Remarks by Louis C. Camilleri, Chairman and Chief Executive Officer of Altria Group, Inc. at Morgan Stanley Global Consumer and Retail Conference

Morgan Stanley Global Consumer and Retail Conference

Introduction

Thank you and good afternoon everyone.  It is a pleasure to be here today.  My remarks contain certain forward-looking statements and I direct your attention to the Forward-Looking and Cautionary Statements section in today’s news release.

Last November, I stood before you at this conference and highlighted Altria’s key objectives, with a focus on four points.

First was the belief, shared by many, that our shares were significantly undervalued by any measure.

Second was our cautious optimism with regard to the evolving litigation environment and our continued conviction in the legal merits of our defense.

Third was our commitment to deliver superior returns to our shareholders, including the pursuit of a potential breakup of the company that would both enhance returns and be strategically compelling.  Such a restructuring would only be pursued if the litigation environment taken as a whole evolved as anticipated.

Finally, I addressed the strategies adopted to grow our businesses, both organically and through acquisitions, to exploit their considerable opportunities and to manage the inevitable challenges that they would confront.

Today affords me an excellent opportunity to review:

* Altria’s progress against each of these points and highlight where we stand today versus a year ago, including the significant potential upside we believe remains on Altria’s valuation,

* Recent key litigation developments and the resulting clarity we believe is emerging,

* The actions we are taking to assure execution readiness for a potential restructuring,

* And the considerable growth opportunities that our businesses face.

Let me start by highlighting Altria’s year-on-year shareholder returns and current valuation.

Our 21.4% price appreciation has outperformed the broader equities market by a considerable margin this year, as shown by our performance versus the S&P 500 index.  We also substantially outperformed the market over the past three and five years.

Altria’s dividend yield has also consistently exceeded the yield of the S&P 500, and today stands at an annualized yield of 4.3%.  Thus, Altria’s total shareholder return has outpaced the performance of the S&P 500 by an even wider margin this year, and over the past three and five years.

As a result, our current market capitalization of approximately $158 billion surpassed its previous record high of $142 billion that was reached back in 1998.

While we are naturally gratified by this strong performance, we believe that our shares remain undervalued in light of the growth prospects and cash flow generating ability of each of our businesses, the improving litigation environment and the strategic benefits arising from a potential transformational change in our structure.

The entire tobacco sector has enjoyed the benefits of a positive re-rating over the past two years.  In fact, our tobacco peers have generated stronger price appreciation and we continue to trade at a multiple discount to many of them.

This discount, let alone the one that prevails versus the broader consumer products sector, demonstrates the significant potential for enhanced returns going forward.

Key to this will be continued improvements in the litigation environment.  Recent litigation and legislative developments have served to reinforce our belief that the climate continues to evolve favorably and that greater clarity is slowly but surely emerging.

We are particularly encouraged by developments this year in the “Lights” cases.

In August, the U.S. Court of Appeals for the Eighth Circuit, in the Watson case, affirmed removal of this “Lights” case from state to federal court, because the court found that Philip Morris USA (PM USA) was acting under the direction and control of the Federal Trade Commission (FTC) in relation to tar and nicotine testing, measurement and disclosures.  While a petition for rehearing is pending, we believe that this ruling has important ramifications going forward.

In October, a state court in Oregon in the Pearson case, also involving PM USA, refused to certify this “Lights” case as a class action.  As is true in the vast majority of smoking and health personal injury class actions, the court in Pearson found that individual issues predominate over common ones, upholding a view we believe is fundamental to all “Lights” class actions, and renders class certification inappropriate.

In August and October, federal district courts in Louisiana and Michigan, in “Lights” cases called Sullivan and Flanagan, dismissed plaintiffs’ major claims based on those states’ consumer protection statutes, which exempt claims based on conduct in compliance with FTC action.  Both courts found that plaintiffs’ claims involved conduct governed by the FTC’s regulatory activity involving low tar and “Lights” cigarettes, and thus fell within the statutory exemption.  This general type of statutory exemption exists in most states, including Illinois.  In fact, just yesterday, plaintiffs voluntarily dismissed the remainder of the Flanagan case.

In evaluating the litigation environment, we must, as I have said, look at it in its entirety.  Part of that environment is the “Lights” cases pending against PM USA.

We believe PM USA has very strong legal and factual defenses in the “Lights” cases.  Individual issues such as whether there has been a misrepresentation, reliance, causation and injury, make these cases inappropriate for class certification, a view the court in Pearson recently affirmed.  The decades’ long involvement of the FTC in all aspects governing tar and nicotine testing, disclosure and advertising, provides a powerful legal basis for dismissal of these cases, as the courts in Sullivan and Flanagan found.  And, the Federal Cigarette Labeling and Advertising Act, as interpreted by the United States Supreme Court in Cipollone and Reilly, adds yet another strong legal basis for dismissal.

Of the 25 pending “Lights” cases, six have been certified as class actions, four of which are on appeal, with the remaining two subject to pre-trial motions.  Of the remaining 19, including Schwab, a purported nation-wide class action pending before Judge Jack Weinstein in the Federal District Court for the Eastern District of New York, all are in various pre-trial stages in the trial courts, with decisions on class certification and other issues to come.

While we are pleased with the recent positive trend in these cases, and are optimistic about the outcomes in Price and the other “Lights” cases on appeal, they remain a part of the evolving environment, as well as a particular focus of our attention and resources.

This snapshot of PM USA’s case count illustrates the significant declines that continued this year versus the 10-year high for individual cases, for class actions, including both certified classes and those seeking certification, 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 new case filings.  In fact, of the 61 new cases filed to date this year, 23 have already been dismissed, bringing total cases dismissed this year to 135.

Supporting the improvement in the litigation environment are legislative developments at both the federal and state levels.  Of particular note is the effect of the federal Class Action Fairness Act, which permits the removal of most newly filed state class actions to federal court.  Indeed, testimony to the power of this Act is the fact that not a single class action against PM USA or any other tobacco manufacturer has been filed and remained in state court since its passage.

In addition, 38 states and Puerto Rico now have appeal bond caps in place, or do not require an appeal bond.  Promoting state bond cap legislation continues to be a high priority for PM USA, and we are pleased that such caps now exist in jurisdictions representing 82% of total domestic cigarette industry volume.

Let me now comment on the Department of Justice, Engle and Price cases.

The trial in the Department of Justice case concluded in June and post-trial briefing concluded in September.  We continue to believe that there should be no finding of liability and we are now awaiting a decision by Judge Kessler.

Importantly, the United States Court of Appeals for the District of Columbia held, in a decision in February of this year, that disgorgement is not a remedy available to the government under the civil RICO statute.  Equally important is the reason given by the court.  The court found that, under the civil RICO statute, the remedies available to the government are limited to forwarding-looking remedies that will “prevent and restrain” future RICO violations.  Thus, the court reasoned, remedies, such as disgorgement, which are backward-looking, and focused on remedying the effects of past conduct, are not available.

Last month, the United States Supreme Court, with no recusals, denied the government’s request for a review of that decision, at this time.

Thus, Judge Kessler’s statements about the Court of Appeals disgorgement decision take on special significance.  In an order following shortly after that decision, Judge Kessler said that the decision had “struck a body blow to the government’s case,” and that the government’s argument regarding the availability of non-disgorgement remedies “reads as if the Court of Appeals had never written its opinion.”  Thus, in addition to the compelling defenses we have to the government’s liability claim, it is our belief that many of the remedies the government is seeking are simply not available to it.

In the Engle class action, a case filed over 11 years ago, PM USA is patiently awaiting a decision from the Florida Supreme Court, following an appeal by the plaintiffs and oral argument in November 2004.

There is strong legal precedent in PM USA’s favor on both class certification and punitive damages and we remain optimistic that the intermediate appellate court’s decision will be affirmed.

PM USA is also awaiting a decision in the Price “Lights” class action from the Illinois Supreme Court.

For many of the reasons I gave earlier in discussing other “Lights” cases, we believe that 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.

In Avery, a case decided in August of this year, over two years after it had been argued before the Illinois Supreme Court, and involving some of the same issues as in Price, the court decertified a class and vacated a $1.2 billion judgment against State Farm.

To sum up, the litigation environment has continued to improve since I last addressed you, and we are cautiously optimistic that it will continue to improve as we await further developments.

As we await these developments, I urge you to have patience, remembering that the legal system in the United States moves at a deliberate pace.  As I just mentioned, the Avery case took over two years from the oral argument to the Illinois Supreme Court’s decision.  I believe that our litigation history teaches that patience and perseverance will ultimately be amply rewarded.

Moving on to the potential restructuring of the company, while the precise timing of key decisions and their chronology remain uncertain, we remain committed to its pursuit and we have dedicated much attention to assuring executional readiness.  This has involved a myriad of activities and developments.  I will highlight a few of them.

The most time consuming task and arguably the most critical is to assure organizational readiness.  We have a rigorous advancement planning process in place and we have used it to match future organizational requirements with the aspirations of our talented employees in terms of both career development and ultimate location.

In addition, each of our operating companies has realigned its organizational structure within the last few months.

We have also refined the role of Altria’s corporate headquarters and taken a number of steps to decentralize several functions.  Information technology and trademark management are but two examples of such decentralization.

In keeping with our resolve to constantly enhance our cost effectiveness, by year-end we will have reduced the size of our corporate headquarters by close to 400 positions, and transferred some 100 positions to the operating companies.

I am pleased with the progress achieved to date on this important front.

Another area of significant progress has been the consistent and rapid strengthening of our balance sheet.

Consider that Altria’s equity, excluding Kraft, is projected at nearly $9 billion by the end of this year.

This excludes the surge in the market value of our 28.7% stake in SABMiller.  While the pre-tax book value of this stake stood at $2.7 billion in September, our holding is currently valued on a pre-tax basis at more than $8 billion.

Net debt has also evolved favorably.  In spite of the additional debt that was incurred by Philip Morris International (PMI) to fund the acquisition of Sampoerna in Indonesia, net debt stood at $5.9 billion in September and, absent any further potential acquisitions, is projected to reach a level of less than $2 billion by year-end 2006.

This has been achieved in parallel to the consistent increase in our dividends, which will entail a cash outflow of close to $6.2 billion this year, as well as the consistent funding of our global pensions to the maximum penalty-free level permitted under current pension and tax rules.  Indeed, Altria’s U.S. pension accumulated benefit obligation funding ratio has equaled or exceeded 100% since 2001.  Our projected benefit obligation ratio has steadily improved since 2002, to reach a level of approximately 106% in 2005.

These are just some of the examples of the progress to date to assure executional readiness.

Let me now briefly review our year-to-date results, before dwelling on the future prospects of each of our operating companies.

In the nine months through September 30, earnings from continuing operations were up 12.8% to $8.4 billion and diluted earnings per share from continuing operations advanced to $4.01, up 11.1% from the first nine months of 2004.

Altria remains on track to deliver solid results this year.  Diluted earnings per share from continuing operations are forecast to reach the high end of a range of $5.05 to $5.10, representing growth of up to 11.6%.  This is despite the current strength of the U.S. dollar, which, if sustained, will prove challenging in 2006.

This performance is primarily attributable to robust results from our domestic and international tobacco businesses, partially offset by weak results at Kraft.

Importantly, they reflect the rewards of our strategic consistency and focus on building premium brand equity; driving innovation through investments in R&D and marketing; managing price gaps; enhancing productivity and cost competitiveness; and supplementing organic growth with strategically compelling and financially attractive acquisitions.

Let me now turn to each of our consumer businesses, starting with Kraft.

Kraft Foods Inc. (Kraft)

It is undeniable that Kraft’s year-to-date performance has been a source of disappointment.  While revenues have improved, Kraft has regrettably incurred margin erosion.  The culprit is evident -- the surge in commodity costs has outpaced Kraft’s deliberate pricing actions.  The magnitude of these commodity cost increases has been unprecedented.  Consider that this year alone, the commodity headwind is estimated to reach a level of $800 million, and that is on top of the $900 million of commodity cost increases incurred in 2004.

In the steeplechase of life, one has to jump the fences and Kraft has been doing precisely that by carefully balancing pricing actions while preserving the health of the categories in which it competes.  It is a delicate balance and, while we all would have preferred to avoid margin erosion, the strategy adopted of deliberate pricing and sustained marketing investment is the right one to enhance Kraft’s long-term competitiveness and growth prospects.

While Kraft’s results have lagged expectations, they do mask significant progress in a number of critical areas.  I will focus on three — new products, cost reduction and cash flow.

A key strategic imperative for Kraft is to transform its portfolio, organically and through acquisitions and divestitures, both to improve its growth profile and to render it less prone to commodity swings.

New products that meaningfully move the needle are critical and Kraft has generated solid results in this area.  New product revenue is projected to reach a record level of $1.5 billion in 2005.  The mantra of fewer, bigger and better is working.  The top 10 new products, which include the South Beach Diet line and Tassimo on-demand coffee innovation, will together generate revenues of approximately $700 million this year.

Importantly, these products generate an average marginal contribution per pound that is 60% higher than Kraft’s aggregate margin per pound on its top 25 categories.

In addition, they generate significantly more incremental revenues than has been the case historically, with average cannibalization rates of only 40%, a significant achievement given the breadth of Kraft’s portfolio, especially here in the U.S.

Kraft continues to aggressively pursue opportunities to reduce costs.  The restructuring program announced in early 2004 is on track and cumulative annual cost savings of approximately $400 million will be achieved by year-end 2006.  These cost savings will reflect the elimination of 6,000 positions and the closure or sale of 20 manufacturing plants, and will require $600 million of cash costs.  Kraft estimates that it will achieve more than $250 million in cumulative savings this year, and has announced the elimination of 5,200 positions and the closure or sale of 19 facilities to date.

Kraft continues to pursue further cost reduction opportunities worldwide and is intensely focused on several areas, including supply chain restructuring, systems harmonization and process simplification.  I believe that Kraft management should be commended for these tough, but necessary actions.

Cash flow performance has outpaced income statement results.  In spite of significant outflows to support the restructuring program, cash flow will increase this year and will be further enhanced with net divestiture proceeds of $1.2 billion.

A key driver has been the reduction in the cash conversion cycle, which has been significantly improved as a result of stock keeping unit reductions, the adoption of consumption-based trade spending and the restructuring of Kraft’s distribution network.

While there has been progress in these and other areas, we fully recognize that Kraft must sustain revenue momentum while enhancing margins going forward.  The environment Kraft faces is both complex and tough, and I need to remind you that Kraft is only 20 months into a 36-month program.

The strategies it has adopted are the correct ones.  I am confident that Kraft has the ability to execute against these strategies, the capacity to innovate and the discipline to invest in its brands for the long term, and I believe that better results will come with time.

Philip Morris USA (PM USA)

Turning now to our domestic tobacco business, PM USA is delivering excellent results within a background of solid improvement in the cigarette industry’s fundamental dynamics.

This is best exemplified by the deep discount segment’s lack of vitality since the fourth quarter of 2002, including the continued decline in the volume of primarily discount-price cigarette imports.

Price gap management has undoubtedly played an important role, as have a number of other favorable developments. These include an erosion in sales over the Internet, historically a conduit for excise tax avoidance and counterfeit cigarette products.

This erosion is the result of greater enforcement and the fact that major credit card companies and major package delivery companies, such as UPS and DHL, have agreed to take steps to prohibit the use of their services for illegal Internet cigarette sales.

It also reflects actions PM USA has taken to protect its trademarks and the numerous favorable legal rulings received to date, and a decline in the incidence of counterfeit as both PM USA and PMI work with law enforcement agencies worldwide to eradicate this plague.  The adoption of complementary enforcement legislation and the allocable share amendment help the Master Settlement Agreement and escrow statutes operate as intended.  And finally, the anachronistic tobacco quota system was eliminated.  As a result of the tobacco quota buyout, PM USA has undertaken a number of initiatives to transition to a free market system for domestic tobacco.

These undoubtedly favorable developments have been somewhat mitigated by the continued competitive ferocity within the industry and further increases in state excise taxes, with year-end average weighted state excise taxes projected to increase by approximately 12% this year.

PM USA is well positioned to continue its leadership of the industry, with total retail share reaching a record 50.1% in the third quarter of this year, as measured by the IRI/Capstone Total Retail Panel.

Its four focus brands, Marlboro, Parliament, Virginia Slims and Basic, together have shown steady retail share growth since the second quarter of 2003 and achieved a total retail share of 48.4% in the third quarter this year, driven primarily by the strength of Marlboro.

PM USA has achieved significant share growth for Marlboro by providing adult smokers with a preferred value equation comprising product, packaging, positioning and price.

A good example is Marlboro’s performance within the important menthol segment, which represents more than a quarter of total cigarette consumption.  Marlboro ’s share of menthol continues to go from strength to strength.

As we look to the future, PM USA is dedicating significant human and financial resources to the development of innovative products which might help address the harm caused by cigarettes.  Furthermore, PM USA is exploring several adjacent categories within the tobacco industry to supplement its future growth prospects.

To wrap up, I am confident that PM USA has the right people, strategies and infrastructure to drive growth in a highly competitive environment.

Philip Morris International (PMI)

PMI is enjoying an outstanding year with solid momentum in volume, market share and income buoyed by the return of Marlboro in Japan and the acquisition of Sampoerna in Indonesia.

Its growth prospects continue to be attractive on the back of its superior portfolio of brands, led by Marlboro and L&M, their strong demographics and leadership of growth segments -- and unparalleled and cost effective worldwide manufacturing, R&D, marketing, distribution and sales infrastructure.

That is not to say that PMI does not face challenges, but I believe it is not only well equipped to deal with these, but that the opportunities that exist by far outweigh them.

Some in the investment community have expressed concern in the recent past with what they perceive to be a slowing of PMI’s organic growth rate.  Let me address this topic.

Over the 2000 to 2005 period, PMI’s volume is projected to increase at a compound annual growth rate of 3.6%, from some 671 billion units to approximately 802 billion units.

Excluding acquisitions, the annual organic volume growth rate declines to 2.1%.  Much of this is attributable to the exceedingly difficult environment that PMI has confronted in three key markets, namely France, Italy and Germany.  Absent these three markets and the step up from acquisitions, organic volume has grown at a solid compound annual growth rate of 4.0%.

Net revenues excluding excise taxes have clearly increased at a faster clip, reflecting PMI’s ability to more than pass on excise tax increases in most instances.  Net revenues have increased at a compound annual growth rate of 8%, and excluding currency at a still robust 6.3%.

As we have witnessed in France, Italy and Germany, prohibitive excise tax increases undoubtedly present PMI with its greatest challenge.  It is not just a question of tax incidence that is at stake, but most importantly tax structure.

Inappropriate tax structures from both a fiscal revenue and harm reduction perspective cause an explosion in the growth of cheap and marginally profitable cigarettes and can cause consumers to seek out tax-advantaged substitute products, such as portions in Germany and roll-your-own products in numerous developed and developing markets.

The good news is that PMI has had considerable success in advocating fair tax structures, with many countries adopting either fully specific tax structures, minimum excise tax levels or minimum reference prices.  In addition, we have witnessed some progress in equalizing the tax burden across all tobacco products.

France and Italy both have a minimum reference price in place today, and we hope that an equalization of the tax burden between cigarettes and tobacco portions will be mandated in Germany in the near future by the European Court of Justice.

It is regretful, however, that governments tend to act only once a crisis is glaringly visible.  Spain is a case in point.  Here the deep discount segment has exploded and is projected to reach 30% of total consumption this year.  Thus, as was the case in both France and Italy, temporary setbacks are often inevitable before appropriate tax reform is implemented.

PMI’s geographic volume mix is today well balanced, with some 49% of volume coming from developing markets.  This is up from 34% in 2000.

Developed markets, defined for this purpose as OECD member countries, represent approximately three quarters of PMI’s income, a proportion that has barely moved in the last five years.  This statistic highlights the significant income growth opportunity that lies ahead, as consumers in developing markets trade up to more premium brands and margins increase over time.

An analysis of the world’s top 30 markets, which account for more than 80% of world cigarette consumption excluding the U.S. domestic market and approximately 80% of PMI’s volume, highlights both PMI’s strength and the vast growth opportunities that remain.

Consider that in these top 30 markets, PMI’s share is only 14.5%, and even excluding the world’s largest market, China, PMI’s share is just 25.6%.  This leaves ample room for future growth.

In the world’s top 30 markets, PMI is the undisputed market leader in 14 and No. 2 in six.  Importantly, PMI’s presence in six of the world’s top markets is essentially non-existent.  These markets, which include China, India and Vietnam, represent total cigarette consumption of more than 2.2 trillion cigarettes, or more than 40% of total international cigarette consumption.  And this does not include the potential for converting smokers to cigarettes from other tobacco products, such as the estimated two trillion bidis consumed annually in India.

To emphasize the opportunity, it is interesting to note that less than 5% of PMI’s income today is derived from markets that together account for a total cigarette consumption of 3.1 trillion cigarettes.  Penetrating these markets is a key priority for PMI either organically or through acquisitions.

Our recent acquisition of Sampoerna in Indonesia is a great example.  In one fell swoop, this financially attractive acquisition enabled us to meaningfully penetrate a 200 billion unit market.  I am pleased to report that the business is faring well and we are ahead of plan in terms of both volume and income, and PMI’s share reached 27.3% in September.  This is exemplified by the strong share momentum that we currently enjoy in Indonesia driven by Dji Sam Soe, A Mild and A Hijau.

I trust that I have conveyed our confidence in PMI’s long-term growth prospects.  Yes, we may confront the occasional excise tax setback or competitive price war, but these tend to be temporary phenomena that do not impair PMI’s longer-term momentum.

Conclusion

To conclude, I want to briefly summarize a few key points, including:

* Our belief that Altria shares continue to have significant upside potential.

* The litigation environment continues to improve, and we believe that additional positive developments are likely.  Again, I urge you to have patience as these developments unfold.

* We remain committed to maximizing shareholder value, and have taken appropriate and timely actions to assure executional readiness in preparation for a potential restructuring.

* And our operating companies continue to successfully pursue strategies for growth and exploit significant opportunities.

In closing, I would like to remind you of the power of Altria to generate cash and reward shareholders.  Over the past five years, we ranked No. 3 among S&P 500 companies by cumulative dividends and share repurchases, despite the fact that we suspended our share repurchase program two years ago.

Looking ahead, we project with Kraft on a cash basis, more than $54 billion in cumulative cash flow, before acquisitions and dividends, in the five years through 2009 and remain committed to using that cash to deliver superior returns to our shareholders.  Thank you.

Note: This presentation includes certain non-GAAP financial measures as defined under SEC rules.  A reconciliation of those measures to the most directly comparable GAAP measures can be found in the presentation materials at www.altria.com.

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Contact Information

Altria Client Services Media Relations Tel: 804-484-8897