Altria (MO) Earnings Call Notes

Notes from the Altria (MO) earnings call..The focus hereis on smokeless products as the potential market for Altria is large..

Regarding smokeless products:
Judy Hong – Goldman Sachs & Company, Inc.: “Okay. And then just… in terms of your Snus and the snuff product, can you talk about whether there is… the spending in the first quarter was also impacted by the investment behind those brands. I mean I imagine that they were just a limited test market, so that would not be the case, but can you talk about that and just maybe give us a color in terms of how you are seeing any progress on those products in your test markets?”

David R. Beran – Executive Vice President and Chief Financial Officer: “Yes, I’d be happy to. As we said or as I said back in the road show and when I was meeting with the investors is that this year the Marlboro Snus and Marlboro snuff were in the investment mode. So, we actually spent more money in the first quarter behind those two initiatives than we did a year ago because we weren’t in test markets then. Is it material? No, it’s not, but it was a slight drag in the first quarter. As we look at those two test markets, we expanded both test markets. I’ll take the moist snuff first, we expanded that into 50 counties surrounding Atlanta and we’re getting great learning from that test market on how consumers feel about the product, the overall product, their overall packaging and promotional strategy in the marketplace. When you look at Marlboro Snus, we expanded Marlboro Snus from Dallas into Indi, where we replaced Taboka Snus in that marketplace. And this same sort of learning has taken place there. We’re looking at all the elements of our value equation and when I say that it’s product, packaging, positioning, and promotion out in the marketplace. And between those two initiatives, we believe that the Marlboro Snus product initiative is a longer-term play because that category does not exist in the U.S. marketplace with any potential size. But we still think that it is a promising category for us to be in.”

Another smokelss question:

Filippe Goossens – Credit Suisse: “Okay. And then my final question, perhaps a follow-up on Judy’s earlier question on Snus. It’s kind of interesting when we look at the enthusiasm of Reynolds in terms of expanding the test marketing to 17 markets now, including some kind of metropolitan markets and contrast that with the somewhat less enthusiastic comments in terms of UST’s longer experience with Snus, it kind of brings up two questions. The first one is obviously you already commented on that you see this as more a longer-term project, still I would like to kind of get more an impression from you, whether you really view this as a category that where the passage of time can meaningfully contribute to your EPS? And secondly, if I follow more kind of the comments from UST this morning, I kind of wonder if consumers will have a tough time embracing Snus as a category. It makes me wonder how they will embrace all these reduced risk or reduced harm products that the industry has been talking about for so long. So, in other words if it’s tough to embrace Snus, why would they embrace reduced risk products any quicker than what we’re seeing with Snus so far?”

David R. Beran – Executive Vice President and Chief Financial Officer: “Let me address the Snus comment… the question. When we went down this path, we spent a lot of time before we even went out into the marketplace, understanding the Snus model in Sweden. And understanding what potential consumers, adult smokers would think about Snus in the U.S. marketplace. And we saw an opportunity, we still see an opportunity and our first… our first entrance so to speak with Snus in the U.S. marketplace was with Taboka. And we use Taboka, so we could get an understanding with consumers before we decided to put Marlboro on the Snus product from a branding standpoint. And what we learned in Indi gave us confidence that the Snus marketplace can develop here in the U.S., but even today when we look at Snus and that’s why we are still in a learning mode both in Dallas and Indi. We don’t think we have it exactly right, we don’t think anyone does yet in the U.S. marketplace because we are creating a new category. And… but we will continue to get learnings from those test markets and at this point we are still confident that it will be a longer-term play in the U.S. marketplace, but that this category can develop.”

While it may be frustrating (it is) at the length of time it is taking for the smokeless products to be rolled out, when you have a brand like Marlboro, which one could argue may be one of the world’s most valuable brands, you cannot risk damage to it. Altria is taking its time and based on the testing success so far, seems to be getting the product right.

We really do not want a “New Coke” (KO) fiasco.

Disclosure (“none” means no position):Long MO