奧馳亞 (MO) 2002 Q4 法說會逐字稿

Good afternoon and welcome to Altria Group, Incorporated, 2002 full year and fourth quarter earnings conference call.

My name is holly and I'm your conference call operator.

Today's call is scheduled to last about one hour, including remarks made by Altria Group incorporated and the question and answer session.

To ask a question, please dial the numbers one followed by four on your touch-tone phones at this time.

Today media representatives on the call will also be able to ask questions following the conclusion of questions from the investment community.

I'll now turn the call over to Nick Rolli, Vice-President of investor relations and communications for Altria.

Good afternoon an thank you for joining us today.

I have several brief announcements before I introduce Dinyar Devitre.

First as you know, we released our 2002 full year and fourth quarter earning release earlier this morning and you can go to the new Altria investor relations website at www.altria.com to obtain a copy.

Those of you on the webcast we're providing summary slide for full year and Altria Group and its family of companies.

Kraft Foods, Philip Morris, U.S.A., Philip Morris, International and Philip Morris Capital Group.

Louis Camilleri, Altria Groups Inc.

Chairman and CEO is joining us on this call and will be available with Dinyar to take your questions.

As you know, Altria Group, Inc., announced that its name change became effective this past Monday.

The company's stock continues to trade under the New York Stock Exchange symbol, MO.

Second, in line with the past we plan to limit this call to a discussion of this year's results.

We will not be covering litigation or regulatory issues.

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

Since the food business was covered 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 of our news result for the various factors that could cause actual results to differ from projections.

Fifth is noted in our news release, Altria Group, Inc., in view of recently adopted SEC rules has discontinued reporting its financials on an underlying basis.

However, the company believes certain measures, such as excluding factors affecting comparisons to 2001 are useful to assist analysts and investors with analyzing business performance and trends and we have provided a reconciliation of these factors in our earnings release.

Altria Group, Inc.'s ownership interest in SAB Miller is accounted for under the equity method beginning with the third quarter of 2002.

Consequently Altria is reporting its share of SAB Miller net earnings based on its ownership interest.

In 2002, Miller's financial results were 100% consolidated for only the first six months of this year.

Finally, today's remarks will cover Altria results, the full year and fourth quarter performance of each of our operating companies and our earnings per-share guidance for 2003.

This will leave ample time for Louis and Dinyar to answer your questions.

Now it's my pleasure to introduce Altria Group, Inc., Senior Vice-President and Chief Financial Officer, Dinyar Devitre.

Thank you, Nick, and good afternoon.

It's my pleasure to welcome all of you to our first earnings conference call as Altria Group, Inc.

2002 was a year of progress and growth for the company despite pressures from weak economy throughout the world and intense competition in the U.S.A. cigarette industry.

Philip Morris International and Kraft Foods delivered outstanding financial results in a difficult global environment and continue to gain market share in their respective industries.

Although Philip Morris U.S.A. experienced a difficult year due to a convergence of factors, it implemented strong promotional programs in the second half of 2002 to restore retail share growth for Marlboro and its other focused brands.

Also during the year, we closed on an agreement to merge Miller Brewing Company into South African Breweries forming SAB Miller, the second largest brewer in the the world.

At closings, the transaction had an implied value of approximately $5.4 billion and Altria Group, Inc., received 413 million shares in SAB Miller representing a 36% economic interest in the enlarged company.

We also continue to deliver value to shareholders in the form of dividends and share repurchases.

In August of 2002, we raised the dividend on our common stock marking the 35th time in 33 years that we have increased the dividend, which now stands at an annualized rate of $2.56 per-share.

In 2002, we repurchased 134 million shares at a cost of $6.3 billion.

Aided by a 1.7 billion increase in cashflow from the SAB Miller transaction representing 6.2% of Altria Group's shares outstanding at December 31st, 2001.

In total, we increased shareholder value by paying out $11.3 billion in dividends and share repurchases in 2002.

So in the year of both accomplishments and challenges, Altria Group, Inc.'s diluted earnings per-share rose 34.6% to $5.21 per-share.

Excluding the Miller gain, the provision for airline industry exposure and other items noted in our release, diluted earnings per-share increased 3.4% to $4.57 per-share in line with our previously announced earnings per-share guidance range.

The 3.4% EPS growth was driven by the favorable impact of the reduction of our shares outstanding of 3.9% as a result of our share repurchase program and a base business increase of 1.1%.

These factors were partially offset by currency which reduced earnings per-share by 1.6%.

In the fourth quarter, diluted earnings per-share was down 14.1% to 85 cents, excluding the provision for airline industry exposure and other items, fourth quarter diluted EPS decreased 15.5% to 93 cents per-share.

The 15.5% EPS decline was due to base-business decline of 20% as lower income of Philip Morris U.S.A. more than offset results at Philip Morris International and Kraft Foods.

This was partially offset by the reduction in our shares outstanding of 4.5% as a result of our share repurchase program.

I will now review each operating company starting with Philip Morris U.S.A., our domestic tobacco company.

In 2002, Philip Morris USA's operating companies income decreased 4.8% to $5 billion.

Excluding a $500 million litigation related charge in 2001, operating companies income decreased 13.1% as lower volume and increased promotional spending in a highly competitive environment and a provision for an individual smoking and health case in Oregon were partially offset by favorable pricing.

Moving on to shipments, volume was down 7.5% to 191.6 billion units for the full year while overall industry volume as reported by management science associates declined 3.7% to 391.4 billion units.

As a result, Philip Morris U.S.A. shipment share reduced 2.1 points to 48.9%.

Versus a year ago, Philip Morris USA's combined retail share for its four focus brand was up marginally to 47.2%.

Marlboro retail share increased 0.1 points to 38.3% and Parliament retail share also grew is he .2 points to 1.4% while Virginia Slims retail share was down slightly to 2.6% and retail share for Basic was down two-tenths of a point to 4.9%.

Philip Morris U.S.A. shipment volume and shipment share decline were due to a number of factors, including a weak economic environment, sharp increases in state excise taxes and resulting consumer frugality, exacerbated by heightened competition.

PM USA was also disproportionately affected by price competition in 2002 due to a high share of the premium segment.

In 2002 there were other factors affecting Philip Morris USA's results and these included higher volume of some manufactures both domestic and foreign that are not complying with either the master settlement agreement or related state escrow legislation and an increase in illegally sold cigarettes including counterfeit cigarettes.

During the first nine months of 2002, the deep discount segment grew rapidly as price gaps widened between deep discount and premium cigarettes.

In July of 2002, Philip Morris U.S.A. announced plans to increase its promotional spending and to expand its retail coverage with a larger sales force.

As a result of the increase promotional spending, which was stepped-up in the fourth quarter, sequential improvement was achieved in the retail share for Philip Morris USA's four focus brands.

From the July low of 46.2%, these brands collectively increased retail share to 48.2% in December, an increase of 2 points.

IRI Capstone (ph) which tracks share on a projected basis in retail stores where Philip Morris U.S.A. generally promotes itself, reported that combined retail share of a Marlboro Parliament VirginiaSlims and Basic increased one point from Q3 to 47.5% in Q4.

Importantly, Marlboro sequential retail share increased 1.1 point from the 2002 third quarter to 38.8% in the fourth quarter.

There are two main reasons why Philip Morris USA's shipment share declined while its retail share increased versus a year ago.

First as you recall, the retail universe captured by IRI Capstone represents about 87% of total industry volume.

Much of the unmeasured environment continues to be impacted by deep discount products.

Philip Morris U.S.A. is working on new approaches to more accurately attract retail share.

With the goal of capturing the majority of the 13% not currently measured.

Second, counterfeit product, particularly Marlboro, has entered into traditional trade channels and is being captured in our retail share but not our shipment share.

In addition, the timing of promotional shipments and estimated movements and wholesale inventory also distort the analysis between shipment and retail share performance.

We expect that going forward Philip Morris USA's shipment share trends and retail share trends will correspond as progress is achieved on the counterfeit issue and an improved retail tracking system is developed.

Now, let me briefly summarize Philip Morris USA's fourth quarter results.

Shipment volume of 43.7 billion units was down 11.5% versus 2001.

The lower volume, higher promotional spending and a provision for an individual smoking and health case in Oregon resulted in an operating company's income decline of 50.7% to $789 million.

Industry shipments of 90.4 billion units were down 7.3% and Philip Morris USA's shipment share was down 2.3 points versus 2001 to 48.3%.

In the fourth quarter, Philip Morris USA's significant promotional investment had the intended effect.

On a sequential basis, PM USA shipment share declined 0.4 points rather to 48.3% from the third quarter to the fourth quarter, 2002, due mainly to promotional distortions.

After adjusting for these promotional distortions and based on estimated movements in wholesale inventories, PM USA believes shipment share was up from the third quarter to the fourth quarter.

Importantly, Marlboro's price gap with deep discount brands declined in December to the 45% range with Marlboro's average price at $3.53 per pack versus $2.43 per pack for the lowest price brand.

Philip Morris U.S.A. believes the 45% price gap is an appropriate level at which Marlboro can grow its retail share.

We have increased price promotion and the narrowing of Marlboro price gap with deep discount cigarette, the retail share of the deep discount segment declined one-tenth of a share point from the third quarter to the fourth quarter.

To sum up Philip Morris U.S.A., there are several reasons why we expect to see progress this year.

First, Philip Morris USA's promotional strategy growth sequential retail share growth in the second half of 2002 and shipment share stabilized in the fourth quarter versus the third quarter.

Second, Philip Morris USA's changed approach to executing its off invoice promotional allowance from February 3rd to March 30th was very well received by the wholesale and retail trade.

It broadened the reach of the company's price promotions to a greater number of retail stores, especially for its largest brand, Marlboro.

Reduces administrative time for Philip Morris USA's sales force and is easy to execute.

Third, Philip Morris U.S.A. is taking aggressive action to address MSA compliance and counterfeit enforcement.

To identify and eliminate counterfeit product, PM USA continues to aggressively support government enforcement agencies in their efforts to take actions against those involved in contraband activities.

Legislation has been drafted in 50 states and a legal plan of action has been implemented to bring civil action against wholesalers and retailers selling counterfeit product and internet providers engaged in illegal cigarette sales.

To date, Philip Morris U.S.A. has filed lawsuits involving more than 90 defendants and others have also taken legal action.

Fourth, we are encouraged by the resilience showed by Marlboro which is as I mentioned gained over one share point of retail from the third quarter to the fourth quarter.

Consumer research for Marlboro continues to indicate the brand's vibrancy and relevancy in the U.S. marketplace.

Fifth, Philip Morris U.S.A. also expects to increase its share of the premium category in 2003 through new product initiatives.

The company just announced this week that it will introduce Marlboro blend number 27, a new product in the Marlboro brand family at retail in April.

Marlboro blend number 27 is a great example of Philip Morris USA's strategy to add consumer value and further build brand equity for Marlboro.

This line extension reinforces Marlboro's flavor heritage and its position as the leader in the premium category by offering adult smokers a new, smooth, rich and mellow flavor choice.

In 2003, Philip Morris U.S.A. strategies are projected to result in lower income but it expects to deliver moderate share growth for Marlboro and its other focus brands.

Longer term, PMUSA strategies are appropriate and key to the strength of its brand portfolio and ensure that it is well-positioned to make progress to its balancing both income and moderate share growth.

Turning to our international tobacco business, PMI delivered strong results in 2002.

Operating companies income for PMI grew 4.8% to $5.7 billion.

Excluding 58 million of charges taken during 2002 for separation programs OCI increased 4.5% to 5.7 billion driven by higher pricing, volume gains and lower costs partially offset by unfavorable currency of $231 million.

Absent the unfavorable currency, PMI's operating company's income would have grown 10.2%.

PMI's 2002 shipment volume increased a solid 3.5% to 723.1 billion units led by strong gains in Japan, Russia, Turkey and a solid business turnaround in Germany.

Last year PMI volumes were up in all major geographic regions.

In western Europe, volume rose 0.7% as gains in Germany, the Benelux countries, Greece, Austria and Spain were partially offset by lower volume in France and Italy.

In France, the total industry has been declining following a steep cigarette tax increase in January of last year.

In Italy, PMI's volume and overall share were down due to low price competition.

However, Marlboro in Italy showed resilience in 2002 increasing one tenth of a share point to 25.6%.

In Germany, volume advanced 1.3% and share increased one-tenth of a share point to 36.9% driven by Marlboro.

This is the first year since 1997 that Germany delivered both volume and share growth.

In fact, Marlboro share performance in 2002 throughout western Europe was outstanding with gains achieved in every single key market.

As a result of Marlboro's continued momentum and share games for L&M in Belgium and Chesterfield in Italy and Spain, PMI's overall share in the highly profitable western European region rose to a record 39% last year, an increase of 0.3 points versus 2001.

In central Europe, the Middle East and Africa, volume increased 2.4% for the year led by the strong performance of L&M in Turkey and Romania partially offset by declines in Poland, Egypt and Lebanon, reflecting weak economic conditions.

In eastern Europe, volume advanced 12.6% last year, fueled by a 25% increase in Russia and solid growth in the Ukraine.

In Russia, the robust volume growth was driven by PMI's strong portfolio brand including L&M, Chesterfield, Parliament, Virginia Slims, Bond Street and the local brand Optoma (ph).

In Asia volume grew 3.4% for the year led by double-digit increases in Indonesia, Taiwan and Thailand as well as gains in Japan, Philippines and Malaysia partially offset by lower volume in Singapore, Hong Kong and Korea due to heightened competition.

In Japan volume was up 2.8% in a declining market driven by the continued momentum of Luck (ph) and Marlboro.

PMI grew share to a record 23.6% in Japan, up 1.2 share points.

In Latin America, volume increased 2.4% for the year driven by Mexico, Brazil and Argentina.

PMI shared advance record 59.4% while in Argentina, PMI achieved a record share of 65.2%.

In 2002, total Marlboro volume at PMI was down 0.6% due mainly to Argentina, Egypt and Turkey reflecting weak economic conditions.

Importantly, PMI achieved market share gains in the top income markets of Austria, Belgium, Canary Islands, Czech Republic, France, Germany, Greece, Japan, Malaysia, Mexico, the Netherlands, Russia, Spain, Switzerland, Turkey, the Ukraine and the U.K.

In the majority of the markets Marlboro grew the share gain.

Turning to a brief recap of PMI fourth quarter results, operating income increased 11% to $1.2 billion driven by higher pricing, volume gains partially offset by higher costs and unfavorable currency of $6 million.

Shipment volume increased 6.4% in the fourth quarter to 165.8 billion units driven by gains in most key regions including western Europe, central Europe, eastern Europe, Asia and Latin America, partially offset by a decline in the Middle East due to weak economic conditions, mainly in Egypt and Lebanon.

Volume was also benefited in the fourth quarter from the timing of shipments to Japan as a result of a shut down of U.S.

West Coast shipping boats during the third quarter of 2002.

Absent this distortion, PMI volume would have been up 5.1%.

Importantly in the fourth quarter, total Marlboro volume at PMI grew 2.6% following six quarters of decline.

This improvement was driven in part by increase marketing investments in PMI's premium brands and retail presence.

PMI's fundamentals remain very strong.

In many of its top income markets, PMI has solid momentum and proven growth strategies to generate future gains.

With its superior brand portfolio led by Marlboro and L&M and its extraordinary global infrastructure, PMI is well positioned to continue capitalizing on opportunities in the international cigarettes market.

This year, PMI expects to deliver annual volume growth of at least 4% and operating company's income growth of 10%.

Turning to Philip Morris Capital Corporation, operating company income of $55 million for the full year of 2002 was down 81.4% versus the prior year and down more than 100% in the fourth quarter.

These results reflect the recording of a $290 million position for exposure related to the troubled airline industry.

Excluding the impact of this provision, PMCC operating income increases 16.6% in 2002 and 8.6% in the fourth quarter.

These increases reflect the growth of PMCC leasing portfolio and gains delivered by its asset management activities including a significant gain during the second quarter of 2002 from the early termination of a lease.

Let me now turn to our food business. 2002 was another year of strong growth for Kraft Foods, the company reported its results yesterday so I shall contain my remarks to some very brief highlights.

In 2002, Kraft Foods worldwide reported volume increased 6.7%.

Excluding the volume impact of divested businesses and the inclusion of businesses previously held for sale, worldwide volume increased 3.1%.

Operating company income increased 4.1% to 6.3 billion.

Excluding the factors that affect comparability versus 2001, operating company income increased 5.5% to $6.4 billion.

In 2002, Kraft Foods North America boasted an income increase of 5.6 percent to $5.2 billion while Kraft Foods International income increased 4.9%.

In the fourth quarter, Kraft Foods reported worldwide volume increased 8.5%.

Excluding the previously mentioned items worldwide volume increased 4.3%.

Operating company income increased 7.8% to $1.7 billion due in part to gains on the sale of businesses of $77 million.

Excluding this and other items, operating companies income grew 1.5% to $1.6 billion during the quarter.

Kraft Foods North America's operating company's income increased 3% to $1.2 billion driven by volume growth of 4% and productivity and synergy savings partially offset by higher marketing and increased benefit costs.

Kraft Foods International operating company income 2.4% to $409 million with growth in the Europe, Middle East and Africa region more than offset by the performance in Latin America which was impacted by the economic crisis in Argentina.

Kraft Foods is committed to building long-term brand strength and long-term shareholder value.

In 2003, Kraft's volume is projected to grow by about 3% driven by new products and the company expects to deliver earnings per-share growth in the 4% to 6% range from the pro forma 2002 base.

In summary, Altria Group, Inc., achieved diluted earnings per-share growth despite a difficult global environment of 3.4%, excluding factors that affect comparability versus 2001.

Philip Morris International and Kraft Foods delivered solid growth in volume and operating company income and both have good business fundamentals entering 2003.

PMUSA promotional sales strategy resulted in retail share improvement in the second half of 2002 and we expect to see continued progress in achieving modest share growth this year for Marlboro and our other focus brands.

Looking forward, Altria Group, Inc., expects to deliver full year 2003 diluted earnings per-share in the range of 4.60-4.70 compared to 4.57 per-share.

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

This concludes my introductory remarks and now Louis and I would be happy to take your questions.

Thank you the first question comes from David Adleman from Morgan Stanley.

Good afternoon, Louis and Denny.

Good afternoon.

Louis, let me ask you a question to start with.

The questions impacting Altria and Kraft are clearly uncharacteristic in a longer term context and I think it begs the question, is there some other underlying issue?

Is the organization, do you think, in retrospect stretching a little too hard 12 or 18 months ago?

Do you have the right people in the right place?

Or is it simply, you know, the economy and, you know, other factors?

I would characterize the issue as being really external, David.

The dynamics of the US cigarette market have deteriorated, as everybody knows, but more importantly I think we're addressing that deterioration in a vigorous and appropriate manner as exemplified by the sequential improvement in our share.

And yes, we are sacrificing income, but I think it is the right thing for the long-term health of the franchise and the business.

Kraft, if you look at the fundamentals of Kraft they're still very strong.

They have some issues pertaining to pension and post employment costs that are hurting their EPS but those are not really cash charges.

In terms of if you look at the real volume performance and marginal contribution performance, the fundamental business is performing well.

So I would say I should add one more point and I think that the management team running all these businesses is terrific.

There is deep talent there.

The one element I would say is that in 2003 across all our businesses, we have increased our marketing.

And we believe that that is a sound investment for the future.

It is in times of economic weakness that you need to increase marketing.

That is being across the board at PMI, PMUSA and at Kraft Foods both in North America and International.

Louis, could you articulate what the marching orders of the domestic tobacco business is today in the current environment?

Historically, you would have said maximize profitability while gaining share.

Is that still the goal or given the external environment, are you willing to, you know, in effect hold share or potentially even lose share if it would result until substantially higher profitability.

NEW SPEAKER1Our strategy is clear, David, I think we have expanded on it in the past.

The strategy for Marlboro U.S.A. is to secure moderate share growth on our focus on four brands Marlboro, Virginia Slims, Parliament and Basic and maximizing income to achieve that.

Do you worry about in effect sort of the situation -- being in the situation that Gala (ph) was in the U.K., you know, a decade ago where you have this strong premium franchise and if consumers are down trading and there is incremental price segmentation in the market that in effect, you know, statistically you're disadvantaged by having a large premium business.

Objectively of course you would prefer it but going forward could it prove to be a bit of an albatross?

NEW SPEAKER1I would say that our experience in the fourth quarter, David, would show that with the appropriate programs in place we can restore share growth and, yes, it implies a sacrifice to income but again, looking longer term with some of the factors that Dinyar mentioned in his opening remarks, be it enforcement activities related to the MSA, related to alternate channeled such as the Internet, the eradication of counterfits, the potential advent of FDA regulation as well as the potential advent of technology going forward and by that I mean low-risk products, that coupled with our infrastructure and marketing knowledge gives me confidence that longer term, we can do well in this market.

And last question, Louis, if you look at the all of those efforts and the legislation that is being enacted and your legal efforts, the efforts of the states and so forth, what kind of pacing do you envision through the remainder of the year in terms of seeing in the deep discount segment, the illegality, under pressure, discount prices coming up and so forth?

NEW SPEAKER1Well, you would hope that these things would come in to place quite rapidly, but experience has shown us that it takes a while to get everything to work.

For example, this legislation pertaining to the NPM's, I think it is about 20 states that have past it.

And within those states, we have noticed that the deep discount segment doesn't perform as strongly as other states.

But that could just mean that the deep discount manufacturer's are focusing on other states.

And, therefore, for it to have full impact, we really need legislation across all states and it would be national legislation.

So, you know, these things take time, David.

And in the meantime, we will do everything that is necessary to achieve the objective I alluded to earlier.

Thank you very much.

Thank you, David.

Thank you.

Our next question is coming from Rob Campagnino from Prudential Securities.

Good afternoon, gentlemen.

Hi, Rob.

Can you talk a little bit about the level of counterfeit and contraband that you estimate is in the U.S. market?

I'm trying to reconcile with what you said about improving sequential share trends for Marlboro and then you said towards the end of that, I believe, that some of that may actually have been Marlboro that you didn't manufacture.

Do you have a reliable estimate for what percentage of the volume is represented by this illegal product?

We don't have an accurate estimate, Rob.

The research we have -- we've done is that the incidence is about one and-a-half to 2%.

But it could be higher than that because the problem with this product is it's not easy to get an accurate read on for obvious reasons.

Okay.

The second question is relating to your decision to go to an off-invoice price.

In my view it seems to have essentially reduced the incentive to your CMO 3 retail partners because they're in and now only getting paid one dollar per carton as I understand it.

Would it be reasonable to expect any changes in how you pay those retailers who participate in your program to -- so maybe to restore that lost incentive?

Rob, for obvious reasons I'm not going to get into the specifics of our strategy because of competitive issues.

Nevertheless, the premise of your question is wrong.

Okay.

The fact of the matter is that we have various programs in CMO 3 is looked after.

So beyond that, I can't tell you anything else.

Okay.

So it would be unreasonable to expect any changes to the retail leader's program or any significant changes to the retail leader's program going forward?

Beyond what I said I'm not going to comment, Rob.

Okay.

Can you give us the amount of the provision for the litigation expense in Oregon?

Yes.

It's $32 million.

Well below the amount of injury award?

Well, there is a specific reason for that and I believe you are aware that in Oregon the state receives 60% of punitive damage awards.

As a result of the master settlement agreement, we believe the state has released 60% of the award.

So if you take that out of the punitives, you're left with 32 million.

That seems to be a reasonable argument to me.

One final question.

In the past your state of dividend policy has been to increase it along with underlying earnings -- under lying operating earnings.

I believe I said that correctly.

Underlying net earnings.

Underlying net earnings.

In your guidance is essentially a flat number for underlying net earnings if you back out the benefit of share repurchase.

Would it be reasonable to expect for you to adhere to your past policy as regard to the dividends?

I don't want to jump on what the board will decide in August, Rob.

All I would say is that we have a history of doing everything we can to enhance the value through quite a generation dividend and buy back program.

Okay, thank you for your time.

Thank you, Rob.

Thank you.

Our next question is coming from Martin Feldman of Merrill Lynch.

Good afternoon, Louis and --

Hi, Martin.

Hi.

I suppose there has been almost all the talk has been on the U.S. business, but I would just ask one question.

With all the proposals that you have in place, when do you believe -- how long will it take for PMUSA to begin return to operating income growth?

Is it 12 months, 12th to 24 months, what would be your best estimate at this point?

I don't think I can give you a precise perfectionist for that, Martin.

Okay.

Moving on.

Perhaps this is the down-take but you commented earlier or Dinyar did in his remarks that the company is looking to balance income and moderate share growth.

Is it -- did you always used to use that word, moderate share growth because I don't remember it if you did and it doesn't employ perhaps there is a slight tilting of the balance towards income?

I would say that we may not have used the moderate word in the past, but the dynamics have changed and we -- we think that moderate is appropriate given the circumstances because absent moderation it would cost you too much money.

Okay.

Thanks for that.

Louis, just on the -- again sticking with PMUSA just a moment.

Net sales, if I read the accounts correctly were down between fourth quarter '01 and fourth quarter '02 by about $1.1 billion.

Can you just tell -- off your promotional activity, how much of that activity comes out of net sales versus SGNA, just throw a little color on that number.

That is a difficult one, margin.

Sorry.

I don't have the precise mix and frankly it would be difficult to give you the precise mix because by giving you that must number it provides you the mix of our promotions and I'm not sure I'm willing to do to give you that.

Okay.

Let's.

For competitive reasons.

I'm sorry.

As the leader in the industry in these challenging times, you know, a lot of people are copying what we do.

So we're doing things such that they can't copy straightaway.

Right, okay.

Let's move on to some questions I think are much more strayed forward.

Just within PMI, can you give us some -- I was -- Italy has been such a (inaudible) for a long time and feeding the comment that the low price segment as grown.

And Marlboro had -- I think a tenth of a share point gain in share last year.

Can you give us some color on that market and as it represents the sort of threat the German low price segment did?

We don't think so, Martin.

It was a relatively temporary problem but there is a caveat I will mention later.

Essentially the issue was that MS, which is the principal brand of ETI, dropped its price to two Euro a pack and in so doing it hurt Diana's performance which stated 220.

MS is now back up to 220.

There has been activity in the mid price segment and there have been a number of launches at the 220 level.

More recently there has been a brand at two.

And this resent brand may be gaining share because of its price attraction.

I think very importantly, however, as you're aware, ETI is about to be privatized in the coming months.

And as part of the whole privatization, it is our believe that the Italian government is looking at reforming its tax system and specifically implementing minimum specific taxes as has been adopted in most other EU countries.

And that clearly would be helpful in bringing the bottom of the market up.

I say that because clearly in so doing they make the ETI privatization more attractive to a potential investor.

Right, Absolutely.

And is it -- I think am I correct in saying that before that transaction can take place, the Marlboro volumes produced by ETI are subject to a blessing by yourself or by Altria?

That is correct.

Okay.

I think last --

Let me just add one thing.

The Marlboro volumes are relatively minimal compared to the Diana volumes.

Okay.

Okay.

You -- Dinyar went through the strong performance and recovery in Germany that PMI has enjoyed.

Is this share and volume growth reflected in local currency, not in dollars but in local currency earnings growth in the fourth quarter or in 2002 from Germany?

In other words, did all the activity lead to descent profit growth?

In local currency income was up.

I can't give you a precise number.

It was positive?

Yes.

And obviously more so I would have thought in dollars?

That is correct.

Okay.

Louis, very last question.

Unless I missed it, I don't think you have spoken about the buy back in any detail.

I mean, the current program is coming.

It is coming to an end.

In terms of the 460 to 470 guidance, can you give us an idea of what you're anticipating putting into the buy back this year?

I'm not in a position to disclose our specific assumptions for this year, Martin.

You're right, the program is essentially completed or will be completed very soon and the board will decide a new promise at the end of February. -- the board will direct a new program at the end of February.

Thank you very much for taking the questions.

Thank you, Martin.

Thank you our next question is come Judy Hong from Goldman Sachs.

Hi Louis, Hi Dinyar.

You mentioned Marlboro showed a volume growth for the first time in several quarters.

I was wondering if you can just elaborate in a little more details in some of the factors that are driving it.

I think you mentioned increased market getting programs that you put into the marketplace and just wondering if you can elaborate a little more on that fund?

Yes.

First of all I should address the premise of the question which was the Marlboro was declining and the reasons for it.

If you analyze it appropriately, Judy, of the last three years, you can essentially bring it down to a few markets and let me give them to you.

That was Turkey, Argentina, Egypt, Germany historically as well as duty free.

Absent those markets, Marlboro was actually growing at 4.6%.

So Marlboro has always had a pretty healthy growth rate absent those issues that I mentioned most of which were economic.

We have back in July announced that we would put more marketing in place and I think it's the combination of those specific markets I mentioned improving their economic circumstances.

Our price gap management in those specific markets as well as stronger marketing support, especially at the point of sale in terms of shelf placement, point of sale programs as opposed to consumer promises.

So there is no discounting here.

It really is a much more effective field force performance.

So we feel pretty good about Marlboro going forward.

I don't know if that addresses your question.

Yeah, it does.

And I guess just looking at 2003, I think Dinyar mentioned that you're looking for about 10% operating profit growth in that business and Louis, you had mentioned that you're actually increasing marketing spending across the board.

Does a 10% take into consideration the increase marketing spending at PMI?

Yes.

Just second question that I that I had was, I was wondering if you can just address kind of a long-term growth outlook for Altria.

You know, Louis, you had mentioned that you're looking for this company to grow ten to 12% organically in the past I know that 2003 you're not likely to get there because of some challenges in your businesses, but really looking at 2004 and beyond, is it double-digit EPS growth in your view still achievable?

Well, it's tough.

But I think it would be premature for me to give you an outlook for 2004 and beyond.

Much will be -- much will depend on our share and income performance this year in 2003 in domestic tobacco.

Okay.

And finally, just -- in the past acquisition strategy obviously has been, you know, one of your priorities and in light of some challenges that you're facing in some of your operations, is acquisition now less of a priority than before or are you still looking to pursue acquisitions of opportunities from above?

No, acquisitions still a key priority.

We will continue to pursue acquisitions in a proactive manner.

Okay, thank you.

Thank you, Judy.

Thank you.

Our next question is coming from Bonnie Herzog of Salmon Smith Barney.

Hi, everyone.

Hi, Bonnie.

I guess, first of all, thanks for giving us guidance on 2003 EPS, it was a big help.

I guess my first question is regarding this guidance.

Can you give us an idea of what can make you either miss or beat the rates that you laid out for us?

Just give me an idea of some of those things that might help you beat the range again or on the down side.

Well, it's a pretty general question, Bonnie.

I mean, I could give you a litany of things that could go wrong and a litany of things that could go extremely well.

So maybe you could refine your question a bit.

Okay, fair.

Now How about just to narrow in on one business, looking in on PMUSA.

If there is something there in terms of achieving some of your goals -- we can move on to the next question.

Let me actually go on to my next question if I may which is on taxes.

So far as you know I think it is around 20 states have already introduced proposals to increase taxes this year.

So I guess in my mind I think it is pretty safe tots that taxes are going to go up again and obviously there is going to increase the absent price on cigarettes.

I guess my question is 2-fold.

First, what are you doing to fight these potential tax increases and I guess increase regulation, for instance, the smoking ban in New York City which I must say was surprising and then second, I think Dinyar mentioned that you are comfortable with your calculated relative GAAP of 45% if I heard him correctly, but that implies an absent GAAP of $1.10 per pack which to me still sounds pretty high and if and when taxes go up this year, overall cigarette prices will be going up and I guess I'm questioning why you expect to be able to grow share with those kinds of prices?

Well, Bonnie, if I understand your question, you're concerned about the absolute price level.

Yes, more so --

And I would say that absolute price levels tend to impact consumption.

Absolutely.

Rather than share and relative price gaps is what impacts the share.

So we are focused on relative price gaps clearly we're doing everything in our power to try to moderate, restrain or stop excise taxes which clearly are very regress I've.

However, one has to be realistic.

A lot of states have huge budget question deficits and the tobacco industry is a relatively easy target.

Yes.

So made into our assumptions is an increase in state excise taxes.

Having said that, we will do everything in our power to try to moderate them but one has to be realistic.

Can I ask how many you're assuming?

No.

Okay.

Well, you can ask but I'm not going to answer.

I had to try, Louis.

But then to go back to your issue about absolute prices, I mean, early '90's, premodel Friday, wasn't the absolute gap around a dollar and, so, I'm just -- I'm just pushing on this issue because I understand your point about, you know, the absolute price and consumption and then moving share, but at some point, you know, the consumer only has so much in its pocket and, you know, that has got to affect some consumption in down trending and when the absolute gap is as high as $1.10 and again that is your numbers because I frankly might think it is higher than that.

That is what is encouraging the consumer to down trade.

So, you know, maybe what you could do for me, Louis, is walk through today versus early '90's.

Well, it is a simple walk, Bonnie.

Okay.

We're going from a 90% relative price gap to a 45% relative price gap.

But why are we not talking absolute.

You still think a relative gap is the key metric to look at right now?

I guess I'm challenging you in thinking about, you know, shouldn't we be thinking more about the absolute gap and the absolute level of cigarette prices in the environment today?

Bonnie, what evidence do you have that the absolute price gap in any given market in the world is the key to look at?

Talking with the trade, the consumer, understanding why people are trading down, the prices are too high.

It's the consistent feedback I have been hearing clearly, you know, this is what I have been hearing.

This is obviously my opinion and that is why I want to hear from your perspective as the leader in this industry what you're hearing on all the studies you have done.

I'm trying to tell you that the relative price gap is want key measure.

Not only in this market but in every single market in the world.

Okay.

Fair.

Can I move to your international business?

I mean, look what has happened in Germany.

Okay.

For example.

All right.

Relative price gap has narrowed, right?

And Marlboro and the premium segment has performed well.

What is the absolute gap in Germany?

The absolute gap has actually increased.

The % gap has narrowed.

So the absolute prices in Germany you have seen increase due to a variety of factors?

Yes.

Okay.

I guess, you know, time will tell.

I move on to your international business.

I have a question on PMI.

Obviously there appears to be a lot of noise overseas regarding taxes or increase taxes and regulation.

Just curious, you know, how you think that is going to affect your business going forward and, you know, really how we should be looking at the long-term volume growth of that business.

I mean, is it closer to 3% and again organic volume growth.

Yes.

Taxes is not a new phenomenon internationally, Bonnie.

We have had to deal with significant tax increases in various markets throughout the world.

Tax incidents internationally is very high, as you know.

Yes.

In a lot of markets it is an add Virginia an ad valorum and we participate through pricing.

But I think governments have come to appreciate and I alluded to it when I spoke about Italy earlier, that they need to insure that because of their ad valorum structures, they don't pay for price wars an hence the significant minimum taxes in specific amounts and in many ways to have an ad valorum tax structure with a very high minimum tax is probably the best structure and that is a structure that essentially is becoming more and more in place in a lot of markets.

Okay.

That is helpful.

And then to be clear for Altria Group regarding your pension expense, you're not changing the current discount and rate of return assumptions?

We have reduced the discount rate to six and a half percent.

The return assumption has stayed at 9% which is essentially in line with resent reports from the SEC --

Right.

-- which said if the asset allocation was skewed towards equity, 9% appeared to be very reasonable given the returns of 10.7% since 1926.

If we look at our 15, 20, and 25 year returns, they're at 9% or higher.

Okay.

And there is no additional expense or increase in expense forecast as a result of this for Altria Group?

No.

It's clearly part of our guidance.

Okay.

I know it's a significant factor in Kraft.

Yes.

But clearly less at the Altria Group company.

You're not giving us an idea how much, the amount?

No.

I mean, I think the important thing to know is that the pension cost increase, past employment cost increases are all baked into our guidance.

Okay.

Last question I have to ask, Marlboro blend number 27, how did you come up with the name?

Did you do any testing?

You know, I'm curious, what message does this convey to the consumer?

Well, Bonnie, of course we did market research.

All I can tell you is all the research results have been very, very positive.

We're all very invited with this line extension, which will hit the market in early April.

In April.

Again it is going to be priced as regular Marlboro with any type of promotions whether at wholesale or at retail, correct?

It will be treated the same way as Marlboro is treated.

It is a Marlboro line extension.

Perfect, thank you so much.

Thank you.

Thank you.

Our next question is coming from Joel Emory of Crest Investments.

Joel, your line is live.

We'll move on to the next question which is coming from Art Cecil of T. Row Price.

I feel like I have been handed a lifeline after that series of questions.

Tax rate for '03?

It's-likely to be around 35% in '02 is 355.

Okay.

I just reiterating, Philip Morris International, EBIT, is expected to be up around 10% in '03?

That is correct.

And then after, despite all the discussion about Kraft over the last 24 hours, the operating profit for Kraft, I gather, is also suppose to be up somewhat in '03.

Is that fair?

Yes, it's up.

Not as strong as it has been historically.

Right.

But in building a model to get to a $4.60 number, it doesn't appear to me to stretched to be able to do that given that Kraft is going to be up somewhat.

International is going to be up 10% and domestic can still be down substantially and you reach your numbers.

If we didn't feel we could do it, we wouldn't have given that guidance.

I understand.

But, you know, all companies are hit by things that are unexpected and I think there is -- there has been that history in the past and I just wanted to be able to come up with something that made sense.

Right.

Thank you very much.

Thank you, Art.

Thank you.

Our next question is coming from Towel Clisner (ph) of TNC.

Two questions.

First what is your thought on the cigarette decline in the market in '03 and the second question has to do with the state excise tax increases.

Are there some state excise taxes that are good for instance, they come into very low tax markets from which a lot of the -- I don't know, Internet operators come from, et cetera.

Would those be actually beneficial to the health of the industry?

Your consumption question, our assumption is around -- a decline of around 2%.

I think I understand your question but we don't like state excise state excise taxes period.

I'm not sure that given a lot of the Internet activities that that would actually change anything.

Okay.

Thank you very much.

Thank you.

Thank you.

Our next question is coming from Chris Growe of A.G. Edwards.

Good afternoon.

Good afternoon, Chris.

I just have I think just a couple of questions here.

First off, some simple ones.

What is your estimate of negatives, if it is a negative, I assume it is from foreign currency translation in 2003?

That is a number you can give out now?

No.

It's actually a positive, Chris.

Okay.

And, you know, we're hopeful that it could be an upside.

Okay.

And then so you have baked in a certain assumption into your -- each of your international divisions on foreign exchange as part of the estimates?

Yes.

Clearly we have obviously been realistic and conservative about it.

Okay.

You know, at current rates, if they were to stay and it's really premature because it's really only January, you know, that could give us a bit of favorability.

Okay.

On your international tobacco division, is there a way or was it meaningful to quantify the benefit from some of the shifting of volume from the third quarter to the fourth quarter because I believe it was because of the dock strike?

Yes.

I believe in our release we actually point out that absent that distortion of the strike on the West Coast, volume was still up 5.1%.

Okay.

And, you know, we have always said that we felt that we could grow our volume internationally at an organic rate of 46% and that remains our target.

Okay.

I missed that in the release.

My next question I have just two more.

The volume that is covered by IRI, I think there is a number of roughly 87% you reference.

That is correct.

Now, how much of your volume is represented in those 87% -- within that number, how much of your volume is represented there?

I'd say the vast majority, but I can't give you a precise number, Chris.

Okay.

I guess what I'm getting at is the new off invoice allowances, I mean, the majority of your -- we know the majority of your volume is already being covered through your promotion, just trying to get an idea what -- what incrementally is going to be covered as part of the new promotional allowance budget and you're saying it is a fairly small amount?

Well, about volume but not necessarily about potential.

I see, okay.

That is the case.

I understand.

Then my last question is, within your guidance of 460 to 470 you have obviously baked in a level of promotion and, you know, based on this off-discount allowance you project to go through March 30th, if that would extend for a longer period of time whether it be a month or six months, would that result in your guidance coming down again?

No.

That is all baked into whatever your assumption is baked in there?

Yes.

Okay.

That is all I have, thank you.

Let me be clear.

No, it would not change our guidance.

Okay.

Thank you.

Thank you.

That's all the time we have for questions from the investment community.

We will now take questions from the media.

To ask a question, please press one followed by four on your touch-tone phone.

Please hold while I poll for questions.

Thank you.

Our first question is coming from Jessica Wall of Reuters.

Good afternoon.

I just had a question, sort of a follow up on blend number 27.

First of all, do you think that it will cannibalize any of your Marlboro sales and can you talk about any plans for any kind of dough me streak brands and any internationally and any brands coming out be at the premium end or at a lower price level?

We pride ourselves in being a premium company and premium supporting premium brands so clearly our focus is on premium brands.

There is a whole battery of new products internationally, but I'm not going to disclose what they are, but there are a lot of plans in to this year.

And regarding your question about cannibalization, clearly there will be some cannibalization but we're pretty confident that blend 27 will provide us with incremental volume and share.

Okay, thank you.

And can you just give us an update on how plans are going for a reduced exposure cigarette?

Well, they're moving along quite nicely and we still plan a first generation launch towards the end of this year.

Towards the end of this year?

Yes.

Okay, thank you.

You're welcome.

Thank you.

Our next question is coming from Chris Chetter (ph) from Dow Jones.

Hello.

Just to follow up on what Jessica was asking.

What are you basing your assumption that Marlboro blend number 27 won't cannibal lies?

Where are you assuming that incremental volume is going to be coming from?

I didn't say it wouldn't cannibalize.

I said it would partially cannibalize.

Okay.

However, it would still contribute to incremental volume and share.

As to the question of the sources of volume, I'm not prepared to go into that.

Okay.

Could we expect other extensions in the domestic -- at the domestic tobacco business this year?

I'm sorry, but I can't respond to that for competitive reasons.

Okay, thank you.

Thank you.

Thank you.

Our next question is coming from Courtney Schlisserman of Bloomberg News.

Hello, I'm also following on the number 27 here.

I just wanted to know about how much do you expect to be spending beyond the product to get it out on the market and what would you consider to be a successful launch for it in terms of sales?

I'm sorry, but again it for competitive reasons I'm not going to provide you answers to either of those questions.

Okay.

Thank you.

All I can say is that, you know, we're confident that the brand will be a success and all the research we have done gives us very positive results and all goes well for the future.

Okay.

Thank you.

Thank you.

Thank you.

I now would like to turn the call back over to Mr. Nick Rolli, for any closing comments.

Okay.

Thank you very much.

That's all the time we have scheduled for this call.

We appreciate you joining us this afternoon and we look forward to talking with you again in the first quarter and we'll be sending out our usual notices to tell you about our first quarter information for the 2003 Altria Group first quarter conference call.

Against again, thank you very much and have a great day.

Thank you.

This does conclude today's teleconference.

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