奧馳亞 (MO) 2002 Q1 法說會逐字稿

Good morning.

Thank you all for joining. Before I introduce Louis, I'd like to make a few brief announcements.

First, as you know, we shared our first quarter earnings release early this morning. And if you have not received a copy, you can go to the Investor Relations section of the Philip Morris Company's Web site to get it.

Second, the call will be limited to a discussion of our business results for the first quarter of 2002. We will not be covering litigation or regulatory issues.

And the results this morning reflect underlying results that treat the Kraft initial public offering and the cessation of good will amortization as if they were applied throughout 2001.

Results also reflect the adoption of the

statements relating to the classification of vendor consideration and certain sales incentives and had no impact on operating companies income, net earnings or basic or diluted earnings per share.

We will provide the 2001 quarterly breakdown of the

impact for our operating companies in the first quarter 10-Q filing sometime in mid-May.

Third, Kraft Foods announced its first quarter results yesterday and hosted a separate conference call.

Since the food business was covered in detail on that call, our discussion of Kraft will be limited on this call.

Fourth, today's remarks may contain projections of future results and I direct your attention to the safe harbor statement at the end of our news release.

For a full review of the various factors that could cause actual results to differ from projections. And finally, media representatives who follow Philip Morris are also on the call this morning.

And now it's my pleasure to introduce our Senior Vice President and Chief Financial Officer, Louis Camilleri. Louis.

Thank you, Nick, and good morning everyone. I'm pleased to review our first quarter results with you.

We had a solid quarter which was in line with our expectations and our projections for the full- year. Operating companies income or OCI was 3.9 percent to $4.5 billion despite an adverse currency impact of $184 million.

Excluding this impact, Operating companies income would have been up 8.2 percent.

Diluted earnings per share of $1.14 was 8.6 percent versus the prior year.

On a constant currency basis earnings per share would have been up 13.3 percent. The 8.6 percent EPS growth was driven by base business growth of 11.4 percent or 12 cents and the favorable impact of the reduction in our shares outstanding of 2.9 percent or three cents as a result of our share repurchase program.

These factors were partially offset by currency, which reduced earnings per share by 5.7 percent or six cents.

Turning to the performance of our individual operating companies I will start with Philip Morris USA, our domestic tobacco company.

Philip Morris USA had what I would characterize as a very solid quarter in the face of continued intense competition as Marlboro continued to exhibit strong growth momentum.

As highlighted in our earnings release, the quarter was marked by a number of factors that make it difficult to read actual, real performance.

As anticipated, the trade did replenish their inventories during the quarter following record low levels in December 2001. This replenishment together with the timing and level of free product promotional shipments versus the prior year impacted industry players in an inconsistent manner.

While industry shipments were up 2.9 percent, we estimate that absent the distortions I just mentioned and the fact that there was one less shipping day this year, volume was actually down close to two percent. We also estimate that our shipment share would have been flat in line with our overall retail share performance as measured by IRI Capstone.

As I said on previous occasions, one needs to focus on retail share performance to monitor real progress. During the quarter, Philip Morris U.S.A.'s four focus brands -- Marlboro, Parliament, Virginia Slims and Basic -- registered solid momentum with combined retail share up .7 points to 47.6 percent.

Very importantly, Philip Morris U.S.A.'s premium brands collectively increased their retail share of market by 0.2 share points in the quarter.

Marlboro's retail share increased half a share point to 38.5 percent.

Philip Morris U.S.A.'s share of the premium category at retail grew .8 percentage points to 62.2 percent. While the industry premium category declined .7 points to 72.9 percent.

Parliament also contributed to our higher retail share by gaining .3 percentage points to 1.3 percent. Virginia Slims retail share was down slightly to 2.7 percent.

Retail shares for Basic, Philip Morris U.S.A.'s major discount brand, was unchanged in the first quarter at 5.1 percent.

PM U.S.A.'s total retail share was essentially unchanged at 50.7 percent.

And we continue to out perform all our major competitors. I should also highlight that Philip Morris U.S.A.'s Operating companies income performance was adversely impacted by the timing of trade credit memos related to the recent price increase announcement.

Absent this feature, OCI would have been up by more than six percent.

Overall, Philip Morris U.S.A. had a good quarter and we're confident that we can continue to deliver our targets for share growth and profit growth.

Turning now to our international tobacco business. Philip Morris International Operating companies income of $1.6 billion increased marginally .4 percent.

Driven by volume gains, higher pricing and lower costs which were all essential offset by the impact of unfavorable currency. Excluding unfavorable currency of $178 million in the quarter, Philip Morris International's operating companies income would have grown 11.8 percent.

Shipment volume increased 2.4 percent to 184 billion units reflecting continued strong volume performances in Eastern Europe, Asia and the Middle East. This strong performance was partially offset by the timing of shipments and distortions in trade purchasing patterns in the Czech Republic, Hungary, Spain and Thailand.

In the Czech Republic, shipment volume was down versus the prior year when the trade significantly increased their inventories ahead of an excise tax increase. In Hungary, we restructured our distribution network during this quarter, which resulted in a reduction of wholesale inventories.

Shipment volume was down significantly reflecting concentration at the wholesale level from approximately at 100 to 30 depots.

In Spain,

, the

distributor, increased its inventories last year from a 10 day to 23 day duration.

And thus we face the difficult comparison this quarter. Importantly, in-market sales and market share are both up in Spain.

Share was up half a point to 32.7 percent.

In Thailand, shipment comparisons are distorted by last year's heavy trade purchases in March ahead of a quarter-end excise tax driven price increase.

In addition, volume was adversely impacted by continued economic weakness in Egypt, Romania and worldwide duty free. Absent these factors, unit volume would have exceeded our four percent growth target.

Turning now to PMI's performance by region. I'll begin with Western Europe.

Total volume in Western Europe was down slightly -- .4 percentage. Strong volume gains in Austria, Belgium, France, Luxembourg, Portugal, the Netherlands and the United Kingdom were more than offset by the difficult comparison I just mentioned in Spain.

In Germany, volume was flat and share was 36.6 percent reflecting the third consecutive quarter of stability. In fact, share was up marginally versus last year's third and fourth quarter signaling a slow-down in the growth of trade brands as price gaps have narrowed and our new marketing programs are showing early signs of progress.

In Western Europe, PMI total market share in the first quarter rose .2 percentage points to 39.5 percent. Marlboro chief share gains in every single market in Western Europe except Germany and Greece.

Turning to Central Europe, Middle East and Africa. Volume was down 3.6 percent as gains in the Middle East and Africa were more than offset by declines in the Czech Republic, Egypt, Hungary and Romania that I mentioned earlier.

As well as a decline in Poland reflecting intense price competition.

We have repositioned the price of L&M the face of economic weakness and intense price competition in Turkey, Romania and Poland.

And the brand is performing strongly in all three markets. In fact, L&M is now the number one selling brand in Poland.

In Eastern Europe, volume rose nearly 16 percent driven by outstanding gains in Russia, the Ukraine and Lithuania. In Asia, volume was up a solid 7.2 percent driven by Marlboro gains in Indonesia, Korea, Japan, the Philippines and Taiwan.

Partially offset by the timing of shipments in Thailand, which I mentioned earlier. In Japan, market share advanced 1.3 share points to a record 23.4 percent.

Driven by the success of Lark One and Lark Milds Menthol and the continued growth of Marlboro.

In Latin America volume was up .3 percent due to modest increases in Argentina, Brazil and Mexico.

In Mexico, Marlboro's share grew 1.8 points to 42.6 percent. In Argentina, the Philip Morris brand continued to capture down traders, helping our total share reach a record 65 percent.

Philip Morris International had a solid quarter and grew share in most of its top 25 income markets with increases of nearly one point or more in Argentina, Belgium, France, Israel, Italy, Japan, Malaysia, Mexico, the Netherlands, Russia, Switzerland, Turkey, and the Ukraine.

Turning to our food business.

As Nick mentioned, Kraft reported its results separately yesterday. So I will touch only on the highlights of their performance.

Kraft Foods had a good quarter both in North America and internationally. Worldwide Kraft Foods volume increased 2.5 percent on an underlying basis with a 2.5 percent increase in both North America and International.

Worldwide operating companies income was up 7.4 percent. Kraft Foods North America delivered operating companies income growth of 7.2 percent driven by volume gains and productivity as well as synergy savings partially offset by higher diary commodity costs.

Kraft Foods International operating companies income was up 8.4 percent due to continued productivity savings and Nabisco synergies.

Turning now to our beer business.

Operating companies income for Miller Brewing Company increased 4.8 percent to $130 million driven by high shipments for its core brands and the successful introduction of Skyy Blue. Miller's new entry in the growing flavored malt beverage category.

Shipment volume was up 1.6 percent reflecting the growth of Miller Lite, Miller High Life, and Foster's. Skyy Blue's volume essentially offset declines in Miller's non-core, lower priced brands.

Miller's income gain this quarter was achieved in spite of a significant increase in marketing to roll out Skyy Blue as well as to increase support for Miller Lite and Miller High Life.

Summing up on Miller, we're encouraged by its improved performance in the quarter.

Miller's making good progress with it's focus on the quality of advertising, new product innovations, improved sales execution and better distribution, particularly for its core brands. It is the second quarter of better performance for Miller and we feel that the turnaround is on plan.

Looking forward, we continue to project full-year 2002 underlying diluted earnings per share growth in the range of nine to 11 percent. As we said in January, the rate of earnings per share growth is expected to be stronger in the second half than in the first half of the year principally due to the impact of currency.

Currency, economic weakness in certain international markets and other factors in the forward- looking and cautionary statement sections of our press release represent continuing risks to this projection.

In summary, we had a solid first quarter.

Our domestic tobacco business delivered higher income and continued to grow retail share for Marlboro in a very competitive environment. Our international tobacco business delivered a solid income gain on a constant currency basis and achieved solid underlying volume growth.

Our beer business continued to show improvement with gains in both volume and income for the second quarter in a row. Our worldwide food business performed well delivering solid income gains and volume growth.

Finally and importantly, during the first quarter we repurchased 21.5 million shares of common stock at a cost of $1.1 billion. This concludes my remarks and I'll be happy to take your questions.

Thank you. The floor is now open for questions.

I'd like to remind our audience, if you do have a question or comment, please press one followed by a four on your touch-tone phone.

And our first question is coming from

of Mortgage Family.

Good morning, Louis.

Good morning, David.

How are you?

I'm good. And you?

Very well, thank you.

A couple things, Louis.

One strategic question I'm increasingly getting from investors is as you become and transition into CEO -- the CEO role -- should investors expect any material change in the company's strategic direction? I assume not, but I wanted to ask the question.

The simple answer is, no. The strategies that we have adopted over the last five years have worked very well.

So why change them? We are growing well.

We have strong momentum. And I think we may tweak one or two things as the environment changes, but the fundamental strategies will remain the same and those that have served us very well in the past.

OK. And Louis, I wanted to secondly ask you about the -- within domestic tobacco the 70 basis point retail market share erosion in the premium segment.

How concerned are you by that? And although the greater changes in the settlement dynamics play out to your favor in '03 and '04, I was curious as to whether you think the payment that the subsequent participating companies had to make this Monday may change their market place behavior over the next couple of months?

Well, we never like to see the discount segment growing,

. But we still think that the premium segment has remained pretty resilient.

If you go back to the fourth quarter of 2000, it's only down about .2 or .3. So it has been very resilient in view of the significant price increases.

Now, I think going forward, as you mentioned, as they start paying the

and their payments ratchet up and our payments actually come down in 2003, that's clearly good news.

Right.

OK, and then last. Louis, is 300 to 350 million still the right range to think about with respect to the adverse foreign currency operating

impact for the full-year?

I would say, yes. Probably on the slightly higher end of that,

, given the Argentinian Peso, which I think this morning was at about 285.

OK. Thanks a lot, Louis.

You're welcome.

Thank you. Our next question is coming from

of Salomon Smith Barney.

Good morning, Louis.

Hi, Bonnie.

How are you?

Fine, thanks. I just had one question to start off with on PM USA.

You mentioned that the trade pricing credits impacted your operating income growth ...

Yes.

... which was really only four percent.

You said without that it'd be six percent. Can you give us a little bit more color on what that is exactly?

Does it have to do with the fact that you announced your price increase on the 28th of March?

Correct.

And ...

When we announce a price increase we usually send the credit memo to the trade. We've done that historically.

So essentially because the price increase was announced a the end of the

we incurred the charge for that credit memo. And therefore, absent that feature, operating companies income would have been 6.3 percent up.

Will that effect the second quarter at all? It won't, will it?

No, clearly it would be favorable to the second quarter because we took the cost of the credit memo in the first quarter, which otherwise would have accompanied the price increase that takes effect in the second quarter.

OK.

So we can expect to see a stronger second quarter in terms of reported operating income for PM USA?

Absent other features, you're correct.

OK. And then just in terms of inventories.

You mentioned that, of course, the trade was building probably, you know, maybe because of the fourth quarter. Also maybe because they were expecting a price increase.

And also, the inventories were high because you shipped your Marlboro

to free promotion, I believe, during the first quarter. You had it, you know, it's really being sold right now during April.

Correct. As have others.

You recall that at the end of the year industry inventories,

, were at a historical low. We estimated that they were about six to six-and-a-half billion units.

Our estimate is at the end of the quarter, inventories have grown to 12.5 billion units. So up about six billion.

And 12.5 is slightly higher than the average, historically.

OK.

But where do you see inventory levels right now? Now that we're into April?

They're starting to come down.

OK.

And then I just had, also, one final question on Poland. You mentioned that your volume was down.

Can you give us an indication of how much volume was down and just maybe a little bit more detail on what's going on in that market since I believe it's one of your top, maybe, six or seven markets in terms of volume. And then maybe just your market share in Poland right now.

Yeah, it's probably in the top 10.

Top 10.

Our volume was down six percent,

. And our share took a hit.

We were down about three share points. What is happening is that there's intense price war at the low price level.

Essentially a brand called

, which is in the 25's format. And that has eaten into our

and

brands.

We clearly have plans to address the situation.

But Poland, as you probably remember, for the last couple of years has had pretty constant price wars and price skirmishes every six months or so.

And we're going through one of those now. But we feel pretty confident going forward that we have the brand portfolio to increase share and we feel pretty confident that as the year unfolds that negative volume performance will turn to positive.

OK. And you mentioned that your share was down three points.

Where is it at, then? The market share.

The market share is about 32 percent.

All right, thanks, Louis.

Thank you. Our next question is coming from

of Prudential Securities.

Good morning.

Hi, Rob.

A quick question. You mentioned -- and then following up on

question about retail promotions and the domestic market.

I know

ships an April promotion in March similar to your promotion. And we're also lopping the quarter, really, the first quarter where RJR introduced a good bit of free product into the market.

Is there any other distortion that I might be missing?

No, those are the principle ones.

But in terms of actual shipments, Rob, you should remember that last year the first quarter was impacted by huge promotional shipments in December of 2000.

But that's

the RJR free product.

That's correct.

Excellent.

And a sort of more strategic question on the domestic market. I mean, I think investors have come to expect -- and despite the fact that you've always said that you manage the business for what's fair.

You know, the optimal combination of share and profitability. I think investors have come to expect a level of share performance from the business.

And with a 51 percent share of the market. Do you think that you're going to reach a point where a share gain is no longer a reasonable expectation?

I don't think so, Rob. We have the objective of continuing to gain share.

You know, about .3, .5 every year. Between .3 and .5.

We continue to believe we can achieve that. And the four focus brands are performing very strongly.

And as you mentioned, we also balance that share growth and insure that we have solid operating income growth in the face of an environment where most of our competitors are not growing the operating companies income.

One final question.

The 1.1 billion in share repurchase in the first quarter. Is that a number that we can expect will be consistent over the four quarters of 2002?

Rob, our practice has been to sort of equalize our buyback program over the years. So I think the first quarter buyback is a good indication of what you'll see going forward.

Excellent. Thank you.

Thank you, Rob.

Thank you.

Our next question is coming from

of Tobacco Analysts.

Louis, hi.

It's

.

Hi,

. How are you?

I'm well. How are you doing?

Very well, thank you.

Good.

Louis, if we -- if we look at the US market clearly your four drive brands or four core brands were up 70 basis points. You said at retail PM USA was flat.

Did you decelerate in any marked sense the non-core brands? Because clearly, they must have dropped reasonably to offset the growth that you had in your drive brands.

Yeah.

As I mentioned earlier

, we faced a very, very competitive environment in the first quarter. And clearly Merit, Benson & Hedges, and Cambridge suffered within that intense, competitive environment because they're brands that we don't really support.

And we do that quite consciously.

OK.

So the -- perhaps the declines in this quarter for those brands are perhaps indicative for the remainder of the year?

I would say that's probably a safe bet, yes.

And hopefully on the four drive brands that they continue to grow in the way they did this quarter.

Correct.

Louis, you spoke about or in the press release you spoke about one to two percent volumes on an underlying basis, the industry being down this quarter. What do you expect for the full year?

Is it also one to two percent for the industry? And also, I am interested in one number, but on a reported basis -- in other words, on an actual basis -- what do you expect the US industry to do this year?

I would say -- to answer your first question -- that we believe industry consumption will be down one-and-a-half to two percent during the year.

Right.

On a reported basis, we anticipate that industry volumes will be up because of the very low inventories we faced at the end of the year. And they'll be up between two and three percent is our best estimate.

With the biggest impact, obviously, being the first quarter?

I would think, yes.

As well as the fourth quarter.

OK. OK.

Louis, moving on a little bit. Within Western Europe your market share gains were 20 basis points.

Yet, if we look at that business over the last almost decade you've been reporting annual gains of somewhere between perhaps 75 basis points and 100 basis points annually. Should we still be looking for that range of growth?

That's clearly our objective,

. As I mentioned, Spain was a distortion so that clearly hurt the number.

I should also mention that Italy was also distorted, which we didn't really highlight because there are always pluses and minuses. But Italy last year had strong shipments in anticipation of a tax driven price increase on April 1.

So, whilst our share in Italy was very strong, industry shipments were down and our volume was down two percent.

OK.

Louis, you also mentioned some softness of Marlboro in Greece. Was there anything material we should look at there?

No, nothing material.

OK.

One other point. Just philosophically, you've seen Austria

be bought by

. You've seen

be bought by Imperial Tobacco.

It wasn't very long ago that you renegotiated you agreement with Japan Tobacco. With all these agreements, just generally and perhaps philosophically, have you been able to enjoy higher margins as a result of the renegotiations of the licensing agreements you have?

Yes, and it's been part of our strategy over the years. And we continue to renegotiate these agreements when they're up for renegotiations to improve our margins.

That is the case with Spain, Italy, Austria, and Japan.

I see.

And then last question, Louis. Can you give us any flavor on what the press has reported on Miller Beer and perhaps your confidence of doing a deal in the near future or what perhaps you would hope to achieve.

Any color at all that you can give us?

No, I can't give you any color,

.

We did issue an announcement back on April 5 concerning that we were in discussions with

regarding a potential transaction involving Miller. And there's no certainty that those discussions will lead to any agreement.

As the business has shown improved performance both last quarter and this quarter, do you remain really enthusiastic about selling it? Or has that changed -- has your view changed at all as you've seen the performance improve?

Well,

, we set a transaction and we are pleased with the performance. That's it's improving.

But this is also consistent, very much, with what we said previously which is why we will be focused on improving the business and the results are starting to show. And

and his team are doing a great job.

We're not oblivious to what's going on in the whole brewing industry and we will explore any transactions that we deem favorable both to our shareholders and to the continued growth of Miller on a global basis.

OK.

Well, terrific, Louis, and thanks. Good luck on getting that done sooner rather than later.

Thanks a lot,

.

OK.

Thank you. Our next question is coming from

of AG Edwards.

Good morning.

Hi,

.

Hi, Louis. I just have a couple questions for you.

My first one is the gap between price -- from premium and discount prices. Can you give me a rough estimate of where that stands today?

Has that changed some as the price increases?

It hasn't changed dramatically,

.

In the first the quarter, premium brands were 3.30. Brands at discount were 2.72 and smaller manufacturers were 2.19.

And that was pretty well in line with the fourth quarter. And it's still a bit early because of the credit memo and the price promotions in the market now to have a feel for where the prices will settle in the second quarter.

Is there a feeling that that will be narrow, more so?

Yeah, and it's very dependent on the

payments in the states going after both the subsequent participating manufacturers.

And very importantly, the non-participating manufacturers.

Right.

OK, my next question was do we look at the premium share being down for the industry this quarter? Is it more a function of the economy or more so of price?

Do you have any feeling there on what's going on?

The economy is clearly playing a role. As

said yesterday in discussing our food results, we have seen a pick up in the food business in private labels.

So, clearly, when the economy weakens that helps the discount segment. And we would hope as the economy recovers and the consumer confidence recovers that that should help the premium segment.

OK. And my last question here.

In markets like Poland, for example, and we've this about Germany in the past. I know it's stabilized there as well.

That you had intense price discounting. Is there any thought behind repositioning brands or perhaps offering new brands that compete in that lower segment to maintain share?

We will do that to the extent that whatever segment we're in proves to be lucrative. And, in fact, as I mentioned in my remarks, we did reposition L&M in Poland towards the latter half of last year.

And L&M is performing extremely well. Beyond our expectations.

And it's now the number one brand in Poland -- growing very strongly.

OK.

I appreciate that. Thank you.

You're welcome.

Thank you.

Our next question is coming from

of

.

Good morning.

Hi,

. How are you?

OK, thanks. A couple questions.

Given that there are many difficult international economies is there any reason we need to temper our expectations for growth of the American blend cigarette segment? Outside of the US?

Not the overall American blend segment,

. What we are seeing is a deterioration in the mix.

Poland being one example. But we're also seeing it markets such as Singapore and Hong Kong where there has been a deterioration in the mix.

And the below premium price segment is growing.

OK, but you still look for that segment to grow at low single digits?

Is that fair for this year?

Yeah, I would say the usual two to three percent.

OK. And then are you any closer to launching a reduced risk cigarette in the US?

We continue to work very hard on that,

. And you'll be one of the first to know when we're ready to launch.

How about expanding the use of

? How close are you to doing that?

Well, as you know, it's on Merit nationwide and we continue to learn from that. And we continue to try to improve it.

Because you know New York state is scheduled to put in its regulations by the end of June of next year at the latest so we'll see how things unravel between now and then.

Anything we should expect this year?

In terms of?

In terms of

?

No, I don't think so.

OK, thank you.

Thank you,

.

Thank you.

Our next question is coming from

of Wellington Management.

Hi, Louis.

Good morning.

Hi,

, how are you?

Fine, thank you. Louis, I was intrigued with your comment there are a couple of things you might tweak going forward.

Might one of them be the pace of share repurchase? I'm just looking at your fixed charged coverage.

It remains quite high even with the pace of share repurchase right now. And unless your making acquisitions in the tobacco area or related areas with the tobacco cash flow, not the food cash flow, it seems like that fixed charge coverage is going to stay where it is or even go higher.

Why wouldn't you want to be increasing your share repurchase activity here?

, we've always been -- and I think you know this -- very shareholder friendly in terms of our dividends and buyback programs.

And I wouldn't read too much into the tweak. That will very much depend on the environment we face.

But clearly, going forward we will continue to be generous in our buyback programs.

Do you see maintaining the current level of liquidity and fixed charge coverage?

Well, we've also said that's just the way Philip Morris has been built in the past over with acquisitions. But going forward, acquisitions will continue to be a part of our strategy.

So we like to keep a certain

pattern.

OK, fine. Thank you.

You're welcome,

.

Thank you.

Our question is coming from

of

Partners.

Good morning, Louis.

Hi, Peter.

All the strategic questions have been answered.

Can I just ask you on the excise tax. Can you just give me the breakdown for where that is applied?

Yes. I'll start with Philip Morris USA.

It's 1028. Philip Morris International is 3334.

Miller was 213. Total 4575.

Perfect. Great.

Do you have it for last year just for comparability?

For the quarter -- actually, I don't have it in front of me.

Not to worry. That's great.

I appreciate it.

I'll make sure somebody gets you the numbers.

That's OK. I'll get them when I need them.

Thanks so much.

You're welcome.

I'd like to remind our audience, if you do have a question or a comment, please press one followed by four on your touch-tone phone.

And our next question is a follow-up from

of Morgan Stanley.

Louis, I was curious for your read on the Japanese cigarette market. Do you think it's entered a period now of modest, secular volume decline?

Or are we seeing the impact of a change towards smaller vendors in the market?

The market is down just short of two percent,

.

And has been down consistently over the last 18 months or so month-after-month. Our sense is that's part of the economy down there.

We've tried to find out what exactly is going on. It's certainly not price.

And our sense is that the economy and the weakness in Japan, generally, is impacting consumption.

OK.

And then if we switch to Germany for one second, Louis. What do you think the likelihood of an increase in the minimum taxes in Germany between now and the election?

Is it pretty remote?

Unlikely, yeah.

As you know, there was an increase in the minimum in November. The first quarter you didn't get the full picture because the prices in January didn't really reflect the new prices.

But we've seen that the trade brands month-after-month have actually come down. So in January I think they were around 15.6 percent.

In February they were 15.4 and in March they were 15.3. So that's a pretty good signal.

Right. OK, thank you very much.

I think, you know, the second quarter will still be a hard comparison, but hopefully first quarter going forward we should be having good comparisons.

Thanks.

You're welcome.

Thank you.

Our next question is coming from

of

.

Hi, Louis.

Hi, Mark. How are you?

Well, thanks. And you?

Well, thank you.

I wanted to look a little deeper if we could in the USA business.

With the one percent volume gain even normalizing for, you know, the trade credit and given the pricing that the industry has taken it would seem to me that there would be potential for more than six percent operations profit growth.

And I assume that the fact that we're not seeing that has to do with this increased competitive environment that you're talking about.

So I wonder if you could really give us a better sense of just sort of, you know, what you're seeing with this intense -- as you put it -- intense competitive environment? And in light of that competitive environment, you know, how you've come to -- how you're thinking about the strategy of raising prices and then raising promotional levels around Marlboro.

Why that's the right way to manage the brand as opposed to, you know, just adopting a, you know, maybe a more conservative front- line price strategy in its place.

OK.

I think to refer to the intense competitive environment is that we've seen a significant increase both in money off incidents as well as product promotional incidents. And quite dramatic increases versus certain brands.

I mean, if I could just give one example.

had a buy one get one free promotion in the quarter that was quite significant.

And their share increased quite dramatically behind that promotion.

Newport has intensified its money off incidents as well as its free product promotions.

Winston-Camel, the same thing. So you are seeing a lot of promotional product.

I think the good news, though, is that if I take our focus brands, they showed strong resilience and growth and they showed growth throughout all trade channels,

, which is very important.

I've read your reports and you quite often say that you're concerned that all other manufacturers discounts are growing still at 30 percent given your information sources.

We think and have tried to reconcile our data with yours and we feel that maybe your information is very much skewed to supermarkets and drugstores, which are the scanning information. And those clearly distort the picture totally for the market because they only represent about 14 percent of total consumption.

Yeah, actually, our IRI data has about 90 percent coverage of the outlets on volume. It's true that it doesn't have that on price, but it has it on volume.

Yeah.

What do you guys think the discount

are growing?

It's about 19 percent in the first quarter.

OK.

But to address your most substantive question on strategy. Listen, we feel we have the infrastructure and we believe we have the most efficient consumer promotions and I think we get the most effective promotions.

And as such we believe that the current strategy benefits us given the coverage that we have and our very strong sales force which is really unmatched by the competition.

Does it raise any question -- and I mean, I'm sure you've analyzed this.

Does it raise any questions about whether you're really now educating Marlboro consumers to, you know, sort of buy when, you know, and load up when on promotion?

No, because we think that there is still a significant equity behind Marlboro,

, and that's a balance we look at very, very carefully.

All right. Secondly, and separately to follow-up on, I guess,

question about

.

You know, and I know you don't want to comment about a specific transaction. But it does seem that you have opened your mind to potentially having Philip Morris take a minority position in a, you know, in a company.

Whereas in the past you have looked at really wanting to own assets and manage them yourself.

Is that something that's different in your thinking in the last year?

And that we could expect more of in other instances?

I don't think you should read too much into that,

.

I think in talking theoretically with your question -- even if we were to take a minority stake, Philip Morris would be the principal shareholder. And it gives us considerable flexibility going forward as to what we want to do.

OK. So basically that would be a transactional situation not something we'd expect to see more broad scale in the way you approach investments and other things in the future?

Right.

OK, thanks.

Thank you. Our next question is a follow-up from

of Tobacco Analysts.

Hi, Louis.

again.

Hi,

.

Louis, I just -- there's one quick number I was looking for.

It would be going back to the

of Germany, I suppose.

but if we exclude the discount segment of the market and simply looked at the premium statement of the market, which is clearly critical to you. How did your share performance do both within that segment and Marlboro within that segment this quarter?

And perhaps you could contrast it even with the previous quarter or this time last year.

We've actually grown .6 share points,

.

And we feel pretty good about that. And it's the first time in awhile that our share of the non-trade brands has grown that strongly.

Right. And there was this ...

In quite awhile.

... there was this major -- not repositioning, but a new media campaign and a lot of new images on Marlboro that came, I think, in the second half of last year past the summer in Germany. Is it largely that that you think is contributing to the growth today?

We think so. We've clearly seen consumer research, especially on Marlboro Reds as indications that there is improvement.

But I would also say that the narrowing of the price gaps has also helped. But clearly within the premium segment, Marlboro seems to be picking up and doing better than it has been for some time.

Especially against West, Lucky Strike and

.

Are those three brands -- in the same period -- have they stabilized?

Are they down slightly? I mean, how have they performed relative to Marlboro?

is actually down.

continues to grow, but not as strongly as before.

Right.

And Lucky Strike also continues to grow, but is sort of flat-ish.

OK. I mean, one other quick point just theoretically on Germany.

Imperial having just bought

it has taught me a little bit about introducing a, you know, a product that they would actually describe as a brand while the

being a generic, cheap product but at the generic price. If that was to happen, like they did with the

offering in the UK, what would you expect to see happen to the discount segments of the market in Germany?

I'm not sure that that would necessarily give great emphasis to that segment,

.

Right.

Imperial has a tradition of launching brands in the low price segment. The fact is, there is a wide proliferation of brands at the 230 level.

And very importantly, you need to get distribution within the trade and these are trade brands. So in most instances, they actually own the brand.

So for Imperial to get distribution will not be that easy.

And even if it did I would have thought -- I would have guessed -- that

would pick up some share some share from within the trade rather than actually getting customers to down-trade.

Yeah. I'd also say that, you know, Germany is a market that is very difficult to launch brands in.

Right.

In fact, I can't think of one brand that has been launched in the 50 years that has done anything.

In fact

, Lucky Strike and West have been there for as long as I can remember.

OK.

OK, well, it's certainly good news on the Marlboro front.

Yeah, we're pleased with that.

OK. Thanks very much, Louis.

You're welcome,

.

There appears to be no further questions at this time and I would like to turn the floor back over to Mr. Rolli.

OK. Thank you very much for joining us this morning.

We look forward to talking again next quarter. And as usual, we'll be sending out a notice in early July with a date and dial-in information for the 2002 Philip Morris second quarter conference call.

Again, thank you very much for joining us. Have a great day.

Thank you, ladies and gentlemen, for your participation. You may disconnect your lines at this time and have a wonderful day.