奧馳亞 (MO) 2001 Q1 法說會逐字稿

Good morning and welcome to the Philip Morris 2001 first quarter earnings conference call. My name is Mandy and I am your conference call operator. Today's call is scheduled to last about one hour including remarks by Phillip Morris and a question and answer session. To ask a question, please dial #1 followed #4 on your touchtone telephone at anytime. I will turn the meeting over to Nick Rolley, Vice President of Investor Relations and Financial Communication for Philip Morris.

Good morning and thank you all for joining us. For those of you who have access just call our web site, please note that you will be in a listen-only mode and we encourage you to browse through the web site while listening to the conference call. Before I introduce Louis C. Camilleri, I have several brief announcements. First, as you know, we issued our first quarter earnings release today, and if you do not have a copy of it, you can go to the web site www.philipmorris.com, click on the Investor Relations section, and our release will be right on the news release section. Second, this call will be limited to discussion of our business results for the first quarter 2001. We will not be covering litigation or regulatory issues. Third, as mentioned in our press release, we have filed the Kraft IPO registration statement with the SEC, and we expect to complete the IPO by the end of the second quarter. Since, we are in the quiet period, we will not be able to answer questions about the IPO or comment on the outlook for our food business beyond what is in the press release. Four, today's remarks may contain projections of future results, and I direct your attention to the same forward statement at the end of our news release for review of the various factors that could cause actual results to differ from projections. And finally, media representatives who follow Philip Morris are on the call in a listen-only mode. And now, it is my pleasure to introduce our Senior Vice President and Chief Financial Officer, Louis C. Camilleri.

Thank you Nick, and good morning everyone. As you have all released our earnings release, and are thus by now familiar with the details of our first quarter operating results. Accordingly, I intend to restrict my comments to the key highlights of our results, and to discuss the factors that drove our performance. Our remarks will cover our consolidated results and the performance of each one of our operating companies, leaving sufficient time for your questions. Let me now turn to our first quarter results, which built off the solid momentum we enjoyed in last year's fourth quarter. All data, I will be quoting will refer to underlying results.

For the first quarter, operating company's income rose 10.1% to $4.4 billion, excluding an adverse currency impact of a $106 million, operating company's income would have been up by 12.8%. Diluted earnings per share of $0.95 were up 6.7% or $0.6 ahead of the prior five-year period. The 6.7% growth was driven by real business growth of 9% or $0.8. The favorable impact of the redemption in our shares outstanding of 4.5% as a result of our share repurchase program, and 2.2% growth was due to the reduction in our effective tax rate from 39% to 38%.

In 2001, we expect our tax rate on foreign operations to be 2% points lower than the US Federal Statutory Rate versus 1% point difference in the year 2000. This reduction results primarily from the favorable closing of overseas orders and is not anticipated to recur in 2002. And just to be clear, 1% point favorability in the tax rate will only apply to 2001. These favorable factors were partial offset by currency, which reduced our earnings per share by 3.4% and the diluted impact within the fiscal acquisition, which reduced earnings per share by 5.6% or $0.5 per share. The strength of our numbers is even more apparent when we compared Pro forma results and if Phillip Morris own the fiscal of the full year 2000 and include good will, amortization, and interest expense in both 2001 and 2000. On that basis, net earnings rose 10.6% while diluted earnings per share increased to 15.9%. As we have said in February, we expect our rate of earnings per share growth to be stronger in the second half of the year than the first half, principally due to the diluted impact within the fiscal acquisition during the first six months of 2001 as well as the effects of currency.

Let me now turn to the performance of our individual operating companies starting with Phillip Morris USA, our domestic tobacco company. Phillip Morris USA registered strong results with operating company's income up 7.7% or $1.2 billion driven by higher pricing. Although, our domestic shipment volume decline 2.3% to $51.6 billion units, this occurred against the backdrop of an industry decline of 3.7% to $98.5 billion units. After adjusting for trade inventories and other factors, we estimate that industry volume declined by 1-2%. Our performance continues to be driven by our strength in the high-margin premium segment. The industry premium segment shipment share grew 0.7 share points to 74.6% while PM USA shipment share of the premium segment arose 1.2% points to 62.9%. At retail, although, the industries premium segment share was down 0.3 points to 73.6%, the segment was actually up 0.1% points when compared the both third and fourth quarters of 2000. Phillip Morris USA's retail share of the premium segment increased 0.8% points to 61.4% in the first quarter. Marlboro was again the story in this segment. The shipment share increased 1.1 points to record 39.9%.

The franchise continued to generate gains in the menthol segments of retail regarded the fastest growing major menthol brand. Marlboro Milds, introduced last April in this segment achieved a retail share of 0.6% in the quarter. Continuous trends in parliament also showed good gains with shipment share up 1% point to 2.4% and 0.5 points to 1.5% respectively. Parliament benefitted from shipments supporting its national launch. In the discount category, basic share of the total industry shipments was essentially flat at 4.9%, but continued to show good results of retail where it was 0.2% points up despite a high end at average retail pack price and its key competitors ____ 00:08:19 & GPC. Turning now to our international tobacco business. Phillip Morris International operating company's income increased 4.6% to $1.6 billion, driven by higher pricing and increased volume. Excluding the unfavorable currency impact of $86 million, operating company's income would have increased 10.3%. Shipment volumes increased 2.6% to $179.9 billion units, reflecting good growth overall, offset by weakness in Germany and Argentina. In fact, if you were to exclude Germany and Argentina, volume would be up 4%.

I also want to point out that the comparison of first quarter volume performance was negatively impacted by two factors. We had one less trading day this year due to the 2000 leap year and distortions in trade purchasing patterns in a number of markets, such as France, Switzerland, United Kingdom, Central Europe, Brazil, Kazakhstan, as well as in worldwide to differ. Overall, our share increased in 20 of our top 25 income markets. With gains of 1 points or more in 14 markets including France, Italy, Japan, Mexico, and Russia. These share gains were fueled by the sustained momentum of Marlboro, which increased share in 19 of our top 25 income markets including Belgium, the Czech Republic, France, Hong Kong, Italy, Japan, Mexico, the Netherlands, Poland's, Portugal, Saudi Arabia, Singapore, Spain, and Turkey.

Now, let me review our regional performance. In Western Europe, volumes rose 1.3% with strong gains in Italy and Spain offset by lower volume in Germany. Excluding Germany, volume was up 4.6%. In Germany, volume in share continued to be effected by the weakness in the vending segment where we have a large share as well as the growth of trade discount brands. As I mentioned in January, the vending segment has exhibited weakness since the November 2000 price increase. And this was exacerbated in February when the vending pack content was reduced to 26 - per pack at 6 Deutsche Marks. We have witnessed similar weaknesses in the vending segments in the past. For example, when the vending pack to move to 5 Deutsche Mark- in March of 1992, the vending segment incurred similar volume declines, but recovered in six to nine month period. Hence, while it may take sometime, we remain confident that Germany will turn around.

Turning to Eastern Europe, volume there arose 6.4% led by strong increases in Russia and the Ukraine, where brand mix also improved driven by good performances in both Marlboro and Parliament. ____ 00:11:49 Europe, Middle East, and Africa, volume increased 4.2%, despite adverse trade purchasing pattern distortions. In Poland, the Czech, and Slovak Republics. We increased share in all those markets as well as Hungary, Saudi Arabia, and Turkey. In Asia, volume increased to strong 7.2% with particular strong gains in Indonesia, Korea, Malaysia, Thailand, and Taiwan. In Japan, share arose to record 22.1% driven by continued strong performance of Marlboro. Latin America volume was down 3.7% due largely to Argentina and Brazil. In Argentina volume declined due to difficult economic conditions resulting in lower consumption as well as significant down trading. Nevertheless, our share was up driven by the performance of the Phillip Morris brands in mid-price segment. In Brazil, results were affected by trade distortions. However, in Mexico, volume and share were up strongly as market leader Marlboro continued to drive growth and achieved another record share of 40.8%.

As stated in our earnings release, Marlboro's volume was up 0.7% in the first quarter and this growth was adversely impacted primarily by Germany and Argentina. Excluding these two markets, Marlboro would have increased 3.7%. Despite, the challenges we have experienced in certain key markets, we have registered good share in volume dense and strong income growth. As we said in January, while some quarters may be impacted by excise packed changes and shipment timing distortions, we remain confident that on a annual basis GMI will achieve organic volume growth in the range of 4-6%.

Turning now to the global food business. To provide a more meaningful comparison, I will be discussing the operating results of our food business on an apple-to-apple basis. Preaching ____00:14:16 as if Phillip Morris had owned it for all of 2000. Kraft Foods North America recorded very solid gains in operating companies income, volume, and operating margins for the first quarter. Operating company's income rose 6.5% to $1.2 billion driven by volume growth, productivity saving, and lower commodity costs. Volume increased a solid 3.3% with increases in all four of Kraft Food North America's major businesses reflecting the success of new products and higher volume especially in beverages. Operating margin improved to 18.7% up nearly a point from a year ago, mainly due to productivity saving and cost management improvements. Cheese meal and enhances volume rose 1%, as increased shipments to grocery customers were partially offset by a decline in the food service businesses. Cheese declined due to adverse price gaps on Velveeta cheese and the exit of the lower margin non-branded products. Meals and enhances volume rose with higher shipments of Kraft, macaroni and cheese dinner, Invernizzi, Kraft mayonnaise, and salad dressings and A1 - steak sauce.

In the biscuits, snacks, and confectionary segment, volume rose 3.3% driven by solid growth in biscuits including Oreo cookies, Ritz, Wheat Thins, and Triscuits as well as new products such as many Oreo's and many Ritz and Peanut butter and Chips Ahoy. Volume of low salty snacks declined primarily due to lower shipments of Planters nuts, the non-glossary channels. Confectionary volume rose due to the continued solid performance of new products such as Terry's, chocolate raspberry, crème savers like candy and LifeSavers, and Jellybeans. Beverages, desserts, and cereals registered solid growth with volume up 7.1%. Refreshment beverages such as Capri Sun Big pouch and Tang pouch delivered overall double-digit gain.

Our coffee volume was also increased due to good performances by Starbucks coffee both through groceries as well as Maxwell House. Well, our desserts business was down slightly. Cool Whip whipped topping and Balance Bar nutrition and energy snack bars send in good results. Post cereal volume declined due to increased competitions in the ready-to-eat cereal category. Oscar Mayer and Pizza volumes rose 2.9% with continued good quality Di Giorono, Tombstone, and Jack's frozen pizza as well as gains from our processed meats business. Volume was down for Lunchables lunch combinations due to the timing of shipments. But, consumption remained very strong at retail. Benefitting from the continued momentum in Lunchables mega pack and introduction of Lunchables Fun snacks.

Moving to our international food business. Building on its excellent performance in 2000, Kraft Foods International operating company's income rose 8.6% to $239 million, driven by volume growth and productivity savings. Excluding an adverse currency impact of $16 million, operating company's income would have increased to very strong 15.9%. Volume increased to solid 3.3% benefitting from gains across most key categories and in developing markets. KFI's operating margin improved to 11.5% up from 10.1% a year ago. Volume grew in both of KFI's major regional businesses. In Europe, Middle East, and Africa, volume rose 0.4%. The strong gains in developing markets were offset by weaker results in Germany and Italy. Germany experienced volume decline as a result of pricing and a reduction in trade inventories, particularly in coffee while trade purchases were lower in anticipation of lower coffee prices.

Italy was lower primarily due to a decline in our ____ 00:19:17 canned meat business. We recorded high coffee volume in numerous other markets including France, Italy, and Poland due to strong marketing and the geographic expansion of new products. For example, we introduced products such as Gevalia Ebony and Jacobs Ebony and Jacobs Milea into a number of new markets in Europe. Tax volume also increased driven by the performance of confectionary and salty snacks including Milka chocolate in France and Côte d'Or chocolate in Belgium. And cheese volumes rose very strongly benefitting from the performances of such brands as Philadelphia and Kraft Sottilette in Italy. Latin America, Asia-Pacific volume was up solid 7.5%. Refreshment beverages recorded double-digit volume growth due to strong gains in Tang powdered soft drinks and good growth in regional and local brands such as Fresh and Verao. Snacks recorded solid growth driven by the performances of Club Sociale and _____00:20:33 biscuits in Brazil and higher sales in China. Our cheese business also delivered a solid performance driven by Philadelphia in Australia, Japan, and the Caribbean, Kraft Singles in Australia and Kraft Eden in the Philippines.

Turning to the beer business. Miller Brewing Company continued to face challenges in the first quarter with domestic underlined shipment volume declining 5.3% to 9.4 million barrels. Partially reflecting Miller's decision to continue to reduce distributor inventories. Operating company's income declined 18.4% to $124 million due to the lower volume as well as double-digit increases in marketing spending behind its core premium brands Miller Lite, Miller Genuine Draft, and Foster's, as well as the impact of higher energy costs. We are addressing the challenges at Miller through a key strategic decisions taken last year including retail pricing realignment, reorganization of the sales force, and continued higher marketing spending.

Based on our current outlook, we are reaffirming the guidance we provided in February for the full year 2001. Underlined diluted earnings per share are projected to grow in the range of 9-11%, which does include the previously disclosed diluted impact of the Nabisco current acquisition. As we have said in our release, currency does remain a concern. In summary, we had a very strong first quarter. Our domestic tobacco business delivered strong gains in income and good share performance. Our international tobacco business delivered increases in both volume and income and gained share in virtually all of its most important markets. Our worldwide food business performed well with gains in volume and income driven by new products and Nabisco. And while our beer business continues to face challenges, we have taken appropriate strategic actions to redress the situation. Finally, an importantly lead during the first quarter, we continued delivering on our commitment to improve shareholder value by announcing a new three year $10 billion share repurchase program. During the quarter, we completed our previous three-year $8 billion program and repurchased $21.5 million shares of common stock at a cost $1 billion. This concludes my remarks and I will now be happy to take your questions.

Ladies and gentlemen, we will now conduct the question and answer portion of the call. In order to ask a question, please press #1 followed by #4 on your touchtone telephone. Questions will be taken in the order in which they are received. Our first question is coming from David Adelman of Morgan Stanley.

Good morning Louis.

Good morning David.

Could you address the pricing gap dynamics in the US cigarette business focussing on the present pricing at the absolute level and what the share dynamics have been most recently among the subsequent participating manufacturers in the MSA?

Yes David. During the quarter, the average price of Marlboro was $3.15 and the average price of the lowest discount was $2.36. So, the difference of $0.79 or 33%, which was slightly lower than in the fourth quarter as you recall the difference then was about $0.83. That 33% difference is actually significantly lower than the price gap that existed prior to the MSA. So, we feel pretty good about the price gaps now as I mentioned the premium segment was slightly down in the first quarter, but it was strongly up in convenience stores as well as tobacco stores, which we find very encouraging, and really the retail share was slightly distorted by native American stores as well as mass merchandises. One specific client had taken on lower price brands towards the middle of last year and that is essentially been flat so, it is a slightly unfavorable comparison.

Okay and then one followup Louis. In the February conference call you had mentioned a working assumption of a negative foreign currency impact on operating income for the full year 2001 of about $300 million is that still an appropriate forecast?

That is probably higher than that now David, as the time in the Euro was about 95, it is now 88. So, I would estimate that our current sports would move like $400-420 million. However, I would caution everyone that it is still early in the year and the dollar is clearly overvalued, and I think that is recognized by everyone at the moment. So, we will see how see the year unfolds.

Okay, thank you very much.

Our next question is coming from Marc Cohen of Goldman Sachs.

Hi Louis.

Hi Mark.

I will just ask a few questions. One is related to the American Food Business and I wonder if you could take us through the seasonality of how Nabisco influences the year-over-year growth trend in that business, you talked about 6.5% apple-to-apple growth and I believe that with synergies on an ongoing basis, you should expect to be doing a little bit better than that. So, I wonder if you could clarify that is this seasonality or just a ramp up of the synergies and then secondly, I wonder if you could work through the map of taking us through how you go from 2.6% international cigarette unique growth into that 4-6% range if you make some adjustments for some of those that were one time factors that might be depressing the number?

Okay. As Nick mentioned, I am very restricted and what I can say regarding the food business going forward. You are right Mark it is essentially the ramp up of the synergies, which comes in for the latter half of this year as well as next year, which impacts that comparison. So, as the year progresses we should be witnessing improved performance at the operating income level. With regards to PMI, as I mentioned earlier, there were a number of distortions, and let me just give you one example. In Switzerland volume was down to 29 and 10% and that was essentially due to significant trade loading last year in anticipation of a price increase that took place April 01, 2000. And it is distortions of that nature, which apply to other markets we have highlighted that explain the 2.6%. So, we do remain confident that we will achieve at least a 4% target for the year and maybe do slightly better than that.

Let me just follow up on that, I guess, what I am curious about is the extent to which this quarter is depressed because of factors that will influence other quarters in 2001 as opposed to things that were happening in 2000?

Well, there were also things that happened in 2001, which hopefully should reverse itself as the year unfolds.

Can you elaborate on those?

Well, for example, there have been markets take Brazil for example where volume increased in December in anticipation of pricing realignment, and therefore we had a weak first quarter, and that should come through for the rest of the year, and there are other examples of that nature.

Okay thanks.

Thank you. Our next question is coming from Martin Feldman of Salomon Smith Barney.

Good Morning guys. Let me just ask one or two questions here. In PM USA your volumes were down 2.3% less, but as you said the industry down 3.7%, and you reflected an adjustment in trade inventories and then you said and other factors. I wonder what those other factors were you were referring to?

What it is essentially growing market which really impacted last year and we have seen that there has been quite a substantial reduction in the growing market. So it offsetting the impact of the trade inventories, if you recall, were built up in the first quarter of last year after having been depleted significantly in December of 1999. 6

Can you give us an estimate what you believe the growing market currently is as a proportion of the overall market?

I do not think we have an accurate volume, but what I can say is that now I believe it is 46 states have enacted legislation that makes it pretty well impossible for people to import products that was exported for overseas consumption. This in itself has reduced the grade market significantly. I think in the later half of 2000 there were about 23 states that enacted that legislation making it 46 states in total now.

Within PMI two questions, you described the problem in Germany with the import of vending machines. Can you describe your share in Germany relative to the other international manufacturers, in other words, not compared to the trade brands, and also what is the outlook in Germany when do you expect that the problems with the vending machine segment to begin to resolve themselves?

Okay. Vending machines in total is down roughly 4 share points and I think I mentioned earlier in my remarks that we had a similar phenomenon back in 1992 when we moved from 4 Deutsch Marks 5 Deutsch Marks of vending pack, and if history is precursor of what may happen in the future, you will note that it took about 6-9 months for that volume to stabilize and start increasing again. So we started in November, we hope to see that the vending segment will recover in the coming months.

So about the end of the year you are looking for a favorable come say in the fourth quarter?

We hope so yes. Having said that I should mention also that our share of industry has essentially remained flat and over-the-counter pack as opposed to the vending pack is actually slightly up, I think.

That is an old statement, but for....?

That is quite strong performance given that the trade brands are up quite significantly they are up about 4 share points as well.

That is old share but for the vending segment?

Right.

Okay. I was just looking at your balance sheet your cash was down from the end of last year from $937 million to $426 million. Is that as a result of, in the sale applications being paid?

Yes. You should note that this year as opposed to the previous year, we actually paid MSA payments in the first quarter last year was in the second quarter in April, and that is essentially for tax planning purposes.

Going forward, should we expect to be in the first quarter.

Yes.

Finally, Louis, in Brazil, one question I meant to ask you. You referred to trade distortions in Brazil. Can you tell us what you meant by that?

Well I think I mentioned it in answering Mark Cohen's question that in Brazil there was significant loading in December of 2000, which weakened 2001 and there was disproportional loading between the two major manufacturers as well there.

Right. Okay. Thanks very much.

You are welcome, Martin.

Our next question is coming from Michael Somer of Pacific Financial Research.

Okay, the next question is coming from Arch Saso of Tea ____ Price.

Hi Good Morning. Has the lower tax rate all that has been part of your EPS guidance of 9-11% growth for the year and what would the first quarter rate have been without these orders coming through favorably, in other words the difference is cautious about one percentage point but given that we have no 35:36______ that did well and there are now with the rate actually have been, was the impact of these all that actually more than 1%?

Well to answer your first question, yes, that the tax rate was part of our guidance and the second one was that the rate would have been 39%, so we would have kept the rate flat versus 2000 despite the impact of goodwill.

Okay, so the gross effect if you will, of these international or it is really was only about a 100 basis points, no more?

Right.

Finally on the settlement payments of the MSA payments, all-inclusive, what is the number in 2002 going to be versus what 2001 is going to be?

01 and 02.

You have some numbers in your annual report, but I am interested in what the overall total cash outlay is going to be in 02 versus 01?

That is they are approximately the same.

Same, not down?

No, in 2003.

Okay and that is the way the expenses will actually be shown. They would not be down in 02 but we will be down 03?

Right.

Okay, thank you.

If you have any further comments, Sir.

No, I am passing the baton to someone else.

Thank you. Our next question is coming from Ann Gurkin of Davenport and Company.

Good Morning. Wonder if you could update us on little more thinking on reduced risk cigarettes and they all have paper select and the accords. Would like me to rule anything out, are you waiting for some kind of regulations or outline from regulatory body?

I think our position in terms of the regulatory environment is pretty clear. We made that very transparent and public. In fact it is up on our website, so if you go to the PM USA web site, you will find our position in terms of regulation. In terms of reduced risk products, we have said that for sometime that we believe it is our responsibility to develop such products and we are busy working on that and they will only be launched once we are ready and the appropriate environment is in place.

Could I get a breakup on volume in the US for cookies and crackers, not combined, but a breakup between the two?

Yeah. I can say that crackers was up 7% and cookies was up 3.3%.

Great, thanks a lot.

Thank you our next question is coming from Nick Brook of Valentine Management.

Hello. Could you outline the impact of the new goodwill accounting rules, which are likely to go into effect on June 30th?

Yeah, we have read that back in January. At the moment the rules says that it should be effective July 1. Our understanding is that _____ 39:13 received a lot of comment like this. So we do not know whether it will be effective July 1, but at this stage that is what we are assuming. As I mentioned back in January I think I would caution you not to put the goodwill straight down to the bottom line, and we would estimate, as I mentioned also in January, that the impact would be about $0.23 for half a year.

But you are saying that with the $0.23 that will not flow to the bottom line you are going to spend some of that?

No I am saying it will.

Thank you.

Thank you. Our next question is coming from Sandy Raju of Merrill Lynch and company.

Good Morning. I had a couple of questions. Louis, can you quantify the impact that some of the trade de-loading and the loss of the extra shipment day actually had on the international shipment volumes during the quarter?

No we have purposefully not quantified it. I would estimate that it probably represents about one and half percent.

So actually you added back in you would have actually achieved a 12% shipping growth number that or close to it anyway? Okay you are targeting. Okay let us get to here, and also in Germany, just not to be the German dead horse, but just in terms of the structural problems with the brands or unnecessarily problems with the market with the trade brands really gaining share. Is there anything being done now that there is a new management in place for a couple of months that could turn around that problem outside of just what is going on representing machine?

That is clearly part of the overall program that the new management team is working on. I think it is pretty premature for us to say anything publically at this stage.

You can get any additional color on that?

No.

Okay. Just to clarify one comment you made on the grand market. Are you seeing a reduction in the size of the grand market or you just seeing a reduction in the growth of the grand market?

The reduction in the overall volume.

The reduction in the overall volume. Okay. And I guess that is about it, thank you.

You are welcome.

Thank you. Our next question is coming for Alec Patterson of Joysner.

Yes Good Morning. I know it is small, but I could not help but pick up some of those through the chosen words describing the going forward strategy on Miller, and I was trying to differentiate whether there was a new strategy evolving on comments like getting the price equation right for the consumer, something like that, or boosting the marketing expense. There are different tact being taken in trying to evaluate what the proper price points are in the market place down through the year.

No the normal way is that there have been reports of suggesting that Miller may have changed the strategy on pricing even though all those reports did caution the readers, but those were just single data points and it was not necessarily reflective in the overall strategy. What I cannot say is that the basic strategy of 7 premium products or premium prices remains intact. There are and there have been price promotion that is used tactically in various markets, and I would say that our competition has been significantly more aggressive than we have in terms of price promotions and clearly we occasionally have to react to that. But the fundamental strategy has not changed.

I guess what I was sort of driving at is, you guys have graced this, bringing the premium products to premium prices in an environment, which seems to allow the industry class utilization being albeit all that. But I imagine that there is also, a sort of, seeking out a proper price point that you feel comfortable with. I was wondering whether you felt that you attain that, assuming that competitions are stabilizing itself, or you are still seeking out that proper price level for the brand equity your products should have?

No, I think we are comfortable with our current price positioning. As I said it is somewhat distorted by the different timing of price promotions as versus our competitors, that is all. But the base price positioning we are comfortable with.

Great thank you.

You are welcome.

Thank you. Our next question is coming from Tim Swanson of A.G. Edward.

Yes Good Morning. William. I think I am going to continue with what Alec was asking about specifically on the manufacturing side of Miller. Can you talk about your capital utilization rates, specifically with regards to the PASS agreement that you have. Has there been any change to that because, I know that PASS has been having some real difficulties of late and then second, you also mentioned an energy issue with respect to Miller. Could you quantify that by any measure?

I will start with the second part first. The energy cost represented about 20% of Miller's high-flow decline in the quarter. In terms of our capacity utilization, it is very high still we have made significant efforts to reduce the number of SKU's, which dramatically increased as a result of the patch contra manufacturer agreement. We continued to be pleased with that agreement and we still continue to enjoy significant profitability from that contra manufacture agreement.

Just a followup. Did patch close one of their plants and to that increase the amount of volume that you would receive or will receive from them?

I cannot really comment on that, but the whole plan over time has been that ultimately patch would stop manufacturing and would become a vigil manufacturer as such.

Okay and then finally very simply just like to say about the phone call would you having to have excise tax breakdowns by divisions?

Yes I can now provide you with that, if you could bear with me a second. For domestic tobacco the excise taxes were $864 million, international tobacco they were $3,345 million, and for beer they were a $168 million for a total of $4,377 million.

Okay, thank you William.

You are welcome.

Thank you. Our next question is coming from Bonnie Herzog from Credit Suisse First Boston.

Good Morning Louis.

Good Morning Bonnie.

I have a couple of questions on PM USA to start with. Can you give me an idea of the promotional activity that is going on in the market place? Right now, I believe your current promotion is with Marlboro buy-three get-two free. How long will that be going on, how much longer?

It is for limited quantity and it is for about three weeks usually.

The total has been three weeks or will be three weeks?

Will be three weeks.

Okay. Is that being going over well I mean?

It is for a limited quantity.

Can you give me an idea also, I just actually wanted to clarify something. In the press release you state that your shipment share was up from Marlboro and Basic. I just want to make sure I understand that. Does that imply that Marlboro volume was down about one percent and Basic volume was down about 14%. You do not actually put volume numbers in the press release. Am I looking at that correctly?

Yeah. Marlboro's volume was down 0.9 and shipments from 39.65 to 39.28. Basic was down 5.9%.

How much 5.9?

Yeah from $5.1 billion to $4.8 billion.

Okay and then a couple of questions on your PMI business. Can you give me an idea of the pricing environment particularly in to your key markets? I guess what I am trying to get back to, Louis, is your top line, may be we exclude assets, our top line is down but you can add back to the foreign currency impact. Where would we see the top line for PMI and is that going to give us an idea of similar pricing that we are seeing outside the US?

Bonnie, you always ask questions on pricing and I always cannot answer them.

Okay. But can you answer where your top line would be if you?

No, because it is a similar question

All right. Then that would be all. Thank you so much.

Our next question is coming from James Borges of First Union Securities.

Hi. Thanks for the conference call.

You are welcome.

Could you comment in general terms on marketing spending plans for Kraft North America and Kraft International following the acquisition and in particular, in the second half after you have been able to realize their greater synergies?

Much as I would love to, I cannot. I am very restricted in what I can say in terms of cost going forward. I am sorry.

Okay Thank you.

Thank you. Our next question comes is a followup coming for Marc Cohen of Goldman Sachs.

Yeah, could you just I want to really two or three issues to go into. One is, in the domestic tobacco company, I wonder if you could talk a little bit about what is happening in terms of mix shift within the discount segment from branded goods to these lower priced, you know, braced on subject to some of the sedimented rates. That is first. Second, my understanding is that there are some consumer promotion changes that are being considered legislatively in Germany, which obviously could have some positive impact of some of your businesses. I wonder if you could talk about what you are seeing in that respect how it might help you businesses and third of all, can you specify, how the Miller inventory reductions were in the quarter?

Yes, so let me start with all other manufacturers. Their shipment share within this, well overall for the industry, the shipment share is sort of flattened out considerably. If you recall, in the first quarter of 2000, it was 41/2 %, it increased to 5.2 in the second quarter, 5.5 in the third quarter, 5.7 in the fourth quarter, and 5.8 in the first quarter of 2001. In retail, it pretty follows essentially the same pattern; it was slightly up in the first quarter. Within the discount category that is sort of essentially mirrored where they now represent about 21% of shipments in the discount category and about 23% as retail. But the growth seems to have slowed down significantly, Mark. The next question I think, related to Miller inventory reductions. It was roughly four days of supply.

How much is that in barrels. Can you tell us?

Slightly less that 200,000 barrels.

The third question related to consumer promotion in Germany, obviously both the food and tobacco businesses are facing some challenges in Germany. I understand the legislature is considering some changes, and very restricted consumer promotion was there. Can you comment on that?

No I think it would be premature, Marc. I am speculating that the consumer promotions pertaining to tobacco would also be very limited in terms of pricing promotions.

Do you have any sense of whether that legislation is moving forward?

All I can tell you is the legislation in Germany is very slow. For example I have been talking about reforming pension for the last six years, and it is still in the legislative process.

Thanks Louis.

You are welcome.

Thank you. Our next question is coming from David Lewis of City Group Asset Management.

Hi. It is just a couple of quick questions. The first is on domestic tobacco. The tobacco the envelope calculation that looks like SG&A increased by about 15% this quarter. Is that correct? Is that a good run rate to use the rest of the year?

SG&A was, your number is pretty well accurate. That essentially reflects the hike in promotional activity.

Okay. Is that expected to continue there right throughout?

I cannot really comment on that.

Thank you. Then in international tobacco, you said generics gained 4% points in the quarter. Can you just tell us what their share of the market is?

It is slightly less than 13% now.

Okay.

In Germany, and it is up versus the first quarter versus the fourth quarter of 2000, it is up less than two share points.

Could you just help me understand, in Germany the pricing between generic and Marlboro?

Yeah, Marlboro on the over-the-counter pack is 550 Deutsch Marks for 19 cigarettes, and on an average, the trade brands are 385.

Okay. And a last question on the hedging front, on that loss, the currency hedged on the yen, does that still exist throughout the balance of this year?

We do not really comment on your hedging policy, David. I can say that we have hedged part our yen exposure. The number I gave out today to the gentleman, I think it was one of his first questions essential takes into account hedge already.

Okay, great. congratulations. Thanks.

Thank you. I think we have time for one more question, if there are any.

We have no further questions at this time, Sir.

Okay, thanks. Well, thank you very much everyone.

Thanks for joining us. We are going to get back to you again in the next quarter. We will be sending out a notice in early July with the date, with all information for the 2001-second quarter conference call. Thank you.

Thank you for your participation. This just concludes teleconference. You may disconnect your lines at this time and have a wonderful afternoon.