Altria Group Inc . ( M O )

Q2 2010 Earnings Call Transcript

July 21, 2010 9:00 am ET


Cliff Fleet – V P , I R

Mike Szymanczyk – Chairman and CEO

Dave Beran – CFO and EVP


Nik Modi – UBS

Tyler Walling – Goldman Sachs

David Adelman – Morgan Stanley

Chris Growe – Stifel Nicolaus

Christine Farkas – Banc of America/Merrill Lynch

Thilo Wrede – Credit Suisse

Karen Lamark – Federated Investors

Ann Gurkin – Davenport

Todd Duvick – Banc of America/Merrill Lynch



Good day and welcome to the Altria Group 2010 second quarter earnings conference call. Today's call is scheduled to last about one hour, including remarks by Altria's management and a question-and-answer session. Representatives of the investment community and media on the call will be able to ask questions following the conclusion of the prepared remarks. I would now like to turn the call over to Mr. Cliff Fleet, Vice President, Investor Relations for Altria Client Services. Please go ahead, sir.

Cliff Fleet

Good morning and thank you for joining our call. This morning, we will only be discussing Altria's 2010 second quarter and first half business results and will not be discussing the status of tobacco litigation. Our remarks contain forward-looking statements and projections of future results. And I direct you to the forward-looking and cautionary statements at the end of our earnings release, for the review of the various factors that could cause actual results to differ materially from projections.

Since Altria acquired UST and the smokeless tobacco and wine subsidiaries on January 6, 2009, U.S. Smokeless Tobacco Company's and Ste. Michelle Wine Estates financial results from January 6 through June 30, 2009 are included in Altria's 2009 first half consolidated and segment results. For a detailed review of Altria's business results, please review the earnings release that is available on our website at Altria reports its financial results in accordance with U.S. generally accepted accounting principles.

Today's call may contain various operating results on both a reported and on an adjusted basis, which excludes items that affect the comparability of reported results. Descriptions of these measures, as well as reconciliations, are included in the earnings press release. Now, it gives me great pleasure to introduce Mike Szymanczyk, Chairman and Chief Executive Officer of Altria Group Inc.

Mike Szymanczyk

Good morning, everyone and thanks, Cliff. We are very pleased with the performance of Altria and its operating companies in the second quarter and the first half of 2010. Our business results over both of these time periods exceeded our expectations coming into the year. The fundamentals of our business remain strong and the premium brands of our operating companies performed very well in what continues to be a challenging business environment. As anticipated, the second quarter of this year was challenging for an income growth comparison point of view, due to the FET related trade inventory movements in the prior-year period.

Altria's adjusted earnings per share for the quarter were the same as the second quarter of 2009. Last year's first and second quarter income results were impacted by trade inventory movements related to the FET increase. Because the FET increase included a floor tax on cigarettes and smokeless tobacco products, the trade depleted these inventories in the first quarter of last year prior to the increase and then rebuilt them in the second quarter. Since the FET increase did not include a floor tax on machine-made large cigars, the trade built these inventories prior to the increase and depleted them in the second quarter of last year. Due to these FET-related volume impacts, separate first and second quarter income comparisons for 2010 versus 2009 are not particularly meaningful.

A look at our first half performance offers more insight into the underlying strengths of our businesses. Last year's first half results included one quarter prior to and one quarter after the April 1, 2009 FET increase. For the first half of 2010, Altria grew adjusted earnings per share by 3.4% and this growth occurred against last year's strong first half adjusted earnings per share growth of 8.5%. This solid adjusted earnings per share growth also occurred despite PMCC's first half operating companies' income decline of $143 million, due to lower gains on asset sales.

Strong adjusted operating companies' income growth from our adult consumer product businesses more than offset PMCC's income decline. Through the first half of the year, our adult consumer product businesses, combined adjusted operating companies' income grew 5.3% versus a year ago. We are further encouraged that the premium brands of our operating companies are maintaining strong positions in the marketplace, in what remains a very challenging economic environment. We thus feel very good about the fundamentals of our adult consumer product businesses.

We are pleased with the progress towards our objective of maximizing cigarette income while maintaining momentum on Marlboro. Marlboro reached a record retail share in the second quarter, as it grew its overall share by an impressive 1.6 share points versus the comparable year ago period to 42.8%, while also continuing to expand its margins. Marlboro's strong retail share performance also enabled PM USA's overall cigarette segment retail share to return to growth, as it grew $0.7 of a share point versus the second quarter of last year to 50.2%. Cigarette segment income performance was also strong. The cigarette segment grew second quarter adjusted operating companies' income by 1.5% versus the year-ago period and 3.8% for the first half of this year.

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