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UST Reports First Quarter 2006 Diluted Earnings Per Share of $.71

Posted on: Tuesday, 25 April 2006, 09:01 CDT

GREENWICH, Conn., Apr. 25 /PRNewswire-FirstCall/ -- UST Inc. today announced that its increased investment in accelerated category growth and premium brand loyalty initiatives for the Company's moist smokeless tobacco products is making progress. As a result of these strategic investments, for the first quarter ended March 31, 2006, net sales decreased 1.6 percent to $433.6 million, net earnings decreased 4.9 percent to $115.9 million and diluted earnings per share decreased 2.7 percent to $.71, compared to the corresponding 2005 period.

"First quarter financial results were ahead of plan and fundamentals improved in our principal business, moist smokeless tobacco," said Vincent A. Gierer, Jr., UST chairman and chief executive officer. "While we would have liked to have seen even stronger premium can sales in the quarter, the bottom line is that our plans to accelerate growth in the overall category and increase loyalty for our Copenhagen and Skoal brands are working."

Murray S. Kessler, UST president and chief operating officer noted, "Category growth remains robust and our net premium can sale trends sequentially improved as the quarter progressed, continuing into the first three weeks of April. This sequential improvement came despite mixed results on a state-by-state basis. Based on these trends combined with adjustments we have made to our plans going forward, we remain confident that we will meet our diluted earnings per share target of $3.05 for the year."

Net sales decreased 1.6 percent in the quarter primarily as a result of lower realized net revenue per premium unit in the Smokeless Tobacco segment, as the Company implemented strategic initiatives to increase premium brand loyalty. The plan calls for a comprehensive, state-by-state offering of various sales incentives aimed at improving the value proposition for adult consumers. The consolidated net sales comparison was favorably impacted by increased premium case sales in the Wine segment.

The first quarter 2006 gross margin declined 3.1 percent or $10.7 million compared to the year-ago period. The Smokeless Tobacco segment gross margin declined 3.9 percent or $12.3 million primarily due to lower realized net revenue per premium unit. The gross margin for the Wine segment and other operations combined increased $1.6 million.

Selling, advertising and administrative expenses in the first quarter 2006 decreased 3.0 percent or $4.1 million compared to the year-ago quarter. The decrease was primarily driven by lower legal and related costs as well as lower selling and advertising expenses due to timing of initiatives versus the prior year period for the Smokeless Tobacco segment. For the Wine segment, higher divisional administration, selling and advertising expenses were more than offset by a $2.5 million gain on the disposal of non-strategic assets.

During the first quarter 2006 the Company recorded a $1.4 million antitrust litigation charge reflecting a change in the estimated redemption rate for coupons in connection with the resolution of certain states' indirect purchaser antitrust actions.

Interest expense in the first quarter 2006 declined 30 percent or $4.9 million primarily due to the repayment of $300 million of senior notes upon maturity in March 2005.

Income tax expense for the first quarter 2005 included a reversal of $4.7 million of federal and state income tax accruals, net of federal benefit.

The company repurchased 1.2 million shares at a cost of $50 million during the first quarter 2006.

Smokeless Tobacco Segment

Consistent with the implementation of its premium brand loyalty initiatives, Smokeless Tobacco segment first quarter 2006 net sales decreased 3.3 percent to $366.3 million and operating profit declined 4.2 percent to $191.7 million compared to the year-ago period. Total moist smokeless tobacco net can sales increased 0.7 percent to 151.7 million. Premium net can sales were stable at 130 million and price value net can sales increased 5.8 percent to 21.7 million. The Company estimates that approximately 3.7 million net premium cans were shifted from the first quarter 2005 to the fourth quarter 2004 as wholesale and retail customers increased inventories in advance of the January 1, 2005 price increase. Adjusted for the inventory shift in the prior year period, total first quarter 2006 net can sales decreased 1.7 percent and premium net can sales declined 2.9 percent.

Share data for the 26-week period ended March 18, 2006 from U.S. Smokeless Tobacco Company's Retail Activity Data Share & Volume Tracking System (RAD- SVT) measuring shipments to retail on a can-volume basis, are included in the attached Supplemental Schedule. To give a clearer picture of how the premium brand loyalty and category growth initiatives have impacted trends in the marketplace, the 26-week period has been broken into two periods, the 16 weeks prior to the plan implementation and the 10 weeks during which the plan was under way. As the data indicate, trends have changed significantly since the plan has been implemented.

Volume % Chg. Vs YAGO Pre Plan Plan Trend RAD-SVT Period Period Chg. Total Category +4.9% +7.4% +2.5 pts USSTC Total -2.5% +1.3% +3.8 pts USSTC Premium -5.6% -1.3% +4.3 pts

"Early results are encouraging, as we have seen a significant improvement in premium unit volume trends in many markets," said Daniel W. Butler, president, U.S. Smokeless Tobacco Company. "We have already made adjustments to our plans for the second quarter to improve performance in those markets that have not responded as we had anticipated, using contingency funds set aside for this purpose."

Wine Segment

Wine segment first quarter 2006 net sales increased 9.1 percent to $56.3 million on an 8.3 percent increase in premium case sales. Operating profit increased 20.2 percent to $8.5 million versus the corresponding 2005 period, including a $2.5 million gain on the sale certain non-strategic assets. During the quarter, the Company announced it had reached an agreement to form a strategic partnership with the Antinori family of Tuscany to distribute the Italian winemaker's portfolio of world famous fine wines in the United States.

Outlook

For the year 2006, the Company reaffirmed diluted earnings per share guidance in the range of $3.00 to $3.14, with a target of $3.05. The earnings decline versus 2005 is primarily the result of an incremental $91 million investment being made throughout the year to grow the category and stabilize premium moist smokeless tobacco unit volume. The Company believes the increased value being offered through the premium brand loyalty initiatives is sufficient even in light of escalating gasoline prices. However, this remains a risk to the plan. Premium unit volume in the second quarter of 2006 is anticipated to be lower than the year-ago period due to timing of new product introductions and promotional activity in the prior year. The decline however is anticipated to show improvement over the underlying trend in the first quarter. The Company continues to expect premium unit volume trends to stabilize in the second half of 2006.

A conference call is scheduled for 11 a.m. Eastern time today to discuss these results. To listen to the call, please visit http://www.ustinc.com/. A 14-day playback is available by calling (888) 286-8010 or (617) 801-6888, code #54387331 or by visiting the website.

UST Inc. is a holding company for its principal subsidiaries: U.S. Smokeless Tobacco Company and International Wine & Spirits Ltd. U.S. Smokeless Tobacco Company is the leading producer and marketer of moist smokeless tobacco products including Copenhagen, Skoal, Red Seal and Husky. International Wine & Spirits Ltd. produces and markets premium wines sold nationally through the Chateau Ste. Michelle, Columbia Crest, and Villa Mt. Eden wineries, as well as sparkling wine produced under the Domaine Ste. Michelle label.

All Statements included in this press release that are not historical in nature are forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Forward- looking statements regarding the company's future performance and financial results are subject to a variety of risks and uncertainties that could cause actual results and outcomes to differ materially from those described in any forward-looking statement made by the company. These risks and uncertainties include uncertainties associated with ongoing and future litigation relating to products liability, antitrust and other matters and legal and other regulatory initiatives; federal and state legislation, including actual and potential excise tax increases, and marketing restrictions relating to matters such as adult sampling, minimum age of purchase, self service displays and flavors; competition from other companies, including any new entrants in the marketplace; wholesaler ordering patterns; consumer preferences, including those relating to premium and price value brands and receptiveness to new product introductions and marketing and other promotional programs; the cost of tobacco leaf and other raw materials; conditions in capital markets; and other factors described in this press release and in the company's Annual Report on Form 10-K for the year ended December 31, 2005. Forward-looking statements made by the company are based on its knowledge of its businesses and the environment in which it operates as of the date on which the statements were made. Due to these risks and uncertainties, as well as matters beyond the control of the company which can affect forward looking statements, you are cautioned not to place undue reliance on these forward- looking statements, which speak only as of the date of this press release. The company undertakes no duty to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

UST CONSOLIDATED SALES AND EARNINGS (In thousands, except per share amounts) (Unaudited) First Quarter 2006 2005 % Change Net sales $433,641 $440,527 - 1.6 Costs and expenses Cost of products sold 104,210 100,404 + 3.8 Selling, advertising and administrative 131,708 135,807 - 3.0 Antitrust litigation 1,350 - - Total costs and expenses 237,268 236,211 + 0.4 Operating income 196,373 204,316 - 3.9 Interest, net 11,470 16,391 - 30.0 Earnings before taxes 184,903 187,925 - 1.6 Income taxes 68,990 66,093 + 4.4 Net earnings $115,913 $121,832 - 4.9 Net earnings per share: Basic $.72 $.74 - 2.7 Diluted $.71 $.73 - 2.7 Dividends per share $.57 $.55 + 3.6 Average number of shares: Basic 161,602 164,766 Diluted 162,649 167,022 UST CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Dollars in thousands) March 31, December 31, 2006 2005 (Unaudited) Assets Current assets: Cash and cash equivalents $200,072 $202,025 Short-term investments - 10,000 Accounts receivable 47,064 54,186 Inventories: Leaf tobacco 201,292 202,553 Products in process 200,176 203,396 Finished goods 150,552 156,343 Other materials and supplies 23,128 21,115 Total inventories 575,148 583,407 Deferred income taxes 10,150 11,622 Income taxes receivable - 2,400 Assets held for sale - 3,433 Prepaid expenses and other current assets 25,903 22,481 Total current assets 858,337 889,554 Property, plant and equipment, net 423,829 431,168 Other assets 42,873 46,261 Total assets $1,325,039 $1,366,983 Liabilities and stockholders' equity: Current liabilities: Accounts payable and accrued expenses $140,864 $231,061 Income taxes payable 78,202 12,566 Litigation liability 16,070 15,151 Total current liabilities 235,136 258,778 Long-term debt 840,000 840,000 Postretirement benefits other than pensions 86,437 85,819 Pensions 94,036 92,159 Deferred income taxes 9,212 11,972 Other liabilities 4,187 3,157 Total liabilities 1,269,008 1,291,885 Contingencies Stockholders' equity: Capital stock(1) 103,885 103,810 Additional paid-in capital 952,283 945,466 Retained earnings 521,000 497,389 Accumulated other comprehensive loss (17,349) (17,802) 1,559,819 1,528,863 Less treasury stock - 46,293,878 shares in 2006 and 45,049,378 shares in 2005 1,503,788 1,453,765 Total stockholders' equity 56,031 75,098 Total liabilities and stockholders' equity $1,325,039 $1,366,983 (1) Common Stock par value $.50 per share: Authorized - 600 million shares; issued - 207,770,982 shares in 2006 and 207,620,439 shares in 2005. Preferred Stock par value $.10 per share: Authorized - 10 million shares; Issued - None. UST CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands) (Unaudited) Three Months Ended March 31, 2006 2005 Operating Activities: Net earnings $115,913 $121,832 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 11,346 11,026 Share-based compensation expense 1,860 1,919 Excess tax benefits from share based compensation (282) - (Gain) loss on disposition of property, plant and equipment (2,372) 339 Deferred income taxes (1,533) (3,133) Changes in operating assets and liabilities: Accounts receivable 7,122 (843) Inventories 8,259 601 Prepaid expenses and other assets 1,148 2,018 Accounts payable, accrued expenses, pensions and other liabilities (86,049) (80,174) Income taxes 68,446 34,746 Litigation liability 919 (2,057) Net cash provided by operating activities 124,777 86,274 Investing Activities: Short-term investments, net 10,000 60,000 Purchases of property, plant and equipment (4,763) (13,564) Proceeds from dispositions of property, plant and equipment 5,957 40 Investment in joint venture (578) - Net cash provided by investing activities 10,616 46,476 Financing Activities: Repayment of debt - (300,000) Proceeds from the issuance of stock 4,594 51,130 Excess tax benefits from share-based compensation 282 - Dividends paid (92,199) (91,003) Stock repurchased (50,023) (50,000) Net cash used in financing activities (137,346) (389,873) Decrease in cash and cash equivalents (1,953) (257,123) Cash and cash equivalents at beginning of year 202,025 450,202 Cash and cash equivalents at end of period $200,072 $193,079 NOTE: Certain prior year amounts have been reclassified to conform to the 2006 presentation. UST Inc. SUPPLEMENTAL SCHEDULE (Unaudited) First Quarter Consolidated Results 2006 2005 % Net Sales (mil) $433.6 $440.5 -1.6% Operating Income (mil) $196.4 $204.3 -3.9% Net Earnings (mil) $115.9 $121.8 -4.9% Diluted EPS $.71 $.73 -2.7% Smokeless Tobacco Net Sales (mil) $366.3 $378.7 -3.3% Operating Profit (mil) $191.7 $200.2 -4.2% MST Net Can Sales Premium (mil) 130.0 130.1 -0.1% Price Value (mil) 21.7 20.5 5.8% Total (mil) 151.7 150.6 0.7% Wine Net Sales (mil) $56.3 $51.6 9.1% Operating Profit (mil) $8.5 $7.1 20.2% Premium Case Sales (thou) 963 889 8.3% Volume % Point Chg. Vs. Chg. Vs. RAD-SVT 26 wks ended 03/18/06(1) YAGO Share YAGO Total Category +5.9% Total Premium Segment -4.5% 59.4% -6.4 pts Total Value Segments +25.9% 40.5% +6.4 pts USSTC Share of Total Category -1.1% 63.4% -4.4 pts USSTC Share of Premium Segment -4.0% 90.3% +0.5 pts USSTC Share of Value Segments +18.6% 24.3% -1.5 pts % Chg. Vs YAGO Pre Plan Plan Trend RAD-SVT(2) Period Period Chg. Total Category Volume +4.9% +7.4% +2.5 pts USSTC Total Volume -2.5% +1.3% +3.8 pts USSTC Premium Volume -5.6% -1.3% +4.3 pts (1) RAD-SVT - Retail Activity Data Share & Volume Tracking System. RAD- SVT information is being provided as an indication of current domestic moist smokeless tobacco industry trends from wholesale to retail and is not intended as a basis for measuring the company's financial performance. This information can vary significantly from the company's actual results due to the fact that the company reports net shipments to wholesale, while RAD-SVT measures shipments from wholesale to retail, the difference in time periods measured, as well as new product introductions and promotions. (2) At the beginning of the year, the Company began implementing its plan to enhance premium brand loyalty and accelerate category growth in the marketplace. The Pre Plan period represents the 16 weeks ended 1/07/06 and the Plan Period represents the 10 weeks ended 03/18/06. The first shipments of Value Packs at lower price points began on 01/09/06.

UST Inc.

CONTACT: Michael G. Bazinet, Media Relations, +1-203-622-3549, or Mark A.Rozelle, Investor Relations, +1-203-622-3520, both of UST Inc.

Web site: http://www.ustinc.com/

Source: PRNewswire-FirstCall

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