Altria Group Earnings Call Insights: The Marlboro Architecture and Promotional Spending

Altria Group Inc. (NYSE:MO) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

The Marlboro Architecture

Nik Modi – UBS: So, just a quick question on the Marlboro architecture. I guess now that’s been in place for a year and you saw some pretty good retail share gains with pricing improving, just curious if there is any diagnostics that you have or you share giving us some insight on how effective this has been, so we can think about next year and the years after in terms of some of the benefits you’ll get from this initiative.

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Martin J. Barrington – Chairman and CEO: Sure, we have diagnostics, some of which were internal and some of which we talk about in settings like this. I think you’ve already alluded to one, which is the – we had nice share gain, which is consistent with PM USA’s objective to maximizing comp up trying to keep Marlboro healthy. We have a diagnostic, Nik, on resetting retail, one of our objectives during the year was to try to get a number of retail stores reset to better reflect the Marlboro architecture and I think our sales and distribution group did an excellent job of doing if you’ve been in stores I think you’ve seen the improvements that have been made on the presentation of the Marlboro brand at retail. But at the end of the day, it’s always about that balance about trying to maximize income, while taking the steps that are appropriate to make sure that Marlboro is healthy over the long-term and we’re very pleased with how PM USA executed on that this year.

Nik Modi – UBS: Marty just a quick follow-up to that, I don’t think I remember two quarters in a row were Marlboro has gained this much market share, which is quite a feat given how big the brand is and just philosophically you said you want to maintain market share momentum and optimize income. Would it be crazy to think that this is just too much share gains for a brand of that size?

Martin J. Barrington – Chairman and CEO: I think Nik; the difference simply isn’t in what time period you’re looking at. If you look at it, say for a quarter or even for two quarters you have to be sure that there were some share gains there, but that is not the strategy. I did give you, for example, just one data point because we manage the brand over time and when we say over time, we’re talking about more than several quarters in fact over years. If one looks back, pick a data point fourth quarter of 2009 and you measure share gains to the fourth quarter of 2012 its nine-tenths. So, you have nine-tenths per share point over three years. We would characterize that as modest share momentum for Marlboro over time. Of course, we have other metrics to measure Marlboro’s health. We want to make sure that all of its brand equity numbers are strong and hopefully improving in the right direction. Nik, I think that’s how we think about it. We try to be sure, share gains are not just a function of how much we invest in the brand, but other competitive dynamics, so it’s awfully, awfully hard to read simply on a quarter or over two quarters. So, I would return I think to understanding our strategy, our strategy is to maximize income there.

Promotional Spending

David Adelman – Morgan Stanley & Co. Inc.: Just a follow-up on pricing, Marty, if I could. So in 2012 relative to the last few years there was clearly a greater emphasis on investing in Marlboro promotional spending, somewhat less net pricing and very good share growth. Can you give us a sense what’s in the plan for 2013 in terms of the relative emphasis of those variables?

Martin J. Barrington – Chairman and CEO: No. I think we will continue with our strategy, David, and obviously for competitive reasons we are not going to lay out PM USA’s promotional plan for 2013. But I do think at a strategic level it’s important for investors to remember our strategy is to maximize income. You have seen the numbers in the release. In the smokeable segment we have got revenue net of excise up 3.6% for the fourth quarter and overall the Marlboro brand is heading in the right direction. We have the Marlboro architecture started but remember big brands like Marlboro we don’t do everything in one year. We have been clear I think about saying that we are going to invest in Marlboro appropriately throughout 2012 and 2013. But I think that’s just more of executing against that consistent strategy. In some years as we say we invest a bit more, some years a bit less, some years the share go up a bit more, it comes down a little bit, but it’s consistent with that long-term strategy of trying to maximize income. I think that’s the way to understand it.

David Adelman – Morgan Stanley & Co. Inc.: Then Marty, with respect to the total U.S. Cigarette category dynamic, you mentioned volumes for the full year or consumption down about 3% with almost no net price increase to the consumer, is that the kind of secular volume decline you would have expected and that you envision going forward?

Martin J. Barrington – Chairman and CEO: I don’t know about going forward because it’s awfully hard to predict the future. But I think that we’ve seen estimates of the secular decline rate being in the neighborhood of 2% to 3% for some period now and that’s probably in the right neighborhood.

David Adelman – Morgan Stanley & Co. Inc.: Lastly Marty you’d be surprised if the FDA doesn’t release its report on Menthol by when?

Martin J. Barrington – Chairman and CEO: I try not to be surprised by regulatory action. I just don’t think we now, I mean they’ve had it for some time as you know and they – our understanding remains I think the last time we spoke about this which is, they’ve sent it out for peer review on the science. We are led to understand that they probably have it back and are looking at it and we would expect that would be the first action that they would take, would be to publish their position on the science on Menthol. As you know they’ve had it for quite some time, so would you expect something in 2013? I suppose so; we just don’t have a lot of line of sight into that.

A Closer Look: Altria Group Earnings Cheat Sheet>>