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RICHMOND, Va. -- Altria Group Inc., the parent company of tobacco companies Philip Morris USA (PM USA), U.S. Smokeless Tobacco Co. (UST) and John Middleton, reported improved performance in the fourth quarter 2009 over the comparable quarter thanks to higher operating companies income from cigarettes, cigars and financial services, as well as operating income contribution from the UST acquisition, lower corporate asset impairment and exit costs, and higher earnings from Altria's investment in beer maker SABMiller plc.
However, fourth quarter results were partially offset by higher interest expense, income taxes and general corporate expenses vs. the prior-year period
"Altria performed very well in last year's challenging environment as it delivered strong adjusted earnings per share growth, which met our increased earnings guidance," Michael E. Szymanczyk, chairman and CEO of Altria, said in a statement. "This result was driven by the solid performance of the four premium brands of Altria's tobacco operating companies. Marlboro displayed resiliency in an intensely competitive promotional environment, and we are also pleased with the strong retail share and volume growth of Copenhagen in the fourth quarter of 2009, behind the successful launch of Copenhagen Long Cut Wintergreen."
While its cigarettes segment's results for the fourth quarter and full year 2009 were impacted by the April 1, 2009, federal excise tax (FET) increase on tobacco products, net revenues for the quarter and full year increased 18.9 percent and 11.6 percent, respectively, over the prior-year periods, due to higher pricing related to the FET increase.
In the fourth quarter of 2009, reported operating company income for the cigarettes segment increased 2.9 percent vs. the prior-year period to $1.2 billion, due to higher list prices and cost savings, which were partially offset by lower volume.
For the full year 2009, reported operating income for the cigarettes segment increased 3.9 percent to $5.1 billion, due primarily to higher list prices and cost savings, and again partially offset by lower volume along with higher pre-tax charges related to the previously announced closure of its Cabarrus manufacturing facility.
However, PM USA's domestic cigarette shipment volume for the 2009 fourth quarter and full year were negatively impacted by the FET increase, a decline in trade inventories, and changes to PM USA's pricing and promotional strategies, the company stated. In the fourth quarter, PM USA's domestic cigarette shipment volume fell 11.4 percent compared to the prior year period, and down 12 percent when adjusted for changes in trade inventories.
For the full year, PM USA's domestic cigarette shipment volume was 12.2 percent lower than the prior-year, but was estimated to be down approximately 10.5 percent when adjusted for changes in trade inventories and calendar differences, according to the company.
Retail share of PM USA's Marlboro brand for the fourth quarter and the full year declined 0.4 share points and 0.1 share point, respectively, compared to the comparable periods, due to higher levels of competitive promotional spending.
In the fourth quarter 2009, net revenues for the smokeless products segment were $343 million, and net of excise taxes, revenues totaled $317 million. For the full year, net revenues reached $1.4 billion, with revenues net of excise taxes being $1.3 billion.
Operating company income for the smokeless products segment in both the 2009 fourth quarter and full year were negatively impacted by costs related primarily to the acquisition of UST, including employee separation costs, asset impairments, integration costs and inventory adjustments. Other costs negatively impacting the income were associated with PM USA's smokeless tobacco products, and value-enhancing activities of USSTC's moist smokeless tobacco brands.
Adjusted operating income was $137 million in the fourth quarter 2009 and $632 million for the full year of 2009.
Domestic shipment volume of USSTC and PM USA's combined smokeless products in the fourth quarter was up 3.6 percent compared to the year-ago quarter. For the full year, domestic shipment volume for these products declined 2.4 percent compared to the full year 2008, due to changes in trade inventories and other factors. When adjusted for these factors, shipment volume for the three- and twelve-month periods was estimated to be up approximately 2 percent and 1 percent, respectively.
Copenhagen and Skoal's combined fourth-quarter volume increased 7.8 percent during the quarter, thanks to its new Copenhagen Long Cut Wintergreen product, the company stated.
Combined retail share of USSTC and PM USA's smokeless products increased 0.9 share points in the fourth quarter 2009 vs. the third quarter 2009, while Copenhagen's retail share grew 1.5 share points during the fourth quarter over the previous quarter. Skoal's retail share, though, declined 0.2 share points compared to the previous quarter.
In addition, Altria reported its UST integration is substantially complete and within budget. The company incurred pre-tax charges of $438 million in acquisition-related charges as well as restructuring and integration costs in 2009, $75 million of which were pre-tax charges incurred in the fourth quarter of 2009.
In 2010, Altria expects to incur additional integration and restructuring charges of approximately $50 million.
Altria's cigars segment was also impacted by the FET increase in the fourth quarter and full year 2009. Net revenues in the fourth quarter increased 38.1 percent to $134 million compared to the year ago quarter, reflecting higher pricing related to the FET increase. Revenues net of excise taxes for cigars increased 6.2 percent to $86 million, also due to higher pricing.
For the full year 2009, net revenues increased 34.4 percent to $520 million, reflecting higher pricing and excise taxes, while revenues net of excise taxes increased 9.8 percent to $358 million, again due to higher pricing.
During the fourth quarter 2009, operating income increased 2.8 percent vs. the prior-year period, to $37 million, and attributed to higher pricing and lower integration costs, which were partially offset by higher costs for trade programs and new products. Adjusted operating income -- which excludes integration costs -- decreased 7.1 percent in the fourth quarter 2009 to $39 million.
For the full year, operating income increased 7.3 percent to $176 million compared to the prior-year period, also due to higher pricing and lower integration costs, and were partially offset by higher costs for new trade programs and products. Excluding integration costs, 2009 adjusted operating income increased 1.6 percent to $185 million.
Fourth quarter volume for Middleton's cigars decreased 2.7 percent compared to the year-ago period to 303 million units, due primarily to trade inventory reductions. For the full year, Middleton's cigar shipment volume declined 3.6 percent over 2008, also due to declines in trade inventories.
These trade inventories declines were due partially to the movement to a more efficient Altria Sales & Distribution system, which reduced wholesale delivery lead times, the company stated. And after adjusting for changes in trade inventories, Middleton's shipment volume was estimated to be up slightly for the full year.
Retail share of Middleton products increased in the fourth quarter and full year 2009, thanks to its leading brand, Black & Mild. In the fourth quarter, retail share was up 1.1 share points versus the prior-year period, to a 31.1 percent share of the machine-made large cigars segment.
Black & Mild's fourth-quarter retail share increased 1.2 share points over the prior-year period to 30.6 percent, thanks to the introduction of Black & Mild Wood Tip and Black & Mild Wood Tip Wine.
For the full year, Black & Mild's retail share increased 1.3 share points vs. the prior-year period.
Altria and its companies achieved $157 million in cost savings in the fourth quarter 2009, and $398 million for the full year. By 2011, Altria expects to achieve approximately $462 million in additional cost savings for total anticipated cost reductions of $1.5 billion compared to 2006, the company stated.
PM USA's Manufacturing Optimization Program, which included the closure of its Cabarrus cigarette manufacturing facility in July 2009, is expected to deliver ongoing cost savings of $188 million by 2011, according to the company, although it incurred pre-tax charges of $74 million in the fourth quarter 2009 and total pre-tax charges of $254 million for the full year due to exit and implementation costs. In 2010, Altria expects to incur pre-tax charges of approximately $100 million related to this initiative.
2010 Full-Year Guidance
Noting the business environment in 2010 is likely to remain challenging, Altria forecasts its 2010 full-year guidance for reported diluted earnings per share (EPS) will be in the range of $1.78 to $1.82, while its 2010 full-year guidance for adjusted diluted EPS will increase to a range of $1.85 to $1.89, a growth rate of 6 percent to 8 percent compared to 2009.
The company also outlined several challenges it expects to face in the coming year, including the continuing consumers' economic pressure and high unemployment. In addition, Altria expects continuing state budget issues could lead to excise tax increase proposals in many states in 2010.
And as PM USA saw profitable federal excise tax (FET) related pricing strategies last year ahead of the April 2009 increase, the company expects the first and second quarters of 2010 to be more challenging for income growth comparison purposes.
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