UST Inc. (UST)
Q2 2008 Earnings Call
July 24, 2008 9:00 am ET
Executives
Mark Rozelle – Vice President, Investor Relations
Murray S. Kessler – Chairman & Chief Executive Officer
Raymond P. Silcock – Chief Financial Officer
Daniel Butler - President of US Smokeless Tobacco Company
Analysts
Nik Modi - UBS Securities
Judy Hong - Goldman Sachs & Co.
Filippe Goossens - Credit Suisse
David Adelman - Morgan Stanley & Co.
Christine Farkas - Merrill Lynch & Co.
Ann Gurkin - Davenport & Co.
Sanket Patel - Greenlight Capital
Andrew Kieley - Deutsche Bank
Presentation
Operator
Previous Statements by UST
» UST, Inc. Q3 2008 Earnings Call Transcript
» UST, Inc. Q1 2008 Earnings Call Transcript
» UST Inc. Q4 2007 Earnings Call Transcript
Mark Rozelle
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 is also 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 on this call. A complete reconciliation of GAAP to non-GAAP financial measures can be found in our press release, which we issued this morning and, as I mentioned, is available on our website.
I will now turn the call over to Murray.
Murray S. Kessler
Despite a challenging U.S. economy, a significant mid-quarter spike in gasoline prices, and a meaningful increase in smokeless competitive activity, UST exceeded our internal and publicly-stated earnings expectations for the quarter.
For the quarter net sales increased 3% versus a year ago, GAAP diluted EPS increased 8% versus a year ago to $0.94 per share, and adjusted diluted EPS increased 5.6% to $0.95, which is above our guidance of approximately 4% EPS growth.
A strong earnings performance was the result of a) continued over-delivery of project momentum cost savings, which helped improve operating margins for both smokeless tobacco and wine, b) spectacular wine division results with net sales up 25% and operating profit up 30%, and c) lower shares outstanding, a result of our increased share repurchase activity over the last 12 months.
Of note, this strong earnings performance also came despite our premium smokeless tobacco business performing below our expectations for the quarter.
So let me provide you my perspective on the premium smokeless volume results. Volume for April and May was solid and on track for our expectations and relative to what we’ve seen over the last year and a half. All of the shortfall occurred in June and all of it occurred in one geographic area. That area, which is characteristically in the Southeast portion of the country, is a lower per capital income and high price value development area, but to be clear, it has nothing to do with the competitive test market in Atlanta where our premium business continues to post growth.
What we do attribute the June shortfall to is a significant increase in gasoline prices that drove the average price of gasoline well over $4.00 a gallon, a new threshold. In the area of the country where our business was negatively affected the cost of gasoline now represents as much as 16% of total per capita income. Second, our own promotional timing which also affected the June performance as our brands were off buy-down in June, similar to years in the past, and three, heightened competitive activity in the form of new product launches and I think more significantly, much higher levels of competitive promotional support at the lower end of the market, perhaps taking advantage of our promotional timing.
The combined effect of outer reduction and support in the face of higher competitive activity and higher gasoline prices caused the shortfall. From our perspective, we can address these issues but there wasn’t enough time to adjust in the month of June. The promotional timing issue is easily addressed. We need to simply be less predictable. From a support-level prospective, as I’ve said all along, we had anticipated this type of issue and retained and level of flexible spending to deal with it. Although to be clear, we have reset our expectations of the environment we will be operating in for the balance of this year into 2009.
As we believe the level of flexible funds that we maintained and which are now being deployed to address the current external environment are sufficient, we are reiterating our previous adjusted earnings guidance of $3.65, with a range of $3.60 to $3.70 and a total shareholder return of 10%. We believe this is another good example of our expanded tool box at work.
With that I will turn the call over to Ray Silcock, our Chief Financial Officer, who will cover second quarter financial results in more detail, and Dan Butler, President of U.S. Smokeless Tobacco Company, who will review operational results.
Raymond P. Silcock
As you have seen from this morning’s earnings release and just heard from Murray, the company continues to exceed its earnings commitments despite the challenging economic environment. Strong Wine results combined with a continued savings from Project Momentum and other cost-improvement efforts helped offset lower than expected premium Smokeless Tobacco volume caused by a soft economy, rising gas prices, and sharply competitive activity. We remain on track to deliver our earnings goals for the year.
Read the rest of this transcript for free on seekingalpha.com