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Article by DailyStocks_admin    (09-09-08 04:43 AM)

The Daily Magic Formula Stock for 09/09/2008 is UST Inc. According to the Magic Formula Investing Web Site, the ebit yield is 10% and the EBIT ROIC is 75-100 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

Overview

Through its USSTC subsidiary, the Company is the leading producer and marketer of moist smokeless tobacco products, including its iconic premium brands, Copenhagen and Skoal , and its value brands, Red Seal and Husky . The Company’s share of the total moist smokeless tobacco category is approximately 60 percent on a volume basis, and 73 percent on a revenue basis, according to data from the Company’s Retail Account Data Share & Volume Tracking System (“RAD-SVT”) for the 52-week period ended December 29, 2007. The moist smokeless tobacco category continues to be one of the fastest growing established consumer packaged goods categories at retail, according to ACNielsen. This trend is further supported by RAD-SVT information, which indicates that moist smokeless tobacco category growth for 2007 was approximately 7 percent. See Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Smokeless Tobacco Segment,” for additional background information regarding RAD-SVT data.

The vision for the Company’s smokeless tobacco business is that its smoke-free products will be recognized by adults as the preferred way to experience tobacco satisfaction. The Company’s primary objective in connection with this vision is to continue to grow the moist smokeless tobacco category by building awareness and social acceptability of smokeless tobacco products among adults, primarily smokers, with a secondary objective of competing effectively in every segment of the moist smokeless tobacco category.

While category growth remains the Company’s top priority, the Company is committed to competing effectively in every segment of the moist smokeless tobacco category and accelerating profitable volume growth, with the goal of growing as fast as the category. The Company is making progress towards this goal through increased brand building, its premium brand loyalty initiative and increased retail promotional efforts related to price-value products.

The following provides a brief summary of each of the Company’s principal moist smokeless tobacco brands and products:

Copenhagen

Introduced in 1822, Copenhagen was among the first brands of moist smokeless tobacco available, and today remains the most authentic and best-selling product in the moist smokeless tobacco category, with annual sales at retail exceeding $1 billion. Copenhagen is a natural flavor product that features a traditional metal lid and a fiberboard can that carries a made date. Copenhagen is available in original fine cut and long cut, as well as Copenhagen Pouches. Copenhagen is recognized as the brand of choice for adult consumers who identify with its rugged, individual and uncompromising image. In addition, during 2007, the Company launched Cope , an all-new line of premium moist smokeless tobacco products that was developed to broaden the appeal of the Company’s Copenhagen brand. The Cope products are available in three varieties, Smooth Hickory , Straight and Whiskey Blend Flavor .

Skoal

Skoal , introduced in 1934, is the leading flavored moist smokeless tobacco brand on the market, with current annual retail sales in excess of $1 billion. The brand’s broad range of product flavor blends, cuts and formats reflects the Company’s continued focus on innovation. Skoal is available in fine cut, long cut and two pouch formats – Skoal Pouches and Skoal Bandits .

Red Seal

A mid-priced brand that offers adult consumers 25 percent more American-grown tobacco per can, Red Seal is available in long cut and fine cut varieties.

Husky

The Husky brand offers deep discount products for value-conscious adult consumers. Husky products are available in long cut and fine cut varieties.

Smokeless Tobacco Products and Health

Reports with respect to the health risks of tobacco products have been publicized for many years, and the sale, promotion and use of tobacco continue to be subject to increasing governmental regulation. In 1986, a Surgeon General’s Report reached the judgment that smokeless tobacco use “can cause cancer” and “can lead to nicotine dependence or addiction.” Also in 1986, Congress passed the Comprehensive Smokeless Tobacco Health Education Act of 1986, which requires the following warnings on smokeless tobacco packages and advertising: “WARNING: THIS PRODUCT MAY CAUSE MOUTH CANCER,” “WARNING: THIS PRODUCT MAY CAUSE GUM DISEASE AND TOOTH LOSS,” “WARNING: THIS PRODUCT IS NOT A SAFE ALTERNATIVE TO CIGARETTES.” In light of the scientific research taken as a whole, while the Company does not believe that smokeless tobacco has been shown to be a cause of any human disease, the Company does not take the position that smokeless tobacco is safe.

Over the last several years, smokeless tobacco has been the subject of discussion in the scientific and public health community in connection with the issue of tobacco harm reduction. Tobacco harm reduction is generally described as a public health strategy aimed at reducing the health risks to cigarette smokers who have not quit and is frequently discussed in the context of proposals for an overall tobacco regulatory regime. It is reported that approximately 45 million adult Americans continue to smoke, and many have made repeated attempts to quit, including with the use of medicinal nicotine products. There has been an ongoing debate in the scientific and public health community as to what to do for these smokers. One idea that has been debated is to suggest that they switch completely to smokeless tobacco. Many believe that certain smokeless tobacco products pose significantly less risk than cigarettes and therefore could be a potential reduced risk alternative to cigarette smoking. There are others, however, who believe that there is insufficient scientific basis to encourage switching to smokeless tobacco and that such a strategy may result in unintended public health consequences.

From a consumer perspective, data from some surveys indicate that at least 80 percent of smokers believe smokeless tobacco is as dangerous as cigarette smoking. The Company believes that adult cigarette smokers should be provided accurate and relevant information on these issues so that they may make informed decisions about tobacco products. This is especially so in light of data from some surveys that indicate that at least half of the approximately 45 million adult smokers are looking for an alternative. The Company believes that there is an opportunity for smokeless tobacco products to have a significant role in a tobacco harm reduction strategy and, therefore, encourages the debate of this topic.

Legislation and Regulation

As indicated above, in 1986, federal legislation was enacted regulating smokeless tobacco products by, among other things, requiring health warning notices on smokeless tobacco packages and advertising and by prohibiting the advertising of smokeless tobacco products on any medium of electronic communications subject to the jurisdiction of the Federal Communications Commission. A federal excise tax was imposed in 1986, which was increased in 1991, 1993, 1997, 2000 and 2002. Also, in recent years, proposals have been made at the federal level for additional regulation of tobacco products including, among other things, the requirement of additional warning notices, the disallowance of advertising and promotion expenses as deductions under federal tax law, a ban or further restriction of all advertising and promotion, regulation of environmental tobacco smoke and increased regulation of the manufacturing and marketing of tobacco products by new or existing federal agencies. Similar proposals will likely be considered in the future.

On August 28, 1996, the U.S. Food and Drug Administration (the “FDA”) published regulations asserting unprecedented jurisdiction over nicotine in tobacco as a “drug” and purporting to regulate smokeless tobacco products as a “medical device.” The Company and other smokeless tobacco manufacturers filed suit against the FDA seeking a judicial declaration that the FDA has no authority to regulate smokeless tobacco products. On March 21, 2000, the United States Supreme Court ruled that the FDA lacks jurisdiction to regulate tobacco products. Following this ruling, proposals for federal legislation for comprehensive regulation of tobacco products continue to be considered. Over the years, various state and local governments have continued to regulate tobacco products, including, among other things, the imposition of significantly higher taxes, increases in the minimum age to purchase tobacco products, adult sampling and advertising bans or restrictions, ingredient and constituent disclosure requirements, regulation of environmental tobacco smoke and significant tobacco control media campaigns. Additional state and local legislative and regulatory actions will likely be considered in the future, including, among other things, restrictions on the use of flavorings. The Company is unable to assess the future effects these various actions may have on its smokeless tobacco business. The Company believes that any proposals for additional regulation at the federal, state or local level should recognize the distinct differences between smokeless tobacco products and cigarettes.

In addition to increased regulatory restrictions, the Company is subject to various marketing and advertising restrictions under the Smokeless Tobacco Master Settlement Agreement (the “STMSA”), which the Company entered into in 1998 with the attorneys general of various states and U.S. territories to resolve the remaining health care cost reimbursement cases initiated by various attorneys general. The Company is the only smokeless tobacco manufacturer to sign the STMSA.

Raw Materials

Except as noted below, raw materials essential to the Company’s smokeless tobacco business are generally purchased in domestic markets under competitive conditions.

The Company purchased all of its leaf tobacco from domestic suppliers in 2007, as it has for the last several years. Various factors, including the level of domestic tobacco production, can affect the amount of tobacco purchased by the Company from domestic sources. Tobaccos used in the manufacture of smokeless tobacco products are processed and typically aged by the Company for a period of approximately three years prior to their use.

At the present time, the Company believes there is a sufficient supply of leaf tobacco available in the market to satisfy its current and expected production requirements. With the enactment of the Fair and Equitable Tobacco Reform Act of 2004 (the “Tobacco Reform Act”) and its repeal of federal tobacco price support and quota programs, tobacco can be grown anywhere in the United States with no volume limitations or price protection or guarantees. As a result, the Tobacco Reform Act has favorably impacted the Company’s cost of leaf tobacco purchases since its enactment. However, the continuing availability and the cost of tobacco is dependent upon a variety of factors which cannot be predicted, including, but not limited to, weather, growing conditions, local planting decisions, overall market demands and other factors.

The Company or its suppliers purchase certain flavoring components from foreign sources, which are used in the manufacturing of the Company’s smokeless tobacco products. The Company believes there is a sufficient supply of such flavoring components available in the market to satisfy its current and expected production requirements.

Working Capital

The principal portion of the Company’s operating cash requirements for this segment relates to its need to maintain significant inventories of leaf tobacco, primarily for the manufacturing of moist smokeless tobacco products, to ensure an aging process of approximately three years prior to manufacture and sale.

Customers

The Company markets its moist smokeless tobacco products throughout the United States principally to wholesalers and retail chain stores. Approximately 35 percent of the Company’s gross sales of tobacco products are made to four wholesale customers, one of which, McLane Co. Inc., a national wholesale distributor, accounts for approximately 17 percent of the Company’s consolidated revenue. The Company has maintained satisfactory relationships with its customers over the years and expects that such relationships will continue.

Competitive Conditions

The tobacco manufacturing industry in the United States is composed of several domestic companies larger than the Company and many smaller ones. The larger companies primarily concentrate on the manufacturing and marketing of cigarettes; however, in 2006, a major cigarette company entered the smokeless tobacco category through its acquisition of one of the Company’s competitors. In addition, certain cigarette companies have begun test marketing smokeless tobacco products and have indicated the intent to continue to expand this activity. The Company is a well established and major factor in the smokeless tobacco sector of the overall tobacco market. Consequently, the Company competes actively with both larger and smaller companies in the marketing of its smokeless tobacco products. Competition also includes both domestic and international companies marketing and selling price-value and deep-discount smokeless tobacco products. The Company’s principal methods of competition in the marketing of its smokeless tobacco products include quality, advertising, promotion, sampling, price, product recognition, product innovation and distribution.

WINE

Overview

The Company, through its Ste. Michelle Wine Estates subsidiary, is an established producer of premium varietal and blended table wines, with a vision for Ste. Michelle Wine Estates to be recognized as the premier fine wine company in the world. According to ACNielsen, Ste. Michelle Wine Estates was the fastest growing of the ten largest wineries in the United States during 2007, with the Company’s wines comprising 6.8 percent of total domestic 750ml units over that period, as compared to 6.2 percent in the prior year.

The Company produces Chateau Ste. Michelle, Columbia Crest and other varietal table wines and Domaine Ste. Michelle sparkling wine in the State of Washington, all of which are marketed and distributed throughout the United States. Washington state wines continue to gain prominence in the market as evidenced by the fact that volume growth for such wines, where the Company maintains its strong leadership position, outpaced most other major regions during 2007 with a growth rate of 18.9 percent, as reported by ACNielsen. The Company produces and markets California premium wines under the Villa Mt. Eden and Conn Creek labels. In addition, through the 2007 acquisition of Stag’s Leap Wine Cellars, in which the Company holds an 85 percent ownership interest, the Company added the following labels: Cask 23 , Fay , S.L.V ., Arcadia , Artemis , Karia and Hawk Crest . The Company is also a leading producer of Oregon pinot noir premium wines marketed under the Erath label. The Company is also the exclusive United States importer and distributor of the portfolio of wines produced by the Italian winemaker Marchesi Antinori, Srl, which includes such labels as Tignanello , Solaia , Tormaresca , Villa Antinori and Peppoli.

Working Capital

The principal portion of the Company’s operating cash requirements for this segment relates to its need to maintain significant inventories in connection with the aging process inherent in the production of wine.

Customers

Approximately 47 percent of the Company’s Wine segment gross sales are made to two distributors, with one of these distributors accounting for approximately 32 percent of total wine segment gross sales. Substantially all wines are sold through state-licensed distributors with whom the Company maintains satisfactory relationships.

Legislation and Regulation

It has been claimed that the use of alcohol beverages may be harmful to health. In 1988, federal legislation was enacted regulating alcohol beverages by requiring health warning notices on such beverages. Still wines containing not more than 14 percent alcohol by volume, such as the majority of the Company’s wines, are subject to a federal excise tax of $1.07 per gallon for manufacturers, such as the Company, that produce more than 250,000 gallons a year. In recent years, proposals have been made at the federal level for additional regulation of alcohol beverages, including, but not limited to, increases in excise tax rates, modification of the required health warning notices and further regulation of advertising, labeling and packaging. Substantially similar proposals will likely be considered in 2008. Also in recent years, increased regulation of alcohol beverages by various states included, but was not limited to, the imposition of higher excise taxes and advertising restrictions. Additional state and local legislative and regulatory actions affecting the marketing of alcohol beverages will likely be considered during 2008. The Company is unable to assess the future effects these regulatory and other actions may have on the sale of its wines.

Raw Materials

In the production of wine, the Company uses grapes harvested from its own vineyards or purchased from independent growers located in Washington, California and Oregon, as well as bulk wine purchased from other sources. Grapes, whether grown and harvested or purchased under contracts with independent growers are, from time to time, adversely affected by weather and other forces that may limit production. At the present time, the Company believes there is a sufficient supply of grapes and bulk wine available in the market to satisfy its current and expected production requirements.

Competitive Conditions

The Company’s principal competition comes from many larger, well-established national and international companies, as well as many smaller wine producers. The Company’s principal methods of competition include quality, price, consumer and trade wine tastings, competitive wine judging and advertising.

ALL OTHER OPERATIONS

All Other Operations consists of the Company’s international operations, which market moist smokeless tobacco products in select markets. Such operations did not constitute a material portion of the Company’s operations in any of the years presented.


CEO BACKGROUND

John D. Barr
Age 60
Shares beneficially owned:
Outstanding shares — 11,680
Shares pledged as security or collateral — 0
Shares subject to options — 2,785
Present term expires in 2008
Director since 2003

Mr. Barr has served as Vice Chairman of the Board of Directors of Papa Murphy’s International, Inc. since June 2004 and as its Chief Executive Officer since April 2005. He served as a director of Performance Logistics Group, Inc. until December 2006, and from March 2004 to September 2005 he served as its Chairman. From 1999 to April 2004, Mr. Barr served as President and Chief Executive Officer of Automotive Performance Industries. He also serves as a director of Penske Auto Group and Clean Harbors Inc.


John P. Clancey
Age 63
Shares beneficially owned:
Outstanding shares — 27,982
Shares pledged as security or collateral — 0
Shares subject to options — 10,285
Present term expires in 2008
Director since 1997

Mr. Clancey has served as Chairman of Maersk Inc. since December 1999. He served as President and Chief Executive Officer of Sea-Land Service, Inc. from July 1991 to December 1999.


Patricia Diaz Dennis
Age 61
Shares beneficially owned:
Outstanding shares — 13,280
Shares pledged as security or collateral — 0
Shares subject to options — 4,285
Present term expires in 2008
Director since 2001

Ms. Diaz Dennis has served as Senior Vice President and Assistant General Counsel for AT&T Services, Inc., a subsidiary of AT&T Inc. (formerly SBC Communications Inc. (“SBC”)) since November 18, 2005. Effective May 2, 2007, her responsibilities include oversight of AT&T corporate litigation and legal matters related to procurement, corporate real estate, environmental and corporate compliance. Previously, she was responsible for labor and employment matters and Sterling Commerce legal matters for AT&T. She has served in various executive positions for SBC and its affiliated companies, including, Senior Vice President and Assistant General Counsel of SBC Services, Inc. from August 2004 to November 17, 2005; and Senior Vice President, General Counsel and Secretary of SBC West from May 2002 to August 2004.


Joseph E. Heid
Age 61
Shares beneficially owned:
Outstanding shares — 17,367
Shares pledged as security or collateral — 0
Shares subject to options — 1,285
Present term expires in 2008
Director since 2003

Mr. Heid served as Chairman, President and Chief Executive Officer of Esprit de Corp. from December 1999 to July 2002. From November 1997 to November 1999, he served as President of Revlon International. He previously served as Senior Vice President of Sara Lee Corporation. Mr. Heid is a certified public accountant.

Murray S. Kessler
Age 48
Shares beneficially owned:
Outstanding shares — 236,925
Shares pledged as security or collateral — 18,100
Shares subject to options — 381,600
Present term expires in 2008
Director since 2005

Mr. Kessler has served as Chairman of the Board since January 1, 2008 and has served as President and Chief Executive Officer of the Company since January 1, 2007. He served as President and Chief Operating Officer of the Company from November 3, 2005 to December 31, 2006. Mr. Kessler served as President of U.S. Smokeless Tobacco Company from April 6, 2000 to November 2, 2005.


Peter J. Neff
Age 69
Shares beneficially owned:
Outstanding shares — 16,151
Shares pledged as security or collateral — 0
Shares subject to options — 5,785
Present term expires in 2008
Director since 1997

Mr. Neff served as President and Chief Executive Officer of Rhône-Poulenc, Inc., the U.S. subsidiary of Rhône-Poulenc, S.A. from 1991 to 1996.


Andrew J. Parsons
Age 64
Shares beneficially owned:
Outstanding shares — 10,022
Shares pledged as security or collateral — 0
Shares subject to options — 0
Present term expires in 2008
Director since 2005

Mr. Parsons served as a Director and Senior Partner of McKinsey & Company where he was employed from 1976 to December 2000. He served as a member of the McKinsey Advisory Council from 2001 to 2004, and is currently a Director Emeritus. Prior to joining McKinsey & Company, Mr. Parsons served in various management positions with Prestige Group Ltd., a division of American Home Products Corporation, now known as Wyeth. He also serves as a director of AT Cross Company and as a director of several private companies and not-for-profit organizations, including the United Way.


Ronald J. Rossi
Age 68
Shares beneficially owned:
Outstanding shares — 23,441
Shares pledged as security or collateral — 0
Shares subject to options — 1,285
Present term expires in 2008
Director since 2004

Mr. Rossi served as Chairman of the Board of Lojack Corporation (“Lojack”) from May 2001 to May 31, 2006. From November 2000 to December 2004, he also served as Chief Executive Officer of Lojack. Mr. Rossi previously served as President of Oral-B Laboratories, Inc., a subsidiary of The Gillette Company, from 1998 to 2000. Mr. Rossi also serves on the Board of Directors of Mentor Corporation.


Lawrence J. Ruisi
Age 59
Shares beneficially owned:
Outstanding shares — 0
Shares pledged as security or collateral — 0
Shares subject to options — 0
Present term expires in 2008
Director since 2008

Mr. Ruisi served as President and Chief Executive Officer of Loews Cineplex Entertainment Corp. (“Loews”) from 1998 to 2002. Prior to joining Loews, Mr. Ruisi served as Executive Vice President of Sony Pictures Entertainment from 1990 to 1998, and from 1994 to 1998 he served as President of Sony Retail Entertainment. He also serves as a director of Hughes Communications, Inc. and Innkeepers USA.

MANAGEMENT DISCUSSION FROM LATEST 10K

INTRODUCTION

MD&A is provided as a supplement to the accompanying consolidated financial statements and notes thereto, to assist individuals in their review of such statements. MD&A has been organized as follows:

• OVERVIEW – This section provides context for the remainder of MD&A, including a general description of the Company’s overall business, its business segments and a high-level summary of the Company-specific and industry-wide factors impacting its operations.

• RESULTS OF OPERATIONS – This section provides an analysis of the Company’s results of operations for the three years ended December 31, 2007. This section is organized using a layered approach, beginning with a discussion of consolidated results at a summary level, followed by more detailed discussions of business segment results and unallocated corporate items, including interest and income taxes.

• OUTLOOK – This section provides information regarding the Company’s current expectations, mainly with regard to the next fiscal year, and is organized to provide information by business segment and on a consolidated basis.

• LIQUIDITY AND CAPITAL RESOURCES – This section provides an analysis of the Company’s financial condition, including cash flows for the three years ended December 31, 2007, the Company’s sources of liquidity, capital expenditures, debt outstanding, share repurchase programs, dividends paid on the Company’s common stock and the Company’s aggregate contractual obligations as of December 31, 2007.

• OFF-BALANCE SHEET ARRANGEMENTS – This section provides information regarding any off-balance sheet arrangements that are, or could be, material to the Company’s results of operations or financial condition.

• CRITICAL ACCOUNTING POLICIES AND ESTIMATES – This section discusses accounting policies that the Company considers to be significant to its financial condition and results of operations, requiring significant judgment and the use of estimates on the part of management in their application.

• NEW ACCOUNTING STANDARDS – This section provides information regarding any newly issued accounting standards which have not yet been adopted by the Company.

OVERVIEW

BUSINESS

UST Inc. is a holding company for its wholly-owned subsidiaries: U.S. Smokeless Tobacco Company and International Wine & Spirits Ltd. Through its largest subsidiary, U.S. Smokeless Tobacco Company, the Company is the leading manufacturer and marketer of moist smokeless tobacco products, including iconic premium brands such as Copenhagen and Skoal , and value brands Red Seal and Husky . The Company competes with larger and smaller domestic and international companies in the marketing of its moist smokeless tobacco products, including those that market and sell price-value or deep-discount smokeless tobacco products. Competition in the marketing and sales of moist smokeless tobacco products is primarily based upon quality, price, advertising, promotion, sampling, brand recognition and loyalty, packaging, product innovation and distribution.

Through International Wine & Spirits Ltd., the Company produces and markets premium wines sold nationally, via its Ste. Michelle Wine Estates subsidiary, under labels such as Chateau Ste. Michelle , Columbia Crest , Conn Creek , Villa Mt. Eden , Red Diamond , Distant Bay , 14 Hands , Snoqualmie and Erath . In the third quarter of 2007, through the acquisition of Stag’s Leap Wine Cellars, the Company added the following labels: Cask 23 , Fay , S.L.V ., Arcadia , Artemis , Karia and Hawk Crest . The Company also produces and markets sparkling wine under the Domaine Ste. Michelle label. In addition, the Company is the exclusive United States importer and distributor of the portfolio of wines produced by the Italian winemaker Marchesi Antinori, Srl (“Antinori”), which includes such labels as Tignanello , Solaia , Tormaresca , Villa Antinori and Peppoli . The Company competes with many larger, well established domestic and international companies in the production, marketing and sales of its wine products, as well as many smaller wine producers. Competition in the marketing and sales of wine is primarily based on quality, price, consumer and trade wine tastings, competitive wine judging, third-party acclaim and advertising.

The Company conducts its business principally in the United States, and its operations are divided primarily into two reportable segments: Smokeless Tobacco and Wine. The Company’s international smokeless tobacco operations, which are less significant, are reported as All Other Operations.

In 2006, the Company commenced implementation of a cost-reduction initiative called “Project Momentum,” with targeted savings of at least $100 million annually within its first three years. During 2007, the Company finalized plans on various other initiatives under Project Momentum, including, but not limited to, manufacturing operations and the procurement function, which are expected to generate at least $50 million in additional annual savings beyond the original target, resulting in a new savings target of at least $150 million annually, within the original three-year period. The Company believes that Project Momentum is an appropriate initiative from a long-term growth perspective, as it is designed to provide additional financial flexibility, which can be used to address competitive challenges in the smokeless tobacco category, make further investments behind its brands or to increase net earnings. Operating income results in 2007 include the positive contribution realized from this initiative, with certain savings realized earlier than originally planned. Given this progress to date, the Company is confident that it is on track to realize Project Momentum’s overall targeted savings within the aforementioned three-year timeframe. See Consolidated Results - Restructuring Charges within the Results of Operations section below for further information.

The Company’s results for 2007 reflected the continued positive impact of its strategic initiatives to accelerate profitable volume growth in both the Smokeless Tobacco and Wine segments. Consolidated net sales of $1.95 billion and diluted earnings per share of $3.27 were both record highs for the Company, representing increases of 5.4 percent and 4.8 percent, respectively, from the corresponding 2006 measures. In 2007, results for the Smokeless Tobacco segment continued to benefit from the Company’s category growth efforts aimed at converting adult smokers to moist smokeless tobacco products, along with the impact of its premium brand loyalty initiative and efforts related to price-value brands. These efforts combined to deliver record net can volume in 2007. Results for 2007 were also favorably impacted by the strong performance of the Wine segment, which once again had record case volume, net sales and operating profit. The results for 2007 also reflected increased net sales and operating profit from All Other Operations and cost savings realized in connection with Project Momentum.

SMOKELESS TOBACCO SEGMENT

The Company’s vision in the Smokeless Tobacco segment is for its smoke-free products to be recognized by adults as the preferred way to experience tobacco satisfaction. The Company’s primary objective in the Smokeless Tobacco segment is to continue to grow the moist smokeless tobacco category by building awareness and social acceptability of smokeless tobacco products among adults, primarily smokers, with a secondary objective of competing effectively in every segment of the moist smokeless tobacco category.

Category Growth

Category growth is the Company’s top focus, as moist smokeless tobacco is a low incidence category and offers a viable option to adult smokers who are increasingly facing restrictions and are seeking a discreet and convenient alternative. For perspective, the number of adults that smoke is significantly larger than the number of adults that use smokeless tobacco products. As a result, every one percent of adult smokers who converts to moist smokeless tobacco products represents a 7 percent to 8 percent increase in the moist smokeless tobacco category’s adult consumer base. The Company views this as essential because consumer research indicates that the majority of new adult consumers who enter the category do so in the premium segment, of which the Company has approximately a 90 percent share.

In addition to advertising initiatives focused on category growth, the Company has utilized its direct mail and one-on-one marketing programs to promote the discreetness and convenience of smokeless tobacco relative to cigarettes to over 4.5 million adult smokers. These programs, which the Company believes have been successful over the past several years, continued during 2007 and the Company intends to continue them in 2008. The success of the category growth initiatives is also impacted by product innovation, as evidenced by the contribution that new products have made to the Smokeless Tobacco segment’s results over the past several years. The success of the category growth initiative is further evidenced by the fact that over the past several years, a majority of the new adult consumers that have recently entered the moist smokeless tobacco category first smoked cigarettes and that category growth has accelerated since the inception of the program in 2004. Based on these results, the Company intends to continue its category growth initiatives and is expecting category growth of 5 to 6 percent in 2008.

Competing Effectively

The Company is committed to competing effectively in every segment of the moist smokeless tobacco category by accelerating profitable volume growth, with the goal of growing as fast as the category. The Company is making progress towards this goal through its premium brand loyalty and brand-building initiatives, and also through price-focused efforts related to price-value products. During 2007, net can volume for the Company’s moist smokeless tobacco products grew by 4.2 percent, or 3.1 percent on an underlying basis (see Smokeless Tobacco Segment – Net Sales within the Results of Operations section below for further discussion on underlying volume), in a category that grew 7.1 percent. For perspective, this is an improved performance relative to the category as compared to 2006 when the Company’s net can volume for moist smokeless tobacco products increased 1.2 percent compared to overall category growth of 6.3 percent.

Premium Brand Loyalty – While category growth remains the Company’s top priority, it has also significantly enhanced its efforts on adult consumer loyalty for its premium moist smokeless tobacco products. The premium brand loyalty plan is designed to minimize migration from premium to price-value products by delivering value to adult consumers through product quality and brand-building efforts, along with promotional spending and other initiatives. As a result of this effort, premium volume has grown on a year-over-year basis for six consecutive quarters, with full-year underlying premium net can volume growing 1.8 percent while market share declines moderated in

2007. See Smokeless Tobacco Segment – Net Sales within the Results of Operations section below for further discussion on underlying volume. To build upon this success in 2008, the Company plans to further increase its brand-building efforts and will continue to selectively increase spending behind price-based loyalty initiatives. The Company expects that the anticipated 5 to 6 percent category growth in 2008, coupled with continued moderating share declines, will result in underlying premium net can volume growth of approximately 2 percent for the year.

Price-Value Initiatives – The Company’s commitment to accelerate profitable volume growth reflects a balanced portfolio approach, which also includes a full complement of marketing support for its price-value products. For example, the Company has implemented plans to expand the distribution and enhance the presence of its Husky brand at retail, and to be competitively priced with other deep discount brands. Likewise, additional promotional support was provided on its mid-priced Red Seal brand. During 2007, the Company’s successful execution of a balanced portfolio approach was clearly evidenced as approximately 12 percent growth in price-value net can volume occurred at the same time as approximately 3 percent growth in premium net can volume.

WINE SEGMENT

The Company’s vision in the Wine segment is for Ste. Michelle Wine Estates to be recognized as the premier fine wine company in the world. This is a vision based on continuous improvement in quality and greater recognition through third-party acclaim and superior products. In connection with that vision, the Company aims to elevate awareness of the quality of Washington state wines and increase its prestige to that of the top regions of the world through superior products, innovation and customer focus. In order to achieve these goals, attention is directed towards traditional style wines in the super premium to luxury-priced categories. The Company has made progress towards its vision, as demonstrated by its recent accomplishments. According to ACNielsen, Ste. Michelle Wine Estates was the fastest growing of the ten largest wineries in the United States during 2007. The Company continued to be the category leader for Riesling, based on ACNielsen data, with approximately 33 percent of the domestic Riesling market in 2007, reflecting a 2.6 percentage point increase over the Company’s reported 2006 share. In addition, as reported by ACNielsen, volume growth for Washington state wines, where the Company maintained its strong leadership position, outpaced most other major regions during 2007 with a growth rate of approximately 19 percent.

Strategic alliances and acquisitions in the Wine segment outside of Washington state have also been important in enabling the Company to achieve its long-term vision. The alliance with Antinori, to become its exclusive United States importer and distributor, and the purchase of the Erath label and winery, both of which occurred in 2006, have broadened the Company’s position with respect to the two key wine regions, Tuscany and Oregon. The addition of Antinori wines positions the Company as a leader in United States distribution of Tuscan wines, while the addition of Erath establishes the Company as one of the largest producers of Oregon Pinot Noir. The Company also completed the acquisition of Stag’s Leap Wine Cellars and its signature Napa Valley, CA vineyards for approximately $185 million, with a 15 percent minority interest held by Antinori California. This acquisition provides additional prestige to the Wine segment’s acclaimed portfolio, further strengthens the Company’s relationship with Antinori, and is expected to contribute favorably to the segment’s continued operating profit growth.

Another key element of the Wine segment’s strategy is expanded domestic distribution of its wines, especially in certain account categories such as restaurants, wholesale clubs and mass merchandisers. To that end, the Company remains focused on the continued expansion of its sales force and category management staff.

Discussion of the Company’s plans and initiatives in the Smokeless Tobacco and Wine segments is included in the Outlook section of MD&A.

RESULTS OF OPERATIONS
(In thousands, except per share amounts or where otherwise noted)

CONSOLIDATED RESULTS

2007 compared with 2006

Net Earnings

Consolidated net earnings increased in 2007, as compared to 2006, as a result of increased operating income, the impact of a lower effective tax rate on earnings from continuing operations and lower net interest expense. The Company reported operating income of $853.6 million for 2007, representing 43.8 percent of consolidated net sales, compared to operating income of $834.8 million, or 45.1 percent of consolidated net sales, in 2006. The increase in operating income was favorably impacted by the following:

• A $105 million pre-tax gain recognized in connection with the sale of the Company’s corporate headquarters building, which favorably impacted the operating margin percentage by 5.4 percentage points;
• Increased net sales and gross margin in all segments;
• Lower restructuring charges incurred in connection with the Project Momentum initiative, which commenced in the third quarter of 2006 (see Restructuring Charges section below). The impact of restructuring charges adversely impacted the operating margin percentage by 0.5 percentage points and 1.2 percentage points in 2007 and 2006, respectively;
• Lower selling, advertising and administrative (“SA&A”) expenses in the Smokeless Tobacco segment, which can be traced to the ongoing impact of savings realized under Project Momentum, as well as the resulting overall focus on cost containment; and
• The presence of an extra billing day as compared to 2006, which is described in more detail within the Smokeless Tobacco Segment – 2007 compared with 2006 section below.

These factors were partially offset by:

• Antitrust litigation charges of $137.1 million in 2007, primarily representing the estimated costs associated with the resolution of indirect purchaser antitrust class actions in the States of Wisconsin, California and Massachusetts, as well as the action in New Hampshire, which adversely impacted the operating margin percentage by 7 percentage points. This compares to a $2 million charge recognized in 2006, which adversely impacted operating margin percentage by 0.1 percentage points; and • Increased unallocated corporate expenses, primarily due to amortization charges for the below-market short-term lease on its former corporate headquarters building and costs associated with a change in executive management, the aggregate amount of which adversely impacted the operating margin percentage by 0.6 percentage points.

Net earnings for 2006 included after-tax income of $3.9 million from discontinued operations, which resulted from the reversal of an accrual for an income tax-related contingency from the Company’s former cigar operations.

Basic and diluted earnings per share for 2007 were $3.30 and $3.27, respectively, an increase of 4.8 percent for each measure as compared to the corresponding comparative measures in 2006. Average basic shares outstanding were lower in 2007 than in 2006 primarily as a result of share repurchases, partially offset by exercises of stock options. Average diluted shares outstanding in 2007 were lower than those in 2006 due to the impact of share repurchases and a lower level of dilutive outstanding options, partially offset by the impact of a comparatively higher average stock price in 2007, as compared to 2006, which effectively increases diluted shares outstanding.

With regard to share repurchases, during 2007, the Company repurchased approximately 11 million shares, or 6.9 percent of its beginning outstanding common shares, for $597.7 million, of which approximately 6.3 million shares were repurchased during the fourth quarter. This repurchase activity was consistent with the Company’s announced plans to spend an incremental $300 million on share repurchases, above the previous guidance, during the fourth quarter.

The Company reported record consolidated net sales in 2007, with the increase from 2006 attributable to the following:

• Increased case volume for premium wine;
• Net can volume growth for moist smokeless tobacco products, with increases for both premium and price-value products; and
• Improved international results.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

RESULTS OF OPERATIONS
(In thousands, except per share amounts or where otherwise noted)
CONSOLIDATED RESULTS
Second Quarter of 2008 compared with the Second Quarter of 2007

Net Earnings
Consolidated net earnings was essentially flat in the second quarter of 2008, as compared to the second quarter of 2007, as increased operating income was offset by higher net interest expense. The Company reported operating income of $237.7 million in the second quarter of 2008, representing 47 percent of consolidated net sales, compared to operating income of $227.8 million, or 46.4 percent of consolidated net sales, in the second quarter of 2007. The increase in operating income was primarily due to the following:

Increased net sales and gross margin in the wine segment;


Lower selling, advertising and administrative (“SA&A”) expenses in the Smokeless Tobacco segment, which can be attributed to Project Momentum;


Lower unallocated corporate expenses, primarily due to the absence of costs related to changes in executive management and the amortization of imputed rent related to a below-market short-term lease the Company executed in connection with the sale of its former corporate headquarters building. The impact of such charges adversely impacted the operating margin percentage by 1 percentage point in the second quarter of 2007; and


Lower restructuring charges incurred in connection with the Project Momentum initiative (see Restructuring Charges section below). The impact of restructuring charges adversely impacted the operating margin percentage by approximately 0.2 percentage points and 0.8 percentage points in the second quarter of 2008 and 2007, respectively.
These factors were partially offset by:

Lower net sales and gross margin in the Smokeless Tobacco segment;


Higher SA&A expenses in the Wine segment, including the impact of the addition of Stag’s Leap Wine Cellars, which was acquired in September 2007; and


The impact of $1.5 million in antitrust litigation charges recognized in the second quarter of 2008, related to the previous settlement of an indirect purchaser antitrust action, due to a change in the estimated costs associated with the resolution of such action, which adversely impacted the operating margin percentage by approximately 0.3 percentage points.
Basic and diluted earnings per share were $0.95 and $0.94, respectively, for the second quarter of 2008, representing increases of 8 percent from each of the corresponding comparative measures in 2007. Average basic shares outstanding in the second quarter of 2008 were 7.7 percent lower than in the comparable prior year period, primarily as a result of the 12.6 million shares repurchased during the 12-month period ended June 30, 2008, the majority of which were repurchased in the latter half of 2007, partially offset by the exercise of stock options. Average diluted shares outstanding in the second quarter of 2008 were lower than those in the second quarter of 2007 mainly due to the impact of share repurchases and a lower level of dilutive options outstanding.

The increase in consolidated net sales for the second quarter of 2008, as compared to the second quarter of 2007, was primarily due to the following:

Improved case volume for existing premium wine brands, as well as the incremental impact from the addition of the Stag’s Leap Wine Cellars portfolio of wines, which was acquired in September 2007;


Improved overall net can volume for moist smokeless tobacco products; and


Improved international results.
These factors were partially offset by:

Lower net revenue realization per can in the Smokeless Tobacco segment.

CONF CALL

Mark Rozelle

For those who have not seen the release, it is available on our website under the Investor Relations section. This presentation is being webcast live and is available on playback mode. The audio will is also available on our website in an MP3 format, which can be downloaded to a player such as an iPod.

Hosting the call will be Murray Kessler, Chairman and CEO of UST. Also joining us with remarks today will be Dan Butler, President of our U.S. Smokeless Tobacco subsidiary, and Ray Silcock, our CFO. At the end of our prepared remarks, Murray and the team will take your questions.

In order to help you understand the company and its results, we will be making some forward-looking statements. Accordingly, it is possible that our actual results may differ from the predictions we make today. Additional information regarding factors that could make such a difference appear in our Safe Harbor statement included in our public filings. We will also be discussing non-GAAP financial measures on this call. A complete reconciliation of GAAP to non-GAAP financial measures can be found in our press release, which we issued this morning and, as I mentioned, is available on our website.

I will now turn the call over to Murray.

Murray S. Kessler

Despite a challenging U.S. economy, a significant mid-quarter spike in gasoline prices, and a meaningful increase in smokeless competitive activity, UST exceeded our internal and publicly-stated earnings expectations for the quarter.

For the quarter net sales increased 3% versus a year ago, GAAP diluted EPS increased 8% versus a year ago to $0.94 per share, and adjusted diluted EPS increased 5.6% to $0.95, which is above our guidance of approximately 4% EPS growth.

A strong earnings performance was the result of a) continued over-delivery of project momentum cost savings, which helped improve operating margins for both smokeless tobacco and wine, b) spectacular wine division results with net sales up 25% and operating profit up 30%, and c) lower shares outstanding, a result of our increased share repurchase activity over the last 12 months.

Of note, this strong earnings performance also came despite our premium smokeless tobacco business performing below our expectations for the quarter.

So let me provide you my perspective on the premium smokeless volume results. Volume for April and May was solid and on track for our expectations and relative to what we’ve seen over the last year and a half. All of the shortfall occurred in June and all of it occurred in one geographic area. That area, which is characteristically in the Southeast portion of the country, is a lower per capital income and high price value development area, but to be clear, it has nothing to do with the competitive test market in Atlanta where our premium business continues to post growth.

What we do attribute the June shortfall to is a significant increase in gasoline prices that drove the average price of gasoline well over $4.00 a gallon, a new threshold. In the area of the country where our business was negatively affected the cost of gasoline now represents as much as 16% of total per capita income. Second, our own promotional timing which also affected the June performance as our brands were off buy-down in June, similar to years in the past, and three, heightened competitive activity in the form of new product launches and I think more significantly, much higher levels of competitive promotional support at the lower end of the market, perhaps taking advantage of our promotional timing.

The combined effect of outer reduction and support in the face of higher competitive activity and higher gasoline prices caused the shortfall. From our perspective, we can address these issues but there wasn’t enough time to adjust in the month of June. The promotional timing issue is easily addressed. We need to simply be less predictable. From a support-level prospective, as I’ve said all along, we had anticipated this type of issue and retained and level of flexible spending to deal with it. Although to be clear, we have reset our expectations of the environment we will be operating in for the balance of this year into 2009.

As we believe the level of flexible funds that we maintained and which are now being deployed to address the current external environment are sufficient, we are reiterating our previous adjusted earnings guidance of $3.65, with a range of $3.60 to $3.70 and a total shareholder return of 10%. We believe this is another good example of our expanded tool box at work.

With that I will turn the call over to Ray Silcock, our Chief Financial Officer, who will cover second quarter financial results in more detail, and Dan Butler, President of U.S. Smokeless Tobacco Company, who will review operational results.

Raymond P. Silcock

As you have seen from this morning’s earnings release and just heard from Murray, the company continues to exceed its earnings commitments despite the challenging economic environment. Strong Wine results combined with a continued savings from Project Momentum and other cost-improvement efforts helped offset lower than expected premium Smokeless Tobacco volume caused by a soft economy, rising gas prices, and sharply competitive activity. We remain on track to deliver our earnings goals for the year.

Before taking you through our Q2 performance in more detail, I would like, as usual, to remind you that I will be referring to adjusted results in my comments this morning. Reconciliations of adjusted results to comparable GAAP measures, along with the rational for why we believe their use is appropriate, are included in this morning’s press release, which is available on our websites.

Sales for the second quarter amounted to $506.2 million, an increase of 3% from the same quarter last year. While reported operating income increased 4.4%, to $237.7 million. On an adjusted basis, operating income amounted to $240.5 million, a 2.5% increase over prior year. Reported net earnings for the quarter decreased slightly to $139.7 million, $141.4 million on an adjusted basis principally as a result of higher interest expense related to the increased debt we took on to fund our share repurchase program.

GAAP diluted earnings per share were $0.94 for the quarter, or $0.95 per share on an adjusted basis, a 5.6% increase versus prior year adjusted EPS. Note that the 2007 adjustments were $0.02 of restructuring and $0.01 from the sale of our previous headquarters while the 2008 adjustment was $0.01 and resulted from our modifying a pre-existing anti-trust litigations settlement in Wisconsin where we experienced higher than anticipated consumer participation in our coupon program.

Turning to our Smokeless Tobacco business, smokeless net can volume grew 1.3% in the second quarter but net sales of $393.7 million were down 1.3% from the same quarter last year, a reduction in net revenue of $0.07 per can to $2.24. This reduction in revenue per can was principally due to the higher growth this quarter of our price-value brands, which were up 9.7% as compared to our premium brands, which declined 0.3%. Increased promotional spending versus the same period last year also adversely impacted our revenue per can.

Smokeless Tobacco adjusted operating profit of $228.9 million was up 0.8% as compared to the same quarter prior year. This amounted to a 120 basis point improvement in operating margin versus last year, bringing our operating margin for the quarter just ended to 58.1% and was primarily due to lower SA&A expense, which more than offset the impact of lower net sales in the quarter.

Second quarter SA&A was down, primarily due to the continued benefit from Project Momentum as our heightened focus on productivity helped us compete effectively in an increasingly difficult environment and continues to have a strong positive impact on our earnings. In fact, since Project Momentum’s inception in 2006, we have achieved an annual savings rate of $117 million, a significant proportion of which is from the Smokeless Tobacco business.

Project Momentum savings from the Smokeless Tobacco business, from reduced corporate expense, and from the Winery, all helped contribute to the company’s overall 5.5% reduction in SA&A this quarter. They also helped offset higher input costs, generally energy related, which we estimate will amount to between $0.02 and $0.03 for the entire year. Of note, we are still on target to reach more than $150 million in annual savings from the Project Momentum initiative by the end of next year.

Moving on to the Winery, we had yet another truly outstanding quarter in that business. Case volume was up 20% as compared to the same period last year to 1.5 million cases with net sales increasing 24.7% to $99.1 million. The Winery’s performance was broad-based. We had strong growth across our entire portfolio of brands including Chateau Ste. Michelle, Columbia Crest, Red Diamond, and Erath. Market share increased in the quarter as our strong brands and superior quality wines were recognized by leading wine publications including Robert Parker’s Wine Advocate and The Wine Spectator.

As we noted in the earnings release, we received more than 35 ratings of 90 and higher, including a 97 rating for our 2006 Chateau Ste. Michelle late-harvest white Riesling, and a 94 for the 2005 Casolari. Casolari is our vineyard and winery joint venture with Piero Antinori and is based in the state of Washington. We also benefited this quarter from the addition of Stag’s Leap Wine Cellars, which we acquired in September last year.

Winery gross profit was $35.2 million in the quarter, an increase of 31% as compared to the same quarter last year. This strong advance in Winery profit was driven by an improved product mix, including Stag’s Leap Wine Cellars and also benefited from higher pricing. These factors, combined with our ongoing focus on cost improvement, helped increase gross margin by 170 basis points to 35.5%.

Operating margin roses 60 basis points to 15%. Higher prices, primarily from an increase in the size of our sales force to support expanded distribution, and the impact of adding Stag’s Leap Wine Cellars, offset a portion of the gross margin improvement.

For all other operations, principally our international business, net sales were up 5.2% in the second quarter as compared to prior year, to a total of $13.4 million. All other operations operating profit was down 16.9% versus last year to $4.1 million. The decline in operating profit was primarily due to the recent $2.00 per can excise tax increase in Canada. This necessitated our adding to the reserve for returned goods there, since the dollar cost of replacing returned cans, following this increase, will go up $2.00. The excise tax increase is expected to impact UST’s earnings this year by about $0.01 a share and is already included in our earnings guidance.

We also continued to use our strong financial position to buy back stock in the second quarter of 2008. We bought 1.3 million shares for $66.8 million, bringing our repurchases for 2008 to 3.7 million shares for a total of $198.7 million, an average price per share of $53.95. It remains our intent to purchase approximately $100 million worth more of stock this year to bring our total stock repurchase to $300 million.

I would like to turn now to 2008 earnings guidance. As noted in the press release, we are confirming our earnings guidance for the year. However, in light of our revised view of the external environment, which includes overall economic weakness, rapidly rising gas prices and competitive discounting, we now plan on spending back all our first half earnings over delivery, and some of our 2008 earnings flexibility as well, in order to shore up our Smokeless Tobacco premium volume in the second half of the year, as well as to offset the impact of the Canadian tax increase, and to cover some of the $0.02 to $0.03 per share of import cost increases.

So, our strong earnings this quarter notwithstanding, we are still expecting to achieve adjusted earnings per share this year of $3.65, up 5.5% from 2007, with a range of $3.60 to $3.70. To be clear, while I’m sure you can do the math yourselves, the second half of the year is expected to be up approximately 2% to 3%, as compared to last year.

So in summary, with a total 5.5% EPS growth versus prior year and a planned dividend payout of $2.52, approximately a 4.5% yield, we remain confident of reaching our shareholder return goal of 10% in 2008.

With that I will turn the call to Dan Butler, President of the U.S. Smokeless Tobacco Company.

Daniel Butler

As Ray noted, the Smokeless Tobacco segment delivered underlying operating growth of 0.8+% versus the prior year as operating margin increased 120 basis points to 58.1% against a net sales decline of 1.3%. Net sales declined despite an overall increase in volume of 1.3% and premium volume was essentially flat and price value volume grew nearly 10%, impacting mix. Continued cost management and savings resulting from Project Momentum initiatives, fueled the growth in operating income and margins.

I would first like to provide some color on our volume results for the quarter. Total net can volume for the second quarter was up 1.3% versus year ago, marking 10 consecutive quarters of overall growth. USSTC premium volume was essentially flat, at (0.03%), below our expectations for the quarter. In price value, USSTC volume growth accelerated to 9.7%, behind continued solid growth on both the Red Seal and Husky brands. While our premium volume trends for the quarter did not meet our expectations, it is important to understand that the shortfall is largely due to both timing and geography.

From a timing perspective the slow down in our premium volume came during the month of June. In fact, for the first nine weeks of the second quarter, premium volume was up 1.3% versus the prior year. Geographically, the weakness was primarily felt in only one of our five sales regions. That region is characterized by lower average household income and strong price value development. In the remaining four regions, USSTC premium volume grew 1.2% for the quarter, in line with the trends we’ve seen since 2006.

We believe the slow down in June is related to several factors. The first is promotional scheduling. As Murray noted, we came off a scheduled buy-down flight at the end of May. Second was an uncharacteristically sharp increase in competitive promotional activity in June that occurred just at the time that we came off deal. For perspective, during the month of June competitive promotional volume was more than double the average level. Thirdly, the rapid run-up in gasoline prices to over $4.00 a gallon that impacted consumers, particularly on and following the Memorial Day holiday.

As we have said, we have maintained the financial flexibility to enable us to adjust promotional spending, scheduling, and regional programming. We have already made plan adjustments for the back half of the year, which should return our premium volume to growth as the year progresses.

While the second quarter as challenging, we are encouraged that in the majority of the country we continue to deliver solid premium volume growth. Underlying that growth was the exceptional performance of Copenhagen and Skoal pouches, which again posted solid double-digit growth nationally despite strong competitive activity and the launch of new price value pouch products. We expect our pouch growth to accelerate in the third quarter behind the launch of Skoal Straight Pouches, which I will expand upon in moment. On the price value side, USSTC volume growth rate increased in the second quarter behind trends on both Red Seal and Husky.

Now for further perspective on volume, I will turn to RAD-SVT data, which is our measure of consumer take-away. I will be reporting on the RAD-SVT results for the full 26-week period ended June 14, 2008.

Starting with the category, moist smokeless tobacco category volume growth accelerated to 7.6% versus year ago. Total USSTC volume grew 1.7% versus year ago and USSTC volume share for the period was 57.9%, down 3.4% versus year ago. Importantly, from a revenue standpoint, total USSTC dollar share continues to be very strong at 70%, driven by our leading premium brands, Copenhagen and Skoal.

As you know, RAD-SVT reports shipments from wholesale to retail and is therefore impacted by new product pipeline sales and promotional products shifted to retail. Both category growth and USSTC reported share were somewhat impacted by pipeline volume associated with new competitive price value launches and a very significant increase in promotional activity on existing competitive SKUs at the end of the period. This promotional activity, which we believe pushed significant inventory into the trade, may have also put pressure on our shipments as customers worked to manage their cash flow and inventory investments. It will take time to determine how strongly that heavy promotional volume pulled through.

Regarding new products, the coming months will provide more clarity on the ongoing source of volume, although past experience and early results suggest that price value items will force volume, primarily from existing price value brands.

Now I will turn to performance by segment. The overall premium segment grew 0.6% versus year ago and represent 52.7% of category volume for the period. USSTC premium volume increased 0.3% and our share of the segment was essentially flat at 90.7%. Similar to what we saw in shipments, RAD-SVT indicates that our premium volume challenge is largely confined to a handful of contiguous states. Excluding those states, the remainder of the country, which constitutes the vast majority of our volume, was up 1.2% for the period.

Turning to price value, segment volume grew 16.5%, somewhat higher than recent trends, reflecting the previously mentioned new product and promotional activity. The price value segment represented 47.2% of category volume. USSTC price value volume growth increased 8.6% versus year ago and USSTC share of the price value segment was 21.4%. Our Husky brand again grew faster than the segment, while Red Seal continues to deliver mid-single digit growth.

As a reminder, while Red Seal is classified as a price value brand for RAD-SVT reporting purposes, we think of it more as a mid-price brand, since it wholesales for nearly 60% more than the leading price value brand. We are very pleased with the solid growth that we have achieved on Red Seal in the last several quarters.

So there are several important take-aways from the shipment in RAD-SVT results. First, with oil and gas prices at record levels and economic pressures mounting, the Smokeless tobacco category continues to be a stellar performer within total Tobacco and more broadly, in the consumer packaged goods industry. Second, economic factors were combined in the second quarter with intense competitive activity, which included the launch of a new competitive price value brand, several new SKUs from existing brands, and a spike in promotional activity at the end of the quarter, at levels well above what we’ve typically seen. Third, despite these factors USSTC premium brands have held up well, although we clearly need to adjust our plans to return premium volume to growth in the back half of the year.

We are committed to sustaining strong performance in a heightened competitive environment and an increasingly challenging economy. Therefore, as we have in the past, we are taking advantage of our financial flexibilities to adjust our plans and address these issues head on.

Looking ahead, we remain committed and optimistic about delivering sustainable premium volume growth in 2008 and the long term. Our optimism traces to our proven business strategy of growing the MST categories by converting adult smokers to smokeless tobacco. In an environment of increased smoking restrictions and increased social pressure on smoker, we believe that strong category growth is sustainable for many years to come.

A key component of growing the category to benefit our business is to build our premium brands and continue to lead innovation in the category. To that end we are currently executing a strong integrated consumer promotion for the Skoal brand and on August 4th we will launch Skoal Straight Pouches nationally.

The pouch segment continues to grow at double-digit growth rates, is a proven success in attracting new-to-category adult consumers, primarily smokers. The straight flavor segment is the largest in the category after natural and wintergreen, representing 10% of category volume and it consistently grows faster than the category. Furthermore, it is the only major flavor segment not currently represented in the portion pack format.

This represents a clear portfolio opportunity for Skoal and its premium innovation will be supported with advertising, point-of-sale consumer sampling, direct mail, trade promotion, and in-store merchandising. We are confident that this exciting new item will provide added fuel for the growth of the category, the portion pack segment, and our Skoal brand.

Also on the innovation front, I would like to update you on our approach to the spit-free pouch segment. As we detailed in the past, the concept of a spit-free pouch always scored well with potential adult consumers but the challenge has been to create meaningful awareness and trials and encourage consumers to adopt a new and unfamiliar behavior. In market performance of various test continue to generate only modest share and we have seen no significant change in that performance over the last quarter.

Having said that, we believe that it makes sense of us to continue to evolve our brand and product offering and continue to gather learning. To that end, in the coming weeks we will discontinue Skoal Dry in the Austin and Louisville test markets and will launch a limited test market for new Skoal Snoose. This product is the evolution of Skoal Dry that we discussed in our investor conference last December. We have optimized the flavors, the pouch size, the package format, and branding. In blind consumer testing, new Skoal Snoose demonstrated overall preference and stronger overall liking than Skoal Dry and the leading competitive Snoose products.

Again, we view Snoose as a challenging and long-term proposition and we are scaling our investment appropriately to efficiently maximize our learning. To be clear, we don’t expect Skoal Snoose, or competitive Snoose products, to meaningfully impact our results in the near future, but we will continue to monitor the segment and we have the capability to scale up rapidly if the market indicates a value-creating opportunity for our shareholders.

So, in summary, while we did not meet our expectations for the second quarter, we are optimistic about our business for the back half of the year. We have brand-building promotions planned for the third and fourth quarter and we have made appropriate tactical adjustments to our plan to address the regional and competitive issues that confronted us in Q2. We look forward to the added contribution from Skoal Straight Pouches, which began shipping in August and we remain committed to delivering long-term, sustainable premium volume growth.

With that I will turn the call back to our CEO and Chairman, Murray Kessler.

Murray S. Kessler

So to sum up, in the context of the current U.S. economic headwinds, I believe our business has held up well, especially when compared to the U.S. cigarette market and frankly, to most other CPG categories. Importantly, we have reaffirmed our guidance for the year, even though we are increasing promotional spending to support premium smokeless volume, are absorbing about $0.01 in adverse impact from a significant excise tax increase in Canada, and are also absorbing about $0.02 to $0.03 of higher input costs.

I believe we continue to meet or exceed earnings for commitments for a number of reasons. First and foremost, we have tremendous brands with high consumer loyalty. Second, we compete in growing categories that have long-term secular trends that favor both the smokeless tobacco and premium wine categories. Third, our expanded business model provides for a level of earnings flexibility, and finally, I am fortunate to have talented and dedicated employees throughout our organization that continue to meet challenges head on, drive innovation, and deliver superior execution.

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