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Altria Q4 Profit Drops 9%; Reveals Philip Morris Spin-off; Guides FY08 - Update [MO]

1/30/2008 12:38:35 PM Tobacco products maker Altria Group, Inc. (MO) said on Wednesday that fourth quarter profit dropped over 9%, despite revenues that rose more than 13%. The company also revealed the spin-off of its overseas unit Philip Morris International Inc. or PMI and identified the new Altria and PMI Boards of Directors. Altria also announced dividend policies, initial dividend rates and share repurchase programs for both companies, and provided 2008 earnings per share from continuing operations forecasts for Altria and PMI.

The New York-based company reported fourth quarter net earnings of $2.188 billion or $1.03 per share, a decline from $2.959 million or $1.40 per share in the same period last year.

Earnings from continuing operations, including gain on sales of busineses, asset impairment, exit and implementation costs and tax items, slipped 9.1% to $2.188 billion or $1.03 per share in the latest period from $2.406 billion or $1.14 per share reported last year.

Adjusted for items, earnings per share were up 5.3% to $1.00 from $0.95 in the year-earlier period, which included a $488 million gain from PMI's reorganization of its tobacco and beer equity holdings in the Dominican Republic. On average, 8 analysts polled by First Call/Thomson Financial expected earnings of $0.97 per share.

Gross profit advanced to $5.205 billion from $4.778 billion. Net revenues for the quarter increased 13.7% to $18.229 billion from $16.027 billion.

US Tobacco revenues were $4.487 billion, down 1.1% from last year, while revenue from European Union climbed 16.8% to $6.429 billion. Eastern Europe, Middle East & Africa or EEMA revenues jumped 30.5% to $2.944 billion and revenue generated from Asia increased 11% to $2.748 billion.

The world's largest tobacco company said operating income for the period slipped to $3.036 billion from $3.244 billion. In the fourth quarter, U.S. tobacco operating companies income decreased 3.2% to $1.1 billion from last year. For PMI, operating companies income decreased 10.0% to $2.0 billion, due primarily to the impact of the Dominican Republic transaction in the fourth quarter of 2006 as well as unfavorable mix.

For European Union, operating companies income grew 17.4% to $917 million, driven by higher pricing and favorable currency of $123 million. EEMA operating companies income increased 21.1% to $516 million, due mainly to higher pricing, lower costs and favorable currency of $25 million.

Cash and cash equivalents at the end of December 31, 2007 was $6.498 billion, while they were $4.781 billion at the end of December 31, 2006. Total debt for both the periods was $11.046 billion and $8.485 billion, respectively.

For the third quarter, the cigarette maker's profit dropped 8.4%, hurt by the spin-off of food maker Kraft Foods Inc. (KFT). The company posted third quarter net income of $2.63 billion, down 8.4% from previous year's income of $2.88 billion. Earnings per share slipped 8.8% to $1.24 per share from $1.36 per share in the same quarter last year. Quarterly net revenues realized by the company improved 8.9% to $19.2 billion from $17.6 billion in the equivalent quarter of the previous year.

Full year net earnings declined to $9.786 billion or $4.62 per share from $12.022 billion or $5.71 per share in 2006. Earnings from continuing operations in 2007 reduced to $9.161 billion or $4.33 per share from $9.329 billion or $4.43 per share.

Adjusted for items, earnings per share were up 8.1% to $4.38 from $4.05 in 2006. Revenues for the year rose over 10% to $73.801 billion from $67.051 billion. For the full year, analysts expected earnings of $4.37 per share on revenues of $37.95 billion.

Outlook

Looking ahead, Altria forecasts 2008 adjusted full-year earnings per share from continuing operations in the range $1.63-$1.67. Earnings per share growth is expected to be stronger in the second half of 2008. PMI sees adjusted earnings per share from continuing operations at current exchange rates in a range of $3.11-$3.17 for 2008, reflecting a growth rate of approximately 12% to 14% from the pro-forma adjusted base of $2.78 per share in 2007.

For 2008, analysts expect earnings of $4.74 per share for the combined company.

PMI spin off

Altria said its board of directors on Wednesday voted to authorize the spin-off of 100% of the shares of PMI to Altria's shareholders. On August 29, the Board announced its intention to pursue the spin-off and said it would be in a position to finalize its decision and announce the precise timing of the spin-off at its regularly scheduled meeting on January 30, 2008.

The distribution will be made on March 28 to Altria shareholders of record as on March 19. Altria will distribute one share of PMI for every share of Altria common stock outstanding as of the record date.

After the spin off, Altria's Board of Directors will include four continuing members from the current Board - Elizabeth Bailey, Robert Huntley, Thomas Jones and George Muñoz - who will be joined by four new directors - Thomas Farrell II, Gerald Baliles, Dinyar Devitre, Michael Szymanczyk. Szymanczyk will serve as Chairman of the Board and Chief Executive Officer of Altria.

PMI's Board of Directors post-spin will include five members who will step down from the current Altria Board of Directors and two others. Graham Mackay, Chief Executive Officer of SABMiller, has agreed to join the PMI Board later in 2008. Louis Camilleri will serve as Chairman of the Board and Chief Executive Officer of PMI following his resignation from those posts at Altria.

The company also said John Reed, one of the longest-serving members, has elected to retire from the Altria Board of Directors. As a result of the PMI spin-off, the date for the annual meeting of shareholders for Altria has been moved to May 28, 2008 in Richmond, Virginia.

Cigarette makers are having a tough time, with consumption falling in the U.S. and a ban on public smoking in place in western Europe. It is viewed that the Marlboro maker will have to concentrate on emerging markets, in addition to tapping the potential already available in Russia and Turkey. PMI controls two-thirds of the company's profit.

According to Louis Camilleri, Chairman and Chief Executive Officer of Altria, “The PMI spin-off and related actions position our international and domestic tobacco businesses for future success as stand-alone companies with unique and formidable strengths, including leading brands, strong cash flow, experienced leadership and solid growth prospects.”

b>Dividends

Altria board also reaffirmed its intention to adjust Altria's dividend immediately following the distribution of PMI shares. This will enable Altria shareholders who retain their PMI shares to receive, in the aggregate, the same annual cash dividend rate of $3.00 per share that existed before the spin-off.

Altria is expected to pay a dividend at the initial rate of $0.29 per share per quarter, or $1.16 per common share on an annualized basis. The company has established a dividend policy that anticipates a payout ratio of nearly 75% after the spin-off.

PMI is expected to pay a dividend at the initial rate of $0.46 per share per quarter, or $1.84 per common share on an annualized basis. PMI has established a dividend policy that estimates a payout ratio of about 65% post-spin.

Share re-purchase

A new $7.5 billion two-year share repurchase program was authorized for Altria. It is expected to begin in April, after completion of the spin-off.

For PMI, a $13.0 billion two-year share repurchase program was authorized, which is anticipated to begin in early May.

Altria also said it has arranged a $4.0 billion, 364-day credit facility. Following the spin-off, Altria intends to access the public debt market to refinance debt incurred in connection with the tender offer.

Among other things, Altria noted that in establishing the initial capitalization of the two companies, PMI would pay Altria $4.0 billion in dividends. Out of these $3.1 billion was paid at the end of 2007. Altria and PMI will reimburse each other for the fair value of stock awards held by their respective employees. Based on the number of stock awards outstanding as of December 31, 2007 the net payment from Altria to PMI would be $427 million.

Stock Movement

MO is currently trading at $76.10, down $0.02 or 0.03%, on 10.08 million shares. For the past year, the stock trended in the range of $63.13 - $88.50.
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