奧馳亞 (MO) 2002 Q2 法說會逐字稿

Good morning, and welcome to the Philip Morris 2002 second quarter earnings conference call.

My name is Mandy and I'll your conference call operator.

Today's call is scheduled to last about one hour including marks by Philip Morris and a question and answer question section.

Please dial one followed by four on the touch tone phone.

I'll now turn the meeting over to Mr. Nick Rolli, Vice President of Investor Relations and Financial Communications for Philip Morris.

Good morning everyone and thank you for joining us.

Today Mr. Denny Devitre, Senior Vice President and Chief Financial Officer of Philip Morris Companies, Inc. will be hosting this call.

Before I introduce Denny, I'd like to make a few brief announcements.

First as you know, we issued our second quarter earnings release earlier this morning.

And if you don't have a copy, you can find it in the investor relations section of our website.

Second, the call will be limited to a discussion of our business results for the second quarter of 2002.

We will not be covering litigation or regulatory issues.

As has been our long standing practice in to assist investors in measuring our real performance, our results discussed today treat the Kraft Food initial public offering as if it occurred on January 1st, 2001, and the cessation of good will amortization, under a new U.S. accounting standard as if it was adopted for the full year 2001.

Third, Kraft Foods announced it's second 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.

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 review of the various factors that could cause actual results to differ from projections.

Finally, media representatives who follow Philip Morris are on the call in a listen-only mode.

And now it's my pleasure to introduce Denny Devitre.

Denny?

Thank you Nick, and good morning everyone.

I'm pleased to review our 2002 second quarter results.

Before I review the performance of our operating companies, I'm particularly pleased to say that we delivered solid earnings per share performance in the quarter which reflects the strong business fundamentals enjoyed by our world wide tobacco and food businesses.

We merged Miller Brewing Company into South African brewers to create SAB Miller and the transaction closed on the 9th of July.

The assumption of Miller Brewing Company debt, resulted in cash flow of approximately $1.7 billion for Philip Morris, which will be used to accelerate our existing share repurchase program, in the second half of this year.

Accordingly, total share repurchases for the full year will exceed $6 billion.

Turning now to our second quarter results, operating companies income rose 6% to $4.9 billion, despite an adverse currency impact of $66 million in the quarter.

Excluding this impact, operating company's income would have been up 7.5%.

Diluted earnings per share of $1.24 was up 11.7% or 13 cents ahead of the prior year.

On a constant currency basis, earnings per share would have been up 13.5%.

The 11.7% EPS growth was driven by, base business growth of 10.8% or 12 cents, and the favorable impact of the reduction in our shares outstanding of 2.7% or 3 cents as a result of our share repurchase program.

These factors were partially offset by currency which reduced earnings per share by 1.8% or 2 cents.

I will now review each operating company's performance, starting with Philip Morris USA, our domestic tobacco company.

In the second quarter, Philip Morris USA's operating company's income increased 5.1%, to $1.5 billion, driven by higher pricing and lower promotional spending, partially offset by lower shipment volume.

On an unadjusted basis, shipments were down 13.8.%.

However, shipments were adversely affected by trade inventory depletions, following our April 2002 list price increase, and year over year timing of promotions.

Absent these factors, we estimate that Philip Morris USA's shipment volume, declined by approximately 4%. [INAUDIBLE] USA's income increased in the quarter, despite the decline in shipments, as it benefited from higher pricing and lower promotional spending, as well as the timing of trade credit memos that we referred to in the first quarter.

According to data from Information Resources Inc., Capstone, which we estimate represents approximately 87% of industry volume, Philip Morris USA's retail share declined 0.7 points to 50.2%, due primarily to a 0.9 share point decline in our non-supported brands including Benson, Hedges, Merit and Cambridge.

However, the combined retail share for PM USA's four focus brand, Marlboro, Parliament, Virginia Slims and Basic, was up 0.2 points to 47.3%, fueled by the growth of Marlboro and Parliament which increased their combined retail share by 0.4 share points.

Given our lower premium brand promotional spending in the quarter, and despite aggressive spending by competitors and deep discount category growth, we are very pleased that both Marlboro and Parliament increased share at retail.

Overall, Philip Morris USA's retail share of the premium segment grew 0.6 share points to 62.1% in the second quarter.

A solid performance in a very competitive environment.

Marlboro's retail share grew 0.1% to 38.3%.

Parliament's retail share was up 0.3 points to 1.5%.

While Virginia Slims retail share was down slightly to 2.6%.

Basic, Philip Morris USA's major discount brand declined slightly at retail to 4.9%.

As we said in our earnings release, the industry's premium segment declined 1 point to 72.6% in this quarter.

This was partly due to Philip Morris USA's lower promotional spending in the quarter and its disproportionately high share of the premium segment.

Conversely, the discount segment grew 1% in the second quarter to 27.4%.

Within this, the deep discount segment was up 1.5 points, driven in part by the growth of cheap import, and now holds a market share of 7.9%.

As mentioned earlier, Philip Morris USA's promotional support was reduced in the second quarter, and we believe that the resulting wider price gaps helped to fuel the share growth of the discount category.

We plan to increase our promotional spending in the second half of the year, and to expand our presence at the point of sale for our four focus brands.

Furthermore for 2003, we anticipate that there will be a narrowing of the difference between the MSA payments of the original participating manufacturers, and those of the subsequence participating manufacturers, and nonparticipating manufacturers on a per fact basis.

We will stay the course with our strategy of striking an optimal balance between long-term share and income growth.

From time to time, Philip Morris USA's results may vary, based on the competition in the marketplace.

But as we have done historically, we will concentrate on Marlboro and our other three focus brands to deliver long-term market share and income growth.

Turning now to international and tobacco business.

Philip Morris international operating companies's income of $1.4 billion increased 5.9%, driven by volume gains and higher pricing, partially offset by the impact of unfavorable currency.

Excluding unfavorable currency of $58 million in the quarter, $36 million of which is attributable to the devaluation of the Argentine peso.

PMI operating company's income would have grown10.2%.

Shipment volume increased 3.1%, to 185.5 billion units, reflecting strong volume growth in Asia, Eastern Europe and Turkey.

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

Total volume in Western Europe was down 2%, due primarily to the timing of shipments to Italy, France and Portugal; however, PMI's share in Western Europe increased 0.5 points to 39.3% fueled by Marlboro gains in most markets.

Importantly PMI's market share in Germany was up 0.1 points to 37.4%.

We are very pleased with this result, as this is the first time in 16 quarters that PMI has grown share in this important market.

Turning to Central Europe, Middle East and Africa, volume was up 4.1%, as strong gains in Turkey, Romania and the Czech Republic were partially offset by declines in Egypt and Poland, reflected continued intense price competition, as well as Saudi Arabia due partly to the timing of shipments.

In Eastern Europe volume was up an impressive 9.3%, driven by the continued growth of our outstanding portfolio of brands in Russia, partially offset by declines in Lithuania and the Ukraine reflecting intense price competition.

In Asia, volume grew 6.7%, driven by gains in Indonesia, Taiwan and Thailand. and the favorable timing of shipments to Japan, partially offset by declines in Korea, mainly due to heightened competition and trade inventory depletions.

And the Philippines reflecting the weak economy and the growth of the low price segment.

In Japan, market share advanced 1.1 points to a record 23.6%, driven by the continued strong growth of both Lark and Marlboro.

In Latin America, volume was up 1.2% due to Mexico and Brazil, partially offset by lower volume in Venezuela.

In Mexico, our share increased 0.7 points to 58.5% driven by Marlboro.

In Argentina, our total share advanced by over one share point to a record 65.3% driven by the continued growth of the Philip Morris brand.

PMI had a good quarter and grew share in most of it's major markets, with particularly strong gains in Belgium, the Czech Republic, France, Greece, Indonesia, Japan, Malaysia, Mexico, Russia, Spain, Taiwan, Thailand, Turkey, and Argentina.

We are very confident in the future of our international tobacco business, with Marlboro as well as a superior brand portfolio of our other international brands, leading and growing positions in the key growth segments of the American blend and low tar-style cigarettes, and our outstanding global scale and infrastructure, PMI has what it takes to deliver strong volume and income performance going forward.

Let me now turn to our food business.

As mentioned earlier, Kraft Foods reported its results separately yesterday.

So I will touch only on the highlights of their performance.

Kraft Foods had a solid quarter both in North America and internationally.

World wide Kraft Foods volume increased 2.1% on an underlying basis.

In North America, volume increased 2%, due primarily to strong results in beverages, desserts and cereals and in biscuits, snacks and confectionery including contributions from new products.

Internationally volume was up 2.4% benefiting from acquisitions.

Growth and developing markets and new products.

Kraft Foods world wide operating company's income was up 6% to $1.8 billion.

Kraft Foods North America delivered operating companies income growth of 6%, driven by volume growth and productivity and cinergy savings.

Kraft Foods international operating company's income was up 6%, resulting from productivity and cinergy savings.

Turning now to beer.

Financial results for Miller Brewing Company are included in our second quarter 2002 results for Philip Morris Company's Inc.

However, given that Miller's merger into SAB was completed in early July, Philip Morris will no longer consolidate Miller's results into Philip Morris company's financial statements.

Subsequently we will account for our investment in SAB Miller under the equity method of accounting.

In the second quarter, operating companies income for Miller Brewing Company increased 0.6%, to $169 million, driven to higher pricing, partially offset by significantly increased marketing expenses, due mainly to the launch of several new flavored malt beverages.

Domestic beer shipments declined 2.5% to 10.9 million barrels, reflecting industry softness due to unfavorable weather conditions and lower shipments for both Miller';s below premium and core brands.

Partially offset by the continued success of Skyy Blue and the launch [INAUDIBLE] Citrona and Salsa DiAblo flavored malt beverages.

International beer volume was up substantially increasing by 15%, driven primarily by gains in Mexico, Russia and the United Kingdom.

In summery, Philip Morris Company's Inc., had another good quarter.

Our domestic tobacco business delivered higher income and continued to grow combined retail share for Marlboro and our other focus brands in a very competitive environment.

Our international tobacco business delivered over 10% income growth on a constant currency basis and gained share in most of it's stock markets.

Our world wide food business continued to perform well, delivering solid income gains and volume growth.

Looking ahead, we project that our full year 2002 underlying Diluted earnings per share growth, will be at the lower end of our previously disclosed range of 9%-11%.

We have decided to invest approximately $350 million to support our premium brands in both our domestic and international tobacco businesses.

With the aim of enhancing market share growth in the United States, and select international markets around the world.

This investment will be partially funded by currency favorability, driven by the strengthening of the Euro that we expect to realize by the second half of the year.

Let me put the size of this incremental investment into perspective.

We are investing approximately $350 million in tobacco businesses that generated over $11 billion in underlying operating company's income last year.

Even with this incremental investment in our domestic and international tobacco businesses, we still expect our full year 2002 underlying Diluted earnings per share growth to be in the range of our original guidance of 9%-11%.

Finally and very importantly, during the first half of this year, we repurchased 45 million shares of common stock at a cost of $2.3 billion, and we plan to spend close to $4 billion in the second half of this year, bringing the total to over $6 billion.

This concludes my remarks, and now I'll be happy to take your questions.

Thank you.

The floor is now open for questions.

If you have a question or a comment, we ask you to please press the numbers 1 followed by 4 on your touch tone telephone at this time.

If at any point your question has been answered, you may remove yourself from the cue by pressing the pound key.

We do ask all participants to please pick up their hand sets while posing their question to ensure optimum sound quality.

Thank you, our first question is coming from David Adellman of Morgan Stanley.

Please state your question.

Good morning, Denny

Good morning, David.

I wanted to ask a few things about the domestic tobacco business.

First the 7.9 share you alluded to, among the smaller deep discount manufacturers, how much of that share to do you estimate is held by what are non-compliant, either SPM's or NPM's?

That's a difficult question to answer, David, in terms of non-compliance.

You know, we don't know really how many of them or what proportion of that share is non-compliant , and I think it would be wrong of me to make any estimate.

There is a portion of that, we estimate 2-3% which are accounted for by cheap imports coming in from all over the world, you know from countries like China, Columbia, India, and a number of markets like that.

We really don't know whether they are in compliance, you know, we are working hard to figure out if they are in compliance or not.

Okay.

Secondly, is the current competitive environment in the U.S. causing you to reevaluate how much of the 2003 MSA cost reduction can fall to the bottom line for the company?

Well, we've always said, David, that, you know, as the time grows closer to next year and as we come to the bridge which we have to cross into next year, we'll decide, you know, how much of that step down goes to -- comes through to the bottom line and how much is reinvested.

It entirely depends on the competitive situation.

You know, based on today's situation, I'd have to say that the market is competitive, but we'll have to see how it develops over the next, you know, 6-18 months.

Ok, and then lastly Denny, the company's prior currency forecast at the operating income line was for a $3-350 million adverse variance this year.

What's the current outlook?

How much reduced is that?

At the end of the first quarter I think we gave a number that where we said it would be close $350 million.

We are now saying it's closer to $250 million.

Okay, thank you.

Thank you, our next question is coming from Rob Campanino of Prudential.

Please state your question.

Good morning.

First of all, I haven't had the pleasure, congratulations and best of luck in your new position.

A couple of quick questions.

I had your inventories in the U.S. at wholesale at about 9.3 billion units at the end of Q1.

Do you have a number of feel for what those levels are currently?

I can tell you that our inventories at the end of the first quarter was somewhere between our wholesale inventories...our wholsesale inventories between 15-17 days.

They are now down...they were down at the end of the second quarter to around 7 days.

Also speaking with the U.S., could you give some insight into the thinking behind having both a price promotion and a product promotion in the store at the same time?

I think you're doing that in September, is that correct?

I wouldn't like to get into the specifics of our promotion plan, Bob, but I will say we are always looking at ways to be as creative and as innovative as possible in the marketplace.

And there may be an opportunity for us doing that going forward.

Okay.

And last question, just could you bridge the gap for me from down 14 on volume to up 5 on pricing -- up 5 on profits?

Now I know pricing was up that 8% in the trade credits, probably another 2-300 basis points in there.

Could you just give a feel for the contributions of the remainder of that number?

You're talking about -- sorry, could you repeat that again?

Just the down 14 volume in the U.S. and you posted a profit number of up 5 and I was just sort of wondering what the components are?

We have firstly the benefit, really, in this quarter of two--two price increases, really.

The first that we took last year at the end of April, and another one at the beginning of April this year.

So, you know, it's effectively two price increases.

We had a lower level of promotion in this second quarter, compared to the second quarter in 2001.

And thirdly we spoke earlier, in fact in the first quarter earnings release call we referred to the trade credit memo, which fell in the second quarter last year, but actually fell in the first quarter of this year, the second quarter this year was favorably benefited by that.

Excellent.

Thank you for your time and once again, best of luck.

Thank you.

Our next question is coming from Bonnie Herzog.

Of Salomon Smith Barney.

Please state your question.

Morning Denny.

Hi Bonnie.

Hi.

I just have another question I guess on the $350 million that you're allocating.

I guess in the press release you state to both the U.S. and international business, can you give us an idea what the breakdown will be between the businesses?

I guess I'm assuming most of it will be, you know, spearheaded through the U.S. Business?

I'd love to give you a breakdown, but I won't.

Okay.

But I will say that we are going to spend the money on, you know, higher levels of promotion, and to improve our presence at the point of sale, not only in the United States but in key select international markets around the world.

Okay.

And then, can I assume the $350 million you talked about it being funded really from the currency that you're going to see, you know the benefits of that in the second half, should I assume that none of this money is from the reduction in the settlement payments that really occur in 2003?

I guess what I'm trying to get at, is next year are we going to see a lot more money being spent behind your brand, from the reduction of your settlement payment.

Actually what I said was, that we are going to reinvest $350 million in our international and domestic tobacco business.

Part of that.

Part.

Is going to be funded by currency favorability, the rest is going to come out of income.

Okay.

So in a sense, what you are doing is spreading, possibly, some of the reduction in the settlement payments that you're going to see next year into this year, as well as next year?

I don't think that's the case.

I think, you know, this $350 million we are talking about really refers to this year.

Okay.

And the stepdown really is a separate issue and comes only next year.

Okay.

That helps.

And then in terms of the trade pricing credit that you guys had in the first quarter, there should have been an impact in Q2 or benefit from that, correct?

Right.

Can you give us an idea, you know, excluding that impact, where your income would have been in the second quarter?

Kind of a follow-on, I think from Rob's question.

Just trying to understand how much of a benefit you got in the second quarter from the trade pricing credit?

Well it was roughly, the credit memo was roughly $28 million.

Okay.

And then a question on your international business.

You mentioned in western Europe, part of the impact there was the timing of the shipments in France, Italy and Portugal?

Can you give us a little bit more color on that, please?

Yeah, sure.

In fact, Western Europe's volume on a shipment basis as you said was down 2%, but there were a number of timing issues, and better to look at Western Europe, really, if I look at it for the year to date, 2002, the first six months and compare it to the year to date last year, in fact our in-market sales are up about 1.5% and there are a number of factors there, there's timing, and also this year, there was sort of a little less than one selling day left this year than last year, and that also affected our volume.

So sort of adjusting for those factors, are in-market sales are up 1.5%, and really we're doing well in almost all the Western European markets.

Okay.

And I just have one final question.

Going back to the U.S. business.

You stated several times that your promotions were lower in the quarter which has impacted, you know, your volume.

And you, again, talked about the difference between this quarter and the second quarter of 2001.

Can you just kind of go in a little bit more detail, I'm trying to remember back in second quarter of '01 where your promotions were at, just in terms of the buy downs but I think for this quarter, for most of the month you were on a consistent 60cent buy down on Marlboro and probably Basic.

And then you did offer some buy 3 get 2 free programs on Marlboro.

No, the facts of the matter are, Bonnie, that we did one less, four weeks less of Marlboro and Parliament promotion this second quarter compared to last years second quarter.

But what was the buy down on the second quarter in '01?

I just don't remember off hand.

It was 60 cents this...it was 60 cents.

It was the same.

It was the same.

Okay.

Thank you.

Thank you, our next question is coming from Martin Salsman of Merrill Lynch.

Please state your question.

Thanks.

Good morning Denny.

Hi Martin.

Hi.

Denny if we look at the discount segments in the market, you said...you estimated at 7.9% and it looks like it will continue through the remainder of this year.

Where do you expect it to be at the end of the year, and how do you expect it to perform through '03 once the various pricing issues become more favorable for the big manufacturers?

Martin, it's difficult for me to give you an exact projection for the end of the year.

I will tell you this, though, if you look at the deep discount segment, the so-called discount segment and discount brand of that segment, they've been growing at approximately 3/10 of a share point sequentially for the last, I guess 4-6 quarters.

So that's been the track record up to now.

Now I've got to say that in the second half of the year, I think you could make a fair assumption to say that there'd be somewhere around there, they could be lower, it's really difficult to say.

Going into next year, I think it's very important to know that the MSA payments or MSA related payments that the deep discount manufacturers will make, will have to go up where as ours comes down.

At the same time there are certain forces at work in terms of the state excise taxes which are going up quite strongly which we don't like, but which helps narrow the percentage gap, between the deep discount brands and the premium brands.

So if you combine all those factors, I see a narrowing of the percentage gap which today stands at between 45-50%.

I see that narrowing going into 2003.

Okay.

And your conclusion from that is you would expect to see that 3/10 of a point increase in that share decline next year presumably.

Hopefully.

Okay.

Denny, just on a broader basis, the $350 million of additional money going into your brands as you said in the U.S. and in some key markets during the remainder of this year, do you expect that higher level of spending to be repeated in the future?

I mean, if the currencies allow and if the cash introduces allow, would you like to be able to put that extra cash into your brands?

Well, we always like to support our brands.

On a higher level.

It's difficult to say whether we'll continue at this high level or not.

It really depends on the competitive situation.

It depends how things work out, and it also depends on what kind of reaction we get to the spend.

Okay.

Let me ask that question another way.

We see terrific growth with Marlboro in virtually all of your key high margin markets outside the U.S.

We've seen Marlboro grow a little in terms of shares this quarter, what do you think the underlying health of Marlboro and perhaps Parliament -- well Marlboro essentially, is like, if you were not to keep promoting to the degree to which you have been doing, and that this $350 million contributes toward?

Do you see the brand as healthy, and this will excelerate growth, or is this without this additional money do you think the retail share could begin to decline at all?

Martin, let me answer this by saying that we track on a regular basis, Philip Morris USA tracks on a regular basis, has surveys which track brand loyalty for Marlboro.

Right.

That is fully intact, and equity values for Marlboro look very strong.

Are they still growing?

Well, you don't measure this thing in terms of growth.

We are already at a very high level in terms of brand loyalty and that'sstaying very solid.

We're in a very competitive marketplace, and the fact is that, you know, we have to compete with price promotions.

We will compete with price promotions.

We definitely will not see the market share, and I'd like to just come around once again to the question of Marlboro's market share.

As you rightly pointed out, it's up in most of the key markets around the world.

If you look at Japan, Western Europe, it's up.

It's up in the United States, also.

And the fact is in a very competitive second quarter, where we sort of took our foot a little off the gas in terms of promotion, it still grew its share, and so we feel very confident that if we give it the right level of promotional support which we plan to in the second half, the brand is going to do even better.

Okay.

That sounds great and I'm very pleased to hear those comments from you Denny.

Just um...one very perhaps minor point, but you did say in your opening remarks, you used the expression on PM USA "results may vary."

I mean I think I wrote down those words precisely.

Now, in the past, I think that the company has spoken about sort of long-term growth rates in PM USA, or Philip Morris International.

Should we-- will you try to tell us more than just saying that the competitive environment is great and we should expect a little more volatility in terms of the earnings growth in that segment or what were you getting at when you reminded us that results may vary?

I think what you said earlier is absolutely correct.

Our plan is to grow both our market share and OCI.

We've done that in the past, we intend to continue to do that in the future.

There may be a quarter that where one -- we do better in one than in the other.

But, overall in the long-term we're going to grow in a balanced way.

Great.

And last point, your shipment volumes in the U.S has been over down 13.8% But you said your adjusted shipments as you believe, were down 4%, much less greater decline than the industry which was down 7%.

Right.

Are those two numbers the 4% and 7% for the industry, directly comprable or does that 7% also need to be adjusted?

It's sort of difficult for us to really talk clearly to that 7%, because we, you know, it includes our competitor's timing of promotions and their loads and deloads.

If your numbers were down 4.7%, what do you think is the right number to be looking at for the overall market, is it higher or lower than the 7% in terms of shipments?

I'm not sort of -- I don't understand your question.

Ok...Denny, I'm just asking if the 4% and the 7% are comprable.

I mean, it's right to be looking.

Yeah, I think it's comparable.

Yeah, Ok.

Thanks for taking all the questions Denny.

Thank you, Martin.

Thank you, your next question is coming from Mark Cowen of Goldman Sachs.

Please state your question.

Hi Denny.

How are you?

Hey Mark.

Really two questions.

One is...you mentioned during the Q&A that the gap is 45-50% right now.

Right.

I wonder if you can give us a sense of where you think it needs to be to really put good grounding and foundation underneath the business so that, again, we get people back to choosing brands for the other qualities that is successfully marketed with in the past.

I think that's one question.

I[INAUDIBLE]

I can't, again, it's difficult to give an exact figure.

I think these things don't happen in a black and white sense, in degrees.

I think that we wanted lower than the current gap obviously, but frankly, I think we can manage the situation with a 45-50% gap.

We would be much happier, obviously, if it was lower than that.

Well I guess I--the follow-up question to that is you are putting $350 million in a good portion of that into the U.S., I suppose in the second half of the year, do you have to put in a similar amount of money in the first half next year to sort of have an annualized impact and permanent impact of this?

We'll have to wait and see.

We'll have to wait and see how things develop.

There are many other factors going on, Mark, as I said.

There's the state excise taxes which are being applied equally to the deep discount segment, plus the premium brands, and that has an impact of narrowing the gap on a percentage basis.

There is a greater, hopefully greater enforcement at the state level of the provisions of the MSA, also creating a more level playing field so that there --a number if things in play there, it's not just a question of the price gap that exists today.

Okay.

I know you went through some commentary here about Marlboro's share behavior in markets outside the U.S.

Can you tell us exactly, did Marlboro grow in the second outside the U.S. or what it down, and to what extent do you think you need to invest in a similar way to narrow price gaps on Marlboro outside the U.S. in order to get it growing at a reasonably attractive rate again?

Well, it was down slightly in the second quarter, Mark.

Marlboro was down slightly in the second quarter, but I'll tell you it was down in markets like Egypt, Argentina, some of the Central European markets, but it was up in the markets where it has -- it has had its traditional strength, Western Europe, it was up in most of the markets in Western Europe and it was up in Japan.

And so let me answer your question once again by saying that although it was down slightly, it was up in the right and in the important places.

Right.

So is the strategy then to put money into narrowing price gaps in these markets that are weak so that, you know, they pick up and then the brand starts to grow on a sort of [INAUDIBLE] global basis?

No, not specifically.

You know, we are obviously managing our price gaps in many of these markets as best as we can.

You know, in some markets it's impossible to manage a price gap.

Take a place like Egypt where there's been heavy de-evaluation.

We've had to take price increases where as is the local brand there, Cleopatra I think, has stayed at the same price for ten years.

So, in situations like that, you can't do much about narrowing the price gap.

But most of our investment for Marlboro will really be in point of purchase investment at the point of purchase.

Ok, thanks.

Thank you, our next question is coming from Tom Russo of Gardner, Russo, Gardner.

Please state your question.

Hi, welcome back Denny.

Great hearing from you again.

A couple of questions.

The first up, the presence of this great bulk coming in from off shore on the sub-price category, what's the possibility of engaging the SBA or other regulatory agency that try to restrain that flow of unreviewed product into the U.S. market, the first question?

Yeah, there has been, you're right, a big surge of cheap imports.

In fact, for the first four months of this year, imports grew from $3.2 billion last year to $5.2 billion this year, based on our information from customs sources.

So that's a pretty big increase.

And, you know, we are working with the states and other authorities as best as we can to see that these imports, you know, follow the regulations, that they follow the rules of the United States.

Good.

Question about two markets abroad, scale if you could the opportunity of the United Kingdom in light of the changed distribution range you have there.

Then in Germany talk for a minute about the success you've had.

You're up .1 of a percentage point for the quarter in market share.

What is the potential on the upside for reclaiming last share?

What was your peak share in Germany and what are the prospects of moving back toward that?

Talking about the UK first, we have a market share of 7% in the United Kingdom, but we are particularly strong in the southeast of the UK where we have much higher market shares.

Marlboro Lights is doing well in the UK and of course we're very pleased with the new arrangements we have with Imperial.

So we feel good about the UK going forward.

Marlboro Lights, particularly is at a stage where it's a young and growing brand and that's what we like.

Good.

In Germany, tremendous recovery, as I said earlier, you know, .1 doesn't sound much but the first increase in 16 quarters, and the brand is on the right track.

It's growing well, and I think we'll start seeing, better and better results moving forward.

Good.

Talk about the timing of your incremented [INAUDIBLE]purchase, the amount beyond which you normally would have faced and how will that be spent?

And then lastly, your thoughts about currency for the balance of the year.

Louie last fall said that he had stopped predicting currency after years of trying.

What are your outlooks...personal outlook for the currency, for the balance of the year?

Louie is right, we shouldn't make predictions.

But as in the first quarter, we said that currency could be unfavorable to the extent of $350 million.

With the strengthening of the Euro, we are now estimating that for this year, that currency could be unfavorability to the extent of about $350 million.

With the strengthening of the Euro we're not estimating for this year currency unfavorability in the range of about $250 million.

Okay.

Share repurchase timing?

Share repurchase timing, well we're going to start rebuying 48 hours from now, which is, I guess, Monday morning because we can't buy on the weekend.

And we have a pretty good program for the second half of the year.

Close to, you know, $4 billion.

So good strong rate of repurchase in the second half, Tom.

Thank you very much.

Thank you.

Bye.

Bye.

Thank you.

Our next question is coming from William Nobler at Adolena Soznov Please state your question.

Hi.

A couple of questions.

First of all, you mentioned that the normal -- or rather the inventories at wholesale dropped from 15-17 days in the first quarter down to 7 days at the end of the second quarter.

How would that compare with the second quarter a year ago, and also what would a normal quote/unquote inventory be?

Normally a little higher than that.

A little higher than seven days.

Ten days, perhaps?

Yeah, around that.

Okay, and do you know how the seven days at the end of the second quarter would have compared with, say, a year ago?

Yeah, I have the number here.

It is a little lower than last year's second quarter.

Okay.

And continuing on, second question on the repurchase of shares, you indicated that you'll be able to start buying on Monday.

When did you...when would you have stopped buying because of the release and earnings and so on?

I think we stopped buying like about ten or twelve days ago.

Okay.

So for the last ten or twelve days you haven't been in the market?

That's right.

Right, and this is, I guess, normal?

Yes.

Typical.

That's right.

Legal blackout period.

I know that you have trouble forecasting currency but do it better than we.

Looking at the economics, you know, which you have to do in making a plan for next year, as you see it today, how do you think currency trend-wise might compare with that expected $250 million loss for this year?

That's a very difficult prediction to make.

And in that case I will follow what louie has always said: Let's not make predictions.

Except to say that we hope that the Euro continues to strengthen.

Right.

Okay, thank you very much.

Thank you.

And thank you.

Our last question is coming from David Ireland of ABM Amro Please state your question.

Good morning to you.

Just a couple of follow-up questions on Germany.

The first, you mentioned obviously your recovery market share there.

I wonder if you could update us a little bit on the competitive balance in Germany, and particularly the momentum at the moment of the value brands, and the second question, will Germany be a target for the international portion of your $350 million spend?

I'm not going to -- we don't like to remark on where we are actually going to spend this money by market internationally.

Fine, thank you.

I will say, though, that we're in good shape in Germany in terms of our share in the so-called industry, you know, outside the trade brands but growing well.

The trade brands themselves have actually been -- their growth has been moderating and their year over year increases have been narrowing.

Right.

Okay, thank you.

Thank you very much.

Thank you.

We are showing no further questions, gentleman.

Thank you all very much.

We appreciate you joining us this morning.

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

Again, thank you very much and have a great day.

Thank you.

Thank you for your participation, ladies and gentlemen.

This does conclude today's teleconference.

You may disconnect your lines at this time and have a wonderful day.