Highlights - Altria Group, q1 2010 earnings conference call ...

April 22, 2010 -

Overall:
Gains in Altria Group Inc.'s operating companies income (OCI) from cigarettes, smokeless products and wine helped push the company's earnings per share up 39.3 percent over the prior year period. Altria's net revenues increased 27.3 percent to $5.8 billion, due primarily to higher pricing related to last year's federal excise tax (FET) increase on tobacco products. Removing the FET, revenues increased 3.6 percent to $4.0 billion.

Michael E. Szymanczyk, chairman and CEO of Altria: "We continue to be pleased with the performance of our tobacco companies' brands, particularly Marlboro and Copenhagen. Marlboro achieved record retail share results in the first quarter, and Copenhagen regained its position as the largest smokeless tobacco brand, as measured by retail share."

Cigarettes:
Philip Morris (PM) USA’s domestic cigarette shipment volume during the first quarter of this year, at 34.1 billion, was 0.7 per cent lower that it was during the first quarter of 2009.

The company’s share of the domestic market, 50.2 per cent, was lower by 0.7 of a percentage point, with the share of its other premium brands falling 0.6 of a percentage point to 4.0 per cent and its discount brands slipping 0.4 of a percentage point to 3.5 per cent.

Shipments of Marlboro, at 29.6 billion, were up by 1.6 per cent, while shipments of other premium brands, at 2.4 billion, were down by 10.4 per cent, and shipments of discount brands, at 2.1 billion, were down by 17.0 per cent.

PM USA was able to report a record result for Marlboro, whose share increased by 0.3 of a percentage point to 42.7 per cent. This performance was said to have been driven primarily by Marlboro Menthol and the introduction of Marlboro Special Blend products. Mike Szymanczyk - well, we haven’t put an aggressive pricing structure on it (Special Blends). So it’s been promoted, but not at a level that exceeds, what would be the level we use on other promotional SKUs.

Smokeless Products:
Altria noted its smokeless products segment financial and volume comparisons for the first quarter 2010 to a year ago were impacted by last year's FET increase. Net revenues for the smokeless segment increased 27.9 percent, to $381 million, compared to the prior-year period, due to higher volume.

OCI for the smokeless products segment reached $178 million, an $180 million increase compared to the prior-year period, due to lower exit, integration and UST acquisition-related costs, higher volume and cost savings. Excluding these factors, adjusted OCI increased 49.2 percent to $188 million.

Domestic smokeless products shipment volume for USSTC and PM USA was 21.9 percent higher than the prior-year period, due to product initiatives in the just-ended quarter -- the launch of Copenhagen Long Cut Straight and Extra Long Cut Natural, the national expansion of Marlboro Snus and expanded distribution of the Skoal Slim Can pouch -- along with trade inventory changes in the prior-year period related to the FET increase.

After adjusting for these factors combined domestic smokeless products shipment volume for the first quarter of 2010 was estimated to be up approximately 5 percent. Copenhagen and Skoal's combined first-quarter adjusted shipment volume increased an estimated 11 percent. USSTC estimated the smokeless category's volume grew at a rate of approximately 7 percent in the first quarter of 2010.

Copenhagen's retail share grew 1.9 share points vs. the prior-year period to 25.6 percent, as the brand benefited from the launch of Copenhagen Long Cut Wintergreen in the fourth quarter 2009. Meanwhile, Skoal's retail share declined 0.9 share points compared to the prior-year period to 23.1 percent.

Question: expectation for the MST (moist snuff tobacco) category growth for this year, now that we are one quarter beyond this? Mike Szymanczyk - well, I can report it what looks to be the our estimate of what the growth rate is in the category I am not going to speculate on what are we doing going forward, but it seems to be running around 7%.

Marlboro SNUS - the product did not shift nationally to wholesale until late in the first quarter of 2010 it is premature to talk about retail share and adult consumer feedback. However, based on our test markets we believe Marlboro Snus has a good opportunity for future growth. Question: Snus, either your early lessons or just looking across to your competitors experience in terms of as a category, any early lessons you can share with us that we still can see in Marlboro the roll out?

Mike Szymanczyk - Well it’s very early. So we’re just in the stage of gaining distribution and getting it positioned on the shelf property. We do have some learnings from our test markets relative to engaging cigarette smokers on this subject that we will be putting in place as a part of this expansion of Snus, as I said in my comments, we feel pretty good about the >font color=red>potential for Snus, we set for a long time, we think this will be a kind of a methodical development of a business rather than something that happens rapidly.

And so based on the fact that I think we have a better understanding of that now than we did within the test markets we should see some more positive results from this as it kind of unfolds over the next few years, but it’s very early for us to be able to read anything on this. Frankly, again, I think by the end of the year we can probably compare it at least somewhat kind of a similar duration of time in the test markets and see what’s different and we will be looking back and try to understand that.

Cigars:
Like Altria's other tobacco businesses, its cigars segment financial and volume comparisons for the first quarter 2010 were impacted by the FET increase in 2009.
Net revenues for the cigars segment increased 17.4 percent vs. the prior-year period to $135 million, reflecting higher pricing as a result of the FET increase. Excluding this factor, net revenue decreased 12.1 percent to $87 million, due to lower volume.

Reported OCI for the cigars segment in the first quarter of 2010 decreased 13.0 percent compared to the prior-year period, falling to $47 million, due primarily to lower volume, partially offset by higher pricing.

Middleton's reported cigar volume decreased 18.3 percent to 282 million units during the first quarter 2010 compared to the first quarter 2009. The company attributed the decrease to wholesalers that accumulated cigar inventory in advance of the FET increase, as there was no floor tax in the 2009 FET increase for machine-made large cigars. Later, wholesalers reduced inventory levels on Middleton's products from the beginning to the end of the first quarter of 2010, according to the company. In addition, Middleton also shipped new product pipeline volume for Black & Mild Wood Tip in the first quarter of 2009.

After adjusting for these factors, Middleton's shipment volume -- as well as the volume for the entire machine-made large cigar segment -- was estimated to be flat compared to a year ago.

Middleton's retail share increased 0.1 share point over the prior-year period to 28.6 percent. During the quarter, Black & Mild's retail share increased 0.3 share points compared to the year-ago period, to 28.2 percent, as it benefited from the 2009 introductions of Black & Mild Wood Tip and Black & Mild Wood Tip Wine.

Black & Mild continued growing its retail share versus the first quarter of last year despite a challenging environment due to an increase in competitive promotional activities. Middletown is monitoring the competitive environment and plans to respond appropriately to defend Black & Mild’s marketplace position.

New products will play in an important role in the brand strong retail share growth. And in the second quarter Middleton plans to introduce Black & Mild Royale to continue building its strong position in the machine-made large cigar category.

In a note to investors, Credit Suisse analyst Thilo Wrede noted the strong performance of its Marlboro, Copenhagen and Skoal brands. But he also highlighted worries that Altria lost cigarette market share for the fifth consecutive quarter and its smokeless business is growing at a slower pace than industry estimates. (Altria Group 1st-quarter profit rises by: MICHAEL FELBERBAUM, Associated Press, 04/21/10)

References: Altria Group, Inc. Q1 2010 Earnings Call Transcript, Seeking Alpha, 4/21/2010..; Altria Group 1st-quarter profit rises, Yahoo Finance, 4/21/2010.