奧馳亞 (MO) 2008 Q4 法說會逐字稿

Good day and welcome to the Altria Group fourth quarter and full year 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) Media representatives on the call will be able to ask questions following the conclusion of questions from the investment community.

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.

Good morning and thank you for joining our call.

This morning we will only be discussing Altria's 2008 full year and fourth-quarter business results.

We will not be discussing the status of litigation.

Since the acquisition of UST did not close until January 6, 2009, we will only briefly highlight UST's 2008 business results.

We plan to file a Form 8-K with UST's 2008 financial results tomorrow.

Our remarks contain forward-looking statements and projections of future results and I direct you toward 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.

As a result of the spin-off of Philip Morris International earlier in 2008, our reported results reflect PMI as a discontinued operation for the full year and fourth quarter of 2007.

Revenues and Operating Companies Income for PMI are therefore excluded from Altria's continuing results.

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

Altria reports its financial results in accordance with generally accepted accounting principles.

Today's call may contain various operating results on both a reported basis and on an adjusted basis, which excludes items that affect the comparability of recorded results.

Reconciliations are also included in the earnings press release.

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

Thanks, Cliff, and good morning to everyone.

It's a bright sunny day here in Richmond, Virginia; appropriate, I think, for a discussion on our 2008 business results.

2008, for us, was a significant year of change, as we repositioned Altria for future success.

For the full year of 2008, I think we delivered strong adjusted earnings per share growth from our continuing operations, of 10% to $1.65 on an adjusted base of $1.50 in 2007, and that was driven by mid-single digit operating companies income growth and importantly, lower expenses.

These financial results were in-line with our guidance that we provided throughout 2008.

In addition to these results, in August 2008, we increased our dividend 10.3% to an annualized rate of $1.28 per share.

In March, Altria successfully completed both the spin-off of Philip Morris International and the significant corporate restructuring, which included relocating our headquarters to Richmond, Virginia.

This enabled Altria to significantly reduce corporate expenses.

In 2008, Altria successfully integrated John Middleton Company, a leading manufacturer in the growing machine-made large cigar business.

Middleton benefited from PM USA's sales expertise and infrastructure during the year, which helped drive growth of its leading brand and the whole company during the year.

In September, Altria announced that it had agreed to acquire UST and its leading premium brands, Copenhagen and Skoal, to gain immediate national scale in the highly profitable and growing moist smokeless tobacco category.

In early January 2009, we successfully completed the UST acquisition, which transformed Altria into the premier tobacco company in the United States.

Altria's tobacco operating companies now have the leading brands of cigarettes, smokeless tobacco and machine-made large cigars.

As part of the deal, we also acquired Ste.

Michelle Wine Estates, a terrific leading premium wine producer in the United States.

At the time we announced the UST acquisition we indicated that the transaction would create $250 million in cost savings.

We now anticipate an additional $50 million in new UST integration cost savings, which brings the total projected integration cost savings to $300 million by 2011.

We are moving very quickly in integrating UST into the Altria family of companies, and we expect to absorb all costs related to the integration in 2009.

We believe this will enable Altria to fully realize the strategic benefits of the acquisition in 2010 and beyond.

Altria used its strong balance sheet to access debt markets twice in the fourth quarter of 2008.

We issued approximately $6.8 billion in long-term notes with an average weighted coupon rate of 9.2%.

This capital and the $4.3 billion we borrowed under Altria's 364-Day Bridge Loan Agreement funded the UST transaction.

Altria intends to refinance the Bridge Loan borrowings with long-term debt during 2009.

The UST acquisition may or may not be accretive to 2009 earnings, depending on several factors;

First, the timing and the realization of the cost-savings program we put in place;

Second, the responsiveness of our smokeless brands to planned investment spending;

Third, growth of the moist smokeless tobacco category, and finally;

Interest rates obtained when we refinance the $4.3 billion Bridge Loan borrowings with long-term debt.

While it's a little bit difficult to predict accretion for 2009, we fully expect the UST acquisition will be very solidly accretive to Altria's 2010 earnings per share.

Altria and its Operating Companies continue to successfully focus on cost management.

In March 2008, Altria announced that it planned to remove approximately $1 billion in cost by 2011.

Altria now expects to deliver $300 million in cost savings as a result of the UST integration and another $200 million from a restructuring program which began in the fourth quarter of 2008, which brings the total projected cost reduction program to $1.5 billion.

As we enter 2009, Altria and its businesses face a challenging environment.

The economy remains in recession with high unemployment and low levels of consumer confidence.

Additionally, the current economic weakness increases the likelihood of the higher tobacco excise taxes.

With this as a backdrop, our guidance is prudent and, I think, appropriately cautious of what we think is likely to be a challenging year for almost all companies.

Altria expects its 2009 adjusted EPS from continuing operations will grow to a range of $1.70 to $1.75.

This represents a 3% to 6% growth rate from an adjusted base of $1.65 per share in 2008.

Our 2009 guidance reflects the following assumptions;

First, increased tobacco excise taxes;

Second, increased investment spending to support the growth of our smokeless brands;

Third, delivering savings in line with our cost management programs.

Fourth, increased pension expenses, and finally;

No share repurchases in 2009.

Altria's suspending its 2008 to 2010 $4 billion share repurchase program, $1.2 billion of which was completed in 2008.

While we recognize the importance of share buybacks to investors, we think it is in our shareholders' best interest to suspend buybacks until we have completed all the financing activities related to the UST transaction, and evaluated the effect of economic conditions on other elements of our business.

We expect to evaluate our share repurchase plan again in the first quarter of 2010.

I believe that 2009 will be a challenging year for most companies, but our tobacco businesses are uniquely positioned for success.

The economic environment and potentially higher increases in tobacco excise tax rates present challenges, but Altria began preparing for these issues last year.

We believe that careful management of the value equation on Marlboro, Copenhagen, Skoal and Black & Mild, balanced with appropriate cost reductions, position the Company for growth in 2009 and beyond.

Looking ahead, our tobacco businesses are well positioned to continue delivering superior shareholder return out into the future.

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

Thanks, Mike.

Good morning, everyone.

I'll start with PM USA, which delivered solid business results, growing both its income and retail market share for full year 2008.

PM USA's 2008 full year revenues net of excise taxes increased 2.6%.

Excluding the $298 million in revenues from contract volume manufactured for PMI, PM USA's revenues net of excise taxes increased 0.6% versus the prior-year period.

PM USA's reported OCI increased 7.9% versus 2007 due to lower wholesale promotion allowance rates and lower SG&A spending, as well as lower charges for the closure of its various manufacturing facility, partially offset by lower volume, higher resolution expenses, costs related to the reduction of PMI contract volume, higher leaf costs, and higher promotional expenditures.

On an adjusted basis, PM USA grew its OCI by 2.5% to $5 billion and expanded its operating margins by 0.6% to 33.3% versus 2007.

PM USA's cost reduction program delivered approximately $104 million in savings in 2008, on top of the $319 million delivered in 2007.

Throughout 2008, PM USA dealt with the effects of the removal of PMI contracted volume.

This volume removal negatively impacted the cost by about $15 million in the fourth quarter and approximately $100 million for the full year 2008.

This contract terminated last month and PM USA expects minimal cost impact in 2009.

PM USA's 2008 cigarette shipment volume of 169.4 billion units was 3.2% lower in the prior-year period, but was estimated to be down approximately 4% when adjusted for changes in trade inventories and calendar differences.

For the full year 2008, PM USA's retail cigarette share grew 0.1 of a share point to 50.7% driven by Marlboro's strong share gains.

In 2008, Marlboro achieved record retail share as the brand gained 0.6 of a share point versus 2007 to 41.6%.

Additionally, we are pleased with Marlboro's balance share growth from both non-menthol and menthol products.

Marlboro's strong 2008 retail share gains were mostly offset by share losses on Virginia Slims, Parliament, and Basic.

PM USA's strategy is to maximize the long-term profitability of those brands through focused regional investment spending.

For the full year 2008, the discount segment's retail share was essentially unchanged at 25.4% despite challenging economic conditions.

The deep discount segment grew 0.2 of a share point in 2008 as major manufacturers continued decreasing their spending on branded discount cigarettes.

Philip Morris USA had similarly strong results in the fourth quarter of 2008.

PM USA's fourth-quarter revenues net of excise taxes, increased 1.8%.

Excluding the $91 million in revenues from contract volume manufactured for PMI, PM USA's revenues, net of excise taxes, decreased 0.7% versus the prior-year period.

PM USA's reported OCI increased 3.5% versus the fourth quarter of 2007 due to lower wholesale promotional allowance rates and lower SG&A spending, partially off-set by lower volume, higher promotional expenditures and increased restructuring charges.

On an adjusted basis, PM USA grew its Operating Companies Income by 4.8% to $1.2 billion.

Domestic cigarette shipment volume of 40.8 billion units was 2.1% lower in the prior-year period, but was estimated to be down approximately 3.5% when adjusted for changes in trade inventories.

Marlboro continued to grow its share in the fourth quarter and gained 0.4 a share point versus a prior-year period.

PM USA closely monitors Marlboro's price gap versus the lowest effective-priced cigarettes.

In the fourth quarter, this price gap was approximately 41%.

PM USA's fourth quarter retail cigarette share declined 0.3 of a share point versus the prior-year period, primarily due to share losses on Virginia Slims, Parliament and Basic.

Overall, we are very pleased with PM USA's 2008 results.

The company had solid operating companies income growth and generated over $5 billion in adjusted OCI, it's cost reduction efforts are on track, and Marlboro had another year of strong retail share growth.

Now let's discuss John Middleton, a leading manufacture of machine-made large cigars and pipe tobacco.

John Middleton was successfully integrated into the Altria family of companies and delivered strong income, volume and retail share results in 2008.

For the full year 2008, John Middleton reported $164 million in OCI, which includes $18 million in integration charges.

The company grew its total cigar shipment volume by 6.2% to 1.3 billion units.

Black & Mild increased its retail share of the growing machine-made large cigar segment by 2.8 share points to 28.3% as it benefited from PM USA's sales and distribution infrastructure and expertise.

In the fourth quarter, Middleton reported $36 million in OCI, which included a $6 million charge for integration cost.

Cigar shipment volume increased 3.4% versus the prior-year period to 311 million units.

Middleton's retail share increased 2.9 share points to 30.5% and Black & Mild's retail share increased 3.1 share points to 29.6%.

Although we did not acquire UST until 2009, let me briefly comment on UST's 2008 business results.

UST's earnings were in line with guidance previously provided in UST's third quarter of 2008 earnings press release.

Business performance and marketplace trends were also in line with earlier reported periods.

We intend to file a Form 8-K with UST's 2008 financial results tomorrow, and we will have more to say about our plans and strategies for UST's businesses at next month's CAGNY Investor Conference.

Let me conclude with the discussion of financial service business results.

Philip Morris Capital Corporation reported OCI of $71 million versus $380 million in 2007.

In 2007, PMCC benefited from cash recoveries of $214 million, and in 2008 PMCC increased its allowance for losses by $100 million due to credit rating downgrades of certain lessees and financial market conditions.

PMCC's allowance for losses now totals $304 million, which Management believes is prudent based on the underlying credit quality and collateral value of its existing portfolio.

In the fourth quarter, PMCC reported a $26 million operating companies loss, primarily due to a $50 million increase in the allowance for losses.

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

Let me close by mentioning our planned future reporting segments.

Beginning with the first quarter of 2009, Altria intends to report against the following segments, Cigarettes, Smokeless Tobacco, Cigars, Wine, and Financial Services.

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

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

In the fourth quarter, Marlboro's net pack price in convenience stores was approximately $4.39, and the lowest effective-price cigarette was $3.12 per pack;

The average weighted cigarette state excise tax at year-end was approximately $1.12 per pack, and the full year 2008 weighted average state excise tax was $1.09 per pack.

In 2008, seven states and the District of Columbia increased their cigarette excise taxes with an average increase of $0.74 per pack;

Our full year 2008 CapEx was $241 million;

Our full year 2008 of ongoing depreciation and amortization was $215 million;

Our fourth quarter MSA and quote of buyout accruals were approximately $1.3 billion or $0.63 per pack.

Of the $0.63, MSA represents $0.58 per pack, and the quote of buy-out represents about $0.05 per pack;

And finally, our full year 2008 tax rate was 35.5%.

We anticipate that Altria's 2009 full year effective tax rate on operations will be approximately 37.1%.

Operator, do we have any questions?

Thank you.

(Operator Instructions) We will be taking questions from the investment community first followed by questions from media representatives.

Our first question comes from the line of Chris Growe with Stifel Nicolaus.

Please go ahead.

Hi, Good morning.

Good morning.

Good morning, I'd like to ask you a couple of questions if I could.

The first one's just -- in the fourth quarter, as you saw your market share decline a little bit, obviously Marlboro had a good performance.

You know you've talked a little about, for years, kind of balancing market share and profitability for the business.

Was there any change in that thinking as your market share moved down a little bit in the fourth quarter?

Well, what we said all along is that our objective is to maximize earnings from our tobacco operations while we achieve modest share growth.

When we look at share, we really look at it on an annual basis, and we put programs into place that sometimes span quarters.

They're different between quarters.

There are fundamental differences between the quarters, and comparisons between one year and another, depending on what we did in the prior-year versus what we decide to do in the current year.

So I wouldn't get too focused on one quarter's share.

I would look at how the share progresses over the course of a year.

So, when I look at 2008, I think it's a pretty good example of maximizing income in the tobacco sector, and particularly in PM USA, while maintaining some modest share growth.

So our share, total share, actually, was up.

But more importantly to us, Marlboro's share was strong.

So that's the way we do it, nothing's changed about that.

We continue to view that as what is primary.

Okay.

And can you talk about -- I don't recall if you gave this, but fourth quarter '08, what you believe the industry did in the fourth quarter, and then I'd just be curious what your volume expectations are for 2009, in relation to the obvious pressures from the tax.

What kind of -- if you maybe could talk about the industry or your own performance, what you sort of expect on the volume side for '09.

Well, I don't think we're going to give out a volume number for 2009.

It's one of those things that's pretty hard to predict.

So I would hesitate to do that for you.

Even for the industry?

Even for the industry.

Okay.

And then just one last one, that is that you've started this incremental promotion for UST, this announcement would be a little more aggressive in the southeast.

I'd just be curious, how much of that is incremental?

How much is just kind of changing or shifting promotional dollars around?

Are you getting that much more aggressive in terms of that region for the UST business?

Well, what we've done is we've changed the approach in those markets, relative to how the UST brands and, in particular, Copenhagen and Skoal, are being promoted.

So that encompasses whatever was done before as a part of the fundamental change of the approach that we have on the marketplace.

Okay, thank you.

Our next question comes from the line of David Adelman with Morgan Stanley.

Please go ahead.

Good morning, Mike and Dave.

Morning.

A couple of things I wanted to ask.

First, can you give us a sense of the magnitude of state and Federal excise tax increases you've incorporated in your 2009 plan?

Well, I would hesitate to peg anything specific, but we're looking at the same world you are.

So we've got scenarios that really accommodate a different set of ranges.

But I think we've pretty much covered the landscape in the way we've looked at alternative scenarios.

So I would rather not get anymore specific than that, but I think we're kind of being realistic about how we've looked at in the range of scenarios that we've used to develop our earnings guidance.

Okay, and Mike are you encouraged to-date that there have not been State Excise Tax increases?

Or do you think it's sort of too soon to form a view about where that might ultimately come out?

I don't think that you want to predict the future relative to what legislators are going to do around the country, so I would hesitate to try to do that.

Okay.

And then, as it relates to UST, some of the syndicated data shows that Copenhagen and Skoal's market share might've been down an incremental 120 basis points or so in the fourth quarter, and I'm just curious, with that as a backdrop, of the promotional spending changes that you've already indicated to the trade, the regional ones that Chris brought up, if ultimately the promotional spending increase you need to put into the marketplace is x dollars to stabilize and grow share of those brands, how -- what component of getting to that magnitude is what you've already committed to, Mike?

Well, all we've done is we've taken an area of the country, and, keep in mind, that program doesn't start until February 1st, it's not actually reflected in stores at this point.

We have taken those geographies, and because we have a infrastructure to be able to deal with promotion and delivery of price on a more regionalized basis, we've moved pretty quickly in the area of softness that, or the greater softness, frankly, that we have seen in those businesses, and that's all that is.

So we're going to look at those businesses quite deeply and we as we get on into the year, we'll decide what, if anything else, we need to do.

But, I'll tell you, that we have accommodated within the guidance that we're providing to our investors, what we think is going to be necessary to have those businesses return to some modest share growth, and be able to fully realize the growth in the category for the company.

Okay, and then two last quick things, Mike, obviously '09 is a tough year, but from the '08 base over time, do you expect to be able to grow PM USA's operating income, not necessarily in '09, but that there will be a future point in time where profitability for that business unit will be higher than it was in '08?

Higher than it was in '08?

Yes, that long-term, from what's you've reported this year, you will be able to report the aggregate profitability.

Maybe not in '09, but over time.

Is that still the expectation?

You're talking about Altria higher than 10% EPS growth?

No, no, no, I'm sorry.

I meant PM USA's dollar amount of operating income.

Oh, PM USA's dollar amount of operating income?

Yes.

Well, I don't know if I can answer that that specifically, but I would say to you that as we look forward, we'd like to grow all of our tobacco companies.

We'd like them all to be growing profitability.

So, I think it is a bit hard for me to say year-to-year, which one is going to grow how much, because there are a lot of outside influences on those businesses, and there is some migration between those categories that takes place that will have some varying on how much one grows versus another.

So it makes it hard to predict.

But we run them all, certainly, with the expectation that we're going to grow earnings in all of them.

Okay, and let me ask you one last thing.

Can you quantify the year-on-year '09 versus '08 increase in the P&L pension expense, please?

Yes, David, that will be approximately $90 million increase, '09 versus '08.

And that will be allocated across the divisions where the employees or retirees happen to be?

Yes.

Okay.

Thank you.

Our next question comes from the line of Christine Farkas with Merrill Lynch.

Please go ahead.

Thank you very much.

Good morning.

A couple of questions, Mike and Dave, if I could.

First thing, on the price gaps between Marlboro and the lowest price , we've seen that narrow now for three or four consecutive quarters.

Would you say this trend is likely to continue, perhaps even falling south of 40%, or is this just variability really on quarter-over-quarter price

Well, right now I would say it's more variability, although excise tax increases do have some bearing on that.

So, you could see some more narrowing, I suppose.

But I wouldn't say it's much more than just kind of the ebb and flow that takes place in the marketplace, driven somewhat by promotion some time, and timing of price changes and those kinds of things.

Okay, thanks, and then on cigars, the fourth-quarter growth was about 3.5% or 3.4%, which slowed from your full year trend of over 6%.

Can you talk a little bit about what you're seeing in that market, if there is any element of trade-down or trade-away?

What might be impacting that slowdown?

I mentioned this in the, I think the third quarter earnings call.

The inventory practices in the large manufactured cigar business are a bit different than they are in the cigarette business, and so that's something we're kind of sorting our way through, and we've done that to some degree this year.

That will continue.

Next year we'd like to manage our inventories in the large manufactured cigar business the way we do in the cigarette business.

We like to have lower inventories at the wholesale level, and we like to be moving our product through so the consumer gets a good-quality product.

I would say to you that the skews in the shipments between quarters is really a reflection of that.

The overall shipment for the year rate that we have, which was up 6.2%, really is very consistent with the level of our share growth, relative to the overall growth of the category.

So it lines up actually pretty well, but I wouldn't get too caught up in the quarter-to-quarter changes.

They're really more a reflection of promotional practices and wholesale inventories.

Okay, great, that is helpful.

Now just a couple of housekeeping items.

The volumes adjusted for inventory in cigarettes, looks like they were down about 3.5% in the fourth quarter and down about 4% for the year.

Clearly it is hard to read into any improvement or deceleration in that minor gap, but would you say or could there be any load in your number ahead of expected Federal reasons and State excise taxes at the distributor level?

And would you expect any load if the Federal excise tax increase is passed?

How do you think the distributors would handle that?

Well, I would say, relative to the end of the year, if that's what you're talking about, the inventory situation is pretty flat versus the previous year.

So I don't think there is any any influence there.

Relative to what wholesalers do, as we're moving on through the year, it's kind of hard for me to predict.

And based on the technicality or how a Federal excise tax will be implemented, is there any opportunity for distributors to load up ahead of that, or does the floor tax really prevent that?

There is a floor tax, as you mentioned, so--

It would prevent that.

Say, I would say that that's neutral, so it shouldn't be.

Okay, final question for Dave.

The $200 million in increased in SG&A savings, did you mention how much of that is allocated to corporate within that bucket?

No, I did not.

Would you give us the split?

Or is that something that is not available?

Are you talking about the $200 million?

The incremental $200 million.

In 2000 and -- oh, the incremental $200 million?

I don't have the split with me at this moment.

Okay, we'll follow up.

Thanks so much.

Our next question comes from the line of Thilo Wrede with Credit Suisse.

Please go ahead.

Morning, gentlemen.

Quick question on your wine business and the SABMiller stake, given that you are suspending the share repurchase program this year, does that change your attitude towards the SABMiller stake, and are you maybe starting to look at options to turn that stake into cash for the Company?

Well, right now we're focused on integrating UST into the business, because we think that is the primary opportunity for solidifying our ability to give shareholders a really strong and stakable return.

The other assets continue to contribute, and the wine business is something that we've got to get familiar with.

Obviously, equity values, right now, are not the most positive that we've ever seen.

So, I think our thought process during 2009 is to continue to watch these businesses and understand them and then we'll make judgments based on what we learn and how we see the marketplace.

Okay, and then a follow-up question on the earlier question about cigarette market shares.

I understand that you manage the business on a quarterly basis.

Yet, at the end of the third quarter, I think you shifted your market share out a little bit to focus on Marlboro growth, not so much the overall portfolio growth.

Should we continue -- should we expect to continue to see Marlboro to perform very strong, the rest of the portfolio to maybe lose shares, so that overall the PM USA market share will be flat or maybe slightly down?

Well, I think that, in general, you're right about our focus.

It's on Marlboro.

That's the primary focus, and we are willing to accept some share loss on the other brands.

We'd like, from an overall point of view, to hold onto our market share, but the primary focus we have is Marlboro.

Okay.

And then a question about your long-term guidance.

I think, in March, you gave long-term EPS growth guidance of 8% to 10%.

For fiscal '09, you're only looking at 3% to 6%.

How much of that guidance is dependant on share repurchases, and how much is the fiscal '09 guidance lowered due to FET increases.

Or, in other words, should we expect that the long-term guidance eventually will have to come down?

Well, we haven't given long-term guidance.

Just to be clear, what we said is -- we said this back in March, that our long-term goal is to have EPS growth in the 8% to 10% range.

And I point out to shareholders that we haven't lost sight of that as a goal.

But a lot of things have changed since last March.

So, we're all dealing with that reality.

I think, when we look at our situation, really, kind of divide it into three segments, and, I would say, from a tobacco operating income perspective, x, let's take out pension for a minute, we feel, actually, by the end of 2009, we're going to be in a pretty good position.

We think these businesses that we've acquired, and the cost management approach that we're taking, in terms of structuring, to be able to be a strong player in the total tobacco sector, will put us in good shape, in terms of the operating income from those businesses.

What's, I think, less certain is the credit market situation, valuation of equities, the effect on our balance sheet, or the need to be more conservative, relative to balance sheet activities, and maintain liquidity, and what the impacts are going to be relative to pensions.

That's less clear.

And, also, I think, relative to our other businesses, and what they contribute, I think that the wine business, I think, looks to be in pretty good shape.

It is -- there is more uncertainty related to the earnings contribution in the beer sector and the earnings contribution relative to PMCC.

So we continue to be focused on that and haven't lost sight of it as a goal.

But I think that clarity will emerge as we get to the -- toward the end of the year and the beginning of 2010 on some of these issues that will allow us to better understand when we feel like we're going to be able to hit that.

And this year, as I said, we're being prudent.

We're being cautious.

We're trying to be realistic in the approach that we're taking to guidance.

Okay, that was helpful.

And then just one last question on the UST integration.

Can you give us a better idea how the integration charges will be spread throughout the year?

Well, we're not breaking it down that way, but we will fully complete the integration before the end of 2009.

And we're on a pretty aggressive time line in that regard.

So you'll be seeing that unfold.

Okay.

As we move on through the year.

Okay, thanks a lot.

Our next question comes from the line of Judy Hong with Goldman Sachs.

Please go ahead.

In terms --

Hi Judy.

Hi, 2009 outlook and incorporating the higher excise taxes and the weak consumer environment, I know you're not going to give any sort of volume guidance, but is there any reason to use a different price elasticity factor as we think about the potential volume impact from all of these changes?

And then, in relation to that, how resilient do you think the premium segment will be, either versus the deep discount segment, or even other tobacco products that we've seen the growth because of some of the tax advantages that those products have?

Well, I can't tell you that I have some other elasticity approach, the history to offer to you.

So I guess that would be the answer to your first question.

Generally, we've seen, in situations where at least the state level, where you have higher excise taxes, you see some narrowing of the premium to discount gap.

So, I don't know how to predict that at the Federal level, but that would be the history that we have, and so I think it is the best history that is available, in this case.

What I think is probably less clear is what takes place between sectors.

And so I think that is an area of some uncertainty.

Okay, and Mike, I know you sound like you feel pretty good about the Marlboro share performance, but on the year-over-year basis, the brand is still growing.

But since the first quarter of '08, the share has been relatively flat.

We've talked about the price gap versus the deep discounts actually narrowing during that time frame, and you focusing a bit more shift to Marlboro away from some of your other brands.

So I'm just curious, sort of, why you think the share performance has been relatively flattish versus the first quarter, and why you feel confident that there is not an issue in terms of perhaps trying -- a need to invest more behind the brand going forward.

Right, Right.

Well, I ought to take you back and replay the first quarter earnings call.

As you know, we had a very aggressive performance on Marlboro in the first quarter.

And we suggested to you at that time that that was opportunistic, but that our goal had not changed, that we wanted to grow Marlboro and we wanted to maintain modest overall share growth.

And there were some particular activities in the first quarter of 2008 that drove the share on Marlboro.

And I have said, since then, that perhaps a little too aggressively.

So, we look at it over the course of a year, and we do manage what we do and what we put into the marketplace throughout the year.

And I would say, "No." There's nothing about quarter-to-quarter changes here that we view as -- indicative of any weakness in the Marlboro franchise.

It's done just about exactly what we expected it to do, based on what we did.

Okay, and then Dave, the remaining $860 million of cost savings, including the UST synergies, can you just help us how we think about the timing of that savings flowing through, whether it is due more to '09, versus '10 and '11 going forward?

It will be over '09, '10 and '11.

I mean, we get a lot of questions on synergies and how you take cost out.

Typically, they don't happen on a trend-average basis.

You are pulling out pieces of infrastructure and then the costs follow that.

So, over the next three years, it's $860, and we're not giving guidance on how you spread it.

But during that -- by the end of that time period, it will all come out.

But it typically happens in steps.

Okay.

Thank you.

Our next question comes from the line of Erik Bloomquist with JPMorgan.

Please go ahead.

Hi.

Good morning, Mike and Dave.

Morning.

I was wondering if we could come back to the question of movement within the different tobacco categories.

And, as a starting point, if you could perhaps discuss what your outlook is for the smokeless category this year, and then, secondarily, what, if any, benefits that category might receive incrementally from the increase in the excise tax, and perhaps intra-category shifting of consumption.

Well, we expect that the category is going to continue to grow.

And we expect that it will -- its most recent historical rates are, I think, pretty good and pretty rational things to use as yardsticks for growth rate.

So that's how we've looked at it.

Whether or not you see some acceleration in that growth, which is always possible, remains to be seen.

And, so, we'll understand that as we get into it.

But we're expecting that the segment is going to continue to grow and going to grow at least at the rate that it has been growing here over recent times.

Okay.

And then -- again on the smokeless category, you know you are planning to drop the Marlboro Snus effort.

Do you think that that could -- or, sorry, the Marlboro MST.

Apologies.

Is there room for the Skoal Snus product, as well, as you go forward, and as that sub-segment of smokeless appears to be growing?

If I understand your question right, you're asking about Snus separate from MST.

Is that--

Yes, that's correct.

Okay.

Well, look.

What we've done, now that we've acquired UST, is, even though we continue to feel like smokeless is a place where Marlboro will play, we've shifted our focus from the MST test that we have had in Atlanta, really, because, right now, we're more focused on the new brands that we have acquired.

And anything that we do, in terms of Marlboro, will ultimately take advantage of what we've acquired with UST in the smokeless area, as least as it relates to MST.

Relative to Marlboro Snus, you're probably aware of the fact that we have recently really repositioned that product, reformulated it, re-packaged it.

It's really a whole new proposition that we've expanded the test market geography a bit out into the southwest, as well as replaced, or in the process of replacing, the existing product with the new product in the marketplace.

And we continue to have optimism about Marlboro Snus as a product for the future.

There is no plan right now relative to the UST Snus products.

We've got to get involved with that and understand it better before we make any decisions about it.

Okay, thank you.

And then, just with respect to the pressures on the cigarette category, and of course Virginia Slims, Basic, so on were under --had the worst volume performances this year.

Is there a risk that that accelerates as a result of down-trading, given that we're looking at significant increases of unemployment in the United States.

And how might you be addressing that?

Or is that something that is hard to discuss at the beginning of the year?

Well, what we've been doing on those brands is becoming more regionally focused on their areas of strength.

And we've pulled resources out of geographies where they were being supported, but they weren't really developed very well.

And so I think what we've been seeing in terms of share loss there is really more related to the shifting of our spending and withdrawing some spending from areas where we didn't think it was necessary or appropriate to continue to spend.

The second part of your question, I think remains to be seen.

It is one of the uncertainties that we all face, is what is going to happen in kind of an economic environment in lots of categories.

But I would say that the primary focus for us, again, is Marlboro.

We will continue to support those brands on a regional basis.

They do have, in those geographies, a pretty loyal consumer base.

And so we'll be mindful of what is happening relative to them.

But again, the primary focus we have is Marlboro.

Okay.

Super.

And my last question is just very simple to today.

Can you just explain why the excise tax rate is increasing?

Yes, and, in the 2008 period, we had some tax true-ups -- was state and Federal taxes in 2009, that just includes, right now, our effective rate with no true-ups.

Great, thanks very much.

At this time, we will now begin taking questions from media representatives.

(Operator Instructions) Our next question comes from the line of Ann Gurkin with Davenport.

Please go ahead.

Hello?

Hi, Ann.

Hi, Ann.

Can we start off with the topic of UST and just get an update of how the integration is proceeding.

Is there anything different versus what you were planning with this -- the acquisition of UST.

And then can you comment at all on the prospect for the wine business?

Okay, the integration's off to a very quick start.

We had a clean team working on this in advance of the close.

And then that allowed us to very quickly get together and come together on the actual plan and we're off to the races in terms of executing that plan.

So it is very, very quick, very rapid and will continue to be as we move on through the first half of the year.

So it is going very well.

And the execution of our initiative in the southeast is going very well.

So we're pretty pleased with progress there.

Yes, we're looking at our wine business.

While we're not giving out specific results, I think we -- based on what we see, we feel optimistic about it.

It is a well-positioned business.

It has good price points, actually, for the economic environment that we're in, and so we're optimistic about it.

Right, and then with respect to potential FDA regulation.

I'm not aware of a bill right now currently in the House or Senate.

But I was wondering if you could comment on the prospect for potential regulation this year, and there's any change in Altria's position regarding potential FDA regulation of tobacco?

No, there is not any change in our position.

And I can't predict on what is going to happen in Congress.

They've got a lot on their plate, so it is hard for me to know.

Right, great, thanks.

You're welcome.

Our next question comes from the line of Chris Burritts with Bloomberg News.

Please go ahead.

Hey, good morning folks.

Good morning.

Good morning.

I was asking, on the job-front picture, as you, I'm sure, know, there have been tens of thousands of jobs cut with many of the announcements in recent weeks.

And I'm wondering whether the additional cost saves that you envision in '09, what is the role of job reduction tied to the UST integration, as well as your own cuts inside of your Company?

Well, first of all, I think it is important to point out that, within the cigarette business, because the cigarette business has been declining for a number of years.

Geez, over the last 10 years, we have consistently reduced the number of people that we have associated with our cigarette business.

That has -- most of the time that's been done through attrition.

We have had circumstances where we've had programs to reduce people.

And, more recently, we announced the closure of our North Carolina plant, as well as other reductions related to some increasing volumes in the cigarette business and the spin of PMI and the loss of manufacturing product for them in this country.

So that's not new.

We have programs that are announced and are public, relative to reductions in the cigarette business.

Those are a part of the cost savings effort that people are aware of that we've gone ahead and announced, and they will continue.

So they are currently -- no.

Relative to UST, I think we've been clear that part of the justification for the UST transaction is that it's a real consolidation opportunity that creates significant synergies, because there are lot of overlaps between the companies, therefore there will be some significant reductions that are tied to that consolidation.

That was managed up front in the transaction.

And the programs available to displaced employees were announced prior to the closing of the transaction, and they are quite generous and quite fair.

and the people, I have to say, involved are performing very well.

And that will -- that process will continue as we go on through the year, as will the continued consolidation of resources here related to the cigarette business.

We also have some movement of the organization as it kind of comes together and we take resources that will continue from UST and integrate them into this business, and, at the same time, we also have some other resources that are associated with the cigarette business that are leaving.

We do add manufacturing facilities related to the smokeless business.

There's really no impact other than the normal productivity programs that would be in a manufacturing facility.

No real impact associated with the acquisition of UST on their manufacturing facilities.

And, in fact, those businesses are growing and expected to continue to grow.

And so we would expect to be looking for efficiencies in those factories, but we're not anticipating that we would see shrinkage, in terms of jobs.

So there's an ebb and flow related to, really, the differences in these businesses.

Your big cigarette business is declining, has been for a while, and the head count associated with that business continues to decline.

On the other side, we have two newer growth businesses, one's cigars, the other one is MST.

And then we have the consolidation of Altria's headquarters here into Richmond, and the development of a more strategic and more cost-effective services group to provide services, staff services to the broad array of businesses that we have.

I would say to you that most all of that activity is really related to fundamental changes in the businesses that we're in, more than it is related to the current economic circumstances in our country.

Thank you.

We have reached the allotted time for questions.

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

Cliff Fleet for closing comments.

Thank you all for joining us today.

I invite you to listen to our February 18th web cast of Altria's presentation at the Annual Consumers Analyst Group of New York, where Mike and Dave will discuss Altria's 2009 business strategies.

If you have any follow-up questions today after this call, please feel free to call us at Investor Relations of Altria.

Thank you.

This does conclude today's Altria Group fourth quarter and full year 2008 earnings conference call.

You may now disconnect.