William Marshall - Altria Group, Inc. Martin J. Barrington - Altria Group, Inc. William F. Gifford, Jr. - Altria Group, Inc..

Christopher R. Growe - Stifel, Nicolaus & Co., Inc. Bonnie L. Herzog - Wells Fargo Securities LLC Judy Hong - Goldman Sachs & Co. LLC Vivien Azer - Cowen & Co. LLC Matthew C. Grainger - Morgan Stanley & Co. LLC Stephen Robert Powers - Deutsche Bank Securities, Inc. Owen Bennett - Jefferies International Ltd. Adam J. Spielman - Citigroup Global Markets Ltd.

Nik Modi - RBC Capital Markets LLC Michael S. Lavery - Piper Jaffray & Co. Gilbert Alexandre - Darphil Associates.

Good day, and welcome to the Altria Group 2018 First Quarter Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by Altria's management and 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, Vice President, Investor Relations for Altria Client Services. Please go ahead, sir..

Thank you, Jennifer. 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 2018 first quarter 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 2017. 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.

Adjusted results excludes 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. With that, I'll turn the call over to Marty..

smokeless tobacco and oral nicotine products, e-vapor and heated tobacco. USSTC is already the largest most profitable non-combustible business in the world, and the company is pursuing FDA authorization to market products with reduced risk claims.

And in March, the company took an important step in that regard by submitting a modified risk tobacco product application for Copenhagen Snuff, and we're looking forward to engaging with the FDA on our application. In e-vapor, Nu Mark grew volume by approximately 30% in the quarter, driven by expanded distribution and benefiting from category growth.

Nu Mark also expanded MarkTen Elite, a pod-based closed system product, to over 6,000 stores in the first quarter. In heated tobacco, PM USA continues to await the completion of FDA's review of PMI's IQOS PMTA application. PM USA's initial lead market plans are ready, and we'll announce its location upon FDA authorization.

At that point, PM USA will begin to build product inventory while activating its marketing plan. It will use a range of tools to build adult smoker awareness, intrigue and demand in the lead market, while also preparing for additional lead markets. Let's touch briefly on FDA news.

The first quarter was an active one for the agency, which published three advanced notices of proposed rulemaking, including one on a proposed nicotine standard for combustible cigarettes. Earlier this month the agency announced a policy change regarding its treatment of substantial equivalence applications for provisional products.

And you'll recall that we've been expecting these actions since last July when the FDA announced its new regulatory framework. As we've said before, these are complex and nuanced issues and any potential product standard will undergo a rigorous, multiyear science and evidence-based process.

We're preparing our submissions on each of the ANPRMNs and we'll actively engage throughout this process. So once again, we're off to a good start. Thus, we're reaffirming our guidance to deliver full-year 2018 adjusted diluted earnings per share of $3.90 to $4.03 per share from a 2017 adjusted diluted EPS base of $3.39.

This range represents a growth rate of 15% to 19% from 2017. With that, I'll turn it over to Billy to provide more detail..

Thanks, Marty, and good morning everyone. Let's start with a deeper look at the Smokeable Products segment. Smokeable segment adjusted OCI decreased 2% in the quarter, primarily driven by cigarette volume declines, strategic business investments and higher resolution expenses, partially offset by higher pricing.

Smokeable adjusted OCI margins declined 1.2 percentage points to 49.7%. We estimate that the cigarette industry volume declined about 5.5% in the first quarter. There are a number of factors at play here, most notably the impact of the California state excise tax increase, which went into effect in April of last year.

We believe the effects of the California SCT were further amplified this quarter due to pantry loading that inflated volume in the year-ago period.

We also continued to see adult tobacco consumers moving between tobacco categories as evidenced by e-vapor category growth and while we continue to be net positive about the strength of the adult tobacco consumer, recent gas price increases could be impacting purchase decisions in the short term.

We continue to closely monitor these and other factors and have good plans in place for all volume scenarios. Our Smokeable segment reported domestic cigarette volume declined 4.2% primarily driven by the industry's rate of decline and retail share declines partially offset by trade inventory movements.

When adjusted for trade inventory movements, Smokeable segment cigarette volume declined an estimated 7%. The cigar business continues to perform well, growing reported shipment volume 3% in the quarter. In the smokeless product segment, USSTC grew adjusted OCI 27.3% in the first quarter, as it lapped the 2017 voluntary recall and grew pricing.

Adjusted OCI margins expanded 7.8 percentage points to 69%. Smokeless industry volume declined an estimated 1% over the past six months, while USSTC's reported domestic shipment volume was essentially flat in the first quarter. We urge caution when comparing year-over-year volume estimates for the smokeless segment.

First quarter 2017 volume was particularly noisy. As the voluntary product recall involved removing significant volume from the marketplace and then replenishing that volume with fresh product. Turning to our alcohol assets. After a challenging 2017, Ste. Michelle grew volume and revenue in the quarter with wine shipment volume up 6.1%.

While adjusted OCI declined $4 million, substantially all of that was due to the one-time employee bonuses Marty discussed. In beer, adjusted equity earnings from our Anheuser-Busch InBev investment were $225 million in the first quarter, reflecting Altria's share of AB InBev's fourth quarter results.

And of course, we continue to reward shareholders by returning significant cash to them through dividends and share repurchases. In March, we raised our dividend 6.1% to reflect final 2017 results and we expect to maintain our dividend payout ratio target of approximately 80% of adjusted diluted EPS.

We repurchased eight million shares in the first quarter at an average share price of $64.33 for a total cost of $513 million. This leaves approximately $500 million remaining in the current $1 billion repurchase program, which we expect to complete by the end of the year. With that, we'll wrap up, and Marty and I will be happy to take your questions.

While the calls are being compiled, I'll 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.

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 a question from the investment community first. Your first question will come from Chris Growe with Stifel..

Hi. Good morning..

Hi, Chris..

Hi. So, Marty, I just wanted to ask you first off if I could, there's been some controversy around the rate of growth in vapor and e-cigarettes and the resulting weakness in the cigarette volumes. You cited this in your remarks and Billy did, I just wonder if you could give some perspective on the growth of the e-vapor category in total.

There's more than just measured channels that, which is what we see. And then, how you think it may be affecting cigarette volume. I don't know if you can give a number there, but just if you can give us an idea of kind of what to expect through the year if possible..

Yeah, so the vapor category has grown. You'll remember Chris, there was a period when it grew fast, when it first came into the market, and then flattened and now it's growing again.

This is consistent I think with what we've been saying all along which is as the technologies get better and particularly as adult smokers are able to learn about the products that we would expect migration over time and that's why we're, have the innovation aspiration we do. So, the numbers are hard to come by as you know.

We can look at the measured channels. It looks to us like the volume was up in 2017 about 11%. And at least in measured channels is moving much faster than that this year. It's very hard to get numbers around the other channels' e-commerce and some of the vape shops.

Listen, in terms of volume, in the cigarette category I think Billy covered it pretty well, which is there are a number of factors which affect cigarette industry volume and it happens over time. Our view on this, we don't guide on volume, as you know, Chris.

But we expect for that rate to moderate as we go through 2018 because we're going to lap the California SET. I'd also remind people that the rates tend to be a little bit lumpy. If I look at 2017, for example by quarter, the rates were 3%, 4.5%, 3.5%, and 4.5% and then it smoothed out to about 4%, which is in the long-term range.

I remind everybody I won't go through the mechanics because I know you all know this, but we have a very highly-developed model to monitor this which comprises both secular decline rate and price elasticity. And we look at a number of factors in the secular decline rates, including the migration of smokers to other technology.

So we're keeping an eye on that. But we have good plans for 2018. We've reaffirmed, we have confidence in the plan. As probably lastly, just worth reminding ourselves that over time there have been other predictions about trend breaks in the cigarette volume decline that have not materialized.

I remember once around 2011 or 2012 about vapor, and it was going to be an immediate disruptor and it turned out not to be true. And then on the other side we remember gas prices dropped and consumers did better, and we were, some were predicting it was going to go up. So we look at it over time.

We monitor it regularly, and we'll be ready for whatever comes..

Okay, just, thank you. Good color there. I had just one follow-up question which is....

Sure..

...in terms of your spending – we know you're spending some of this tax savings back behind the business. And we don't need to get into quarters here, but has that spending started aggressively already? And, we saw Marlboro sequentially improve a little bit.

Can we attribute some of that to some of the incremental spending already? Or is that still to come?.

No. Yeah, we're spending. It's in our plans for 2018. You're right. We're not going to guide by the quarters.

But, Chris, if you look at the national launch of Marlboro Ice, if you look at the expansion of MarkTen Elite, if you look at the filing of the MRTPA application for Copenhagen snuff and so forth, you can see that those investments are starting to flow through in those important long-term places. And I think we've got a year to go.

But again, we're encouraged by Marlboro stabilizing sequentially from the last quarter..

Thank you..

Okay. Chris, thanks for the questions..

Appreciate it..

Your next question is from Bonnie Herzog with Wells Fargo..

Thank you. Good morning..

Hi, Bonnie..

Hi. I have a couple questions on IQOS. Could you guys give us an update on your expectations for the PMTA timing? And then I'd like to hear from you on what you think are the prospects for IQOS in the U.S. in light of the adoption curve that Philip Morris highlighted in Japan.

Do you guys foresee similar limitations along the adoption curve in the U.S.? And just like to hear from you what learnings you're taking from, again, what they're seeing in Japan right now?.

Sure. So I'm afraid we don't have much to offer you on timing because it remains at the FDA. And, as you know, those timelines, Bonnie, and they continue to look at it. But we're hopeful we'll hear from them soon. We remain very excited about the prospects of bringing IQOS to the U.S. marketplace.

We think it's a very good product with a good sensory experience that has good satisfaction parallel to cigarettes. There's no ash, there's less odor. And it's a compelling harm reduction opportunity, as we know, from the application. So, I know there has been some discussion about its performance in Japan.

I know that you'll remember that when we've been asked to try to pick a market that we like, we've refrained from doing so. And I think that turns out to be right. We're trying to gain the insights from each of the markets, apply them to what we think will happen in the U.S. market.

It's also worth reminding people that we have a portfolio approach to harm reduction. So while we're very excited about IQOS and we are going to be working very hard to convert adult smokers, we also have the largest smokeless business in the world, which is already profitable. And obviously, we're building a vapor business.

So that's how we think about it in the context of our long-term strategy. And we don't get too excited about short-term information about IQOS. We continue to believe in it and we're really excited about bringing it to the U.S. market..

Okay. Thank you for that. But then that does beg a follow-on question just in terms of how do you guys envision IQOS interacting with the more developed e-cigs market than what you see outside of the U.S., because certainly that's the case here. And then you touched on your full portfolio of reduced-risk products.

So help us understand how you expect that to interact within your own portfolio?.

Okay. Well, that's what we're going to – sure, good question. That's what we're going to go find out when we get to market. This is a product that has not been introduced to the U.S. market.

And I know you remember from our Investor Day presentation that our belief is, is that consumers, like in most categories, will segment along product lines and we want to be there with the leading options. And so, as the consumer segment, we will make investments behind the leading bets.

And the honest answer is no one will know how it will interact until we put it in the market and observe that, and that's one of the things we're going to learn as soon as we can get it there..

Okay. One final question for me, if I may, just on your smokeable operating income growth, which was negative, which is very unusual for you guys. So, just want to understand how much of this was planned. I know you talked about stepping up spending.

But I just really want to understand how we should think about this going forward? And then do you guys think that the stepped-up spending is resulting in the share stabilization you're looking for, for Marlboro. Thanks..

Yes. I think the investments are paying back, and this is why we have said for some time now, including when we guided early in the year, that long-term investors should look, I think, at our full year performance against our strategies, including these investments.

And, by golly, we're guiding to a 15% to 19% EPS growth year and we see 30% in the first quarter. So I know it's tempting in some places to bore into the segment reporting for each quarter, but that's not how we think about it. And I think investors should think about it the same way, which is long-term growth in EPS.

And by the way, that gets converted into cash through the dividend payout ratio..

Okay. Thank you..

All right. Thanks for the questions..

Your next question is from Judy Hong with Goldman Sachs..

Thank you. Good morning..

Hi, Judy..

So, Marty, I guess I just wanted to go back to kind of the industry question and the interaction between combustibles and e-vapors. And clearly, the stock price performance in the last couple of months, adjusted investors are really concerned about how much e-vapor category, particularly JUUL, is taking share away from your combustible product.

So, I'm just wondering if you have any response to that or any data that you can share us in terms of the interaction across those brands..

Well, there is interaction, and as you know and we've been predicting this as we bring innovative products to the marketplace, there is going to be interaction because if you will remember again from presentations we've made previously, we know about half of adult smokers are looking for products to migrate to that offer them nicotine that they may want or need, but that offer them a reduced harm.

So we would expect that over time. Now, again, just another historical footnote. We went back and we looked, and I have counted at least five brands in the e-vapor category that had very significant growth rates early and then fell back to earth over time. And so, this is not the first time that we have seen some excitement about a category growth.

And what we're learning is, is that you have to dimensionalize the size of the category. The category is about $90 billion retail in the United States. We think vapor is probably about $3 billion of that in 2017. So it remains a fraction of the overall category. And time will tell as adult smokers migrate. So again, we're the long-term people.

Our long-term strategy is to move them to innovative products. But I think it's worth remembering the history that there have been some rockets before that haven't sustained their trajectory..

Okay. And then, I guess, just when you kind of think about the FDA actions, though, just in terms of – seems like there is a lot of concern around the youth access issue on e-vapor category and obviously there's been some letters being sent to some of the retailers.

Do you think that that is a positive development in a sense that that actually allows some of those dynamics to kind of shift a little bit more in favor of the combustibles? Or does it sort of undermine your plan to kind of develop the e-vapor category, IQOS as well as your Nu Mark product?.

I hope it doesn't. But I think it's important that everybody understand that this is a category that comes with responsibility. And those of us who have been here for some time understand that the responsibility actions we take, particularly in the area of youth access, are most important.

And, some of the developments we've seen, I think may reflect that other companies have not understood that as they've entered the market. It's why we work so hard on this in terms of youth access prevention in our trade programs and the like.

There is nothing inconsistent, in my view, with trying to develop innovative products for adults while taking steps to limit their reach to young people. And we have done it for decades and that's how we're running our e-vapor business..

Okay. And then question for you, Billy. Just, obviously, you bought back about $500 million of shares in the first quarter. You've got another $500 million left in your authorization. But your balance sheet is still pretty strong.

You're generating cash, and it seems like the stock price reaction recently would suggest that you could actually be much more aggressive in terms of the buybacks.

So do you have any updated thoughts in terms of how you think about the buyback for the balance of the year?.

Yeah, Judy, as we've said before, look, we buy back shares based on market conditions. We're currently in a program and we'll evaluate that as we progress through the year..

Okay. Thanks..

Good to speak with you..

Your next question is from Vivien Azer with Cowen..

Hi. Good morning..

Hi, Vivien..

So thank you for the color on kind of the puts and takes on cigarette industry volumes.

I was wondering if, just from an industry perspective – not necessarily for your volumes – do you have a sense of what that number would have been if you exclude California?.

I don't..

Okay. No problem. Just in terms of the dynamics within the cigarette category, Marty, I think over the last few quarters we've been discussing some of the dynamics that are happening at the lower end of the category..

Yes..

And it looks like, per your disclosure, deep discount does continue to gain share.

So could you offer a little bit more color on the dynamics that you're seeing at the low end, please?.

Sure. Maybe two things, Vivien, from our end. One is sort of how the consumer is doing and then the movement within discount. So we continue to be net positive on the consumer. But we're watchful of a few things, to be sure. I mean on the positive side we're at full employment. And confidence remains good and the housing starts look okay to us.

On the watch-out list I think is you haven't seen the wage gains that you might expect in a full employment environment. And, of course, they're not evenly distributed. Gas prices are up about 10% year-over-year, as you and some others have noted.

And we're also watching to make sure that there aren't other costs that are kind of eating away at disposable income. But net-net I think we remain positive. There is no question though that there are manufacturers in the marketplace that are investing behind trying to get the lowest price cigarette brand in the store.

And you see that in the deep discount. So discounts about 24% according to our estimate. It's up about three tenths, which is a tick up from where it had been. All of that basically from the deep discount end. Looks to us like about half of that is switching out from manufacturers discount.

And then the other three-tenths, give or take, it's not quite this precise, but roughly, Vivien, comes from the remaining 75% there. So there are consumers, to be sure, who will go into a trade channel and ask for the cheapest brand in the store. And there are some companies that are offering it to them.

So I think that probably explains our view of what's happening in the discount category. Obviously, it's not an area of focus for us, as we're focused on premium, especially Marlboro..

Absolutely. That's really helpful. If you take a step back, Marty, and I really appreciated your comments that, yeah, when gas prices were good....

Yeah..

...clearly it was apparent with cigarette volumes.

And if we kind of go back to 2015 and look over the last three years, have you notice any evolution in price elasticities?.

No. And we – it's something we look at all the time, and we have not seen any change there..

All right. That's good news. Last question for me. On FDA – I'm not sure if you're going to comment on this, but I'm going to try to ask the question anyway..

Okay..

I'm curious whether you think the FDA appreciates that the pharmacokinetic profile can be very different within e-cigarettes, because as I think about the ANPRM around characterizing flavors, anything that is a combustible cigarette, and certainly what you guys are aspiring to do on IQOS fits into a much more tightly-regulated flavor profile.

And I wonder whether they, whether they're kind of looking at that, if the pharmacokinetic profile matters and whether that informs how you're thinking about characterizing flavors – or whether you think they should be. Thank you..

Sure. I can't speak for the FDA, but I'm confident that they will look at that, along with a host of things. Our experience with them has been that they're very thorough, and I think that they will look at the product performances and I'm sure with the flavor ANPRM, this is going to come up.

So, while I can't speak for them it seems sensible to me that they would do that..

Terrific. Thank you..

Sure..

Your next question is from Matt Grainger with Morgan Stanley..

Hi. Good morning. Just had one question. The investment in – that you made in the all-other segment this quarter was a bit below our expectations.

And, I guess I'm asking more in absolute rather than relative to my own expectations, but you highlighted expanding MarkTen Elite into 6,000 stores but given the magnitude of measured channel growth in the e-cigarette category, what are the constraints against more rapidly accelerating investment in the all other segment? Are there capacity constraints that are guiding that or is it really just taking a more measured approach before you fully commit to one of the new technologies that you're supporting this year?.

Yeah, Matt. There're really no constraints from a capacity standpoint. It's really when you see that, you'll see fluctuations when you compare year-over-year, quarter by quarter. There'll be puts and takes as we move through the year. And so we certainly are disciplined as we approach the e-vapor category but no constraints that are limiting us..

Okay. Great. Thanks..

Thanks, Matt..

Your next question is from Steve Powers with Deutsche Bank..

Good morning. I guess....

Hi, Steve..

Continuing on with e-vapor and the topic du jour, I'm wondering what your analytics tell you about the demographic overlap between today's e-vapor consumer and really I guess the JUUL adopter specifically, and your core smokeable segment consumer.

Because I guess I'm just trying to – is there anything there that might make you more or less optimistic when you think about direct smokeable cannibalization risks on your brands from e-vapor? Especially in the near term as JUUL growth remains robust and for example your MarkTen franchise grows. Thanks..

Maybe I'll take that up a level, Steve, so I don't, be commenting about other people's products and competitive information which we have which I'm not particularly interested in sharing on a call.

But I think what we do know is that among adult smokers, it's pretty widely held that they are looking for alternatives and that's true for both adult male and female smokers as well as across the age cohorts.

I can say also that we take great care when we we're looking at the age cohorts to make sure that we're focusing our efforts on adult smokers and so forth. But in terms of the interplay between one brand and our cigarette brand, I think that's a topic I'm not going to discuss on the call. I hope you can appreciate that..

I do. I just thought I'd try..

I appreciate it..

I guess separate tact on the topic..

Sure..

As your vapor business grows and builds on some of the newer products that you're bringing to market, is there any update on how you're thinking about the profitability ramp and how you dimension where run rate margins might mature towards in that segment under the various growth scenarios that you're considering?.

Yeah, I thought when we presented at Investor Day and Jody took us through how he's thinking about it, what our aspiration for vapor is to be the leading e-vapor company in the United States that offers superior products to people who want them.

And that we have cigarette margins – cigarette-like margins at scale and that continues to be our aspiration and as the volume comes in it helps us along that way. So we are bullish about the ability to build a business there that has cigarette-like margins. It's early right now of course and we're investing.

And there's a lot of FDA spend, but over time, we're pretty bullish about that possibility..

That's great. If I can squeeze in one more..

Sure..

The various advanced notices of proposed rulemaking that you mentioned that the FDA had issued over the last several months, can you remind us....

Yes..

...of the expected timeline from here of your responses and the likely news flow that you see associated with it? Because just given what we saw in March, obviously, FDA-related headlines can certainly have an impact on how the market perceives risk around your stock.

So, I just, I think it's important to remain clear about what may or may not lie ahead on that front..

Yeah, so if I remember this correctly, there are 90 day response deadlines to each of the ANPRMs and they all came out within about a week or so of each other. I don't have the date in my head at the moment, but we can get you that. I think that we and others have asked for extensions.

These are enormously complex topics they've asked on, and so they may be extended. And if that's of interest to you, Steve, I'll have Bill get you those dates. I just don't have them top of mind. But nominally 90 days, but there may be extensions for the replies. And the replies will probably trigger some discussion of those as well..

Perfect. Thank you so much..

All right. Thanks for calling..

Your next question is from Owen Bennett with Jefferies..

Good morning, guys. Hope all well..

Hi, Owen..

Just one question for me, I think, just following up on Vivian's. So you spoke about the deep discount competition, but could you comment on the promotional environment ex the deep discount brands, please? Thank you..

Yeah, it continues, I would say, to stay competitive. I don't think there's been any significant changes in the first quarter that I would call out from the typical back and forth on the promotional. Naturally, you have some folks that are expanding brands, and they put promotional devices in place.

But I don't think it's anything materially different from the fourth quarter..

Cool. Thank you, guys..

Thanks, Owen..

Your next question is from Adam Spielman with Citi..

Hi. Thank you very much. Two questions, if I may. The first one is on the discount segment within cigarettes.

How big does that have to get before you start getting concerned about it, would be the first question?.

Okay. Well, we watch it carefully obviously given our focus on premium business, and you'll probably remember, Adam, there have been periods in the past where the discount category grew such that we had to take action to compete more effectively there.

I would say at 24% of the market, it's relatively stable, and you see us continuing to do a good job. So, we don't have a trip wire that I'll call out, but it's something that we monitor..

Can you just remind us sort of back in – my memory was in – was suddenly in the sort of mid-2004 period, sort of beyond that, it was an issue. What sort of percentage was it at that point? I know you're not going to say sort of a 28.2% is suddenly....

Right..

...going to do something.

But sort of ballpark, are we talking 30%? Are we talking 28%? Are we talking 35%?.

I'll give you a different metric that we monitor....

Yes..

...which is price gap. So I think that's probably the easier way to think about it. You remember this from Marlboro Friday and others. Net gap gets out of line, and then we know we have to be mindful of that. The gap's right now at about 30%. And it can probably expand a bit, but that's probably the better number to look at, Adam..

Fine. Okay, that's very good. And then secondly, we haven't talked about – much about smokeless in the Q&A. Obviously, volume's roughly flat. As we think about the next quarter or two, we've got the recall.

But if you sort of strip out the effects of the recall, should we sort of be thinking that this category is flat now? And the other thing I was really surprised about was your strong margin.

And again, whether in the medium term you see significant upside from here? Or whether it's going be a much more gradual thing on the OCI margin?.

Yeah, well, thanks for that because it allows me to observe that it's hard to grow margin from 69%.

I mean, it's a very high margin category, isn't it?.

Yes..

That's flatter a bit because of the recall. Obviously, we had a lot of costs in the first quarter of 2017, so the delta between this quarter and that, Adam, is flatter a bit by that, but it's a high margin business. There's no denying it. I think it's fair to observe that the category has been flattish in terms of its volume growth.

It used to go about 5%, call it, and it's clearly slowed down a little bit to be flattish or down a little bit on the six-month moving. There's probably a couple of reasons for that.

One is something we talked about earlier which is there are consumers that are trying other products; and secondly, the retail pricing is up more in 2017 than it has been over 2015 and 2016. And I think that's had an effect on category growth which is something we're also looking at..

Okay. Thank you.

And that was partly a tax rise, if I remember, in Pennsylvania?.

Yeah, and MST also had an excise tax increase in California last year, too..

Okay. Thank you..

All right. Thanks for the questions..

Your next question is from Nik Modi with RBC Capital Markets..

Yeah. Good morning, everyone..

Hi, Nik..

Hey, Marty. So just two questions from my end. First on just general Marlboro trends, outside of California, can you guys like pinpoint the areas? I'm just curious how broad-based it is versus is it isolated in certain regions, markets where you could be a lot more tactical? That's the first question.

And then the second question is just maybe an update on MarkTen Bold, if you can give us any thoughts on kind of early consumer response..

Sure.

Billy, you want to talk about Marlboro?.

Yeah, I'll talk about Marlboro. From a standpoint of being broad-based, it is broad-based, Nik. From a standpoint of fine-tuning, we are always in the process of fine-tuning. That's something that the PM USA team does very well. And they'll look and adjust state-by-state to fine-tune the effectiveness of our spending related to Marlboro..

MarkTen Bold, I think, is off to good start, Nik. It's a very good product, particularly as it appeals, I think, to adult smokers who are looking for similar experience there. And so, it's early days with MarkTen Bold, but the early feedback is very good..

And I guess what I'm really trying to get at, maybe I should have been more explicit. Obviously, MarkTen Bold is your first foray with the salt technology..

Yeah..

And obviously, there's certain other products in the marketplace that have done very well with that technology.

So I'm just trying to understand, how much of this is about the brand versus the actual experience? And can you do more stuff with MarkTen Bold to get consumers to try it, because obviously with the salt technology, the consumer experience is a lot better?.

Yeah, it's true. And I think it's also format. So I think in the e-vapor category, the product bundle is both the format, the satisfaction and the flavor. And so we have very good flavor there, and I think it has good satisfaction. But it is a cig-alike product, and that is a segment that is under some pressure in e-vapor.

We've got, obviously, in MarkTen Elite, a pod-based product, which is a different formulation. And what we're trying to do there is to match consumer expectations through different devices. You may know, for example there, that the pod has about twice as much liquid as another competitive brand.

And we're trying to meet the consumer where they want to be through different techniques. I think we're going to see this for a while, Nik, as both formats, flavors and satisfaction are worked on in the category.

And remember, we also have the complexity of the FDA rules that allow you to launch some products but not others, given when they were in the marketplace. So that's the bundle of things that we're working through. But when I look at what Nu Mark has done, we have a very good offering in cig-alike.

I think we have a very good offering now in a pod-based product. And through our interest in Avail, we're learning a lot about the open segment. So I think that's the right strategy..

Great. Thanks, Marty..

Good to talk to you, Nik..

Your next question is from Michael Lavery with Piper Jaffray..

Good morning..

Hi Michael..

You mentioned on IQOS, obviously assuming that it's approved for marketing authorization, that you would have a lead market and then other lead markets. And so it sounds a little bit like you'll have a measured approach.

How do you think about the range of scenarios? Is it something you could accelerate if the responses click? Is there capacity limitations? What are some of the things that frame how you think about the trajectory that would presumably build towards an ultimate national expansion?.

Yeah, good question. We built at least three scenarios that depend on the consumer reaction to it. We have contingency plans in place to scale it faster in faster scenarios. Capacity we do not expect to be an issue. We've got some things to learn, as you know, about pricing and the brand and how we go to market.

I mean, I don't want people to underestimate, this is all new with IQOS, as PMI has experienced. What we've tried to do is to have a program in place that allows us to learn quickly, make the adjustments we need, and to scale fast depending upon its performance, which we continue to be optimistic about..

Oh, no. That's helpful. Thank you. And just back to gas prices as well for a minute. It was, depending on where exactly you benchmark it, about a two to even four or so point lift a couple years ago. In terms of magnitude, obviously, prices now are higher than in the last few years.

But do you have any ability to quantify how much that may be driving some of the category pressure?.

I think it's one of many factors. It's not the same dramatic effect as when they dropped. I think that's fair to say. But because so much of the volume moves through convenience and gas, Michael, if it's up – I saw a figure, I think, $0.25 maybe year-over-year – it's not insignificant. And so we're keeping a close eye on it.

It's not the same magnitude, but I think it's one of many factors that has affected the volume, probably, in our view..

Okay. And on Marlboro Ice, obviously, 130,000 stores is a tremendous reach. I think you call on maybe twice that, or something close to that.

Is that something you expect to have further expansion potential? Or is it in the right places already? Or maybe somewhere in between?.

Well, we're about eight weeks out, so we try to get to the right places fast. And then, obviously, when brands continue to succeed, we'll get them in a wider distribution. But the way we do this is we set target distributions and dates and we're right on track with Marlboro Ice.

And given its success, it wouldn't surprise me at all to see it expand over time..

Okay. Thank you. One last one on the MRTP for snuff obviously some of the FDA's own targeted timing is not strict, but just to understand when their theoretical clock starts, has that application been accepted already? Because I think that's when they sort of began the countdown.

I know you submitted it but is it sort of finally – officially formally accepted by them?.

No. You're getting pretty good at this about knowing all this technical stuff Michael. It's been filed but it has not been technically accepted which takes some time for them to go through the application, dot the I's, and cross the T's. So, I guess in FDA's view, the clock has not yet started to run..

Okay. Thank you very much..

All right. Thanks for calling in..

We invite the media to ask questions at this time. Your next question will come from Gil Alexandre with Darphil Associates..

Good morning..

Good morning..

Could you give us an estimate of where excise tax increase at the state level may be coming from this year? And I have a second question..

Sure. We've had two that have been passed this year. There's been one in Oklahoma, which was $1 a pack and there was a second in Kentucky which was $0.50 a pack. We had proposals for about 26 of them. Some of the state legislatures are now starting to wrap up but we continue to see those as risks but so far this year anyway those two I called out..

I thank you. And could you give us an indication now that you're past the California excise tax what the volume declines could be over next 12 months? I know (49:36)....

Yeah, sure. Let me go back to where we started, it may be you were not on the call early. We don't guide on volume. What our observation was is that we would expect for the volume decline rate to moderate as we lap California going into the second quarter..

I thank you..

All right. Thank you for your questions..

Thanks..

We do have a follow-up question from Bonnie Herzog with Wells Fargo..

Hi. I just wanted to get back in..

Hi, Bonnie..

Hi, again. I had another question on Marlboro.

I was hoping you could give us a sense of how the brand is performing so far in April now that you guys have lapped the California tax increase? Are you continuing to see sequential monthly improvements in share?.

I guess it won't surprise you Bonnie to know that I'm not going to comment on the second quarter until we get to the second quarter. You'll have to forgive me..

All right. One final if I may. I wanted to talk to you guys or clarify something with acquisitions. You've suggested in the past that you guys are open to exploring them whether it's businesses or technology.

So I guess I'm asking, if this is still true especially given the strength of your balance sheet?.

Yes. That remains true. I think Billy's description at the Investor Day and at CAGNY about our willingness to grow our business both organically and in the right scenario non-organically continues to be true..

Okay. Thank you..

All right. Glad you called back in..

Thank you. At this time, I would like to turn the conference back over to Mr. Bill Marshall for closing comments..

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

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect..