奧馳亞 (MO) 2008 Q3 法說會逐字稿

Welcome to the Altria Group third quarter 2008 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.

(OPERATOR INSTRUCTIONS).

I would now like to turn the call over to Mr.

Cliff Fleet, Vice President of Investor Relations for Altria Client Services.

Good morning, and thank you for joining our call.

This morning, we will provide an update on the status of the agreement for the proposed acquisition of UST, and discuss Altria's third quarter business results.

We will not be discussing the status of litigation.

Our remarks contain forward-looking statements and projections of future results and I direct you to the forward-looking and cautionary statement at the end of our earnings release for the review of the various factors that could cause actual results to differ materially from projections.

I also encourage you to read other important information about the proposed acquisition of UST by Altria in this morning's press release in the section entitled "other information." As a result of the spinoff of Philip Morris International earlier this year, our reported results reflect PMI as a discontinued operation for the third quarter of 2007, and revenues and operating companies income for PMI are therefore excluded from Altria's continuing results.

For a detailed review of Altria's third quarter business results, please review the earnings release that is available on our website, www.altria.com.

It gives me great pleasure to introduce Michael Szymanczyk, Chairman and Chief Executive Officer of Altria Group, Inc.

Thanks, Cliff.

Good morning to everyone.

Before we get to Altria's third quarter business results, I'd like to first update you on the status of the proposed acquisition of UST.

Altria has fully committed financing to complete the transaction.

Given the current volatile credit markets, the total financing charges to close the transaction will be higher than originally anticipated.

But Altria doesn't expect this to have a material impact on the financial return of the transaction.

However, until Altria completes its long- term financing for the transaction, it will be difficult to predict if the UST acquisition will be accretive to Altria's adjusted diluted earnings per share within 12 months of closing as was initially anticipated.

Last week, Altria and UST announced that Altria's proposed acquisition of UST passed federal antitrust review, completion of the transaction remains subject to UST shareholder approval, and certain other customary closing conditions.

UST is scheduling a special shareholder meeting in early December 2008, during which UST shareholders will vote upon the proposed transaction.

If it's approved and all other conditions to closing are satisfied, we expect the transaction to close during the first full week of January, 2009, and no later than January 7th.

Now, let's turn to Altria's third quarter business performance.

Altria reported diluted earnings per share from continuing operations of $0.42 versus $0.43 in the prior year period.

We delivered strong adjusted earnings per share growth from continuing operations, up 15% to $0.46, driven by a combination of higher operating companies income and lower general corporate expenses.

PM USA had a particularly strong quarter with adjusted operating companies income up 6.3%.

And Middleton continued its strong performance.

This quarter Altria benefited from accelerated cost savings from its previously announced corporate restructuring.

Corporate expenses declined 43% versus the prior year period and Altria expects to realize $250 million in annual savings beginning in 2009, as a result of it's corporate restructuring.

This quarter's results were negatively impacted by lower SABMiller equity earning due to a charge of $85 million resulting from intangible asset impairments, a higher income tax rate, and an increased allowance for losses of $50 million at Phillip Morris Capital Corporation.

In August, Altria increased its regular quarterly dividend by 10.3% to $0.32 per common share, which equates to approximately $660 million in quarterly dividend payments to our shareholders.

Based on Altria's closing stock price on September 30th, the dividend yield was almost 6.5%.

Altria is reaffirming its full year 2008 EPS guidance reflecting confidence in the strength of our businesses.

Specifically, Altria's 2008 adjusted diluted earnings per share from continuing operations is expected to be in the range of $1.63 to $1.67 which represents a growth rate of 9% to 11% from an adjusted base of $1.50 per share in 2007.

Our plans for the fourth quarter of 2008 are consistent with delivering results within this full year guidance.

Because of the economic uncertainties we all face, Altria is taking steps now to continue adding value to shareholders over the long term.

The prevailing economic conditions and financial market uncertainties create a challenging environment for all companies.

We are developing plans for 2009 to help mitigate the effects of economic uncertainties in our business over the next few years.

First, by integrating UST into the Altria family of companies and absorbing all costs related to the integration in 2009, in order to fully realize the strategic benefits in 2010 and beyond.

Second, by using the UST acquisition as an opportunity to streamline Altria Client Services, our services provider, to further lower costs and improve effectiveness beyond our previously announced cost reduction program.

Finally, by carefully monitoring the value equations on the powerhouse group of brands that our operating companies will have in the marketplace to ensure they are satisfactory to our adult consumers as they experience tough economic times.

We believe that once we close the transaction and integrate UST into the Altria family of companies, Altria will be well positioned to provide superior long- term shareholder returns.

We will provide more details on our 2009 plans in January at our year end earnings release and at the February CAGNY Conference.

I would like to turn the call over to Dave Beran, Altria's Executive Vice President and Chief Financial Officer, who will discuss Altria's reporting segment and business results

Thanks, Mike.

Good morning, everyone.

Let's begin with PM USA's third quarter results.

PM USA delivered outstanding financial results in a challenging environment.

On an adjusted basis, PM USA grew its operating companies income by 6.3% and continued to expand its operating margins.

PM USA's third quarter revenues net of excise taxes increased 4.6% to $4.2 billion.

Excluding the $97 million in revenue from contract volume manufactured for PMI, PM USA's revenues net of excise taxes increased 2.2% versus the prior year period.

PM USA's reported operating companies income increased 5.7% to $1.37 billion, due to lower wholesale promotional allowance rates and lower SG&A spending.

The positive impact of these factors on PM USA's OCI was partially offset by lower volume, increased resolution expenses, higher leaf costs, costs related to reduction of contract volume manufactured for PMI, and higher charges for the previously announced closure of the Cabarrus North Carolina manufacturing facility.

Adjusted for costs related to the Cabarrus facility closure, PM USA's third quarter 2008 operating companies income increased by 6.3% to $1.4 billion.

PM USA's adjusted OCI margins increased 130 basis points to 34.1% versus the prior year period.

Margin improvements were driven primarily by lower wholesale allowance rates, reduced promotional spending, and SG&A cost reductions.

PM USA's domestic cigarette shipment volume of 44.9 billion units was 4.8% lower than the prior year period, but was estimated to be down approximately 4% when adjusted for changes in trade inventories and calendar differences.

For the first nine months of 2008, PM USA's domestic cigarette volume of 128.6 billion units, was 3.6% lower than the prior year period, but was estimated to be down approximately 3.5% to 4% when adjusted for changes in trade inventories and calendar differences.

As the cigarette industry environment continues to evolve, PM USA believes it can no longer accurately predict future cigarette industry decline rates and PM USA is no longer providing this guidance.

Evolving industry dynamics include the prevailing economic conditions, unpredictable cigarette excise tax increases, adult consumer activity across multiple tobacco categories, and trade inventory changes as wholesalers and retailers continue to adjust their levels of cigarette inventories.

The average cigarette state excise tax at the end of the third quarter was approximately $1.12 per pack, which is in line with PM USA's 2008 forecast.

To date, in 2008, seven states and the District of Columbia have increased their cigarette excise taxes with an average increase of $0.74 per pack.

In a highly competitive retail environment, Marlboro increased its third quarter retail share by 0.5 share points versus the prior year period to 41.6%.

Price gap between Marlboro and the lowest effective priced cigarettes remain relatively stable at 43% in the third quarter.

PM USA's retail cigarette share declined 0.1 share point versus the prior year period to 50.5% as Marlboro's strong retail share gains were offset by share losses for Virginia Slims, Parliament and Basic.

For the first nine months of 2008, PM USA's retail cigarette share increased 0.3 share points.

PM USA continues to monitor the economic landscape as consumer confidence levels have fallen and unemployment rates have increased.

At this point, the Company believes that the challenging economic conditions in the US may have motivated some price sensitive adult smokers to consider lower priced tobacco products like roll your own products and small cigars.

Additionally, in the third quarter, the discount category's cigarette retail share increased 0.3 share points versus the prior year period to 25.4%.

This share level is still lower than the fourth quarter of 2007 when the discount category share reached 25.6%.

For the first nine months of 2008, the discount category's, cigarette retail share is unchanged versus the prior year period at 25.3%.

PM USA continues to invest in the development of adjacent smokeless products and test markets for both Marlboro Snus and Marlboro Moist Snuff.

PM USA has now delivered a total of $340 million in SG&A cost savings against its 2007 to 2011 $600 million cost reduction program and the Company remains committed to achieving the additional $260 million by 2011.

In the first nine months of 2008, PM USA delivered approximately $40 million in SG&A reductions .

PM USA's manufacturing consolidation plan is on schedule and within budget and the Company plans to close the Cabarrus manufacturing facility by year end 2010.

PM USA continues to transition its infrastructure to deal with the effects of the removal of the contract cigarette volume manufactured for PMI and expects it to be completed in the fourth quarter of 2008.

This transition negatively impacted costs by about $35 million in the third quarter, and approximately $85 million in the first nine months of 2008.

PM USA expects total 2008 costs of about $100 million.

Overall, we are very pleased with PM USA's third quarter results.

The Company had strong operating companies income growth, its cost reduction efforts are on track and Marlboro had another strong quarter of strong retail share growth.

Now, let's turn to John Middleton's results for the third quarter.

John Middleton had solid business results in the quarter.

The Company reported $37 million in OCI which includes a $9 million charge for integration costs.

Middleton grew its total cigar shipment volume by 2.3% to 329 million units.

In the third quarter, cigar volume was impacted by the timing of promotional shipments.

For the first nine months of 2008, Middleton's cigar shipment volume increased 7.1% versus the prior year period.

Black & Mild increased its share of the growing machine-made large cigar segment by 2.2 share points to 29.2%.

John Middleton continues to capitalize on PM USA's sales and distribution infrastructure and expertise to help grow Black & Mild by increasing the brand's retail distribution and visibility.

Turning to our financial services business, Philip Morris Capital Corporation reported a $7 million operating companies loss.

This quarter's results reflect a $50 million increase in the allowance for losses.

PMCC's allowance for losses now totals $254 million which management believes is prudent based on the underlying credit quality and collateral value of its existing portfolio.

PMCC's portfolio remains well diversified by lessee and industry segment.

As of September 30th, approximately 73% of PMCC's lessees were investment grade as measured by Moody's and S & P.

Excluding aircraft lease investments, approximately 86% of PMCC's lessees were investment grade.

PMCC remains focused on managing its portfolio of leased assets to maximize gains and cash flows from income generating assets as well as asset sales and related activities.

PMCC's financial results will vary over time as investments mature or are sold.

I will conclude by saying that PM USA delivered strong income growth, improved its adjusted operating margins and continued to reduce its SG&A spending.

Marlboro achieved strong quarterly retail cigarette results while lowering its promotional spending.

And finally, John Middleton delivered strong income and retail share performance as Black & Mild benefited from PM USA's sales and distribution infrastructure.

Mike and I will be happy to take your questions now.

While the operator compiles the calls, I want to cover a few housekeeping numbers.

In the third quarter, Marlboro's net pack price in convenience stores was $4.40, and the lowest effective priced cigarettes were $3.08 per pack.

Cap Ex was $46 million.

Ongoing depreciation and amortization was approximately $50 million.

Our third quarter MSA and quota buyout accruals were approximately $1.5 billion, or $0.66 per pack.

Of the $0.66, MSA represents $0.61 per pack and the quota buy out represents $0.05 per pack.

And finally, our third quarter tax rate was 36.2%.

We anticipate that Altria's 2008 full year effective tax rate on operations will be approximately 36.7%.

Operator, do we have any

Ladies and Gentlemen we will now start our Q&A session.

(OPERATOR INSTRUCTIONS).Our first question comes from the line of David Adelman with Morgan Stanley.

Good morning, David.

Few things I wanted to ask you.

First, Mike, if you exclude next year the impact of UST, and if you were to take off the table for a moment the risk of a substantial increase in the federal excise tax, how feasible do you think it would be in that context for Altria to deliver its long- term 8% to 10% EPS growth next year?

Well, that's a clever way of getting the guidance for the next year, but I'm not going to talk about that, David, until we get to January, so I think your question is premature.

Seriously, I do think that it's going to be important to look at the fourth quarter to get some guide posts on some of these thing.

What the market is going to do, what unemployment is going to be, what the pricing dynamics and competitive dynamics are in the marketplace, and I can't ignore interest rates.

Interest rates will be a part of what we have to deal with in the coming years.

So it's hard to separate out UST when you are thinking about all of this, but fourth quarter will tell us a lot, and I think that, anything I gave you on that subject at this point in time will be inappropriate and not thoughtful, as I think we have to see how the fourth quarter unfolds

At this moment, do you feel comfortable with the scale of the pricing gaps in the US cigarette category?

Well, we went through the third quarter, we didn't see a lot of change there at all, and I think, you know, our USA business performs quite well.

As I said before, we kind of maximize our earnings while we maintain some modest share growth and so we put our foot on the gas a little more, sometimes, take it off a little bit.

In that context, we grew pretty fast in the first quarter probably faster than we particularly needed or wanted to grow, and so we're getting a little more income out of the USA business right now, but still showing very good growth, I think, on Marlboro, so we're pretty happy with our cigarette business right now, and the relationship between the segments

And on the UST acquisition, Mike, with a higher than originally envisioned financing cost, is that going to affect your calculus on how much you should spend to improve the consumer value on the premium brand?

On UST's key premium brands?

No, I don't think that there will be a relationship between those at all.

And can you frame for us the excise tax risk going into 2009 at the federal and state level, and what type of incremental contingencies from a cost perspective are you developing if it is an onerous scenario?

Well, I think it's hard to frame right now, particularly because you're going to have so much change in the government.

It is, I think, going to be a difficult economic environment and that can play both ways relative to that subject.

As I mentioned in my remarks, we think cost is an important issue.

We think the UST acquisition represents a good opportunity to rethink how we do a number of things in order to make ourselves more efficient, and that we want to get all that done in 2009, so our objective is to get more costs out of the system than we had originally anticipated back in March when we originally talked about that subject.

And to use this integration as that, as an opportunity to do that And we're trying to quantify that more for you, David, when we get to January and February but because we're working on it right now.

So I wouldn't want to do that right now, but we will try to give you more.

And that would be incremental to the 250 million in synergies you called out on UST?

Yeah.

Okay.

Thank you.

Our next question comes from Judy Hong from Goldman Sachs

Mike, I'm hoping if you could elaborate your comment about as you look at 2009, carefully monitoring the price gap or the value equation, and whether that relates to really looking at not just the price gap within cigarettes, but really looking at the value equation across all of tobacco products, and whether that means that there is actually a heightened need to think about the value equation and address that issue as it relates to some of the lower products, lower price tobacco products.

Well, I think there are several things to think about.

First of all, in answer to your question on segments, we're going to be playing in three different segments.

Yes, we're going to be paying attention to the value equation on our brands in all three segments.

So we will be monitoring that, paying close attention to it.

Just as we have for some time in the cigarette business.

I think when consumers get under some economic stress, it's important for brands to be focused on delivering value to their consumers and not finding themselves in a situation where they haven't paid close enough attention to what's happening and then have consumers decide that they will move to other brands, so I think it's in those kinds of times that you have to be the most thoughtful about it and that's why I called it out.

It's something that we always pay attention to, but I think we will be particularly diligent to it relatively to that subject.

There's more factors than simply price there to deal with, and so we'll be looking at totality of our value equation, and we really wanted to put ourselves in our consumers' shoes and try to make sure that they feel good about the way we're serving up our brands to them relative to competitive products, so our feeling is that it's going to be a difficult economic time so we have to pay more attention to it.

Just following up on that, Mike, if you think about the growth of the little cigars and roll your own products, and the recent quarters, I mean how concerning is that growth, how big of a size are those categories right now, and at what point do you get more concerned that is really encroaching on the premium cigarettes segment that you have to think about the value equation, not just within cigarettes, but looking at cigarettes, premium cigarettes versus little cigars or roll your owns or etcetera?

While they tend to be small, they are showing some growth, but the growth is in the very bottom in terms of the pricing spectrum, it's really within the overall discount segment, the movement of that segment has been within the same range it's been for quite some time, but there has been some movement at the bottom of that segment, including in the areas of roll your own, but also not only there, but deep discount as well, whether it's been some growth, but the growth has come out of the discount segment.

But I think you have to be mindful of those things.

We pay close attention to them.

It's not anything I would call a trim line change at this point, but certainly something to pay attention to.

Okay.

And then if we look at the menthol segment, Mike, how much of the Marlboro share growth at this point is coming from Marlboro menthol as opposed to non- menthol Marlboro?

You know, it moves around a little bit.

I think it's kind of, pretty close to 50/50.

I think most recently.

About half of it is menthol, about half is, the rest of the franchise.

And can you confirm that in the third quarter you eliminated the free goods promotion and whether that impacted your competitive performance within menthol?

Well, we move around on our promotion activity.

We like to try some new things and find some ways to be more efficient and so we have a different promotion packing in the marketplace on items right now.

They seem to be working pretty effectively, so I wouldn't suggest to you that we're able to make some determination that they have had any meaningfully different impact on those SKUs than we saw with the buy one, get one free, at least to this point

And my last question, Mike, your decision not to provide industry volume forecast going forward.

I'm hoping if you can provide some color as to what the thinking there in not providing the guidance going forward there?

I think Dave provided the color.

Dave, you can talk about it if you want, but I think it's - - I think we just feel like there's so many different moving parts associated with that, and some are very difficult to get your hands around, like retail inventory, for example, it's difficult to get your arms around with any accuracy, that while we'll still try to figure it out, look at it, we just don't feel like it's prudent to have to focus on it.

Dave, do you have anything to add to that?

We are going back to where we were prior to 2007.

We do internal estimate, but prior to 2007, I never provided guidance for that reason.

It's, it's somewhat unpredictable, yes, we still look at it internally, but we're going back to where we were before 2007.

Okay.

Thanks.

Our next question comes from Nik Modi with UBS.

Good morning, guys.

Good morning.

Just a quick question on the cost environment.

I understand several other tobacco players have increased or passing on surcharges just to help offset some of the increasing costs whether it be tobacco leaf or transportation and it was, it's been recent so the pull back in diesel hasn't had an impact, so just want to get your perspective on the cost environment, if you can give us some help there.

Yes.

The cost of raw materials went up this year.

Primarily driven by the cost of fuel and oil prices as that worked its way through the system, whether with transportation costs or fertilizer costs.

And overall for the year, we expect our leaf costs to be up approximately $100 million from where it was last year.

But we plan for that in the overall guidance that we gave earlier on in the year, and part of those costs and increases are temporary in nature, because they are reflected in surcharges on propane and fertilizer costs so we would expect to see that moderate somewhat next year.

And Dave, just quickly, with the dollar doing what it does, it's doing, do you think you'll see a benefit, more so than you were expecting into '09?

Given some of these are dollar denominated commodities?

We could, but the dollar, as we've seen this year, the dollar has swung quite a bit versus currencies worldwide, and I think at this point, it would be pure speculation to determine where the dollar will end up being next year on average.

But currently, it is, it is a favorable, but you'll never know how that might end up next year.

Great, that's it for me.

Thank you.

Our next question comes from Adam Spielman from Citigroup

A couple of questions, I noticed in terms of your market share, although it's up year on year, if you look sequentially Marlboro's market share is down about 20 basis points.

And your PM USA share is down I think 50 basis points.

At the same time, it's been a very good quarter certainly in terms of profit and pricing.

I was wondering whether, what we should read into that, whether actually you think you got the balance of it right, and bearing in mind your market share is still at over 50%, you are looking to make sure the profit continues?

That would be my first question.

Well, Adam, I think as I've discussed previously, we are always trying to strike a balance between maximizing income and maintaining some level of modest share growth, particularly on Marlboro, and that's not an exact science quarter to quarter, and we worried not much about that quarter to quarter.

We really look at it on a longer term basis, so I would say to you that the products in the marketplace were responsive to the things we did.

We continued to get very good year- over- year share growth on Marlboro and for the total year the brand and total company are in good shape in the cigarette business, and so we are, I think, kind of managing the business to accomplish the objective, maximize income, modest share growth over the long term.

I wouldn't worry that much about sequential performance, because we don't worry lot about that.

We're really looking at it more in the longer term basis.

Okay.

Thank you very much.

And the second question, I guess it's hard for tobacco anaylsts to think about PMCC.

I notice from the balance sheet you've currently got financial assets of about $5.6 billion.

You told us how much of that was non- performing, but first of all, I missed the figure you gave, but more importantly, can you tell us how you, what criteria you used to decide if some of your financial services assets are non- performing, and how we might expect that to continue if the economic situation does indeed get worse.

Yes.

When we look at the allowance for losses, at this point, our leese payments are current, it's more a future look based on the economic conditions that we see in the marketplace, and various credit ratings that the underlying lessees currently have.

And we look at potential impairment charges every quarter and take into account those two factors and that's how we determine our overall allowance going forward so currently, we had in the second quarter an allowance of $204 million and added $50 million to that allowance and at this point, given the economic environment, we think that's prudent.

But we look at that each quarter.

Thank you very much.

Our next question comes from Ann Gurkin from Davenport.

I don't know if you're willing to comment any further, given a difficult economic environment, what changes you may be making to strategies to support your premium brand growth?

And then secondly, do you feel like the environment could take another price increase if necessary?

Well, Ann, I would say at this juncture, first of all, both of those questions would be things I wouldn't want to cover because I think they are competitively sensitive subjects, so I wouldn't want to answer them specifically.

But once again, I would go back to looking at the fourth quarter here before I would start to make predictions about what 2009 is going to bring.

I think that there has been quite a bit of economic change taking place, just recently actually, and so it would be helpful to see a bit more unfold before you really start making predictions about what the impact's going to be on the business, and what you might need to do about it so I think, wait and see is probably a good attitude right now relative to 2009.

Fair enough.

That's great.

We, we want to be in a good position to deal with 2009.

That's why we're putting in place some actions to speed up on the UST integration and to look at our cost structure now and be prepared to take some actions, those are things that we're trying to do to be prudent, conservative and prepared so that we can deal with the environment more successfully that we see in 2009.

Great.

Are you seeing any kind of inventory build at wholesalers or retail ahead of anticipated excise tax increase early in '09?

Well, I would say total inventories right now are a bit below where they were this time last year.

Okay.

And then about SABMiller, I don't know if you can comment, in the fourth quarter, do you have another asset impairment to write down?

Any other charge related to that fourth quarter?

No, we do not

So that's it for the year you expect right now?

That's all we expect this year, but we're just an equity investment holder, 28.5% so for further details, I would recommend that you talk to SABMiller.

Okay.

That's great.

Thank you very much.

Thank you.

Next question comes from Erik Bloomquist with JP Morgan.

Hi, Erik.

I was hoping to circle back to some of the drivers that are behind the decision to cease guidance in terms of the overall cigarette category growth.

Specifically, I wanted to come back to the adult consumer activity, could you talk about that more and help us understand, is it in fact that we're seeing an acceleration in consumer switching out to cigarettes or adopting other products in the interim?

When they can't smoke in a public arena?

Or if you could give us more feel, and secondly, in terms of the order of magnitude of impact of the various items cited by Dave, is it really fair to believe that tax increases are the biggest ones driving that uncertainty around future cigarette volume growth, or decline?

Thank you.

Well, I think just the general trend is you're seeing the cigarette volume decline and you are seeing the smokeless tobacco and large manufactured cigar volumes grow.

You know, I think the rate that we've seen so far this year is something in the range of, I guess, around 3.5% to 4%in cigarettes, and I think the smokeless business has been growing, pushing 7%, and large manufactured cigar business has been in the 4% or so, 4% to 5% range.

And that seems to be the trend.

How that actually occurs relative to consumers and exactly why individual consumers do what they do, I'm not going to speculate, but that's what the numbers say and I think that's really what's important and part of how we're planning our business strategy going forward.

And then with respect to the performance of Parliament and Virginia Slims in the quarter, is there anything in particular going on there or is that how would you characterize the declines ahead of, say, Marlboro.

Part of what we've done is focus our spending on those brands into their areas of strengths so we anticipated some nominal share loss on those products as we've really expanded their margins by focusing in on some more specific consumer areas.

And just a housekeeping question.

In terms of the $100 million or so that you are spending in PMI as you wind down Cabarrus, that's something we can simply assume we don't have in 2009 that's a cost that will cease at the end of 2008?

That's the overhead cost that's associated with the burden of keeping two factories up and running, so that cost goes away when we, the fixed portion of that goes away when we close the Cabarrus facility

And so that will have an impact on 2009.

That will continue because we'll be working on closing that facility during a good portion of 2009.

Will be clear of that in 2010, but have most of it in 2009?

I would say that's probably fair.

Okay.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from Thilo Wrede from Credit Suisse

I want to follow up on a question, I think, that Adam Spielman asked.

In the first quarter, it looked like you were focusing much more on market share growth rather than profit growth.

Now, this quarter it looks like you're focused more on profit than market share growth.

I know that you don't manage the business quarter by quarter, but is there a, you know, should I look at this as being somewhat inconsistent or what will you focus on going forward?

Well, we look at the year and we, have objectives that we like to achieve for the year and they reflect the philosophy that I articulated to you which is to maximize earnings while maintaining modest share growth but we don't evaluate that simply quarter by quarter.

We look at it on a longer term basis, as I believe I've said before I think we got out of the box a little faster than probably needed to in the first quarter.

You know, good news in that, and there's bad news.

We made less money, but we also got more shares so as we've gone on through the year, we've been able to tighten that down a little bit, and actually feel very good about the dynamics of the business and fundamentals of the business, and particularly the fundamentals of the Marlboro brand, and grow revenues and grow income, so that's the way I look at it.

I'm not seeing anything in the third quarter that I would say is an underlying fundamental issue that is of concern to us, to the contrary, the business performed about the way we expected it to perform based on what we did.

So does that mean that this quarter's performance is much more representative of how you are planning to run the cigarette business going forward than the first quarter's performance was?

No, not necessarily.

Okay.

Another question, on Middleton, you said that because of inventory or promotional shipments, the growth was slower than it had been for year to date.

How much did the economy and the overall market conditions play into the slow down of the growth on top of the promotional shipments?

Well, not much.

I think you have to look at the second and third quarters together, because there was some inventory impacts in that business.

Business has a bit of a different kind of inventory management approach, at the wholesale level, which over time we'll seek to manage more like we manage cigarette inventories in our business.

But I would look at the second and third quarter together if I was trying to get a handle on what was going on overall the shipments, because anything else is really an artificial movement that was driven by inventory changes between the quarters.

And then last question, can you give us an idea of what the financing rate would be for the UST acquisition to make the deal acreative in '09?

I don't know off the top of my head, Dave.

At this point, it's the financing plus any accelerated synergies that we get from the UST transaction over and above the 250 that we previously talked about.

At this point in time, it's tough to give you a number.

All right.

Thanks a lot.

Next question comes from Thomas Russo with Gardner Russo.

Hi, Mike.

Hi, Tom.

As I look at the news this morning, I look at the news headlines and they say Altria discount brand gain US smokers.

Altria sees shift to roll your own small cigarettes.

Altria sees smokers may have moved into cheaper products.

Those are the headlines that come away from this morning's meeting.

Again, I thought I heard Dave say that even though you crept up slightly in the third quarter, you are still below fourth quarter price value volumes and Mike said that the deep discounts grew with the cost of the discounts category.

So if the impressions that the headlines leave with investors from this call is you are about to see a break away in the price value and deep discount, how would you counter that impression?

I don't think we've seen that.

I think we often see some movement within the discount segment between the deep discount portion of it and the other really low price types of items in the segment, but in the end, we don't play there.

So our point of view is that what we really need to pay attention to is the overall discount segment, whether that segment is moving in a direction that we think threatens our premium business.

We're not seeing that at all.

The headlines notwithstanding?

What headlines are you talking about?

There's just news feeds coming out from today's call, the media runs simultaneous to the call and those are headlines.

That's obviously the headlines coming from somebody who doesn't really understand the business.

But no, I wouldn't suggest that's an appropriate headline.

Okay.

Then two other quick questions.

As to the Cabarrus charges, are those your portion of total charges or do you not have some agreement for cost sharings?

On the winddown from Cabarrus?

Those are our charges.

The production that we make for PMI we get a, the manufacturing costs plus a markup, but as far as the closing of the costs of Cabarrus, that's what, in June of last year, we provided guidance for and charges last year for that.

The ongoing charges that we are seeing this year is basically the reduction in overhead absorption that would have gone to PMI so we are fully capturing that this year

That's your absorption.

Your burden, not shared?

That's right.

And then lastly, on the Middleton, can you describe how many of your outlets Middleton is now available at, and what sort of facing they enjoy, what kind of market penetration and distribution, and pace of getting them to full penetration, if it's intended.

Well, it varies quite a bit, Tom, by item.

But what I can tell you is that we have made steady progress each month since we've turned it over to the PM USA sales organization and we've focused on some specific SKUs so those SKUs are the ones that are showing increased penetration.

It varies by SKU though.

So it's moving in the direction we expected it to move in.

We actually have more plans relative to distribution and presence on those products that we will unfold as we go into 2009.

But we're making steady progress on that and it varies by SKU

Thank you.

Next question comes from Chris Burns with Bloomberg News

Thanks for this call.

I wanted to ask, given the interest in the longer term, how many quarters has it been since PM USA reported a decline in total market share, granted today's decline is a small point, but it looks like it's been at least since 2005 and 2004.

Thanks.

How many quarters?

Let me make sure I understand your question.

It's since we've shown, since PM USA shown an overall decline on a year- over- year basis?

Yes, it was down what - - On a quarterly basis.

Just, you know, how long has it been since overall market share has fallen?

You mean in any space in time?

Yeah, you know.

It was down in the third quarter for the first time in how many quarters was my question.

And is that important?

Is that symbolic of something?

You know, I can't answer your question on a quarterly basis.

For the year to date, PM USA's share is up 0.3 share points so I just don't know on a quarter by quarter basis, I mean, we look at shares with a lot of frequency and they go up and down so it's really more important for us to look at shares on a longer term trim line, but even when we go and look at quarters, we don't expect necessarily that we're going to grow sequentially quarter to quarter all the time because we spend differently in quarters, so it's, it would be kind of unusual for that to occur given the way we operate the business so I would say once again, I don't see anything extraordinary about that.

Again, it was, performance from a share point of view was about what we expected it to be.

It was about flat for the total company, and Marlboro was up 1/2 a share point which is quite good.

So I don't see anything there to be concerned about

And finally, is it fair to say that the Company plans to accelerate cost reductions, and plan to wrap those in to the savings you plan with the UST takeover?

It's not fair to say they are wrapped into the UST takeover, what I said was we would use the UST integration as an opportunity to look at the whole of, particularly our services operations to make that more efficient and that would generate some additional cost savings beyond simply those related to the UST side of the integration.

That's what I meant to say, and yes, we would expect to make that one effort, and we expect there will be some additional savings that come out of that beyond the savings we've already announced.

And this is a reflection of your preparation for what you say may be a difficult '09, right?

Well, I think that the economic circumstance in '09 that we'll all operate in is likely to be difficult.

It looks that way as we're watching what we see on TV and read in the newspaper.

That's what it looks like so I think that we want to try to be as prepared as we can to deal with that kind of a circumstance

And lastly, your year earlier average price for Marlboro in convenience stores bouncing off the $4.40 a pack in the third quarter.

Hang on a minute.

I don't have that.

We can call you back and give you that if you want.

Okay?

At this time, I would like to turn the floor back over to Mr.

Cliff Fleet for closing comments.

Thank you for joining us today.

If you have follow up questions, please call us at Altria Investor Relations.

This does conclude today's Altria Group earnings conference call.

You may now disconnect.