Highlights - Altria - Q4 2009 Earnings Conference Call and more..

January 29, 2010 -

Michael E. Szymanczyk, Altria’s chairman of the board and chief executive officer, descirbes Altria "as the premier tobacco company in the United States with leading brands in cigarettes - Marlboro, smokeless tobacco - Skoal/Copenhagen and machine-made large cigars - Black& Mild.”

Marlboro maker Altria Group Inc. said Thursday, January 28th that cost-cutting and strong sales of smokeless tobacco such as Skoal and Copenhagen led its fourth-quarter profit to climb 7 percent, even though it sold fewer cigarettes. The company said it cut expenses $157 million during the fourth quarter and $398 million for the full year and expects additional cost savings of about $462 million by 2011. It closed its Cabarrus County, N.C., cigarette factory in July to bring its manufacturing capacity in line with falling demand. (Philip Morris USA production plant in Cabarrus County, North Carolina closed..)

The company said it sold 11.4 percent fewer cigarettes in the fourth quarter than a year earlier. Altria estimated a total industry decline of about 10 percent. For the year, Altria’s cigarette volume fell 12.2 percent, compared with 8 percent industrywide.

In the fourth quarter, Philip Morris USA reported volume declines among all cigarette brands, including Marlboro, Parliament, Virginia Slims and Basic. Marlboro, the best-selling brand in the U.S., lost 0.4 point of market share in the quarter to end up with 41.7 percent (from 42.1 perecnt) of the U.S. market, according to data from Information Resources Inc. Altria's share of the U.S. cigarette market fell to 49.4 percent in the fourth quarter from 50.9 percent a year earlier.

Altria's Philip Morris USA unit increased prices on many of its cigarette brands last fall, but has lost market share as competitors like Reynolds American Inc (RAI) ratcheted up promotional spending, e.g. with Pall Mall.

Volumes may be declining, but cigarettes remain Altria’s biggest business by far, accounting for $14.4 billion in revenue in 2009 compared with Smokeless category that brought in $1.2 billion. In general, cigarettes account for approximately 91% of expenditures on all tobacco products in the U.S.. Total United States expenditures on tobacco were estimated to be $88.7 billion in 2005, of which $82 billion were spent on cigarettes. In 2005, consumers in the United States spent $2.61 billion on smokeless tobacco products, and more than $1 billion on cigars each year. (CDC Smoking and Tobacco Use: Economic Facts About U.S. Tobacco Use and Tobacco Production)

Smokeless Tobacco:
Copenhagen's retail share growth was quite impressive as it grew 1.5 share points from the third to the fourth quarter behind the successful launch of Copenhagen long-cut wintergreen. Smokeless tobacco volume grew 3.6 percent during the quarter and for the year volume for Altria's smokeless products declined 2.4 percent but gained market share.

Skoal also displayed relatively strong retail share stability in the fourth quarter when compared to some competitive brands which appeared to be impacted by Copenhagen's new product launch. Altria expecting Copenhagen Wintergreen to have big impact.. These products are chasing Reynolds American's American Snuff Company's Grizzly - the nations number one moist snuff brand..

To build on this successful launch, Copenhagen plans to introduce two new smokeless products in the first quarter of 2010. Copenhagen long-cut straight will expand the brand into the straight segment which the brand has historically under served, and Copenhagen extra long-cut natural will strengthen the brand's position in the core natural segment. Skoal also has a number of initiatives planned to strengthen its position in the smokeless products category which will unfold as the year progresses.

Copenhagen and Skoal both have areas of strength, although they are national brands. But I (
Szymanczyk) would say when you look at the growth in Copenhagen, it's really strongly being driven right now by Copenhagen long-cut wintergreen and that is everywhere across the board.

Flavors account for 56 percent of Altria’s smokeless sales, Mr. Szymanczyk said in a speech last September to analysts and shareholders. "They’re clearly trying to make the product more palatable and more appealing to a broad audience,” says James F. Pankow, a professor of chemistry at Portland State University in Oregon. Dr. Pankow in summarizing his recent paper: “The bottom line is that the flavorant levels in the smokeless products are in general markedly higher than in popular wintergreen and menthol flavored tobacco products,” said Pankow. “Moreover, the amount of wintergreen flavorant could by itself pose serious health risks to some consumers.” (Smokeless Tobacco products with up to 700% more flavor additives than candy..)

That audience, public health experts say, includes children. “The flavors are designed to attract kids,” says Kenneth E. Warner, dean of the University of Michigan School of Public Health and a founding director of its Tobacco Research Network.

Last week, Altria told its distributors that Marlboro Snus would move out of test marketing and be available nationwide in March. (Marlboro SNUS market test being expanded..) But some analysts say that there have been very few successful new product introductions in the tobacco industry for decades, suggesting that snus is up against steep odds. “It’s a pipe dream,” says David Adelman, an analyst at Morgan Stanley, of the prospects for snus. How's SNUS doing in the U.S. - will Susan Ivey tell us the truth??

Dr. Gregory N. Connolly, a Harvard public health professor: “It is worth noting that for every pack of snus sold in the U.S., about 3,000 packs of lights are sold..”

Click to enlarge..
Altria sold fewer cigars - for the year, cigar volumes decreased 3.6 percent. Black & Mild also continued its strong share performance in 2009, growing 1.3 share points versus the prior year period. Share growth was driven by the successful new product launches of Black & Mild Wood Tip, Black & Mild Wood Tip Wine and the equity campaign introduced at the beginning of the year, "Enjoy Black & Mild." We are also pleased with the initial results for Black & Mild's new untipped product, Black & Mild Cigarillo, and expect to continue expanding into geographies where this product is sold. Black & Mild increased its retail share of the machine made large cigar category by 1.2 share points to 30.6% while Middleton's cigar volume in the fourth quarter of 2009 declined by 2.7% due primarily to trade inventory reductions.

The company said the business environment for 2010 is likely to remain challenging, as adult consumers remain under economic pressure and face high unemployment. Its tobacco operating companies also continue to see competitive promotional activity. It also expects that continuing state budget issues may lead to excise tax increase proposals in many states in 2010.

Reference: Altria Group, Inc. Q4 2009 Earnings Conference Call Transcript, Seeking Alpha, 1/28/2010; Where There’s No Smoke, Altria Hopes There’s Fire by DUFF WILSON and JULIE CRESWELL, The New York Times, 1/30/2010; Altria Group 4th-quarter profit climbs partly on strength of Skoal and Copenhagen sales by AP - AP Business Writer Michelle Chapman in New York contributed to this report, 1/28/2010; Altria profit up but cigarette volumes shrivel by William Spain & Andria Cheng, MarketWatch, 1/28/2010..