UST Inc. (NYSE: UST) recently reported stronger than anticipated results for the fourth quarter and year 2006 primarily driven by continued improvement in premium moist smokeless tobacco net unit volume, record sales and operating profit for the Company’s wine operations, cost and spending favorability and the reversal of income tax accruals.
Highlights include:
Fourth Quarter 2006
- GAAP diluted EPS $.85
- GAAP diluted EPS +$.08 above most recent guidance
- Adjusted non-GAAP diluted EPS $.86 (see table)
- Premium moist smokeless tobacco net can sales +1.7% vs. year-ago
- MST category growth +8.3% (26 weeks ended Nov. 25, 2006) vs. year-ago
- Wine segment net sales +26% and operating profit +27% vs. year-ago
Year 2006
- GAAP diluted EPS $3.12
- Adjusted non-GAAP diluted EPS $3.18 (see table)
- GAAP and adjusted non-GAAP diluted EPS +$.08 above most recent guidance
- Premium moist smokeless tobacco net can sales +0.1% vs. year-ago
- MST category growth +8.0 percent (YTD Nov. 25, 2006) vs. year-ago
- Wine segment net sales +14% and operating profit +17% vs. year-ago
“We are pleased to have significantly exceeded our original diluted EPS target, despite $22 million in unbudgeted restructuring charges related to Project Momentum,” said Murray S. Kessler, president and chief executive officer. “With our premium moist smokeless tobacco net can sales back on the growth track, continued solid growth expected in our wine operations, and the financial flexibility Project Momentum will provide, we have confidence that we can achieve our long-term goal of generating a 10 percent-plus annual return for our shareholders on a consistent and sustainable basis, including earnings growth and a strong dividend yield.”
Consolidated Results
For the fourth quarter ended Dec. 31, 2006, net sales increased 2.4 percent to $485.7 million, operating income decreased 2.5 percent to $220.7 million and net earnings decreased 4.5 percent to $137.2 million. Fourth quarter 2006 GAAP diluted earnings per share of $.85 declined 3.4 percent versus the prior year period, but exceeded the Company’s expectations by $.08, primarily driven by stronger than anticipated revenue growth ($.03), cost and spending favorability ($.02) and the reversal of federal income tax accruals, net of federal benefit ($.03).
Fourth quarter 2006 results include restructuring charges related to Project Momentum of $4.5 million. Adjusting for these charges, non-GAAP diluted earnings per share were $.86, a decline of 2.3 percent versus the year-ago period. Also affecting comparative results, 2006 included the impact of the reversal of $4.7 million ($.03 per diluted share) of income tax accruals, net of federal benefit, approximately half of the benefit, $9.3 million ($.06 per diluted share) experienced in 2005.
For the year 2006, net sales were stable at $1,850.9 million, net earnings decreased 5.3 percent to $505.9 million and GAAP diluted earnings per share decreased 3.4 percent to $3.12, also $.08 above previous guidance.
For the year, 2006 results include restructuring charges of $22 million ($.08 per diluted share). The Company also had income from discontinued operations of $3.9 million ($.02 per diluted share), resulting from the reversal of an income tax related contingency accrual recorded in 2004 when the Company disposed of its cigar operations. The reversal was triggered when the Company decided to sell its headquarters building and relocate as a result of Project Momentum. On an adjusted non-GAAP basis, diluted earnings per share were $3.18, down 1.5 percent versus year-ago.
Total year comparative results were also impacted by a reversal of income tax accruals, net of federal benefit of $4.7 million ($.03 per diluted share) in 2006 versus $18 million ($.11 per diluted share) in 2005. This was partially offset by a net pretax charge of $2 million in 2006 and $11.8 million ($.04 per diluted share) in 2005, recorded in connection with the settlement of certain states’ indirect and direct purchaser antitrust actions.
Smokeless Tobacco Segment
Investments in premium brand loyalty initiatives, combined with continued strong levels of category growth as a result of the Company’s substantial efforts to convert adult smokers, drove better than expected unit volume results in the fourth quarter 2006. Premium moist smokeless tobacco net can sales increased 1.7 percent to 134 million, price value net can sales increased 7.8 percent to 23.4 million and total net can sales increased 2.5 percent to 157.4 million.
Growth in fourth quarter 2006 premium net can sales reflects a continued sequential improvement in underlying trends as shown in the table below.
Change vs. prior year period Q1* Q2 Q3 Q4
2006 2006 2006 2006
Premium net unit volume (2.9)% (1.8)% +0.7% +1.7%
* Adjusted for prior year inventory shift which was due to a price
increase, as previously disclosed.
U.S. Smokeless Tobacco Company’s Retail Account Data Share & Volume Tracking System (RAD-SVT) for the 26-week period ended Nov. 25, 2006, measuring shipments to retail on a can-volume basis, indicates growth in total category shipments remained brisk, increasing 8.3 percent and USSTC’s total shipments increased 3.1 percent versus the year-ago period. The total premium segment increased 1.8 percent, with USSTC’s premium shipments up 2.3 percent. The total value segments, including price value and sub-price value increased 18.7 percent, with USSTC’s price value shipments up 7.7 percent during the same period. USSTC’s total share of 61.4 percent declined 3.1 percentage points, roughly half the rate of the decline experienced prior to the implementation of the premium brand loyalty plan.
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. Because RAD-SVT records shipments from wholesale to retail, the data can vary significantly from the Company’s actual results which are reported as net shipments to wholesale.
Smokeless Tobacco segment fourth quarter 2006 net sales of $380 million decreased 2.2 percent versus the year-ago period. The decline in net sales on higher unit volume reflects the Company’s continued investment in premium brand loyalty, primarily through price focused initiatives, which resulted in strengthening premium unit volume trends. Operating profit for the segment, including its share of restructuring charges of $4.1 million, declined 4 percent to $207.8 million.
“The premium loyalty and category growth plans we put in place at the beginning of the year to stabilize premium can sales have now resulted in premium volume growth,” said Daniel W. Butler, president, U.S. Smokeless Tobacco Company. “The sequential improvement in trend as the year progressed gives us confidence we will achieve our goal of delivering profitable volume growth in 2007.”
For the year 2006, Smokeless Tobacco segment net sales decreased 2.5 percent to $1,522.7 million. Total moist smokeless tobacco net can sales increased 1.2 percent to 632.7 million. Premium net can sales increased 0.1 percent to 541.4 million and price value net can sales increased 8.2 percent to 91.3 million.
Smokeless Tobacco segment operating profit for the year 2006 declined 5.6 percent to $805.1 million. Total year 2006 results include restructuring charges of $19.5 million related to Project Momentum and a $2 million antitrust litigation charge reflecting a change in the estimated redemption rate for coupons and higher than anticipated administrative expenses in connection with the resolution of certain states’ indirect purchaser antitrust actions. The prior year period results include an antitrust litigation charge of $11.8 million recorded in connection with the settlement of certain states’ indirect purchaser antitrust actions.
Wine Segment
The Wine segment delivered record sales and operating profit in the fourth quarter, driven by exceptional third party acclaim and product ratings, as well as continued solid premium wine category growth. Strong case sales for its core brands, new product introductions and the inclusion of Erath and Antinori, two new business ventures entered into during the year, led to the increase. As a result, net sales increased 26.3 percent to $94.6 million on a 22.1 percent increase in premium case sales versus the year-ago period. Operating profit for the segment increased 26.6 percent.
“Our strategic plan to upgrade the portfolio, capitalize on Pacific Northwest wines and improve return on assets is working. We have excellent momentum heading into 2007,” said Theodor P. Baseler, president, Ste. Michelle Wine Estates.
For the year 2006, Wine segment net sales increased 13.7 percent to $282.4 million on an 11.4 percent increase in premium case sales versus the corresponding 2005 period. Operating profit advanced 16.7 percent to $44.1 million, including a $2.5 million gain on the sale of certain non-strategic assets, partially offset by a $0.3 million restructuring charge.
Outlook
For 2007, GAAP diluted earnings per share are targeted at $3.30, with a range of $3.25 to $3.40, indicating the Company currently sees more upside than downside to its 2007 initial forecast. As the Company indicated at its annual investor conference in December, diluted earnings per share are anticipated to increase over the prior year in the range of 1 to 3 percent in the first three quarters, with the balance of the increase coming in the fourth quarter due to the inclusion of an extra billing day in the Smokeless Tobacco segment. Guidance for 2007 excludes any gain associated with the sale of the Company’s headquarters, less any additional restructuring charges associated with Project Momentum, as management is not able, in good faith, to make a determination of the estimated amounts or range of amounts, to be incurred in connection with these items.
Over the long-term, the Company’s goal is to provide an annual shareholder return of at least 10 percent, including diluted earnings per share growth and a strong dividend. The improved trends in the premium moist smokeless tobacco business and the Project Momentum cost savings initiative provide confidence that this goal can be achieved, while at the same time giving the Company flexibility to grow its business in light of increased competition in the Smokeless Tobacco segment.
A conference call is scheduled for 9 a.m. Eastern Time today to discuss these results. To listen to the call, please visit www.ustinc.com. A 14-day playback is available by calling (888) 286-8010 or (617) 801-6888, code #16398770 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 distributes and markets Antinori products in the U.S.
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)
Fourth Quarter
2006 2005 % Change
Net sales $485,721 $474,412 + 2.4
Costs and expenses
Cost of products sold 133,609 122,190 + 9.3
Selling, advertising and
administrative 126,194 126,678 - 0.4
Restructuring charges 4,502 - -
Antitrust litigation 675 (767) -
Total costs and expenses 264,980 248,101 + 6.8
Operating income 220,741 226,311 - 2.5
Interest, net 9,567 10,995 - 13.0
Earnings before income taxes 211,174 215,316 - 1.9
Income tax expense 73,971 71,639 + 3.3
Net earnings $137,203 $143,677 - 4.5
Net earnings per share:
Basic $.86 $.88 - 2.3
Diluted $.85 $.88 - 3.4
Dividends per share $.57 $.55 + 3.6
Average number of shares:
Basic 160,275 162,725
Diluted 162,062 163,736
UST
CONSOLIDATED SALES AND EARNINGS
(In thousands, except per share amounts)
Year ended December 31,
2006 2005 % Change
(Unaudited)
Net sales $1,850,911 $1,851,885 - 0.1
Costs and expenses
Cost of products sold 466,088 443,131 + 5.2
Selling, advertising and
administrative 525,990 518,797 + 1.4
Restructuring charges 21,997 - -
Antitrust litigation 2,025 11,762 - 82.8
Total costs and expenses 1,016,100 973,690 + 4.4
Operating income 834,811 878,195 - 4.9
Interest, net 41,785 50,578 - 17.4
Earnings from continuing
operations before income taxes 793,026 827,617 - 4.2
Income tax expense 291,060 293,349 - 0.8
Earnings from continuing
operations 501,966 534,268 - 6.0
Income from discontinued
operations, including
income tax effect 3,890 - -
Net earnings $505,856 $534,268 - 5.3
Net earnings per basic share:
Earnings from continuing
operations $3.13 $3.26 - 4.0
Income from discontinued
operations .02 - -
Net earnings per basic share $3.15 $3.26 - 3.4
Net earnings per diluted share:
Earnings from continuing
operations $3.10 $3.23 - 4.0
Income from discontinued
operations .02 - -
Net earnings per diluted share $3.12 $3.23 - 3.4
Dividends per share $2.28 $2.20 + 3.6
Average number of shares:
Basic 160,772 163,949
Diluted 162,280 165,497
UST
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Dollars in thousands)
December 31, December 31,
2006 2005
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $254,393 $202,025
Short-term investments 20,000 10,000
Accounts receivable 52,501 54,186
Inventories:
Leaf tobacco 201,035 202,553
Products in process 233,741 203,396
Finished goods 145,820 156,343
Other materials and supplies 20,662 21,115
Total inventories 601,258 583,407
Deferred income taxes 11,370 11,622
Income taxes receivable - 2,400
Assets held for sale 31,452 3,433
Prepaid expenses and other current assets 27,136 22,481
Total current assets 998,110 889,554
Property, plant and equipment, net 389,810 431,168
Other assets 26,189 46,261
Deferred income taxes 26,239 -
Total assets $1,440,348 $1,366,983
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable and accrued expenses $268,254 $231,061
Income taxes payable 18,896 12,566
Litigation liability 12,927 15,151
Total current liabilities 300,077 258,778
Long-term debt 840,000 840,000
Postretirement benefits other than pensions 86,413 85,819
Pensions 142,424 92,159
Deferred income taxes - 11,972
Other liabilities 5,608 3,157
Total liabilities 1,374,522 1,291,885
Contingencies
Stockholders' equity:
Capital stock (1) 104,956 103,810
Additional paid-in capital 1,036,237 945,466
Retained earnings 635,272 497,389
Accumulated other comprehensive loss (56,871) (17,802)
1,719,594 1,528,863
Less treasury stock - 49,319,673 shares
in 2006 and 45,049,378 shares in 2005 1,653,768 1,453,765
Total stockholders' equity 65,826 75,098
Total liabilities and stockholders' equity $1,440,348 $1,366,983
(1) Common Stock par value $.50 per share: Authorized - 600 million
shares; issued - 209,912,510 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
(Dollars in thousands)
Twelve Months Ended December 31,
2006 2005
(Unaudited)
Operating Activities:
Net earnings $505,856 $534,268
Adjustment to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 45,839 46,438
Share-based compensation expense 10,403 5,976
Excess tax benefits from share-based compensation (9,863) -
Goodwill and intangible impairment - 3,313
(Gain)/loss on disposition of property,
plant and equipment (327) 8,911
Deferred income taxes (16,922) 19,167
Changes in operating assets and liabilities:
Accounts receivable 1,685 (12,724)
Inventories (15,780) (16,247)
Prepaid expenses and other assets 14,703 16,255
Accounts payable, accrued expenses,
pensions and other liabilities 40,541 6,757
Income taxes 22,945 (39,977)
Litigation liability (2,224) (11,438)
Net cash provided by operating activities $596,856 560,699
Investing Activities:
Short-term investments, net (10,000) 50,000
Purchases of property, plant and equipment (37,044) (89,947)
Proceeds from dispositions of property,
plant and equipment 6,179 22,942
Acquisition of business (10,578) -
Investment in joint venture (3,620) -
Net cash used in investing activities (55,063) (17,005)
Financing Activities:
Repayment of debt - (300,000)
Excess tax benefits from stock-based compensation 9,863 -
Proceeds from the issuance of stock 68,214 69,375
Dividends paid (367,499) (361,208)
Stock repurchased (200,003) (200,038)
Net cash used in financing activities (489,425) (791,871)
Increase/(decrease) in cash
and cash equivalents 52,368 (248,177)
Cash and cash equivalents at beginning of year 202,025 450,202
Cash and cash equivalents at end of period $254,393 $202,025
NOTE: Certain prior year amounts have been reclassified to conform to the
2006 presentation
Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures
The adjusted non-GAAP financial measures used in this press release exclude the impact of 2006 restructuring charges and, where applicable, the impact of income from discontinued operations. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles and may be different from non-GAAP measures used by other companies. Non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. The Company believes that these non-GAAP financial measures are helpful in assessing ongoing and forecasted operating results. In addition, these non- GAAP financial measures facilitate the Company’s internal comparisons to historical operating results and comparisons to competitors’ operating results. The Company has included these non-GAAP financial measures in this press release because it believes such measures allow for greater transparency related to supplemental information used by management in its financial and operational analysis. Investors are encouraged to review the reconciliations of the non-GAAP financial measures used in this press release to their most directly comparable GAAP financial measures as provided below.
Reconciliation of GAAP To Adjusted Non-GAAP Diluted Earnings Per Share
Fourth Quarter Year Ended Dec. 31,
2006 2005 % Chg. 2006 2005 % Chg.
Diluted EPS (GAAP) $.85 $.88 -3.4 $3.12 $3.23 -3.4
Less: Income From Disc.
Operations - - (.02) -
Diluted EPS From Cont.
Operations (GAAP) .85 .88 -3.4 3.10 3.23 -4.0
Add: Restructuring Charges .01 - .08 -
Adjusted Diluted
EPS (Non-GAAP) $.86 $.88 -2.3 $3.18 $3.23 -1.5
UST
SUPPLEMENTAL SCHEDULE
(Unaudited)
Fourth Quarter Year ended Dec. 31,
Smokeless Tobacco 2006 2005 % 2006 2005 %
Net Sales (mil) $380.0 $388.6 -2.2% $1,522.7 $1,561.7 -2.5%
Restructuring
Charges (mil) $4.1 - - $19.5 - -
Antitrust
Litigation (mil) $0.7 ($0.8) - $2.0 $11.8 -82.8%
Operating Profit (mil) $207.8 $216.4 -4.0% $805.1 $852.5 -5.6%
MST Net Can Sales
Premium (mil) 134.0 131.8 1.7% 541.4 541.0 0.1%
Price Value (mil) 23.4 21.7 7.8% 91.3 84.4 8.2%
Total (mil) 157.4 153.5 2.5% 632.7 625.4 1.2%
Volume % Point
MST Share Data Chg. Vs. Chg. Vs.
RAD-SVT 26 wks ended 11/25/06(1) YAGO Share YAGO
Total Category +8.3%
Total Premium Segment +1.8% 57.1% -3.7 pts
Total Value Segments +18.7% 42.7% +3.7 pts
USSTC Share of Total Category + 3.1% 61.4% -3.1 pts
USSTC Share of Premium Segment +2.3% 90.5% +0.5 pts
USSTC Share of Value Segments +7.7% 22.6% -2.3 pts
(1) RAD-SVT - Retail Account 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.
Fourth Quarter Year ended Dec. 31,
Wine 2006 2005 % 2006 2005 %
Net Sales (mil) $94.6 $74.9 26.3% $282.4 $248.3 13.7%
Restructuring
Charges (mil) - - - $0.3 - -
Operating Profit (mil) $16.7 $13.2 26.6% $44.1 $37.8 16.7%
Premium Case
Sales (thou) 1,494 1,224 22.1% 4,563 4,096 11.4%
Other
Net Sales (mil) $11.1 $11.0 1.4% $45.8 $41.9 9.4%
Restructuring
Charges (mil) - - - $0.2 - -
Operating Profit (mil) $4.0 $3.1 27.1% $16.0 $14.3 11.3%
SOURCE UST Inc.
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