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May, 2007

Santa Fe Natural Tobacco Company converting to standard case sizes,
Medium and Ultra Light Filter Soft Packs discontinued

Santa Fe, New Mexico - Beginning June 1, Santa Fe Natural Tobacco Company, the maker of Natural American Spirit cigarettes and rolling tobacco made with additive-free natural tobacco and certified organic tobacco, is converting its 10M case (50 cartons) to the industry standard 12M (60 cartons) and 6M (30 cartons) cases.

Why the change? "To make things easier on our distributors and retailers," says John Collins, Santa Fe's sales planning manager. "The new 12M case packaging is designed to go through cutting and stamping machines with no hand labor. This move will also help us be more responsive to customers by improving their warehouse efficiency and order frequency.

"Since some of our customers prefer parcel carrier shipping," he adds, "we've designed a protective outer sleeve for the 12M cases shipped via parcel carrier. The sleeve is easily removed prior to processing through automated stamping equipment

To service smaller retailers and ensure the highest quality, certain styles will be available only in 6M cases and other styles in 12M cases. For example, Menthol Filter, Perique, and Organic styles will be available in 30-carton, 6M cases. Regular, Medium, and Ultra Light Filter hard packs will ship in 12M, 60-carton cases. "10M case orders will be history, as they say, after Friday, June 1," he says.

In another move to make things less complicated for distributors, retailers, and itself, Santa Fe Natural Tobacco Company is also discontinuing Medium Filter soft pack and Ultra Light Filter soft pack for both standard and what some state legislators refer to as "fire-safe" products. The company has seen increasing customer demand for hard packs.

"These styles will continue to be sold in soft pack until supplies are depleted, which is expected in early June," Collins says. "We'll keep customers informed regarding availability at the time of ordering. Both Medium and Ultra Light Filters will continue to be available in hard pack."

"Given increasing legislation by the states to require what they describe as 'fire safe' cigarettes, many wholesalers are forced to carry multiple inventories to deal with states that have and don't have 'fire safe' requirements," says Collins. "By delisting Medium and Ultra Light soft packs, we hope to help wholesalers maximize warehouse space and provide products with the greatest demand."

The company urges wholesalers carrying Medium and/or Ultra Light only in soft pack to make the conversion to hard pack as soon as possible, selling out soft packs and increasing hard pack inventory.

Santa Fe Natural Tobacco Company, based in Santa Fe, NM, makes Natural American Spirit additive-free natural tobacco products. The company was named one of the best places to work in New Mexico and celebrates its 25th anniversary in 2007.

Natural American Spirit tobacco products are made using only premium quality, whole-leaf natural tobacco. Natural American Spirit also offers the only cigarettes made with certified organic tobacco.

Members of the trade needing additional information on these changes, or set-up information regarding the Medium and Ultra Light hard packs, are urged to contact John Collins at 505.982.4257. He can provide a complete list of product descriptions and case sizes, weights and measures and pricing as well as pack, carton and case scan codes. - (Bickers)

Imports put the squeeze on Bulgartabac
Sofia - In a one-two punch for Bulgarian tobacco monopoly Bulgartabac, new foreign cigarette brands are set to enter the local market while some of the already popular import brands will become even cheaper.

Tobacco powerhouse Philip Morris said it is reintroducing to the Bulgarian market the Assoss cigarettes with a retail price of 2 levs per pack.

In February this year, Philip Morris tested the market with the Blue, Red, and Silver editions of its brand L&M. The local representatives of the company refused to say if there are plans to increase the number of brand offerings.

Gallaher Bulgaria has also registered a mid-price brand Ronson. The cigarettes manufactured by Austria Tabak retail at 2 levs a pack. The company has also registered for distribution in Bulgaria LD Air Blu, LD Red, and LD Silver with a retail price of 1.80 levs.

Scandinavian Tobacco will lower the price of its Rockets Original and Rockets White brands from 7.20 to 3.80 levs per pack while its Slim Agenda Blue and Slim Agenda Vanilla cigarettes will sell at 2.70 levs instead of 4 levs per pack.

Greece's Karelia Tobacco Company is cutting the price of its Karelia Slims cigarettes from 4 to 2.40 levs.

British American Tobacco is adding Pall Mall Superslims Blue and Pall Mall Superslims Amber to its local portfolio at 2.70 levs per pack. The company sparked the pricing war with Bulgartabac in early 2007 by making more affordable its popular Viceroy, Kent, and Pall Mall cigarettes.

None of the cigarette makers is willing to reveal any market share or sales figures.

Cigarette importers regained pricing power at the beginning of 2007 after Bulgaria deregulated cigarette pricing. Importers are now merely required to register with the finance ministry the price at which they intend to market their produce.

Bulgartabac responded to the increased competition by cutting the price of its mid- and low-market offerings and has earmarked some 18 mln levs to boost the market share of its slim cigarettes and diversify the pack sizes for some existing brands.

Altadis rebuffs Imperial again, raises forecasts
Paris - Altadis mounted its defenses against a 12 bn euro (US$16.3 bn) offer from Imperial Tobacco, reported Reuters, raising its forecasts and saying it could sell about 650 mn euros of non-core assets. The Franco-Spanish company, which rejected Imperial's 47 euro a share bid earlier this month, said the offer did not fairly reflect Altadis's value. In a presentation, Altadis said it saw higher sales growth for both its cigarette and cigar divisions in 2007-10 as well as "significant upside" for EBIDTA (earnings before interest, tax, depreciation, and amortisation).

"These are very aggressive targets," said a Madrid-based analyst who did not wish to be named. "It is a clear response to Imperial's offer to make them raise their price."

Altadis, which makes Gauloises and Gitanes, said its cigarette sales would rise by 2.5-4.5% in 2007-10, up slightly from an earlier 2007-09 forecast of 2-4%. Cigar sales were now seen up more than 8%, from 4-6% previously.

Altadis raised its EBITDA margin forecast on cigarettes to 41% by 2010, compared with a previous 2009 forecast of 34.5%. It now sees its EBITDA margin in cigars at 37.5% in 2010, up from 34.5% in 2009.

Altadis also said it had identified non-core assets to put on the block, most of which it could sell by the end of 2008.

"Under the current circumstances it is the duty of the company to accelerate the identification of any potential further upside that could be captured in the coming years," chief executive Antonio Vazquez said in a statement.

"This will give the market enough visibility to properly assess the real value of the company".

Japan Tobacco scores big on overseas sales
Tokyo - Japan Tobacco Inc., the world's third-largest traded cigarette maker, posted a 12% rise in profit for the third quarter on increasing overseas sales and gains from the weaker yen.

Net income for the three months ended Dec. 31 rose to 70.8 bn yen ($585 mn), from 63 bn yen a year earlier. Sales rose 4.7 % to 1.26 tn yen.

Domestic sales in the nine-month period fell 0.3% to 2.62 tn yen as the population declines and consumers become more health-conscious. A tax rise in cigarettes in July also discouraged individuals to buy the products.

The number of cigarette sold at home declined 7.9% to 135.5 bn after the tax increase, Japan Tobacco said. It increased the retail price of a pack of cigarettes by as much as 30 yen.

The number of cigarette sold overseas rose 9% to 240.1 bn for the 12 months ended Dec. 31, helped by increased sales of Winston and Camel brands, Japan Tobacco said. Sales rose in Europe, Middle East, and Russia. That pushed up overseas revenue, including taxes, by 9.3% to $8.59 bn for the 12 months.

Japan Tobacco last month began buying shares of Gallaher to fend off counter bids. As of today, it holds an 8.04% stake, or 52.82 mn shares, in the maker of Benson & Hedges cigarettes in Europe after buying the stock from Jan. 15, said Japan Tobacco's Seto.

R.J. Reynolds Tobacco Co. announced on May 15 that it will end a joint international venture with Gallaher Group PLC on Nov. 30 because of Japan Tobacco's purchase of Gallaher. Reynolds and Gallaher will retain the rights to the cigarette brands they introduced or distributed through the joint venture: Austin, Reynolds, and Zuni-three American-blended styles-and National American Spirit from its Santa Fe Natural Tobacco Co. Inc. subsidiary.

Japan Tobacco said the purchase will double its market share in Russia to 34%. The company said last month it expects to conclude the acquisition as early as on April 18.

Japan Tobacco plans to spend 700 bn yen in cash and take out loans from Merrill Lynch & Co. to help pay the rest, said chief executive officer Hiroshi Kimura, at a press conference in Tokyo on Dec. 15. He said the company may borrow about 1 tn yen, and there was a risk of a counterbid from rivals.

Sicpa-Assan to implement tobacco and alcohol tracking system
Ankara - Turkey's Board of Revenue has implemented a country-wide product tracking system for locally manufactured and imported tobacco and alcohol products, and named Sicpa-Assan as the technology provider to install and maintain the new system.

In 2006, Turkey's Ministry of Finance sought proposals for a nationwide banderol-applied product tracking system. The government's three-fold objective was to introduce improved enforcement measures to prevent tax evasion, reduce unfair competition against local manufacturers arising from illicit trade, and provide additional protection to consumers.

Turkey is the first country in the world to implement a single technology to securely monitor all excisable tobacco and alcohol products. According to the Turkish Board of Revenue's estimation, over seven bn items will be protected per year.

Sicpa-Assan was awarded the contract on the basis of its record in deploying high-technology security tracking solutions, as well as for the cost-effectiveness of its proposal. Sicpa-Assan is a Turkish joint-venture company established by Sicpa and Kibar Holding to develop product security and related technologies for product authentication and supply chain security.

Under the terms of the deal, Sicpa-Assan will be responsible for the implementation, training, maintenance, repair, and technical assistance of all modules of the system, which combines integrated security technologies, inks and systems, hardware, and software.

The product tracking system will require the installation of non-intrusive automatic tracking systems onto manufacturers' packing and filling lines for product monitoring and transmission of the relevant information to a central data management system. To handle the monitoring of imported products, dedicated facilities are being set-up close to the customs points of Istanbul, Izmir, and Mersin.

All local manufacturers and importers have until June 19, 2007 to comply with the new requirements.

United States
Tobacco Companies spending less on ads
New York, NY - After setting a record high in 2003, tobacco companies spent less money marketing and advertising their products in 2004 and 2005, a federal agency said Thursday.

Promotional spending by the five largest US cigarette makers, including North Carolina-based Reynolds America Inc., dropped to $14.15 bn in 2004, down from $15.15 bn in the previous year, and fell further to $13.1 bn in 2005, according to a report issued by the Federal Trade Commission. The FTC has monitored cigarette sales and marketing trends in regular reports since 1967.

The report comes as Congress considers legislation that would give the Food and Drug Administration the authority to regulate the production and marketing of tobacco products. Similar legislation passed the Senate in 2004 but not in the House. The current bill may have better prospects for passage with Democrats now in charge of both chambers.

Most of the tobacco companies' promotional spending is in the form of price discounts to cigarette retailers and wholesalers to reduce the price of cigarettes to consumers, the FTC report said. The companies provided $10.9 bn in price discounts in 2004, equal to 77.3% of all marketing expenditures, and $9.8 bn, or 74.6% of promotional spending, in 2005, the report said.

The agency said its findings were based on data submitted by the five major cigarette makers in the United States: Altria Group Inc., parent of Philip Morris, which makes Marlboro cigarettes; Winston-Salem, North Carolina-based Reynolds America, which owns R.J. Reynolds Tobacco Co., makers of Camels; Houchens Industries Inc., the parent of Commonwealth Brands Inc., which makes discount brands USA Gold and Sonoma; Loews Corp., which owns Lorillard Tobacco Co., which makes Newports; and Vector Group Ltd., parent of Liggett Group Inc. and Vector Tobacco, which sells Grand Prix and Eve cigarettes.

Houchens sold Commonwealth Brands to British company Imperial Tobacco Group PLC earlier this year.

Altria holders want tobacco split after Kraft spinoff

New York, NY - Altria Group Inc. still hasn't quieted shareholders. A month after investors persuaded the company to spin off Kraft Foods Inc., the world's biggest cigarette maker by market value faces new pressure, this time to separate its faster-growing international tobacco unit from the US division.

"International tobacco is Altria's crown jewel," said Brad Kinkelaar, who helps manage $2.8 bn at Thornburg Investment Management Inc. in Santa Fe, New Mexico. "We would favor the international unit kicking out the domestic unit." He holds 850,000 of New York-based Altria's shares.

Sales gains at Philip Morris International helped boost Altria's profit from continuing operations 9% to $2.21 bn, or $1.02 a share, in the first quarter, according to the average estimate of five analysts surveyed by Bloomberg.

The international unit, which on its own would be the world's largest cigarette producer, probably posted an 18% increase in earnings as it raised prices on brands including top-selling Marlboro, said Filippe Goossens, a Credit Suisse analyst in New York.

Philip Morris USA's profit probably rose 4.4%, Goossens estimated in a note to investors April 9. His projections are before expenses including interest and debt.

Shares of New York-based Altria have risen 8% this year, including 5.6% since March 30, when it distributed its 89% stake in Kraft to shareholders. The stock climbed 15% in 2006, outpacing London-based British American Tobacco Plc's increase of 9.9%. It trailed a 37% gain by Reynolds American Inc., parent of the second-largest US tobacco company.

By shipments, Altria's tobacco units trail China National Tobacco Corp., which is owned by the Chinese government.

Altria chief executive officer Louis Camilleri, who mentioned a possible tobacco breakup in 2004, deflected analysts' questions on the subject at a meeting in January.

"We think there's a further restructuring coming that will unlock shareholder value at Altria," said Matthew Kaufler, who helps manage 231,000 Altria shares among assets of $2.6 bn at Clover Capital Management in Rochester, New York.

The company may decide as soon as August to spin off the division, according to Erik Bloomquist, an analyst at J.P. Morgan Securities Ltd. in London.

Spinning off Northfield, Illinois-based Kraft may allow that company's ceo, Irene Rosenfeld, to make acquisitions and buy back shares more aggressively than she could under Altria.

As a separate company, Lausanne, Switzerland-based Philip Morris International also would probably accelerate share repurchases and acquire companies in eastern Europe and other emerging markets, said analyst Christopher Growe at A.G. Edwards & Sons Inc. in St. Louis. He recommends investors buy Altria shares.

Altria spent more than $5 bn on acquisitions in Indonesia and Colombia in 2005 to spur growth as tobacco consumption falls 2% to 2.5% a year in western Europe. Philip Morris International, headed by ceo Andre Calantzopoulos, has the biggest share of smokers in Italy, Germany, France, and Spain.

Tobacco International - May, 2007

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