ProShares Ultra 7-10 Year Treasury
Q1 2008 Earnings Call Transcript

Published: 24 Apr 2008

[Operator:]

Good day ladies and gentlemen and welcome to the First Quarter 2008 UST, Inc. Earnings Call. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Mark Rozelle, Vice President-Investor Relations. Please proceed.

[Mark Rozelle:]

Good morning. Thank you for joining us as we discuss our first quarter 2008. 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 will also be available on our website in an MP3 format, which can be downloaded to a player such as an iPod. Hosting the call will be Murray Kessler, Chairman and CEO of UST. Also joining us with remarks today will be Dan Butler, President of our U.S. Smokeless Tobacco subsidiary, and Ray Silcock, our CFO. At the end of our prepared remarks, Murray and the team will take your questions. 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 will also be discussing non-GAAP financial measures in this presentation. A complete reconciliation of GAAP to non-GAAP financial measures can be found in the press release, which we issued this morning and is also available on our website. I will now turn the call over to Murray.

[Murray Kessler:]

Good morning and thank you for participating in UST's first quarter 2008 earnings call. As you can clearly see from the results published in our earnings release this morning, the company enjoyed another good quarter. I'm pleased with the results. Net sales increased 5.7%, adjusted operating income increased 6.7%, adjusted diluted EPS increased 12%, and GAAP diluted EPS increased 23.9%. Ste. Michelle Wine Estates was a significant driver of top-line growth, posting a 25.3% increase in net sales for the quarter behind a 15.5% increase in case sales. U.S. Smokeless Tobacco Company again contributed to revenue growth, increasing net sales 1.7% behind a 3% increase in total unit volume and a 2.1% increase in premium unit volume. Strong top-line growth coupled with project momentum cost reductions resulted in a 40 basis point increase in our underlying operating margin. The company also benefited from its increased investment in share repurchases during the latter half of last year and $132 million in share repurchases during the first quarter of this year. When you combine strong net sales growth and an improved operating margin and a lower share account, you get a leveraged impact on diluted EPS. This increased 12% versus from a year ago on an adjusted basis. I think this is a pretty good example of our expanded toolbox at work. Before I turn the call over to Ray Silcock, our Chief Financial Officer and Dan Butler, the President of U.S. Smokeless Tobacco Company, I'd like to make a few other observations on the quarter. First, the categories we compete in remain vibrant with super/ultra premium wines up 12% on a year-to-date basis, and smokeless up 7.1% in the most recent 26-week period. We're still estimating the moist smokeless category to grow 5% to 6% for the year. Second, despite some continued U.S. STC market share loss, we saw no significant change in trend between the premium and price value smokeless segments during the quarter. Third, competition remains fierce in the smokeless category as it has been for some time, but thanks to the state-by-state premium loyalty plan developed and well executed by the U.S. STC management team, we are a much more adept competitor. Of note, U.S. STC plans focus on existing national smokeless competitors and their recent initiatives as nothing we have seen from new entrants in test markets appears to be a material threat to the company in the foreseeable future. Fourth, Ste. Michelle Wine Estates remains the fastest growing Top Ten winery in the U.S. during the first quarter. I am pleased with the winery team's ability to plan for and deliver consistent, strong growth, especially in light of the integration of two significant assets during the last 18 months. For the quarter, Ste. Michelle Wine Estates earnings growth on the surface appears troubling, but was negatively impacted by a number of unfavorable comparisons and does not cause us concern. As Ray will explain, we still believe the Ste. Michelle Wine Estates team will achieve their original earnings goals for the year. Fifth, it was a busy quarter on the legislative front. Two states, Utah and New York, totaling about 2.5% of total U.S. STC volume will convert from an ad valorem tax structure to a weight-based tax structure effective July 1st. That brings the total to 15 states or 24% of our volume that now tax premium and price-value moist snuff on a fair and equitable base. Importantly, the company also changed its position during the quarter regarding FDA regulation of tobacco. To be specific, the company now supports the House version of FDA Regulation HR 1108 that was recently passed by the House Energy and Commerce Committee. It has always been UST's stance that the company would support FDA regulation if it recognized the distinct differences between smokeless tobacco and cigarettes. We believe the current bill, while not perfect, more appropriately recognizes the distinct differences which manifests itself in different marketing restrictions for the two categories. It also leaves the door open for relative risk comparisons between the two categories if the science supports the claims of the satisfaction of FDA. We believe the science will support a harm-reduction claim. We also believe the bill will level the playing field within the smokeless tobacco category since, as it exists today, only U.S. STC is a signatory to the smokeless tobacco master settlement agreement. Under this bill, all smokeless tobacco manufacturers will operate under similar marketing and manufacturing restrictions. Going forward, we will actively support passage of the House version of this bill. Sixth, the company issued $300 million in long-term debt during the quarter. The offering was over-subscribed almost five-fold, demonstrating the importance of UST's reliable cash flows during these troubled times in the financial markets. And finally, seventh, the weakening economy and substantially increased gasoline prices of course remain a watch-out. We know this is your primary concern and want to remind you that tobacco and alcohol historically are resistant to economic downturns. In addition, our plan to retain a level of flexible spending that would allow us to make adjustments as necessary to respond to changes in the external environment be it the economy or competition. While we understand and share the concern many of you have voiced, we remain confident in our plans for the year and are therefore reaffirming earnings guidance. With that, I will turn the call over to our Chief Financial Officer, Ray Silcock. Ray?

[Ray Silcock:]

Thank you, Murray, and good morning, everyone. As you've seen from this morning's earnings release and just heard from Murray, we're off to a strong start in 2008. Our first-quarter sales volumes, net sales and earnings are up for the company and for each of our major businesses. I'd like to start this morning by giving you some color around those strong results, followed by a brief overview of some of the financial events at UST in the past quarter. Before taking you through our Q1 performance, I'd like to remind you that, in my comments, I primarily refer to adjusted results. Reconciliations of adjusted results to comparable GAAP measures, along with the rationale for why we believe their use is appropriate, are included in this morning's press release, which is available on our website. Sales for the total company were $472.7 million in the quarter just ended, up 5.7% from the same quarter last year, while net earnings amounted to $125.6 million, an increase of 3.8%. We reported GAAP diluted EPS of $0.83 for the quarter. On an adjusted basis, EPS amounted to $0.84 per share, a 12% increase versus the prior year. Nearly all of the adjustments impacting the first quarter prior-year comparison were in the 2007 period. These Q1 2007 adjustments included anti-trust litigation settlements in the sale of our previous headquarters, as well as some project momentum-related restructuring charges. Restructuring charges in Q1 2008 were $412,000 before tax, which rounded to $0.01 per share. For our smokeless tobacco business, net can volume grew 3% in the first quarter, while premium volume was up 2.1%. Net sales were up 1.7% to $373.6 million. As previewed in our 2008 smokeless plan in the first quarter, we purposely increased promotional spending. This iincluded the launch of Skoal Edge Wintergreen and the Husky distribution drive. This, combined with the relatively faster growth of our price value brands, contributed to a modest $0.03 reduction in Q1 net revenue realization per can. Operating margins in Q1 improved 110 basis points as compared to prior year to $203.8 million, driven by lower SA&A. SA&A expenses in the first quarter were lower than year ago principally due to the continued benefit from Project Momentum savings. Let's look into the winery. Case volume this quarter was up 15.5% as compared to the same period last year, and net sales increased 25.3% to $86.2 million. We had growth across much of our wine portfolio in Q1 with Chateau Ste. Michelle, Red Diamond and 14 Hands all growing strongly. The inclusion of Stag's Leap Wine Cellars, acquired in the third quarter of 2007, also had a strong impact on the Q1 sales. If we exclude it, our net sales would have been 12.7%, ahead of Q1 2007. Gross margin was 34.9% of sales in the first quarter, compared to 35% in Q1 of 2007 with a dollar gross margin of $30 million, an increase over prior year of 24.6%. Winery segment operating profit of $11.3 million for the first quarter. It was, however, up only 1.7% from the prior year. This discrepancy between gross margin growth and operating income growth resulted from a variety of factors. Gains on sales of property were recorded in the first quarters of both 2007 and 2008, but the gain in 2007 was lower. And we reversed an expense accrual in Q1 2007 but not in Q1 2008. These two factors impacted that year-on-year comparison by $1.4 million. Additionally, winery operating margins were also reduced. This is because although we booked 100% of the gross margin from Stag's Leap, we may only record 85% of the operating margin. This difference arises from our shared ownership of the Stag's Leap brand with Antinori. And SA&A was higher in Q1 2008, principally due to Stag's Leap integration costs. When all of these factors came together, the quarterly comparison, Q1 2008 versus Q1 2007, was impacted by approximately $3 million, pulling our operating profit improvement versus prior year down to 1.7%. Versus plan, however, winery operating profit was off only about $1 million in the quarter, and we confidently expect that the winery business will make this up and achieve its planned profit objectives in 2008. Our international business also grew in the first quarter with net sales up 19.9% and operating profit ahead 22.9%, helped by a weak U.S. dollar. Our international business is principally in Canada, where our team has consistently demonstrated their ability to grow the business, albeit from a small base despite a difficult business environment. Turning now to other financial events in the first quarter, on February 29, we successfully completed a $300 million 10-year bond issuance. Despite our having to compete with several other issuers that day, the offering was almost five times oversubscribed. At 193 basis points, our credit risk premium was lower than we had originally expected, resulting in a total coupon for the bond of 5.75%, significantly better than we had anticipated. Proceeds of the bond offering were used to repay a bridge facility and to pay down our revolving credit line. Borrowings from both of these have been utilized to fund our stock repurchase program in the fourth quarter of last year. Long-term debt increased by $50 million in the quarter and was up from $1.090 billion reported at the end of last year to $1.140 billion at the end of Q1. The lower coupon on the newly issued bonds helped reduce the weighted average cost of long-term debt, which dropped to 6.57%. And we continue to buy back more stock in the first quarter of 2008, buying 2.4 million shares with a total dollar value of $132 million. Although this puts us ahead of our announced buyback program on a year-to-date run-rate basis, it remains our intent to buy $300 million worth of stock this year. As I mentioned earlier, Project Momentum continues to have a strong positive impact on our earnings in Q1, and we expect that to continue for the balance of 2008. Since Project Momentum's inception in 2006, we have reached an annual savings rate of $102 million and we are on track to reach our $150 million goal by the end of 2009. As we discussed at our investor meeting at the end of last year, we are focused on achieving further cost savings and continue to pursue a variety of opportunities. For the full year 2008, as noted in the headline of this morning's press release, we are reconfirming our earnings guidance. As we told you last quarter, we expect to achieve earnings per share of $3.65 in 2008, up 5.5% from 2007 on an adjusted basis, with a range of $3.60 to $3.70. While first-quarter EPS was up 12% from prior year, we expect earnings per share for the remaining three quarters to be up approximately 4% from the same period as last year. This more modest EPS growth for the balance of the year is in line with our prior guidance, and while appearing somewhat conservative is we feel a prudent planning stance in the light of current economic conditions. Importantly though, with 5.5% EPS growth versus last year and with a planned dividend payment of $2.52, which is a 4.8% yield, we anticipate that the Company, even with this prudent planning stance, will exceed its shareholder return goal of 10% for 2008. With that, I'd like to turn the call to Dan Butler, President of the U.S. Smokeless Tobacco Company. Dan?

[Dan Butler:]

Thank you, Ray, and good morning everyone. As Ray already outlined, the Smokeless Tobacco segment delivered solid top and bottom-line performance in the first quarter. Net sales were up 1.7% versus year ago, behind sustained volume growth in both premium and price-value brands, and adjusted operating profit increased 3.7%. Operating margins increased 110 basis points to 54.5%, behind the increased revenue and reduced costs. Now, I'll focus on the volume results for the quarter. Total net canned volume for the first quarter was up 3% versus a year ago, our ninth consecutive quarter of overall growth. Notably, these results are on top of strong overall unit volume growth of 2.3% in the year-ago quarter. USSTC premium volume was up a solid 2.1% versus year ago, in line with our guidance for the year. In price value, USSTC volume grew 8% behind solid growth on both the Red Seal and Husky brands. Several things are worth noting in our Q1 volume performance. First, total USSTC premium volume has posted growth for seven consecutive quarters. During the first quarter, both of our premium brands, Copenhagen and Skoal, performed well as the result of the ongoing execution of our premium loyalty plan, continued innovation, and strong brand building. Worthy of note, Copenhagen had a particularly strong quarter. Second, total USSTC portion packs, including both Copenhagen and Skoal pouches and Skoal Bandits, increased mid single digits versus a year ago, a lower rate of growth versus history due to the comparison to a year-ago period that included the pipeline sale associated with the successful launch of Skoal Citrus pouches. As noted previously, portion packs are a successful component of our category growth strategy with 28% of new-to-category adult consumers using pouches and total retail sales of over $0.25 billion. We attribute this success of the approachability, ease-of-use and discreteness of the form. Going forward, we expect double-digit growth in the segment for the full year, and we've strengthened our plans to maximize awareness, trial, and in-store merchandising. Third, in price-value, USSTC growth was driven by strong performance on both of our brands. Husky contributed the majority of the increase, sustaining strong double-digit growth as a result of continued efforts to expand distribution and strengthen retail presence. Red Seal again grew solidly in the mid single digits, in line with our expectations and the total category. Fourth, a word about new Skoal Edge Wintergreen, which is being launched to address a segment of the market where price value has disproportionate strength. This exciting new premium product began shipping on March 17 and is off to a strong start with broad trade acceptance and enthusiastic consumer response in the early days. This truly differentiated product is unique in terms of both flavor and a softer, more comfortable mouth feel than anything in the category. The package graphics are bold and breakthrough and Skoal Edge is supported with an equally bold, fully integrated marketing plan, including introductory promotional displays, high-impact point-of-sale materials, direct mail, one-on-one sampling, and consumer advertising. Fifth, our new Cope subline was launched in September of 2007, comprised of Cope Straight, Cope Whiskey Blend and Cope Hickory Blend. As you all recall, new Cope is designed to offer adult consumers a more approachable product from the leading iconic brand in the category and as such will allow us to more effectively sample the brand to potential new adult consumers. At this point, new cope retail sales are at an annual run rate of over $50 million which is while meaningful, is somewhat below our expectations as trial and awareness are still relatively low. Accordingly, the brand is executing a planned integrated promotion called the Cope Chop Shop that invites consumers to design a custom motorcycle on our website and submit their design in a competition. Early response to this promotion has been outstanding. Now, let me turn to RAD-SVT data, which is our measure of consumer take-away. I will be reporting on RAD-SVT results for the full 26-week period ending February 23, 2008. Overall, trends remain consistent with those reported in previous quarters. Starting with the category, total MST volume growth increased 7.1% versus year ago. We continue to estimate plus 5% to 6% category growth for the full year. Total USSTC volume grew 3.1% versus a year ago for the 26 weeks, and USSTC volume share was 59.0%, down 2.2 points versus a year ago. While share is down for the 26 weeks versus the prior 26-week period ended 12/1/07; USSTC's sequential monthly share have been essentially stable since October, and our year-over-year share change continues to represent an improvement versus prior-year trends. From a revenue standpoint, USSTC dollar share continues to be very strong at 71.2%, driven by our leadership in the premium segment. Now, turning to volume performance by segment; the overall premium segment continued to grow plus 1.7% versus a year ago and represented 54.2% of total category volume for the period. USSTC premium volume increased 1.8%, and our share of the premium segment increased 0.1 percentage point to 90.7%. In the Price Value segment, volume growth continued to slow to plus 14.3%, as compared to the full-year 2007 growth rate of 15.4%. The PV segment represents 45.7% of category volume. Total USSTC price value volume growth increased 10.4% versus year ago. Our Husky brand significantly outpaced PV segment growth, while Red Seal again delivered mid single digit growth. USSTC share of the PV segment was 21.6%, down 0.8 percentage point versus a year ago. Let me summarize our key take-aways from the shipment and RAD results. First;, the Smokeless Tobacco category and USSTC brands continue to perform well even within as difficult and uncertain economic environment that includes record high gasoline prices. Second, despite intense broad scale competition, our sequential share has been essentially flat since October, even in light of the difficult economy. We have not seen an acceleration in Price Value growth rates. To the contrary, PV segment growth has actually slowed. Third, all of our core brands; Skoal, Red Seal, Husky and especially Copenhagen, once again turned in solid growth versus year ago, and we're pleased with the balanced performance across our portfolio. It is worth noting that the USSTC team continues to generate strong results even while undertaking significant changes in policy and process that challenge the organization to be adaptive. A highlight for the quarter was the national rollout of a new field sales management system which equips all USSTC sales personnel with a completely new software system and state-of-the-art hardware, such as tablet PCs and wireless scanners and printers. This system was designed to improve our selling effectiveness and efficiency but represented a profound change in how the work gets done in the field. Our entire sales force had to learn a new way of doing their job, and I'm proud of how they have executed this significant change while continuing to deliver against their key priorities with excellence. Now, let me turn to our outlook for the balance of the year. Our priority focus remains on growing the MST category by converting adult smokers. In 2008, we will sustain investments of well over $100 million in direct mail to adult smokers, reach-out advertising, product innovation, one-on-one marketing, and in-store merchandising. We will continue to drive our leadership in the portion pack segment with increased marketing support and continued innovation in common quarters. On top of this, we're bringing a new level of creativity and integration to our brand-building efforts, as evidenced by strong advertising campaigns and interactive consumer promotions. As always, we will adjust and optimize our spending behind the state-by-state premium loyalty plan, as necessary, to react to competition and/or any impact from a softening economy. Our plan assumes continued strong category growth of 5% to 6%, which combined with modest share decline should deliver sustained underlying USSTC premium volume growth of about 2% in 2008. We expect continued double-digit growth in our USSTC price value businesses as we sustain mid single digit growth on Red Seal and continue to build distribution on Husky. In total, we expect USSTC to continue to make progress in accelerating profitable unit volume growth. With that, I will turn the call back to our CEO and Chairman, Murray Kessler.

[Murray Kessler:]

Thanks, Dan. I just guess, in summary, I would just like to reiterate that despite a lot of concerns out there about the economy, gasoline prices, etcetera, the business has performed well and we think we had a real strong quarter. With that, we will be happy to answer your questions.

[Operator:]

(Operator Instructions). And your first question comes from the line of Judy Hong with Goldman Sachs. Please proceed.

[Judy Hong:]

Good morning, everyone.

[Murray Kessler:]

Good morning Judy.

[Judy Hong:]

Murray, I appreciate your comment on just the economic situation not really affecting your business, but I'm just hoping if you could give a little bit more color in terms of any anecdotal evidence or any trend changes that you've seen as the quarter progressed. I mean, clearly, the CNG channel, broadly speaking, has been weak. I'm just wondering whether you've seen any traffic issues hurting your business in that channel, anything that you could just shed a little bit more light there would be helpful and in relation to that, I'm just wondering. Just given the fact the smokeless tobacco tends to be viewed as a more of a value proposition versus cigarettes, whether that sort of, people coming from the cigarette category is actually offsetting the potential impact from the economic situation.

[Murray Kessler:]

The data we have, the RAD data is through February. I'm not a big fan of the Nielsen data that the Street tends to get which I don't think is representative. We have a custom data that just does C stores, that gives the consumer take-away. But there were no changes in trends on the consumer take-away. You have fluctuations within the quarter on shipments, which are normal based on promotion timing, etc., but you know, the basic underlying trends; we didn't see anything different. We made a point of it in the release to say premium was growing at 1.7% and we were at 1.8% before, and it didn't change and PV basically didn't change at all. We certainly hear it and is your theory possibly correct that, with cigarettes, a number of cigarette excise taxes and restrictions offsetting that? Sure. But frankly, we sell pretty expensive or premium wines. We have a segment of our wine segment that is value-based and we have a segment that's pretty well luxury. Those businesses continue to perform well. I think we had our eyes open and we made sure we had strong plans and are executing well, but at this point, while we're paying attention to it, too, and we obviously in our guidance kept some flexible spending built into that guidance, the trends have remained strong.

[Judy Hong:]

Okay. Then just looking at the PV segment, it looks like, again, the volume growth, really is sequentially decelerating a little bit, even with a lot of new products in the marketplace. Are you expecting that number, though, to accelerate as the year progresses, with the Grizzly snuff being rolled out nationally, you've got Red Man being rolled out nationally as well?

[Murray Kessler:]

No, I think it is going to decelerate.

[Judy Hong:]

Okay. Then on the portion packs, you've talked about your growth rate slowing in the quarter. Part of that seems like a comparison issue. But is there any impact in terms of the other snooze products that are in the marketplace that may be getting into some of your growth in that category?

[Dan Butler:]

Judy, it's Dan. I think, first, to pick up on your observation, it is largely driven by lapping a year-ago pipeline fill and we've seen that in the past when we've launched new pouch SKUs. We tend to run along at a good, strong, double-digit growth and then the quarter that we lap an introduction drop down. So we expect that to snap back pretty quickly. As I indicated in my comments, we are intent upon continuing to drive strong growth in pouches, and you'll see more from us in that in the future. Relative to snooze, I mean quite frankly on a national basis when you're looking at our numbers, it's not even a rounding error.

[Judy Hong:]

Okay, thank you.

[Murray Kessler:]

Yes, and just to add to that, Dan, I think consumer take-away numbers on pouches continue to be double digits. So Dan was really explaining shipments, which get more affected by pipeline fills and that type of thing.

[Operator:]

And your next question comes from the line of Christine Farkas with Merrill Lynch. Please proceed.

[Christine Farkas:]

Thank you very much and good morning, everyone.

[Murray Kessler:]

Good morning, Christine.

[Christine Farkas:]

A question, Murray, for you or for Dan; looking at your premium market share which continues to climb but the rate of increases has slowed to just 10 basis points this period. I'm wondering if you can comment a little bit about the dynamics within premium, which of course might lead you to comment a little bit on competition in terms of what you're seeing at the high end.

[Dan Butler:]

Good morning, Christine, it's Dan. I'm still very pleased with our performance within the premium segment. I mean, frankly, it's 10 basis points on an over 90% share, so when you are at a 90 share, it's pretty tough to grow 100 basis points. So, the fact that we, I think, consistently from quarter to quarter to quarter have strengthened our share of the segment is a good thing. There's really only one other branded competitor in the premium segment. Frankly, they've been having a very difficult time. So I think we're doing quite well.

[Christine Farkas:]

Okay, great. Then with respect to the margin improvement in the Tobacco segment year-over-year, could you isolate for us at all how much of that might be due to mix versus your cost savings from Project Momentum?

[Murray Kessler:]

Ray commented on net revenue realization, which was relatively flat off a few pennies versus a year ago, and that was largely driven by mix because, as I indicated in my comments, our price value business is growing at a faster clip than or premium business, but we're pleased with where we are. The margin improvement really comes from control on costs and the ongoing benefits from project momentum.

[Christine Farkas:]

Okay, great. And last question, just quickly on your project, on your loyalty program, I should say, in terms of building or maintaining that, you commented the last couple of quarters that this dollar amount is pretty stable now. You might tweak from state-to-state but the overall pull is relatively stable. Is that still the case here in the first quarter?

[Murray Kessler:]

What we said in our annual investor conference, that we would moderately increase the spending and continue to make adjustments and we have done that through the first quarter as we have for the last several quarters. It's a lot of tactical adjustments and shifting to the right programs, and shifting between states, but I would say we're right contract with where we want to be.

[Christine Farkas:]

Okay, thank you very much.

[Operator:]

Your next question comes from the line of Erik Bloomquist with JPMorgan.

[Erik Bloomquist:]

Hi, Good morning.

[Murray Kessler:]

Good morning Erik.

[Erik Bloomquist:]

I just wanted to go back to your announcement on the FDA support. I'm curious in terms of the confidence that you have that you are going to be able to make a relative risk claim. Is that source primarily using the Swedish experience? I'm curious why that is going to be possible, given that the EU itself has been reluctant to extrapolate the Swedish experience. What's different about being able to make that claim in the US? Then the second question was if you could just remind us what the marketing restrictions are that UST subjects itself to that its competitors aren't subject to and how that will change the competitive environment, assuming FDA is passed? Thanks.

[Murray Kessler:]

Okay, let's talk about the first one. I want to be real clear that, over the past seven or eight years, the debate on harm reduction has elevated, has been discussed, has gotten us to the point where we can have these frank discussions relative to distinct differences between smokeless tobacco and cigarettes, that you saw manifest itself in at least the current version of the legislation. It's progressed to a point. It's just our belief -- you'll never get it to a point where it ever translates into a claim if there's not a process, no matter how difficult that process is and no matter how long that process takes. So, I'm not going saying that the FDA is going to pass, and instantly -- whether it be in the EU or be in here. But we believe that, through a process and evaluating whether there is additional research or the research now is sufficient, that with that process that ultimately there are going to be claims that can be made. Even if you get the most basic claims, that for example, secondhand smoke -- you are never going to get to any claims without a process, so that is one of the reasons we are embracing it -- that we believe that, overtime, with rational people evaluating the science and the research and possibly additional research that we will support, that you can get there. Whether that takes five years or it takes a year or it takes ten years, it ultimately needs a process to move forward. As it relates to the marketing restrictions STMSA. Now, we are the only ones that have restrictions, for example, on sponsorship. So we can do one branded sponsorship; any smokeless tobacco competitors can do multiple. We can only -- and by the way, we embrace these because we are responsible marketers and we think it's the right thing to do, but it does put us at a competitive disadvantage. So, for example, our competitors can drop samples off anywhere they want, drop cases off, and leave them. We only can drop off samples. Well, we don't drop off samples; we sample an adult-only facility that have six-foot barriers, that adds significant cost to our structure, so that we can be able to continue to communicate one-on-one with consumers and have sampling. That adds cost to our system that's not in other systems. We think we're doing it the right way; everybody should advance to our way, and they will under the bill. Other examples would be giveaways. One of our major competitors is out there launching a product with a premium giveaway, a branded premium giveaway. We can't do those types of things. So there are many, many examples. The STMSA is -- it's 70, 80 pages long of restrictions that we face that our competitors don't.

[Erik Bloomquist:]

Okay, great, thanks. And then, it was really good news on the change in the tax structure. I know you get this question every call, but can you update us on what other states are in the pipeline, where we might see similar kinds of change?

[Murray Kessler:]

It's hard to say. What I'm hoping we are demonstrating overtime -- because Erik, I've been adamant that, that we believe that that roughly national $0.70 tax subsidy that our competitors get is inherently unfair and different than what's done on cigarettes and wine and gasoline and every other consumer product. But what we're hoping we're demonstrating is, whether there's more this year or not more this year, you kind of never know. Certain circumstances have to come together. But I think what you've seen consistently over the past several years is, as we keep moving the needle on it. This particular quarter, 2.5% of volume in a 1 billion unit volume, you're talking about eliminating a tax subsidy across 25 million cans. It's meaningful.

[Erik Bloomquist:]

Great. Thank you, Murray.

[Operator:]

Your next question comes from the line Ann Gurkin, UST. Please proceed.

[Ann Gurkin:]

Good morning -- with Davenport.

[Murray Kessler:]

Good morning, Ann.

[Ann Gurkin:]

I wanted to follow-up on the FDA. It's our understanding that the Senate version is different than the House version. So can you help me reconcile those two?

[Murray Kessler:]

Yes, you're absolutely correct -- that the Senate version that came out of committee, which has not advanced since it came out of the Health Committee. And then there's a separate version, and the version that came out, which is HR 1108 that came out of the House Energy and Commerce Committee has broader support. So, you saw UST support the Bill; you saw the small cigarette manufacturers support the bill; you saw the National Association of Convenience Stores, which is a large and important group that has now pulled their opposition from the Bill. So there's broader support. So, it's our hope that the Senate will either just adopt the House version of the bill or adopt the amendments that were put into the House version of the Bill. But if it went the Senate way, we obviously wouldn't be in support. We're in support of the way the bill has evolved and progressed, and that's the version we will continue to support.

[Ann Gurkin:]

Okay, great. And then, if I understood correctly, you look for your premium volume to be up. Is it about 2% for the year or at least 2%? Where are we now?

[Murray Kessler:]

Well, it's always about 2%. I mean (multiple speakers).

[Ann Gurkin:]

About 2%; no change there. Are you tempering that number or is it no change to your outlook for premium segment growth?

[Murray Kessler:]

No, we said about 2% and it was 2.1% in the first quarter. But, whether it's 1.5% to 2.5%, it's not going to make a big difference. The key thing is, are the fundamentals happening? Right now, it's about 2%. So it's not a change in thinking.

[Ann Gurkin:]

Okay, great. That's great. Thank you. Operator Your next question comes from the line Filippe Goossens with Credit Suisse. Please proceed.

[Filippe Goossens:]

Yes, good morning, everyone.

[Murray Kessler:]

Good morning, Filippe.

[Filippe Goossens:]

My first question is actually for Dan this morning. Dan, Reynolds recently announced that they're going to roll out their Camel Snus best marketing to a number of more metropolitan markets like New York City and San Francisco. Does that have any impact in terms of what you're going to do with Skoal Dry or with Rebel, given that they are now becoming a bit more national in terms of their best market? I mean, is there something that they have learned that you have not seen yet, or what's kind of your current thinking here, Dan?

[Dan Butler:]

Well, I can't speculate on what Reynolds approach is. Obviously going into metro markets is a different kind of approach. From our perspective, the category still has not gained significant traction and quite frankly, we're disappointed in the consumer response to it. We've all talked about the fact that it's going to take time and education to create a consumer awareness and trial. But what we're seeing in market for all of the players is, versus some reasonable velocities in the early days when they were very heavily promoted, sequentially the volume has really not held up and has declined overtime. So, we're really trying to figure out the right steps to take going forward and what the appropriate approach and level of investment is in the segment.

[Murray Kessler:]

Yes. Dan is being cautious with his answer, Filippe, because, frankly, we had told you at the investor conference we had additional activity planned. We are reevaluating that right now. We are very disappointed in the total performance of whether -- they call it Snus or we call it spit-free. We've been testing this thing now for seven years. The newer entrance, if you go back, is now, in original markets, is over two years, and it is not gaining the traction, given the level of investment that's been put there. Carefully stated, I'm not sure the Emperor is wearing any clothes in this segment right now. Now, that doesn't mean we're not going to continue to push it, and we're going to participate in it. We certainly don't believe we're going to get left behind at the pace that it's going. I guess the part we struggle with the most is, ultimately, we need to turn this into a financial proposition that creates value for our shareholders, and that is not obvious right now.

[Operator:]

Your next question comes from the line of Samuel [Wieman] with JPMorgan. Please proceed.

[Carl Wells:]

I think there is actually some confusion. It's Carl Wells from Cork Street Capital in London. I noticed that your market share forming the price value segment by about 0.8%. I wanted to understand, gain a better insight perhaps into which competing products may have taken the most share off you. In particular, I'm aware that Red Man took 0.8% market share, and I believe that is due to be rolled out further in the US. Is that having a significant effect on your business?

[Dan Butler:]

Good morning. It's Dan. I mean frankly, the principle reason that we show a little bit of share declined within the PV segment is because of our strong business in Red Seal, which is close to a 7% share. Frankly, Red Seal is at a significantly higher price point and significantly more profitable than the other brands in the segment. We've even argued to ourselves whether in fact Red Man is not so much a price value brand as it is a sub-premium brand. But we are very pleased with our performance on Red Seal which, as I stated, has grown mid single digits for the last several quarters. It's a large and profitable brand for us. The Husky brand is actually gaining share within the PV segment.

[Carl Wells:]

Okay, thank you.

[Operator:]

Your next question comes from the line of David Adelman with Morgan Stanley. Please proceed.

[David Adelman:]

Good morning.

[Murray Kessler:]

Good morning, David.

[David Adelman:]

Could you help me reconcile something on your market share? You had talked about share stabilizing I think since November. I know it's not apples and oranges -- it's a little bit apples and oranges. But if I look at the RAD market share data that you provide -- and I realize that's not on a quarterly basis, per se; it's a little bit longer than that. But if you look at that data that you've released each quarter over the last several years, it looks like your share was sequentially flat in the middle of last year and that the sequential share performance from Q3 to Q4 and now from Q4 to Q1 seems to demonstrate an accelerated decline, or a return, rather, to the prior trend. So how does one reconcile those two things?

[Murray Kessler:]

So, the way you reconcile it is that basically the trends in the market aren't changing, right? So there's not an acceleration or a deceleration. Our premium volume, our total volume has grown around 3% and the category has grown around 6.5%, so as soon as you lap it a year, it's steps down, right? That seems to happen every year around October. So you get that step-down. Then it goes -- whatever that trend change is going to affect, you can do the math on it and just literally put monthly shares down and you see how it plays out, David. So you get that step-down, and then it stays stable for like the next nine or ten months, and whatever adjustment of the trend took place, then you overlap it and it happens again. So, when we report that 26 weeks that was in December, you have three months of the step-down, and you have three months of the prior year. Then you get to this period and you get the full 26 weeks. So, we are less focused on share. We are trying to get there over time. But we are focused on profitability. But the net result of it is you get this recurring theme where you get this step-down that takes two periods to happen and then it's stable through the summer. Then you overlap it again in the fall. Until we are growing as fast as the category, that's going to keep happening. We are gaining on it and that gap is less, so where a couple of years ago that step-down was 3.5 points or so, last year, it was 2 points and hopefully, in the plans we have this year, it will be less again. In my dimmer switch analogy, over time, without sacrificing the profitability of the category in our company, we'll get it to where we are growing as fast as the category. But it will take time because we're trying to do -- balance both things.

[David Adelman:]

Then one other question on the Price Value competitive dynamics -- I realize that, over a long period of time, there's obviously been a substantial number of product introductions, and there are a number now in the marketplace or are that soon would be rolled out. How do you think about the competitive intensity, from a new product perspective, in the price value or sub-price value segment today, leaving aside the economic dynamic, versus the last several years?

[Murray Kessler:]

I think there is more competitive activity and the market is slightly less competitive. That sounds like a strange statement, but you definitely have more competitors, but it's fragmenting the heck out of that lower end of the market. But PV was growing on both a percentage basis and an absolute basis, faster, meaning it was having more impact on us a couple of years ago than it is now. So it's not just the percentage growth has come down from 30% growth to 14% growth and continuing to slow, but the absolute number of cans of the PV segment is growing, is less. So it seems to us that, those initiatives which made be very successful for those other companies and help them build their businesses -- the question is what's the source of volume? It doesn't appear to be coming from our company right now that Dan and his team's loyalty plan is doing what it's intended to do.

[David Adelman:]

Okay, thank you.

[Operator:]

Your next question comes from the line Nik Modi with UBS. Please proceed.

[Nik Modi:]

Good morning, guys.

[Murray Kessler:]

Good morning, Nik.

[Nik Modi:]

I've just got a few quick questions. Can you comment any on the behavior of any of the dual users out there? I guess a third of your consumer base are also smokers. So is the rising gas price environment maybe leading to more domestic consumption given the relative economics? And then the second question is, where are you in the process regarding the higher calling rates for your sales force? I guess Project Momentum was enabling some higher efficiencies. So just where are you in that process?

[Dan Butler:]

Good morning, Nik. It's Dan. On the first question, you're sort of asking a real-time question about what's happening in this economy and this environment of higher gas prices. I can hypothesize about it; I don't have real-time data to talk about consumer dynamics. What I did show you in December at the investor conference was that those consumers that are dual consumers of smokeless and cigarettes, a very high proportion of them, close to 90%, recognize the superior value of MST relative to cigarettes. So I think that bodes well for us. Relative to the sales organization, we have increased retail call coverage in the first quarter; we feel very good about the progress we're making there. As I indicated in my comments, this was a significant change for our sales organization. Anytime you implement a system-wide change, including software and hardware, that's a big change for people. It takes a lot of learning, a lot of training, and a lot of focus to make sure that you don't take your eye off the ball. I'm extremely proud of the manner in which our organization has taken on that change. We have executed the systems change successfully. There were expected bumps along the road; we're working through those, and we are hitting all of our key objectives. So, we're very pleased with how that project is progressing.

[Nik Modi:]

Dan, will the sales frequency calls ramp as we go through the year? Like, are you just getting started, or do you think you are already kind of at the rate you were expecting?

[Dan Butler:]

No, I think we will continue to build over time.

[Nik Modi:]

Okay, and then just the last question -- in your promotional modeling, the state-by-state plan, do you look at gas pricing, local gas pricing within that model? Can you just provide a perspective on kind of how you think about as it moves and how you dial up or down promotions respectively?

[Dan Butler:]

We are primarily focused on what is happening in the market and what the price gaps are to competition, and how to manage that. Gas prices are an overlay, and we're focused also on the per-capita income. So our plans has originally conceived and as have adapted them have also taken into account the disposable income and the economic conditions in the local market areas.

[Nik Modi:]

Thanks a lot.

[Operator:]

Your next question is a follow-up from the line of Filippe Goossens with Credit Suisse. Please proceed.

[Filippe Goossens:]

Good morning, gentlemen. Sorry, the lights went out in the building here, so I lost everything there.

[Dan Butler:]

I don’t know my last answer!

[Filippe Goossens:]

So, sorry again about that. Dan, I don't know if you were talking about it when you were responding to me but do you see -- again with Snus, do you see any difference in terms of the response rates between Rebel and then Skoal Dry? In other words, is there an issue potentially in terms of name recognition with Revel or the initial read-through with Skoal is pretty much the same as with Revel?

[Dan Butler:]

Did you hear our answer at all?

[Filippe Goossens:]

No, I did not, I did not. I can follow up later on, Dan, if you like. I'll just step out.

[Dan Butler:]

No, no, just what we said, Filippe, was that we were disappointed in general, despite sort of what a lot of chatter has been on this segment, that we've been very disappointed with the progress of this segment in total. The differences between Revel, Skoal Dry and the other brands are they are immaterial. The entire segment itself has gained very little traction, and we had plans to be more aggressive. Frankly, we are revisiting those because the size of this market and how slowly it's developing -- it's so tiny and taking so long to gain any traction. You've got almost seven years of experience and our competitors out there now for a couple of years -- we're struggling whether this segment is really going to take hold or not and whether an American consumer is really interested in this form of tobacco or not. So, we will probably continue some testing and make some modifications, but we are less enthusiastic and, frankly, disappointed.

[Filippe Goossens:]

Okay. Then just a housekeeping item, Dan -- can you just give us a number for both your loyalty and category spending program to date? In other words, ever since you started to roll that out, if I recall correctly, late '05, what your run-rate is now for both loyalty and category spending?

[Dan Butler:]

That's not a number that we typically share, Filippe. As we told you the big ramp-up was going into the 2006 plan. That's when we announced the step-up in the investment. We stepped it up further in '07, and then, as I indicated in December, there will be moderate increases this year.

[Filippe Goossens:]

Then a couple of questions for Ray. If I may and again apologies if they have been addressed before. Ray, Project Momentum -- where are you in terms of program to date run-rate in terms of savings?

[Ray Silcock:]

As I mentioned on the call, Filippe, we are at $102 million is our since-inception run rate on Momentum. We are on track to get to the $150 million target by the end of next year.

[Filippe Goossens:]

Okay. Then in terms of working capital, Ray, I think it was close to a 100 basis points increase in working capital as a percentage of LTM sales with receivables days up one day. Anything in particular, or is that still related to the extra shipping day from the last period in '07?

[Ray Silcock:]

I think a piece of it is the extra shipping day. Also, coming across the end of the year, there were a variety of -- a sort of a variety of things that happened. I'm having to go through the list, but most of them were pretty mundane. We made a share, part of our share repurchase program; we bought a lot of shares two days before the end of the year, $20-odd million dollars worth, for example, $25 million. That got paid for this year. So, it was things like that that caused sort of movement in the working capital. I don't believe there's anything significant. It's not business-related. It's one-time event related. It's not something that we believe is of any concern.

[Filippe Goossens:]

Okay, then the last question for you, Ray -- in terms of the share buybacks, obviously you've spent about $132 million out of the $300 million. Is there room to change that $300 million number? In other words, if we were to see, again, some weakness in the share price as we saw at the beginning of the second quarter where we got close to the $51 level, is there room, in other words, to play around if there are other periods of weakness here?

[Ray Silcock:]

Yes, we've been pretty clear that the $300 million is where we are comfortable for this year. We think that -- we purchased the shares in the first quarter at a good price and we continue to believe that our stock is a good investment. We've also been clear, Filippe, as you know, that if there were a non-fundamental business-driven drop in the share price, we would consider increasing the amount of the share repurchases this year. But I think it's fair to say that we don't see that as of right now.

[Filippe Goossens:]

Okay. Then a final question for Murray, if I may? Murray, on the wine business, do you have any data available that would give us a feel for what the like-for-like results would be? In other words, if you were to exclude your M&A activity of the last 12 months, how is the core business doing? The reason I'm asking, again within the context and trying not to be too repetitive, but in the context of all the questions about the status of the consumer, we've seen some players that are active in affordable luxury, let's say, Coach to give just one example. They've all seen declines in their business. Yet it seems that, on the wine side, your business is still holding up. Is that correct if you look at the like-for-like type results?

[Murray Kessler:]

Yes, net sales up for the quarter on a like-for-like basis would have been up 12.5%, 13%. If you look at the top ten wineries on a total Nielsen basis, ours was the fastest growing top ten winery U.S. during the quarter. Then, if you hone in on our biggest brand, Chateau Ste. Michelle, Chateau Ste. Michelle was the fastest growing top ten brand in the US. So, they are continuing to perform very well. Frankly, underneath that, brands like Erath and Red Diamond had just very significant growth during the quarter. So, the portfolio is performing well. We are nervous about it, too, because you worry about restaurant consumption and everything else, but you know, the wine team is just performing beautifully.

[Filippe Goossens:]

How much of the wine sales, Murray, again are away from home? Is it around 50% for you guys, or --?

[Murray Kessler:]

I think that's right, yes.

[Filippe Goossens:]

Okay. Then just as a final question on the gas stores, maybe for you, Murray or for Dan. If people are not trading down or they are not reducing the amount of cans they purchase, do you have any sense what they might be cutting back on when they make those trips to the gas store, given the fuel prices?

[Murray Kessler:]

That's a tough one. That's a tough one, Filippe. I've met with a number of customers recently and I always ask them how they are feeling about it. Everybody's, at this stage right now, trying to understand what the consumer behavior is. I've heard a variety of different answers so it's tough to get a handle on. One thing that's interesting is that we are seeing some evidence that people are making more trips to the gas pumps and smaller fill-ups in order to minimize the dollar impact at the pump. That could actually help, but at this point, I would say it's kind of speculative.

[Filippe Goossens:]

Okay, great. Thanks very much, gentlemen.

[Operator:]

(Operator Instructions). There are no additional questions at this time. I would now like to turn the presentation over to Mr. Kessler for closing remarks. Please proceed, sir.

[Murray Kessler:]

Just to reiterate again, we think it was a good quarter and we appreciate your interest for UST and we continue to believe the stock is a compelling value. Thank you very much.

[Operator:]

Thank you for your participation in today's conference. This concludes your presentation and you may now disconnect. Good day.