ProShares - Ultra 7-10 Year Treasury

UST reported Q3 2008 adjusted diluted EPS of $0.91, up 4.6% from last year, and nine-month adjusted diluted EPS of $2.70, up 7.1% year over year. Total net sales increased 1% in the quarter and 3.2% year to date. In U.S. Smokeless Tobacco, reported total net can volume was down 0.2%, though management said underlying total net can volume was up 9%; premium net can volume was estimated up 0.1% on an underlying basis but down 0.9% reported because of shipment timing. Ste. Michelle Wine Estates volume rose 17.7% and net sales rose 21.2%. For full-year 2008, management reaffirmed adjusted diluted EPS guidance of $3.60 to $3.70, with a target of $3.65, and said Q4 EPS was expected to be flat, partly because last year’s fourth quarter included a 53rd week and 8.0 million net cans for USSTC.

Murray Kessler’s tone was confident and upbeat, even while acknowledging “unprecedented economic head winds” and the distraction of the Altria acquisition. He said the business responded well to competitive pressure by increasing promotional support on premium smokeless brands, stabilizing share, and restoring growth trends later in the quarter. He also emphasized that the company was on track to deliver its original 2008 earnings target and said the transaction with Altria was progressing smoothly.

Ray Silcock mostly addressed transaction-related costs, saying UST disclosed approximately $7.1 million of acquisition costs in the quarter and that additional costs would come through when the deal closes in Q4. Financially, management highlighted that EPS growth outpaced net sales growth due to project momentum cost savings, a lower share count from repurchases, and a lower effective tax rate from reserve reversals. Kessler also quantified full-year headwinds and offsets, citing about $0.02 to $0.03 of higher input costs, a $0.01 hit from the Canada SVT increase, a $0.02 hit from suspended buybacks, and a $0.06 benefit from tax reversals, which he said left the $3.65 EPS target as a “pretty clean number.”

Analysts focused on whether the late-quarter improvement in premium smokeless was sustainable, how much pricing had been reduced, and whether the company had to choose between promotions and profit. Kessler said the stronger second-half trend was driven by a defensive promotional response, easing gas prices, and lapsing competitor launches, and he estimated realization per can was down about $0.10 for the quarter. He also said Snus remained a tiny part of the category with no meaningful breakthrough, and noted the Southeast still lagged the rest of the country because of disruption from gasoline shortages and hurricanes.