Unverified Participant Martin J. Barrington - Altria Group, Inc. William F. Gifford - Altria Group, Inc..

Vivien Azer - Cowen and Company, LLC Adam J. Spielman - Citigroup Global Markets Ltd. Michael S. Lavery - Piper Jaffray & Co. Christopher Growe - Stifel, Nicolaus & Co., Inc. Judy E. Hong - Goldman Sachs & Co. Patty Kanada - Wells Fargo Securities LLC Matthew C. Grainger - Morgan Stanley & Co. LLC Jennifer Kaplan - Bloomberg LP.

Good day, and welcome to the Altria Group 2017 Second 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.

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 Mr. Bill Marshall (0:33), Vice President, Investor Relations for Altria Client Services. Please go ahead..

Thank you, Lisa. Good morning and thank you for joining us. We're here this morning with Marty Barrington, Altria's CEO, and Billy Gifford, Altria's CFO, to discuss Altria's 2017 second quarter and first half business results.

Earlier today, we issued a press release providing these results, which is available on our website at altria.com and through the Altria Investor app. During our call today, unless otherwise stated, we're comparing results to the same period in 2016. Our remarks contain forward-looking and cautionary statements and projections of future results.

Please review the Forward-Looking and Cautionary Statements 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.

Adjusted results exclude special items that affect the comparability of reported results. Descriptions of these non-GAAP financial measures and reconciliations are included in today's earnings release. Now, I'll turn the call over to Marty..

Well, thanks Bill (1:56) and good morning everyone. Based on strong tobacco operating company performance, Altria delivered solid results in the second quarter and first half of 2017.

The smokeable products segment generated strong income growth despite a large cigarette excise tax increase in California, and the smokeless products segment has largely rebounded from its first quarter voluntary product recall. We grew adjusted diluted earnings per share 4.9% in the second quarter and 3.3% for the first half of 2017.

The smokeable products segment delivered 6.4% adjusted operating companies income growth in the second quarter as strong pricing more than offset volume declines and higher promotional investments. For the first half, smokeable products segment adjusted operating companies income grew 7.2%.

As I mentioned, the smokeable segment's results were negatively impacted by California's $2 per pack cigarette excise tax increase, which went into effect on April 1. California is a high-volume state, previously accounting for approximately 7% of total U.S. cigarette industry volume.

Following the tax increase, California's volume contribution dropped to 5% which drove total U.S. industry volume down approximately 4.5% in the quarter. In addition, Marlboro has a strong share in California of over 50%.

Thus Marlboro was disproportionally impacted by the tax increase contributing to its decline of 0.3 of a national retail share point in the second quarter to 43.5%. We expect these dynamics will continue to dampen Marlboro's share through the back half. Outside of California, Marlboro's second quarter share remains stable, sequentially.

Past experience shows that tax increases of this magnitude are most disruptive immediately following implementation, after which the rate of decline moderates.

We continue to anticipate an approximate 1% negative impact on industry volumes for the full year as a result of the excise tax increases in California on April 1, and Pennsylvania last August.

Looking to the back half of the year, PM USA recently announced the national expansion of Marlboro Black Menthol 72's, a product PM USA expects will further enhance Marlboro's position in the growing menthol segment and among adult smokers age 21 to 29. Moving to the smokeless products segment.

USSTC has largely rebounded from its first quarter product recall. It delivered 9.8% adjusted operating companies income growth in the second quarter. USSTC grew smokeless products volume 1.4% in the quarter and gained retail share sequentially, growing 0.6 of a share point over the first quarter.

USSTC estimates that the recall had about a half of a share point impact on its total retail share in the second quarter. And Copenhagen continued to gain ground in the second quarter growing 0.7 of a retail share point to a record share of 34.1%. That was a particularly strong performance as it lapped the Copenhagen Mint national expansion in 2016.

Through the first half, Copenhagen remains both the largest and the fastest-growing smokeless tobacco product in the U.S. On a combined basis, Copenhagen and Skoal retail share declined 0.7 of a share point in the second quarter, driven by Skoal's 1.4 share point decline.

For the first half, combined Copenhagen and Skoal retail share declined 0.6 of a share point. The smokeless products segment delivered 1.6% adjusted operating companies income growth for the first half of 2017, as higher pricing was partially offset by the first quarter recall.

Now that the product recall is complete and trade inventories are substantially replenished, USSTC is well-positioned moving into the second half of the year. Finally an update on our innovative tobacco products efforts. In e-vapor, Nu Mark's MarkTen brand continues to grow volume and retail share.

It is currently the number two e-vapor brand nationally with a second quarter national retail market share of approximately 13% in mainstream channels. MarkTen is now present in stores representing nearly 65% of e-vapor volume in those channels.

And among stores, with MarkTen distribution through the full second quarter, MarkTen's retail share was approximately 24%. We're pleased with MarkTen's progress and Nu Mark plans to continue growing the brand in the back half.

In heated tobacco, the FDA began its substantive review of Philip Morris International's modified risk tobacco product application for IQOS in late May.

The FDA published PMI's Executive Summary and research summaries to its website for public review and comment, and the agency plans to publish additional sections of the application on a rolling basis. We continue to work closely with PMI throughout the review process.

As a reminder, PMI submitted its pre-market tobacco product application for IQOS to the FDA on March 31. Our team at PM USA continues to build its U.S. commercialization plans which we look forward to sharing with you in the future. I'll wrap up with guidance. Obviously, our business fundamentals remain strong.

We continue to expect higher adjusted diluted EPS growth in the second half of the year as some first half headwinds moderate and because the fourth quarter will include equity earnings from our beer investment whereas the fourth quarter of 2016 did not.

As a result, we are reaffirming our full year guidance of 7.5% to 9.5% adjusted diluted EPS growth. Here's Billy for more details on our performance..

Thanks Marty and good morning everyone. I'll start with the smokeable products segment. As Marty discussed, cigarette industry volumes declined approximately 4.5% in the second quarter, impacted by the significant cigarette excise tax increase in California.

The smokeable products segment's reported cigarette shipment volume declined 2.9%, moderated by trade inventory movements. When adjusted for these inventory movements, PM USA's cigarette shipment volume was down an estimated 5%. For the first half, cigarette industry volumes declined by an estimated 3.5%.

The smokeable products segment's cigarette shipment volume decreased 2.8% on a reported basis. When adjusted for trade inventory movements, PM USA's cigarette shipment volume declined an estimated 4%. The cigar business continues to perform well, delivering volume growth of 13.1% for the second quarter and 12.7% for the first half of 2017.

Smokeable products segment adjusted OCI margins expanded by 1.6 percentage points to 51.7% in the second quarter, driven by higher pricing. For the first half, adjusted OCI margins expanded 2.2 percentage points to 51.4%. In the smokeless products segment, industry volume grew an estimated 1% in the past six months.

USSTC's reported shipment volume grew 1.4% in the second quarter, but declined 1.7% in the first half due to the recall. Smokeless products segment's adjusted OCI margins increased by 0.7 of a percentage point in the quarter to 70%, driven principally by higher pricing, partially offset by higher SG&A spending and unfavorable mix.

For the first half, smokeless products segment adjusted OCI margins decreased by 1.1 percentage points primarily due to the recall, partially offset by higher pricing. Looking ahead, we expect to see some impact on the smokeless category from California's excise tax increase on smokeless tobacco products, which went into effect on July 4th.

California accounts for roughly 4% of U.S. smokeless industry volume and we expect the average price per can in California to increase by over $1 or approximately 25% in the third quarter. Turning to our alcohol assets, Ste. Michelle faced headwinds in the first half, largely due to trade inventory reductions and increased competitive activity.

In recent quarters, we have observed a slowdown in premium wine category growth in measured channels, and the trade ended 2016 with excess inventory of Ste. Michelle products. As the trade reduced their inventories, Ste. Michelle's shipment volume was negatively impacted, down 12.4% for the first half. Ste.

Michelle is working closely with its major distributors to manage through this, and believes that volume trends will improve in the second half versus the first half.

In beer, adjusted equity earnings from our investment in Anheuser-Busch InBev were $142 million in the second quarter, reflecting AB InBev's first quarter results, which it reported in May.

This excludes a $408 million gain related to AB InBev divestitures in the quarter, which were planned as a closing condition of the SABMiller business combination. I'll wrap up by underscoring our ongoing commitment to return cash to shareholders. First, through the first half of 2017, we paid shareholders nearly $2.4 billion in dividends.

Second, we repurchased $1.6 billion in shares, leaving approximately $335 million in the program as of June 30th. This week, our board authorized a $1 billion expansion to the share repurchase program. We expect to complete the $4 billion program by the end of the second quarter of 2018.

That concludes our prepared remarks, and Marty and I are now happy to take your questions. While the calls are being compiled, I remind you that today's earnings release and our non-GAAP reconciliations are available on altria.com. We've also posted our usual quarterly metrics which include pricing, inventory and other housekeeping items.

You will see that we've included a few additional data points on the discount cigarette category. This is in response to a few recent questions we received on the topic.

With that, operator, do we have any questions?.

Thank you. Investors, analysts, and media representatives are now invited to participate in the question-and-answer session. We will take questions from the investment community first. Our first question comes from Vivien Azer with Cowen and Company..

Good morning..

Hi, Vivien..

So thank you so much for the additional disclosure. Maybe I can start there. While we don't have a time series, I suspect part of the 40 basis point gain that we saw for deep discount is, of course, coming from some of the disruption that we're seeing in California and Pennsylvania.

But if Nielsen is any guide, and some of the other public company competitor disclosures is a guide as well that deep discount has been gaining share already prior to what's happening in California and Pennsylvania. And if that's the case then Marty, I was just hoping to get your thoughts on why you think we're seeing that dynamic. Thanks..

Yes, we can – I'll get Billy maybe to talk about the geography in a minute. But, when we look at it, it looks like churn in the discount category to us. The gain in deep discount, so for reference for people who – we're referring to the quarterly metrics report where we put these data in that Billy referenced.

And we show there that the discount category has not grown year-over-year. In fact, it's essentially flat down a tenth. But there is some difference between the branded discount which is down five tenths and deep discount which is up 4. So it looks to us like it's basically churn there.

I mean importantly for us, there does not appear to have any significant effect on Marlboro or in L&M. Indeed, if you look at the share chart in the earnings release, you can see that the discount category for us was actually up a tenth over the half.

Billy can talk about the geographies, but there's no question that when you have a major excise tax increase in a state, some people do trade down.

I don't know, Billy, you want to talk about discount?.

Yes. Vivien, basically with discount, and as Marty mentioned, it's a discount phenomena, tends to be consolidated through the middle of the country and down into the Southeast, and it really is trading within that discount category.

I would say L&M, our discount brand, is well represented in that category and is doing exactly what we want, which is grow share while not growing the overall discount category..

That's helpful. Thank you. Just as a follow up to that then, seemingly then we're talking about a distinct segment of the total smoker population. So Marty, can you offer any comments on kind of the health of the smoking population broadly from an economic standpoint? And then specifically perhaps that lower-end smoker? Thanks..

Yes, sure. Overall, Vivien, I would say that we continue to have a largely constructed view of the economic situation of our consumer. Unemployment's down, housing is up, wage gains are starting to come through. All the stuff that we talk about all the time, so I won't repeat that. That looks to us to be pretty stable.

Gas prices are up a little bit, but not remarkably so in a way that affects our business.

I think what you may be getting at though that there is a segment of consumers in our category who will go into the store and ask the clerk for the lowest-priced brand, and they may be picking up some share there but again, it appears to be coming out of perhaps the branded discount segment without certainly no effect on our brands, so we don't see it in premium, generally.

I hope that's helpful..

Very helpful. Thank you so much..

Okay. Thanks for calling..

Your next question comes from the line of Adam Spielman with Citi..

Thank you very much. Just to follow Vivien's question, I guess, you're talking about within discount, you're seeing this churn, and I was just wondering whether you've seen deep discounts as innovation in any way, or whether your sort of major competitors have somehow deemphasized their discount brands. So that would be my first question.

I do have a complete separate question on buy backs, but if you could answer that first..

Sure. Yes, thanks for calling. We do not see that. I think it's basically a function of price, Adam..

Fine. And then on buy backs, I at least was surprised by the quantum of buy backs in this quarter.

I know you've increased your guidance, but is this quarter the guidance – what you did in 2Q, does that tell me anything about the run rate we should expect for Q3 and Q4?.

Yes. Thanks for that question, Adam. I wouldn't read anything into any particular action. We really monitor the marketplace. We have a disciplined approach to share repurchases, and it really is dependent on market conditions that we see in the marketplace on the rate that we're going to buy shares back.

I think you – if you put it in context as a whole and you go back to when we began share repurchases in 2011, you can see it's been a great investment of our excess cash..

Fine. And then my final question. You've obviously left your guidance for EPS unchanged for the full year and the question is have you altered in any way your assumptions about beer and the contribution from beer? And maybe as you have perhaps increased your buy back assumptions that's been offset by slightly different assumptions for beer..

I guess the honest answer is....

... Baked into that EPS guidance..

Yes, I think I understand the question, thank you. That's why we do a range. And I think the range is sufficiently broad that, look, if you could predict your EPS with perfect prescience, you would put out a number, but you can't of course because of dynamics, again, you see it again this year as well.

So we try to have the range to be broad enough to cover all that. We put our best thinking into what we can do within the range and that does include what we expect out of our beer investment. So the answer is yes, it's all in the guidance and we think the range is sufficiently broad to cover it..

And it hasn't changed basically enough to – the assumptions for beer within the....

No. No, I don't think so. I think we were thoughtful about putting the guidance together at the first of the year and I think that we are comfortable with the guidance range we have at this point in time..

Okay. Thank you..

All right. Thanks for calling..

Your next question comes from the line of Michael Lavery with Piper Jaffray..

Good morning..

Hi, Michael..

You have the share in Marlboro falling more than your discount piece of your portfolio like you pointed out, and so there's some unfavorable mix there. You also mentioned in your prepared remarks some higher promotional investments, but your smokeable price mix in total is still a strong number..

Yes..

Can you just give us a sense of how you think about the promotional lever? And related to that, obviously too, there was a good margin lift in that segment.

Was pricing the only or primary driver? Is there some other pieces there? How should we think about kind of the run rate and outlook there?.

Okay. Let me try to tackle those. I think that you know what the strategy is. We're trying to maximize income in the segment, and that's a balance between that and making sure we have momentum on the key brands including Marlboro. So the share on Marlboro is down primarily because of the California effect.

But other metrics on Marlboro continue to be strong. Its equity is great. As you can see, we've got very good pricing through the first half, Michael. The demographics have stabilized since Marlboro architecture. We just have a massive increase in California. We over-index in California, and so I think that explains that.

The competitive environment I think we would describe as, it's always competitive. It may be useful for a couple of comments on that. One is if you think of competitive activity as occurring within say a band, it looks to us like the competitive activity remains within the band although perhaps a bit on the high side of the band.

We have some promotional launches and some promotional activity from other competitors but we monitor that carefully, as you know. And what we basically do is we adjust as we need to adjust. So I think it's pretty steady as she goes and we're very happy.

When you look at the income performance in the smokeable segment at more than 7% for the first half, despite the California increase, I think that they're doing a great job over there in line with their strategy..

That's great. That's helpful. And then just one on IQOS.

Can you give a sense of how you think about some of the contingency planning? Obviously, the FDA comment period alone runs through mid-December, so even early 2018 for a decision might be a little optimistic, but perhaps as soon as that or realistically, it could be two or even three or something years before you hear just knowing it's – how that can go.

How do you think about resource allocation given some of that uncertainty? And if it is sooner than later, how quickly could you be able to activate some of your commercialization plans?.

Yes. Well, look, we're preparing to be ready on the nominal timelines that the FDA has said with respect to approving those applications. Your question correctly implies of course that's not completely within our control and it could take longer than that. That's why we're investing in with discipline.

We're trying not to over-spend on the front end but we will certainly make the appropriate investments once we know we're go. So the way we look at it is we're going to be ready at the earliest moment to proceed expeditiously. If it turns out to be longer, we have contingency plans in place to do that.

It's just not within our control, so we try not to fret too much about that, we just try to be ready when we can go..

Thank you. That's helpful..

All right. Michael. Nice to hear your voice..

Our next question comes from the line of Chris Growe with Stifel..

Hey, Chris..

Hi. I want just a bit of a follow on to an earlier question. And forgive me if you said this, but I just was trying to understand if you could frame the elasticity in California. And related to that, a couple other companies have talked recently about less c-store trips.

I was just curious if you're seeing that as well, if that's been a factor at all in your business..

I'll take the second one first, and then I'll ask Billy to comment on the elasticity question, Chris. We have not observed that in our category at c-store. We've been reading carefully the reports. We've seen others comment on that, but at least with respect to our category, we have not seen that yet..

Yes, Chris, and in regards to elasticity, what we see in the marketplace, looking at other states that have had large increases, as you see it dip down, there is consumer reaction just following a CT increase.

There's a bit of trade-down that takes place as they digest that price increase in the marketplace, and then we see it return to normal elasticity through time once they've digested it and feel comfortable with where cigarettes are priced. So through time it is the negative 0.3 elasticity that we see through time..

So your expectations for the California plus say, Pennsylvania drag, the 1 percentage point drag on volume would likely include some improvement as we go ahead in future quarters? Still obviously a negative, but some improvement in the way the consumer reacts..

Yes. Chris, when we look at other states, we see that improvement take place. It's just it's hard to predict exactly how long it's going to take based on the level of the increase for the consumer to get comfortable with cigarette prices again..

Okay. I had just one follow-up, if I could, on Copenhagen. Just to understand, I think you had said there was still a bit of a market share drag of like 50 basis points on that brand.

Is that just trade inventories were building back to normal levels? Are you kind of at a point here where you don't see that residual effect continuing in the second half of the year on the share?.

Well, you see that on almost all the metrics the business bounced back terrifically in the second quarter, it's just that when you're out of the market and you lose your share, it just takes longer to gain the share back.

And so I think we said at the first quarter call that we expected to gain that back over the course of the year and we were trying to point out the gain that we made in the second quarter of I think 0.6 sequentially. So I think we'll get it back over the course of the year, but it doesn't bounce back immediately..

Okay. Thanks for your time..

All right. Thanks for calling..

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

Thank you. Good morning..

Good morning, Judy..

So first just a quick follow-up on Marlboro. Just kind of thinking about the third quarter volume because clearly in the second quarter you had the benefit of the favorable inventory movement.

If I kind of extrapolate the inventory sort of getting back to normalized level and then you have a bit of unfavorable comp in terms of the third quarter, could we see volume down something like a 10% on Marlboro? I'm just kind of thinking about the magnitude of some of these inventory movements..

Well, I'll speak to the inventory movements. I won't speak to guidance on volume, particularly around numbers because you know we don't do that, but you're right to point out the factors. We do have some trade inventory as we point out in the metrics report that built in the second quarter.

And as you know, Judy, it all kind of normalizes over the course of the year, and so in the back half, that'll pay itself back, I'm sure.

I know you remember we have one fewer shipping day in the third quarter and then we have to work our way through this effect that Billy was just discussing with Chris about the volume declines that are resulting from the cigarette excise tax increase. So those are all the dynamics, but we have not put out a number about third-quarter volume..

Okay. And then, Marty, just kind of looking at some of the recent trends for e-vapor category, it looks like growth has reaccelerated, at least in the measured channel data. And clearly some of that is being driven by MarkTen XL.

So just wanted to get a sense of kind of the broader industry momentum that you're seeing how sustainable do you think, just from a category perspective? And then to some extent, if you go back two or three years ago, there was a little bit of a shift of combustible volume into e-vapor, so is that something that you're starting to see or just kind of get a sense of the broader e-vapor category trend..

Yes. Let me share with you some of the macro data that we have, just to get everybody oriented. In 2016 we estimated that the spend in the category was about $2.5 billion; that was flat to 2015. But we have seen a pick-up both in volume and in dollar sales in 2017. So I don't know, maybe 8% on volume year-over-year.

And then there's been some price mix as you know. A lot of that is driven by MarkTen, which has really gotten traction with the consumer and we put out some share numbers on that today. The other phenomenon that's happening in the category as I know you know, is there's poly use.

So adult tobacco consumers do shift between segments of the tobacco category, and I think that what you're seeing as vapor moves up and down, and maybe even MST, is you see people moving among and between those categories.

I think those are all factors that go into the growth rate for vapor and then of course, when there's new technologies that are put in the market, we find high trial and that drives some of the growth..

Okay. That's helpful. And my last question just on IQOS.

Can you give us some update on how much you've discussed with various jurisdictions on sort of the tax structure or any kind of regulatory structures around IQOS and what kind of feedback you've gotten so far?.

Yeah. We have an engagement plan that we're talking to public policy officials, to state tax officials and others, and I am encouraged that there is, I think a more broad acknowledgement among public policy people these days that harm reduction is the way forward and that tax policy will be an important component of that.

It makes good sense to try to encourage people to migrate to products that may hold out less harm. We are particularly pitching that in the states, but as you know, state excise tax structures are highly complex and idiosyncratic by state, so the reception varies from state to state.

But we are out there sharing our views about that and trying as best we can to persuade people to be thoughtful about that..

Got it. Okay. Thank you..

All right. Thanks for calling..

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

Hi, good morning. This is Patty Kanada on for Bonnie..

Hi, Patty. Welcome..

Hi. Thank you. Just a question on smokeless. Could you give us a little bit more color on where you are in terms of replenishing trade inventory? It seems that there may be some residual supply constraints.

And then in terms of the consumer, has there been any pantry loading going on or trade-down or brand switching? And does your guidance assume consumers entirely come back once this issue is fully resolved?.

Okay. We have noticed that some people have commented on that, so I'm glad to have a chance to talk about the replenishment. Actually, I think it's going pretty well.

If we look at – I don't know, we went back and looked at some data through June and with a small exception of maybe, I don't know, call it two, three or four SKUs, all of the orders were being completely fulfilled. So that's a pretty quick snap back from a recall and a transition from a two-factory environment to a one-factory environment.

I'd like to take the occasion to congratulate the UST team on such a good job. There was a brief hiatus during the July 4 holiday. Our people have been working very hard in the factory and we gave them an appropriate July 4 holiday. And there was a short period there where a few more SKUs were not available and we had to limit some orders.

But on the whole, the vast majority of the SKUs are at full fulfillment, and as you can see from the numbers in the second quarter by the smokeless team, I think they've done a very good job. So our view is that we're pretty much back in business in the smokeless business. We have not seen any pantry loading that I'm aware of..

Okay. Great. And just one other question on menthol..

Sure..

We have San Francisco's ban possibly going into effect next year and a few other cities looking to similar legislation.

What are you seeing on the ground in those places, and where do you think this all goes?.

Well, there's a group of people that are trying to take decisions away from other adults and we oppose that. And we thought that was very bad public policy.

You know our position on menthol because we've articulated it extremely thoroughly at the FDA, and as a matter of first instance, if there's going to be anything done on menthol, it ought to be done by the agency that has the expertise to assess whether the science and the evidence supports it.

In our view, and the view of many others who weighed in on the FDA, is that there is not. For San Francisco to try to create its own set of rules out there doesn't seem to be good public policy to us, but this happens. Local jurisdictions have views about tobacco issues and while we fight them, they go ahead and reimplement them.

Obviously it's a tiny fraction of the volume..

Great. Thank you..

All right. Thanks for calling in..

Your next question comes from the line of Matthew Grainger with Morgan Stanley..

Hi, Marty. Hi, Billy. Thanks.

First question, I guess as we think about some of the comparability headwinds for the third quarter that you mentioned and how to model the back half generally, I wanted to also ask about the pricing outlook because in 2Q you had strong price mix in combustibles, but there was the benefit of earlier timing of the price increase.

And you did incur some inventory buildup, which we talked about earlier, that I'm assuming will probably unwind in the second half and result in some higher promotional expense flowing through.

So is it fair to directionally expect price mix to moderate a fair amount in the next quarter or in the back half relative to what we saw here in Q2?.

Well, I don't want to talk about forward pricing as you can appreciate, and I think that the dynamics are well understood, Matt, about what we have out there. I tried to articulate them in terms of the inventory, but I'm not going to talk about forward pricing of course..

Okay. Understood. And just to follow up on Patty's question on the San Francisco menthol ban..

Yeah..

I know you've sort of been down this road from a legal perspective before with the flavored smokeless....

Yes..

In New York.

I mean, given how the bill is written and your experience trying to litigate these types of bans in the past, how optimistic are you that this could potentially be reversed? Or is it kind of a done deal once it's implemented at this point?.

Well, there are other jurisdictions that have implemented it. And my guess, what I would say is that while we continue to think we have strong arguments, it's fair to observe that we have not been able to block them in other jurisdictions.

It always depends a bit on state law and other factors, but we'd like to have public policy defer to the experts but they often don't and sometimes the courts are reluctant to interfere with that. So it can be uphill..

Okay. Thanks. And just one last one. Can you give us an update just from a legislative perspective on some of the agricultural bill amendments related to deeming regulations and where those stand at the moment? Just your level of optimism that that could move forward..

I hope so. It's in the ag bill as you know and I thought that the – we were happy to get it past the committee and that predicate date really needs to be changed. I think there is widespread understanding that the predicate date issue should be changed.

It's a very, very complex environment in Washington, to state the obvious, and so we'll have to see where it goes in the budget. But I think that there is a lot of support for that amendment and we continue to work that very, very hard..

Okay. Great. Thank you, Marty..

All right. Matt, thanks for calling..

Your next question comes from the line of Jenny Kaplan with Bloomberg..

Hi. Thank you so much for taking the question..

Hi. Good morning..

Good morning. I'm interested in just hearing – I know this morning that BAT CEO was talking about how they're planning to apply to the FDA for their glo product. And so I'm wondering how that impacts your plan and how you think about the competitive environment as you work with Philip Morris to introduce IQOS. Thanks..

Right. Well, thanks for your question. I appreciate you calling in. As you might expect, I've been spending my time this morning thinking about this call, so I didn't have a lot of time to review the BAT material. I did see the headline statement apparently that they're going to pursue an FDA application for glo.

Our plans assume the following which is, because the application is in by PMI in the United States and we're working that we expect to have first mover advantage. But our plans also assume in our category that we will have competition, so I think both scenarios are covered..

Thank you..

All right. Thanks for your question..

The next question comes from the line of Vivien Azer with Cowen and Company..

Hi. Thanks for the follow ups..

Welcome back..

Thanks. On IQOS and the dialog that you're engaging with at the state level, if my understanding is correct, the consumables will be subject to the MSA, subject to the FET and selectively subject to state excise taxes. Can you give us a sense of what proportion of states or U.S.

volumes would, in theory, tax IQOS as a cigarette absent any change in the statute? Thanks..

Most of them..

Got it. Thanks. And then my other question is on minimum age increases. I know California is probably a little bit hard to read because of the overlap with the state excise tax. And while Hawaii is small, it's really our only kind of clear example.

And given that there looks to be some movement in New Jersey and possibly Oregon on that front, is there anything that you can offer in terms of your insights around how raising the minimum purchase age in Hawaii impacted the market? Thanks..

It's too small, and it's so idiosyncratic because it's an island that it's just hard to extrapolate from it. I think we had said previously when we studied California that we had not seen any significant effects there and obviously we'll be monitoring New Jersey very carefully..

Terrific. Thanks again..

All right..

Your next question comes from the line of Michael Lavery with Piper Jaffray..

Thanks for the follow up, too..

Welcome back..

Just wanted to revisit Nat Sherman. It's, I think, a couple quarters now that you've owned it and curious some of the status there.

Are you still developing some plans for what to do with that? Have you begun doing any expansion of distribution? What's sort of the status on how you think about that brand?.

Yes, the integration is well underway. I think that we're doing very well against the plan we have. We're working on the branding strategies now. Obviously getting our arms around the factory and we'll have more news on Nat Sherman in the back half of the year, but we're very pleased with how it's gone so far, Michael..

Okay. Great. Thanks..

Thanks..

Thank you. At this time, I would like to turn the call back over to Bill Marshall (40:21) for closing remarks..

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

Thank you. This concludes today's conference call. You may now disconnect..