Altria Group, Inc. (MO) Q2 2008 Earnings Report, Transcript and Summary

Good day and welcome to Altria Client Services Second Quarter 2008 Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by Altria management and a question-and-answer session. [Operator Instructions]. Media representatives on the call will also be able to ask questions following the conclusion of questions from the investment community. I'd now like to turn the call over Mr. Cliff Fleet, Vice President, Investor Relations for Altria Client Services. Please go ahead sir.

Good morning, and thank you for joining our call. This morning we will discuss Altria's second quarter 2008 business results. Our remarks contains forward-looking statements and projections of future results and I direct you to the Safe Harbor statement at the end of our earnings release for review of the various factors that could cause actual results to differ materially from projections. As a result of the spin-off of Philip Morris International earlier this year, our reported results reflect PMI as a discontinued operation for the second quarter of 2007. And revenues and operating company's income for PMI are therefore excluded from Altria's continuing results. For a detailed review of Altria second quarter business results, please the earnings release that is available on our website, altria.com. Please note that in this morning's call, we will only be discussing the second quarter business results and we will not be discussing the status of litigation. I would now like to turn the call over to Dave Beran, Altria's Executive Vice President and Chief Financial Officer.

Thanks Cliff. Good morning. As you have seen from our press release Altria reported very good business results in the second quarter. Altria delivered strong earnings per share growth with solid operating company's income performance from PM USA and John Middleton. Altria reported diluted earnings per share from continuing operations of $0.45. Excluding special items Altria delivered a strong adjusted earnings per share growth from continuing operations, up 12.2% to $0.46, primarily driven by higher operating company's income and lower general corporate and interest expense. For the first half of 2008, Altria's adjusted diluted earnings per share from continuing operations increased 10.8% to $0.82. Altria is reaffirming that its full year 2008 guidance for adjusted diluted earnings per share from continuing operations will be in a range of $1.63 to a $1.67. This represents an earning per share growth rate of 9% to 11% from an adjusted base of $1.50 per share in 2007. While our first half results were at the high end of our earnings guidance range, we're taking a measured approach to the second half of 2008, as two factors could potentially impact our ability to exceed our earnings per share guidance. The factors include higher and expected in inflation, which impacts PM USA's resolution payments and input costs, as well as higher than expected cigarette industry volume declines. Even with these two factors, we remain confident that Altria will meet its financial objectives. Based on the strength of our businesses and a history of delivering business results in challenging external environments. This quarter, Altria benefited from accelerated cost savings generated by its previously announced corporate restructuring. Corporate expenses declined $43 million in the second quarter, just $73 million, which should be the approximate run rate for the rest of the year. Altria expects to realize $250 million in annual savings beginning in 2009 as a result of the corporate restructuring. Altria also returned a substantial amount of cash to its shareholders in the form of share repurchases and dividends. Altria commenced its stock buyback program and repurchased approximately $1.2 billion of its stock. We repurchased 53.5 million shares during the quarter at an average price per share of $21.81. Additionally, Altria declared a quarterly dividend of $0.29 per common share paid to stockholders of records as of June 13, 2008. This equates to approximately $600 million in dividend payments. Combined, the stock buyback and dividends totaled approximately $1.8 billion. This represents over 4% of Altria's June 30th market capitalization. Now let's discuss PM USA's second quarter results. PM USA's second quarter revenues net of excise taxes increased 3.8% to approximately $4.1 billion. Excluding the $107 million in revenues from contract volume manufactured for PMI, PM USA's revenues net of excise taxes increased 1%. PM USA's operating company's income increased 33.2% to approximately $1.3 billion, due to lower pretax charges related to the Cabarrus facility closure, as well as lower wholesale promotional allowance rates. The positive impact of these on PM USA's operating company's income was partially offset by lower volume, increased resolution expenses, and cost-related through reduction of contract volume manufactured for PMI. Adjusted for items related to the Cabarrus facility closure, PM USA's second quarter 2008 operating company's income increased by 3.8% to approximately $1.4 billion. PM USA's adjusted OCI margins increased 90 basis points to 34.7% versus the year-earlier period. Margin improvements were driven by lower promotional spending and SG&A cost reductions. PM USA's domestic cigarette shipment volume of 43.6 billion units was 4.5% lower in the prior-year period, but was estimated to be down approximately 3.5% on adjusted for changes in trade inventories. PM USA's premium volume mix increased 50 basis points to 92.9% versus the year earlier period. In the second quarter PM USA's estimates that total cigarette industry volume declined by approximately 4%. For the first half of 2008, PM USA's domestic cigarette volume of $83.7 billion was 2.9% lower than the prior year period but was estimated to be down approximately 3.5% on adjusted per changes in trade inventories. For the full year 2008, PM USA now projects a total cigarette industry volume decline of approximately 3% to 3.5%. PM USA is also revising its estimated long-term cigarette industry decline rate to a range of 3% to 3.5%. These revised industry decline rate estimates reflect PM USA's current assessment of business conditions, which include economic conditions, cigarette excise tax activity, adult consumer activity across multiple tobacco categories and trade inventory changes. Retailers appear to be carrying lower levels of cigarette inventories which maybe due to increased carrying cost for inventoried items such as fuel and cigarette. With over 400,000 stores selling cigarettes, this trade inventory reduction and its impact on industry volume estimates is difficult to measure precisely. Industry volume estimates are very sensitive to this trade inventory movements. The average cigarette state excise tax at the end of the second quarter was approximately $1.10 per pack, which is in line with PM USA's 2008 forecast. Today, in 2008, five states have increased their cigarette excise taxes with an average increase per state of $0.89 per pack. In a highly competitive environment, PM USA's retail share grew half of share point to 51% in the second quarter, driven by Marlboro. Marlboro increased its retail share by 0.8% to 41.8% as the brand continued to benefit from investment spending at PM USA made earlier this year. Price snatch between Marlboro and the lowest effective priced cigarettes remained relatively stable at 43% in the second quarter. Marlboro's strong retail share gains were partially offset by share losses for Virginia Slims while basic in covenants [ph] retail shares were essentially unchanged versus the prior-year period. The discount category remained relatively stable. Its second quarter retail share was unchanged versus the prior year period. PM USA continues to invest in the development of adjacent smokeless products and test markets both Marlboro Snus and Marlboro MST. PM USA is pleased with these learnings and is incorporating them into future plans. Let me briefly update you on PM USA's cost reduction initiatives. PM USA has delivered approximately $25 million to-date against the $300 million in additional SG&A reductions announced in March of this year. In the past 18 months, PM USA has delivered a total of $325 million in SG&A cost savings. And the company remains committed to achieving the additional $275 million by 2011. PM USA's manufacturing consolidation plan is on schedule and within budget, and the company plans to close the Cabarrus manufacturing facility by year end 2010. PM USA continues to transition its infrastructure to deal with the effects of the removal of the contract cigarette volume manufactured for PMI. PM USA expects this volume removal to be completed by the end of October, 2008. This transition negatively cost by about $30 million in the second quarter and approximately $50 million in the first half of 2008. PM USA expects total 2008 costs of about a $100 million and the company continues to seek ways to reduce this impact. Overall, PM USA has solid income performance. Their cost reduction efforts are on track and Marlboro had strong retailer share gains in this very competitive quarter. Now, let's turn to John Middleton's results for the second quarter. John Middleton had strong business results. The company delivered $50 million in operating company's income and grew its total cigar shipment volume by 11% to 355 million units in the second quarter. John Middleton is capitalizing on PM USA's sales and distribution infrastructure and expertise to help grow Black & Mild. At the end of the first quarter of 2008, John Middleton contracted to use PM USA's sales force to represent Middleton's brands at retail. In the second quarter, John Middleton saw the initial benefits from this representation, as Black & Mild's retail product availability and visibility increased. This contributed to Black & Mild's retail share and volume gains. Black & Mild increased its share to growing a machine made large cigar segment by 2.9 share points to 27%. John Middleton will continue to focus on increasing product availability and visibility of its brands at retail as the year progresses. Turning to our financial services business; Philip Morris Capital Corp. reported $30 million in operating company's income in the second quarter, reflecting lower asset management gains and lower lease revenues versus the year-earlier period. PMCC's results will vary over time as investments mature or are sold. Overall, we are very pleased with Altria's strong second quarter performance. To sum up, PM USA delivered solid income growth and improved its adjusted operating margins. Marlboro achieved record retail share while lowering its quarterly promotional spending. John Middleton delivered strong income volume in retail share performance, as Black & Mild benefited from PM USA's sales and distribution infrastructure. Our company's cost management programs contributed to Altria's strong financial performance. Altria's corporate restructuring program delivered significant cost savings and PM USA reduced its SG&A spending. These two programs combined, contributed almost $65 million in savings for the quarter. Altria commenced its share repurchase program and purchased shares for approximately $1.2 billion. And finally, Altria reaffirmed its adjusted income per share guidance for the year, reflecting our confidence in the strength of our businesses. I am now happy to take your questions. While the operator compiles the calls, I want to cover a few house keeping numbers. In the second quarter, Marlboro's net pack price in convenient stores was $4.31 and the lowest effective price brand was $3 per pack. CapEx was $40 million. Depreciation and amortization was approximately $50 million. Our second quarter MSA in quarter buyout accruals were approximately $1.4 billion or $0.65 per pack. Of the $0.65, MSA is $0.60 per pack and the quarter buyout is about a nickel per pack. Our cash balance as shown in schedule eight declined, because PM USA made its MSA payment in the beginning of the second quarter. This payment totaled $4.1 billion. And finally, our second quarter tax rate was 36.8% and we expect a full year tax rate of 37%. Operator, do we have any questions. Question And Answer

Thank you. [Operator Instructions]. Our first question is coming from Nik Modi with UBS. Please go ahead.

Good morning guys.

Good morning, Nik.

Just a couple of quick questions; just on the FDA bill given across the house. Just curious on your thoughts on the outcome. And then on the promotional environment, it seems to you have gotten materially better net revenue per pack realization in the second quarter. But you only had... part of the quarter it was the price increase, I am just wondering if we're to expect that realization to improve in the second half of the year? Thanks.

Okay. Thanks for your question Nik. On your first question, as you know, Philip Morris USA has been a supporter of top, but reasonable federal regulation of tobacco products by the FDA. And we think yesterday's vote by the house represents good progress. And we remain hopeful that bill can continue to receive attention during the rest of the session. But given the calendar and then many other issues pending before Congress we just do not know the outcome at this point. With regards to promotional activity in the second quarter, we look at our own promotional activity, specifically I'll address all their brands, but specifically Marlboro, our promotional activity was less versus it was in the first quarter of 2008 and it was actually below what we've spent in the second quarter of 2007. And we can say that's across the board. For all brands in the industry it still remained a pretty half-way competitive environment with some major brands promoting at levels equal to or exceeding levels in the first quarter of last year...excuse me first quarter of this year. But as we go look on to future, we're looking our business, I'll come back to ... we look at our business around the value of inflation. So its positioning of the brand the product, the promotion, and price is both one element of all of those elements working together and in the first quarter, we saw some opportunity. We went after that opportunity. In the second quarter, you saw that benefit, because we dropped. We were able to drop our promotional levels both on promoted units and price off, and saw the benefit of that investment spend in the first quarter. And our spending will be going into third and fourth quarter. I won't go into it for competitive reasons, but we'll continue to read the marketplace. But what I can say is that despite lower promotional spending Marlboro was able to grow share up 0.8%. Thanks for the question.

Thank you. Your next question is coming from Judy Hong with Goldman Sachs. Please go ahead.

Thanks. Good morning.

Good morning Judy.

Just a follow up on the FDA question, and my question really relates to the menthol provisions that were added to the original version. I'm just wanted to get your thoughts on how significant those provisions are in your view is my question?

There was a lot of talk early on about a menthol brand. Neither the bill that passed the house last night, nor the parallel senate bill contained such a provision. So, there is no reason for me to speculate on that. And we ... you were asking about specifics of these two ... of this legislation. We are engaged in that process. We have good people on the Hill working on that process and you can see by reading the bill what the specifics are, but I would prefer to have back engagement with members of Congress and not discuss that in detail on this call.

Okay. Dave, just looking at your industry volume decline outlook longer term now down 3% to 3.5%. A couple of questions related to that; one is, whether that changes your mid-single digit profit growth outlook long term? And then secondly, whether this sort of changes the way you look at the adjacent categories and perhaps expedite or increase your urgency to become a bigger participant in those adjacent categories where growth seems to be going, as well as looking at some of the cost savings opportunity more aggressively to perhaps offset a bigger volume decline.

If we use, the second quarter as a proxy and look at our assumptions for the second quarter. In the second quarter the industry volume was down slightly more than we expected. But we delivered EPS growth on a six-month basis up 10.8%. So we look out into the future; we still haven't backed off our total shareholder return of 12% or better. With regards to adjacent spaces next to cigarettes, that's one of the levers that we talked about in our road show and you saw it with us getting into the cigar business with John Middleton and had good results this quarter. And you see it with our test markets both one snus and snuff. And I go back to the mission of Altria. Part of our mission is to make sure that we're financially disciplined. And right now we look at where we are in the learnings that we're getting. We feel quite comfortable that we can hit the targets that I've given today, and continue on the path to take those learnings and then when we think we have it right to take further actions. But you're right. We are interested in those adjacent spaces, that's why we have activity there.

Okay, and then my final question Dave, just in terms of your full year guidance for this year, the last conference call you've talked about the growth being more weighed towards the second half of the year. And clearly the Q2 actually I think came in better than expected. So my first question is what drove the Q2 results to come in better than what you had anticipated and then, secondly if you could elaborate a little bit more on the inflation outlook vis-a- vis the MSA pools as well as some of the other cost increases that you're looking, that could potentially be more of a headwind, in the second half of the year.

Okay. We look at the second quarter, we were actually pleased to get more on cost reductions, both at the corporate level and our G&A functions. The process that we've put in place, we've had it for a number of years that we had a well thought out process on how we go about looking to take out infrastructure that can give us cost reductions, but not anything to impact the future of the business. So in the second quarter, we were able to accelerate that. Now when you look out into the third and fourth quarters, the number one potential impact could be inflation. It would... we've and just we've seen fuel prices come down somewhat over the last two weeks, but inflation is still running at a level that is higher than we've seen for quite some time. And the way the inflation works in the MSA it's basically what the index, the CPI index is on December of 2009. So it's not the average, December 2008.... it's not the inflation, it's December, 2008 over the index December, 2007 and in the past, over the past years that number has fluctuated depending on what happens during the course of the year. We actually took our pool up in the second quarter versus the first quarter and we're monitoring the overall inflation rate as the year progresses. The other place that the, really the petroleum costs hit was in the area of leaf and because it hits, it impacts fertilizer costs that farmers use to grow our product and diesel fuel. So we actually, back in the second quarter build in inflation adjustments and also adjustments for propane prices for our farmers and that should be hitting us in the second half of year, but typically when we look at our overall materials cost that's the cost of doing business and but for those reasons, I feel quite comfortable maintaining our guidance at 9% to 11%, but not taking up that at this time.

Thank you very much.

Thank you.

Thank you. Your next question is coming from Christine Farkas with Merrill Lynch. Please go ahead.

Thank you very much. Good morning, Dave and Cliff.

Good morning, Christine.

Couple of questions for you Dave. Can you comment on what your underlying margins at PM USA would have been or how much they were impacted by the contract volumes this quarter, or the lack of a contract volume?

Well two things okay. If we look at the costs that are associated with the contract volume, it is...we are reducing our overall volume that impacted costs, approximately $30 million in the second quarter, because we can't pull cost out quick enough but we have to shutdown facilities, and that's and we should expect approximately $100 million for the total year of 2008. Now the asset impairment charge in the second quarter was at $35 million. And --

Okay now that's helpful. The operating number, the $30 million is what I was looking for. That's great. A question on your inventory and your outlook of the volumes being down 3% to 3.5% for the industry and you commented on changes in at retailer inventories. Certainly that make sense for this year or for the next few months as retailers reduced your inventories, by suspect a 5 [ph] at some point. So beyond '08 or part of '09, is your outlook more about the excise tax environment and cross category behavior?

The way we kind of predict what will happen or make estimates of what will happen in the future is basically what has happened over the last three to four or five year. I guess I would say if the economy continues to go down, there will be upward pressure on the states to raise excise taxes and that's reflected in thinking, but also when states raise excise taxes by sharp amount and this year even though we are on track with the average state excise tax position it was made up little bit different. Five states took up excise taxes on an average of $0.89 per pack, and what we saw happen is now there are very small categories but in a number of states increase in other categories performances such as roll-you-own and small cigars because they have a tax base that is vastly different than that of cigarettes. And so it really brings up another question about the overall tax policy among the categories. But they are tiny, okay they are tiny categories for instance roll-your-own was based on tax records to the first five months is about 4 billion units. Small cigars approximately 2 billion units, but they were growing at rates of about 18% off a very small base. So we saw that taking place in a couple of states where we saw these large increases. So that's also has come into our thinking as we look down the road.

Okay and then my last question Dave with respect to the overall pricing environment, I think your comments were clear about that. But can you comment if there already were pockets of extra promotional activity for example maybe in menthol or certain regions or geographies across the U.S., where you see heightened activity?

We basically saw... when we look at the total U.S. and I go back to remarks that and we may back in on the road show about Marlboro has a national platform, but then we do have tools that our disposal to go in where we see pockets of competitive activity. Our competitors had a different brand development, we have one the strong than that on the West Coast, ones that's strong on the East Coast and we saw with their major brands competitive activity not changing a lot from what we saw in the first quarter. Now, with some of the lesser brands, yes, less promotional activity, some of the major brands no.

Okay, that's helpful, thanks a lot.

Thank you.

Thank you.

Thank you your next question is coming from David Adelman with Morgan Stanley. Please go ahead.

Good morning.

Good morning David

A few things I wanted to ask, Dave, first you're a target for consumption decline in the U.S. cigarette category this year. Can tell fairly material improvement from the first half pace. And I am just curious why do you think that would occur?

We think that we go back and looked at consumption last year. We saw a rather steep decline in the first quarter. It moderated in the second and third quarter and then the decline got steeper in the fourth quarter. It moderated some in the first quarter. This year was relatively the same in second quarter of moderated a little bit and as we look out over the third and fourth quarter at this point we don't believe that the fourth quarter will have the same sort of decline we saw in the fourth quarter of last year.

Okay and the numbers here in the release to 4% number that's a consumption number you're speaking to is that correct?

That's a consumption number. Okay. And that 's based on our read of the shipments versus the overall change in inventories of that wholesale and retail.

Okay and then secondly Dave I am curious about your reactions to the observation particularly given some increased pace of movement within tobacco but outside the cigarette category that you are not moving more aggressively with respect to moist smokeless tobacco and particular and perhaps Snus the, the test market I think in Atlanta of moist smokeless started last October, its almost the year ago its really has an expanded materially and I just wonder the outside perception is there is a lack of urgency on those types of efforts because you are not moving. It would appear with great speed. So I am just curious about your reaction that observation.

Yes, and out of it not characterize it as a lack of urgency, I would characterize it as and we want to make sure that we do this in a financially disciplined way, and when I say financially disciplined that we go out. We have tested all elements of the overall value equation behind both snus and with snuff and we got it completely right, then we won't incorporate that into our plans. And right now, both of those initiatives are investment spent for us and our goal is to take it from investment spend to being, making a profit. But right we are in... these test markets are what I call burning laboratories and make sure we get it right.

And thus the recent accelerated down trading in smokeless to make that category any less attractive to you.

Could you repeat your question?

Sure. There's been a reacceleration in the down trading...consumer down trading, to price value products within moist smokeless tobacco and I am just curious whether that dynamic mix the category or your perception of the opportunity any less attractive than you might have thought six months or a year ago.

No it is not.

Okay. And then two other things I wanted to ask, Dave. One on the FDA, how do you conceptualize two particular risks. One is a follow up to Judy's question. You know the risk with this revised provision to your menthol franchise long term and secondly the risk, if a real anti-tobacco zealot gets the role of running the FDA's tobacco effort under this legislation.

As I said with Judy, okay, you are getting into specifics. This is...the first step is to get the legislation passed and once the legislation is passed, it actually to go through rule making from the regulatory body. And we support, okay we support this regulation for all the reasons we have quoted over the past seven years. And yes there is risk anytime, the business or the external environment changes. But we built an organization, and infrastructure up over the years that has enabled us to continue to be successful, despite the changing business conditions that might present...that might be presented to us in the future and this is about one of those.

And then one last question Dave on the Capital Corporation. There have been some adverse legal rulings on the SILO-LILO structures, and I realize that your leases are somewhat different than those, but can you find for us what the... if all of those decisions ultimately were adverse to you, what your maximum tax liability associated with that would be?

Yes, thanks for your question, and no I wont frame will it be in total, because right now, as we look at this... the we believe our facts are different from the facts of these other cases. As you know, we actually went and paid approximately $150 million in taxes. I think that was the time period from 96 to 99 and right now we have a summary judgment motion. It's fully grapevine [ph] for the judging of the set or argument or ruling that motion. Predictions are that that sometime by the fall, but basically there is no deadline. But if we win, the case is over; if we lose the judge will set a trial day, likely early to mid 2009. We believe in our position, we will defend it. So I won't speculate on how the other three cases impact us, because the facts are different. But we think that our accounting treatment that we have and our financial statements are reflected of our performance there or a future performance there.

Thank you.

Thank you.

Thank you. Your next question is coming from Ann Gurkin from Davenport. Please go ahead.

Good morning.

Good morning, Ann.

Can I get the outlook on... good morning. The second half, if we look to the second half and we see a heightened economic challenging environment for the smokers. Is it fair to assume that there is an increasing likelihood that industry becomes more promotional in the cigarette space?

That's always a risk. Typically what we've seen in past economic downturns, a number of things take place. First you see consumer confidence go down. And we have seen that. There was slight tick up this past month, but typically with, to see consumer confidence below an index of 100 and you typically as we've seen the past potential down trading to the discount products. We have not seen that this time, because typically when you see the CPI... excuse me, the consumer confidence go down, you see a corresponding large step up in unemployment. Unemployment has inched up, but it is still not at levels that we have seen in past economic downturns. And the other factor that comes into play is the overall relationship between the top and the bottom, and currently and that's something we monitor every week and through the second quarter the gap between Marlboro and lowest effective price product is about 43%, which we continue to see as a good spot for Marlboro. So, but once again we will remain a competitor in the marketplace, depending on actions that take place there. However, the second quarter we were able to pullback on promotions, and still have solid share growth behind Marlboro.

Along the same discussion, I guess there is some mixed data on whether we're seeing acceleration in consumer down trading and cigarettes and I would be interested in your comments on what kind of that motion right now?

We actually look at the lowest category deep discount in the cigarette market. What we saw was a slight increase in deep discount from a year ago. It went up 0.2% from 11.3 to 11.5, but is actually came down 0.3% from the first quarter of 2008. So we see some trading going in and out of the lowest but if you look at it over the last 24 months, you will see periods where it goes up two-tenths down two-tenths up two-tenths down two-tenths and overall, the overall discount category is unchanged. So there seems to be some in-switching within that category, but no consorted movement up that we can see at this time.

Right. That helps and then if I could ask a couple of questions on adjacent products. In Atlanta the Marlboro most smokers, products, I understand you've instructed retailers to give away a ten to consumers who purchase any smokeless products. Can you explain to me how is that strategy, what you're trying to achieve that change in strategy in Atlanta?

It is really not a change in strategy. The...what you are talking about are tactics that we and other consumer-based products manufactures employ when they are trying to get trial of a product. And so that's one promotional execution. We've had many others in that marketplace and that gets to this whole concept of what we really are using the test markets that we have no only in Atlanta but in Dallas and Indi, as learning laboratories that will inform our future plans on how we go about entering those categories.

And then with respect to these test markets are a learning labs. Do you feel like the pace of adjustments to market findings is fast enough to get accurate leads on how either snus or Marlboro moist smokers are performing in these test markets.

Yes we do.

Okay, great. Thank you.

Thank you.

Thank you. Your next question is coming from Filippe Goossens with Credit Suisse. Please go ahead.

Yes good morning David and Cliff.

Good morning, Filippe.

Good morning, a few questions for Cliff [ph] as well. Let me first start with the FDA; I know you are not going to comment too much on it but let me just at least try on the one side. If we read the bill correctly last night and we kind of came away with the impression that right now the committee who have to do the research on menthol that it has not given any indication what the remedies would have to be if it comes to certain conclusion. So, that basically for us means that there's absolutely no instruction here that the only thing they could do in the worst case scenario were to be bad menthol. If that's the way we should read it, what could you see David today as some of the potential remedies in the scenario that they would come to the conclusion that menthol might make it more difficult to quit or make it easier to again start smoking?

As I said earlier, currently that bill nor the Senate bill contains any sort, any such provision of completely banning menthol. And as I said earlier, I am not going to get into specifics. I don't this is the proper forum for that but thank you for that question anyway.

Okay, let me move on then to some other business question. And thanks very much for the frank outlook long term in terms of the industry trends, and I think I may have asked this on the last call already, but does that basically mean that currently the way you are thinking about what's going on in terms of the economy, excise taxes et cetera, et cetera, that we might be seeing a potential change in the price elasticity of demand for cigarettes. I mean it's one thing for the industry to raise pricing 5% per annum, all other things being equal, but given that the consumer is not being safe with inflation virtually every single item that she or he purchases that maybe there will be more elasticity here going forward. Is that basically what let you to your revision for the long-term outlook?

Yes Filippe it was, when you talk about elasticity. If you talk about elasticity to other non-tobacco products, that's not yet. Its...we are examining the elasticity that exists between cigarettes, over the years. It's been pretty solid about 0.3, but the question that we're asking ourselves now is the cross price elasticity between cigarettes and other tobacco categories. Like I've commented earlier about in some states this year where we saw $1 per pack increase in state excise taxes. Typically in the past, which you would see is a pretty sharp decline based on that 0.3 elasticity, but what you would see as if it was greater that it might go to cigarette sold in two different channels, like contraband or over the Internet or even increases in counter effects. And today we're starting to see, I mentioned too small cigars in the we are all in there tiny, slight increases there. So, we're looking at that cost of elasticity, but even with that increased decline rate, we remain confident in achieving our goals, but you're right. We're looking right now at cost price elasticity. I have a number that I can quote, not at this time.

Okay Dave. Then the other question as you know there is an attempt in the State of California to basically ban drug stores from selling tobacco products. Any initial read on there in terms of what if that were to be enacted whether that could be followed by other states as well? And if this could potentially in a worst case scenario also spillover to the C store channels.

At this point, I do not know the status of the vote, on that bill in San Francisco. If you look at the U.S. marketplace though, there are approximately 400,000 outlets that sell cigarettes. And the percent of cigarette volume in drug stores is a small number compared to the total overall industry. And at this point, first we will have to see what happens in San Francisco and I can't speculate whether there would be any spillover into the other states. But with the number of outlets selling cigarette products, I really don't see that much I mean overall impact to the industry.

And then my final question kind of more a broader industry strategic-type question. There was a report out this morning, demonstrating that in Scotland that somebody had conducted a study saying that areas or in public areas where smoking was no longer permitted, there were double digit decreases in a number of illnesses. And the right now if you look at U.S. the smoking bans or more inactive on a local basis. How do you look at if there were to be an attempt to enact smoking bans on state-wide levels, whether that would at all accelerate the existing consumption decline that you're seeing and could this ultimately lead to what we would call kind of like, the final round of consolidation within the tobacco space as companies will look at either ways to enter categories that are still growing good. You referred yourselves to a smokeless roll-your-own and cigars or basically looking for other ways to leverage the cost infrastructure over a larger base of units. Thanks David.

That was a long question. Let me try to put it in a few parts. First, the question about in the U.S. federal versus local versus state smoking restrictions. I don't have the number in my head, but there are quite a few states in the U.S. with various platforms of smoking bans and I think the first question was if it got broader, what's the potential impact on the overall consumption or volume? And we've done a number of studies looking at various impacts of smoking bans on consumption and it's tough to get an accurate read on that. Because the question, does a ban take place because incidents and over consumption has changed over time that led to the ban or did the ban cause it. Quite frankly, we've looked at quite a few of these and we can't draw a conclusion on that. As far as the consolidation; in the tobacco industry, consolidation has been with us for years and as I look out, I would say that it would continue to be with us. And that's nothing new, that's been with us for decades. We thank you for the question.

Thank you, David.

And our final question is coming from Adam Spielman with Citigroup. Please go ahead.

Good morning. In fact my questions have been answered and given the time, I won't ask anymore. So thank you very much.

Okay. Thank you. Adam.

Thank you. At this time, I would like to turn the floor back over to management for any closing comment.

Thank you all for joining us today. If you have any follow-up questions, please call us at our Altria Investor Relations. Have a good day.

Thank you. This does concludes today's Altria Client Services second quarter 2008 earnings conference call. You may now disconnect.