Altria Group, Inc. (MO) Q3 2011 Earnings Report, Transcript and Summary

Good day, and welcome to the Altria Group 2011 Third Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Brendan McCormick, Vice President, Investor Relations for Altria Client Services. Please go ahead, sir.

Good morning, and thank you for joining our call. This morning, we will only be discussing Altria's 2011 business results for the third quarter and through the end of September, and will not be discussing the status of tobacco litigation. Our remarks contain forward-looking and cautionary statements and projections of future results, and I direct your attention to the forward-looking and cautionary statement section at the end of our earnings release for the review of the various factors that could cause actual results to differ materially from projections. For a detailed review of Altria's business results, please review the earnings release that is available on our website, altria.com. Altria reports its financial results in accordance with U.S. Generally Accepted Accounting Principles. Today's call will contain various operating results on both a reported and on an adjusted basis, which excludes items that affect the comparability of reported results. Descriptions of these measures and reconciliations are included in today's earnings press release and are available on our website. In addition, comparisons discussed in this conference call are to the same prior-year period unless otherwise stated. Now it gives me great pleasure to introduce Mike Szymanczyk, Chairman and Chief Executive Officer of Altria Group Inc.

Thanks, Brendan, and good morning everyone. Altria made significant progress in the third quarter on its plans to continue delivering strong returns to shareholders. The company increased its dividends, 7.9%. It completed its previously announced $1 billion share repurchase program. It exceeded its goal of achieving $1.5 billion of cost reductions, and it grew its third quarter adjusted diluted EPS 3.7%. And our consumer products businesses continue to expand their adjusted operating margins. For the first 9 months of 2011, adjusted diluted EPS grew 4.8% and includes a $0.01 per share charge for the judgment paid in the Scott case. In the cigarette segment, Philip Morris U.S.A. delivered strong third quarter adjusted operating income margin growth despite difficult comparisons which were impacted by trade inventory depletions in 2011, and strong operating companies income growth in Marlboro retail share performance in 2010. PM U.S.A.'s reported cigarette volume declined 9% for the third quarter as the trade depleted inventories that had been built in the first half of this year. After adjusting for trade inventories, PM U.S.A. estimates its cigarette shipment volume declined approximately 5%. Marlboro's third quarter retail share was negatively impacted by relative changes in manufacturers' promotional activities. Following PM U.S.A.'s July 2011 list price increase, Marlboro's retail price increased more than major competitive premium and discount brands as PM U.S.A. focused on growing its adjusted operating companies income margins. As we have stated before, PM U.S.A.'s objective in the cigarette category is to maximize income growth while maintaining modest retail share momentum on Marlboro. PM U.S.A. balances these objectives over time rather than focusing on quarter-to-quarter income and share results that may fluctuate on a short-term basis due to the timing of Marlboro's new products, and brand building initiatives as well as competitive activity and trade inventory dynamics. PM U.S.A. is willing to accept short-term negative retail share comparisons on Marlboro, as it balances these objectives. We remain confident in Marlboro's brand strength as its equity, loyalty rates and adult demographics remain strong. In the smokeless products segment, USSTC delivered strong adjusted operating companies income and margin growth driven by Copenhagen and Skoal. In the cigars segment, John Middleton achieved double-digit growth in net revenues and operating companies income and delivered strong adjusted operating companies income margin growth in the third quarter. In the Wine segment, Ste. Michelle delivered excellent financial and volume results as it continue to focus on improving its mix to higher-margin premium products. Overall, we are pleased with our business results through the first 9 months of the year which were achieved in a difficult economic environment marked by intense competition in our tobacco businesses. We believe that we are on track to achieve solid adjusted earnings per share results for the full year. We are reaffirming our adjusted diluted EPS guidance as we expect to deliver EPS growth in the range of 6% to 9% for the full year, or $2.01 to $2.07 off an adjusted base of $1.90 per share in 2010. This adjusted EPS guidance includes $0.01 per share charge related to the Scott case. We also expect to achieve reported diluted EPS in the range of $1.60 to $1.66 per share. In the third quarter, Altria completed its previously announced share repurchase and cost reduction programs. Yesterday, Altria's board approved 2 new initiatives to build on this year's progress and support our goal delivering average annual adjusted diluted EPS growth of 7% to 9% over time. First, the board authorized the new $1 billion share repurchase program as part of Altria's ongoing commitment to return cash to shareholders. Altria intends to complete this new program by the end of 2012, but the timing of such purchases depends upon marketplace conditions and other factors. And the program is subject to the discretion of the board Second, following the completion of our 2007 to 2011 program, we have announced the new cost reduction program, which is primarily focused on cigarette-related infrastructure costs. As you are aware, cigarette industry volume has declined significantly following the 158% increase in the federal excise tax in April 2009, resulting in our need to continue reducing cigarette-related infrastructure. Altria expects this new cost reduction program to deliver $400 million in estimated annualized cost savings by the end of 2013. Altria estimates total pretax restructuring charges of approximately $375 million with approximately $340 million being recorded in the fourth quarter of this year. A substantial portion of the charges will result in cash expenditures related primarily to employee separation costs of approximately $300 million. The charges also reflect other associated costs, including lease termination and asset impairment. Altria's made consistent progress in this challenging economic environment. Marked by volatility in the financial markets, slow economic growth, high unemployment, and low consumer confidence. We believe that our strong brand positions outstanding people, high dividend yield, focus on cost management and the past consistency of our adjusted EPS growth continue to differentiate Altria positively from other investment alternatives. Altria grew its adjusted diluted EPS 6.1% in 2009 and 8.6% in 2010, and expects to grow its 2011 full year adjusted diluted EPS in the range of 6% to 9%. Altria believes that the ongoing performance of its businesses, along with its new share repurchase and cost reduction initiatives, will allow it to deliver 2012 adjusted diluted EPS growth that is consistent with this past performance. I will now turn the call over to Howard Willard, Altria's Executive Vice President and CFO, who will discuss Altria's business segment results in more detail.

Thank you, Mike. Good morning. Third quarter reported operating companies income in the cigarette segment, decreased 0.8% to $1.5 billion primarily due to lower shipment volume as the trade depleted inventory build in the first half of the year and higher FDA user fees, partially offset by higher list prices and lower restructuring costs. When adjusted for restructuring costs, third quarter operating companies income decreased 2.4% to $1.5 billion. In the third quarter, adjusted operating companies income margins increased 1.5 percentage points to 41.7% and were higher than those of our principal competitors. Reported operating companies income for the first 9 months increased 4.5% to $4.4 billion primarily due to higher list prices and lower restructuring costs partially offset by lower shipment volume, higher FDA user fees and the $36 million charge for the Scott case. Adjusted operating companies income for the first 9 months, which is calculated excluding restructuring costs but including the Scott case charge, grew 2.2%. Our cigarette segment's operating companies income margins for the first 9 months increased 1.1 percentage points to 40.3%. For the first 9 months of 2011, PM U.S.A. grew its adjusted operating companies income per pack and adjusted operating companies income margins faster than its principal competitors. PM U.S.A. and Marlboro's volume comparisons for the third quarter were impacted by trade inventory dynamics. PM U.S.A.'s reported domestic cigarette volume for the third quarter declined 9% primarily due to trade inventory reductions and retail share losses. For the first 9 months of 2011, PM U.S.A.'s volume declined 5.4%. When adjusted primarily for trade inventories, PM U.S.A. estimates that its volume declined approximately 5% for both time periods. The total cigarette category volume was estimated to be down approximately 3.5% for both the third quarter and first 9 months of this year. Through the first 9 months of the year, PM U.S.A. has delivered solid adjusted operating companies income growth and increased its adjusting operating income margins while retaining some of the strong share gains achieved last year for Marlboro. In the smokeless products segment, reported operating companies income increased 16.7% for the third quarter to $245 million and 12.6% to $660 million for the first 9 months due primarily to higher pricing and lower SG&A costs. When adjusted for restructuring and UST acquisition-related costs, operating companies income increased 15.5% to $246 million for the third quarter and 10.1% to $664 million for the first 9 months. Adjusted operating companies income margins for both the third quarter and the first 9 months increased 3.1 percentage points. Total smokeless products shipment volume declined 2/10 of a percent for the third quarter and 1.2% for the first 9 months as shipment declines in other portfolio brands, including Marlboro Snus, were partially offset by volume growth for Copenhagen and Skoal. Marlboro Snus volume was negatively impacted by lower levels of promotional activity compared to last year's national expansion, and the shift in mix with packages with 6 pouches to tins with 15 pouches. After adjusting for trade inventories, USSTC and PM U.S.A.'s combined smokeless segment volume was estimated to be up approximately 5% and 4%, respectively, for the third quarter and first 9 months of 2011. USSTC and PM U.S.A. believe that total smokeless category volume grew by approximately 5% for the first 9 months. Copenhagen and Skoal's combined volume grew 6.8%, and their combined retail share grew 1.4 share points in the third quarter. Copenhagen continue to deliver strong volume and share results supported by recent product introductions, including Copenhagen Wintergreen pouches. Skoal grew its volume for the third quarter as it benefited from new products introduced earlier this year which were partially offset by the delisting of 7 SKUs in the second quarter. Skoal's third quarter share, retail share, declined 3/10 of a share point sequentially due impart of the impact of the delisting of the 7 SKUs. We are encouraged by Skoal's quarterly retail share performance which has been relatively stable since the fourth quarter of 2010, despite the impact of the SKU reductions. Overall, USSTC has delivered strong financial results in the smokeless products segment so far this year. Copenhagen continues to deliver strong results and Skoal continues to transition as it benefits from brand building initiatives and new product introductions such as Skoal X-tra, while streamlining its SKUs. In the cigars segment, Middleton increased its third quarter reported and adjusted operating companies income by 27.9% to $55 million. While the cigars segment adjusted operating companies income was down 15.6% to $124 million for the first 9 months, Middleton's results have shown sequential improvement since the first quarter of 2011. Adjusted operating companies margin increased 2.7 percentage points to 50.5% for the third quarter. Margin stability in the second and third quarters has given Middleton an adjusted operating companies margin of 45.9% for the first 9 months of 2011. Middleton cigar volumes increased 3.7% for the quarter and 1.8% for the first 9 months. Middleton's third quarter cigar volumes benefited from new product introductions and increases in trade inventories. Black & Mild's retail share declined half a share point, 29.2% for the third quarter, but was up 4/10 of a share point for the first 9 months of this year and sequentially versus the second quarter of 2011. The brand's retail share performance so far this year has benefited from brand building initiatives and new product introductions, including the launch of untipped cigarillos in both Classic and Sweets blends. In the fourth quarter, Middleton plans to nationally introduce an untipped version of Black & Mild Wine, which along with Black & Mild Sweets and Classic, will be available in a new Aroma Wrap foil pouch. In the Wine segment, Ste. Michelle's reported operating companies income increased 91.7% to $23 million for the third quarter and 74.2% to $54 million for the first 9 months. Adjusted operating companies income increased 41.2% to $24 million for the third quarter and 26.1% to $58 million for the first 9 months. Adjusted operating companies income margins increased 2.2 percentage points to 18.9% for the quarter and 1.7 percentage points to 17.3% for the first 9 months. Wine shipment volume increased 19.7% for the third quarter and 8.9% in the first 9 months. These strong business results reflects Ste. Michelle's focus on premium higher-margin products. The financial services segment's third quarter reported operating companies income was $83 million, an increase of $56 million primarily due to a decrease in the allowance for losses and higher gains on asset sales. PMCC assesses the adequacy of its allowance for losses relative to the credit risk of its leasing portfolio on an ongoing basis. For the third quarter, PMCC decreased its allowance for losses based on management's assessment of the credit quality of its leasing portfolio including reductions in exposure to below investment grade lessees, resulting in $35 million of additional operating companies income for the third quarter and first 9 months. The allowance for losses at the end of the third quarter was $167 million versus $202 million at the end of the second quarter of 2011. Altria also delivered value to shareholders by returning cash to them through dividends and share repurchases. The company paid almost $800 million in dividends in the third quarter and $2.4 billion in the first 9 months, reflecting our objective of returning 80% of adjusted diluted EPS to shareholders in the form of dividends. Altria completed its previously announced $1 billion share repurchase program in the third quarter by repurchasing $14.8 million shares of its common stock at an average price of $25.93 for a total cost of $384 million. For the total program, Altria repurchased $37.6 million at an average price of $26.62. Mike and I will now be happy to take your questions. While the calls are compiled, let me cover a few housekeeping items. Marlboro's price gap versus the lowest effective priced cigarette was 36% for the third quarter. Marlboro's net pack price in the quarter was $5.74, while the lowest effective priced cigarette was $4.22. The cigarette discount categories third quarter retail share was 27.9%. The estimated weighted average cigarette state excise tax at the end of the third quarter was $1.37 per pack. Copenhagen's third quarter retail price was $4.23, and its price gap versus the leading discount brand was approximately 43% in the quarter. CapEx was $35 million for the third quarter, and we anticipate that our 2011 full year CapEx will be approximately $125 million. And finally, depreciation and amortization was $63 million for the third quarter and Altria anticipates that its 2011 full year ongoing depreciation and amortization will be approximately $250 million. Operator, do we have any questions?

[Operator Instructions] Our first question comes from the line of Chris Growe from Stifel, Nicolaus. Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division: I just want to ask you a question. In terms of the Marlboro brand, could you characterize your promotion in the quarter. Was promotional spending for the brand up or down? Obviously, it sounds like maybe it was down in relation to certainly competition. Was that a factor in the market share decline in the quarter?

Well, our percent revenue promoted has remained pretty constant this year. So we didn't do anything unusual in the third quarter. We faced actually a tough comp in the quarter from several directions from a inventory point of view, from a market share point of view. Our market share in the third quarter a year ago was 42.6%, which was the record share for the year that we achieved in 2010. So when we look at it, we felt like we kept in line with what we thought was the goal here which was to maximize income. But then to make sure that we're maintaining some modest momentum on this brand over time, and so I wouldn't get too caught up with the particular share result in the quarter, it's a function of a lot of things. If you look at Marlboro's share over the last few years, what you'd see is that there's about 1.5 share point deviation spread that the brand's operated in. And I think that when we get inside the numbers, what we see is that it's pretty much related to promotion-sensitive consumers. Every brand has a percentage of their makeup in promotion-sensitive consumers. Marlboro's level of that is lower than most because it has a very high brand loyalty and the brand loyalty has maintained itself, even as we've gone through some tough economic times. But competitive activity, as well as our own level of promotion spending does have an influence on this promotion-sensitive group, so we see some share deviation up and down that takes place based on those variables. And that's what you got going on, and you've had it going on this year as we faced the record share level last year where we had a lot of activity related to the launch of our Special Blend lineup. So I couldn't tell you there was anything exceptional there. We did see Marlboro's price go up relative to primary competitive brands during the quarter following pricing activity at the very beginning of the quarter at retail. And so that has some, I think, short-term impact. But gaps for Marlboro stayed in the range they've been in for the previous time since the FET increase, which is the mid-30s, we haven't seen much change there. That's relative to the lowest-priced products. There was some gap expansion versus some of the other premium brands during the quarter. Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division: Okay, and just a follow-up question to that. Are you seeing growth in, if we can call it sort of the deep discount category, is there any sort of noticeable change there? And then I would also like to talk about maybe a shift in some other categories, whether it be roll-your-own or little cigars? Is that also a factor that maybe could play in the cigarettes, say, over the next 12 month or so?

Well, if you look at the overall range of big brands in the category and you look at the discount segment overall, what you'll see is that over the -- since the FTE, since actually the beginning of this downward economic cycle which is 2008, they've all modulated in a range and they pretty much stayed in that range. The discount business has modulated in a range in the mid to high '20s. Marlboro has modulated in a range as I described and you'll see that in some other brands, particularly premium brands. In the discount segment, you've seen some consolidation within the segment though, and that was primarily driven by Pall Mall. You see a few other brands that share shifts around 2 within the discount segment. But all of that has actually behaved in a pretty stable way. Now I think what you're referring to are things like roll-your-own small cigars at one time played a role in terms of some interaction with the cigarette business down at the bottom. You see some of that going on. That's actually not a new thing. It ebbs and flows, sometimes the particular product that becomes a focal point is new. But for the shopper that's looking for the very cheapest thing that they can find in the smokable segment, there's always something that is moving around in that regard. And it does have some nominal impact, but I wouldn't say that recently there's been any significant impact on the overall category related to that kind of activity. We don't play there, so we really don't participate at the lowest price arena in the categories. So this does not have much of an impact on our business, but it can have some impact on I think overall discount segment at the very bottom of the segment, where you have shoppers that are looking for the very lowest-priced products that they can find. Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division: Okay, that's helpful. And I just -- one more question. Do you see your inventory levels now at call it normalized levels going forward or as you enter Q4?

They're low.

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

I just kind of wanted to go back on Marlboro and on your very strong margins. China maybe hear from you how you're trying to strike the right balance between your profits and share. Marlboro retail share is down year-over-year and sequentially as you mentioned. So with the long term is your goal to strike a better balance between the 2, or are you comfortable with the trends from this quarter were to continue?

Well, first of all, I don't see the quarter as a trend. It's simply an outcome from the factors that took place in the quarter. And again, I'd point out that there is a certain portion of the brand. In Marlboro's case, it's about 10% of the brand that is what we call alternate purchasers there. 90% of that franchise is made up of consumers that say that they buy the brand 100% of the time, and that has remained pretty constant. So among these alternate purchase group, you do see activity with these people that's stimulated by promotion. And in a bad economic environment, you'd see more switching among that group because they're shopping for deals among a group of brands that they qualify as acceptable to them. So when we look at it, it's really a matter of how much money do you want to spend at any point in time relative to that group because you know in some ways you're renting share. And so, we look at that regularly and we make decisions about what we think is appropriate in balancing our objective to maximize profit while we maintain some modest momentum on the brand. But we just don't look at share as the way we understand the health of the brand. We look at other underlying factors that actually are more important to understanding the health of the brand. And those factors remain very strong for Marlboro. So we monitor all of that on a regular basis. But like I say, these kinds of deviations we've seen over the past few years as we've been in a tough economy, it's not in fact the best economic environment to really try and grow share because of the difficult circumstances. Some consumers are in. So you want to make sure that you're maintaining your equity strength, doing sensible things to build that equity and at the same time, being involved in the promotion activity that is always going to be in any category to a reasonable level, but understanding that at the end of day, the objective with the franchise is to try to make money with it. So I would say we're pretty comfortable with where we are, and we're simply managing this franchise the way we think is best for its long-term benefit to the company.

Okay, that's helpful and I appreciate the detail. Just another quick question on Marlboro Menthol. Can you talk how that brand performed during the quarter?

Well, I don't think we've given out the specifics, but Marlboro Menthol has been a growth franchise for us. And so over the long term, I think it's performed just well. We haven't given out the specific shares for the quarter.

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

Mike, the operating income for PM U.S.A. through the 9 months is up about 2% on an underlying basis. That's clearly below the level generated over the last couple of years. Is there something beyond the economy and maybe some modest increase in competitive intensity that's accounting for that slow down or is that really the explanation?

Well, it was up a bit more as we went through the first half and then this is a quarter of tough comparisons. The comparisons are a bit different as we get into the fourth quarter. But I would say certainly, you have a difficult economic environment and so you're managing all the factors related to the brand, including the competitive marketplace as well in this kind of environment. So it does put some downward pressure on the category overall. I'd hasten to point out, though, your 2.2% that you referred to includes a $36 million charge for Scott, which is a onetime charge. So it actually is, on an ongoing basis, a bit better than that.

Fair point. Okay. Secondly, Mike, clearly this quarter or starting this quarter, there's been some flowback of volumes from New York state Native American reservations to conventional retail outlets. And government data would indicate that you were substantially under-shared in that venue. And I'm curious to what extent do you think that dynamic has adversely affected your -- the retail market share data that you've disclosed?

Well, you can estimate these things a bit, although I again would hasten to point out that when we use these kind of statistical share panels, and ours is proprietary but it's constructed in a way that's similar to the syndicated panels that you'll see more publicly available, that these panels are representations and so the absolute shares aren't necessarily precise. It's the trends that you're trying to derive as you look at these panels is why I always kind of encourage people not to get too caught up with quarters. You really have to look at the stuff over a longer period of time to make really good use out of it. But relative to what you're referring to, there was some significant competitive volume that was being shipped through channels that are not measured by these types of panels. And with the change of the enforcement in New York, that volume which was not tax paid, volume moved. Best that we can tell it moved down to some lower tax jurisdiction states, and is being picked up now on these panels. The best we can approximate, David, is it had a negative -- about a negative 2/10 of a share point effect on Marlboro. That doesn't mean that, that's a volume change. It just simply means that volume that was out there, not these panels, moved into the panels. And so from our perspective, it doesn't really have any bearing on the way we look at the business, but it does have a nominal effect on the numbers but not the trends.

Okay. And then lastly, Mike. Can you articulate sort of on a multiyear view from here, what the pathway is for Skoal to be able to gain market share?

Yes. Look, this is the year where we really have worked, kind of reconfigured the Skoal franchise to get it properly positioned. To get the SKUs rationalized and to get the product offering right, so that it's relevant to the market as it exists today. And we're still in the midst of that, although I think that what we've seen is the brand stabilized over the last 4 quarters. It was declining. We're still working against a base where there are a number of SKUs. They're in the base that we have since discontinued. And we've launched some new SKUs that we think better position the brand, and they're building and offsetting some of that loss. So we have to lap all of that before we really understand where we are with the Skoal brand. But actually we're pretty pleased it stabilized and it looks like what we've put into place is beginning to perform properly. And hopefully, what we'll see once we kind of get past this period of our reconstructing the brand, we'll see some steady growth. I think it's important to point out though that Skoal doesn't operate a vacuum, it exists in the category with other brands. One of which is Copenhagen, and Copenhagen is showing really strong growth. And so, Skoal has to compete with that and we're not quite as far along with Skoal as we are with Copenhagen. So I think that does have a bearing on the numbers as well. But combined, Skoal and Copenhagen are doing quite nicely.

Your first question comes from the line of Michael Felberbaum from the Associated Press.

Two questions for you, on the kind of related question. On the cost savings program that you guys have announced today. There was a mention of employee separation cost. Can you give a little bit more color on what exactly that mean, are we talking about layoffs within the cigarette production? And can you talk a little more about overall what you're seeing? Obviously, industry -- cigarette industry volumes continue to decline and this cost reduction program was necessary because of that. Can you talk a little bit about more on what we're seeing in the marketplace?

Well, I'll take your second question first. Since the April 2009 FET, you've seen some pretty substantial declines in overall industry cigarette volume. Albeit they've been consistent with historical price elasticity, nonetheless, there's pretty significant tax increase and so we had a significant impact on volume. And as we've said all along, one of the things that you're going to have to do in this business is as volume declines and that business you have to takeout cigarette-related infrastructure cost, in order to manage the business properly, you can't carry infrastructure for a business that was originally designed for a bigger business. You have to continue to shrink it as the overall business shrinks. And so that's all that's going on. In the current year, we've seen a little bit of moderation of the decline rate. Looks like it's running about 3.5% these days. Nonetheless, it's still a significant decline rate for the cigarette category. As to the specifics of what we're going to be doing relative to our employees, the way the rules work, we have to disclose this first publicly before we can really address it with our employee base. So I'm going to suggest that you call media affairs later on today if you want more detailed information about what specifically we're doing because I'm going to address this with my employees before I address it with you.

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

Mike, can you talk a little bit about the MLP adjustments, how would you assess the impact that, that has on your business so far this year? And then if you could talk a little bit about maybe trends that you're seeing in the MLP stores versus the non-MLP stores. And then to the extent that this program adjustment was made this year, are you in some ways surprised to see the Marlboro market share actually not up a little bit more just given the changes and how should we think about that as you're lapping it next year, just to the consumers, the ability for the consumers to actually not see the benefit of the MLP program?

Well, as I've described before, these trade programs aren't new, so the MLP program is not like it's a new piece of spending that's out in the marketplace relative to the trade. It's just a redesign of that. The program remains pretty stable in the marketplace and has a relatively strong participation rate. Pretty much in line with what we've seen in the past. In general, retailers that are participating in these kinds of programs generally have stronger market shares than retailers that aren't participating on it. So that's not just the case for MLP, it's the case in general as we've seen these programs work in history. It's pretty hard to kind of segment out individual pieces of the marketing puzzle on a brand and ascribe particular share results to them. I don't know how to do that. I would just say that the program seems to be effective, seems to be of interest to a good percentage of retailers and they are participating in it.

Okay. And then just on the cost savings program, can you maybe help us think about the phasing of the savings. Is this half next year and then another half in 2013? And then maybe the bucket of where the cost savings could hit, SG&A, cost of goods sold, and would this be more in the PM U.S.A. operating unit?

Well, again, as we stated in the release, this is cigarette and cigarette-related infrastructure. So it's focused on Philip Morris U.S.A. and it's focused on our service companies to the degree that they are servicing Philip Morris U.S.A. And it's salaried-related, so it is not focused on our hourly headcount in our factories or our hourly operation. Actually, the cost structure on that side has actually kept pretty much in line with cigarette volume decline. So that's where it's centered. We put out the total by the end of 2013 and as has generally been our practice as we accrue savings. We generally let people know that when we do quarters, but we don't do it in advance.

Okay. And then just finally, I know we haven't talk about this in a bit, but just in terms of how you're thinking about your alcoholic beverage portfolio. I know you've made a decision for the time being that it does make sense to keep it under your business, but any update or thoughts there?

No, there's nothing that's changed there.

Your next question comes from the line of Nik Modi with UBS.

Mike, just a quick question on L&M. We're certainly picking up a lot more investment behind that brand in the trade. Just curious, your thoughts behind that is it seems like you've kind of de-emphasizing your discount portfolio and now you're seeing kind of a reemergence of support. I know L&M has good demographics, so could you just provide any context on that? And then the second question is for Howard. If you think about the inventory situation as well as some of the price protection that was put into place when those price increase went through, do you have an understanding of how much that's affected net pricing?

Well, why don't you go ahead, Howard, and talk about the impact at pricing?

Sure. I mean as you look at our net price per pack in the quarter it was up. But as you pointed out, there was clearly an impact from the inventory de-loaded in the third quarter versus the first half. I hesitate to tease out exactly what the impact was on the net price per pack. We've sort of indicated that on an adjusted basis, we thought our volume was down about 5%. But clearly, there was an impact in the quarter.

And Nick, your other question was specifically related to L&M?

Yes.

Okay. Look, we put L&M out in the marketplace in a program several years ago to begin to offset some decline in the Basic brand. So Basic was always kind of a regionalized brand in terms of where it had its strength. And so in some other geographies where we didn't have much of a business in Basic, we put a different positioning in which was L&M. And so we've seen kind of slow steady growth on L&M over the past several years. We saw a bit of growth on it here in the quarter, but it remains a relatively small brand. We don't have a -- any change of strategy relative to discount. But we do have a certain amount of discount share that was predominantly positioned in Basic. And so we're -- as we see the Basic brand kind of decline, we're trying to go ahead and pick that share up with L&M.

Your next question comes from the line of Priya Ohri-Gupta with Barclays Capital.

Just wanted to see if you could discuss potential funding of your share repurchase program, the new billion dollar program that you've announced whether you look to fund it incremental debt similar to what happened earlier this year, or potentially out of free cash flow. And just secondly, do you have a $600 million debt maturity coming up next July related to legacy UST paper? Do you have plans in place right now to address that, and if you could provide a color, that will be great.

Sure. Well, as you know, we've issued some debt earlier this year. I'm not going to comment on our future issuance plans. But we feel that we have multiple sources of cash to fund the $1 billion share repurchase program through the end of next year.

Your next question comes from the line of Chris Growe with Stifel, Nicolaus. Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division: I just have a quick follow-up question for you. Just a quick follow-up on Marlboro. You've had a lot of new product activity or brand extensions for that brand. Were those a factor year-over-year in some of the share decline? I know you don't like to give some detail on these individual brands, but just collectively if that was a factor. And then also related to that, I'd like to understand if that is a factor for helping stabilize or grow the share going forward as I assumed there's continued activity in the Marlboro brand, we should expect to see in future quarters and years.

Well, much of the deviation that you see quarter-over-quarter is really related to promotion activity. And so, we can have variability depending on what we promoted a year ago and what we promoted this year. So and that's -- some of that like as I've mentioned, Special Blend was launched a year ago so it had a higher level of promotion activity. So you can see some deviation related to that because it's a year of following the launch here.

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

Thanks, everyone, for joining our call this morning. If you have any additional follow-up questions, please contact us in Investor Relations later today. Thanks very much.

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