA, the congress on -- and had some mentions and obviously discussions of modified risk tobacco products. Is that something that -- obviously, it's an opportunity for the industry. There's been no applications for an MRTP. Do you have any plans or anything you could speak about in that regard or any update on modified risk tobacco products and how PM USA or other businesses may foresee that?

I could certainly comment on why we supported the FDA, which included this protocol to get modified risk tobacco products approved, and we've advocated to the agency as we have for some time now. And you can see these papers on altria.com that we believe that's an important policy issue for FDA. We believe that the role of manufacturers, like ourselves, are to try to develop these products to make the case about why they should be considered for modified risk if the science and evidence supports it. And it's the agency's role to consider those applications and then communicate accurately to consumers if the case is made. And we're actually pleased that there's all this activity at FDA. It's an important component of its mission to regulate tobacco products, so we support that.

Your next question comes from the line of Philippe Buson [ph] at Mitsubishi Securities.

2 questions if I may. The first one, you have about $1.4 billion in debt coming due on November. I'm going to assume that you will refinance that. Given the current rate environment, might you also be taking advantage to refinance some of your higher coupon debt? Or the premium at which those bond rate is just too high that you're not willing to take the hit on the P&L?

Yes, I'd rather not talk about our future plans for that debt. Certainly, when you look at our historical pattern, in some cases, we've -- when our debt is matured, we've issued new debt, and we did do a tender refinancing last year. But I'm not in the position to share kind of what our plans are through the end of this year.

Okay. And then just a follow-up on Bonnie's question with regard to e-cigarettes. As you know, one of your competitors yesterday kind of estimated that the impact of e-cigarettes on volumes for cigarettes may have been somewhere around 1%. I understand it's very early on. It's a small category. But more holistically, my question is the way that you see the category potentially evolve over time, what do you see the margin potential to be? And how do you make sure that you're going to protect the profit pool from the traditional cigarettes as there could be more cannibalization down the road?

Yes, I understand your question. It's just so early to make any predictions about that. I don't think I'd be giving you any help. I have replied in response to a question a bit earlier about -- it's very hard to even understand at these small numbers, the volume impact or not. So to be predicting about future rates and margins and cannibalization is just a bit ahead of where we are.

Your next question comes from Michael Lavery of CLSA.

Just looking at your share repurchase pacing, you've had comfortably over $1 billion each of the last couple of years and now you've got $300 million authorization for this year plus a little bit from Q1. With the NPM cash coming in, what -- it seems like you'd be in a position to certainly do more comfortably. Is there other strategic priorities that might be on your radar instead? Or how are you thinking about the capital allocation?

Sure. I think as you pointed out, we've done over $2 billion since 2011. And certainly, we feel good about the new $300 million program. I think to start off with how we thought about this year, obviously, the primary way we return cash to shareholders is through dividends, and the dividend was increased last August. And I think each year, we look at kind of our various cash needs and decide what the appropriate amount of share repurchase is. And I think at this point, we feel comfortable with the $300 million, but certainly, we'll keep an eye on that as the year evolves.

Okay. That's helpful. And then just looking at e-cigarettes, does today's announcement imply or suggest that you wouldn't do -- that you're only moving organically? Or would you still consider an acquisition in that space as well?

Well, our announcement today is that we have developed a product that we intend to launch in the second half, and we don't comment on acquisitions.

Well, okay, fair enough. And then just -- I realize you'll obviously give us a lot better detailing in June, but is that something you would consider using the Marlboro brand for? Or would it be a separate brand that you'd go to market with?

I know it's tempting, Michael. I'm just going to ask everybody to hold on until we roll out our plans. Good try.

Your next question comes from the line of Ann Gurkin of Davenport. Ann H. Gurkin - Davenport & Company, LLC, Research Division: I wanted to switch to cigars. I wonder if you could comment a little bit about your strategy for the cigar business. Is there a need for innovation, repositioning the brand? Can you comment on the loss at retail? Can you just give us an update on cigars?

Yes, it's pretty competitive out there in the cigars space. You have our strategy, which is we're trying to -- just as we are with cigarettes, we're trying to maximize income there. We have, as you know, Ann, a large percentage of the tipped segment there, and the profitability there remains pretty good. It's in the cigarillo space where we're seeing lots of competition with low-priced entries, some of which is being facilitated by these imports that Harry and I mentioned in our remarks. And so we would like to have greater exposure in the cigarillo space, but we're also mindful of trying to maximize our profitability there, and that's what the brand people are trying to work through right now. If you've been at retail and you've seen this, it's just mighty competitive on price, and we're, of course, prefer to compete on equity.

Your next question comes from the line of Thilo Wrede of Jefferies. Thilo Wrede - Jefferies & Company, Inc., Research Division: Marty, you mentioned a minute ago that if the economy improves, you might consider your promotional activities. Is there any particular number that you look at when you judge the economy? Is it unemployment? Is it consumer sentiment? Or is it more a gut feeling by management how the economy is doing?

I would say it's a combination of a number of factors that we track closely. We certainly track unemployment. We're mindful of underemployment. I'll remind people that the labor participation rate continues to drop, which, really, if it were -- if the unemployment rate were corrected for that, unemployment would be even higher than it's -- being what's reported. Thilo, we watch housing starts pretty carefully, and that's actually a bit of an encouragement, isn't it, that housing starts are doing better than they were a year ago. We've got a number of those factors that we watch. And then, of course, we try to manage the brands to the gaps as best we can based on all those data. Thilo Wrede - Jefferies & Company, Inc., Research Division: Okay, and then the other question I had for you, for 5 of the last 6 quarters, at least in my math, the retail price increase for Marlboro, when you exclude the impact of state excise taxes has been below the price increase that I calculate when I look at the reported numbers that you have in your income statement. Can you help me understand philosophically how this continues to -- this retail price underperformance continues to drag on like this?

Well, again, I'd go back to if we start with manufacturers' pricing, our pricing picked up really quite nicely. At retail, there are a number of factors that influence the average retail pack price. Some of them are our trade programs. Some of them are retailers, strategies about how they choose to compete at the C store. And what you've seen, I think during the period, that you've referenced is a number of those strategies coming to bear in the retail market. So as you know, we offer a variety of Marlboro programs, MLP, Flex, Margin Option, Orcher [ph], intended to offer retailers the opportunity to align their strategies as best they think they can with Marlboro, and I think that's -- those are the dynamics you see. Retailers have different strategies for different platforms. Indeed, for different stores, our goal is to try to offer programs that give them choices to make with respect to our business.

We will now take questions from the media. [Operator Instructions] Your next question comes from the line of Chris Ferrara of Bank of America.

I just wanted to follow-up real quick on the buyback question. I know you said $300 million is the number and you're comfortable with it. But can you just give a little color as to why you're comfortable with it? Because I think you recognize the question, which is you had a lot of buyback, you have more cash coming in and now the buyback projection's lower. So any color you can give on why would be fantastic.

Sure. I think I hesitate to give forecasts on what we're going to use our cash flow through throughout the rest of the year, but I think it's something that we look at pretty carefully. And certainly, when you look at an 80% dividend pay out ratio, most of the cash is going out on a pre-regular basis. And I think for now, we feel that the $300 million number is the right number. Certainly, there'll be greater color as to the cash usage as the year progresses.

Your final question comes from the line of Vivien Azer of Citi.

I just wanted to circle back on the question that Michael asked. Can you just clarify from a regulatory standpoint, is there anything that would preclude you from using an existing cigarette brand name on novel new tobacco products?

Well, that's a bit of a complex topic. What I was trying to convey to Michael was as we're thinking about the product that we intend to launch in the second half, Vivien, that we'll have our plans rolled out as they become more final. If -- maybe that's best handled offline. I can get Brendan or someone to walk you through the complexities of using cigarette brands in various spaces.

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

Thanks, everyone, for your interest in Altria. If you have any additional questions, please call us today at Investor Relations.

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