Altria Group, Inc. (MO) Q4 2007 Earnings Report, Transcript and Summary

Good day, and welcome to Altria Group's Fourth Quarter 2007 And Year-End Earnings Conference Call. Today's call is scheduled to last about one hour including remarks by Altria management and the question-and-answer session. [Operator Instructions]. Media representatives on the call will also be able to ask questions following the conclusion from the investment community. I will now turn the call over to Mr. Nick Rolli, Vice President of Investor Relations and Financial Communications for Altria. Please go ahead, sir.

Good afternoon, and thank you for joining us. Earlier today, we issued a news release, which contains detailed information on Altria's 2007 full-year and fourth-quarter results and specifics about the spin-off of Philip Morris International. Additional information about the spin-off including answers to frequently asked questions is available in a special section of the Altria website at altria.com\pmispinoff. Today's call is limited to a discussion of our business results. Our remarks contain forward-looking statements and projections of future results, and I direct your attention to the Safe Harbor statement at the end of our news release for a review of the various factors that could cause actual results to differ materially from projections. And now, it's my pleasure to introduce Louis Camilleri, Altria's Chairman and CEO. Louis?

Thank you, Nick, and good afternoon everyone. I assume that you have by now familiarized yourselves with the contents of our rather copious release this morning. Accordingly, I intend to limit my opening remarks to the key strategic highlights of our 2007 performance, our outlook for this year, and of course the spin-off of PMI, which will take effect on March 28. As stated in this morning's announcement, we will be holding an investor presentation in New York on March 11. You will appreciate that I have no intention of stealing Mike Szymanczyk's or Andre Calantzopoulos' thunder. Thus I intend to defer certain questions that are likely to arise today, so that they can be addressed on March 11 in a detailed and comprehensive manner within the context of our growth strategies going forward. 2007 was by most measures an excellent year. Our consolidated financial results were strong and a number of strategic actions were taken, which will bear fruit in 2008 and beyond. Of particular note is that absent the unfavorable impact of trade inventory reductions that affected both Philip Morris USA and Philip Morris International, our fourth-quarter performance was marked by a sustained improvement in our business fundamentals. In a year that was marked by a step-up in MSA payments and an above-trend erosion in cigarette consumption, Philip Morris USA faired remarkably well. Its market share performance was strong led by Marlboro and the successful launch of Marlboro Smooth and Marlboro Virginia Blend. Philip Morris USA took several actions to further its adjacency strategy with the December acquisition of John Middleton and the successful test market introductions of Marlboro Smooth and Marlboro Moist Smokeless Tobacco. The latter introduction has [inaudible] much debating in ink in the recent past. While it is still early days, let me just say that we are very encouraged by the results to date, particularly in terms of the consumer response to the product and repurchase rates. Indeed, we remain steadfast in our view, the Marlboro is exceedingly well positioned to capture growth in this exciting category. On the cost front, the Philip Morris USA team is fast implementing the manufacturing reconfiguration announced last summer, and is on track both in terms of timing and savings delivery. In addition, Philip Morris USA delivered overhead savings of more than $300 million in 2007, which was the principal contributor to its unit margin gain of close to 6% versus 2006. While admittedly buoyed by currency, PMI generated income growth of 12.5% for the full year and 15.5% for the quarter. Absent currency and other items, its organic income growth rate was solid, with operating income up 6.8% for the year and up 7.3% for the quarter. Volume performance improved in the fourth quarter. Indeed, close to 70% of PMI's top 25-income markets registered improved trends in the fourth quarter. Of particular note is that PMI registered improving market share trends in numerous key markets as the quarter unfolded, most notably in Russia, Germany, Turkey, and France. Having said that, I will be the first to admit that our share performance in some markets, most notably Japan, cast a shadow on an otherwise very strong year. I am however confident that we have a number of exciting plans and products to enhance our market share fortunes in 2008 and beyond. These include Marlboro Filter Plus, Marlboro Intense, several Marlboro Menthol extensions, and a wide array of innovations supporting Parliament, Virginia Slims, Chesterfield, and Philip Morris. These four premium brands recorded combined volume of 115 billion units in 2007, which grew at a combined rate of 9.1%. For perspective, this total volume is more than Reynolds’ and approximately 3 times Lorillard’s annual volumes. As I look into the rearview mirror, I believe we accomplished most of what we have set out to do in 2007. And importantly, looking forward, we have set the stage for an exciting future. That brings me to the forthcoming spin-off with PMI and the 2008 outlook for both Altria and PMI. Our announcement this morning contains a number of significant details regarding the spin-off of PMI as well as the anticipated actions that still need to be taken prior to the distribution. The principal ones in chronological order are the tender offer and consent solicitation for Altria's notes outstanding that we will launch shortly, the New York Stock Exchange application, the finalization of the Form 10, and our presentation to the investment community on March 11. Our announcement also includes details regarding Altria's and PMI's anticipated dividend policies, each company's respective initial dividend rate, and two-year share repurchase programs. In total, we anticipate a combined cash outflow to shareholders of more than $33 billion over the next two years in the form of dividend and share repurchases. That represents more than 20% of our current market capitalization. As I indicated in August, our two-year share repurchase programs are based on what we view as an optimal and prudent balance between the anticipated financial needs of each company to generate growth and retain adequate financial flexibility, our firm resolve to secure solid investment grade ratings, and to reward shareholders in a sustained and generous manner. Altria and its shareholders have historically always had the benefit of an outstanding Board of Directors. I am especially pleased that this tradition will continue as Altria and PMI between them will retain substantially all of the current Board members and have attracted several immensely qualified new directors to their respective Boards. The senior leadership teams of both Altria and PMI have been identified and will be announced by March 11. I am confident that each company will be led by a team of talented individuals who have the skills, experience, and determination to take both companies to the next level. While Mike, Andre, and I will disclose our longer-term strategy and earnings ambitions for each company on March 11, I do wish to address our earnings outlook for 2008. This morning's release provides specific projections for each company. On a combined basis, they're projected to reach an underlying earnings per share level of between $4.74 to $4.84, reflecting growth of 8.2% to 10.5% versus Altria's 2007 underlying earnings per share of $4.38. While Altria excluding PMI is projecting solid operating performance for its domestic tobacco businesses, it will face some transitional and temporary headwinds that will affect it's 2008 earnings growth rate. These include an anticipated higher tax rate of close to 1 percentage point, a temporary absorption of higher manufacturing overheads as PM USA winds down its contract manufacturing for Philip Morris International and prepares for the Richmond facility's absorption of comparative volume, and further investments to support Philip Morris USA's entry in the smokeless categories. PMI is projecting a robust earnings performance driven by pricing, cost reductions, and continued currency favorability at prevailing rights. Volume, however, is anticipated to be essentially flat or slightly down, reflecting continued total cigarette consumption erosion in several markets. Nevertheless, we anticipate that mix will continue to sequentially improve. The prevailing economic uncertainty and its ramifications on consumer confidence, and disposable income are obviously a concern as we weigh the challenges and opportunities that we will confront in 2008. However, we believe that we are well positioned and certainly better than most to weather these uncertainties. Price gaps are within our established targets in most markets around the world, and the deep discount segment here in the United States is not exhibiting any untoward movement. Input costs remain relatively benign, and the pricing environment is on the whole stable. As I mentioned in August, I am of the firm belief that the actions announced this morning will enhance our growth rates through sharper focus, speed to market, and execution, and will greatly benefit our shareholders. That being said, let me assure you that we are all very much committed to and intend on delivering on this promise. Thank you, and I'll now be glad to field your questions. Question and Answer

Thank you. [Operator Instructions]. Our first question is coming from Judy Hong with Goldman Sachs. Please go ahead. Judy Hong - Goldman Sachs & Company, Inc.: Hi, Louis.

Hi, Judy. How are you? Judy Hong - Goldman Sachs & Company, Inc.: Good. How are you?

Well, thank you. Judy Hong - Goldman Sachs & Company, Inc.: I had a few questions. First, I will start with your outlook for share buyback and just kind of broadly speaking the capital structure issue. I'd imagine that even with today's buyback announcement, both entities still have ample flexibility to take on more leverage and still maintain an investment grade rating. So can you just help us understand some of the financial needs that you've talked about in thinking about the growth opportunities for each business? And to the extent if those opportunities don't materialize, should we expect share buyback to be higher than what you've announced today?

Well, the Board announced two separate two-year programs, Judy, and I am not willing to go beyond that. In terms of capital structure, I think it's very important and history has taught us that we should have flexibility and financial wherewithal to be able to respond to opportunities. As the years unfold, we will see what we do, and clearly that's something we will address in further detail on March 11. But those are our plans, and I think they make eminent sense from a business growth perspective and shareholder return perspective. Judy Hong - Goldman Sachs & Company, Inc.: Okay. And then in terms of share buyback, again, in terms of what's included in your guidance, can you clarify first whether both share buybacks are included in Altria and PMI's guidance, and how should we think about kind of 2008 in terms of the timing and the amount of the buyback? I know you've talked about the two-year program.

Yes. Judy Hong - Goldman Sachs & Company, Inc.: But just to 2008.

Fair question. I think our release mentioned when both Altria and PMI will be able to initiate their share repurchases. PMI will have to be later than Altria because as you know under the SEC Regulations, we can only stop buying back once we have a full week moving average of trading… actual trading. We anticipate like we've done historically that the share repurchases will be essentially constant over the two-year period, and that's what our earnings guidance provides you. Essentially, if I take the two combined, Judy, the benefit of share repurchases in '08 is slightly less than 1% in terms of growth, and clearly it will impact 2009's growth rate a lot more. Judy Hong - Goldman Sachs & Company, Inc.: Okay. And then, in terms of the cost savings opportunity, I know you've talked about the corporate expense coming down over the next couple of years. You also have the savings coming from the manufacturing moving out of PM USA to international, but beyond that and beyond sort of the $300 million of overhead savings that you've indicated for 2007, do you expect the cost structure for both entities to see more savings opportunities? I mean if you look at PM USA cost per unit, it looks like it's still higher than some of its peers, what the opportunities could be and perhaps think about when we could get further announcement on cost restructuring?

Well, clearly that will be a major topic of our March 11 presentation, Judy, for both companies, and we will be able to take you through our productivity and cost reduction initiatives and ambitions at that time. Judy Hong - Goldman Sachs & Company, Inc.: Okay. And then my final question, in thinking about PMI’s volume outlook, clearly this is an area where I think we had been hoping to see a better number. It looks like 2008 is going to be another year where you wouldn't see volume growth in this business. Can you just kind of talk about maybe longer term whether it is something realistic to think that you could see 1% to 2% kind of volume growth going forward, and in relations to that how we should think about balancing, getting... trying to get better volume growth as opposed to more pricing or mix improvement?

Well, our ambition certainly is that over time we can get to that 1% to 2%, Judy. As you all know and I think everybody is well aware of the issues we faced in the recent past, which was dislocation in some markets, major competitive entries in various low price segments and in several markets as well. That clearly has held our volume performance, organic volume performance, because when I add in acquisitions the volume has actually done pretty well. 2008... in 2007, for that matter, our market share performance was what I'd characterize as being mixed. In 2008, I would hope that we can improve that, and as the years unfold I think we can get back to greater market share growth across more markets, which will translate into volume growth. So that clearly is an ambition that we have and it is something that we will address on March 11. Judy Hong - Goldman Sachs & Company, Inc.: Okay. Thank you, Louis.

You're welcome.

Thank you. Your next question is coming from David Adelman with Morgan Stanley. Please go ahead. David Adelman - Morgan Stanley & Co. Inc.: Good afternoon, Louis.

Hi, David. How are you? David Adelman - Morgan Stanley & Co. Inc.: Good. Louis, a couple of things. First, let me revisit this issue on the buyback and the capital structure, and no one can dismiss the magnitude of cash you're going to return to shareholders over the next several years, but it looks to me like both businesses under these current plans won't even get to one times debt to EBITDA, and arguably it would be substantially less than that at the new Altria if you consider the SABMiller stake. I'm just wondering if you could... could you help us understand your thoughts about the capital structure long-term for both of these businesses that would allow them to maximize their value for shareholders?

Well, I'm glad you recognize, David, that cash outflow of $33 billion over two years is adequate in your mind. I think it's huge. In terms of going forward, I think your calculations need to be revised because debt-to-EBITDA would be slightly above 1 actually. So I'd check your numbers. My own sense is that as we have said in the past, this is... we are into this for the long term. I know some analysts out there had numbers of $30 billion or plus in terms of buybacks. And I think we need to retain financial flexibility because there are opportunities out there and we do see opportunities. And history has taught us that having financial flexibility is in the interest of the business and shareholders. I think we will address more in terms of capital structure on March 11, but at this point in time, David, we're very happy with the announcement. I think it’s generous and it leaves us adequate financial flexibility. I would also say that there's quite a lot of uncertainty in credit markets today, and that's not something that we should ignore. I mean read the newspapers every single day of each week. So--. David Adelman - Morgan Stanley & Co. Inc.: I try to avoid. Okay. Let me ask you, Louis, secondly about the performance expectations for organic OCI growth for both businesses. Over time, where do you think they should be relative to their respective peers? Do you think that they are middle of the pack? Do you think you can aspire particularly outside the United States to be in the top quartile? Do you think that's a realistic expectation? I realize they haven't been there recently and that there have been reasons for that, but what about going forward?

One of the reasons were doing this whole restructuring, David, and I'm very confident that both companies will be top-tier performers. David Adelman - Morgan Stanley & Co. Inc.: Okay. And then in Japan, Louis, what's really happened there? That used to be and has the potential to be such a gem. Marlboro has this fabulous demographic profile, you took back control of the business, that should have accelerated performance and yet the converse has occurred. So what's really happened? I think you've changed the management there. What is the... what precisely can be done to improve the performance? And how long do you think it's going to take to really inflect the trend line in what must be your second or third most profitable international market?

Fair question, David. Clearly, our performance in Japan more recently has not met our expectations. I think the Marlboro takeback, which you referred to clearly was a huge focus of our attention, and I don't think there is necessarily an appreciation by investors as to what that entails and the magnitude of the work that that entails to ensure that it would not be derailed. As you know, it added significantly to the profitability of that market. In so doing… and I think we were very successful there, in so doing we may have slowdown in terms of innovation. We are catching up, and I'm confident that under the new management team that you just mentioned… we put Fred [inaudible] who is Head of Japan now. He is probably one of our best marketing executives inside of Morris International. I'm confident over time through innovation we will be able to restore our share growth that we had historically. David Adelman - Morgan Stanley & Co. Inc.: Okay, and then last question, Louis. As it relates to the cost savings opportunity at PM USA, longer term I know Lorillard runs a very tight ship, but you are five times their size in volume. Do you think it is realistic to think that you can approach their level of total per unit costs or is that unrealistically aspirational?

I think Mike and Dave and [inaudible] will cover that in considerable detail at the investor presentation, and clearly I don't want to defer every question, but that one is a key one. I think one of the things you have to bear in mind, David, particularly when you compare Philip Morris USA to Lorillard is that PM USA has a national infrastructure in place. Lorillard, as you know, most of their business comes from the Northeast, and that really has a major effect on the cost base. Furthermore, PM USA is the industry leader, takes on costs that the others don't necessarily do. Those two are sort of rather important factors. Having said that, Mike clearly will describe his productivity initiatives going forward. David Adelman - Morgan Stanley & Co. Inc.: Okay. Thank you very much. I look forward to 11th. Good luck.

You are welcome. Thank you, David.

Thank you. Your next question is coming from Christine Farkas with Merrill Lynch. Please go ahead.

Thank you very much. Good afternoon, Louis.

Hi, Christine. How are you?

Good, thank you. I have two questions for you. Firstly, looking at Altria or PM USA side and studying your '07 profit growth, you’ve highlighted several challenging factors that units should meet or should see in 2008 and you’ve put forward a target for EPS growth in the 9% to 11% range and also we've the impact of the buyback. Can you help us just reconcile what else is baked into that expectation or that forecast for '08?

Well, as I said in my remarks, we believe that the domestic tobacco businesses, Philip Morris USA and John Middleton, will perform very strongly. And there are some sort of transitional issues, which I mentioned in my opening remarks. But we feel pretty good about the business, as I mentioned, in terms of the price segments. Share is doing well, our new products are performing extremely strongly, and generally in terms of consumption, I referred to this somewhat in my remarks, 2007 was sort of a higher erosion in the consumption trend than normal, and we saw slight improvement in the fourth quarter as our release points out. And our census that consumption in '08 should come down 2.5% to 3%, which is slightly more in line with the historical trends.

Okay, great. And just before I get to my second question, just so unclear then, you don't have additional productivity savings that haven't yet been discussed here with the Street baked in to the PM USA number for '08?

That is correct.

Okay, great. That is helpful. And then, just on your second point with consumption trends down or expected to be down 2.5% to 3%, that's in light of potential pickup in data excise taxes in '08 and ongoing smoking ban. In light of all that, you still see a moderate improvement in consumption declines in '08?

Yes.

Terrific. Thanks a lot.

Thank you.

Thank you. Your next question is coming from Filippe Goossens with Credit Suisse. Please go ahead.

Yes. Good afternoon, Louis. How are you?

Hi, Filippe. How are you?

Not too bad. Couple of housekeeping questions before I start with the real questions. March 28, anything magic about March 28 because it's not the last business day of the quarter?

It's a magic because it's a Friday.

Okay. No, because I would have thought that it would have been on the last business day, which is Monday of the month, but okay. Secondly, just coming back to Judy's and David's earlier question about the amount of monies being returned to shareholder over the next two years, the combination of the buybacks plus the dividends just happens to be 20% of your market cap that you laid out. Should I kind of read into that that the size of the buyback was to some degree driven by not trying to exceed that 20% in order not to run foul of the IRS rules for the tax free nature of the spin-off, or it just happens to be that these numbers kind of happened to line up?

No. I think those numbers are coincidental. The share repurchases are what we believe is the right share repurchase programs over the next two years for the two companies, Filippe.

Okay. And then, I know typically you never speak about litigation on these calls, but given the spin-off let me just try to get a quick update on two items, if you don't mind. First, when do you expect the Second Circuits to comeback on the Schwab, a question I'm sure that was fully taken into consideration when the Board affirmed the spin-off decision this morning? And secondly, the error count on the Engle filings, please?

Yes, Schwab, I'm not sure. I think they could well come sometime in the second quarter, it could be later. With regard to Engle, it's a moving number frankly. The latest number we have is about 1200 cases, representing some 7200 plaintiffs. The difference between the cases and the plaintiffs is that some plaintiffs’ lawyers are obviously trying to save the filing fee of $250 per plaintiff. So they are trying to save $1.5 million roughly. As you know, they have to be individual cases. It's a moving number because our sense is that total number already includes a number of duplicate plaintiffs. Furthermore, some of the dockets may be somewhat delayed in giving the information. So we're hoping that over the next few weeks there will be clarification on the actual number of cases in plaintiffs, but that's essentially where we are now today, Filippe.

Okay. Great. And then just… now to the real questions. I know you will address more of that and your colleagues will address some of those in March, but let me just take a stab at few of them, if I may. The first one relates to China. Obviously, a tremendous opportunity for Philip Morris International, yet it is about I think now the third year since you signed the initial Memorandum of Understanding. When may we see some initial rollouts there?

Yes, second year. I think we singed surely before Christmas December '05. We would hope that you will see movements this year and in the first half of this year. Things clearly have been slow, but there has been a lot of progress behind the scene, and we are confident that over time both the joint venture and the license agreement will progress significantly.

And should we look, Louis, first towards basically Chinese-made products being sold outside of China, or is it rather looking at the Philip Morris organization selling Philip Morris products within the Chinese market?

Well, it's a bit of both. It is predominantly the Chinese brands in various markets across the world as well as the Marlboro license agreement.

Okay. Then, the second question, Louis. A lot has been written recently about a number of products that you have in the pipeline, some of which are innovative products. Can you just kind of quickly compare how the European regulatory environment and particularly to who… framework agreement compares to the MSA and how would that positions you in terms of your ability to deliver on these innovative products?

I don't think the SEC, the way it stands, is prohibiting in any way innovations that we have going all those that are planned. Clearly, we take into account the regulatory environment and the future regulatory environment when we basically come up with those products. I am not sure weather you're referring to cigarettes or here in America the smokeless products that we're working out.

Well, actually I'm trying to refer to the… what’s know as the Heatbar?

Well, we continue to develop that product. It certainly has a lot of benefits. Its potential downside is that it is completely different ritual, and therefore that will take time, but it certainly has a number of benefits and we continue to improve the product. And as you know, we continue to test it in various market. Most notably, the last entry test was in Australia.

Okay. But in summary on this question, Louis, you do not see the whole framework agreement or the European current regulatory environment to be restrictive in terms of your ability to innovate, correct?

Not at all. It's… in fact, I would think that's, it would encourage that kind of products.

Okay. Then moving on to the US, Louis, obviously 2007 consumption trends weakened, whether it was a result of price increases or ongoing smoking restrictions. But looking more forced, two questions if I may, one, in your guidance for '08 EPS growth, have you baked in at all any potential increase in the federal excise tax or do you believe that's more going to be an '09 issue depending on who wins the White House? And secondly, perhaps more importantly, if you can just talk a bit more about the algorithm that you're using in the U.S. market, more specifically focus on market share versus profitably running the business?

Right. We don't think that's a... there is a great prospect for a federal excise tax increase in 2008. Whether it will become an issue in 2009 or not is still somewhat up in the air as you said. That is something in terms of the excise taxes generally, including state excise taxes that Mike and Dave will cover in terms of the environment going forward. In terms of the algorithm, I'm not going to give you precise formula, Filippe, but as I mentioned earlier, I think we see consumption improving versus the trend line we saw in 2007. We continue to see increased market share. Marlboro Smooth and Virginia Blend in particular are doing extremely well. And clearly, PM USA will continue to balance its income and share growth appropriately.

Okay. And then just two final questions. One, in terms of the decision parameters in terms of a potential national rollout of the smokeless products, can you give us little more color there, Louis? I know it is kind of tough perhaps to share that with you for competitive reasons, but any guidance would be very useful?

Well, I think Mike will address the strategy in smokeless, so I'm not going to give you precise timing and I'm not sure he will either, for obvious reasons. The fact of the matter is, if I first talk about the smooth product, we are very encouraged by the consumer response. In Dallas, as you know, we've just expanded to Indianapolis, and we are learning a lot from that test, but we are very, very encouraged by what we see. In terms of the Atlanta test, the share we are getting is great, and despite a pretty vigorous response from competitors, we feel that we're learning a lot from that test and that the product is absolutely superb and consumers continue to be very attracted by the product, its packaging, the taste characteristics of the product, and obviously its pricing. And we are confident that Marlboro can be successful, both with the smooth product and the moist smoking tobacco product in the smokeless category.

Okay. And then the final question, Louis. With regard to Germany, obviously, it has been a rough year because of the tax law changes there. What's your outlook for '08? Do you feel more comfortable that with new product innovation on your side you will be able to start seeing growth in that market again?

We certainly would hope so, Filippe. I think we have some pretty good plans. Marlboro's share clearly has stabilized more recently. L&M is doing fabulously well. It is probably one of the fastest growing brands in Germany today. The Tobacco Block product in the fine-cut segment appears to be growing very solidly and is clearly a huge innovation. I think it is captured close to 2% of the fine-cut segment since its launch sometime in September. So Germany is always a tough market, has been for a very long time, but I think the team we have in Germany, the plants we have, we should see some better performance in terms of share going forward.

Thank you Louis. Look forward to see you in March.

Thank you, Fillippe.

Thank you your next question is coming from Erik Bloomquist with J.P. Morgan. Please go ahead.

Hi. Good afternoon, Louis.

Hi, Erik. How are you?

Fine, thank you. Yourself?

Well, thank you.

Good. Firstly, I just wanted to follow up a little bit on the volume outlook for the PMI business in 2008. You were talking about volumes roughly flat. Could you give us some more details on the markets where you expect volumes to be difficult, and also then the offsetting markets where we should expect some good organic volume growth out of the PMI business?

At this stage, I am not sure I want to share all that with you, Erik. It’s early days. I think the main culprits remain the same, and the main markets that will do well remain the same. I think we will give you a much better detailed sense of that on March 11 and I would rather defer that question today if that's okay with you.

Sure, that's fine. Secondly then, in terms of the Chinese joint venture, is it fair then, given the news flow out of that, to assume that the negotiations are concluded and that now that all that is left is implementation of an agreed action, whether in China or outside China?

The negotiations were actually concluded a long time ago. The focus has been on the implementation and building up the mutual trust and the mutual plans that we all agree to, and that's a considerable amount of time. I think we’re there now. We are very committed and our partners, The China National Tobacco Company, are very committed to making this a big success. And clearly, it's taken time, but I think now everything is in place for it to be implemented and executed.

Okay, and in terms of that implementation is it correct to believe that this is some kind of reciprocal agreement, and as much is it for in order to sell the PMI product to Marlboro in China, you need to sell a certain amount of Chinese product outside?

No, I wouldn't say that it's a mathematical reciprocal agreement. I think it's really a strategic partnership between Philip Morris International and The China National Tobacco Company. If you think about it, Philip Morris International can offer the NTC its infrastructure and know-how in the rest of the world and China National Tobacco Company can offer PMI its infrastructure and know-how in China, and I think it's a strategic partnership that we hope we will be able to build over time.

Okay. And am I correct in assuming that to get more details in terms of volume expectations, particularly for PMI brands in China, that we’ll need to wait until March?

Well, I am not sure we will disclose at precise volume expectations, Erik, in terms of China. But what I can tell you is that as I said earlier we believe that Marlboro will be manufactured and sold in China within the first six months of this year.

Okay, great. One last question then in terms of the buyback. I would agree with your assessment, it's generous, it’s in line with our expectations.

Thank you, Erik.

I was just curious about what we should use when estimating the cost of the incremental debt used to fund the buyback, do you have any guidance for us on that?

I am not sure I can give you precise numbers on that. As you know, interest rates have come down, but spreads have increased. We will go to the markets. We have financing in place through the banks, bridge financing as well as credit facilities, but at this point I am not willing to provide you with the interest rates.

Okay, fine. Thank you.

Thank you, Erik.

Thank you. We would like to invite media representatives to ask questions at this time. [Operator Instructions]. Your next question is coming from Ann Gurkin with Davenport. Please go ahead.

Good afternoon, Ann.

Ann Gurkin, your line is alive.

Hello?

Hi, Ann.

Hi. Excuse me. I have a couple of questions, Louie.

Yes.

First, regarding your statement about the expanded test at the Marlboro Moist Smokeless Tobacco product in Atlanta, is it fair to assume that expanded test will also include some revision on maybe how you work with distributors to get the products on the shelves or how it's displayed or pricing or maybe the rack in which the product is sold? Is it fair to assume there are changes getting made there as well?

Well, Ann, that's why it's a test market. We are looking at various parts of the actual mix as it were of the product offering, and we are testing various ways of marketing that product to the consumer. But as I said earlier, I think the early indications are very solid and we will continue to test various aspects of the products and continue our consumer research.

Okay. Then we are hearing in Richmond at your manufacturing facility here that capacity is tight, given the move from comparison. I was just wondering if the timing is still on track to move the production off to Richmond, and with this tight capacity are other opportunities to maybe outsource some of the production or are there ways to get around that type of capacity to help manage your costs?

It's tight, but we are, as I said in my remarks, smack on time in terms of timing as well as in terms of delivery of the savings. We had said that we would move some 57 billion units offshore. As of the end of January, 30 billion will have already been moved out. So we feel very good that we are smack on our plan in terms of the transfer to PMI as well as the absorption from Cabarrus. But as I mentioned earlier, it will create some duplication in 2008 in terms of costs.

Great. And then, with regard to the FDA potential regulation of tobacco, do you think this is still an active issue? And do you think PM USA is changing their view on this issue when they become a standalone company?

No, I don't think PM USA will change its views on FDA. PM USA as well as Altria have always supported FDA. Whether FDA will see the light of day this year is a question mark, it's an election year and as the months unfold there’ll be less focus on FDA. It will clearly very much depend on the bills that and the contents of the bills themselves. PM USA clearly has a voice today to ensure that there are no adverse ramifications, and I think that is an important position to be in. So I wouldn't anticipate major changes there. So I think there you will see basically a continuation of the strategy.

Okay. And then one more thing, can you comment on whether each Board will review any potential changes to the dividend at... in the August time frame when Altria used to review the dividend policy? Do you think August will be the timing when this situation is reviewed?

I can't tell you that, Ann. The Board will decide that, but historically the parent was in August. So my guess is Altria will certainly be in August. And PMI, the Board hasn't really been formed yet, so that will be their call. So we will see when we get there.

Great. Thank you.

Thank you, Ann.

Thank you. Your next question is coming from Chris Burritt with Bloomberg News. Please go ahead.

Hi, good afternoon.

Good afternoon.

On the topic of snuff, a couple of analysts had raised a question, so I thought I’d ask. Why did not PM USA move quicker on smokeless as it saw the growth of the market and it saw the drop-off in cigarette consumption?

I think that's a legitimate question. The reason is very simple. We wanted to ensure that we had a fabulous product, both in fine-cut and long-cut form, in regular and in menthol. We have achieved that. We have a fabulous packaging as well in terms of the freshness of the product. So I think people were rather skeptical upfront that we could actually produce a product that could match competitive offerings. We've achieved that organically and consumer response to the product has been terrific. So we prefer to take our time and get the right product on the market and try to rush something and potentially get a product there that doesn't meet consumer aspirations.

And as you were planning this launch, did you discuss or do you now have a market share that the PM USA would like to achieve in smokeless over a period of three years or five years that you could share?

We clearly have our internal ambitions that we are not about to share with you, but all I can tell you is that the share momentum we are seeing in the test market is very encouraging and very satisfactory.

And may I ask you one last question? As you... as your focus shifts, what are you going to miss at least in dealing with the U.S. cigarette market?

The lawyers.

Thank you very much.

Thank you. Your next question is coming from Vinnee Tong with Associated Press. Please go ahead.

Hello? I am sorry, Ms. Tong, your line is live.

Can we take the next question, operator, please.

Your next caller is Chris Growe with Stifel Nicolaus. Please go ahead.

Hi. Good afternoon, Louis.

Hi, Chris. How are you?

I'm doing well. Thanks for taking the question. My... I just have a few kind of follow-ups. My first one is, I just was curious if there's any limitations to share repurchase from... really from a PM USA standpoint around… whether it is considerations or book value, that sort of thing?

No, the only limitation is retaining adequate financial flexibility and financial wherewithal for the future.

Okay. And then I wondered also if you could speak to strategically how we should look at the SABMiller stake? Obviously, there is financial consequences to an outright sale of that, that would even be considered. But is that something that you would like to speak to in terms of what the company will do with that stake once PM USA has it in its business?

No, other than reiterating what I have said in the past, investment in SABMiller that arose through the merger with Miller has been an economic homerun, and I think that SABMiller is extremely well positioned to continue to grow strongly. It has arguably probably the best geographic footprints amongst all breweries. I would anticipate as you have seen that there will continue to be consolidation in the brewing industry, and we have ridden that wave very successfully and we will continue to ride that wave. I think that investment as well helps in terms of Altria's debt ratings, its cost of borrowing, and its cost of capital. So this is a strategic investment and it is something that we can... we will continue to ride for the foreseeable future.

Okay. And then, I just was curious about you had mentioned some very strong cost savings from PM USA. Could we get the same number for PMI for 2007? And related to that, are there any additional restructuring actions you would anticipate for PMI in say 2008?

There were considerable cost savings at PMI in '07 as well, particularly in G&A, as their programs are starting to kick in. I’m not sure I’ll give you a precise figure. Andre has mentioned 100 million productivity in the past. I think we did better than that in 2007, and we will lay out our ambitions going forward in terms of productivity and cost reduction initiatives. But I do want to stress both for PMI and for Altria that it is the topline that is the key to growth in earnings and less so in terms of costs, that doesn't mean we're not focused on costs, we are, but the focus is really on the topline. That's where we will get the growth and the earnings growth.

Thank you. Your next question is coming from Christopher Bowe with Financial Times. Please go ahead.

Hi, Louis. Thanks for taking my question.

Hello, Christopher.

Hey, not to be confused with Chris Growe, just an odd one-two punch. Anyway a quick question from me is what kind of litigation risk exists for PMI as a separate entity ahead? It's clearly going to be different, but it doesn't seem that would be non-existent?

No, it's certainly non-existent. There has been litigation internationally as you are aware and as the disclosure showed. However, the industry has been very successful, and I think we will continue to be successful. That is not to say that there won't be claims and litigation internationally, but it's not something that I'm unduly concerned about.

Great. Thank a lot.

Thank you.

Thank you. Your next question is coming from William Booth with Wellington Management. Please go ahead.

Louis, congratulation on this day... announcement.

Thank you, Nick.

Louis, you mentioned China, and this may be suitable for March 11, but would it be fair to assume that whatever brands… PMI brands are produced in China will be to Chinese tastes as opposed to western blends?

No.... let’s be clear, the product will be Marlboro, and it will be Marlboro's traditional worldwide tasting cigarette, and that's something that CNTC is adamant about and so do we. As you know, there has obviously been question marks about Marlboro's ability to perform in a predominantly Virginia market. But over time, Marlboro has done well in Virginia markets, particularly Marlboro Lights. The UK is one example where Marlboro is probably the only growing premium brand. And the Middle East, not long go, was a complete Virginia market. It's now predominantly an American blend market. I don't think China is going to switch that quickly, but there is certainly scope for American blend segment to develop in China, and that's what the CNTC wants in terms of our expertise as well.

And the manufacturing process, you will have your own people there for the blending and flavoring of the product?

That is correct.

Good, okay. Well, I am looking forward to March 11. Thanks very much.

Thank you, Nick.

Thank you. Your next question is coming from Adam Spielman with Citigroup. Please go ahead.

Good afternoon, Louis. Thank you for taking my call.

Hi, Adam. How are you?

I'm fine, thank you. Can I first of all just confirm something about the two buyback programs? I assume that the Boards in future, as I say, decide could accelerate these buyback programs, but equally if they decided for whatever reasons they could stop them at least for another opportunity?

That is correct. The Board is all powerful.

Thank you very much. Can you... you mentioned on... related to PMI, and you said in your statements that you're expecting 12% to 14% EPS growth in 2008, and I think very helpfully you said that about 1 percentage point of that would be some buybacks. Can you say what percent… how many percentage points come from currency gains?

The 1% actually, just to be clear, I referred to are combined impact of the share repurchases on the combined EPS. In fact, it’s got a slightly higher impact on Altria than it does PMI. The impact on PMI is very marginal in terms of the 12% to 14% projection. We think that out off of that 12% to 14%, organic growth excluding everything is around 90%.

Thank you very much. That's very helpful. And finally if I can, turning to the joint venture with the Chinese, there is going to be producing Chinese heritage brand, if I remember correct that's based in Switzerland.

Yes.

Can I infer asking that that initially at least the main emphasis will be in the European Union and possibly Eastern Europe, or will it be equal emphasis right around the globe?

I think that you're correct in your assumption that we will start predominantly in Central and Eastern Europe and we will move elsewhere as time unfolds.

Thank you very much.

You are welcome.

Thank you. Your next question is coming from Todd Duvick with Banc of America Securities. Please go ahead.

Yes, good afternoon. This is actually Tom [inaudible] for Todd.

Good afternoon, Tom.

Thank you, couple of questions. First, can you provide any guidance on the timing of the tender for the outstanding Altria bonds as well as any insight into the process being used to determine the price at which you'll tender?

No, not much insight other than it will be launched shortly and the process will be announced as part of that launch.

Okay. Other than what you've made in your prepared statements, nothing else?

No.

Okay. And secondly, can you provide any guidance on when Altria will issue new debt once the separation is done, new long-term debt?

Well, we have bridge financing in place to do the tender offer and consent solicitation, and we clearly have the intention to term that out. It will very much depend on market conditions as to the precise timing of that.

Okay, great. Thank you.

Thank you, Tom.

Thank you. Your next question is coming from Jonathan Fell with Deutsche Bank. Please go ahead.

Hi, there.

Hi, Jonathan.

Maybe this is more a question for March as well, but I was wondering if you could say anything about how you're now looking at the structure of long-term incentive plans, bonus schemes top managements at PMI and at Altria? Are these being structured in a way that's driven by share price… total shareholder return, is it EPS, or are there other appraising metrics more important?

Shareholder return, EPS, and other operating measures are always clearly very focused targets. I think you'll see in our Form 10 that PMI will somewhat change the mix of its compensation versus what has been traditionally in the case with Altria. Let's not forget that Altria was a parent company with various operating divisions. And as we said, one of the reasons… or one of the rationales for the separation was to align compensation of executives more closely with that of shareholders. So total shareholder return is going to be a critical element, and PMI going forward will probably have a bit more stock in the mix than has traditionally been the case with Altria. I think that addresses your question.

Yes, it does. Perfect. Thanks a lot.

Thank you.

Thank you. Your next question is coming from William Knobler with Atalanta Sosnoff. Please go ahead.

Congratulations on the spin.

Thank you.

And just one question, when can… or when will you start buybacks, will you wait for the split of the companies or would you start before?

We actually have that timing in the release, William. I believe we say that Altria will start in April and PMI will start in May.

Okay. Congratulations. Look probably to see you on 11th.

Thank you very much, William.

Thank you. Our next question is a follow-up from Erik Bloomquist with J.P. Morgan. Please go ahead.

Hi, Louis.

Hi, Erik.

I just wanted to confirm a couple of things quickly. There will be a secondary listing for Philip Morris International in Switzerland, is that correct?

Yes. I think we anticipate that we'll have a secondary listing in Switzerland and the most likely in Paris with Euronext.

In Paris, brilliant. Okay. Secondly, can you talk about any kind of non-compete agreement between PM USA and PMI in general and then also perhaps in terms of duration?

Well, I think... I mentioned this back in August. The key... probably agreement that will define the relationship, if any, between PM USA and PMI going forward relates to intellectual property. And I think that the agreement essentially ensures that both companies are very well protected in terms of their intellectual property and have rights for their respective territories going forward for a considerable amount of time, including rights of first refusal on new technology that could potentially come about from their now separate R&D facilities.

Okay, great. So, in other words if PMI's R&D facility in Switzerland has a breakthrough in a… with cigarettes, that could be licensed… that PM USA would have the first right to license that product?

Right.

Okay. And then, did that also apply to the products like Marlboro Filter Plus that PMI has launched in Eastern Europe?

Well, PM USA already owns that intellectual property because they shared R&D. So whatever has been essentially developed up to now is already shared with their respective territories.

Okay. Thank you, that's helpful.

You are welcome.

And then my last question was again just in terms of the general environment in which Philip Morris is operating in 2008. Is it fair to say that in emerging markets up-trading continues generally and that we are seeing that continue in places like Russia and Turkey?

I would say that as a general statement that's a fair one. It can vary by market, but generally we are seeing up-trading and we're seeing clearly a significant improvement in our own mix in most of these markets, particularly the two you just mentioned.

Okay. And then... but in terms of the improvements in a market like Poland, that would be more attributed to industry consolidation and being able to move pricing up in the industry profit pool. Is that fair?

No, but we're also seeing improvements in mix there as well.

Okay. Lovely. Thank you.

Thank you.

Thank you. Our next question is coming from Vanessa O'Connell with Wall Street Journal. Please go ahead.

Vanessa?

Yes.

Hello, there.

You are on.

Hello?

Yes.

Can you hear me?

I can hear you.

Okay. Sorry about that. I had a question about the production of Marlboro in China. I know that there are some imported Marlboros for sale there now that are subject to strict quotas. But when the production of Marlboro begins there won’t that also be subject to quotas? And can you may be elaborate a little bit on why it's beneficial to actually make the Marlboro brand there?

Well, the CMTC clearly will decide in terms of the production volume. There are no specific quotas on domestic production, and the commitment is that... so production will meet consumer demand and it won’t be restrained if the consumer demand is there.

And it's just two factories, right, still currently?

Initially, two factories, that's correct.

Also just going back to what you mentioned on Japan, an innovation in Japan, can you elaborate a little bit on that? Are there certain types of products that from your perspective might be good fast growers in the further there?

Well, clearly I can't discuss plans that are... products that aren't in the market and that we intend to launch, but I can certainly give you two examples. We launch Marlboro menthol product called Crisp. It's doing extremely well. We launched it in the latter half 2007. It gained 0.3 share points and contributed to Marlboro’s slight market share gain in the fourth quarter. Another great product is Virginia Slims [inaudible], which is one-milligram product, which has done extremely well as well. So there are existing innovations and clearly a number of planned ones, which clearly I'm now at liberty to discuss for obvious reasons.

Thank you very much. And finally, I just wanted to ask about cost cutting internationally. Can you give us some sense of what the... where you might look to cut costs internationally or how?

Well, we're always looking at being more cost effective and efficient. At this point, I don't want to specifically target any area. We have centralized procurements, we have centralized a lot of back-office activities with centers both in Krakow in Poland as well as Madrid in Spain, and you will continue to see a lot of that. So we will address most of that on March 11, but as I said, whilst as we continue to focus on costs, the key certainly in our industry is topline growth and ultimately volume and revenue growth.

Great. See you on March 11.

Thank you very much.

Thank you. Our final question is a follow-up question coming from Chris Growe with Stifel Nicolaus. Please go ahead.

Hi, Louis. Again, thank you.

Hi, Chris. I just had two quick ones. The first one is, can you give us the tax rate assumptions then for… I guess for the combined company, if not perhaps the pieces, for PMI that is?

Yes. I think back in August I gave indications of an ultra tax rate of between 37% and 38%, and for PMI between 29% and 30% and those still remain pretty pertinent and accurate estimates.

You’d mentioned the tax rates for Altria being a little… about 1 percentage point higher in '08, [inaudible] in that range?

Versus 2007.

Okay. Got you. And then the... just the last question, relative to this very robust new product pipeline you have for Marlboro, should we expect PMI’s premium volume to grow in 2008, I guess specifically Marlboro, but also the whole, kind of premium brands that you operate there?

Well, I have said in my remarks that we anticipated a continued improvement in our mix and clearly that means premium is going faster than the others.

Okay. Thank you.

Thank you.

Thank you. There appear to be no further questions at this time. I would like to turn the floor back over to management for any closing remarks.

Well. Thank you very much for joining us today. We look forward to providing with additional information regarding the March 11 investor presentation. So we'll get back to you with further details. Again, thank you very much for joining us. Have a great day.

Thank you, everyone.

Thank you. This concludes today's Altria Group's fourth quarter 2007 and year-end earnings conference call. You may now disconnect.