updated 6/26/2007 1:18:09 PM ET 2007-06-26T17:18:09

Altria Group Inc., parent of the Philip Morris cigarette companies, will cut in half its U.S. manufacturing base, closing a North Carolina plant that employs 2,500 as it moves cigarette production for non-U.S. markets to Europe.

The manufacturing shift announced Tuesday comes amid a declining U.S. cigarette market and Wall Street speculation that Altria would soon move to split its domestic and international tobacco businesses into two companies.

Philip Morris USA will transfer all production from its Cabarrus, N.C., plant to its Richmond production center, which will become its sole American manufacturing plant by 2011.

The Richmond plant also will switch from making cigarettes destined for both U.S. and international markets to a strictly domestic market.

In 2006, the two plants produced 80 billion cigarettes for overseas distribution. Those cigarettes will now be produced in European plants, though Philip Morris International has not specified which ones, explained David Sylvia, a spokesman for Philip Morris USA.

“We will continue to produce the cigarettes in both the Cabarrus and Richmond facilities for Philip Morris International through the fall of 2008,” he said. “The Cabarrus facility will also continue to produce cigarettes for us in the U.S. through 2010.”

The shift comes as the U.S. market for cigarettes loses its luster, with an increasing number of states restricting smoking in public places.

“Over the last decade or so, cigarette consumption has declined by approximately 2 percent per year,” Sylvia said. “It’s attributable to a host of factors — and we expect that decline to continue.”

Last year, Philip Morris USA shipped 183.4 billion cigarettes, while Philip Morris International shipped 831.4 billion cigarettes in 2006.

Altria’s announcement makes its U.S. and international cigarette units more independent. Some analysts have predicted Altria would split the businesses into two companies and expect an announcement as early as August.

An Altria spokeswoman would not comment Tuesday on that possibility.

Such a split would be part of a restructuring designed to increase value for Altria shareholders that started with the parent company’s spinoff in March of its remaining majority stake in Kraft Foods Inc.

Altria said in a statement that it planned to increase production at plants in Europe by the third quarter of next year.

Philip Morris International will cut costs by taking advantage of excess capacity at European plants, where manufacturing costs are lower than in the U.S., PMI spokesman Greg Prager said. With the Cabarrus plant closure, PMI will shift the production of 57 billion cigarettes per year to Europe, meaning all PMI production will be done at plants outside the U.S., Prager said.

He declined to name the plants that would increase production. PMI’s plants in Europe are in Lithuania, Poland, Romania, the Czech Republic, Germany, Greece, Holland, Portugal and Switzerland.

Altria shares rose $1.47, or 2.1 percent, to $70.22 in afternoon trading.

Most North Carolina hourly employees and many salaried employees will be offered positions in Richmond, Altria said. Sylvia said the move will bring “several hundred” jobs to Richmond. Philip Morris USA employs 6,300 in Virginia, primarily at its Richmond cigarette plant.

Other workers at the North Carolina plant will be eligible for between three and 20 months of severance pay and benefits, depending on length of service, plus outplacement counseling.

The company said it expects cost savings of about $335 million by 2011, of which $179 million will be realized by Philip Morris International and $156 million by Philip Morris USA.

Altria expects Philip Morris USA to record an initial pretax charge of about $325 million, or 10 cents per share, in the second quarter, mainly for employee separation. There will be about $50 million in charges for the remainder of 2007.

Total expenses through 2011 will be about $670 million at Philip Morris USA, including accelerated depreciation charges of $143 million, employee separation expenses of $353 million and relocation costs, partly offset by gains on sales of land and buildings, of $174 million.

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