Monday, July 23, 2007

Altria: Earnings and Some Interesting Comments

Dinny Divetre opened the Altria (MO) earnings call by saying "As mentioned earlier, my remarks today will focus on our quarterly results. I will not be addressing specific actions Altria may take going forward to further enhance shareholder value except to repeat what I said last quarter.

He continued, "We remain as committed as ever to meaningfully enhance long term shareholder value. We continue to carefully and diligently examine the benefits of a spin-off of Philip Morris International and other possible value enhancing options to decide the optimal long-term strategic course to follow. And once a decision has been made, we will promptly communicate it."

Okay, we won't ask. Earning were about as expected, up 5% after charges related to the NC plant closing. Altria purchased another 30% of a Mexican cigarette maker in a deal valued at $1.1 billion, brining it's stake to 80% and adding $.30 a share to earnings once it closes. The rest of the stuff was rather vanilla until the Q&A.

Q: "It will take some time before Marlboro Snus will really have a meaningful impact on your EPS. So, would it be fair to say that over the near term, we may hear from Philip Morris more news in terms of the adjacency strategies that will make a more meaningful impact on the EPS and also would some of these adjacency strategies be suitable to be exported to other markets, let's say Western Europe which demonstrates today many of the same trends as we are seeing in the US market."

A: "Well, we have announced or PM USA rather has announced that it is going to progress with its adjacency strategy and going to go further into the smokeless category. So I think, you can expect further news from Philip Morris USA. As far as the prospects for Snus you're right, this is a new category and that's why we are going to go about it very carefully and cautiously and that's why we are doing this test -- we did the test market with Taboka. We learned a lot. We are using many of those lessons in the introduction of Marlboro Snus. And now we will gradually step this up and you can expect more news from us in the future"

Meaning? I would look towards more acquisitions or large investments in existing makers for Altria. They have a huge cash hoard and a painfully under leveraged balance sheet. There is no tobacco related investment out of their reach.

Q: " Speaking of Snus and smokeless, certainly there is a shift, and depending on what happens with the federal excise tax increase, which certainly will also include other tobacco products. It's going to depend on the gap. It's going to depend on how all the manufacturers handle it. If it occurs, where do you see your portfolio makeup in terms of, as you look out the next 5-10 years and I am thinking specifically PM USA? If you use just the first sort of step into smokeless, would you expand like you said into other tobacco products? Do you feel that will become a larger and larger stake of your overall portfolio into a less (inaudible) top-line."

A: "Philip Morris USA has announced and said many times in the past, they are committed to their adjacency strategy that covers a wide range of non-cigarette products. And if these are successful which we hope they will be, then obviously these products will make up a larger part of the business than they do today. The question remains. Which are going to be successful? Which are not going to be successful? And it's impossible to predict but I would venture to say that, five years from now certainly non-cigarette products will make up a meaningful proportion of the Philip Morris USA product mix."

Commenting on more potential M&A, Devitre said "there are always going to be M&A opportunities out there and there are opportunities out there today, but there are many business development opportunities out there today and we just showed you one with our acquisition of 30% of our Mexican business, so there are many opportunities like that. There are also free standing M&A opportunities.."

Clearly two things are happening. First, Altria some how, some way is going to get into the smokeless tobacco business and second, mergers or acquisitions are in their future. It is clear that the Altria we know to day and the Altria we will be holding shares of years from now will be a dramatically different company.

As for the PMI spin? We will wait patiently for the August 29th board meeting for an announcement or at the very least dividend or buyback news...


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