Altria Group - Earnings Call - Q1 2011
April 20, 2011
Transcript
Speaker 1
Good day and welcome to the Altria Group 2011 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. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. 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. Clifford Fleet, Vice President, Investor Relations for Altria Client Services. Please go ahead, sir.
Speaker 5
Good morning and thank you for joining our call. This morning we will only be discussing Altria Group's 2011 First Quarter Business Results and will not be discussing the status of tobacco litigation. Our remarks contain forward-looking and cautionary statements and projections of future results, and I direct your attention to the forward-looking and cautionary statements section at the end of our earnings release for the review of the various factors that could cause actual results to differ materially from projections. For a detailed review of Altria Group's business results, please review the earnings release that is available on our website, altria.com. Altria Group reports its financial results in accordance with U.S. generally accepted accounting principles. Today's call may contain various operating results on both a reported and on an adjusted basis, which excludes items that affect the comparability of reported results.
Descriptions of these measures and reconciliations are included in today's earnings press release and are available on our website. In addition, comparisons discussed in this conference call are to the same prior year period unless otherwise stated. Now it gives me great pleasure to introduce Michael Szymanczyk, Chairman and Chief Executive Officer of Altria Group.
Speaker 4
Thank you, Cliff, and good morning to everyone. Altria Group delivered strong financial results in the first quarter with adjusted diluted EPS growth of 4.8% as our businesses navigated through high unemployment, low consumer confidence, and a competitive business environment. As we anticipated, adjusted EPS growth comparisons for the first quarter were challenging, but our results exceeded our initial expectations and give us confidence in our ability to achieve adjusted diluted EPS growth within our forecasted range for the year. In the cigarette segment, PMUSA reported strong adjusted operating company's income growth with margin expansion. We are particularly pleased with these financial results since, in the comparable year ago period, the cigarette segment's adjusted operating company's income growth was also quite strong. Timing of new product launches and trade inventory changes impacted year-over-year comparisons for retail share, volume, and income in the cigarette segment.
New product launches this year and in the first quarter last year had a significant impact on both PMUSA's and Marlboro's retail share comparisons. PMUSA shipped two Marlboro Special Blend SKUs at the beginning of the first quarter last year. The success of this launch significantly benefited Marlboro's retail share results in all of the first quarter of 2010, creating a challenging retail share comparison. Two additional Marlboro Special Blend SKUs were shipped toward the end of the first quarter this year with minimal impact on the quarter's retail share results. Trade inventory changes also impacted quarterly year-over-year cigarette segment shipment and income comparisons. PMUSA believes the trade built inventory from the beginning to the end of both comparable time periods, but the trade built less inventory this year than in 2010.
The trade inventory build in the first quarter could negatively impact volume and income results for the cigarette segment if depleted in the future. PMUSA's reported cigarette shipments declined versus the comparable year ago period and, after adjusting for trade inventory changes, were estimated to be down slightly more than the cigarette category. PMUSA's adjusted cigarette shipments declined more than the category due to a decline in retail share. This retail share decline occurred primarily due to the timing of the Marlboro new product launches I mentioned and retail share losses on some of PMUSA's other brands, primarily Discount, as PMUSA optimizes the long-term income of its portfolio brands. PMUSA is pleased with Marlboro's first quarter performance. The brand gained retail share as the quarter progressed, showing increased momentum and turned in an excellent profit performance.
Although PMUSA faces a particularly challenging second quarter retail share comparison as Marlboro had a record retail share result in the second quarter of 2010, we expect quarterly retail share comparisons to improve significantly in the second half of the year, both overall and for Marlboro. Overall, PMUSA delivered solid cigarette segment business results in the quarter. Although competition remained intense and comparisons were tough, operating company's income continued to grow, operating company's margins continued to expand, and Marlboro is well positioned for the balance of the year. In the smokeless products segment, USSTC and PMUSA reported solid business results in a competitive environment. We are particularly pleased with the smokeless products segment's operating company's income result as it had a challenging comparison to the first quarter of 2010.
As in the cigarette segment, there were a number of factors in the smokeless products segment impacting year-over-year comparisons for income, volume, and retail share. Last year's results benefited from the 2009 fourth quarter launch of Copenhagen Wintergreen. Given the timing of this launch, the first quarter of 2010 represented the first full quarter of shipments for this very successful new product. Second, the 2010 first quarter shipments of two new Copenhagen products, Long Cut Straight and Extra Long Cut Natural, and the national launch of four Marlboro Snooze products, and the Skol Slimline can pouch promotion in the first quarter of 2010. USSTC and PMUSA shipped several new smokeless products in the first quarter of 2011, although these launches did not benefit this quarter's results as much as new products and promotions contributed to last year's first quarter results.
This year, Marlboro and Skol each launched two new Snooze products, and Skol shipped eight new Skol Extra products toward the end of the quarter. As a result of the year-over-year changes in new products and promotional activities, reported smokeless product shipments declined versus prior year period. However, after adjusting for these factors, USSTC and PMUSA estimate that their combined smokeless product shipment volumes grew slightly below the smokeless category's growth rate for the quarter. The smokeless product segment's retail share declined versus last year as the segment had a challenging comparison due to the new product activity in the year-ago time period as well as Skol's year-over-year retail share performance. On a sequential basis, however, USSTC and PMUSA grew their combined retail share of the smokeless category due to sequential retail share growth for both Copenhagen and Skol.
Copenhagen's retail share increased both sequentially and on a year-over-year basis due to continuing marketplace momentum from its new products and strength in its core natural business. Copenhagen plans to build on this momentum and help drive future growth by launching Copenhagen Wintergreen pouches nationally in the second quarter of this year. Skol grew retail share on a sequential basis as comprehensive brand building initiatives positively impacted its performance. USSTC expects the new Skol Extra products shipped toward the end of the quarter will contribute to the brand's future growth. Overall, USSTC and PMUSA delivered solid first quarter smokeless product segment results. Copenhagen and Skol both grew sequential retail share, and adjusted shipment volumes and operating company's income grew on a year-over-year basis. USSTC and PMUSA believe they are well positioned to continue delivering solid results in the smokeless category as the year progresses.
In the cigar segment, post-FET increase, marketplace dynamics continue to impact Middleton's reported income results. Middleton is working to resolve these issues but expects that a resolution will take some time and that these marketplace dynamics will continue to have an impact on Middleton's income results for the year. In response to these dynamics, Middleton invested in promotional initiatives to defend Black & Mild's marketplace position that benefited Middleton's volume and retail share results for the quarter. Middleton's reported shipments and Black & Mild's retail share both increased versus the comparable year-ago period. Middleton has several brand building activities planned for the balance of the year designed to continue enhancing Black & Mild's performance. These activities include introducing nationally two untipped cigarillo varieties in the second quarter of this year to expand Black & Mild's position in the untipped cigarillo segment, where it historically has not competed widely.
This is the largest machine-made large cigar segment, representing over 50% of the category share in 2010, and introducing Black & Mild shorts as competitively priced tipped cigarillo alternatives in a number of high-volume geographies. Middleton believes these and other actions planned for the balance of the year should enhance Black & Mild's marketplace position and improve the company's financial results as the year progresses. In the wine segment, Ste. Michelle reported solid business results with strong growth in adjusted operating company's income due in part to Ste. Michelle's focus on improving its mix with higher margin products. First quarter reported wine shipments were essentially the same as the prior year period, and Ste. Michelle believes that shipments in both time periods were impacted by wholesale inventory movements. Ste. Michelle's retail unit volumes continue to grow, helping position the company for solid business results in the balance of the year.
Overall, we are pleased with our results through the end of the first quarter as our businesses successfully navigated through a challenging environment and faced some difficult comparisons. The underlying strengths of these businesses, in conjunction with solid first quarter results, give us confidence that we can deliver adjusted diluted EPS growth of 6% to 9% for the full year in a range of $2.01 to $2.07, off an adjusted base of $1.90 per share in 2010. Given that first quarter EPS results outperformed our expectations, in part due to trade inventory dynamics that will play out as the year progresses, we expect some unevenness in adjusted EPS growth on a quarterly basis, with more growth toward the back half of the year. I will now turn the call over to Howard Willard, Altria's Executive Vice President, CFO, who will discuss Altria's business segment results in more detail.
Speaker 2
Thank you, Mike. Good morning. In the cigarette segment, reported operating company's income increased by 9.5% to $1.3 billion due primarily to higher list prices and lower restructuring costs, partially offset by lower volume and higher FDA user fees. When adjusted for restructuring costs, first quarter operating company's income increased by 7.1% to $1.3 billion, and adjusted income margins increased by 2.5 percentage points to 39.6%. As Mike noted, we are particularly pleased with these results since, in the first quarter last year, adjusted cigarette segment operating company's income grew by a strong 6.7%. Reported cigarette segment shipments declined by 6.4%, but after adjusting for trade inventory changes, declined by an estimated 5%. The trade increased cigarette inventories from the beginning to the end of the first quarter, benefiting reported cigarette segment volume and income results.
PMUSA estimates that the overall cigarette category's adjusted volume declined by approximately 4% in the first quarter, which is in line with historical price elasticity. PMUSA's first quarter cigarette segment retail share declined by 1.2 share points to 49% due to retail share declines of seven-tenths of a share point on its portfolio brands and half a share point on Marlboro. Marlboro's retail share was 42.2% in the first quarter. Marlboro Menthol performed well in the marketplace as its retail share grew by one-tenth of a share point to 6.1%, based in part on the introduction of Marlboro Skyline Menthol in the fourth quarter of 2010. The smokeless product segment's reported operating company's income increased by 8.4% to $193 million due primarily to higher pricing and lower restructuring costs. When adjusted for restructuring and UST acquisition-related costs, operating company's income increased by 3.2% to $194 million.
Reported smokeless product shipments decreased by 1.3%, but when adjusted primarily for the timing of new product launches, increased by an estimated 6%. USSTC and PMUSA estimate that the smokeless products category grew 7% in the first quarter. USSTC and PMUSA's combined retail share of the smokeless products category decreased by 0.6 of a share point versus the comparable year-ago period to 54.7%, but increased by 0.2 of a share point on a sequential basis versus the fourth quarter of 2010 due to share growth for both Copenhagen and Skol. Copenhagen grew 0.3 of a share point versus the fourth quarter of 2010 to 26% and also grew by 0.4 of a share point on a comparable year-over-year basis. Skol also grew 0.3 of a share point on a sequential basis to 22% but declined 1.1 share points on a comparable year-over-year basis.
Middleton's reported operating company's income decreased 53.2% to $22 million, primarily due to promotional investments made to protect Black & Mild's marketplace position. Middleton's overall retail share grew by 0.6 of a share point to 29.1%, driven by Black & Mild's retail share performance. Black & Mild grew its retail share by 0.8 of a share point, 28.9%. When adjusted for integration costs, operating company's income decreased by 54.2% to $22 million. Middleton's first quarter shipments grew by 1.9%. Increases in imported machine-made large cigars have made trade inventory volumes difficult to determine accurately in the short term. Consequently, Middleton is only providing its reported company shipments. Ste. Michelle's reported operating company's income increased by 71.4% to $12 million. When adjusted for UST acquisition-related and restructuring costs, operating company's income increased by 25% to $15 million.
The wine segment's shipment volume was essentially the same as the prior year period, but shipments were impacted primarily by wholesale inventory changes. Ste. Michelle believes that in the first quarter of 2011, wholesalers depleted inventory built during the fourth quarter of 2010, while in the year-ago period, wholesalers increased inventories. Ste. Michelle's retail unit volume increased by 2.3%, while the wine industry's volume grew 3.2%. The financial services segment's reported operating company's income of $21 million was the same as last year. At the end of the quarter, the allowance for losses was unchanged versus the end of last year at $202 million. Altria Group continued to deliver shareholder value by managing its cost structure. Altria Group delivered $35 million in cost savings across its family of companies in the first quarter of 2011.
We are confident that we can achieve the remaining $110 million in cost savings from our $1.5 billion program by the end of this year. Since 2006, we have delivered nearly $1.4 billion in cost savings. Altria Group also delivered value to shareholders by returning cash to them. In the first quarter, the company paid almost $800 million in dividends, reflecting our intention to return 80% of adjusted diluted EPS to shareholders in the form of dividends. Based on our annualized dividend rate of $1.52 per share, our closing stock price of $27.01 on April 15th, our yield of 5.6% makes Altria Group's stock an attractive investment. Altria Group intends to complete its previously announced 2011 $1 billion share repurchase program by the end of this year, but the timing of any share repurchases depends upon marketplace conditions and other factors and remains subject to the discretion of our Board.
Mike and I will now be happy to take your questions. While the calls are compiled, let me cover a few housekeeping items. Marlboro's price gap versus the lowest effective price cigarette was 35% in the first quarter. Marlboro's net pack price in the quarter was $5.70, while the lowest effective price cigarette was $4.21. The cigarette discount category's first quarter retail share was 27.6%. The estimated weighted average cigarette state excise tax at the end of the first quarter was $1.36 per pack. There were no cigarette excise tax increases in the first quarter. Copenhagen's first quarter net retail price was $4.17, and its price gap versus the leading discount brand was approximately 40% in the quarter. As of March 31, 2011, 20 states in the District of Columbia used a weight-based smokeless tobacco excise tax system, representing approximately 32% of the smokeless tobacco category's volume.
CapEx was $13 million in the first quarter, and depreciation and amortization was $60 million. On April 15th, Philip Morris USA made its annual 2010 MSA payment of approximately $3.5 billion. The amount includes approximately $267 million that Philip Morris USA disputes it owes as a result of the 2008 non-participating manufacturer adjustment. Operator, do we have any questions?
Speaker 1
Once again, as a reminder, if you would like to ask a question or make a comment, please press the star key followed by the number one on your touch-tone phone at this time. 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 is coming from Judy Hong with Goldman Sachs Group.
Speaker 0
Thanks. Good morning. Mike, just starting with a little bit more of a question around just the Marlboro's share performance. Clearly, I understand that there is obviously the timing of the new product launches and the promotional timing that affects the market share performance on a quarter-to-quarter basis, but maybe you can give us a little bit more perspective on your strategy to use these line extensions to go after the fringe Marlboro users. If you think about just the core Marlboro franchise, so when you X out some of these new products, can you tell us how much retail share of the core Marlboro franchise is up or down? As some of these new product launches got into the retail this year, can you tell us how the share is performing for Marlboro?
Speaker 4
Let me talk about the Marlboro share just a little bit because I often remind investors that quarter-to-quarter comparisons, due to the amount of activity either we have in the marketplace or competitors have in the marketplace, cannot be indicative of underlying trends in the business. I think the first quarter of 2011 is a case in point. If you go back to 2010, the Marlboro share grew for the year up about 0.8%, well ahead of what had been its average growth rate over the past few years. That was substantially more than was necessary to offset the growth of our other premium brand share loss, which is something we like to cover with Marlboro. That means that the rest of that share was largely garnered from promotion-sensitive consumers and discount consumers who, as I've talked before, shop.
Every brand, even though Marlboro has a very high loyalty factor relative to other consumer products, has some percentage of its business that's price-sensitive. We have some share points that are like that. If you look at the first quarter of the year, actually the first half, what you'll see is that we had a major product launch, very successful behind Marlboro Special Blend. While most of that share is sustainable share, some of it, due to promotion activity when you launch a new product, comes from these more promotion-sensitive or discount shoppers. That activity wasn't replicated in the first quarter of this year. If you look at the total year last year, during the period that we had that launch activity, we saw a very strong share, actually a record share in the second quarter for Marlboro.
As the launch activity abated, we also saw some of that, what I'll call temporary share, slip away. As we lapped that quarter, the first quarter of this year, we didn't have the same kind of activity. We expected to see some loss of the share. During the same time this year in the first quarter, you had some other products that had a high level of activity that was price-related: Newport Menthol, Camel, continued low-price activity on Pall Mall that can cause some of this more promotion-sensitive or discount business to shift around. I think more indicative of the Marlboro business right now is its comparison March to December. We showed some nice share growth during that period of time, even without the extraordinary support that we had in the year-ago timeframe.
We think Marlboro is actually in pretty good shape, and we're going to face a tough comparison in the second quarter. As we move into the back half of the year, the comparisons will be more favorable. We tend to look at the brand's performance on a longer-term basis rather than on a quarter-to-quarter basis or even a half-to-a-half. I think it's doing fine. We don't break out the various pieces, but the franchise continues to show good strength.
Speaker 0
Okay. Just some color around the new Marlboro Leadership Program that you've implemented with the retailers where you're suggesting max price for Marlboro in given markets. I guess just wondering so far what the adoption rate has been in terms of the retailers agreeing to that program. In general, if we think about Marlboro's average pricing, how much pricing would come down if the majority of the retailers agreed to adopt this program? Finally, any risks that as the pricing of Marlboro comes down as a result of this program? Again, it's sort of maybe risk of the brand equity question here.
Speaker 4
First of all, just some context. You know Marlboro has for a while had a program available to retailers that wanted to use Marlboro as a means to draw traffic into their stores. This is really a redesign of that program because all programs kind of become less relevant over time and their structure as marketplace conditions change. That's the case with this one. We look at these programs periodically and update them. We updated this program effective April 1. It's designed to be cost neutral with the old program. Beyond that, you know the response rate, not a program that's designed for every retailer necessarily based on their strategy, nor were the ones in the past. The response rate to this program has been, I think, very positive by many retailers, and some retailers won't choose to do it. That's what we expect.
We'll see what the impact is in the marketplace, but we expect to see some positive impact on the brand's performance as we have in the past with programs like this one when some of our customers get behind it.
Speaker 0
Okay. Finally, on your decision to put the MSA disputed payments into the escrow account this year, which is different than what you've done in the past, can you just give us a little bit of color in terms of the rationale?
Speaker 4
You know this dispute is now in full arbitration, and we felt like that was the appropriate decision this year.
Speaker 0
Okay, thank you.
Speaker 1
Our next question comes from the line of Nick Modi with UBS Investment Bank.
Speaker 5
Good morning, everyone.
Speaker 4
Good morning.
Speaker 2
Morning.
Speaker 5
Just following up on Judy's question on the Marlboro Leadership Program. Mike, is this, I'm just trying to think of the P&L impact here, and you know it strikes me as this is just basically a reallocation of monies within your existing trade agreements within the various customers that you deal with. Is that kind of a fair characterization? I mean, will you be outlaying incremental dollars and cents to help fund the backend incentives for folks that sign up on the option?
Speaker 4
We would expect it to be neutral.
Speaker 5
Okay, it's just effectively a reallocation of dollars.
Speaker 4
Yes.
Speaker 5
Okay. The other question is on the state excise tax environment. The wording in the press release and your commentary continues to suggest a really cautious tone. Obviously, we've had limited activity thus far. Several states have looked to reduce excise taxes. How should we think about this? It seems like the environment is actually a little bit better than what most folks in the industry thought at the beginning of the year. Any thoughts on that?
Speaker 4
It's still early in the year.
Speaker 5
Okay. And.
Speaker 4
We never get overly optimistic about this. We will continue to be paying close attention.
Speaker 5
Great. Just the last question quickly on the ad valorem to weight-based and smokeless. Are there any other states that are considering a conversion in terms of tax methodology?
Speaker 4
I think there may be some activity there. Off the top of my head, I can't detail it for you. I think we expect to, as the subject of excise taxes comes up in states, you can expect in those where ad valorem exists that this subject will come up. Sometimes it comes up where ad valorem doesn't exist as somebody tries to propose to go to ad valorem. I think you're going to continue to see activity there.
Speaker 5
Okay, thanks very much.
Speaker 1
Our next question comes from the line of David Adelman with Morgan Stanley.
Speaker 3
Good morning, Mike.
Speaker 4
Hi, David.
Speaker 3
Two things I wanted to ask you. First, what are your thoughts about the TIFSA X menthol recommendation, and what type of impact do you think it might ultimately have on the FDA's thinking with respect to menthol?
Speaker 4
I don't have much to add to what we said in January to that subject. I don't think what occurred was much different than what generally I think people thought would occur. I think obviously the FDA will take that under advisement. We have continued to say we think they'll operate based on the science and the evidence and make their regulatory decisions accordingly. We haven't felt like we'd see some dramatic impact, and we'll watch and see how it unfolds.
Speaker 3
Okay. Mike, I wanted to ask you about your characterization of the elasticity, the price elasticity of the U.S. cigarette category. This quarter and in the past, you've commented that you see no changes versus historical elasticity. My question is, pricing to the consumer was probably up about 5% or 6% Q1 on Q1 last year, and it looks like consumption was down about 4%. Is what's happening in your view that the structural decline in industry volume, in other words, the decline that would occur in the absence of pricing being higher, is higher than it might have been in the past?
Speaker 4
No, I wouldn't draw that conclusion. I think your timeframe probably is too short to really determine any trend, David. We generally would have to look at that on a longer timeline to understand whether or not there was any trend line change. The history is pretty long on this, and it seems to support a pretty stable elasticity.
Speaker 3
Okay, thank you.
Speaker 1
Our next question comes from the line of Christine Farkas with Bank of America Merrill Lynch.
Speaker 0
very much. Good morning.
Speaker 4
Morning.
Speaker 0
Mike, I had a question related to MLP, but maybe not. We've seen or heard about some reduced discounts on some of your other Marlboro brands, the Special Blends or the 72s. Given your comment about the MLP program being cost neutral, I'm trying to understand if that's a statement based on the MLP program itself or if you're also including some of the changes to discount plans on the other parts of the Marlboro franchise.
Speaker 4
You know we regularly change promotion activity in various states and relative to various SKUs. You should expect to see that separate and apart from the Marlboro Leadership Program. The Marlboro Leadership Program's cost, you know, will vary a little bit based on take rate versus estimates. In general, we think it'll be about cost neutral, and our expectation is that that won't have an impact on our overall performance or spending performance for the year.
Speaker 0
Great. Moving to cigars, this was clarified in the prior quarter as well. We have a strong competitive environment here. There was some discussion about the imports and the impact that's having on the environment. Has there been any update on that? Is there some way to close that loophole, or will this remain as tough for the rest of the year?
Speaker 4
I think it's an issue we'll have for the remainder of the year, but during that period of time, we will have taken the appropriate steps to get that playing field level.
Speaker 0
Okay. Finally, for me, just to understand, given your statements in the press release about the IRS developments or just clarification or disclosure, I just want to understand if, in fact, that program impacts your buyback program for the year. Does that change the potential timing or even occurrence of the buyback for the year?
Speaker 4
No, we don't see it impacting either our dividends or our announced buyback.
Speaker 0
Okay. Great. Thanks so much, Mike.
Speaker 1
Thank you. We will now take questions from the media. Our next question comes from the line of Vivian Azar with Citigroup.
Speaker 0
Morning.
Speaker 4
Hi.
Speaker 0
I was just wondering if we could, as you turn back to the Marlboro franchise just quickly one more time and just clarify, you know, is there a floor to the Marlboro price gap that you're not willing to cross to the extent that the Marlboro Leadership Program does indeed kind of reduce Marlboro's price gap at retail?
Speaker 4
I'm not sure I understand what you're asking me.
Speaker 0
Is there a minimum price gap that you're just not willing to go below? You know, is it 30%, and you know at 30% you just have to hold Marlboro's pricing, or?
Speaker 4
Generally, it would be difficult to articulate something like that. That number that you're referring to is kind of a national number, but the reality is that it's made up of a lot of different pieces. There are different price gaps in different states based on both activity in those states and excise taxes in those states. Competitive pricing moves with some regularity, so it's always changing that number. In terms of our activities and the actions that we take, we take those on a more precision basis. We wouldn't be looking to some total national number to drive our decision-making. It's much more surgical than that. I guess the general answer to your question is no. What we do is we deal with the business issues in the marketplaces as we see trends develop or opportunities develop.
Speaker 0
Okay. Understood. I guess what I was just trying to get at is, you know, with Marlboro's kind of status as a premium brand, do you think that at some point, you know, you lower Marlboro's price gap so much that it erodes that premium brand equity?
Speaker 4
We really haven't seen that occur. Actually, the dollar gap has expanded on Marlboro over time, but the % gap has narrowed somewhat because of the excise tax increases. I don't think that that's an issue.
Speaker 0
Okay. Fair enough. In terms of the delay in terms of some of the SET activity, has that at all improved your outlook for cigarette industry volumes for the year or the absence of any?
Speaker 4
You know, we don't get predictive of it, but as I commented on David's question, I don't think we've seen any evidence that the normal elasticities have changed any.
Speaker 0
Fair enough. Thank you very much.
Speaker 1
Our next question comes from the line of Chris Growe with Stifel Financial Corp.
Speaker 3
Hi, good morning.
Speaker 2
Hi, Chris.
Speaker 3
Hi. I just had two questions for you. The first one in relation to the cigarette division, you had mentioned how inventories are built throughout the quarter. Is there a certain number of sticks or days or however we can look at that that you think may be a little extra within that division that could be worked out in the future? I'm just trying to get a sense of what that could do to volumes in the future.
Speaker 4
I am not going to try to segment that out. All I'm going to say is that we saw some inventory building in the quarter, but less than we had in the quarter a year ago. I am just going to leave it at that.
Speaker 3
Okay. I wanted to ask about the promotional levels in the smokeless division, your smokeless business. You had pulled back a little bit on those in the fourth quarter. You had a lot of work going on at retail. Would you characterize promotional levels in smokeless back to more normal levels in the quarter?
Speaker 4
I think we had pretty normal levels. We had a lot of activity in the first quarter last year because we launched a number of new products, and we had less of that. The Skol Extra launch was really at the tail of the quarter. I don't think there was anything unusual about the activity in the quarter this year. Maybe it'll fit less than there was last year.
Speaker 3
I guess somewhat related to that, you've done a lot of the shelf resets in the smokeless, your smokeless business. I assume it's always work, right? Is that pretty well complete now? We've seen like an expanded space for smokeless. Is that all sort of in place now where you wanted to initially get that done?
Speaker 4
I think the work regarding the physical work regarding resetting these sessions is pretty well complete. There's still some tweaking and adjusting going on. I think it's now really the ordering procedures and getting at retail the same kinds of practices relative to ordering that maintains a really high in-stock condition with fresh product to occur in the smokeless business, as is the case in the cigarette business. There's still more work to do to take advantage of now having the space allocated in a better way in terms of the impact on the consumer.
Speaker 3
Okay. In that change of or that increase in space, would a product launch like the new Skol products be incremental to your shelf space, or are those replacing other products in your shelf spend on average?
Speaker 4
That depends on the geography. I mean, Skol has a lot of SKUs, but the distribution on those SKUs isn't consistent across the country. In each geographic situation, we've accommodated how to position Skol Extra in the store based on the circumstance. That would really vary by store and by development of particular SKUs on Skol.
Speaker 3
Okay, thanks for your time.
Speaker 1
Our next question comes from the line of Ann Durkin with Davenport.
Speaker 0
Good morning.
Speaker 4
Hi, Ann.
Speaker 0
Just wanted to know why there is more disclosure or discussion in this quarter's release in the financial services section. That seems to be a change. Should I read there's a change in timing coming of a decision or anything I need to know?
Speaker 4
No, we added that disclosure. I think that kind of completes it. There was a ruling in a case on some of these similar kinds of leases, Willow Silo, called the Wells Fargo case, not too long ago, the other day. We just decided to add this additional disclosure.
Speaker 0
Mike, I'm always interested in your opinion of the consumer. Since January to now, is there any change in consumer behavior or expectations for consumer behavior, challenges of the environment? I would love your update on your view of the consumer.
Speaker 4
I think as we looked at it, you know our consumers still face high unemployment and still are expressing low confidence. That doesn't seem to have changed a lot. I think you can add to that they've got increased fuel cost pressures now. I don't think the situation has changed a lot for the general consumer out there. As much as you'd like to say that and you may see some strength in the stock market, I don't think that the general consumer gets the same outcome out there right now. We're still cautious about that.
Speaker 0
Great, thank you very much.
Speaker 1
Our next question comes from the line of Thomas Russo with Gardner Russo & Gardner.
Speaker 4
Hi, Mike. Good morning.
Speaker 2
Hi, Tom.
Speaker 4
Question about any victories, any progress underway with the illicit trade or the counterfeit channels that you might share with us. That is an ongoing activity for us. So much of what goes on there is work that we do with law enforcement. We do not talk about that. Generally, you read about that after it is over. That kind of activity continues to occur. I do not think there is anything new to report relative on that subject in terms of impact on the business. It is also something that you have to keep constant pressure on because certainly the dynamics in the marketplace are such that if you do not, you can see it expand. Thank you. Just an observation from you. What reads do you have from duty-free or from parts of the U.S.
where there is heavy international traveling about the separation of the Marlboro brand equity for those who are non-U.S. consumers in light of what they are seeing abroad in their home markets versus the U.S.? Has any kind of brand equity effects started to surface as the two product offerings diverge over time? No, I do not think so. U.S. duty-free has been U.S. duty-free now for a while, and the rest of it has been in PMI's hands for a while. That was the case before the spin. I do not think that anything meaningfully different is there. We have had products in those different environments that are manufactured in different places for some time now. There is nothing new there. Thank you.
Speaker 1
Again, in order to ask a question, please press star followed by the number one on your touch-tone phone. Thank you. At this time, I would like to turn the floor back to Mr. Clifford Fleet for any closing remarks.
Speaker 5
I want to thank everyone for joining us today. If you have any follow-up questions, feel free to give us a call at Investor Relations here at Altria Group.
Speaker 4
Have a good day.
Speaker 1
Thank you. This does conclude today's teleconference. You may now disconnect.