Question-and-Answer Session
Operator
(Operator's Instructions) Our first comes Judy Hong with Goldman Sachs.
Judy Hong - Goldman Sachs
Good morning, Judy. Mike, I guess first I want us to get a better understanding of just the inventory movement situation here as it relates to the impact on your business versus the industry as a whole. What is the difference between how much you're impacted versus the industry generally and why is there a difference, if there is a meaningful difference — the trading is just trying to carry lower levels of your inventory or is the catchup to have all of the products kind of at more equalized levels?
Michael E. Szymanczyk
Well, there's a couple of different factors here to consider here in the third quarter. Inventory is kind of a complex item in the third quarter. You have to go back to 2008. What you see in 2008 in the third quarter about the middle of August, the wholesale trade began building inventory. It is not uncommon for inventory changes to be skewed toward Marlboro simply because it sells through faster.
So if rebuilds take place they often start earlier on Marlboro because inventory depletions happen faster on Marlboro simply because of its size. So there is a difference relative to that brand versus our other brands and, I believe, versus other competitive brands.
So that's the first thing. You have a base that has inventory inflation in it last year. This year you have a base that is reduced. Due to the federal excise tax increase, trade decreased its inventory following the excise tax increase and they have maintained that reduction and you didn’t have a corresponding inventory situation that you had a year ago.
So you have a doubling situation. You have the impact of the bio-decline related to the excise tax and you have the impact in the base of an inventory build a year ago that did not occur this year.
The best example I can give you is if you take Marlboro in the third quarter and you adjust its volume for the inventory changes of wholesale versus a year ago, and then you adjust it for its market share improvement, and then you apply historical price elasticity to it, you'll come out with a volume level that is almost identical to the volume level that it achieved in the third quarter.
So when we look at the Marlboro brand, it's tracking just exactly the way it should track from as shipment point of view once you modify the shipment numbers based on these inventory changes that have nothing to do with the brand's ongoing performance. It's also a bit encouraging to see that because it also indicates that we haven't had any fundamental change in counterfeit activity, at least to this point that has influenced the volume of the brand.
- To read the full transcript on Seeking Alpha, click here »
