Altria Group (MO)

Q4 2011 Earnings Call

January 27, 2012 9:00 am ET

Executives

Michael E. Szymanczyk - Chairman, Chief Executive Officer, Chairman of Executive Committee and Chairman of Philip Morris USA Inc

Brendan McCormick - Vice President of Communications

Howard A. Willard - Chief Financial Officer and Executive Vice President

Analysts

Ann H. Gurkin - Davenport & Company, LLC, Research Division

Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division

David J. Adelman - Morgan Stanley, Research Division

Judy E. Hong - Goldman Sachs Group Inc., Research Division

Nik Modi - UBS Investment Bank, Research Division

Vivien Azer - Citigroup Inc, Research Division

Christina McGlone - Deutsche Bank AG, Research Division

Priya Ohri-Gupta - Barclays Capital, Research Division

Michael Lavery - CLSA Asia-Pacific Markets, Research Division

Presentation

Operator

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Good day, and welcome to the Altria Group 2011 Fourth Quarter and Full Year Earnings Conference Call. Today's call is scheduled to last about one hour including remarks at Altria's management and a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Mr. Brendan McCormick, Vice President, Investor Relations for Altria Client Services. Please go ahead, sir.

Brendan McCormick

Good morning, and thank you for joining our call. This morning we will only be discussing Altria's 2011 business results for the fourth quarter and full year and will not be discussing the status of tobacco litigation. Our remarks contain forward-looking and cautionary statements and projections of future results, and I direct your attention to the forward-looking and cautionary statement section at the end of today's earnings release for the review of the various factors that could cause actual results to differ materially from projections. For a detailed review of Altria's business results, please review the earnings release that is available on our website, altria.com.

Altria reports its financial results in accordance with U.S. generally accepted accounting principles. Altria's management also reviews operating companies income, operating margins and EPS on an adjusted basis, which exclude certain income and expense items that management believes are not part of underlying operations.

Last month, Altria announced that it would also include charges for tobacco and health judgments from adjusted financial calculations. References to adjusted financial calculations on today's call reflect this redefinition. Today's call also contains various operating results on both a reported and on an adjusted basis, which excludes items the affect the comparability of reported results. Descriptions of these measures and reconciliations are included in today's earnings press release and are available on our website.

In addition, comparisons discussed in this conference call are to the same prior year period unless otherwise stated.

Now it gives me great pleasure to introduce Mike Szymanczyk, Chairman and Chief Executive Officer of Altria Group Inc.

Michael E. Szymanczyk

Thanks, Brendan, and good morning, everyone. Altria has delivered strong returns for its shareholders in 2011 in a challenging business environment, while taking steps to continue creating shareholder value into the future. Altria grew its adjusted diluted earnings per share by 7.9%, which is consistent with adjusted EPS results over the past few years. Altria delivered total shareholder return of 26.9% in 2011, outperforming the return of the S&P 500 for the 12th consecutive year. Dividends remain an important component of Altria's shareholder return. The company paid out approximately 8% of its adjusted diluted EPS in dividends and increased its dividend by 7.9% in August. Altria also repurchased $1.3 billion of its shares in 2011 at an average price of $26.91 per share. Altria intends to complete the balance of the October 2011 $1 billion repurchase program by the end of 2012, subject to the discretion of the board. Altria completed its previously announced $1.5 billion cost-savings program ahead of schedule in the third quarter of 2011. Following the completion of this program, we announced a new program that we expect to deliver annualized cost savings of $400 million versus previously planned spending by the end of 2013.

Altria continues to focus on developing lower-risk products that appeal to adult tobacco consumers. To support this goal, Altria Client Services has entered into an agreement with Okono, an affiliate of the Danish company, Fertin Pharma, to develop innovative noncombustible-nicotine-containing products for adult tobacco consumers. Fertin is a global leader in the development and manufacture of nicotine gum with additional capabilities and other products and technologies. This new product initiative combines the expertise of the Altria family of companies with Okono and its affiliates, product development and manufacturing capabilities.

Altria's operating companies delivered strong 2011 profitability. Adjusted operating companies income and margins grew in cigarettes, smokeless products and wine. These gains were partially offset by declines in adjusted operating companies income in cigars and financial services.

Earnings from our equity investment in SABMiller also contributed to Altria's profitability. PM U.S.A. continue to focus on maximizing income from its cigarette business while maintaining modest share momentum on Marlboro over time. In 2011, higher pricing and effective cost management helped PM U.S.A. grow its adjusted operating companies income and margins, which exclude the impact of restructuring charges and tobacco and health judgments.

Marlboro retained some of its strong share gains that contributed to a record retail share performance of 2010, as its full year share in 2011 is higher than its 2009 share. Marlboro's retail share gains 2010 were exceptionally strong due to an introductory offer on Marlboro Special Blend. Marlboro share decline in 2010 versus 2010 reflects PM U.S.A.'s focus on growing income and margins and not building the brand on price promoted share. Marlboro's underlying brand equity remains strong. Price gaps continue to be stable, and retail share deviations that Marlboro experienced in 2011 were driven by short-term, year-over-year changes in promotional spending in the marketplace that influence promotion-sensitive adult consumers.

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