ProShares Ultra 7-10 Year Treasury
Q4 2007 Earnings Call Transcript

Published: 24 Jan 2008

[Operator:]

Good day ladies and gentlemen and welcome to the Q4 2007 UST, Inc. earnings conference call. My name is Lisa and I will be your coordinator for today. At this time all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call Mr. Mark Roselle, Vice President of Investor Relations. Please proceed sir.

[Mark A. Roselle:]

Thank you for joining us this morning as we discuss our fourth quarter and year end 2007 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 in playback mode. The audio is also available on our website in an MP3 format. 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 US Smokeless Tobacco subsidiary and Ray Silcock our CFO. At the end of our prepared remarks Murray and his 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 filing. 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 we issued this morning which is also available on our website. I will now turn the call over to Murray.

[Murray S. Kessler:]

Good morning and thank you for participating in UST’s earning call for the fourth quarter and total year 2007. I’ll be making some opening comments and observations then Ray Silcock, chief financial officer will review financial results in more detail. He will be followed by Dan Butler, president of US Smokeless Tobacco Company who will provide more color on the results of our principal business. So, let’s get started. From my perspective 2007 was a very good year for UST by almost any measure. We began the year with a commitment to build on the momentum we started gaining in 2006 and with a clearly defined plan to strengthen our business model. The goal was to accelerate profitable volume growth in each of our core businesses

[Raymond P. Silcock:]

Good morning once again to everyone on the call. As you have both seen and heard today, in 2007 we continued to use many of the tools in our toolbox to address challenges, to improve our business and reward shareholders. During this past year the company reported record sales and record earnings per share driven by accelerated premium can volume growth in moist smokeless tobacco, by record wine sales and by increased costs savings from project momentum. Notably this record performance was achieved in an increasingly competitive smokeless tobacco category. Also in 2007 the company utilized its strong cash flows and strong balance sheets to triple its share repurchase program as compared to prior years and to acquire an 85% in Stag’s Leap Wine Cellars, one of the best known and most well respected luxury wine brands in the US. I will discuss both of these items in more detail later. Before taking you through the results I’d like to remind you that I will mainly be referring to adjusted results in my comments. Reconciliations of the adjusted results to comparable GAAP figures as well as the rational as to why we believe the use of such measures is appropriate is included in this morning’s press release which as Mark already mentioned, is also available on our website. Now, to our financials; in the fourth quarter in 2007 we reported our highest ever quarterly net sales $532.9 million an increase of 9.7% versus the fourth quarter of 2006. Both of our core businesses contributed to this top line growth with more than of the increase coming from the wine segments. This strong performance resulted in the relative proportion of wine in our overall business mix resulting in a modest reduction in our total gross margin percent for the fourth quarter. As compared to prior year percent Q4 2007 gross margin was down by 170 basis points to 70.8% although total gross margin dollars were up $25.2 million in the quarter. Adjusted operating income for the quarter was also up from prior year rising 7.7% to $243 million. On a percentage basis operating income was down 80 basis points to 45.7%. As with our gross profit margin this traces back to the more rapid growth we achieved in Q4 in the wine segments where margins are lower than for smokeless tobacco. You should note however that wine segment operating profit margins as compared to Q4 2006 increased 240 basis points in the quarter while those in our smokeless tobacco business were essentially flat. The increase of $17.5 million in adjusted operating income while largely arising from volume improvements from both smokeless tobacco and wine segments were also from ongoing cost savings as a result of our continued commitment to project momentum. In fact, project momentum continues to provide cost savings significantly ahead of our original expectations. It’s implementation is not only helped drive our business by allowing us to spend more on brand building programs but, has also engrained a focus on efficiency and productivity throughout the entire company. We believe that this cultural shift will help us consistently delivery our 10% shareholder return objectives in the future. In 2007 the company realized $73 million in project momentum savings up from the $65 million we told you at the December investor conference. When added to the $15 million we already realized in 2006 this brings our annual savings run rate from project momentum to approximately $88 million well on the way to our $150 million a year goal. Adjusted net earnings for the quarter amounted to $147.9 million up 5.2% from last year’s fourth quarter. While adjusted diluted earnings per share came to $0.95 up 9.2% from the $0.87 per share we reported in Q4 2006 and up by $0.04 from our most recent earnings guidance of $3.42 for the whole of 2007. This increase of $0.04 per share as compared to our guidance was due in roughly equal part to project momentum savings coming in more quickly than had originally been expected as we just noted and from the impact from an excise tax refund in the wine segment. The improvement of $0.08 per share versus same quarter last year was primarily due to growth in net sales and also as a result of lower administrative expenses. The lower admin cost was somewhat offset by our previously planned increases in selling and advertising expenses principally in the smokeless tobacco segment by an increase in interest expense and by a higher effective tax rate. The effective tax rate for the quarter at $35.8% compares to a 35% rate in Q4 2006. While an increase in the federal tax deduction for qualified domestic production activity had a favorable impact, our overall increase in effective tax rate was primarily due to a reduction in income tax accrual reversals. A $1 million reversal in Q4 2007 took place of a $4.7 million reversal in the same quarter last year. $0.95 diluted EPS of Q4 also reflects a reduction in the number of shares outstanding as compared to prior year. While the acceleration of the share repurchase program that took place in Q4 did not impact Q4 earnings per share, the $250 million worth of shares that we repurchased earlier in 2007 did, increasing the fourth quarter’s EPS by $0.03. Adjusted EPS for Q4 2007 excludes $0.06 from both restructuring charges and antitrust litigation charges, the later to resolve two of the last remaining [Calmwood] derivative antitrust lawsuits. Q4 2006 adjusted EPS excluded $0.02 in restructuring charges. Turning now to the full year; in 2007 our net sales increased 5.4% to a record $1.95 billion. As in the quarter this strong performance was driven by record volume in both the moist smokeless tobacco and wine segments. Gross margin of 73.1% was down 170 basis points in 2007 as compared to prior year. Again, primarily due to the mix affect resulting from the wine segment growing faster than smokeless tobacco for the year. Total dollars of gross margin were up $41.4 million. Adjusted operating income for 2007 was up 5.2% from last year to $903.1 million. While improved operating profit margins both in the smokeless tobacco business segment up 140 basis points to 55.7% and in wine up 120 basis points to 16.9% our total adjusted operating margin including corporate expenses was approximately the same as it was in 2006. Adjusted diluted in shares increased 8.5% in 2007 to $3.46 per share with improved earnings, a lower effective tax rate and an increase in share repurchases all having an impact. For the year, the effective tax rate was down from 36.7% in 2006 to 36% in 2007. Adjusted EPS for 2007 excludes $0.54 of antitrust litigation charges, $0.04 of restructuring charges and $0.39 from the gain on the sale of the company’s former headquarters building. 2006 adjusted net earnings excluded $0.07 from a combination of restructuring charges, antitrust litigation charges and income from discontinued operations. Moving on the individual businesses segments; since Dan will shortly be providing insights on the smokeless tobacco unit’s performance for the quarter and the year, I will focus on their operating profit and also on adding a little more color to the wine segment’s 2007 performance. The smokeless tobacco’s segment adjusted operating profit for the fourth quarter increased 4% to $221.1 million and continued focus on cost management through project momentum lead to a $5.2 million reduction in administrative expenses in Q4. This allowed UST to allocate additional resources to brand building initiatives and to increase net sales through higher can volume while still being able to increase total operating profit in the quarter. The smokeless tobacco segments percent operating profit margin remained essentially flat to prior year of 55.8%. For all of 2007 adjusted operating profit rose 4.2% as compared to 2006 to $861 million and the operating profit margin increased 140 basis points from the prior year to 55.7% of sales. Strong net can volume and continued cost reductions from project momentum were the main reasons for improved performance. Turning now to the wine segment; net sales were up 30.5% in the quarter on a 20.2% increase in case volume as our wine business continues to flourish. Most of the wines in Ste. Michele Wine Estate’s portfolio including Chateau Ste. Michelle, Columbia Crest, [inaudible], Erath and the Red Diamond brands were all part of this strong growth. As a further indication of how well the wine segment has performed during the quarter Ste. Michelle Wine Estates had four wins on AC Nielsen’s of the top 25 growing wines for the 13 week period ended December 15, 2007, more than any other wine company. Sales of the recently acquired Stag’s Leap Wine Cellars products were also a significant factor in Q4 top line growth. Driven by this strong volume fourth quarter operating profit for the wine segment increased by 48.5% to $24.8 million and operating profit margin improved 240 basis points as compared to Q4 2006 the 20.1%. Higher promotional spending, additional operating costs as a result of the Stag’s Leap Wine Cellar acquisition and an increase in spending to support sales force expansion offset some of the favorable impact from higher volume. Q4’s operating profit also includes a $4.8 million refund for state business and occupation taxes, a result of our business having been reclassified in 2007 by the state of Washington. For the full year 2007 wine segment net sales were up 25.4% to $354 million and operating profit increased 34.9% to $59.9 million. Net operating profit included the $4 million full year affect of the state excise tax refund. Including the refund impact the wine segment’s operating margin improved by 120 basis points to 16.9%. All in all it was an extraordinary year for our wine business. Our core products grew strongly in part by strong ratings. In fact, 87 or our products received ratings of 90 or higher from a variety of publications and three of our products made Wine Spectators top 100 wines of the year list this year. New products and labels such as 14 Hands and Red Diamond also came on powerful in the year and made a contribution to the bottom line as well. Last, but by no means least, we made the largest acquisition in UST’s and Ste. Michelle Wine Estate’s history when we acquired Stag’s Leap Wine Cellars in September and this acquisition has already made a meaningful contribution to our net earnings. Looking forward 2008 promises to continue to show growth for Ste. Michelle Wine Estates with the advantage of a full year’s contribution from Stag’s Leap as well, we look forward to another strong year ahead. Our last remaining business segment is international operations principally the Canadian smokeless tobacco business where a 3.3% improvement in can volume in the fourth quarter resulted in an increase of 20.1% in net sales bringing them to $13.4 million. Operating profit was up 23.6% to $4.9 million and that includes favorable foreign currency exchange impact. For the full year 2007 international operations net sales reached $50.9 million, an increase of 9.4% as compared to prior year and operating profit in this segment reached $18.7 a 16.1% improvement over prior year. Moving now to our share repurchase program; during the fourth quarter of 2007 the company indicated that it would increase share repurchases by an incremental $300 million to achieve total repurchases for 2007 of approximately $600 million. As a result, we repurchased 6.3 million shares during Q4 2007 at a cost of $347.7 million bringing our total stock repurchase for the year to 11 million shares at an overall cost of $597.7 million. Primarily due to these increased levels of share repurchases net debt in the quarter rose to $1 billion in cash on hand including short term investments at the end of the fourth quarter amounted to $47.2 million a decline of $78.5 million from the end of the third quarter. Net interest expense increased by $3.6 million to $13.2 in the fourth quarter, while for the full year it was down slightly to $40.6 million compared to $41.8 million in 2006. We plan on continuing to utilize our strong financial position both to strengthen our businesses and to return cash to shareholders. In this regard we have already announced our intent to repurchase $300 million worth of shares in 2008 and to raise the dividend to $2.52 a share, an increase of 5% versus 2007. This will bring our total dividend yield for 2008 to 4.6% based on $55 stock price. In summary I am pleased and proud to present the financials for such an exceptional quarter and year with record sales, record earnings per share and strong fundamentals across all of our businesses. We look to 2008 from a solid position today and remain confident in our earnings guidance for 2008 of $3.65 per share. I would also note that we expect that our quarterly earnings will occur in similar proportion throughout the year to those in 2007. With that, I’d like to turn the call over to Dan Butler, president of US Smokeless Tobacco Company.

[Daniel W. Butler:]

Good morning everyone. As indicated, the smokeless tobacco segment delivered solid top and bottom line performance in the fourth quarter. Net sales grew 4.2% to $396.1 million behind volume growth in both premium and price value brands inclusive of an extra billing day in the fourth quarter. Underlying operating profit increased 4% versus a year ago to $221.1 million driven primarily by the increase in revenue as costs savings were largely reinvested in strategic brand building programs in the fourth quarter. These investments were focused on Copenhagen and Skoal brand in the areas of communication through website, print advertising, one-on-one and adult consumer based loyalty programs. Included are the onetime costs associated with transitioning our branded sponsorship from Skoal racing to Copenhagen bull riding. Now, turning to volume results for the quarter; total net can volume for the fourth quarter was up 7.3% versus a year ago marking eight consecutive quarters of overall growth. UST’s premium volume was up 5.9% and price value volume was up 14.9%. These reported volume figures benefited from an extra billing day versus 2006. Since our products are dated for freshness, they are shipped each week to arrive on Monday. Therefore, an extra billing day essentially represents a full extra week of shipments. As we expected, shipments for the extra week on December 31st were below average since it was an unpromoted and fell during the holidays. The benefit of the extra billing day was partially offset by lower shipments to the military channel during the quarter due to a business disruption in the supply chain. This issue was one time in nature and is now behind us so we do not expect military volume to have a meaningful impact on our trends going forward. Even adjusting for the net impact of these two factors which benefited the quarter by a little over 7 million cans UST’s total volume in Q4 remains strong. Total volume would have been up 2.7%, premium volume would have been 1.3% and price value volume would have been up 10.5% versus the prior year. For the full year total reported net unit volume was up 4.2% with premium volume up 2.9% and price value volume up 11.9%. Again, adjusting for the extra week in the military, full year underlying total unit volume was up 3.1%. UST’s premium brands increased a strong 1.8% on the year and UST’s price value growth accelerated to 10.8%. The full year underlying growth of 1.8% on premium is notable as it was significantly ahead of our original objective of growing premium volume 1% on a year and represented the strongest rate of premium growth in well over a decade. Now, let me provide a little more insight on Q4 volume results. From this point forward I’ll be referring to underlying volume trends exclusive of the extra billing day. First, volume performance during the quarter is indicative of our ability to grow despite difficult economic conditions. We started with a strong October but experienced a slight pull back in November as gas prices increased sharply. After making adjustments to our plan we saw volume respond in December and we are off to a strong start in January so our momentum continues. Second, once again both of our premium brands Copenhagen and Skoal grew versus the prior year. Both brands are benefiting from continued product innovation, the premium loyalty plan and strengthened brand building. Our efforts have strengthened the remarkable consumer loyalty to these brands and as Murray noted in his comments, we continue to perform well in the Atlanta market in the face of significant new competition. Third, we again posted strong double digit growth on Copenhagen and Skoal pouches versus a year ago. The total portion pack business which includes Copenhagen and Skoal pouches plus Skoal Bandits returned to double digit growth in the fourth quarter after lapping the reintroduction of Skoal Bandits in the third quarter of last year. Portion packs are an easier to use, more discreet smokeless tobacco option and they continue to appeal to smokers who switch to moist smokeless tobacco. Fourth, in price value UST’s 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 the retail presence. Red Seal turned in its’ fourth consecutive quarter of low to mid single digit growth delivering against what we set out to do in the 2007 plan. Fifth, we continue to see strong volume contribution from new products that have been introduced in the last three years. These products include several new Skoal long cut and pouch SKUs, new and improved Bandits, the Cope sub line and the Husky line. In total they contributed 13.4% of total can volume during the quarter. Sixth, and finally, it is notable that the total net can sales for the full year, even excluding the extra billing day were the highest ever recorded for US Smokeless Tobacco Company. This was achieved as a result of our sustained effort to accelerator moist smokeless tobacco category growth and came despite the dramatic increase in competition in recent years. Now, let me turn to RAD-SVT data which is our measure of consumer takeaway. I will be reporting on RAD-SVT results for the full 26 week period ending December 1, 2007. Overall, trends continued in line with those we reported in our last quarterly call. Starting with the category, total MST volume gross continued at a strong pace of 7.1% versus a year ago, an acceleration from the [inaudible] we reported in Q3. For total USSTC volume grew 3.5% versus year ago in line with what we reported in Q3. USSTC volume share for the period was 59.9% down 2.1 points versus a year ago. We saw some erosion in sequential share but our rate of year-over-year decline has improved significantly versus the -3.2 share point loss experienced in the full year 2006. From a revenue standpoint total USSTC dollar share continues to be very strong at approximately 72% reflecting our leadership in the premium segment. Now, turning to volume performance by segment; the overall premium segment grew 1.7% versus year ago, an acceleration from the 1.3% growth reported last quarter. The premium segment represented 55.1% of total category volume for the period. US Smokeless Tobacco Company premium volume increased 2.2% and our share of the premium segment increased .5% points to 99.9%. The strength of our premium brand continues to be broad based with 35 states that represent 74% of our premium volume hosting growth. And, as we saw in our shipments both the Copenhagen and Skoal brands grew strongly during the period. In the price value segment volume grew 14.7% versus year ago in line with the 14.5% growth reported last quarter but a full percentage point lower than the growth posted in the first half of the year. The price value segment represented 44.7% of category volume. Total US Smokeless Tobacco Company price value volume growth increased 10.9% versus year ago. Our Husky brand continues to our pace the overall segment growth while Red Seal delivered mid to single digit growth as planned. USSTC’s share of the price value segment was 21.9% down .8 percentage points versus year ago. To summarize our key takeaway from shipping and RAD results; first, our company’s strategy to attract adult smokers to the category and our premium brand building efforts continued to fuel category growth. These efforts have resulted in robust category growth in 2007 and strong momentum going into 2008. Moist smokeless tobacco continues to be a remarkable growth story within consumer packaged goods. Second, our leading Copenhagen and Skoal brands posted growth in the fourth quarter and the full year on both a reported and underlying basis. These results came behind the investment in the premium loyalty plan, strengthened brand building and the contribution of portion packs. We have now posted six consecutive quarters of premium volume growth, a clear indication that our plans are driving sustainable results. Third, the price value segment continues to grow though at a lower rate than in previous years as USSTC premium brand loyalty continues to improve. USSTC price value brand performance is improving behind the distribution built on Husky and a focused promotional plan on Red Seal without negatively impacting our premium volume trend. Fourth, and finally, new products continue to make a significant contribution to our sales, fueled by the current year’s successful launches of Skoal Citrus Blend in long cut and pouches and the Cope sub line. These kinds of new products differentiate our premium brands from competition and provide more approachable forms and flavors for adult smokers who continue to switch to smokeless tobacco. Now, let me turn to our expectations for 2008. We begin this year with increased focus on brand building and adult consumer communication building off the investments we made in Q4 and enhanced branded websites, new advertising campaigns and improved one-on-one marketing. We will continue to selectively increase spending behind price based loyalty initiatives and expect price gaps between premium and priced value to narrow further as the recent price increases by major PV brands are fully reflected at retail. We continue to maintain flexibility in our plans to pursue volume opportunities or address competitive activity. Our plan assumes continued strong category growth of 5 to 6% for the year which combined with moderating share decline should deliver sustained underlying USSTC premium volume growth of about 2% in 2008. We expect continued double digit growth in our US Smokeless Tobacco Company price value businesses as we sustain growth on Red Seal and continue to build distribution and retail presence on our fast growing Husky brand. In total, we expect USSTC’s underlying growth rate to continue to improve in 2008 as we make progress on our goal of growing as fast as the category. To sum it up, 2007 was a solid year for USSTC in which we delivered record unit volume results while exceeding our profitability targets. We have strong plans for 2008 built on a foundation of innovative brand building marketing programs and we are off to a good start. We retain financial flexibility in the plan to pursue opportunities and respond to competition as needed and we look forward to posting another strong year of performance. With that, I’ll turn the call back to our CEO and Chairman Murray Kessler.

[Murray S. Kessler:]

Just to reiterate, from my perspective 2007 was an excellent year and I’m extremely proud of the entire UST team. Our fundamentals as strong and importantly our new business model is working. With that I and the team would be happy to answer your questions.

[Operator:]

(Operator Instructions) Judy Hong your line is open ma’am.

[Judy Hong:]

A question about your sequential market share decline, I think the share has been kind of stable at 61%. In the fourth quarter you talked about share being down slightly on a sequential basis. Can you just give us your perspective on that trend? And, how much of that is reflected of some of the fourth quarter challenges that you’ve allowed to?

[Daniel W. Butler:]

I wouldn’t say it reflects anything we talk about relative to the fourth quarter challenges. Those challenges in November as gas prices spiked were really sort of felt across the category and we saw good response. And, I also wouldn’t characterize it as sort of a change in the competitive dynamics. I think what’s important is to look at the year-over-year trends overtime continue to be consistent and we’ve shown consistent improvement. We are in pursuit of a long term grow of growing as fast as the category but, we recognize that until we get there, we will see some share overtime. I think we’re making good progress. Our year-over-year share decline was in this period was about two points which is a significant improvement versus last year which was a significant improvement versus the year before. So, I think what you’ve seen over time is our year-over-year trends in both premiums and price value have increased as category growth has accelerated. It’s a sustainable model. But, we continue to be focused on continuing to improve our business until we are growing as fast as the category.

[Murray S. Kessler:]

Just to add to that, until you’re growing as fast as the category mathematically that has to happen. So, you get these step ups each year where we’re getting the moderation but, as you lap it – there was no change in trends. We were growing 3.5% the last 26 week period, we’re growing 3.5% this period, the category was the same, PV didn’t speed up. So, there was no change in competitive dynamics. But, I think at the heart of this, and it’s really an important point, this is why I’m very focused on saying a 10% total shareholder return and where mathematically you might say, “You could do a little bit more.” Or, “You could push it harder.” We believe we are delivering a terrific return to our investors but, at the same time we’re not satisfied until we’re growing as fast as the category. That’s why we’re deliver that return because we want to reward our investors along the way but, we’ll continue investing until we’re growing as fast as the category. In a year where things were spectacular and we set new records across all of our businesses, the one area that we want to keep getting better at and pushing at is accelerating profitable volume until we’re growing as fast as the category.

[Judy Hong:]

Then just in terms of your thoughts on the environment out there? We’re facing a weaker consumer, the gas prices remain elevated. Do you think that’s going to have a major impact on both the category growth and the segment share dynamics? Are you seeing any points that would support that?

[Murray S. Kessler:]

Well, I’d be naïve not to pay attention to it and to be concerned about it. I read the papers too. But, our trends continued right on. If you look at the way we’re performing in January, how we finished the year, other than a tiny tick back in November that Dan and the team made some adjustments for, we haven’t felt it yet. I think as a category, I wouldn’t call us recession proof but, I think in general our kind of categories tend to be kind of recession resistant. I think probably the biggest change versus prior recessions is this state-by-state plan that we put into place. You can buy Copenhagen and Skoal now for, if you’re a careful shopper and look for value packs and buy downs you can get it for prices that were four or five years ago. So, I’m not going to be overly confident about it but, we haven’t felt it and we are pretty confident that we have enough flexibility in the plan to sort of be a standout in this economy.

[Judy Hong:]

Finally Ray, you gave us the share buyback plan for this year in your analyst meeting. But since then you’re share price has come down, part of it was market related. But, how should we think about your comments about being opportunistic in terms of thinking about the parameters that you look at? Do you look at the share price decline? Do you look at your stock price relative to other names in the space? Given sort of the recent decline that we’re seeing, should we think about this more as an opportunistic time where you could be seeing a bigger step up in share buybacks this year?

[Raymond P. Silcock:]

Judy, as we said at the investor conference we’re pretty comfortable with where we are for next year at $300 million of share buybacks. But, I think there’s always the opportunity to revaluate where we are. I think that as we said in December too, I think we use a variety of different ways of looking at it from the stock price, absolute stock price and vis-à-vis the other peer group comparisons and so forth. So, I think we’ll continue to look at that as we go forward into the new year but, the $300 million number is kind of where we’d like people to continue to focus for the time being.

[Operator:]

Our next question comes from Nik Moodi from UBS. Please proceed.

[Nik Moodi:]

Just a couple quick questions; Dan, can you just remind us on the major innovation projects that you have for 2008? Just [inaudible] or new concepts?

[Daniel W. Butler:]

We are selling in right now a new Skoal Wintergreen called Skoal Edge Wintergreen which is a much bolder, more flavorful wintergreen that we’ve had in the past and it is designed to compete much more effectively in the wintergreen segment which is the largest segment in the moist smokeless tobacco category. The product frankly, has gotten the best product scores internally of anything we have done in recent years. It has real breakthrough packaging. We’ll start shipping that on Saint Patrick’s Day and we have very high hopes for what they will do for the Skoal brand. It’s another example of how we’re working across multiple fronts to strengthen our competitiveness in the category. So, that one’s teed up. Other ones are coming that we have not announced yet and I think as I indicated in the December investor conference we continue to work to optimize the Skoal dry proposition. You’ll be seeing some news on that in 2008 and, as I indicated then, with some product refinements we’re confident that we have the best quality sort of discrete spit free products that’s available in the marketplace and you’ll be hearing more about that later in the year. I think the other thing you might be hinting about is that we have discussed before, we have some sort of breakthrough innovative type products that are sort of ready to go but we’re waiting for the right opportunity and the right environment and a very dynamic environment right now. We’ll pick the right time to move on that front.

[Nik Moodi:]

Then on the Cope sub line that was launched in the fourth quarter, any early learning’s from that from that in terms of is it accomplishing your goal of attracting more smokers into the Copenhagen family? Any perspective you can provide there?

[Daniel W. Butler:]

It’s a little early for us to get a real clear read on that Nik but, what it does is it really enables the Copenhagen brand to activate much more effectively in our one-on-one marketing events and gives us a better way to engage with interested adult consumers. We’ve been very successful in building distribution with the restage of Copenhagen Straight and what with Copenhagen Black. We’ve strengthened distribution and retail velocity on those. Hickory Blend is the one that is new and that is gaining traction. We’ve got some pretty significant brand building behind Cope brand specifically in the plans for 2008. So, that’s a real brand building effort it’s not a quick hit and it will be a sustained effort going forward.

[Nik Moodi:]

Just a last question for Ray, and I ask this question every call, any new perspective on new costs savings projects in the pipeline? If you can just give us some color on that. Are there more projects? Are they substantial? Anything there?

[Raymond P. Silcock:]

Nik, I don’t think there’s anything to add to, there again, what we talked about in December where we have a process, we’re looking at additional products, we have a beyond project momentum task force. We believe and I believe there are significant opportunities that will help us to continue to drive our costs favorably in the future.

[Operator:]

Our next question comes from Christine Farkas from Merrill Lynch. Please proceed.

[Christine Farkas:]

A couple of question for Ray first, if I could then, on tobacco for Dan or Murray. Ray, just to clarify the excise tax gains in wine, that was part of your underlying operating profits reported and not part of one time tax or other charges and gains?

[Raymond P. Silcock:]

That’s correct. We included those in the operating profits.

[Christine Farkas:]

And, that’s about $0.02?

[Raymond P. Silcock:]

It was approximately $0.02 on the quarter and then the year as well.

[Murray S. Kessler:]

We don’t adjust for taxes Christine because those kinds of things happen almost every year one way or another. That particular one isn’t a one timer. There’s part of it that was a catch up but, that re-class actually affects it going forward, a portion of it going forward as well.

[Christine Farkas:]

If I could move to your costs of goods, the pickup in cost of goods, I’m just trying to get a sense of how much of that came from underlying acquisitions in the sense that wine had higher costs of goods versus growth of commodities either in glass, or in grapes, or even in tobacco, if there’s anything to mention there?

[Raymond P. Silcock:]

Basically, as I think I said in my prepared comments, the shift in the cost of products was principally as a consequence of a mix shift increase proportion of wine where the cost of products sold is somewhat higher than it is on smokeless tobacco. With smokeless tobacco I think it would be accurate to say that we saw no significant changes actual either in the fourth quarter or the year in the cost components. With respect to wine, we did not see any significant changes there either. Obviously Stag’s Leap Wine Cellars has a different cost of products sold profile to some of our other wines so there is some difference there but not significant shift in the underlying commodity costs.

[Christine Farkas:]

Moving to tobacco; I just want to understand the military hiccup in the fourth quarter. Does that mean you’ll see those volumes pick up in the first quarter? Or, are those volumes lost and we just go back to your regular base [inaudible]?

[Daniel W. Butler:]

No, that was kind of a onetime hiccup and the volume’s gone and you don’t get to get it back. It was sort of an [inaudible] of all kinds of things that happen from software implementations all the way down to, believe it or not, a barge crashing on Rhine River in Germany which disrupted the supply chain and resulted in out-of-stocks because we deploy a lot of our Iraq and Afghanistan shipments go through Germany. There were a lot of factors that all came together and resulted in a volume miss for the quarter that impacted our total reported trends. But, it was all sort of one time in nature, it’s all taken care of and we should be back to business as usual.

[Christine Farkas:]

Then, just finally on your [snooze] products or [snooze] type products, is there anything to mention there in terms of changes with consumer takeaway? How’s that looking? Or, is that changing at all given the competitive products that are being tested?

[Daniel W. Butler:]

Well, I think I just spoke a moment ago about some of the changes we’re looking at making Skoal dry and product quality and regarding the competitive [snooze] products, we provided an update in December at the investor conference and things haven’t really changed. The fact is that those products appear to be highly incremental to the category, they appeal disproportionately to adult smokers which is what they’re designed to do. So, in all of those test markets in aggregate we see category growth accelerating, we see our premium volumes performing above the national average so we see it as truly incremental in the category but, as I’ve said many times before it’s a pretty significant change in behavior and it’s going to take time and education to really get this thing to start moving. But, we’re committed to the concept and I think it’s just going to take a while for this one to play out.

[Operator:]

Our next question comes from Erik Bloomquist from JP Morgan. Please proceed.

[Erik Bloomquist:]

A question on the overall volume growth; you addressed it initially Murray with respect to the goal being to be growing as fast as the category and the forecast for this year looks like it will continue to lag the category although with good trends in both price value and premium. What I wanted to understand was kind of the longer term trend that you see developing? When do we see premium volumes coming off this 2% level? Or, is it more a question of the price value growth accelerating? Then, as a component of that, what kind of role do you see the portions pouch product playing in that? Is that going to be where you see most of the incremental premium growth? I’m guessing it’s roughly half of the premium growth now. Is that really the lynch pin to this strategy of getting premium volumes up enough – combined acceleration in the price value products?

[Murray S. Kessler:]

In general, we’ve made great progress on catching up with the category. If you look at the category, I don’t have the exact numbers, I presented them at the investor conference, if you go back a few years ago the category was growing three or four and we were declining and there was like a five or six point gap between the growth in us and the growth in the category. That came down to about a four point gap but, the category accelerated. So, we went to like a 1% growth and the category went to 5 to 6. Then, this year if you take all of our businesses combined we went to like 3% growth and the category has grown 7 so the gap keeps closing each year. If you look at the numbers Dan said, he said premium volume up about 2%, the category we think growing around 5 to 6% and then double digit growth with our PV brand. Implicit in that is that the gap once again cuts almost in half where, I don’t know exact number in front of me, but let’s call it somewhere around 4% and the category grows 5 to 6% we’re significantly gaining on it. The trick in this over the past few years is where a lot of investors and people have been concerned about us having to take some significant price reduction, we’ve been able to gain ground on category to accelerate the performance of the company while protecting the company’s and the category’s profit pool. That’s an important thought here. So, while we’ve given up a little bit of share we don’t view this as a light switch where you just flip it on, we view it more as a dimmer switch as we’re bringing it up and we’re gaining on it and making great progress on that while at the same time growing the earnings and the returns for the company.

[Erik Bloomquist:]

Okay. Within that gradually brightening outlook, how do you see the development of the pouch product? Is that the key incremental driver given that it appeals more to smokers coming new to the category similar to the dry product?

[Murray S. Kessler:]

I would say that Dan presented that pouches, we view converting smokers and growing the category as job one and that we believe that pouches play a significant role in making that happen. There are many markets out there were we’re testing and I think, Dan, help me out with the number, I think you were saying we’re selling $250 million worth of pouches and they’re growing double digits now for three or four years in a row. Yeah, it’s important but, I don’t want to over emphasize that as that is the strategy because while our pouches are growing double digits and they are becoming a larger portion of our portfolio they’re still a little roughly 10% of our premium volume and it’s not all pouches that are driving the growth. We’re seeing strong growth on long cuts, we’re seeing growth on Copenhagen which isn’t just fueled by Copenhagen pouches, we’ve got good growth on Copenhagen long cut, we’ve got good growth on the new Cope sub line so, it’s not sort of a one dimensional strategy. Pouches are a component of it but, we’ve got a lot of elements working. I think the strategy is converting smokers and there are a number of ways and pouches is an important part but, there’s a lot of parts of it.

[Erik Bloomquist:]

Then coming back to that conversion of smokers, the number out from a little while ago from you is that it’s roughly one out of 10 who are introduced to the category convert. Is there any indication that that’s number increasing? That there’s a higher conversion ratio?

[Murray S. Kessler:]

I don’t have any additional information. You’re going back a few years ago now when we talked about increasing one-on-one marketing and we said [inaudible] model how that got us there. We also quoted the numbers that said that people that have been in the category 11 years or longer about one in 10 were previously or said they had smoked first and now when you ask that question two out of three say they had previously smoked first for someone in the category four years or less as a validation of what we’re doing is working and obviously, the interest of the cigarette companies shows we’re converting smokers and that it’s an instance based strategy. We tend to get that about – the diagnostic data tends to come about four months after the year end and I tend to share that kind of midway at some investor conference midway through the year once we get it and analyze it. But, I don’t really have any updates on the incidents data at this point.

[Operator:]

Our next question comes from Andrew Kieley from Deutsche Bank. Please proceed.

[Andrew Kieley:]

I was wondering if you could talk about in terms of consumer price sensitivity given some of the economic and housing issues and gas prices, are you seeing more sensitivity in certain geographic regions? Or, is it pretty wide spread across the country when you talk about pull back related to the higher gas prices?

[Daniel W. Butler:]

I would say we’re not really seeing that. We monitor our performance on a state-by-state basis every month and I can’t correlate the spike in gas prices with significantly different performance in one state versus the other. I think what we saw in November was a slight pullback and it wasn’t characterized of any particular segment of the country. And, as I indicated in my comments too we’re encouraged overall that we’re posting pretty solid growth on our premium businesses in most of the states in which we do business.

[Andrew Kieley:]

Second, in Atlanta you mentioned that performance is doing pretty well. Are you seeing any market share shifts? Or, are you making any pricing or promotional changes there?

[Murray S. Kessler:]

As I highlighted on my comments Andrew, we did not lower prices. I mean, there were some modest changes. There’s a number of counties there, to try to understand, we varied some different plans but there was nothing dramatically unusual and we did not lower prices on our products a penny. The value pack prices after were the value pack prices that were in the market before hand. We had obviously, some good execution and point of sale and things like that, that you would expect. But, in general, I think the sale side has it right that’s been covering that and monitoring it and I don’t really have much more to add than what they’ve already reported on.

[Andrew Kieley:]

Last thing; Dan mentioned continued narrowing of price gaps in 2008. Do you think that will come fully from the discount competitors raising the pricing? And, does it sort of rule out higher premium pricing next year?

[Murray S. Kessler:]

Well, I’m not going to comment in terms of what we might do in terms of pricing next year. But, we feel all of the competitive, major competitive price value brands priced towards sort of the end of November and that’s flowing through to retail over the last month so we’ll see how those gaps evolve. But, we look at price gaps on a state-by-state basis. That is one of the metrics we use in managing this plan on a state-by-state basis. So, sure overall price gaps between premium and price value will come down due to competitive price increases but we’ll continue to sort of monitor and optimize and if we feel like we need to in some cases we may work harder to narrow those gaps if we feel like it is needed.

[Andrew Kieley:]

On last thing, just on the regulatory side, maybe you if you could update us on what you see in terms of the [FET] and potential FDA regulation?

[Murray S. Kessler:]

In [FET] Congress passed an extension until March, 2009. There was some discussions of whether or not it would be submitted to the old bill even though they extended it to sort of the President to have to pine on which he has indicated he would veto a second time. I’m not sure whether they are going to do that or not. It feels like, to us, that this is an issue that will occur, it won’t be a 2008 discussion it will be a 2009 discussion. On FDA, it’s still active. If it’s going to get seriously active it will happen probably in the spring. But, I’ve heard some people say there’s very low likelihood or not likelihood. We still see it as active so we’re participating in that process and to reiterate we’ve evolved in our position on this. If we could get some changes made that would in our opinion that are relatively minor changes in the scheme of this thing, this is a bill that we could support if the bill would recognize the distinct differences that I outlined at the investor conferences between smokeless tobacco and cigarettes.

[Operator:]

Our next question comes from Ann Gurkin with Davenport. Please proceed.

[Ann Gurkin:]

I was wondering if you could give more detail on the adjustments you made to your plans in November?

[Murray S. Kessler:]

They were minor in nature. We probably made some minor adjustments to buy downs and maybe a little bit in value packs; nothing significant. We sort of estimate that November was affected by gasoline prices. It’s hard to quantify and know for sure because the business, it never got declining it just slowed up a little bit from the trend and then resumed right back into place in December and we’re off to a great start in January. I wouldn’t be overly concerned with it. I think we’ve come a long way with these state-by-state plans and the flexibility in the plan to make adjustments. And, these are the kinds of things Dan and his team do all the time.

[Ann Gurkin:]

As we start 08 and as we face a more difficult economy are you going to need to increase or make more adjustments that could impact 08 earnings outlook?

[Murray S. Kessler:]

To be clear, something you’ve seen us do as part of our business model over the past couple of years is when we build these plans we retain some flexibility right from the beginning so we don’t have to change earnings. And, depending on the situation, etcetera, we make adjustments. Dan, has flexibility in his plans if he needs it for changes based on the economy, or changes based on competition. So, no I wouldn’t raise that as a concern right now we’re pretty confident.

[Ann Gurkin:]

If we exclude the extra week of volume which according to your release was primarily premium volume, I’d just be curious as to your thoughts on the performance of your premium volume excluding that extra week. Was it in line with expectations? A little bit weak? A little bit better?

[Murray S. Kessler:]

It was up 1.3%. We probably would have liked to see a little bit better but, you’re talking tenths. And, to put it in perspective a few years ago premium volume was declining 5% and to be sit here and be saying, “Boy I would have like to seen it up 1.6 versus 1.3,” when the trends have continued and they’re strong in January, I’m not concerned about it in the least.

[Ann Gurkin:]

Lastly, we spent some time walking through some stores in Atlanta and certainly came away with the perception that brand look is very strong but also came away with a question; we did see, as you referenced in your comments Marlboro moist smokeless price is a $1.50ish a can raising the question are we going to see – where’s your confidence that you can keep the premium volume price and the risk that pricing isn’t going to have to come down on average maybe not this year but going out several years? I’d just be curious to get more comment.

[Murray S. Kessler:]

That 3.4% volume growth I gave you for premium volumes included the period when they discounted down to that level. So, said another way, we did not need to adjust our numbers. Hopefully, the world is seeing what we knew and what we believe that Copenhagen and Skoal brands have very highly loyal consumers and highly differentiated brands and we do really well.

[Operator:]

Our next question comes from David Adelman from Morgan Stanley. Please proceed.

[David Adelman:]

I wanted to ask you about the price value segment. I think now it has about a 45 share of volume more or less. What are you planning for that segment’s unit volume growth rate in 08? Then, longer term as you model it out, do you envision it growing in perpetuity? Do you see its growth rate moderating or peaking at what level?

[Daniel W. Butler:]

Well, we see that growth rate continuing to moderate and its moderating not only on a percentage basis but also on absolute year-over-year terms. Back a few years ago price value was growing 28% year-over-year and was picking up sort of five share points in the category year-over-year to where most recently you’re seeing about 14.5% growth. We expect that growth rate to continue to moderate over time and we expect our price value growth actually to continue to accelerate. The reason our price value business is growing slower than the price value segment is because we really have a mid price brand in Red Seal that is turning in good solid growth numbers in the low to mid single digits. But, that historically, it’s been the majority of our price value business. Now, we’ve got the Husky brand which is growing high double digits and its becoming a larger share of our PV business so as we continue to get traction on Husky and build out the distribution and have a good competitive brand at that price point I think you’re going to see our price value growth accelerated as the segment starts to slow down. So, when is it going to hit equilibrium? It’s hard to say but I think you’re going to continue to see sort of gradually strengthening trends in premium and a continued slow down in the growth rate to price value.

[David Adelman:]

Versus your respective competitors in premium versus price value where do you think amongst those two where do you think you’re directing greater levels of competitive intensity? In other words do you think you’re having a greater relative competitive impact within the premium segment? Or within the price value segment?

[Daniel W. Butler:]

I would say that within the premium segment I don’t think we’re trading consumers up from price value back up to premium. I think what we’re doing on premium, sort of the loyalty plans is stopping the bleeding so that we’re benefitting from where we put the real muscle is on growing the category. I’d say the premium effort for the most part is filling the bucket and plugging the hole at the bottom. Then, we are competing for share in the price value segment and while the category is moderating, the PV segment is moderating, our share levels eventually should hopefully start to respond because our growth rate should surpass those. All of this activity, I think a good news dynamic is when you see new brands launch, they’re just trading within that PV segment now. That growth rate started the year – it went from a couple of years ago at 28% to 25% to 20% to it entered this year at around 18%, exiting this year growing at around 14% and if you go back and look at some of the high volume PV areas where it initially started its in the single digit growth. It’s heading the right direction but, again, we are competing effectively as we said and are competing more effectively within the PV segment for share and growing the category and making sure we’re not down trading.

[Murray S. Kessler:]

You’ve written about it but, that’s why the [inaudible] initiative if the state excise equity initiative is very important because it plays a significant loyalty component in leveling the playing field.

[Operator:]

Our next question comes from Filippe Goossens from Credit Suisse. Please proceed.

[Filippe Goossens:]

Maybe the first few ones for Ray, if I may. Ray, Judy asked the question about your flexibility in terms of share buyback, so your thoughts about revising potentially that $300 million target for this year. How do you think about net worth? Right now net worth from your share buybacks last year is negative. Is that at all a determining factor in potentially revising upwards that $300 million? Or, that’s really not going into the thinking process here?

[Raymond P. Silcock:]

I think it would be fair to say that is not in our thought process. We do not believe that is something of concern either positive or negative. We believe that people who look at the business

[Filippe Goossens:]

That’s what I thought, I just wanted to confirm. Then, on the project momentum run rate of about 88 clearly, ahead of schedule. May we see some more let’s say savings being brought forward in 2008? Or, you’re pretty much going to move now to kind of the normal trajectory that you had initially envisioned?

[Raymond P. Silcock:]

I think that’s a hard question to answer except I would say we are working hard on something that goes beyond project momentum. So, whether we actually increase project momentum savings per say or whether we go beyond project momentum to a new initiative I do think that we will see more savings. As I mentioned in my prepared remarks, we’re really focused on improving that, we’re focused on increasing our efficiencies, developing our productivity and I believe we’ll see added benefits coming through to our bottom line as we progress through this year and 2009 as well.

[Filippe Goossens:]

How much in charges have you budgeted for 2008 as far as the project momentum?

[Raymond P. Silcock:]

The total amount in project momentum is $35 million in 2008. But, as I say we’re focused on.

[Murray S. Kessler:]

Was your question on the charges?

[Filippe Goossens:]

Yeah. The charges.

[Raymond P. Silcock:]

I’m sorry, I misunderstood the question. The answer to that question is there’s no restructuring charges anticipated in 2008 because even though there is a possibility we might encounter some we have no way of realistically making an estimate at this point in time.

[Filippe Goossens:]

Then, my final question as it relates to Ray; can you give us a feel for if you were to exclude the one week extra shipping on the smokeless side how your operating profits on the smokeless side would have performed?

[Murray S. Kessler:]

Let me jump in on that Filippe. It’s not an exercise I’m willing to do because that’s sort of the old days of UST where you have an extra week and do this EBD adjustment. As far as I’m concerned the amount of volume we have in a year and delivering our goals is one consideration as well as share repurchases and price increases, and cost savings and everything else. So, we made decisions based on having that volume as part of our financial plan. So, there is just no way to adjust for it because we might have done something else within getting our goals. Again, I don’t think you should think of it that way.

[Filippe Goossens:]

Okay, we should think of it more holistic in terms of again, the entire toolbox at your disposal in order to meet that goal of total shareholder return of 10%?

[Murray S. Kessler:]

Exactly.

[Filippe Goossens:]

Murray, two quick question for you perhaps if I may; as it relates to the comment from Dan for November, with the deceleration in volume performance because of gas prices, did you see people trade down? Or was there actually also an impact in actual consumption? What’s your take on that?

[Murray S. Kessler:]

The impact we saw across the premium segments in Red because that’s our takeaway measure category, what we came back a little bit in the month of November, the category came back a little bit for the month of November, price value came back. There was no change in the dynamics of switching and again, consumption we don’t have the final December numbers yet. We have one of our services and it rebounded along with the shipments.

[Filippe Goossens:]

So you did not notice any down trading basically. Final question, you’ve again very well articulated the focus on profitable volume growth and eventually to grow at the same rate as the category. Now, is there a particular share point or a percentage of overall share that you say is kind of like a line in the sand, I’m not willing to drop below whatever the number is? Or, the focus will remain on profitable volume growth regardless of when you will start growing at the same rate as the category.

[Murray S. Kessler:]

I think my actions speak louder than my words. The line in the sand is when premium volume is not growing. So, when you saw us draw a line in the sand and spend an extra $80 million and take down our operating earnings is when premium volumes started growing. But, in a category that is continuing to progress and our brands are continuing to grow and deliver great returns with a bright future and protecting the category profitability no, I don’t have a particular line in the sand number other than to say that the engine in this company is premium volume needs to grow.

[Operator:]

(Operator Instructions) Our next question comes from Greg Fontana from [ ] Capital. Please proceed.

[Greg Fontana:]

Just one quick question, I don’t think I missed it but, what was the price value volume for you excluding the extra day?

[Daniel W. Butler:]

The growth rate was I think 10.5% for the quarter excluding the extra billing day.

[Greg Fontana:]

10.5?

[Daniel W. Butler:]

Yes.

[Operator:]

Now I’d like to turn the call back over to closing remarks from Murray Kessler, chairman and CEO. Please proceed sir.

[Murray S. Kessler:]

Thank you for your continued interest in UST. We’re glad to have delivered such strong results in 2007 and now we’re focused on 2008. We’ll talk to you next time.

[Operator:]

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day. Thank you.