UST, Inc. Q3 2008 Earnings Call Transcript

Oct.24.08 | About: ProShares Ultra (UST)

UST, Inc. (NYSEARCA:UST)

Q3 2008 Earnings Call

October 24, 2008 9:00 am ET

Executives

Mark Rozelle – Vice President, Investor Relations

Murray S. Kessler – Chairman & Chief Executive Officer

Raymond P. Silcock – Chief Financial Officer

Analysts

Judy Hong - Goldman Sachs

David Adelman - Morgan Stanley & Co.

Erik Bloomquist - J.P. Morgan

Christine Farkas - Merrill Lynch

Nik Modi - UBS

Ann Gurkin - Davenport & Company

Andrew Kieley - Deutsche Bank Securities

Mark Cohen – Merrill Lynch

Operator

Welcome to the third quarter 2008 UST, Inc. earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Mark Rozelle, Vice President of Investor Relations.

Mark Rozelle

Good morning and thank you for joining us as we discuss our third quarter results. For those who have not seen the release, it is available on our website under the Investor Relations section. This presentation is being webcast live and is available on playback mode. The audio is also available on our website in MP3 format.

Hosting the call will be Murray Kessler, Chairman and CEO of UST. Also joining us today will be Ray Silcock, our CFO. At the end of our prepared remarks, Murray and Ray will take your questions.

Murray will make a few comments on the status of the agreement announced on September 8, 2008, for Altria to acquire all outstanding shares of UST for $69.50 per share. Other than that, we do not plan on further discussing or answering questions concerning the agreement. The purpose of this call is to review third quarter 2008 results and we ask that all questions be focused on this.

In order to help you understand the company and its results, we will be making some forward-looking statements. Accordingly, it is possible that our actual results may differ from the predictions we make today. Additional information regarding factors that could make such a difference appear in our Safe Harbor statement included in our public filings. We also encourage you to read the Other Information section in our release.

We will be discussing non-GAAP financial measures in this call. A complete reconciliation of GAAP to non-GAAP financial measures can be found in our press release, which we issued this morning, which I mentioned is available on our website.

And just one more thing before we get started. In connection with the proposed acquisition, UST intends to file with the SEC in the coming weeks a proxy statement on Schedule 14-A. Investors and shareholders are encouraged to read UST’s proxy statements and all relevant documents filed with the SEC because they will contain important information about the proposed transaction.

I will now turn the call over to Murray.

Murray S. Kessler

Good morning and thank you for participating in UST’s third quarter 2008 earnings call. Given the big news of the quarter, the pending acquisition of our company by Altria, today’s call will be structured a bit differently than our usual call format. I will handle the call and comments in what may be my last opportunity to do so.

I am pleased to say that we have good news to report, not just on the progress of the transaction, but also on the continuing good performance of our business, particularly in the face of unprecedented economic head winds.

While I will be leading the call, I speak on behalf of my entire team in thanking you for the support you have shown us as shareholders these past few years. But now on to the quarter.

As announced on September 8, 2008, we are being acquired by Altria for $69.50 per share. As you heard from Altria yesterday during their conference call, the process for completing the transaction is proceeding smoothly. We have received federal regulatory approval, Altria has committed financing in place, and a special meeting of UST shareholders will be held on December 4, 2008. Assuming shareholder approval at that meeting, Altria expects the transaction to close during the first full week of January 2009 and no later than January 7.

I will not be commenting any further on the transaction during this conference call. Details of the transaction are, however, available in the definitive proxy statement which we will mail next week. A preliminary proxy was filed and is available on the SEC website.

Where I will be focusing my comments this morning is on business results. In the face of the increased competitive activity, strong economic head winds, higher gasoline prices, the suspension of our share repurchase program, and distraction associated with this transaction, I am very pleased to report that UST:

One, exceeded our internal quarterly estimated adjusted diluted EPS, which finished at $0.91 per share, 4.6% ahead of last year’s third quarter;

Two, exceeded our nine-month estimate for adjusted diluted EPS, which finished at $2.70 per share, up 7.1% versus year ago;

Three, successfully responded to increased competitive activity with additional investment on our premium smokeless tobacco brands that returned them to over 1% growth by the latter half of the quarter;

Four, stabilized sequential market share on our smokeless business as a result of that same investment;

Five, delivered project momentum cost savings in excess of estimates, which along with favorable tax reversals, allowed us to make those investments that were necessary in USSTC without compromising quarterly or annual earnings estimates;

And six, continue to deliver outstanding double-digit top and bottom line growth in our wine business.

I will provide more detail on the key results and then Ray Silcock, our Chief Financial Officer, and I will respond to your questions on the business.

Starting with U.S. Smokeless Tobacco Company, net sales and operating profits were down versus year ago for the quarter as we purposely invested our flexible funds to meet increased competitive promotions and new product activity. As a result, underlying total net can volume of plus 9% for the quarter, although recorded volume was minus 0.2%. This difference traces to a negative impact of almost 2.0 million cans which can be attributed to a difference in shipment timing versus year ago.

There was one less Sunday in Q3 versus year ago. For perspective, approximately 2.0 million cans are delivered each Sunday to certain qualified wholesalers in order for them to meet retailer requests for Monday delivery of our products. We authorized Sunday delivery for qualified customers several years ago but this is the first time it has every meaningfully affected a reported shipment comparison.

As you will hear in a moment, our RAD-SVT data, which is unaffected by shipment timing of this nature, supports our estimate for strong underlying growth.

The shipment timings also affected premium net can volumes, which we estimate was up 0.1% on an underlying basis but was down 0.9% on a reported basis. This is consistent with our estimate of flat premium volume for the quarter that we provided when we held our last conference call.

To be clear, we expected flat volume for premium in Q3 because we knew it would take about four to six weeks to implement our promotional response to the increased competitive activity we saw earlier in the summer. A look at how volume trends progressed during the quarter demonstrates the success of our competitive response.

To be specific, the third quarter played out the exact opposite of the second quarter. As we discussed last quarter, during the first two months of the second quarter, our premium smokeless brands were growing as expected at about 1.3% but during the final month of the quarter, June, in the face of heavy competitive promotional support, three new competitive product launches, dramatically rising gasoline prices, and a gap in our own promotion plan, our premium volume declined and share losses accelerated.

As we could not adjust plans instantly, we entered the third quarter with premium volume declining, but by the second half of the third quarter our promotional adjustments were in place and were working, resulting in premium volume growth trends of plus 1.2% for the final month and a half of the quarter.

This is especially notable as this plus 1.2% is against a comparable year-ago period when we launched new Copenhagen, which included a significant pipeline build, and to be clear, we are not adjusting for that comparison.

It is also worth noting that all brands, especially pouches, contribute to the improvement in trend.

As I said, a look at RAD-SVT provides some additional clarity to the shipment results.

Last quarter we reported that USSTC premium growth in RAD had slowed to plus 0.3% for the 26 weeks ending June 14, 2008. This was down from the plus 1.8% growth we reported in the preceding 26-week period which ended February 23, 2008, and clearly was driven by a softer second quarter.

In the most recent 12-week period ended December 6, 2008, which reflects recent trends and most closely aligns with the third quarter, USSTC’s premium growth trend rebounded back to plus 1.6% behind our adjusted promotional plan.

Essentially, the business has returned to the previous growth rate and our market share for both our premium and total business stabilized when comparing to the second quarter and has actually sequentially increased monthly over the summer after a low point in June. We provided a little extra detail on these trends in the release.

Worth noting, our currently reported market share fully includes the effect of the heavy competitive activity earlier in the summer, which resulted in an additional spike in category growth, which was up plus 8.2% versus year ago during the 12-week period September 6, 2008.

Turning to the winery, Ste. Michelle Wine Estates had another tremendous quarter. Behind continued strength across our entire portfolio of wines, total Ste. Michelle Wine Estates volume increased 17.7% versus year ago during the third quarter and net sales increased 21.2%.

From a Nielsen Consumer take-away perspective, Ste. Michelle Wine Estates grew 13% during the quarter, outpacing the category that grew 2.4%. This resulted in share gains for Ste. Michelle Wine Estates and once again placed Ste. Michelle Wine Estates as the fastest growing top-ten winery in the U.S.

We attribute this robust and sustained performance to the high levels of acclaim our wine continues to garner, over 80 90+ ratings so far this year. This is directly tied to the superior quality being consistently delivered by our wine makers and the entire winery team.

It is also attributed to increased distribution associated with our investment over the last few years to increase the size of the winery sales force.

We also had a positive growth from our all other operations during the quarter, which is primarily our moist, smokeless tobacco business in Canada. Despite a significant increase in the federal excise tax, Canada’s volume held up pretty well, thanks in part to the introduction of a larger can that provides additional value to our Canadian adult consumers and is consistent with the goals of the change in the tax law.

The combined impact for total UST, Inc. from the performance of our operating division was a 1% increase in net sales versus year ago for the quarter and a 3.2% increase in net sales on a year-to-date basis.

Earnings per share grew faster than net sales, with third quarter adjusted diluted EPS up 4.6% versus year ago and year-to-date diluted EPS up 7.1% versus year ago. The faster EPS growth relative to net sales is the result of continued cost reductions associated with project momentum, a lower share count due to share repurchases, and a lower effective tax rate associated with the reversal of reserves.

And most notable, solid Q3 EPS growth came despite the meaningful additional investment we made on smokeless tobacco promotions during the quarter to respond to increased competition.

In addition, we suspended share repurchases as soon as the Altria acquisition discussions began in earnest, which could have added another penny in the quarter.

As it relates to the remainder of the year, we believe the increased competitive environment we faced in smokeless tobacco is easing. Price value brands have recently all taken price increases, competitors are lapsing their new product launches, and gasoline prices have come down significantly.

Accordingly, we believe we will be able to promote at a level currently built into our Q4 projection and therefore remain confident that we will deliver full-year adjusted diluted EPS within the previously projected range of $3.60 to $3.70 per share with a target of $3.65.

As we told you last quarter, for the year, we are absorbing about $0.02 to $0.03 of higher input costs, a $0.01 negative hit associated with the SVT increase in Canada, and now a $0.02 negative impact from the suspension of our share repurchase program.

That roughly $0.06 negative impact is essentially a wash with the $0.06 benefit we received from the lower effective tax rate associated with tax accrual reversals, therefore, I think you can look at the annual adjusted diluted EPS forecast of $3.65 as a pretty clean number.

Also, please remember the fourth quarter of last year included a 53rd week of volume for USSTC, which was 8.0 million net cans, which pretty much explains why we are forecasting flat EPS for the final quarter.

So in summary, given what’s going on in the external environment right now, I am pleased that UST remains on track to deliver our original earnings target for 2008. During my tenure at UST I have always been impressed with resilient and responsive to investment our spectacular brands and our loyal adult consumers are and I am glad to say 2008 appears to be no different.

Importantly, thanks to the additional tools we have put in our toolbox in recent years, we have been able to consistently deliver on our shareholder return goal. Going forward, I am confident our great brands and great people will reach even higher levels of performance as part of Altria and what I believe will clearly be the world’s greatest total tobacco company. I look forward to helping make the integration a huge success.

Ray and I will now be happy to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Judy Hong – Goldman Sachs.

Judy Hong - Goldman Sachs

Murray, you talked about the sequential improvement in the premium brands as the quarter progressed with your incremental promotional spending. How sustainable do you think is that sequential improvement, especially as we see lower consumer confidence and just the more distressed the conditions for the consumers in the U.S. and whether you are taking any additional proactive steps to provide more value to the consumers.

Murray S. Kessler

Gasoline prices is always something that we track very closely and that is coming down dramatically. As we’re sitting here on the call, it’s down $4 today or something, the price of oil. So that’s gone back to retail good news.

I think a second one is that a lot of these competitive new product introductions we faced in the beginning of the year, that challenged us with pipeline and some competitive trial, are all starting to lapse. So if you add up all those new product launches, they probably represented 5 or 6 share points and one of the incremental differences versus a year ago, and if you get into the fourth quarter, that more than cuts in half and as you get into the first quarter it goes down again.

But on an ongoing level of performance of those, they haven’t continued to grow. They were kind of one-shot, they got a level of share, and if anything they’ve tailored off since then in the aggregate. So I think that competitive new product pressure that was on us is going to subside significantly.

And from our own standpoint, we stepped up the flexible funds significantly in the third quarter and made sure we had stronger programs in place in the fourth quarter and deployed all of those. So we will have stronger promotion plans in the fourth quarter versus year ago.

And our PDL to price increases. The gap is closing again, as well.

So, you put all those together, and but for the consumer confidence, I would say we were set to have some really very positive growth. But I’m pretty optimistic that we have real strong plans in place going into the fourth quarter.

Judy Hong - Goldman Sachs

And if I look at your PV brands they were up only 3% or so in the quarter, I’m just wondering if you can address what’s happening within your PV brand portfolio as to whether the emphasis on the premium in the quarter sort of left an emphasis on your price value brands in the quarter.

Murray S. Kessler

It is possibly some of that but I think the big issue, Red Seal growth is the same rate now in the third quarter that it did in the second quarter. The issue was Husky and this time last year, if you remember Dan saying that we were putting additional emphasis on Husky. We did a huge distribution drive and built in a lot of distribution and rolled it out in a more national way to be more competitive. And I think that’s part of what’s going on here, is you’ve got some inventory comparisons.

If you look at just RAD for quarter, and I don’t know if you noticed, but I gave you just pure quarterly RAD versus that longer 26-week period, and I did it on purpose. So you see the RAD numbers, which aren’t affected by these pipeline and certain timings to the same extent, you see real strong growth on premium and acceleration and sequential share gains during the quarter. And that’s because, I think, that in between the summer delivery, last year we launched new Copenhagen in the last few weeks of September, it was a very late quarter launch, so all the pipeline build was sort of incremental in the category, and I don’t know if you remember or not, but last year we had like 2.5% premium volume growth and very strong price value growth, but if you explore that in the third quarter, and Dan got up on the call and said that underlying we think it’s about 1 point to 1.5 points less than that, it’s more like 1.5% to 1.6% growth on our incremental programs.

And I didn’t adjust for any of those. But, to me, what’s really going on with the business is what RAD is saying right now, that our total business take-away consumers, is around less than 2% and premium is a little more than 1%.

Judy Hong - Goldman Sachs

And then in terms of Snus, I know previously you’ve been a little bit reluctant to comment on Snus making any meaningful inroads in the near term. You’ve got Reynolds now rolling out Camel Snus nationwide. Do you think that they’re beginning to gain some traction, maybe faster than you expected? What are your thoughts there for Snus, generally?

Murray S. Kessler

Our Snus test, we put it in and in selected customers it’s doing fine. I haven’t seen any change in trend that would change the opinions I’ve given you in the past. So they obviously see the numbers different than me but it still remains a very tiny piece of the category and I don’t see it building significantly in original markets in any material way. So I’m not saying it can’t over time, I’ve always been a believer, but no, there are no breakthroughs going on right now.

Operator

Your next question comes from David Adelman – Morgan Stanley & Co.

David Adelman - Morgan Stanley & Co.

I wanted to ask you three things. First, but for the pending acquisition, would you have promoted during this quarter at a level that generated a 7% year-on-year operating profit decline in the smokeless business?

Murray S. Kessler

I think to be very fair, I think the answer is yes, because here’s the way I see it. Three years ago we ended up sitting back and watching and not being aggressive, and you were one of the people who jumped all over me on that, and sat back and let it turn into a 4% or 5% volume decline over the course of the year, to the point we had to call off earnings and had to reset the entire business.

Then we went to this new methodology of a state-by-state plan, being very quick and very proactive. And the result of that is we probably spent back a dime off of retail price over the quarter, somewhere around that, and if you do the math on, you came out into the second quarter growing around 1%. In order to end up flat last quarter you had to be declining 2% or 3% for that final month of June and going into July, and instantly through that investment we were able to correct it, get back the sequential share points that we had lost and get the business corrected rather than going through some major restructuring and pain.

So I think that’s more about lessons learned and frankly, when I made the decision to do that spending, I had no idea whether we were going to sign the deal with Altria. We had to make that decision in June or July and we negotiated through the course of the summer and maybe it was going to happen and maybe it wasn’t, so I was making the decisions for the business.

David Adelman - Morgan Stanley & Co.

Secondly, help me understand something. Even in the second half of the quarter, when you were clearly spending at high levels, the per-can revenue shows that, the per-can profit shows that. You really only were getting back to premium volume growth and total shipment growth that you were generating without that level of higher promotional spending in the first quarter, and basically last year as well. So I’m just curious, is it because the economy is tougher and the competitive environment is tougher, is that why you’re not performing even then at a higher level than you were previously, in the absence of that higher promotional spend?

Murray S. Kessler

I would say it would be the macro external environment and what was going on with the competition require a higher level of support. I am assuming you are talking about the RAD numbers, which have us about 1 point.

The point being that you were growing 1.8 when you weren’t spending that kind of money, but gasoline was $1.50 cheaper a gallon. We had the launch of Red Man, the launch of Grizzly snuff, the launch of Grizzly pouches. So you had those three or four new products. I think it was an unusual period of time.

But I don’t view that as a permanent change. I view that as there was a surge against us and we needed to respond with that and that’s not a level we need to maintain as an ongoing. It’s just thinking about it a little differently, to meet it very quickly.

David Adelman - Morgan Stanley & Co.

And then if you were not concerned about profitability, for a moment, and the goal and the objective was to generate on Skoal and Copenhagen market share growth, to outgrow the category, for a sustained period of time, how much do you think, on a weighted average national basis, you would need to bring down those products’ average pricing?

Murray S. Kessler

I think Mike was very clear and very open saying that he has a plan in mind and that he will share that plan and we look forward, when we are allowed to, sitting down with them and working through with that plan because he stated that is his goal. But I think that when the transaction is complete he is going to come and share the operating plan with everybody and the good news is, based on the way this thing has progressed with the approvals, you’re not going to wait long.

Operator

Your next question comes from Erik Bloomquist – J.P. Morgan.

Erik Bloomquist - J.P. Morgan

Just wondering if you could drill a little bit into performance of premium. Was there a divergence within Copenhagen and Skoal performance? And also within pouches? And secondly, I was curious if you’re seeing any particular change in terms of consumers, seeing more smokers adopting smokeless or if there’s any change in that dynamic with the category growth being a bit higher.

Murray S. Kessler

Let me answer the Copenhagen/Skoal question. Every brand, so both Copenhagen, the poor portion of Copenhagen came back beautifully and grew nicely in the quarter. The same thing was true, our pouch business was one of the areas we focused on, some of the spending.

If you remember, our pouch business slowed a little bit during the second quarter with the competitive new product pouch launches. Swedish Match launched pouches, Conwood launched pouches on both their premium and the PV. And we got back to very strong, I think we were near 20% pouch growth for the quarter, both on an underlying basis and close to that on a reported basis. Skoal came back strongly and our price value brands all responded well.

The only one thing I will say is a little different is that the new launch Copenhagen, which Dan told you last time we were not thrilled with the results we’ve gotten from new Copenhagen. That one was a drag on the quarter because you had almost 2.0 million cans of pipeline last year, 1.5 million cans of pipeline last year, and the product hasn’t really performed up to its levels. So new Copenhagen dragged down the total Copenhagen franchise, but the core Copenhagen snuff, Copenhagen long-cut, Copenhagen pouches, were all up beautifully.

And the second one was smokers. I have no additional data on smokers over the course of the quarter right now. We get all that usage and diary panel data at the end of the year.

Erik Bloomquist - J.P. Morgan

In terms of what’s happening with the new Copenhagen launch, is that something that we should expect continued promotion on to try and get that to where you think it should be or is that something you think has been necessarily impacted by the competitive launches and will just, as you anniversary those launches, you will see better results our of new Copenhagen?

Murray S. Kessler

The new products, nothing has gone against new Copenhagen in the packaging. The question is, just like everybody else who has a hard time trying to launch a premium brand in difficulty in the compete, we had the same difficulty trying to launch in trying to launch a new premium brand.

At the heart of it, I think Dan and the team, they’ve done a beautiful job building the brands and the investment and this was a creative idea but at the heart of it is Copenhagen is rugged, tough, authentic, natural, and I’m just not sure that Copenhagen consumers are willing to accept some flavors. But we’re selling some cans. It’s nothing compared to a new product like Copenhagen pouches, which modifies form and stays true to the core.

And I think the good news that you’re also hearing on this call is despite some sort of discussions by some of my competitors relative to the success and the basic Copenhagen snuff category, the Copenhagen snuff business had a good quarter.

Operator

Your next question comes from Christine Farkas – Merrill Lynch.

Christine Farkas - Merrill Lynch

I’m wondering if you can comment just a little bit about regional performance, particularly in the Southeast. Is that where you saw most of the rebound coming in the second half of the quarter?

Murray S. Kessler

It was a broad scale acceleration and performance. That Southeast that I pointed out in the last quarter is a good question. It recovered. I think it would have recovered more because we spent a fair amount of resources down there. But then as it got towards the end of the quarter, that whole gasoline pipeline issue and the hurricanes cost us some inventory. Some of our key retailers, one of them actually shut down 50 to 70 stores in a key area for us, for two weeks. That whole Southeast border, there was no gasoline for a while. So it’s a little bit hard to read.

The answer is, it recovered but there is still a drag on performance relative to the rest of the country and remains an area of focus because if I was reporting what the rest of the country did right now, that north of 70% which is growing strongly, you would be pretty pleased with how strong those numbers are.

Christine Farkas - Merrill Lynch

So you are suggesting that the drag from the Southeast is still pretty meaningful?

Murray S. Kessler

Yes, I think that’s fair. It improved and I think it has improved more than the numbers we see, because of what happened with some disruption, so I’m optimistic that we have the right programs there and they have made some fundamental changes to the programming. But, yes, that’s a challenging part of the country. Those are high PV markets.

Christine Farkas - Merrill Lynch

It sounds like it’s difficult to quantify but how much would you say of this drag, per se, would be coming from hurricane disruption and overall economic factors, because we are seeing gasoline prices drop, as you have indicated, so perhaps that sensitivity would improve. But is there a way to quantify how much of the slowdown or the drag in the third quarter, although it sounds like it’s improving, is coming from those factors versus price gaps or other things?

Murray S. Kessler

It’s hard. I would be guessing.

Christine Farkas - Merrill Lynch

With respect to your overall top line in the tobacco business, which was done sharper than we’ve seen in a long time, was the plan kind of done in one shot or as the quarter progressed you saw that the reactions was perhaps not as strong as you had hoped and you picked that up? I’m trying to figure out, as the quarter went through, did you find that your original plans were just not deep enough to recover the share from the second quarter?

Murray S. Kessler

No, it was one shot, defensive. Remember, I didn’t have a lot of time to react because April and May were quite good for the company, June was off. You’ve got about a four-week lead time to get anything reflected at retail. So to be able to affect August and September, you get into one week, two week, three weeks, when we saw June was really an issue. We made a decision to go and to make sure we shored the business up. And that includes additional value packs in parts of the county, some promotions and things that will actually carry through into the fall as well.

So, no, it was a defensive planned incremental activity that was very specific in nature. We had sequential share gains all summer long and it’s been a long time since we were actually increasing that share line every month.

Christine Farkas - Merrill Lynch

With respect to SG&A costs in the quarter, were there M&A-related costs that you could perhaps float for us or do you anticipate some of those in the fourth quarter?

Raymond P. Silcock

We had costs related to the Altria acquisition. I think we disclosed approximately $7.1 million of costs in the quarter. There will be added costs when the transaction closes and those will be included in our fourth quarter results.

Operator

Your next question comes from Nik Modi – UBS.

Nik Modi - UBS

In terms of convenience store, just generally, did you notice traffic start picking up as the quarter went through and gas prices started to moderate substantially? The second question is the things that retail, this category is pretty inefficient in terms of only about 20% of the SKUs actually make most of the money in the category, I think it’s somewhere in the 70% to 80% of the total profit for the category at retail. How does the retailer think about that situation and do you think that they will become more efficient over time in terms of really shelving the fast-moving SKUs?

Murray S. Kessler

We have spent a lot of time partnering with customers on category management. OTP is so profitable, you know this. You know this as well as I know this. That when you look at the total amount of space most convenience stores have dedicated to it, there is always the big accounts like sheets with really big sections, but you go into most gas stations, most convenience stores, you are talking about a rack with about 20 SKUs on it.

And given the level of profitability and the incrementality of how loyal consumers are, whether it’s our brands or others, how loyal they are to their individual cut and flavor, they all make a lot of money. So over time will there be some rationalization? I guess that’s true with every category, but in my personal opinion, there needs to be more space dedicated to smokeless. And that’s still a significant, when you look at total tobacco and how much profitability and how much volume comes out of moist smokeless as a total category, I believe that it’s underspaced.

Convenience store traffic. Were you at NACS? I went to NACS, I talked to a bunch of retailers. They were, at the time, all still stinging from the summer of gasoline prices being very high. The Southeast customers, obviously it was a concern because they didn’t even have gasoline at their pumps. But I didn’t hear definitive answers one way or another on traffic.

We had a retailer advisory group at our place earlier in the summer and that answer was interesting that they thought traffic was pretty good because gasoline had gotten so high that people weren’t filling up a full tank anymore, they were coming in filling up a half of tank, so they were still seeing folks there. Dan’s not on the call today and he’s closer to that number than I am. I think we can get back with a definitive answer. But I think it had to suffer a little bit.

Operator

Your next question comes from Ann Gurkin – Davenport & Company.

Ann Gurkin - Davenport & Company

Do you expect any kind of distortion in inventory build in the fourth quarter?

Murray S. Kessler

Let me talk to UST specifically. It is going to go up and down a little bit through the quarter because last year, if you recall at this time, Congress was considering, or had voted and passed, and [inaudible] bill that was passed on to the President for signature. And a number of wholesalers early in the quarter were trying to build a little bit of inventory because they knew the prices were going to go up and it was an opportunity to make some inside margin? And then he vetoed it and it sort of came right back out.

So the good news is I think there will be some up and downs within the quarter, but I don’t see any major swings crossing the year.

Ann Gurkin - Davenport & Company

And on wine, do you have an adequate supply of grapes for 2009, any issues on sourcing grapes?

Murray S. Kessler

No.

Operator

Your next question comes from Andrew Kieley – Deutsche Bank Securities.

Andrew Kieley - Deutsche Bank Securities

How strong do you think brand equity is generally among the PV segment? Theoretically, if we saw price gaps on premium products next year narrow significantly, do you think that there’s brand equity in PV products that’s anywhere near premium, to keep consumers from leaving that segment?

Murray S. Kessler

I think that the brand equity levels for Copenhagen and Skoal are extremely high and given a closure of price gap, if that’s the way it ultimately plays out, I think our brands will perform extremely well. Because brand loyalty aside for other brands, we have done our own quantitative and consumer studies that say that consumers are extremely loyal to our brands and would prefer to be consuming those products. And as an example, Copenhagen snuff, hands-down winner in blind taste tests, given a closer price, are going to want to dip Copenhagen.

So I think our products are positioned beautifully for a potential significant investment.

Andrew Kieley - Deutsche Bank Securities

Just reading through the proxy that you put out, it talks about a scenario of new innovative products. I was wondering if that’s anything revolutionary or new versus what you’ve talked about in the past, or if you can give any details on that.

Murray S. Kessler

I’m trying to avoid comments on the transaction, but you’re just talking about in general when it talked about our internal valuation method of a scenario new products?

Andrew Kieley - Deutsche Bank Securities

Exactly.

Murray S. Kessler

I’ve been very clear with that. I think I said that when I stood up at the investor conference, etc. we were trying to wait to see how the regulatory front proceeded but that we were ready to go with innovative products. And nothing has changed in that regard. Obviously, given the transaction, I think we will wait to one, see how the regulatory environment persuades, and then also eventually show those new products to Altria and then we will decide what’s the appropriate next step.

But I will stand behind what I’ve said on every conference call in the past, notwithstanding anything that’s been announced in the past few weeks. I don’t believe that any smokeless company has any technology that we don’t and that we couldn’t quickly be able to roll out or launch.

Andrew Kieley - Deutsche Bank Securities

In the wine business, it’s safe to say you’re making some good distribution gains and that’s helping to drive the growth, but within the growth are you seeing any discernable trade down or weakness from consumers in that premium wine segment, that’s affecting things at all?

Murray S. Kessler

Our wine segment? No. I think our wine brands are absolutely perfectly positioned for this economy. If you look at Columbia Crest and Ste. Michelle, especially Columbia Crest, you can buy a 90-rated bottle of wine for $8 to $10 versus having to pay $30 to $40 for a 90-rated bottle of wine. And we sell more 90-rated bottles of wine than any winery in the world.

So I think going into this economy, the fact that Columbia Crest and Ste. Michelle consistently show up on every best value list in the country is partially why we are just roaring along through this economy.

Operator

Your next question comes from Mark Cohen – Merrill Lynch.

Mark Cohen – Merrill Lynch

I know you don’t want to talk about the price gap answer to David’s question but maybe you can at least give us some tools to work with so we can understand the price elasticity. So can you put into perspective how much you reduced the average prices on Copenhagen and Skoal in the quarter and what the response of the brands were to those price reductions?

Murray S. Kessler

Yes. I think our realization per can was down about $0.10 for the quarter, something like that. You could do that math on your own. And I think we were running, prior to that, about $0.04 or $0.05 down on just the general promotion. So call it an extra nickel at the wholesale level and you can figure out whatever that passes through to a consumer.

And then I told you we came into June and July, the math has to work out that you were down in the 2% to 3% range and it got back up to the plus 1% or 2%, so you had almost a 4 point swing in trend.

Mark Cohen – Merrill Lynch

So it sounds like it’s incredibly sensitive.

Murray S. Kessler

It’s more complicated than I just did but I think you saw a pretty darned good response for our investment this quarter.

Operator

There are no further questions.

Murray S. Kessler

Like I said, everything is proceeding smoothly. I just want to thank everybody for everything from their challenging questions and keeping us on our toes from an analyst community, from support from shareholders. We look forward to closing the deal in the first week of January, which we’re all on track for, and I can speak on behalf of my management team that we’re excited about joining the Altria team and making the acquisition a smash success for them. I think it’s going to do beautifully as part of their company. Thanks for all your support.

Operator

This concludes today’s conference call.

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