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Executives

Clifford B. Fleet – Vice President, Investor Relations

Michael Szymanczyk – Chairman and Chief Executive Officer

David R. Beran – Executive Vice President and Chief Financial Officer

Analysts

David Adelman - Morgan Stanley

Judy Hong - Goldman Sachs

Nik Modi - UBS

Adam Spielman - Citigroup

Ann Gurkin - Davenport

Erik Bloomquist – JP Morgan

[Keela Reed] – Credit Suisse

Thomas Russo – Gardner Russo

[Chris Burrett] – Bloomberg News

Altria Group, Inc. (MO) Q3 2008 Earnings Call October 23, 2008 9:00 AM ET

Operator

Welcome to the Altria Group third quarter 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)

I would now like to turn the call over to Mr. Cliff Fleet, Vice President Investor Relations for Altria Client Services.

Clifford Fleet

Good morning and thank you for joining our call. This morning we will provide an update on the status of the agreement for the proposed acquisition of UST and discuss Altria’s third quarter business result. We will not be discussing the status of litigation.

Our remarks contain forward-looking statements and projections of future results and I direct you to forward-looking and cautionary statement at the end of our earnings release for review of the various factors that could cause actual results to differ materially from projections.

I also encourage you to read other important information about the proposed acquisition of the proposed acquisition of Altria in this morning’s press release in the section entitled “Other Information.” As a result of the completion of the spin-off of Philip Morris International, our reported results reflect PMI as a discontinued operation for the third quarter of 2007 and revenues and operating company’s income for PMI are therefore excluded from Altria’s continuing results.

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

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

Michael Szymanczyk

Thanks very much Cliff. Good morning to everyone. Before we get to Altria’s third quarter business results, I would like to first update you on the status of the proposed acquisition of UST.

Altria has fully committed financing to complete the transaction given the current volatile credit markets the total financing charges to close the transaction will be higher than originally anticipated but Altria doesn’t expect this to have a material impact on the financial return of the transaction. However, until Altria completes its long-term financing for the transaction it will be difficult to predict that the UST acquisition will be accretive to Altria’s adjusted diluted earnings per share within 12 months of closing as was initially anticipated.

Last week Altria and UST announced that Altria’s proposed acquisition of UST passed federal anti-trust review. Completion of the transaction remains subject to UST shareholder approval and certain other customary closing conditions.

UST is scheduling a special shareholder meeting in early December 2008 during which UST shareholders will vote upon the proposed transaction. If it is approved and all other conditions of closing are satisfied, we expect the transaction to close during the first full week of January 2009 and no later than January 7.

Now let’s turn to Altria’s third quarter business performance. Altria reported diluted earnings per share from continuing operations of $0.42 versus $0.43 in the prior year period. We delivered strong adjusted earnings per share growth from continuing operations up 15% to $0.46 driven by a combination of higher operating company’s income and general lower expenses.

PM USA had particularly strong quarter with adjusted operating company’s income of 6.3%. Middleton continued its strong performance. This quarter Altria also benefited from accelerated cost savings from its previously announced corporate restructuring. Corporate expenses declined 43% versus the prior year period and Altria expects to realize $250 million in annual savings beginning in 2009 as a result of its corporate restructuring.

This quarter’s results were negatively impacted by lower SAB Miller equity earning due to a charge of $85 million resulting from intangible asset impairments, a higher income tax rate and an increased allowance for losses of $50 million at Phillip Morris Capital Corporation.

In August Altria increased its regular quarterly dividend by 10.3% to $0.32 per common share which equates to approximately $660 million in quarterly dividend payments to our shareholders. Based on Altria’s closing stock price on September 30, the dividend yield was almost 6.5%.

Altria is reaffirming its full year 2008 EPS guidance reflecting confidence in the strength of its businesses. Altria’s 2008 adjusted diluted earnings per share from continuing operations is expected to be in the range of $1.63 to $1.67 which represents a growth rate of 9-11% from an adjusted base of $1.50 per share in 2007. Our plans for the fourth quarter of 2008 are consistent with delivering results within this full year guidance.

Because of the economic uncertainties we all face, Altria is taking steps now to continue adding value to shareholders over the long-term. The prevailing economic conditions and financial market uncertainties create a challenging environment for all companies. We are developing plans for 2009 to help mitigate the effects of economic uncertainties in our business over the next few years. First, by integrating UST into the Altria family of companies and absorbing all costs related to the integration in 2009 in order to fully realize the strategic benefits in 2010 and beyond.

Second by using the UST acquisition as an opportunity to streamline Altria Client Services, our services provider, to further lower costs and improve effectiveness beyond our previously announced cost reduction program.

Finally by carefully monitoring the value of apportions on the powerhouse group of brands that our operating companies will have in the marketplace to ensure they are satisfactory to our adult consumers as they experience tough economic times.

We believe that once we close the transaction and integrate UST into the Altria family of companies; Altria will be well positioned to provide superior long-term shareholder returns. We will provide more details on our 2009 plans in January in our year-end earnings release and at the February [Cagny] conference.

I would now like to turn the call over to David Beran, Altria’s Executive Vice President and Chief Financial Officer who will discuss Altria’s reporting segment and business results.

David Beran

Good morning everyone. Lets begin with PM USA’s third quarter results. PM USA delivered outstanding financial results in a challenging environment. On an adjusted basis, PM USA grew its operating company’s income 6.3% and continued to expand its operating margins. PM USA’s third quarter revenues net of excise taxes increased 4.6% to $4.2 billion. Excluding the $97 million in contract volume manufactured for PMI, PM USA’s revenues net of excise tax increased 2.2% versus the prior year period.

PM USA’s reported operating companies income increased 5.7% to $1.37 billion due to lower wholesale promotional allowance rates and lower SG&A spending. The positive impact of these factors on PM USA’s OCI was partially offset by lower volume, increased resolution expenses, higher leaf cost, costs related to the reduction of contract volume manufactured for PMI and higher charges for the previously announced closure of the Cabarrus North Carolina manufacturing facility.

Adjusted for costs related to the Cabarrus facility closure, PM USA’s third quarter 2008 operating company’s income increased by 6.3% to $1.4 billion. PM USA’s adjusted OCI margins increased 130 basis points to 34.1% versus the prior year period. Margin improvements were driven primarily by lower wholesale allowance rates reduced promotional spending and SG&A cost reductions.

PM USA’s domestic shipment volume, up 44.9 billion units, was 4.8% lower than prior year period but was estimated to be down approximately 4% when adjusted for changes in trade inventories and calendar differences. For the first nine months of 2008, PM USA’s domestic cigarette volume of 128.6 billion units was 3.6% lower than the prior year period but was estimated to be down approximately 3.5-4% when adjusted for changes in trade inventories and calendar differences.

As the cigarette industry environment continues to evolve, PM USA believe it can no longer predict estimated future cigarette industry decline rates and PM USA is no longer providing this guidance. Evolving industry dynamics include the prevailing economic conditions, unpredictable cigarette excise tax increases, adult consumer activity across multiple tobacco categories and trade inventory changes as wholesalers and retailers continue to adjust their levels of cigarette inventories.

The average cigarette state excise tax at the end of the third quarter was approximately $1.12 per pack which is in line with PM USA’s 2008 forecast. To date in 2008, seven states and the District of Columbia have increased their cigarette excise taxes with an average increase of $0.74 per pack.

In a highly competitive retail environment, Marlboro increased its third quarter retail share by 5/10 of a share point versus the prior year period to 41.6%. Price tax between Marlboro and the lowest effective price cigarettes remain relatively stable at 43% in the third quarter. PM USA’s retail cigarette share declined 1/10 of a share point versus the prior year period to 50.5% as Marlboro’s strong retail share gains were offset by share losses for Virginia Slims, Element and Basic.

For the first nine months of 2008 PM USA’s retail cigarette share increased 3/10 of a share point. PM USA continued to monitor the economic landscape as consumer confidence levels have fallen and unemployment rates have increased. At this point the company believes that the challenging economic conditions in the U.S. may have motivated some price sensitive adult smokers to consider lower priced tobacco products such as roll-your-own products and small cigars.

Additionally, in the third quarter the discount category cigarette retail share increased 3/10 of share point versus the prior year period to 25.4%. This share level is still lower than the fourth quarter of 2007 when the discount category share reached 25.6%.

For the first nine months of 2008 the discount category’s cigarette retail share is unchanged versus the prior year period at 25.3%.

PM USA continues to invest in the development of adjacent smokeless products and test markets for both Marlboro Snus and Marlboro Moist Snuff. PM USA has now delivered a total of $340 million in SG&A cost savings against its 2007-2011 $600 million cost reduction program and the company remains committed to achieving the additional $260 million by 2011.

In the first nine months of 2008, PM USA delivered approximately $40 million in SG&A reductions. PM USA’s manufacturing consolidation plan is on schedule and within budget and the company plans to close the Cabarrus manufacturing facility by year-end 2010. PM USA continues to transition its infrastructure to deal with the effects of the removal of the contract cigarette volume manufactured for PMI and expects it to be completed in the fourth quarter of 2008. This transition negatively impacted cost by about $35 million in the third quarter and approximately $85 million in the first nine months of 2008. PM USA expects total 2008 costs of about $100 million.

Overall, we are very pleased with PM USA’s third quarter results. The company had strong operating company’s income growth. Its cost reduction efforts are on track and Marlboro had another strong quarter of strong retail share growth.

Now lets turn to John Middleton’s results for the third quarter. John Middleton had solid business results in the quarter. The company reported $37 million in OCI which includes $9 million charge for integration costs. Middleton grew its total cigar shipment volume by 2.3% to 329 million units. In the third quarter cigar volume was impacted by the timing of promotional shipments. For the first nine months of 2008 Middleton’s cigar shipment volume increased 7.1% versus the prior year period.

Black and Mild increased its share of the growing machine-made large cigar segment by 2.2 share points to 29.2%. John Middleton continues to capitalize on PM USA’s sales and distribution infrastructure and expertise to help grow Black and Mild by increasing the brands retail, distribution and visibility.

Turning to our financial services business, Phillip Morris Capital Corporation reported a $7 million operating company’s loss. This quarter reflects a $50 million increase in the allowance for losses. PMCC’s allowance for losses now totals $254 million which management believes is prudent based on the underlying credit quality and collateral value of its existing portfolio.

PMCC’s portfolio remains well diversified by lessee and industry segment. As of September 30, approximately 73% of PMCC’s lessees were investment grade as measured by Moody’s and S&P. Excluding aircraft lease investments; approximately 86% of PMCC’s lessees were investment grade. PMCC remains focused on managing its portfolio of leased assets of maximized gains and cash flows from income generating assets as well as asset sales and related activities.

PMCC’s financial results will vary over time as investments mature or are sold.

I will conclude by saying that PM USA delivered strong income growth, improved its adjusted operating margins and continued to improve its SG&A spending. Marlboro achieved strong quarterly retail cigarette results while lowering its promotional spending and finally John Middleton delivered strong income and retail share performance as Black and Mild benefited from PM USA’s sales and distribution infrastructure.

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

While the operator compiles the calls I want to cover a few housekeeping numbers. In the third quarter Marlboro’s net pack price in convenience stores was $4.40 and the lowest effective price cigarettes were $3.08 per pack. CapEx was $46 million. Ongoing depreciation and amortization was approximately $50 million. Our third quarter MSA and quarter buyout accruals were approximately $1.5 billion or $0.66 per pack. Of the $0.66 MSA represents $0.61 per pack and the quarter buyout represents $0.05 per pack. Finally, our third quarter tax rate was 36.2%. We anticipate Altria’s 2008 full-year effective tax rate on operations will be approximately 36.7%.

Operator, do we have any questions?

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from David Adelman - Morgan Stanley.

David Adelman - Morgan Stanley

If you exclude next the year impact of UST and if you were to take off the table for the moment the risk of a substantial increase in the federal excise tax how feasible do you think it would be in that context for Altria to deliver its long-term 8-10% EPS growth next year?

Michael Szymanczyk

That’s a clever way of getting the guidance for next year but I’m not going to talk about that David until we get to January. I think your question is premature. Seriously, I do think it is going to be important to look at the fourth quarter to get the guide posts on some of these things. What the market is going to do, what unemployment is going to be, what the pricing dynamics and competitive dynamics are in the marketplace and I can’t ignore interest rates. Interest rates are going to be part of what we have to deal with in the coming year. It is kind of hard to separate out UST when you are thinking about all of this. The fourth quarter will tell us a lot and anything I gave you on this subject at this point in time would really be inappropriate and not thoughtful. We have to see how the fourth quarter unfolds.

David Adelman - Morgan Stanley

At this moment do you feel comfortable with the scale of the pricing gaps in the U.S. cigarette category?

Michael Szymanczyk

Well as we went through the third quarter we didn’t see a lot of change there at all. I think our USA business performed quite well. As I have said before we kind of really try to maximize our earnings while we maintain some modest share growth so we try to put our foot on the gas a little bit more sometimes and take it off a little bit. In that context we grew pretty fast in the first quarter, probably faster than we particularly needed or wanted to grow so we are getting a little more income out of the USA business right now but still showing very good growth on Marlboro so we are pretty happy with our cigarette business right now and the relationship between segments.

David Adelman - Morgan Stanley

On the UST acquisition with a higher than originally envisioned financing cost is that going to affect your calculus on how much you should spend to improve the consumer value on UST’s key premium brands?

Michael Szymanczyk

No I don’t think there will be a relationship between those things at all.

David Adelman - Morgan Stanley

Lastly, can you frame for us the excise tax risk going into 2009 at the federal and state level? What type of incremental contingencies from a cost perspective are you developing if it is a very onerous scenario?

Michael Szymanczyk

I think it is pretty hard to frame right now particularly because you are going to have so much change in the government. It is I think going to be a difficult economic environment and that can play both ways relative to that subject. As I mentioned in my remarks we think cost is an important issue. We think the UST acquisition represents a good opportunity to re-think how we do a number of things in order to make ourselves more efficient and we want to get all that done in 2009. So, our objective is to get more cost out of the system than we had originally anticipated back in March when we originally talked about this subject and to use this integration as an opportunity to do that. We’ll try and quantify that more for you when we get to January and February because we are working on it right now. I wouldn’t want to do that right now. We will try to give you more on that.

David Adelman - Morgan Stanley

That would be incremental to the $250 million in synergies you called out on UST?

Michael Szymanczyk

Yes.

Operator

The next question comes from Judy Hong - Goldman Sachs.

Judy Hong - Goldman Sachs

I’m hoping you can elaborate on your comment about as you look out into 2009 carefully monitoring the price gap or the value equation and whether that relates to really looking at not just the price gap within cigarettes but really looking at the value equation across all tobacco products and whether that means there is actually a heightened need to think about the value equation and address that issue as it relates to some of the lower priced tobacco products.

Michael Szymanczyk

Well, I think there are several things to think about. First of all to answer your question on segments we are going to be playing in three different segments. Yes we are going to be paying attention to the value equation on our brands in all three segments. So we will be monitoring that and paying close attention to it just as we have for some time in the cigarette business. I think when the consumer gets under some economic stress it is important for brands to be focused on delivering value to their consumers and not finding themselves in a situation where they haven’t paid close enough attention to what is happening and then have consumers decide they are going to move to other brands. I think it is in those kinds of times you have to be the most thoughtful about it and that is why I called it out. It is something we always pay attention to but I think we will be particularly diligent to it relative to that subject. There are more factors than simply price there to deal with and so we will be looking at the totality of our value equation and really wanting to put ourselves in our consumers shoes and try to make sure they feel good about the way we are serving up our brands to them relative to competitive products. Our feeling is that it is going to be a difficult economic time so we have to pay more attention to it.

Judy Hong - Goldman Sachs

Following up on that if you think about the growth of the little cigars and roll-your-own products in recent quarters how concerning is that growth? How big a size are those categories right now and at what point do you get more concerned that is really encroaching on the premium cigarette segment that you have to think about the value equation not just within cigarettes but looking at premium cigarettes versus little cigars or roll-your-own, etc.?

Michael Szymanczyk

They tend to be small but they are showing some growth but the growth tends to be at the very bottom in terms of the pricing spectrum. It is really within the overall discount segment. The movement of that segment has been within the same range it has been for quite some time but there has been some movement at the bottom of that segment including in the areas of roll-your-own but also discount as well where there has been some growth but the growth has come out of the discount segment. I think you have to be mindful of those things and we pay close attention to them. It is not anything I would call a trim line change at this point but it is certainly something to pay attention to.

Judy Hong - Goldman Sachs

If we look at the menthol segment how much of the Marlboro share growth at this point is coming from Marlboro menthol as opposed to Marlboro non-menthol?

Michael Szymanczyk

It moves around a little bit. I think it is kind of close to 50/50. I think most recently about half of it is menthol and half of it is the rest of the franchise.

Judy Hong - Goldman Sachs

Can you confirm that in the third quarter you eliminated the free gift promotions on Marlboro Menthol and whether that impacted your competitive performance within menthol?

Michael Szymanczyk

We move around on our promotion activity. We like to try some new things and find some ways to be more efficient so we have different promotion packing in the marketplace on some items right now. They seem to be working pretty effectively. I wouldn’t suggest we are able to make some determination they have had any meaningfully different impact on those SKU’s than we saw with the buy-one get one free.

Judy Hong - Goldman Sachs

Your decision not to provide industry volume forecasts going forward if you can just provide some color as to what the thinking is there in not providing the guidance going forward there.

Michael Szymanczyk

I think Dave provided color. Dave you can talk about it if you want. I think we just feel like there are so many different moving parts associated with that and some of them are very difficult to get your hands around like retail inventory for example. It is a very difficult thing to really get your arms around with any accuracy. We will still try and figure it out and look at it. We just don’t feel like it is really prudent to have people focused on it.

David Beran

We are basically going back to where we were prior to 2007. We do internal estimates but prior to 2007 never provided guidance for that reason. It is somewhat unpredictable. Yes we still look at it internally but we are going back to where we were before 2007.

Operator

The next question comes from Nik Modi – UBS.

Nik Modi - UBS

A quick question on the cost environment. I understand several other tobacco players have increased or are taxing on surcharges just to help offset some of the increasing costs whether it be tobacco leaf or transportation. It has been recent so I guess the pull back in diesel hasn’t really had an impact. I want to get your perspective on the cost environment if you can give us some help there.

Michael Szymanczyk

The cost of raw materials went up this year primarily driven by the cost of fuel and oil prices as that worked its way through the system with transportation costs or fertilizer costs. Overall for the year we expect our leaf cost to be up approximately $100 million from where it was last year. We planned for that in the overall guidance we gave early on in the year and part of those cost increases are temporary in nature because they are reflected in surcharges on propane and fertilizer costs. So, we would expect to see that moderate somewhat next year.

Nik Modi - UBS

With the dollar doing what it is doing do you think you will see a benefit more so than you were expecting as we go into 2009 given some of these are dollar denominated commodities?

David Beran

We could but the dollar as we have seen this year the dollar was swung quite a bit versus currencies worldwide and I think at this point it would be pure speculation to try to determine where the dollar will end up next year on average. But, currently it is a favorable but you will never know how that might end up next year.

Operator

The next question comes from Adam Spielman – Citigroup.

Adam Spielman - Citigroup

First of all, I noticed in terms of your market share although it is up year-over-year if you look sequentially your gross market share is down about 20 basis points and the whole of PM USA’s market share is down 50 basis points. At the same time obviously it has been a very good quarter particularly in the sense of profit and pricing. I was wondering what we should read into this. Do you think you have the balance of it right and mind you market share is still over 50%, you are looking to make sure the profit continues. So that would be my first question.

Michael Szymanczyk

I think as I have discussed previously we are always trying to strike a balance between maximizing income and maintaining some level of modest share growth particularly on Marlboro and that is not an exact science quarter-to-quarter and we worry not much about that quarter-to-quarter. We look at it on a much longer term basis. I would say to you the products in the market place were responsive to the things we did. We continued to get very good year-over-year share growth on Marlboro and for the total year the brand and the company are in good shape in the cigarette business and I think we are managing the business to accomplish the objective; maximum income with modest share growth over the long-term. I wouldn’t worry too much about sequential performance because we don’t worry a lot about that. We are looking at it really on a longer term basis.

Adam Spielman - Citigroup

Thinking about PMCC, I noticed on your balance sheet you currently have got financial assets of about $5.6 billion. You told us how much of that was nonperforming. I missed the figure you gave. More importantly, can you tell us what criteria you use to decide if some of your financial services assets are nonperforming and how we might expect that to continue if the economic situation does indeed get worse.

Michael Szymanczyk

When we look at the allowance for losses at this point our lease payments it is more a future look based on the economic conditions that we see in the marketplace and various credit ratings the underlying lessees currently have. We look at potential impairment charges every quarter and take into account those two factors and that is how we determine our overall allowance going forward. So, currently we had in the second quarter an allowance of $204 million. We added $50 million to that allowance and at this point given the economic environment we think that is prudent. We look at that each quarter.

Operator

The next question comes from Ann Gurkin – Davenport.

Ann Gurkin - Davenport

Given a difficult economic environment what changes may you be making to strategies to support your premium brand growth and secondly do you feel like the environment could take another price increase if necessary?

Michael Szymanczyk

I would say a this juncture first of all both of those questions would be things I wouldn’t want to cover because I think they are competitively sensitive subjects. I wouldn’t want to answer them specifically. Once again I go back to looking at the fourth quarter here before I start to make predictions about what 2009 is going to bring. I think there has been quite a bit of economic change that has taken place just pretty recently actually so it would be helpful to see a bit more unfold before we really start making predictions about what the impact is going to be on the business and what we might need to do about it. I think wait and see is probably a good attitude right now as far as 2009. We want to be in a good position to deal with 2009. That is why we are putting in place some of the actions to speed up the UST integration and to look at our cost structure now and be prepared to take some actions. Those are things that we are trying to do to be prudent and conservative and prepared so that we can deal with the environment successfully that we see in 2009.

Ann Gurkin - Davenport

Are you seeing any kind of inventory build at wholesalers or retail ahead of an anticipated excise tax increase early in 2009?

Michael Szymanczyk

I would say total inventories right now are a bit below where they were this time last year.

Ann Gurkin - Davenport

If I could just also ask about SAB Miller. I don’t know if you can comment, in the fourth quarter do you expect to have another asset impairment write down? Any other charge related to that in the fourth quarter?

David Beran

No we do not.

Ann Gurkin - Davenport

So that is it for the year that you would expect right now?

David Beran

That is all we expect right now. We are just an equity investment holding with 28.5%. So for further details I would recommend you talk to SAB Miller. That is all we expect.

Operator

The next question comes from Erik Bloomquist – JP Morgan.

Erik Bloomquist – JP Morgan

I was hoping to circle back to some of the drivers that are behind the decision to cease guidance in terms of the overall cigarette category growth. Specifically I wanted to come back to the adult consumer activity. Could you talk about that a bit more and also is it in fact we are seeing an acceleration in consumers switching out of cigarettes or adopting other products in the interim when they can’t smoke in a public smoking arena? Or if you could give us a little bit more feel for that. Secondly, in the terms of order of magnitude of impact of the various items cited by Dave is it really fair to believe that tax increases are really the biggest one driving that uncertainty around future cigarette volume growth or declines?

Michael Szymanczyk

Well, I think just the general trend is you are seeing the cigarette volume decline and the smokeless tobacco and large manufactured cigar volumes grow. I think the grade that we have seen so far this year is something in the range of 3.5-4% in cigarettes and I think the smokeless business has been pushing 7% and the large manufactured cigar business has been in the 4-5% range and that seems to be the trend. How that actually occurs relative to consumers and exactly why individual consumers do what they do I’m not going to speculate on. That is what the numbers say and I think that is really what is important and is part of what we are planning our business strategy on going forward.

Erik Bloomquist – JP Morgan

With respect to the performance of Parliament and Virginia Slims in the quarter is there anything particular going on there or how would you characterize the declines ahead of for example Marlboro?

Michael Szymanczyk

Part of what we have done is we focused our spending on those brands in the areas of their strengths so we anticipated some nominal share loss on those products as we have really expanded their margins by focusing in on some more specific consumer areas.

Erik Bloomquist – JP Morgan

And a housekeeping question in terms of the $100 million or so you are spending in the PMI as you wind down Cabarrus is that something we can simply assume we don’t have in 2009 that is a cost that will cease at the end of 2008?

David Beran

That is the overhead cost associated with the burden of keeping two factories up and running. That fixed portion of that goes away when we close the Cabarrus facility so that will have an impact in 2009. That will continue because we will be working on closing that facility during a good portion of 2009.

Erik Bloomquist – JP Morgan

So we will be clear of that in 2010 but will have most of it in 2009?

David Beran

I would say that is probably fair.

Operator

The next question comes from [Keela Reed] – Credit Suisse.

[Keela Reed] – Credit Suisse

I want to quickly follow-up on a question I think Adam had. In the first quarter it looked like you were focusing much more on market share growth than profit growth. This quarter it looked like you were focusing more on profit than market share growth. I know you don’t manage the business quarter by quarter but should I look at this as being somewhat consistent or what will you focus on going forward?

Michael Szymanczyk

We look at the year and we have objectives we like to achieve for the year and they reflect the philosophy I articulated which is maximizing earnings while maintaining modest share growth. Once again we don’t evaluate that simply quarter by quarter. We look at it on a longer term basis. As I believe I said before I think we got out of the box faster than we probably needed to in the first quarter. Good news in that and there is bad news. We made less money but we also got more share. As we have gone on through the year we have been able to tighten that down a little bit and actually feel pretty good about the dynamics of the business and the fundamentals of the business particularly the Marlboro brand and at the same time been able to grow revenues and grow income some. So that is the way I look at it. I’m not seeing anything in the third quarter I would say is an underlying fundamental issue that is of concern to us. To the contrary the business performed about the way we expected it to perform based on what we did.

[Keela Reed] – Credit Suisse

Does that mean this quarters performance is much more representative of how you are planning to run the cigarette business going forward in the first quarter?

Michael Szymanczyk

No, not necessarily.

[Keela Reed] – Credit Suisse

Another question I had was on Middleton. You said because of promotional shipments the growth was slower than it has been year-to-date. How much did the economy and the overall market conditions play in the slow down of the growth there on top of the promotional shipments?

Michael Szymanczyk

Not much. I think you have to look at the second and third quarters together because there was some inventory impacts in that business. That business has a bit of a different kind of inventory management approach I guess at the wholesale level which over time we will seek to manage more like we manage cigarette inventories in our business. I would look at the second and third quarter together if I was trying to get a handle on what was going on overall in shipments because anything else is really an artificial movement that was driven by inventory changes between the quarters.

[Keela Reed] – Credit Suisse

Can you give us an idea of what the financing rate would be for the UST acquisition to make the deal accretive in 2009? What is the go to rate there?

Michael Szymanczyk

I don’t know off the top of my head.

David Beran

At this point there is moving parts. Of course it is the financing plus any accelerated synergies we get from the UST transaction over and above the 250 we previously talked about. At this point in time it is tough to give you a number.

Operator

The next question comes from Thomas Russo – Gardner Russo.

Thomas Russo – Gardner Russo

As I look at the news this morning I look at the news headline and they say Altria discount cigarette U.S. brands gain U.S. smokers. Altria’s key shifts to roll-your-own small cigarettes. Altria sees smokers may have moved into cheaper products. Those are the headlines that come away from this morning’s meeting. Although I thought I heard Dave say even though you crept up slightly in the third quarter you are still below fourth quarter price value volumes and Mike said the deep discount gained at the cost of the discount category. So if the impression leave with investors on this call is that you are about to see a break away in the price value of deep discounts how would you counter that impression?

Michael Szymanczyk

I don’t think we have seen that. I think we often see some movement within the discount segment between the deep discount portion of it and the other really low priced types of items in the segment but in the end we don’t play there. Our point of view is that what we really need to pay attention to is the overall discount segment and whether that segment is moving in a direction we think threatens our premium business and we are not seeing that at all.

Thomas Russo – Gardner Russo

Headlines notwithstanding.

Michael Szymanczyk

What headlines are you talking about?

Thomas Russo – Gardner Russo

They are just news feeds that are coming up from today’s call. The media runs simultaneous to the call and those are the headlines we are seeing.

Michael Szymanczyk

Those are obviously headlines coming from somebody who really doesn’t understand. I wouldn’t suggest that is an appropriate headline.

Thomas Russo – Gardner Russo

As to the Cabarrus charges are those your portion of total charges or do you not have some agreement for cost sharing on the wind down from Cabarrus?

David Beran

Those are our charges. The production that we make for PMI we get the manufacturing cost plus a mark up. But as far as the closing of the cost of Cabarrus that is what in June of last year we provided guidance for and charges last year for that. The ongoing charges we are seeing this year is basically the reduction in overhead absorption that would have gone to PMI. We are fully captured in that this year.

Thomas Russo – Gardner Russo

That is your absorption. Your burden, not shared?

David Beran

That’s right.

Thomas Russo – Gardner Russo

Lastly, on Middleton can you describe how many of your outlets Middleton is now available at and what sort of spacing they enjoy and what type of penetration and distribution they enjoy? Some pace of getting them to full penetration.

Michael Szymanczyk

It varies quite a bit by item. What I can tell you is we have made steady progress each month since we turned it over to the PM USA sales organization and we focused on some specific SKU’s and so those SKU’s are the ones that are showing increased penetration. Penetration varies by SKU though. It is moving in the direction we expected it to move in. We actually have more plans relative to distribution and presence on those products we will unfold as we go into 2009. We are making steady progress on that and it varies by SKU.

Operator

The next question comes from [Chris Burrett] – Bloomberg News.

[Chris Burrett] – Bloomberg News

I wanted to ask given the interest in the longer term how many quarters has it been since PM USA reported a decline in total market share? Granted today’s decline is just a zero point or small point but it looks like it has been at least since 2005 and 2004.

Michael Szymanczyk

How many quarters. Let me make sure I understand your question, since we have shown a…PM USA has shown an overall decline on a year-over-year basis? Or a quarterly basis?

[Chris Burrett] – Bloomberg News

How long has it been since overall market share has fallen?

Michael Szymanczyk

In a space of time?

[Chris Burrett] – Bloomberg News

It was down in the third quarter for the first time in how many quarters was my question. Is that important or is that symbolic of something?

Michael Szymanczyk

I can’t answer your question on a quarterly basis. For the year-to-date PM USA’s share is up 3/10. I just don’t know frankly on a quarter by quarter basis. We look at shares with a lot of frequency and they go up and down. It is really more important for us to look at the shares on a longer term trend line but even when we go look at the quarters we don’t expect necessarily we are going to grow sequentially quarter-to-quarter all the time because we spend differently in the quarters. It would be kind of unusual for that to occur given the way we operate the business. I would say, once again, I don’t see anything extraordinary about that. Again the performance from a share point of view was about what we expected it to be. It was actually about flat for the total company and Marlboro was up ½ share point which is quite good. I don’t see anything there to be concerned with.

[Chris Burrett] – Bloomberg News

Finally, is it fair to say that the company plans to accelerate cost reductions? I think you said that and you plan to wrap those in to the savings you plan with the UST take over.

Michael Szymanczyk

It is not fair to say they are wrapped into the UST take over. What I said was we would use the UST integration as an opportunity to look at the whole of particularly our services operation to make that more efficient and that would generate some additional cost savings beyond simply those related to the UST side of the integration. That is what I meant to say and yes we would expect to make that one effort and we expect that there will be some additional savings that come out of that beyond the savings we have already announced.

[Chris Burrett] – Bloomberg News

This is a reflection of your preparation for what you say may be a difficult 2009, right?

Michael Szymanczyk

I think the economic circumstance in 2009 that we will all operate in is likely to be difficult. It looks that way as we are watching what we see on TV and read the newspaper that is what it looks like. So, I think that we want to try and be as prepared as we can to deal with that kind of circumstance.

[Chris Burrett] – Bloomberg News

Lastly, your year earlier average price for Marlboro in convenience stores bounced to $4.40 per pack in the third quarter?

Michael Szymanczyk

I don’t have that. We can call you back and give you that.

Operator

At this time I would like to turn the floor back over to Mr. Cliff Fleet for closing comments.

Clifford Fleet

Thank you all for joining us today. If you have any follow-up questions please call us at Altria Investor Relations.

Operator

This does conclude today’s Altria Group third quarter 2008 earnings conference call. You may now disconnect.

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Source: Altria Group, Inc. Q3 2008 Earnings Call Transcript
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