Sarah Knakmuhs - VP, IR Marty Barrington - Chairman and CEO Billy Gifford - CFO.

Owen Bennett - Nomura Bonnie Herzog - Wells Fargo Securities Chris Growe - Stifel Nicolaus Judy Hong - Goldman Sachs Matthew Grainger - Morgan Stanley Vivien Azer - Cowen and Company William Marshall - Barclays.

Good day. And welcome to the Altria Group 2015 First Quarter Earnings Conference Call. Today’s call is scheduled to last about one hour including remarks by Altria’s management and a 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 Knakmuhs, Vice President, 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 CEO; and Billy Gifford, Altria’s CFO to discuss Altria’s 2015 first quarter business results. During our call today unless otherwise stated, we’re comparing results to the same period in 2014.

Earlier today, we issued a press release regarding our first quarter results. For a detailed review of them, please review the earnings release on our website at altria.com or via the Altria investor app. Our remarks contain forward-looking and cautionary statements and projections 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. Future dividend payments and share repurchases remain subject to the discretion of Altria’s Board.

The timing of share repurchases depends on marketplace conditions and other factors. Altria reports its financial results in accordance with U.S. generally accepted accounting principles. Today’s call will contain various operating results on both a reported and adjusted basis, which excludes items that affect the comparability of reported results.

Descriptions of these non-GAAP financial measures and reconciliations are included in today’s earnings release, which is available on our website and via the Altria investor app. Now I’ll turn the call over to Marty..

Thanks, Sarah. Good morning, everyone, and thanks for joining our call. Altria is off to a strong start in 2015. Our core tobacco businesses continued to deliver on their strategies, backed by the strengths of their leading premium brands. Each of our reportable segments grew operating companies income and expanded their margins.

Altria grew its adjusted diluted EPS by 10.5%, paid approximately $1 billion in dividends, and repurchased 3.6 million shares in the first quarter, and earlier this morning we reaffirmed our guidance for 2015 full year adjusted diluted EPS growth of 7% to 9%. Here are some important highlights from the quarter.

PM USA delivered on its smokable segment strategy of maximizing income, while maintaining modest share momentum on Marlboro over time. This segment produced outstanding results in the first quarter driven by higher pricing, higher volume and Marlboro retail share growth.

PM USA has invested steadily to strengthen Marlboro and those investments continue to pay-off. As a result, the smokable segment grew adjusted operating companies income by over 12% in the quarter.

PM USA’s reported cigarette shipment volumes grew 1.6% in the quarter, benefiting from a moderation in the industry decline rate, trade inventory movements and retail share gains. In the machine made large cigar category, John Middleton continued to strengthen its leadership position in the profitable tipped cigar segment.

The company posted strong double-digit volume growth in the quarter driven primarily by Black & Mild. In the smokeless product segment, USSTC grew first quarter operating companies income by 5% and expanded its operating company income margin by one percentage point to over 63%.

USSTC estimates that its adjusted smokeless segment volumes grew approximately 4% in the quarter, while smokeless industry volumes grew 2% over the past 12 months. Copenhagen and Skoal grew their combined retail share by half of a percentage point in the quarter.

Turning to innovative tobacco products, Nu Mark remains focused on building a robust portfolio of innovative tobacco products for adult smokers and vapors. Nu Mark began shipping its next generation e-vapor product, MarkTen XL, into lead markets this month. In the wine segment, Ste.

Michelle posted a quarter of nearly 23% operating companies income growth, primarily through improved premium mix. In the first quarter, equity earnings from SABMiller investment were negatively affected by SABMiller special items and unfavorable currency impacts from a stronger dollar.

The investment continues to support our strong balance sheet and provides cash flow through its dividend. So, we came into 2015 with momentum, and our first quarter results reflect another quarter of strong execution against our well defined strategies. We believe our businesses are positioned to help us deliver against our full-year guidance.

Billy Gifford will now discuss our business results in more detail..

Thank you, Marty. Good morning everyone. Our smokable products segment helped drive adjusted diluted EPS growth of 10.5% in the first quarter. The smokable products segment and fewer shares outstanding also contributed to that growth.

The smokable products segment delivered strong adjusted operating company’s income growth of 12.6%, primarily driven by higher pricing, higher shipment volume and lower resolution expenses due primarily to the end of the federal tobacco quota buyout payments.

Despite costs being higher in the quarter due primarily to higher pension and benefit cost and timing of SG&A spending, the smokable segment expanded its adjusted OCI margins by 2.3 percentage points. Volume was also strong.

After adjusting for trade inventory changes and other factors, PM USA estimates that its first quarter cigarette shipment volume was essentially unchanged and that total industry volumes declined approximately 0.5%.

For the quarter PM USA grew Marlboro’s retail share by three-tenths of a share point to 44%, and grew its total cigarette category retail share by fourth-tenths of a share point.

L&M share gains also contributed to PM USA's first quarter performance as the brand continued to grow its share while the overall industry discount category declined in the quarter. In the total machine-made large cigars category, Black & Mild’s retail share declined 0.6 points in the first quarter.

As Marty mentioned, Middleton continued to concentrate on the more profitable, tipped cigars segment, where Black & Mild gained share. In the smokeless products segment, operating companies income increased 5% in the first quarter as higher pricing was partially offset by higher promotional investments.

After adjusting for trade inventory changes and other factors, USSTC estimates that its domestic smokeless product shipment volume grew approximately 4% in the quarter, while the industry grew approximately 2% over the past 12 months. Copenhagen and Skoal’s combined retail share grew five-tenths of a share point in the quarter to 51.2%.

Copenhagen’s retail share grew one share point, while Skoal’s retail share declined five-tenths of a share point. The wine segment delivered very strong results in the first quarter. Ste. Michelle grew operating companies income by 22.7% in the first quarter, primarily driven by improved premium mix. Shipments increased by 0.5% in the quarter.

That wraps up the operating results. Marty and I will now take your questions. While the calls are being compiled, let us cover a few housekeeping items. As a reminder, comparisons when made are against the first quarter of 2014 unless we note otherwise.

Marlboro's price gap versus the lowest effective price cigarette was 31% in the first quarter, down 2 percentage points. For the first quarter, Marlboro's net pack price was $6.06, up $0.15, and the lowest effective priced cigarette was $4.62, up $0.17.

The estimated weighted average cigarette state excise tax was $1.49 per pack for the first quarter, up $0.01. Wholesale inventory changes are one factor PM USA uses to estimate adjusted PM USA and industry volumes.

PM USA estimates that its wholesale inventories were approximately 2.6 billion units at the end of the first quarter of 2015 and 2.4 billion units at the end of the fourth quarter of 2014. At the end of the first quarter of 2014, PM USA's wholesale inventories were estimated to be approximately 2.5 billion units.

PM USA estimates that cigarette industry wholesale inventory levels were 5.5 billion units at the end of the first quarter of 2015 and 5.4 billion units at the end of the fourth quarter of 2014. PM USA estimates that first quarter of 2014 wholesale inventory levels were 5.5 billion units.

Copenhagen's price gap versus the leading discount brand was 29% in the first quarter, down 3 percentage points. Copenhagen's retail price was $4.22 in the first quarter, up $0.13. The price of the leading discount brand was $3.26 in the first quarter, up $0.17. CapEx was $48 million for the first quarter.

Ongoing depreciation and amortization was $49 million for the quarter.

Operator, do we have any questions?.

[Operator Instructions] Our first question comes from the line of Owen Bennett of Nomura..

Good morning guys..

Hello Owen..

And couple of questions please, I mean firstly, any commentary on Marlboro Black is that still taking share, if you could say, I mean, how much of Marlboro share growth is being driven by Black and then secondly, any update on recent market share trends for MarkTen.

I notice how you no longer have the statement about being amongst the top e-vapor brands nationally like you did at year end and should we read anything into that? Thanks very much..

Sure. Let us start with Marlboro Black. It continues to do a terrific job. In fact, it has grown for 17 consecutive quarters. We don’t break the shares out by SKUs as you know Owen, but Marlboro Black is doing a terrific job, particularly in the important segment of adult smokers, 21 to 29.

I hope you had a chance to see our remarks [Indiscernible] about our vapor business. Our aspiration there is to succeed in the long term.

What that means is we are moving with appropriate dispatch, but with financial discipline, always learning from the consumer and frankly what we are working on principally right now in addition to our distribution and brand building is product development. Consumers are telling e-vapor manufacturers that the products are not yet there.

That is why you see us improving our product development pipeline and to be sure, share is important, but it will be important as soon as the products are established with the consumers. We are not unduly focused on share. We are focused on getting the right products in the consumer’s hands..

Okay. Thanks very much..

Thanks for calling..

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

Good morning..

Hi Bonnie..

Hi.

My first question is on consumption, given the strong industry cigarette volume and the decelerating smokeless industry volume, do you have a sense of underlying total tobacco consumption when considering both of these categories, and then do you believe it is rising and if so why? And then maybe touch on, your outlook for, the cigarette decline rate, is the 3% to 4% decline rate realistic going forward?.

Okay, great. Thanks for those questions. Let me start with cigarette volume. We don’t forecast volume going forward as you know. It has been 3% to 4% over the last several years and we think that, you have to look at that over time. To be sure this quarter is a break, but it is only a quarter. So we will have to see.

Probably the best answer to your question about consumption is the total consumption rate over the last several years as measured by government sources, which has been declining at about call it 1% to 1.5% total pounds. So that takes into account Bonnie, all of the products that adult tobacco consumers are trying and of course it is a dynamic time.

We have seen more movement among the categories. That is probably the best marker..

Yes. I mean that was kind of the basis for my question because, how smokers industry volume has been – has been performing not as well. So I think there has been a lot of interplay between the two categories.

So you would agree with that?.

Yes, and I think there is still growth there of course..

Right. Sure, it has just been [disarranged] slightly.

And then I did want to touch on MarkTen and just hear from you just any updates you have about recent consumer behavior for MarkTen and then could you talk about the revenue for the business given that was down quite a bit sequentially, but was up year-over-year, but I am trying to also understand how much of a drag potentially was in those numbers from your financial service business.

So if you could help me understand that that would be helpful?.

I will try to give you a little help. It is in the all other category and so we don’t break it out too much under that. But we are in investment mode.

That is the best way to understand it and in response to Owen’s question I pointed out that we have a lot of work underway to make sure that we have a robust portfolio of products because that is what the consumers are saying to everyone, which is, I’m willing to try these products, but they are not quite there yet.

And so we are continually working to improve our offerings. That is why we have come out with MarkTen XL, twice the battery size, and so forth.

And so I think that is the way to understand it and we are going to be investment mode here, but we do it in a financially disciplined way, always cognizant of our long-term financial goal of 7% to 9% growth in our EPS and we have been able to pull that off, and I’m confident that we will over time..

Okay, thank you and then speaking of MarkTen XL, when do you expect that to be a nationwide expansion.

I think you mentioned you are growing out into lead markets, and then how incremental do you anticipate this is going to be and how concerned are you with cannibalization for that extension?.

We will talk about national once we get into lead markets and we see how it does. That is our innovation system, which is to put products in consumers hands, conducting experiments about whether the offering is interesting to them, find out how we can improve it and then we roll forward, and you saw that is how we did MarkTen.

I think that is what you should expect with MarkTen XL..

Okay, and then just my final last question is your discount volume has been strong especially O&M, I like to hear what has been driving that especially given the stronger consumer, and maybe here have you touched on how you are balancing the growth of this segment with margin expansion, and what your strategy is in this space?.

Yes, good questions both. Look, our focus is on the premium end of the business. More than 90% of PM USA cigarette shipments are premium and that is where the action is for us. But of course there is a discount segment out there. It is declining over time. The real reason that we are growing our discount business there is because of L&M.

It is a terrific product that is priced competitively in the marketplace and it is doing great. So it is not our principal focus, but it does help the business albeit small..

All right. Thank you..

Thanks for your questions Bonnie..

Your next question comes from Chris Growe of Stifel..

Hi, good morning..

Hi Chris..

Hi.

Just had a question for you, this is several quarters in a row where the price gap between Marlboro and the lowest priced product in the market has been down, and you have been taking very strong [Indiscernible], two questions around that, one would be as you look at your promotional setting overall in the quarter, could you say that was up or down, and I mean for the cigarette business overall, and then is there any – are you pulling back on promotions say in the premium side versus discount to help widen that gap.

We seem to be in a little better economic situation today and perhaps that gap could widen a bit from this level?.

Okay. Thanks for your questions. Let me go at it this way. We had net pricing realization in the cigarette – in the smokable segment of more than 5%. So you can see that despite the fact that the price gap has narrowed, we are as you point out taking strong pricing, which is great.

The reason the price gap has narrowed in the quarter is because some discount brands increased their pricing faster than the premium brands did, and that is what accounts for the math, including some rounding frankly when you do the math and the price gaps.

So price gaps are a important metric as we have spoken about and we keep an eye on them, but boy, to have a quarter where we can grow our volume, grow our margin, get strong pricing realization, you can see the result of that Chris with nearly 13% operating company income growth. That is pretty good algorithm for us price gaps narrowing or not.

I don’t know Bill you want to say a word about promotional spend?.

Yes, I think if you think about it Chris, you will recall last year we actually had started dialing back promotional spend around Marlboro, and so we’re lapping that as we go through the first quarter..

Okay, great. Thanks for your time today..

Thanks for calling in Chris..

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

Thank you. Good morning..

Good morning Judy..

So I guess I wanted to just go back to the cigarette consumption question and I hear this is one quarter, we really have to look at it on the longer term basis, but I don’t recall a quarter where you had this kind of volume performance with the price growth that you are seeing across all the players.

So, I’m just wondering if you could give us a little bit more color just in terms of the sustainability of this kind of performance within the current macro and competitive backdrop, if there is anything in terms of the investments that a lot of the players have made and perhaps bring equity building initiatives are kind of driving some of that as well because it seems to kind of imply that historically when you saw the volume performance really come through, typically it was associated with lower pricing and certainly that is not what we are seeing today?.

Yes. Let me see if I can give you a bit more color to try to help you with it. You are right. It has been some time since we have seen numbers like this. Part of it is the comp versus a year ago. I mean the volume was down pretty significantly in the first quarter of ’14 as you remember. But there is no denying that several factors are at play here.

The economy is improving. It is improving for our consumer set finally, happily after this very difficult time during the recession. We have the phenomenon of dropping gas prices and if it occurs for us at a time after we have made very significant investments in Marlboro. We implement the Marlboro architecture. We launch Marlboro Black.

I would say all of those factors came together to contribute to what is a very strong quarter for PM USA. That is our analysis for our business at least..

Okay. And then Billy, just thinking about the SABMiller contribution clearly the effects and some of the headwinds from a macro perspective is depressing SAB with contribution right now. It is a business that obviously you don’t necessarily have a control over in terms of the operating performance.

How do you sort of think about your 7% to 9% earnings growth algorithm to the extent that if SABMiller, the currency continues to weaken, do you have levers, either buyback or at the operating line that you can offset the weakness or because it is sort of outside of your control, you kind of look at that as more of a transient factor?.

Yes, Judy. I think when you think about the SABMiller asset, it has been a great asset for us. It has performed very well. We are talking about one quarter and you mentioned the negative drivers from that equity income year-over-year, one being the special items, which were primarily related to asset impairment and then the negative currency drag.

We don’t provide down to that level for the total year, but now at the beginning of the year when we provide that guidance we incorporate a number of factors and SAB was incorporated in that..

Okay. So basically you have a view of how SABMiller would perform throughout the year and that bakes – that is just baked into your guidance.

But to the extent the SABMiller piece gets worse than your anticipation, I guess the question is really do you have other levers to kind of drive the offset?.

Yes, I think Judy overall you heard us reiterate guidance today. We feel good about that and we feel good about where the business is..

I do think Judy, it is Marty, that your reference to levers is exactly correct. That is what differentiates the Altria offering. We have numerous levers that we can use to try to meet our long-term goal of 7% to 9%, and if you look over the last several years we have been able to do that has various businesses have been up or down..

Understood. Okay, thank you..

Thanks for your question..

Your next question comes from Matthew Grainger of Morgan Stanley..

Hi, good morning..

Hi Matt..

Hi, two questions, one, first I wanted to ask you about the performance in the smokeless products segment, and specifically the acceleration in consumption for your products during the quarter, improving to 4%, Marty I just wanted your assessment of what actions you have taken or what factors during the quarter would have driven that acceleration, is that a function of perhaps addressing the value proposition around some of the brands in the degree of pricing that you have taken or would you attribute some of that to tactical efforts that you have made on Skoal whether you are seeing any impact there?.

Sure. I think you have identified the two drivers. One is Copenhagen continues to grow strongly. You see a share point in the quarter and I do think the actions we are taking on Skoal are improving.

In fact if you look at the quarterly results for Skoal, it is down half a share point, but it is the fourth consecutive quarter where it has narrowed those share losses year-over-year. We gave it a new equity campaign.

We have terrific equity-based promotions I think that are improving its relationship with its consumer set and then as we have been working on the price gaps on Skoal Classic. I think all of that is helping to steady up Skoal, and that is spot on strategy for us.

So I think it is the combination of Copenhagen’s continued growth and our work on the value equation on Skoal..

Okay, and I think we saw more improvement in [UST] volumes than we did for the category overall, but would you say there is any change in the level of interaction between smokeless and other alternative – other smokable alternatives?.

Yes, I know. It is just hard to tease that out right now. It has been a couple of quarters. We do know that some of the growth previously in smokeless was due to cigarette smokers coming into the category. We now know that there are vapor alternatives. We now have a recovering economy.

It is just really hard to tease out Matt what exactly those factors are, but we will be able to do it over time I would expect..

Okay, thanks.

And just one question on the cigar performance as well, just if you could help me better understand the mismatch between the volume growth in the market share trend? I know you are focused on tipped, but with volumes up 10% and share down roughly 50 basis points, does that imply that growth is up 15%, 20% in untipped, or is that just noise in the data?.

It is probably short term noise, although untipped does continue to grow. What we’re trying to do is to balance the share question with profitability and in this segment we always try to maximize income first.

So, Black & Mild happily has a very strong share position in the segment that is providing frankly most of the profitability, and we think that is the better course at this time..

Okay, great. Thank you both..

Thanks for calling in..

Your next question comes from Vivien Azer of Cowen and Company..

Hi, good morning..

Good morning Vivien..

So not to labor the point, but I also do have a question on smokeless tobacco, Marty we talked a lot about price elasticity in cigarettes and clearly they are holding up quite well, can you just remind us how you guys think about or chalk out price elasticity in the smokeless segment?.

Yes, we have some proprietary models for that that allow us to try to get some sense. They are not as highly developed as you might expect in a category that has been around as long as cigarettes, but that is really a proprietary view of it, which I’m not prepared to talk about on the phone candidly..

Okay, fair enough.

As we look ahead to the mix shift that is ongoing in the cigarette segment, is it wise to say if the consumer continues to hold up, can you point back to another time where we have seen this much kind of trade up or resumption in trade up and how we should think about that trajectory continuing all else being equal from a macro perspective?.

Well, we do know that when adult tobacco consumers are feeling better about their economic situation, they want to be in premium brands. And in this category, the premium brand they want to be in is Marlboro.

We have seen that several times if you go back in history for example and you look at the [indiscernible] narrow price gaps got out of line the consumer was not feeling good about that. You’re much too young to remember Vivien, but people predicted that was going to be end of brands and so forth.

In effect it wasn’t, it was that one the consumers thought that the price gap was appropriate. They came right back rowing into Marlboro. So, Marlboro has that kind of equity and we would expect that as consumers continue to consolidate around premium brands that Marlboro will do just fine..

Terrific, thank you very much..

Thank you very much..

Your next question comes from [indiscernible]..

Good morning..

Hi, Michael..

Just back on Marlboro, obviously it had a strong share performance in the quarter, can you just highlight any of maybe what the key drivers were there and how much Rich Blue have contributed?.

It’s early for Rich Blue, it’s having a nice little effect in a trace I would say Marlboro architecture, Marlboro Black, strong Marlboro equity those continue to be the drivers of Marlboro’s growth..

Okay that’s helpful.

And then, just looking at it on a longer view going back 5, 6 years it’s up a little over 2 share points, your discount share is up slightly as well, but it is partly offset by about a 1.5 share loss for the other premium, you just said obviously your premium focused company and clearly Marlboro is the focus and the star, but is there anything you can do with the other premium brands that would make sense to invest there or is there any way, how do you think about those as a piece of the puzzle and is there any way to hold or gain share in those that make sense?.

Yes, that’s really a terrific question, we do have these other terrific premium brands that we offer for adult smokers they don’t get a lot of support because frankly they have their franchise pretty settled and are very profitable.

But parliament is probably the best example, we gave some limited support to parliament last year and it really paid back very well.

Our focus is Marlboro, the other premium brands produce nice profitability contribution and if we can do some modest things for them that help stabilize their share well producing that profitability, we’re open to that..

Okay, that’s helpful thanks.

And then, just lastly on maybe a little bit just broader view where do you see sort of risk is there near term or long term and just what do you kind of see as where the watch outs are, what maybe specifically for this year in terms of what could put you at the lower end of the guidance or just longer term in terms of strategically?.

Well, there is always risks in every business right, and we kind of look at that at the beginning of the year and the category like this, you’re always watching volume, you’re watching your pricing power, you’re watching regulation, you’re watching excise tax, I mean, you’re competitive activity now those of all, then well handled overtime and we have good plans and place for all of them but if you are trying to identify factors in this industry that present risk as well as opportunity those are probably some of them..

Okay, thank you very much..

Thanks for calling..

[Operator Instructions] Your next question comes from Bill Marshall of Barclays..

Thank you, good morning..

Hi Bill..

Just kind of building off of Judy’s question I think from earlier in your comments Marty, obviously there is a lot of top line momentum here and even underlying the consumer seems to be doing better and you pointed that the levers that you have across the P&L, just want to put into context your strong first quarter into context with your full year outlook of 7% to 9% earnings growth.

Is there anything specific we should be looking out for the spending ramp up, is it just a matter of a tougher 4Q comparison anything specifically in there as you launch Nu MarkTen product anything that we should be looking out for?.

No, I don’t think in particular. I think Billy said it best earlier which is when we put the year together for our guidance, there are always puts and takes and we look at the operating company performance and we look at SAD contribution, you always look at exercise taxes and so forth and so on.

So, I think the guidance that we put together which we reaffirm today just reflects our view particularly early in the year about we can do. I think we pointed out previously, I think when we gave the guidance, we have got some pension and benefit expense which is flowing in.

We’re are winding up the Philip Morris Capital core business so it’s not contributing at the same rate it used to contribute at. And we’re making discipline investments in the innovators space that’s probably the best way to look at that Bill..

Okay, thank you. And just a quick question.

I’m just a curious on your side, as you see when your competitors go through the MRTP modified with tobacco product process with the FDA, just wanted to get your thoughts about prospects for the PM technology – and if you had any idea of a timeline when you think that could be commercialized and kind of the process that you’re looking at going through onto get that into market?.

Yes that’s an interesting area to ask about, thank you. Listen, one of the reasons we supported FDA was because this process now allows manufacturers to bring products to the FDA to try to see if we can get them qualified as modified risk or reduced risk.

And so, the [indiscernible] was the first hearing and there was quite a lot of buzz about that but it was just a first hearing, it was expected to be a long term project to bring these projects to market so I think I wouldn’t be over reading that too much.

We continue to work with BMI on our own process regarding heat not burn, the first milestone to watch for will be the filing of the application.

And then hopefully the one after that will be its approval and that we continue to work in the meantime on our branding and marketing and go to market strategies as we’re very hopeful about that product and as you know we’ll have the exclusive on that product in the United States. So, we continue to pursue that..

Thank you..

Thanks for calling..

Thank you, there are no further questions. At this time I would like to turn the call back over to Ms. Sarah Knakmus for any closing comments..

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

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