Altria Group (MO) Smashes Q409 Revenue Estimates; Q409 Conference Call Highlights

Altria Group (MO) Smashes Q409 Revenue Estimates; Q409 Conference Call Highlights

Altria Group Inc.  reported an EPS of $0.39, ex-items, for Q409. The EPS was 1 cent lower than the analyst estimate of $0.40. Revenue for the quarter was $5.37 billion, compared to the estimate of $4.14 billion.

The Following are Highlights from MO's Q409 Conference Call:

Michael E. Szymanczyk, Chairman and Chief Executive Officer:
Altria delivered strong financial results. Adjusted earnings per share increased by 6.1% to $1.75 which met our increased guidance. In addition, we increased our dividend by 6.3% to an annualized rate of $1.36 per share.

Cigarette segments suggested operating company's income increased by 5.5%, $5.3 billion as PM USA implemented a profitable strategy around the significant FET increase and the marketplace disruptions that followed.

In the fourth quarter of 2009 the combined volume o Copenhagen and Skoal grew 7.8% versus the prior year period which was ahead of the Smokeless categories volume growth rate.

...the Cigar segment through it's adjusted operating company's income by 1.6%. Behind the continued retail share growth of Black & Mild and despite significant one-time reductions in wholesale inventories.

We are particularly pleased with Marlboro's performance. Marlboro's full year 2009 retail share was down only a tenth of a share point versus 2008 despite competitive spending on discount brands, which followed the increase in the Federal Excise Tax.

Copenhagen and Skoal continued to benefit from USSTC's [ph] actions to return them to growth.

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 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 the geographies where this product is sold.

Across the Altria family of companies $398 million in cost savings were delivered from 2009. Since 2006 over $1 billion in cost savings against the $1.5 billion cost reduction program have been delivered and we expect to complete the program in 2009.

Tobacco excise taxes at the federal and state levels increased substantially in 2009. The federal exercise tax on a pack of cigarettes increased by 158% to $1.01 per pack and there were correspondingly large percentage increases on smokeless tobacco and machine-made large cigar products.

PM USA estimates the trade inventories for its cigarettes declined by 17% from the beginning to the end of the year.

Altria forecasts 2010 adjusted diluted earnings per share will increase to a range of $1.85 to $1.89. This represents a six to 8% growth rate from an adjusted base of $1.75 a share in 2009. Due to PM USA's profitable FET-related pricing strategies last year, we expect the first and second quarters of this year to be more challenging for income growth comparison purposes than the back half of 2010.

David R. Beran, Chief Financial Officer & Executive Vice President:
For the full year 2009, reported operating companies income for the cigarette segment increased by 3.9% to $5.1 billion, due primarily to higher list prices and cost savings partially offset by lower volume and higher pre-tax charges related to the previously announced closure of its Cabarrus manufacturing facility. When adjusted for restructuring charges, adjusted cigarette segments operating company's income grew by a strong 5.5% to $5.3 billion despite significant cigarette volume decline.

PM USA's reported cigarette shipment volume declined 12.2% for the full year, but was down an estimated 10.5% when adjusted for changes in trade inventories and calendar differences. PM USA estimates that total cigarette industry volume declined an estimated 8% in 2009 when adjusted for changes in trade inventories and calendar differences.

The cigarette segment also delivered strong results in the fourth quarter. Reported operating companies income increased 2.9% to $1.2 billion, due primarily to higher list prices and cost savings, partially offset by lower volume. When adjusted for restructuring charges, adjusted operating company's income grew by 2.8%.

During the back half of 2009 Marlboro's retail share of 41.8% was essentially the same as the first half of the year and significantly higher than its share in the initial period of dislocation following the FET increase.

For the full year of 2009 smokeless products volume increased 2.4% versus the full year 2008, but was up about 1% when adjusted to the same factors. Recorded operating company's income for the smokeless product segments was $79 million in the fourth quarter of 2009.

In 2009 Middleton accomplished its objective of growing earnings and Black & Mild's retail share of the machine made cigar category. Reported operating incomes for the full year 2009 grew by 7.3% to $176 million, but when adjusted for integration costs operating company's income grew by 1.6% to $185 million.

St. Michelle's full year 2009 retail volume as measured by Neilson grew by 10% as adult consumers increasingly chose its high quality and affordable wines. St. Michelle's full year 2009 wine shipments were down 2.1% versus a year ago period to 6 million cases. Reported full year operating company's income for the wine segment was $43 million, but was $73 million when adjusted for acquisition related charges of $30 million.

Reported operating company's income for the full year of 2009 increased $199 million versus the prior year period to $270 million due primarily to higher gains on assets sales and a lower increase to the losses for 2009.

For the fourth quarter of 2009 financial services reported operating companies income increased $36 million versus the prior year period due primarily to an increase in the allowance for losses in the fourth quarter of 2008. The allowance for losses at the end of 2009 was $266 million reflecting a net decrease of $38 million for the year.
Q&A Session

(Q) I just want to get a feel for your cigarette volume expectations, I'm really looking out kind of post-FET, I want to lap that. Are we just returning to previous levels of decline? Do you expect a little bit of an increase in the decline rate for the industry? What is baked into your assumptions? (A) Well, I don't think we'll get into giving forward projection on volume but what I would say to you is that what we've seen since the FET is very consistent with historical with prices elasticities. If you're going to lap a pre-FET quarter, although as I pointed out in my remarks, there were some inventory implications relative to that first quarter, and in the second quarter you're likely to see, I think, take away that is pretty consistent with historical projections. I can't guarantee that but we don't have any data that would tell us something to the contrary, although once again, there were some pretty significant inventory adjustments that took place in the second quarter. So you know I think history is still the best guide here. But there are nuances and that is why I'm kind of forewarning people that we're going to see some facts on comparisons quarter-over-quarter in 2010 that are related to the nuances both from an inventory point of view and from a tax point of view that came out of the activities in 2009.

(Q) Hey, Mike, just in terms of Marlboro and the competitive environment, I think in 2009 clearly saw the step up in promo spending from Pall Mall. What is your assessment of how that sort of plays out in 2010 and at what point do you think there would there be a need for Marlboro to sort of step up more in terms of the promos and get more competitive in the market place? (A) Well I cannot predict what the future is going to be. I can you, I think we have a pretty good model in place for how we both read what's going on in the marketplace and how we respond to it in a very tactical, surgical way that is sufficient. That's why you are seeing the shares hold up and the margins [ph] because we're pretty I think refined today in the way we go deal with competitive issues. But at the end of the day, Marlboro has not been you know the significant loser to the - to any changes related to discount. It's come from other places and some of that has been ours but some of that is the rest of our premium portfolio as well as basic in some geographies where we don't give it much support although I have to say in our other premium brands we saw a step down in their market share following the FET. But then they've been remarkably stable ever since then through the balance of the year and, of course, their margin and profitability has been quite strong following that because of pricing actions we took. So in all, Judy, it's hard to predict the future but I would say what we're doing so far right up through the end of year has worked very well for us and I don't see any reason why it won't continue to.

(Q) And then just in terms of the fourth quarter, your operating profit per unit or per pack and the cigarettes stepped down from the second and the third quarter even though pricing has obviously held up pretty nicely. So I'm just wondering if there is anything that caused the profitability to step down on a quarter to quarter whether timing of expenses or anything that could explain that difference? (A) Well I always like to remind people look - the way we run the business, the cost savings and spending are not bounded by quarters in the way we built and execute plans. That means that in any given quarter, if you evaluate margins compared to a prior quarter, you may be incorrectly optimistic or pessimistic about the result because we don't look at it that way. I would point out to you that the margin for Marlboro versus the margin in the fourth quarter of the prior year was higher than this year. But I think I look at the whole year rather than try to sort through the course because we just don't follow things that way. So there are differences in the bases each year that are going to play out when you start doing the math for a particular quarter.

(Q) have you or any representatives had any subsequent discussions as of yet with representatives of the FDA? (Q) Well, here's how the FDA communication process works. And understand that the FDA is building their enterprise, if you will. So they started from scratch and appointed Dr. Dayton [ph] as Director and he has been building that enterprise. There is a communication system with them. They have set up an electronic docket. So they raise the subjects where they want to have input, and then you communicate to that electronic docket. That's a public docket, so anybody can communicate on that particular subject. And so we communicate to them via that, and that's the process so far. So I think as they get their enterprise put together there will become more interaction that is direct communication with FDA individuals, inspectors and people like that. But that has not begun yet in the regulatory process, but there is a lot of communication relative to the subjects or questions that have to be answered or places where the FDA has asked for input. But that's through a docket system where those communications are typically in writing and people can see them.