Good day. And welcome to the Altria Group 2014 Second Quarter Earnings Conference Call. Today’s call is scheduled to last about one hour including remarks by Altria’s management and the question-and-answer session. (Operator Instructions) Representatives of the investment community and media on the call will be able to ask questions following the conclusion of the prepared remarks. I would now like to turn the call over to Ms. Sarah Knakmus, Vice President of Investor Relations for Altria Client Services. Please go ahead, ma’am.

Good morning and thank you for joining us. We are here this morning with Marty Barrington, Altria’s Chairman and CEO; and Howard Willard, Altria’s CFO to talk about Altria’s 2014 business results for the second quarter and the first half. During our call today unless otherwise stated, we are comparing results to the same period in 2013. Earlier today we issued a press release regarding our second quarter results. For a detailed review of Altria’s business results, please review the earnings release on our website at altria.com. Our remarks contain forward-looking and cautionary statements and projection of future results. Please review the forward-looking and cautionary statement section at the end of today’s earnings release for various factors that could cause actual results to differ materially from projections. 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 exclude items that affect the comparability of reported results. Descriptions of these measures and reconciliations are included in today’s earnings release and are available on our website. Now I’ll turn the call over to Marty.

Thanks, Sarah. Good morning, everyone, and thanks for joining our call. In the first half of 2014, Altria delivered adjusted diluted EPS growth of 5.2% and we made good progress against our full year plans. Our company’s leading premium brands and the strength of our diverse business model continue to deliver value for shareholders. Here are the highlights for the second quarter and first half of 2014. The smokable product segment delivered adjusted operating company’s income growth of 3.6% in the second quarter and 4.9% in the first half, while maintaining modest retail share growth on Marlboro. In the second quarter, Marlboro achieved excellent retail share of 44 points, up 0.3 from last year. For the first half Marlboro share grew 0.1 to 43.8 share points. Adjusted operating company’s income margins also increased both in the quarter and the first half with pricing as a key driver. So year-to-date, the smokable product segments performance has been strong. In smokeless, in the first half of 2014, USSTC focused on strengthening the Skoal value equation in part by better managing price gaps on Skoal Classic. On a sequential basis Skoal’s retail share was unchanged versus the first quarter. Copenhagen and Skoal delivered second quarter retail share of 51.1 share points, up 0.4 from last year and the highest combined share since we acquired UST. For the first half, Copenhagen and Skoal delivered combined retail share of 51 points, an increase of 0.3. Operating company’s income grew by 5.6% in the second quarter and 6.5% in the first half, while operating company’s income margins expanded to 66.6% and 64.5%, respectively. Our smokeless business continues to perform well in the competitive environment in line with it strategies. Turning to innovative products, Nu Mark began the national expansion of MarkTen e-vapor products in June in…

Thank you, Marty. Good morning, everyone. Altria grew second quarter adjusted diluted EPS by 4.8%, primarily driven by higher adjusted operating company’s income in the smokable and smokeless products segments, lower interest and other debt expense and fewer shares outstanding. These factors were partially offset by the investments we're making in innovative products and comparatively lower operating company’s income in the financial services business. As Marty mentioned, the smokable product segments adjusted operating company’s income grew 3.6% to $1.8 billion in the second quarter and 4.9% to $3.3 billion in the first half. In both periods higher pricing was the driver, partially offset by lower cigarettes shipment volume. As anticipated in the second quarter, the trade reduced inventory levels they build during the first quarter, after adjusting for trade inventory fluctuation and other factors, PM USA estimates that it’s second quarter and first half cigarette shipment volume declined approximately 4% and that industry volume declined approximately 4.5% for both periods. PM USA grew total retail share by 0.3 to 51 share points in the second quarter and 0.2 to 50.8 share points in the first half of 2014. In addition to Marlboro’s strong retail share, L&M continued to grow retail share despite declines in the industry's discount share. John Middleton also contributed to our solid first half smokable segment results. Middleton cigars shipment volume increased 11.1% in the second quarter and 6% for the first six months supported by Black & Mild in the tipped segment and the expansion of Royal Comfort in the untipped segment. While the competitive environment remains challenging, Black & Mild’s retail share was essentially flat for the first half of the year. In smokeless, operating company’s income increased 5.6% to $285 million in the second quarter and 6.5% to $524 million for the first half…

(Operator Instructions) Your first question comes from the line of Michael Lavery of CLSA.

Good morning.

Good morning, Michael.

I wanted to just actually talk about a hypothetical a little bit and just in terms of looking at SAB and if somebody were interested in trying to buying that asset. Can you just help us understand a couple of things? One, first in the mechanics, is it right to assume that every shareholder, yourself included, would be treated the same so that for instance you couldn't get shares and somebody else cash? And then especially if a cash deal is sort of the proposal, how do you think about what would make it interesting for you in terms of -- do you just look at accretion, is it -- measure economic profit differences or how do you think about the valuation creation or potentially dilution that comes with that?

Sure. This is Howard. I think any acquisition is going to be governed by U.K. Takeover law, which has a number of protections in place to try and ensure that the shareholders are treated fairly. And so I think at the highest level that would certainly govern the transaction. I think with regard to a cash deal, I think we would evaluate that the way we would any potential transaction for SAB and we would evaluate it through the eyes of the Altria shareholder and determine whether or not we thought that provided significant enough incremental value to warrant giving up the strong performance that we’ve gotten on an ongoing basis from SABMiller. And I think that we would vote our shares based on that view.

Okay. That’s helpful. Thanks. And then just one last question, smokeless, at least I think I do it on kind of the servings equivalent, which is loose, but it’s around 7% of your volumes and 14% of EBIT. Certainly, those margins are fantastic. E-cigarettes are sort of getting all the attention on the margins these days, but with two very different margin profiles in those businesses, and of course different potential long-term opportunities. How do you think about allocating resources or making those investments in terms of if those compete for resources with each other at all?

Yeah, that’s a good question. I mean, we allocate resources obviously based on the core businesses that we have today mentioned one which is smokeless, of course we have smokable and wine and we obviously have strength in our core businesses. They are terrific businesses with leading positions, great shares, great margins, and so forth and so on. With respect to innovative products, the way that we’re going about that Michael is to have a disciplined approach to innovating our way forward. You saw that for example about the way we handle test markets in Indiana and Arizona before we determine to do a national launch. So it's a little early. As everyone keeps saying to know about margins in the e-vapor business, but we’re focused on the adult tobacco consumer and if they're interested in these kind of innovative products, we want to make sure that we’re developing positions there. And in any category which emerges we intend to be the market leader.

That’s great. Thanks very much.

Thank you for calling.

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

Thank you. Good morning, everyone.

Good morning, Judy.

Marty, obviously we have the major announcement last week which if the deal does go through potentially changes the competitive landscape with two of your competitors getting bigger and then obviously Imperial getting bigger in the U.S. market as well. So just wanted to get your thoughts on what you think the competitive implications might be and how you are thinking about your strategy going forward in maybe a different competitive environment.

Well, thank you for your question. As I am sure you can understand, I am not going to comment on a transaction that’s been proposed by others. I think the questions here are best directed to them. But I can tell you that at Altria, we’re the market leader today, we would be a market leader after any transaction has been proposed. We are really focused on maintaining our market leadership, that’s what we told our organization, and that’s how we’re thinking about.

Okay. That's fair. And then maybe just in terms of the cigarette industry trends, Marty. I guess this year the industry declining of sort of 4.5% probably a little bit worse than what we’ve seen and then maybe the pricing at the same time, though, is getting better. So, is that how you kind of characterize the environment, maybe the overall volume is a little bit softer, but the industry is getting actually pretty healthy pricing and the competitive dynamics are a little bit more rational and that’s kind of the balance that we’re seeing at this point?

Yeah. So let’s talk about those in turn. Good questions both. The volume, our estimate of course is 4.5%. I would counsel folks not to over read one estimate in one quarter. If you go back and you look at the historical line rates say for the last three years, actually you see an average rate over that period of about 3.5% and it’s been as high as 4, it’s been as low as 3. So they bounce around a little bit which is why we always say and believe that we should read them over time. So it is higher at 4, 5, but I wouldn’t over read again one estimate. Certainly PM USA had very nice pricing realization. In fact, it’s having quite a strong first half. Its income is up nearly 5%. Its margin is growing. Price realization is strong. So I would tell you that at least from our perspective I think what PM USA is doing is spot on strategy. We are trying to maximize the income. We are trying to keep modest share momentum on Marlboro and I think that the dials that they have been at PM USA in the first half have really worked very, very well.

Okay. And lastly, Howard, just in terms of your guidance change, the low end's coming up by $0.02, what’s driving that change?

I think probably the biggest driver of that is the performance we’ve had in the first half. We feel like we’ve had a good performance in the first half. Our strategies have been progressing quite nicely. And frankly the risk of anything upsetting those strategies in the first half has kind of passed now and so we feel like we’re in a position to kind of narrow the range that we think we can hit for the year.

Got it. Okay. Thank you.

Judy, thanks for calling.

Your next question comes from the line of Owen Bennett of Nomura.

Hello, Owen, are you there?

It seems that line has disconnected. Your next question comes from the line of David Adelman of Morgan Stanley.

Hello, David, are you there? Operator, could we check our connections please to make sure people are in the queue?

Your next question comes from the line of Vivien Azer of Cowen & Company. Vivien Azer - Cowen & Company: Hi, good morning.

Hi, Vivien. Vivien Azer - Cowen & Company: My first question has to do with Marlboro. Clearly the share momentum is good with share gains accelerating sequentially into the second quarter. I know you guys don't comment on kind of specific lines of the Marlboro brand family that drive outside performance. But if you could offer any color at all in terms of the share gains, that would be helpful.

You are right, Vivien, we don’t offer specific insights into the lines of the Marlboro business. But sure I think that what you see is that the Marlboro franchise overall is performing very well. Since we put in the Marlboro architecture and in particular with the new platform of Marlboro Black which has been quite successful, what you see is that Marlboro really has continued to perform very well. I think that speaks to the strength of the architecture. It’s a big brand, and we have now opened it up I think to the possibilities that it has in terms of marketing slightly different lead to different segments within the franchise, attracting competitive smokers while all the time being faithful to Marlboro’s positioning. And I think that’s what we’re seeing play out in the marketplace. Vivien Azer - Cowen & Company: Fair enough. Very early days on MarkTen to be sure, but any kind of initial color that you would like to offer in the first month of the national expansion?

Well, we’re pretty encouraged. It is early, but we have achieved strong distribution. It’s now in 60,000 stores which is quite a lot in a short period of time. It’s been enthusiastically received by the trend, Vivien. And as you know, we have a lot of confidence in that product. So we’re very, very pleased to be able to roll this out nationally and really moving eastward as the year goes on. But we’re off to a good start is what I would say. Vivien Azer - Cowen & Company: Okay. Fair enough. And last thing, I know you guys weren't a party to the lawsuit against TPSAC and the resolution that was announced yesterday. But do you have any comment on how you think that might impact the FDA's view of menthol and the science as they publish their report?

I haven’t read it yet. I just saw the press reports but I would say that the press reports are consistent with the position that our regulated companies took with the FDA, really for the last four years. Our position was composition of the TPSAC was flawed by appointment of people that had conflicts of interest. We thought it was inconsistent with the statute and we have been calling on FDA as you know if you look at the filings that are available on our website consistently to try to correct that. So I'm sure that we’re trying to be a constructive partner at FDA but it's important for the integrity of the system that everybody play by the rules. So I'm sure FDA is assessing what it will do. And I haven't seen anything from them yet this morning. Vivien Azer - Cowen & Company: Fair enough. Thank you very much.

Thanks for calling.

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

Good morning.

Good morning Bonnie.

I have a follow-on question on MarkTen. So you mentioned you have distribution over 60,000 retail points since you began the national rollout. So how quickly do you anticipate getting to full distribution? And then it seems like the focus right now is expanding the distribution. So I’d like to hear how big of a priority technology and innovation are for you?

Good question. So our plan as we described previously is to have a rolling launch. We started that in June in the 25 states in the western part of the country. Obviously, as you’re building a new brand and you’re building capacity, you want to roll this out. Overtime, you want to be cognizant of having product in the store, so the people could get it, no out of stocks and the like. So we will be rolling eastward as we go through the summer and into the fall and that's how we’re thinking about the distribution. Distribution is important but it's not the only thing and you’ve touched on a couple of others, obviously. I continue to be very encouraged by the product development pipeline I see out of Nu Mark in e-vapor space. So as everyone knows, I know, and many have written that the consumer continues to move around unsurprisingly in a new category about what they want out of these products. And so we are hard at divining those consumer insights and having products available for them. So while we’re excited about MarkTen, I don't think it's last thing that anyone should expect either from us or others.

Okay. That’s helpful. And then I had a quick question on your SG&A expense in the quarter. It was up 21% year-over-year and was almost 14% of sales. So I guess I am assuming this is primarily due to the rollout of MarkTen. But could you talk about any other potential factors for this being high and then really how we should think about your SG&A going forward?

Hi Bonnie. This is Howard.

Hi.

I think certainly one of the drivers in the quarter was as you pointed out the rollout of MarkTen. Given that this was the quarter that we did the western launch, that was an impact. But I will also say to you that historically you’ve seen some movement quarter-to-quarter in the amount of SG&A expense. And we tend to budget that on a full-year basis. So I think that you will get a better idea of the trend by looking at that on the full-year basis. And I think well certainly the innovative product space is going to have an impact. We continue to have quite a focus on reducing costs in the core and you should continue to see us focus quite sharply on that. But that’s going to be probably reveal itself on a longer-term basis looking at annual term.

Okay. And then if I may, I just had one final question, a little bit of a follow-up. And given the expected changing industry dynamics, maybe you could remind us of your priority in terms of how you are going to continue to strike the optimal balance between growing market share and defending your turf while trying to maximize profitability?

Okay. I’m not going to comment with regard to any proposed transactions but I will tell you I guess two things, one that the smokeable segment remains the same. We’re trying to maximize income while making sure that we have modest momentum on Marlboro. That's been winning strategy for decades and that is not going to change. The other thing I just would observe is that change is constant in business and we had Altria prepare for all scenarios. And I think that's the way to think about it which is we’re prepared to compete today, we’re prepared to compete tomorrow.

All right. Thank you for that.

Thanks for calling.

Your next question comes from the line of Chris Growe of Stifel.

Hi. Good morning.

Hi Chris. Good morning.

Hi. I just had two questions for you, if I could. I just wanted to get a little better sense around the fourth quarter expectations. I think we have known all along it is going to be a pretty strong quarter for you, with the MSA cost reductions and as well as the tax rate decline year-over-year. I don't know if maybe, Howard, can give a little more color on the tax rate decline. Is that still expected to be down? I think you used the word significant in the press release. I want to get maybe a little more flavor for how much it could be. But then just understand your thoughts on MSA cost savings and any change in your view, given the competitive conditions in that category. It looks like a lot of that could come to the bottom line?

Sure. I will ask Howard to comment on that for you, Chris.

Sure. I think we’ve communicated that our full year tax rate is expected to be about 35%. And if you compare that to the back half of last year, you’ll see that that’s significantly lower in the fourth quarter. I think last years tax rate was a little in excess of 37%. So that gives you an idea going from 37% to 35%, that’s a pretty significant impact. And then with regard to the FETRA payments discontinuing in the fourth quarter, on an annual basis our FETRA payments had been about $400 million. So on a quarter’s impact, that would be estimated to be about a $100 million.

Okay. And if I could ask a question and thanks in advance for the inventory information you gave today was very good. I just want to get a sense of where you think the -- your inventory levels are and perhaps for the category are currently, just a good kind of base case, based on the numbers you have given. So in that they are down a lot year-over-year in this -- for the industry, is that considered a low level or is that a level that you think is pretty normalized going forward?

If I would say at the end of the second quarter, I mean, the one thing to remember always is that they tend to wash themselves out over the year, Chris. So they do go in and out a little bit for the quarter, but at least for PM USA, the inventory levels tend to wash themselves out over the year. The other thing to understand is as industry cigarette volume does come down over time, you would expect for wholesale inventories to come down with them. But I don't think there's anything particular to call out about ending inventories in the second quarter.

Okay. Thank you for the time.

Thanks for calling.

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

Hi. Good morning. Can you hear me?

Hi. David, I lost you there, glad you called back?

Okay. Great. Thanks, Marty. A couple of quick things for me. First, out of curiosity, given the prospect of real competitive change amongst your competitors in the U.S. cigarette market, going into the prospect of that transaction closing, or those transactions closing and then the subsequent aftermath. Are there particular strategies to try to be opportunistic? Could there be some disruption that you have already planned for or even starting to implement?

Guess what I would say David is what I said, one or twice already this morning is that I'm not going to comment on the transaction that’s been proposed by others. What we do at Altria is we focus on our business. We’re the market leader today. We have the leading positions to leading brands. I think superior infrastructure. I would expect for all of that to obtain. It is true that the competitive environment changes and you take that when you said strategy and it will be unsurprising to you to know that Altria has examined lots of scenarios over time to examine how best we might compete. So all that work has been done, but I think it's both premature and inappropriate for me to say what those might be.

Okay. Second question. If Lorillard and Reynolds do combine as planned and are successful in achieving the cost synergies that they envision, that combined company would have per pack controllable costs that are considerably lower than where PM USA's per pack costs are today. That company would be smaller than you are and it would have a more diverse brand portfolio than you currently have. And I am curious, if they are successful in achieving that, would that cause you to sort of take a fresh look at your overall cost structure? Do you think that that would indicate that there are further opportunities to make sizable cost reductions at PM USA?

David, I admire your persistence and I'm sure you'll appreciate my answer, which is I’m not going to comment on the transaction by others. But I would say this, we look at our cost all the time. And you’ve seen where PM USA is in terms of its controllable cost. And I don't think anybody should have reason to think that we won’t continue to have that kind of focus on controlling our cost. It’s part of the algorithm for growth.

Okay. And then, lastly, a question about the -- during this quarter the price vertical was reinstated. And I am curious as a result of that, was there any change in the policy or the timing and the magnitude of intercompany cash, cash flows from PM USA to Altria?

Hey, David, I really don’t think it had any impact. I mean, we continue to have a strategy to address the reinstatement of that verdict and we've been managing our businesses much the way we have over the last several quarters.

Okay. Thank you.

David, thanks for calling back in.

We now invite the media to ask questions. (Operator Instructions) Your next question comes from the line of Michael Felberbaum of the Associated Press.

Good morning. I’m curious as far as the MarkTen e-vapor product go. How do you see Altria’s ability to become a market leader in that category when the company is kind of the last of the majors to enter the category on a national level? And what differentiates your product that will help that growth?

Sure. Thank you for your question. I would say the following. One is, it’s very important to remember that the e-vapor category is just really beginning, it's emerging, and it’s very early days. There is very little brand equity that has been built by anyone. The products continue to change over time. So I think the idea that the category somehow fully developed and we’re late to the game is not the right way to look at it in our view. I would say the second thing that gives us confidence in our ability to move to market leadership in the e-vapor category is the fact that we are the market leader in every category in which we compete virtually. So whether it’s cigarettes or smokeless or a wonderful wine company, what we've done is we've built terrific brands with superior products and satisfied adults in a way to allow us to build our businesses. So that's how we’re thinking about it. This is a business we’re in. These are the consumers that we set out to satisfy and if consumers are interested in e-vapor products, we want to be the best at it.

Thank you.

Thank you for your question.

(Operator Instructions) Thank you. At this time I would now like to turn the call over to Ms. Sarah Knakmus for closing remark.

Thank you everyone for joining our call this morning. If you have any follow-up question, please contact us at Investor Relations.