Remarks by Louis C. Camilleri, Chairman and Chief Executive Officer at Altria Group, Inc.'s 2005 Annual Shareholders Meeting

2005 Annual Shareholders Meeting

Introduction

Good morning, ladies and gentlemen and thank you for being here.  During 2004, Altria Group, Inc. made excellent progress toward achieving our major strategic objectives.  We entered 2005 in a strong competitive position and our operating companies are well positioned for future growth.

In 2004, we delivered diluted earnings per share from continuing operations of $4.57, including $.10 in net charges, primarily for the Kraft restructuring.

Our total shareholder return in 2004 was 18.4% assuming dividend reinvestment, significantly outperforming the Dow Jones, the NASDAQ and the Standard & Poor's 500 indices.

We raised the dividend 7.4%, to an annual rate of $2.92 per common share, marking the 37th time in 35 years that the dividend has been increased and representing a compound annual growth rate of 8.7% over the past five years.

We are also witnessing continued improvements in the litigation environment, which I will discuss in more detail later.

I also want to comment on the possibility of separating Altria into two, or potentially three, strong and independent entities.  While we have begun making detailed preparations for a restructuring, the precise timing and chronology are uncertain, and continuing improvement in the entire litigation environment is a prerequisite to such action by the Board of Directors.

In the meantime, our operating companies continue to accomplish a great deal and are responding to a challenging environment with effective strategies that are designed to secure both top and bottom-line growth, as seen in our first-quarter results, which we announced just last week.

Net revenues increased 8.7% to $23.6 billion.  Operating income increased 12.5% to $4.2 billion, due primarily to higher income from our tobacco businesses, favorable currency and a gain on sales of businesses at Kraft, partially offset by higher commodity costs at Kraft.

Earnings from continuing operations increased 18.3% to $2.6 billion.  Diluted earnings per share from continuing operations were up 17% from last year to $1.24.

Overall, we had a first quarter with solid results that met our expectations.  I would like to briefly review first quarter results for each of our businesses and illustrate how they are executing on long-term strategies beginning with Kraft Foods.

Kraft Foods Inc. (Kraft)

In the first quarter of 2005, Kraft's net revenues increased 6.4% to $8.1 billion, reflecting solid progress against its Sustainable Growth Plan.  Ongoing volume increased 2.5%, but was down 0.3% excluding the impact of acquisitions.  Operating income increased 18.9% to $1.2 billion, benefiting from lower asset impairment and exit costs, and gains on sales of businesses.  However, excluding these items, operating income was down, due primarily to higher commodity costs.

Kraft's vision is to help people around the world eat and live better, and it is successfully executing on its global strategies to achieve its goals.

It has significantly increased marketing spending to strengthen the value of its brands, with a cumulative increase of $460 million last year alone.  Most of this increase was to address price gaps, but Kraft also increased its advertising spending by more than $100 million.  This year, Kraft plans to increase consumer marketing spending by an additional $200 to $250 million.

The impact of that investment is evident in improved share trends across Kraft's top 25 categories in its U.S. portfolio, with sequentially improving aggregate market share continuing in the first quarter of this year.

Kraft is accelerating the shift in its portfolio toward growth categories where it can leverage both sustainable competitive advantage and scale.  It has identified four global core categories, cheese and dairy, biscuits, coffee, and specialty refreshment beverages, where it is driving for clear leadership.

Kraft is also investing in innovation, with a focus on both developing new products and improving existing ones.  A great example is Lunchables Chicken Dunks, which is on track to become a $50 million business in 2005. 

Another outstanding example is DiGiorno Microwave Rising Crust pizza, which delivers oven-baked taste and is one of several new pizza varieties that added $100 million to Kraft's pizza revenues last year.

In Europe, Kraft has expanded Milka M-joy, a convenient tablet form of its popular chocolate brand that provides a platform for future growth ideas.

Kraft is emphasizing the important trends of health and wellness, and convenience.  For example, it introduced Nabisco 100 Calorie Packs in 2004.  These are portion controlled, single-serve snacks that are projected to become a $75 million business this year.

And it has partnered with the author of the South Beach Diet to offer products that contain whole grains, vegetables and lean sources of protein.  The initial response to this line from Kraft's retail partners has been very strong.

In the area of convenience, Kraft introduced the Tassimo hot beverage system in France during 2004.  This new, proprietary system uses smart technology to enable consumers to make a variety of superior-tasting coffeehouse beverages using real milk, one cup at a time, at the touch of a button.  Consumer reaction has been very positive.  Kraft is expanding the Tassimo system into other markets, including the U.S., later this year.

Kraft is demonstrating its commitment to act responsibly through a variety of activities, including shifting the mix of products it advertises in television, radio and print media viewed primarily by children ages six to 11.  Kraft will advertise products that meet its Sensible Solution criteria in those media, and is phasing out advertising for products that do not.

Kraft is a strong and profitable food industry leader with enormous global potential and a great management team.  It is investing in its brands and is well positioned for growth over the long term.  I am confident that Kraft is on track to achieve its full potential and can deliver stronger results in the years ahead.

Philip Morris USA (PM USA)

Turning now to our domestic tobacco business, in the first quarter, PM USA's operating companies income increased 7% to $1.0 billion, primarily driven by lower wholesale promotional allowances, partially offset by expenses related to the quota buyout legislation and lower volume.

Shipment volume decreased 0.7% to 42.8 billion units versus the same period a year ago, but was essentially flat when adjusted for an extra shipping day in the first quarter of 2004 and the timing of promotional shipments.

Retail share performance was solid, with PM USA's first quarter total retail share up 0.4 percentage points versus the prior year to 50%, driven by Marlboro.

In the first quarter of 2005, Marlboro achieved a 39.8% share at retail, up 0.8 percentage points.  PM USA continues to enhance Marlboro's brand equity.  In January 2005, it began shipping Marlboro Red and Lights 72mm in commemorative packs to mark Marlboro's 50th anniversary.  In March, PM USA began shipping Marlboro UltraSmooth in several test markets to evaluate consumer acceptance of its taste.  Its other focus brands, Parliament, Virginia Slims and Basic, also performed well in a highly competitive environment during the first quarter.

One of PM USA's major priorities is to stem the flow of illegal cigarettes, including counterfeit and other forms of contraband by working closely with law enforcement agencies.

We applaud the recently announced commitment of the federal government and major credit card companies, along with state attorneys general, to prohibit the use of credit cards for the illegal sale of cigarettes over the Internet, including sales where age is not verified or taxes are not paid.

PM USA recognizes that its long-term success is dependent upon aligning with society's evolving expectations of a responsible tobacco company.  It is making progress on this critical issue on several fronts.

In September 2004, PM USA began offering QuitAssist^TM, a new information resource to help connect smokers who have decided to quit with expert quitting information from public health authorities and others.  Earlier this year, PM USA began posting information on its Web site in Spanish, and it plans to continue enhancing its Spanish-language offerings.

PM USA responsibly markets its products to adult smokers.  It also continues to work proactively to help prevent youth smoking through comprehensive actions including retail programs designed to prevent youth access, such as the We Card training program.

In addition, PM USA and PMI continue to make considerable investments to develop, scientifically evaluate, commercialize and launch products with technologies that potentially reduce a smoker's exposure to harmful compounds in cigarette smoke.

We are encouraged that legislation has been reintroduced in the U.S. House and Senate to provide the Food and Drug Administration with authority to regulate tobacco products.  We support the bills in their entirety because they would establish, for the first time, a comprehensive and coherent national tobacco policy in this country.

Importantly, the legislation will also provide a framework and standards for products that could potentially reduce the harm caused by smoking, and define the appropriate ways to communicate about those products.

I believe that PM USA's strategies are clearly working.  The investments it has made are paying off with strong brands and solid performance, while it continues to make significant progress with its societal alignment initiatives.

Philip Morris International (PMI)

Turning to our international tobacco business, in the first quarter, PMI generated operating companies income of $2.1 billion, up 13.1%.

The income growth was due primarily to higher pricing, favorable currency and a one-time benefit from the inventory sale to PMI's new distributor in Italy, partially offset by unfavorable mix and expenses related to the European Community agreement.

PMI's cigarette shipment volume of 201 billion units rose 2.1% in the first quarter, reflecting higher volume in Italy as a result of the one-time inventory sale, continued strong recovery in France and gains in many other markets, partially offset by lower shipments in Germany.

Turning to a brief review of PMI's business by geographic region, in the first quarter PMI's cigarette volume in Western Europe was up 0.6%, due mainly to France and the inventory sale in Italy, mostly offset by a decline in Germany.  Excluding the inventory sale in Italy, PMI's volume was down 7.2% in Western Europe.

Importantly, PMI gained share in key Western European markets, including France, the Netherlands, Spain and Italy.  Despite losing share in Germany, PMI's overall share in Western Europe grew 0.2 percentage points to 38.9%.

In Germany, PMI is facing a challenging environment.  This is due mainly to the continued decline in cigarette smoking incidence, a result of two large tax-driven price increases in 2004, and the rapid growth of other tobacco products, mainly tobacco portions, which enjoy favored tax treatment versus cigarettes.  Portions grew to 5.1 billion units in the first quarter of 2005, more than double their volume in the first quarter last year.  PMI is taking action on a number of fronts to address the challenging situation in Germany.

In Central Europe, cigarette volume increased 5.2% in the first quarter of 2005, due mainly to Poland, Romania and Greece and partially offset by declines in the Czech Republic, Switzerland and Serbia.  In Poland, market share advanced 5.0 points, while impressive share gains were also achieved in Hungary, Greece and Romania, although share was down in Switzerland.

Turning to Eastern Europe, the Middle East and Africa, cigarette volume grew 7.8%, driven by gains in Egypt, Kazakhstan, Turkey and Ukraine.  Market share gains in the first quarter were robust in this region, driven by PMI's strategy of participating in all major profitable price segments.

In Japan, volume was down 6.5% in the first quarter due to the timing of shipments, primarily related to the impending change in health warnings, which become effective on July 1, 2005, partially offset by a ramp-up of Marlboro inventories in advance of the Marlboro license take-back from Japan Tobacco in May. 

In preparation for that take-back, PMI has invested heavily behind expanding its sales force to replace the support Marlboro currently receives from Japan Tobacco.  Regaining full control over Marlboro in Japan next month will entitle PMI to 100% of the profits generated by the brand and will fuel income gains in this highly profitable market. 

Market share continued to grow in Japan, reaching a record 24.8% in the first quarter, due to the continued success of Marlboro, Lark and Virginia Slims Rosé.  In the rest of Asia, cigarette volume increased 5.7% driven by robust growth in Thailand and the Philippines. 

In March, PMI acquired a 40% stake in Sampoerna, the third-largest kretek manufacturer in Indonesia.  PMI has initiated a tender offer for all of the remaining shares, which closes on May 18.  Sampoerna generated operating companies income of $360 million in 2004.  The tobacco industry in Indonesia is comprised of 92% kreteks, which are made of both tobacco and cloves.  Sampoerna possesses leading kretek brands, Dji Sam Soe and A Mild, and together with Marlboro, it will have the strongest premium brand portfolio in Indonesia.

Turning to Latin America, volume was down 3.7%, due primarily to lower volume in Argentina and Brazil, partially offset by continued growth in Mexico.  Volume in Mexico rose 4.4%, aided by last year's introduction of Marlboro Mild Flavor, and PMI's market share increased 2.5 percentage points to a new record of 61.6% in the first quarter.  PMI recently acquired a controlling interest in Coltabaco, the largest tobacco company in Colombia, helping to position it for future growth in Latin America.

A major area of focus at PMI is addressing regulatory and societal issues, and it continues to discuss ways of improving tobacco regulation with governments and health authorities in many countries.

Philip Morris International supported the concept of the Framework Convention on Tobacco Control (FCTC), and supports national regulation of the tobacco industry, including regulation of many issues addressed in the FCTC, such as regulation of descriptors, health warnings, ingredient disclosure and assessment, constituent testing, public place smoking and efforts to stop the illicit trade in cigarettes.  However, PMI does not support a complete ban on all tobacco advertising, excessive excise tax increases or regulation through litigation.

PMI provides comprehensive information about tobacco product issues and the negative health effects of smoking in 27 languages on its Web site, and it has implemented an expanded program of communications to adult smokers that includes pack onserts, which have been translated into 36 languages.

It also vigorously supports the fight against contraband and counterfeit cigarettes and encourages government efforts to reduce consumer down-trading to cheap products or to substitute products like roll-your-own.  PMI has demonstrated its determination to combat contraband and counterfeit by entering into a wide-ranging agreement last year with the European Community.  PMI is pleased with the agreement's impact on its relationships with the relevant EU and member state institutions and the actions taken to date.

PMI uses clear, conspicuous health warnings on all its tobacco products and advertisements, even when the law does not require them.

It remains fully committed to youth smoking prevention and currently supports youth anti-smoking programs in nearly 70 countries, focusing on retail access prevention, teaching children to decide against smoking and on retailer compliance with laws to prevent them from buying cigarettes.

To sum up, PMI captured a 14.5% share of the international tobacco market last year, and the acquisition of Sampoerna will add another share point to its market share.

Going forward, PMI is well placed to continue to grow internationally with its substantial market positions, superb brand portfolio, commitment to societal alignment, significant scale and global infrastructure.

Improving Litigation Environment

I would now like to comment briefly on developments in the litigation environment since last year's meeting.   The positive trend in litigation that we have witnessed for several years continued throughout 2004 and into 2005, with favorable developments in numerous trial and appellate courts.

Investors have been watching three major cases especially closely, the U.S. Government case in Washington, D.C., the Engle case in Florida and the Price case in Illinois.

Last week, the U.S. Court of Appeals for the District of Columbia rejected a request by the government for a full-court review of an earlier decision holding that disgorgement of past revenues and profits is not an available remedy in the federal government's civil RICO case against PM USA and other defendants.

We are pleased with the court's decision and remain confident that the law and the facts support our defense.  The trial is proceeding, and we expect a decision from the trial judge by the end of this year.

In the Engle case, you will recall that a Florida appeals court overturned the $145 billion verdict against PM USA and others, decertified that class action in May of 2003, and then reaffirmed that decision in September of the same year.   In November 2004, the Florida Supreme Court heard oral arguments on appeal.  There is strong legal precedent in PM USA's favor on both class certification and punitive damages issues. We remain optimistic that the appeal court's decision will prevail, and hope for a decision from the Florida Supreme Court by the middle of this year.

In the Price "Lights" class action case, in September 2003 the Illinois Supreme Court agreed to review the trial court's judgment and heard oral arguments in November 2004.  PM USA has very strong arguments in its favor on both the merits and the fact that the case should never have been certified as a class action, based on the law in Illinois.  We expect to get a decision from the Illinois Supreme Court by the middle of this year.

Other "Lights" litigation remains a particular focus of attention.  As with Engle and Price, we believe that the predominance of individual issues over so-called common issues makes class certifications inappropriate.  Many of these cases are in their early stages, and we are hopeful that, as they proceed, our legal position will be vindicated.

Overall, the trend in litigation is clearly improving, as illustrated by this snapshot of PM USA case counts.  There have been significant declines from the 10-year high to this year for individual cases, for class actions, including both certified classes and those seeking to be certified, and for third-party payor reimbursement cases.  In addition, the number of cases set for trial continues to decline, as well as the number of annual new case filings.

Dismissals also continue at a steady rate.  In fact, over the past 50 years of tobacco litigation, 96% of all cases have been dismissed before going to trial.

To sum up, although PM USA will continue to face litigation challenges, I believe that the trend is clearly favorable and litigation developments are likely to have continued positive effects this year and into the future.

Conclusion and Tribute to Employees

I hope that I have conveyed my enthusiasm for Altria's prospects, and the strengths that I believe will ensure our future success.  Our operating companies have some of the world's most valuable brands, including Marlboro, L&M, Kraft and Nabisco.

Additionally, our financial resources provide us with a significant competitive advantage.  In 2004, we delivered $9.4 billion in net earnings, placing us at number nine among the most profitable companies on the Fortune 500 list.

The Altria family of companies generated a total of $16.4 billion in total taxes paid to federal, state and local governments in the U.S. alone in 2004, and that number more than doubles when taxes outside the U.S. are considered.

We delivered nearly $11 billion in operating cash flow in 2004, largely from our tobacco operating companies, and we plan to continue using our strong cash flow to reward you, our shareholders.

In fact, a recent study highlights our shares as the best performing by far among all companies comprising the original members of the Standard & Poor's 500 since that index was created back in 1957, with an annual return of nearly 20% through 2003.  Put another way, the purchase of 100 shares for a little over $4,400 in 1957 would have grown to more than $20 million today, including reinvested dividends.  That is an absolutely stellar performance, and I assure you that we are fully aware of this legacy as we strive to deliver value to our shareholders over the long term.

I would like to extend my warm personal thanks to our colleagues here in East Hanover for hosting both this and the Kraft Annual Meeting just two days ago.  We are all deeply grateful for the time and care you put into making our guests feel welcome and comfortable.

In my experience, caring is fundamental to the employees of the Altria family of companies.  Year after year, they dedicate themselves to the success of our businesses and the well-being of their communities.

They serve as our ambassadors around the world, giving generously of their own time and money.  Last year, $27 million in personal and company donations were directed to not-for-profit organizations, such as Greenwich House, City Harvest, D.C. Central Kitchen and Sanctuary for Families, with $14 million in employee donations alone.

This caring spirit is integral to the way our companies strive to be outstanding corporate citizens.  Where there is a serious humanitarian need, you are likely to find members of the Altria family of companies there to offer assistance.

Last year, when the world was still reeling from the devastation caused by the tsunami in Southeast Asia, your companies funded AmeriCares' first emergency airlift of water purification kits and medical supplies to Sri Lanka.  We then committed a total of $6 million to ongoing relief efforts throughout the affected region.  In addition, we established a global matching gifts program, matching twice the amount donated by our employees to maximize those contributions.

Our companies remain committed to causes that address the most critical societal needs, feeding the hungry through grants to food banks and meals-on-wheels programs, including our partnership with the Association of Nutrition Services Agencies, which provides meals to people with HIV/AIDS and other devastating diseases; feeding the spirit by promoting creativity and diversity in the arts with sponsorship of such events as the Romare Bearden Homecoming Celebration; and feeding the soul by providing support for counseling, legal services and shelter for victims and survivors of domestic violence by partnering with the National Network to End Domestic Violence.

As a family of companies, Altria attracts a remarkably talented and diverse workforce. I am proud to note that, in its fifth annual Top 50 Companies for diversity, DiversityInc ranked Altria Group number one. 

In closing, I want to pay tribute to all the employees of the Altria family of companies.  No matter how great the challenge, they commit every ounce of their energy to keeping our businesses among the most highly respected in the world.

That commitment extends beyond business essentials to a long-engrained culture of compliance and integrity.  Every decision is fully grounded in an overriding dedication to both the letter and the spirit of the law.  I know of no other group of professionals who are more creative or more dedicated.  It is a pleasure and an honor to work alongside them.   Compassion, integrity and commitment - these are the qualities that make our employees the best in the world.  I salute them.

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