奧馳亞 (MO) 2003 Q1 法說會逐字稿

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  • Operator

  • Good morning and welcome to the Altria Group first quarter 2003 earnings conference call.

  • My name is Dante (ph) and I'm your conference call operator.

  • In order to ask a question, please press 1 followed by 4 on your touch tone phone.

  • Today's call is scheduled to last about 1 hour including remarks by Altria Group and the question and answer session.

  • Media representatives on the call will also be able to ask questions.

  • I'll now turn the call over to Mr. Nick Rolli, vice president of invest or relations and financial communications for Altria.

  • Please go ahead, sir.

  • Nick Rolli - VP of Investor Relations and Financial Communications

  • Good morning and that you all 4 joining us.

  • I have several brief announcements before we begin with the formal remarks.

  • First as you probably know, we issued our 2003 first quarter earnings release this morning.

  • If you do not have a copy you can go to the Altria investors relate ors website at www.altria.com to obtain a copy.

  • For those of you listening we are also, Altria group Inc.

  • And its family of companies.

  • Second Kraft Foods announced its results yesterday and hosed a separate conference call.

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

  • Third, 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 review of the various factors that could cause actual results to differ from projection.

  • Today Dinyar Devitre, Altria Group's senior vice president and Chief Financial Officer will be joined for the Q and A session by Bill Ohlemeyer, PMUSA's vice president and associate general counsel who will respond to questions on recent litigation events.

  • Now it's my pleasure to introduce Dinyar Devitre.

  • Dinyar Devitre - SVP and CFO

  • Thank you and good morning.

  • For the first quarter of 2003 Altria Group's were down one eighth percent to a dollar and 7 cents in line with our experts (ph) given a continued difficult glow pal economic environment.

  • The EPS change versus the first quarter of last year was due to an operations decline of 14.8 percent or 16 cents per share due primarily to Philip Morris's results partially offset by a favorable impact of 5.8 percent or 6 cents per share due to the reduction in our shares outstanding.

  • A favorable currency impact of 2.7 percent or 3 cents per share and a favorable impact of 4.5 percent or 5 cents per share for integration and separation charges in 2002.

  • As you all know, due to the price class action suit against Philip Morris U.S.A., Standard and Poor's, Moony's and Fitch (ph) ratings took rating actions that eliminated tree's access to the commercial paper market.

  • As a result, Altria has fully drawn against its long term revolving credit line of 5 billion dollars in order to repay its mature commercial paper and to normal (ph) working capital needs and has suspended its sharing purchase program until such time as its access to the Capital Markets is restored.

  • Let me briefly describe the terms and financial impact of the price bonding requirement.

  • First, the court reduced the amount of the bond necessary for Philip Morris U.S.A. to stay execution of the judgment in the price case.

  • Philip Morris U.S.A. will place in escrow account a preexisting $6 billion long term note which is a Philip Morris U.S.A. asset.

  • The $6 billion note was issued in April 2002 by Philip Morris USA's parent company, Altria Group, Incorporated as part of an intercompany financing arrangement.

  • The long term note pays interest at 7 percent a year and a principal payments are due in three installments beginning April one of 2008, 2009 and 2010.

  • Second, Philip Morris U.S.A. will make 4 equal quarterly payments of $200 million beginning in September of this year into an account administered by the clerk of the mad son county circuit court.

  • Thus in 2003, cash flow impacts of this bond requirement is 610 million dollar comprised of 4 hundred million of cash into escrow and half a year of interest on the note of 210 million dollars.

  • In 2004 the cash flow impact is 820 million dollar comprised of 4 hundred million in escrow and 4 hundred 20 million for interest on the note.

  • While these cash outflows may result in no impact to the P and L. And remember, that all of the moneys in the account accept for the administrative fee will be turned to Philip Morris U.S.A. if and when it prevails on appeal.

  • While the major impact of the price case has been our inability to access Capital Markets and the result and suspensions of share repurchases we nevertheless the reaffirming the earnings per share guidance we provided on January 29th of this year of $4.60 to $4.70 for the full year 2003.

  • I will now review first quarter results for our operating companies starting with Philip Morris U.S.A. our domestic tobacco company.

  • In the first quarter Philip Morris USA's results were in line with expectations.

  • Operating companies income decreased 40.6 percent to 742 million dollars due to lower volume and higher spending to support its new promotional strategy and expanded sales force.

  • We are encouraged by Philip Morris USA's progress this year in achieving retail share growth as well as price gaps and volume stability versus the fourth quarter of 2002.

  • Philip Morris USA's shipments were down 16.1 percent to 43.8 bill billion units in the first quarter, while interest industry shipments as reported by management signs associates decreased 12.9 percent to 88.2 billion units in the first quarter of 2003 versus the same period last year, comparisons to the year ago period were adversely impacted by both higher promotional shipments and a significant buildup of inventories by the trade in the first quarter of last year.

  • Turning to retail share performance, as of this quarter Philip Morris U.S.A. has begun reporting retail share results based on an enhanced retail tracking service, the IRI capstone total retail panel.

  • Philip Morris USA's retail share is lower using data from the IRI cap stone total retail panel compared to its previous service because the new service expands coverage into stores where Philip Morris U.S.A. historically had a lower retail service.

  • Based on IRI capstone Philip Morris U.S.A. retail share in the first quarter was 48.3 percent, an increase of 0.2 points versus the fourth quarter added by Philip Morris USA's new off invoice promotional allowance program that is paid at the wholesale level on its 4 focused brands.

  • The promotional program broadens the reach of those brands price promotions to a greater number of retail stores and has been extended through May 2003.

  • Combined retail share for Philip Morris USA's 4 focused brand, Marlboro, Parliament, Virginia Slims and Basic was 45.8 percent, reflecting growth of 0.3 points versus the fourth quarter of last year.

  • Marlboro Short showed continued resilience increasing 0.1 points versus the fourth quarter to 37.5 percent at retail, while Parliament's share was up 0.2 points at retail versus the fourth quarter.

  • The narrowing of Marlboro's price gap with deep discount brands is key to achieve retail share growth for the brand.

  • In convenience stores Marlboro's price gap with deep discount brands was approximately 44 percent in the first quarter with Marlboro's net price with about $3.50 per pack versus $2.42 per pack for the lowest price brands.

  • With increased price promotion and the narrowing of Marlboro's price gap with the deep discount cigarettes total retail share growth for the deep discount segment increased moderately by 0.1 share points from the fourth quarter of 2002 to the first quarter of 2003.

  • It is also important to note that the discount cash was down 0.4 share points in the same period.

  • During the last week in March, Philip Morris U.S.A. launched a new line extension Marlboro blend number 27.

  • Philip Morris U.S.A. also recently announced that it will launch another line extension, Parliament Ultra Lights in the second quarter.

  • These initiatives demonstrate Philip Morris USA's commitment to increasing premium volume this year and beyond.

  • To sum up on Philip Morris U.S.A., we are pleased with the volume and share stability exhibited by our domestic tobacco business.

  • Philip Morris USA's strategies are having the intended effect and while income will be lower in 2003, it proceed to deliver (ph) moderate share growth for Marlboro and the other focus brands this year.

  • Turning now to our international tobacco business, PMI delivered operating company's income of 1.7 billion dollars in the first quarter, this represents an 8.1 percent increase versus the prior year, driven by volume gains, hire pricing and favorable currency of 85 million dollar partially offset by unfavorable mix and higher investment spending.

  • PMI shipment volume increased 3.6 percent to 190.7 billion units with strong across-the-board volume growth, which was partially offset by declines in three markets in Western Europe.

  • In Western Europe volume fell 2.2 percent due to declines in France, Germany and Italy, partially offset by gains in Spain, Austria and Greece.

  • In France, shipment volume was down nearly 11 percent, primarily driven by a significant 9.8 percent market decline following a tax driven price increase in January 2003.

  • PMI share essentially held steady in the quarter at 39 percent although Marlboro's share was down slightly due to a decline in the premium segment.

  • In Germany, PMI's volume was down 4.2 percent did you to an industry decline of 6.7 percent as a result of the January 2003 tax driven price increase.

  • PMI's share grew to 37.3 percent, an increase of 0.7 points driven by Marlboro's continued momentum.

  • In Italy, volume declined 6.6 percent due to low price competition.

  • The year over year share comparison was hugely distorted by competitor shipment (inaudible) due to shipment distortions in the Italian market, PMI's local market share in Western Europe was down 0.5 point with 38.9 percent in the first quarter, excluding the distortions in Italy PMI share in Western Europe an Marlboro's share were both up 0.1 share points.

  • In central Europe, the Middle East and Africa, volume was up 6.2 percent driven by the Czech Republic, Turkey, Poland and Romania, partially offset by declines in Saudi Arabia, Egypt, Israel and Lebanon, reflecting consumer downtrading as well as some anti-American sentiment.

  • In Eastern Europe volume advanced 11.8 percent fueled by a 21 percent increase in Russia and solid growth in the Ukraine.

  • In Russia PMI experienced a stronger performance for most of its brands due to improved distribution and expanded market coverage.

  • Volume also benefited from the launch of next in September of last year.

  • In the quarter, PMI gained 3.2 points to reach a share of 24 percent driven by L and M and locale brand Optima.

  • In the premium segment in Russia, Marlboro, Parliament and Virginia Slims all recorded double digit percentage volume growth.

  • In Asia, volume grew 5.1 percent driven by Japan, Taiwan and Thailand, partially offset by lower shipments to Korea, due to heightened competition and a decline in Indonesia as a result of the November 2002 tax driven price increase.

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

  • Lark (ph) share advance 0.4 points to 7.4 percent while Marlboro was up 0.5 points to 8.8 percent.

  • PMI's overall share in Japan rose to a record 24.1 percent, an increase of 0.7 points versus the same quarter last year.

  • In Latin America, volume rose 4.4 percent driven mainly by Argentina where Marlboro, L and M and the Philip Morris brand all performed well.

  • Shipments were also up in Mexico and Brazil.

  • As we noted in our release, total Marlboro volume at PMI was down 1.5 percent in the quarter.

  • However, Marlboro posted volume gains in Japan, Mexico, Spain, Austria, Greece, the Czech Republic, Romania, Russia, the Philippines and Argentina and its share increased a number of important markets.

  • Volumes for Parliament, Virginia Slims, Lark (ph), Chesterfield, L and M were up in the quarter driving PMIs 3.6 percent volume gain.

  • To sum up on PMI, we are confident that 36 percent volume gain.

  • To sum up on PMI, we are confident that continuing solid fundamentals and business building strategies and investments at Phillip Morris International will enable it to drive volume, share and income growth this year and for the long term.

  • Let me now turn to our food business.

  • Kraft reported its results yesterday so I shall contain my remarks to some very brief highlights.

  • In the first quarter Kraft Foods worldwide volume increased 0.1 percent, despite the impact of divested businesses of 0.8 percentage point and the shift in shipments supporting the Easter holidays which fall into the second quarter of 2003 versus the first quarter of 2002.

  • Kraft's volumes were also impacted by a reduction in trade industries in the first quarter of 2003.

  • It is estimated that the shift in Easter shipments, the reduction in trade inventories and a difficult business environment in Venezuela reduced Kraft's total value by nearly 2 percent in the first quarter.

  • Worldwide operating company's income increased 13.6 percent to 1.5 million dollars.

  • Kraft Foods North America boasted an operating company's increase of 18.1 percent to 1.3 billion dollar while Kraft Foods International operating income decreased 6 percent to 237 million dollars.

  • To conclude, Kraft Foods and Philip Morris International delivered growth in volume and operating company's income in the first quarter and both have good business fundamentals.

  • PM's US business has stabilized and having success in its new proportional strategy and expanded sales force.

  • Longer term, these are key to strengthening Philip Morris USA's portfolio and will ensure that it is well positioned to make progress to its balancing both income and moderate share growth.

  • This concludes my introductory remarks and now Bill Ohlemeyer and I will be happy to take your questions.

  • Thank you.

  • Bill Ohlemeyer - VP and Associate General Counsel

  • Operator, we can take some questions now.

  • Operator

  • Thank you.

  • The floor is now open for questions.

  • If you do have a question or comment at this time please press one followed by 4 or your touch tone phone.

  • If at any point your question is answered you may remove yourself from the queue by pressing the pound key.

  • First question coming from David Adelman of Morgan Stanley.

  • David Adelman

  • Good morning Dennie (ph) and Bill.

  • Dinyar Devitre - SVP and CFO

  • Good morning.

  • Bill Ohlemeyer - VP and Associate General Counsel

  • Good morning David.

  • David Adelman

  • A big picture question relating to the Miles bonding (ph) experience.

  • Is it causing the company to reevaluate any of its long term strategy, the appropriate financial policies that's traditional dividend and share repurchases intense and so forth?

  • Dinyar Devitre - SVP and CFO

  • What I can tell you as we have said we for the time being we have suspended share repurchases until we have access to the commercial paper (ph) and capital markets.

  • But other than that, I think we feel pretty confident by the strategies we followed to date and we will continue to follow them in the future.

  • Obviously there will be a bit of a lag before we can get back into the Capital Markets but overall, I would say our long term strategies are very much in place, David

  • David Adelman

  • And as it relates to the access to the Capital Markets, if you chose to could you buy back stock finance through the bank credit lines that you have

  • Dinyar Devitre - SVP and CFO

  • No, we wouldn't want to do that, David

  • David Adelman

  • What is it specifically regarding the access to Capital Markets that you need, do you need to return to being an A1, P1 commercial paper issuer or is there sufficient liquidity if the markets were forthcoming to the P2 level you could restart share repurchases

  • Dinyar Devitre - SVP and CFO

  • There is some funding available at A2, P2 but I don't know whether we'll be able to access this at this time.

  • I think we really have to get back to the A1 ratings to get significant access to the capital market

  • David Adelman

  • Do you have an understanding what the agencies want to see from a litigation perspective to get you back to that rating?

  • Dinyar Devitre - SVP and CFO

  • Well, we have spoken to the rating agencies yesterday an at the moment they still have us on a credit watch.

  • And obviously they are concerned about litigation and you know this will take some time to resolve in their own minds and we will work and try to persuade them that in fact our litigation position is as sound as it was prior to this case.

  • David Adelman

  • One last question on the international tobacco business, if you strip out currency, operating income was up 2 or 3 percent, clearly you're spending back, as you indicated you would, the currency benefit or some of the currency benefit, are you disappointed in that context then that volumes were only up 3.6 percent?

  • Dinyar Devitre - SVP and CFO

  • No, I think 3.6 percent was a good show, very good show, David in this difficult economy around the world for any consumer product's company to grow volume at 3.6 percent I think is very good.

  • You're right, we did spend back some of the currency gain into the business but many of these spendbacks build long term volume and we did spend back money to build our infrastructure in the Asian markets for sort product development and new brand initiatives and also for putting together some global campaigns.

  • So we feel extremely good about the 3.6 percent in this environment.

  • David Adelman

  • Actually Dennie (ph), one last thing.

  • Did you retest the aircraft portfolio for impairment during the first quarter?

  • Dinyar Devitre - SVP and CFO

  • Yes, we did and our residual values are well within the assessed values

  • David Adelman

  • Thank you very much.

  • Dinyar Devitre - SVP and CFO

  • OK.

  • Operator

  • Thank you.

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

  • Martin Feldman

  • Good morning Dennie (ph).

  • Dinyar Devitre - SVP and CFO

  • Hi Martin.

  • Martin Feldman

  • If about could talk first about the international market, clearly your volumes and shares were pretty good, if I generalize every where outside Western Europe.

  • Would you agree with that?

  • Bill Ohlemeyer - VP and Associate General Counsel

  • Yes.

  • Martin Feldman

  • And Western Europe you have some weaknesses as you went through, despite that, your operating margin declined from 42.3 percent to 41.6 percent.

  • I suppose my question is, Western Europe clearly has a disproportionately large degree of PMI's profits.

  • Do you think we can expect to see during the reminder of this year a recovery in the margin back to exceeding PMI's margins of last year?

  • Dinyar Devitre - SVP and CFO

  • I certainly think we will see margin improvement through the year Martin.

  • I'm not sure where we will be in comparison to last year but we will see improvements through the year.

  • As I said, in Western Europe we did have a difficult quarter primarily due to tax driven price increases in the major markets, and that affected our volume in Western Europe, but this is going to come back gradually through the year and so I can see margin improvement quarter by quarter.

  • Martin Feldman

  • We have heard with increasing frequency about Italy and clearly this was a difficult quarter for PMI in Italy.

  • Do you see that this segment of the concept now beginning to grow more quickly than it has to date?

  • Dinyar Devitre - SVP and CFO

  • Well, first of all let me say that we have had -- PMI is expert in handling problems like this.

  • They have had problems like this in other markets and over the years there's always one market that will have some kind of a problem.

  • In the past two years it's been Germany.

  • We have basically resolved that problem.

  • We have the expertise to handle the Italian problem, too.

  • You have to remember that there were low priced brands at 2 Euro that did grow, there's been a price increase recently and those brands are off the 2 year-old mark, they are up to 2.2 per pack now and I think we'll be able to manage the situation a little better going forward because of the rounded price and you know, we are looking at the situation and we will manage the gaps as effectively as we can

  • Martin Feldman

  • OK.

  • But in talking about managing the gaps, I mean, is it appropriate opinion to have that the deep discount segment of the market in Italy is growing and it's that that you're having to manage?

  • Bill Ohlemeyer - VP and Associate General Counsel

  • Yes

  • Martin Feldman

  • OK Dennie (ph).

  • I think my last question, if we look at the US domestic market, you had the deep discount segment of the market growth slow to virtually nothing, just about I think 10 basis points or something it was up.

  • If your profit per thousand fell I think 29 percent from 2390 to 6094 and you showed share growth of your 4 key brands, do you think that the cost associated with, you know, that additional share growth is worth the margin pain?

  • Dinyar Devitre - SVP and CFO

  • Well, you have to look at this, where would we have been.

  • I don't think you can look at the .1 in isolation.

  • I think you have got to say this is the cost of bringing about stability in this market for ourselves and are moderating the share growth of the discount segment, of the deep discount segment.

  • If we hadn't taken these actions, who knows where our share would have been?

  • That's the way I'll answer your question.

  • Martin Feldman

  • The last point again related to the same issue clearly I think you have given the market confidence today with your -- without the buy back program achieving your original guidance or your target of achieving your original guidance of 460 to 470.

  • When I look at the tax increases that have been legislated in the US I think in seven states to date with proposals elsewhere they are running on average of just over 100 percent on a state by state basis.

  • That's a bit higher than we saw during 2002.

  • What do you think happens to the state excise taxes during the remainder of this year and given how weak the state economies are, do you think they have a potential to hurt numbers more than you currently anticipated?

  • Dinyar Devitre - SVP and CFO

  • First of all, I hope that the proposed increases, not all the proposed increases go through.

  • We estimate at the end of last year, the weighted average state tax was about 66 to 67 cents per back and we estimate this year and there are increases taking place in certain states as you say, that the year end rate will be somewhere between 72 and 75 cents a pack.

  • So that will be clearly sharply lower than the percentage than we have seen in the 6 states to date.

  • Martin Feldman

  • Why the expectation that the rate will come down?

  • Dinyar Devitre - SVP and CFO

  • You have to work it on a weighted basis, Martin.

  • Martin Feldman

  • Last question would be -- I mean it would be a silly question not to ask although I don't really expect an answer.

  • Do you have any idea as to when you think the -- if you may have some - the rating agencies let you return to the CP (ph) markets?

  • Dinyar Devitre - SVP and CFO

  • You have to ask the rating agencies that question.

  • I think we are worthy of going back to our original ratings.

  • I think, you know, our businesses are sound.

  • We have solid cash flows.

  • But you really have to ask the rating agencies and please do ask them

  • Martin Feldman

  • Dennie (ph) I don't think you're alone in that field.

  • Thank you for taking my questions.

  • Dinyar Devitre - SVP and CFO

  • OK.

  • Operator

  • Thank you.

  • Our next question is coming from Andrew Conway of CSBC.

  • Mr. Conway, your line is live, sir.

  • Again, Mr. Conway, your line is live.

  • Our next question is coming from Rob Campagnino of Prudential.

  • Robert Campagnino

  • Good morning gentlemen.

  • Perhaps I missed this, but under your new measurement, what is the share of the fourth tier?

  • Dinyar Devitre - SVP and CFO

  • Under our new measurement --

  • Robert Campagnino

  • Under the total retail panel, what is your number for fourth tier share?

  • Dinyar Devitre - SVP and CFO

  • About 9.9 percent in the first quarter of this year

  • Robert Campagnino

  • OK.

  • Do you have comparable IRI capstone numbers for the first quarter just to give us a feel for what your share might have been in the rest of the market that you're now capturing?

  • Dinyar Devitre - SVP and CFO

  • Can you repeat that question?

  • Robert Campagnino

  • You have given us a total retail panel numbers.

  • Do you have sort of the numbers under the old measurement system?

  • Dinyar Devitre - SVP and CFO

  • Yes.

  • Under the old measurement system in the first quarter of last year our share would have benefit -- was 50.7 percent.

  • And in the first quarter of this year is 50 percent.

  • So under the old measure we're down about 0.7 points.

  • Robert Campagnino

  • Just by my quick calculations it seems the rest of the market that you're now capturing with the retail panel you have a 35 share.

  • Is that reasonable?

  • Dinyar Devitre - SVP and CFO

  • Which brand are you talking about

  • Robert Campagnino

  • I'm talking overall share?

  • Dinyar Devitre - SVP and CFO

  • 35 percent?

  • Robert Campagnino

  • If you have 50 percent of 87 percent.

  • Dinyar Devitre - SVP and CFO

  • No, it doesn't work like that.

  • We don't have 50 percent of 87 percent.

  • The retail panel measured the universe and the panel was based on the stores we covered, and the stores we covered accounted for 87 percent of the universe

  • Robert Campagnino

  • I understand that.

  • Dinyar Devitre - SVP and CFO

  • Our share in the - what we call the non-workload is I think what you're getting to ...

  • Robert Campagnino

  • Exactly.

  • Dinyar Devitre - SVP and CFO

  • Would have been probably in the low 40s

  • Robert Campagnino

  • OK.

  • Excellent.

  • Your new wholesale leaders program is out in the market, and it's not particularly concern of yours.

  • I think there's a chance that it causes some dislocation of wholesalers.

  • Could you speak broadly as to what you hope to accomplish with that program?

  • Dinyar Devitre - SVP and CFO

  • I think the old wholesale leaders program had three levels of payments and there was not much of a gap between the first level, the second level and the third level.

  • What we have basically done is made it more performance oriented and the gaps between the first level of payment and the second level of payment and the third level of payment have sort of grown wider so if you're a really good performer you get into the top level and make some money and if you don't do so well you get in the third level and make a little less money than you used to do.

  • Like anything in life, you do well you get paid well, if you don't, you don't get paid too well

  • Robert Campagnino

  • One final question.

  • You don't actually borrow Monday to repurchase shares.

  • It seems to me what you're doing is you're operating out of an abundance of caution keeping your cash flow operations as a resource here in case you're shut out of the commercial paper pockets for an extended period of time.

  • If you get back sooner than you expect or you get back without havoc, to use your cash flow for operations for working capital needs, will you make up the difference if that's a correct word in your share repurchase program?

  • Dinyar Devitre - SVP and CFO

  • Sorry.

  • Could you just repeat that question

  • Robert Campagnino

  • You don't borrow money to repurchase shares

  • Dinyar Devitre - SVP and CFO

  • Right

  • Robert Campagnino

  • I'm assuming you're using your money from cashflow operations as a reserve against your revolver in case you need it for working capital; is that correct?

  • Dinyar Devitre - SVP and CFO

  • That's right

  • Robert Campagnino

  • If it materializes that you don't need that, will you make up in accelerated share repurchase, is it cash flow from operations ...

  • Dinyar Devitre - SVP and CFO

  • Yes, if the cash flow from operations is sufficient, sure we'll use it.

  • Robert Campagnino

  • OK.

  • Thank you

  • Operator

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

  • Bonnie Herzog

  • Good morning.

  • Hello.

  • Dinyar Devitre - SVP and CFO

  • Yes hi Bonnie.

  • Bonnie Herzog

  • Yes I wanted to make sure you could hear me.

  • I have sort of a follow on question to the share buyback being suspended and the rating agencies.

  • Maybe it's more of a question for Bill.

  • My understanding is that the S and P is waiting to see the success of the plaintiff attorney challenge to this recent agreement or order by Judge Byron.

  • So can you give us an idea possibly, Bill, how long that appeal process would take?

  • What I'm hearing is that S and P wants to be punctual (ph), but they won't be successful in challenging this agreement.

  • Bill Ohlemeyer - VP and Associate General Counsel

  • The form and the substance of any challenge to this agreement will happen this way.

  • On or before Monday, we have to file our post trial motions with Judge Byron in the trial court, the motions to attack his judgment.

  • Those motions are the pre-remembering sit to our ability to file a notice of appeal and begin to pursue the appeal of the judgment in the Illinois appellate courts.

  • I suspect because this was a judge-tried case that Judge Byron will fairly promptly rule on those post trial motions.

  • It would not surprise me if he ruled them as early as Tuesday or Wednesday of next week.

  • At that point, we will promptly file a notice of appeal and at that point, then, the plaintiff's lawyer would have the ability to ask the appellate court to hear an appeal under rule 305 G of Judge Byron's decision.

  • So the issue will be teed up for the appellate court very quickly, the plaintiff's lawyer, if he challenges will very much want to have it heard very quickly and as I said yesterday or the day before, the standard of review the court has to apply to that appeal is a much higher standard than they will apply to our appeal of the merits of the case.

  • They will -- the plaintiff's lawyers will have to argue that Judge Byron abused his discretion in setting this reduced bond.

  • That standard is the highest standard to overcome on appeal for somebody complaining about something that happened to them in the court below, and it essentially would require the plaintiff's lawyers to argue and prove to the courts that the judge basically didn't follow any of the procedures you're supposed to follow in order to reach a decision like this, which are -- you know, is completely contradicted by the facts.

  • He took evidence, he took evidence from the plaintiff's lawyers, they put on an expert witness, he had evidence from us, we had days of hearings and I think it's extremely unlikely that a court of appeals would or could conclude that in this circumstance on this record that Judge Byron abused his discretion in reducing this bond.

  • Bonnie Herzog

  • And that's as far as the challenge can be taken?

  • Bill Ohlemeyer - VP and Associate General Counsel

  • Yes

  • Bonnie Herzog

  • OK.

  • So you're thinking maybe in the next month or 2, we should have an answer?

  • Bill Ohlemeyer - VP and Associate General Counsel

  • I don't think it will take that long on that issue.

  • I think the plaintiffs lawyer has an interest in -- if he has an interest in challenging the bond he needs to do it as quickly as he can once the appellate court has jurisdiction of the case.

  • That occurs when the notice of appeal is filed.

  • We will file the notice of appeal as promptly as we can because we want to expedite the appeal of this matter, also.

  • I think the challenge, if it comes from the plaintiff's lawyers to the bond, in the appellate court could come within a couple of weeks, start to finish

  • Bonnie Herzog

  • That's good because then if I'm reading S and P correctly that's one of the key variables that they are looking for, the change in the rating.

  • OK.

  • Now Dennie (ph), I have a follow-on question with your wholesale leader program, the new program that was just announced.

  • I know you walked through sort of your strategy and the different levels.

  • One of my concerns with this new program would be some of the -- a lot of the wholesalers, probably the smaller wholesalers are a little upset by this new change and they are finding it difficult to achieve certain market share levels and if they can no longer continue to buy directly from your company, my concern would be does this encourage them to now pursue more volume in the low end market?

  • Is that something that you have addressed and you just feel that even though that's a con it doesn't outweigh the pros of this change?

  • Dinyar Devitre - SVP and CFO

  • Obviously something like that, this has just gone in and our people at Philip Morris U.S.A. are obviously monitoring the situation very carefully.

  • If they see a problem that emerges that you know in any fundamental way affects our business I'm sure they will make the appropriate tactical changes.

  • But I don't think -- I can't see this being a long term problem because frankly whenever you make a change of this type, the guys who have not been doing very well will always complain.

  • But over a period of time I think this will settle down.

  • In any case, I don't see it as a major problem ...

  • Bonnie Herzog

  • OK.

  • Fair enough.

  • And then I just have a question on your new Marlboro blend line extension (ph).

  • Can you give me an idea what type of incremental shipment volume you saw in the first quarter because my understanding is that that was bought, you know, at a wholesale level I believe it was a third or fourth week of March, so you might have seen some shipment volume for that new brand hitting your P and L.

  • Dinyar Devitre - SVP and CFO

  • Yes, it was in the region of about 300 million in the first quarter

  • Bonnie Herzog

  • So you're please with that from the buy in so far ...

  • Dinyar Devitre - SVP and CFO

  • Yes, we are doing very well on the buy in.

  • Bonnie Herzog

  • I wanted to ask a question about your reduced risk cigarette, I think last year you talked about coming to market with something in 2003.

  • I'm just curious what the status of that is, and is that still on schedule?

  • Dinyar Devitre - SVP and CFO

  • Yes, it's still on schedule later in the year.

  • Bonnie Herzog

  • You still have plans of re-introducing it later this year.

  • Dinyar Devitre - SVP and CFO

  • Yes.

  • Bonnie Herzog

  • OK thank you so much.

  • Dinyar Devitre - SVP and CFO

  • Thank you.

  • Operator

  • Our next question is coming from Art Cecil of T. Rowe Price.

  • Art Cecil

  • Morning.

  • Could you all indicate what your interest expense for KS now might be for the year given the perhaps higher rates you're paying domestically and also the possibility there might be more debt reduction or cash accumulation now that the share repurchase has been suspended?

  • How do those two factors play out against each other?

  • Dinyar Devitre - SVP and CFO

  • I think it will be roughly a wash.

  • I this I the higher rates we have to pay on the bank lines will add interest costs on the other hand because of our debt going down we'll save some interest there.

  • So on balance it will be a wash.

  • Art Cecil

  • So interest expense for calendar '03 will be more or less equivalent to what you had in calendar '02?

  • Dinyar Devitre - SVP and CFO

  • No, it would be a wash versus our plan.

  • I -- as far as '02 is concerned, I really can't give you a number right off the top.

  • Art Cecil

  • For '03?

  • Dinyar Devitre - SVP and CFO

  • Yes, for '03

  • Art Cecil

  • Then on the release on the international sod (ph) you mentioned the fact that higher investment spending was a partial offset to some of the policies with respect to internationals operating income, can you give some ideas to how much the higher investment spending was in the quarter for international tobacco?

  • Dinyar Devitre - SVP and CFO

  • Roughly somewhere between 30 and 40 million bucks.

  • Art Cecil

  • And that would be -- would you categorize that as in incremental spending in lieu of the favorable translation situation or is that something you always had on the plan?

  • Dinyar Devitre - SVP and CFO

  • In lieu of the favorable currency

  • Art Cecil

  • And the yearly tax rate, can we assume that 35.2 is what you're looking at for the yearly tax rate?

  • Dinyar Devitre - SVP and CFO

  • Yes, that's what we are looking at.

  • Of course there is always an issue of audits, tax audits being closed and as they come about, that may affect the overall rate but at the moment that's what we're looking at.

  • Art Cecil

  • OK.

  • And then one last thing on this, on the rating agencies, is it your understanding that the rating agencies are focussed on the miles litigation or are they concerned about all litigation, which takes on a whole new element of uncertainty as to when they are going to be more accommodating to you all?

  • Bill Ohlemeyer - VP and Associate General Counsel

  • Art, I think that's a question you ought to direct to them, but I think the litigation environment, the headlines notwithstanding, is not -- the risk I think is static if not reduced in the sense that the supreme court decision on punitive damages I think will temper what is going to happen in individual cases.

  • We have not seen an increase in the filings of individual or class action cases.

  • We do have a small number of these so called lights class action cases but the only other ones that are certified as class actions are in states where there are bond caps, no punitive damages and currently on appeal.

  • So the miles -- like I said the miles headline notwithstanding, the litigation environment has not been one in which new and uncertain risks have arisen over the past 6 months.

  • The issues to be decided in a case like miles are decided and decided in our favor in cases that are tried from time to time all over the country and individual claims.

  • So there's really nothing new there ...

  • Art Cecil

  • So you're not putting worlds in their mouth certainly but it sort of look like miles is their focus rather than the broader concern of litigation that they would only be catching up to, I guess ...

  • Bill Ohlemeyer - VP and Associate General Counsel

  • Well, it certainly was an acute and very significant and very difficult, you know issue for us to navigate.

  • Art Cecil

  • Thank you very much

  • Operator

  • Thank you.

  • Our next question is coming from Joel Emory (ph) of Crest Investments.

  • Again, Mr. Emory (ph), your line is live at this time.

  • Thank you.

  • We'll move on to our next question.

  • It is coming from William Booth of Wellington Management.

  • William Booth

  • Bill, a question for you falling on the question of the rating agencies.

  • You know, if you want to listen to those calls, at least I was struck by perhaps the lack of background that they would have had on the industry, and I'm wondering in hindsight if you look back and you say you probably could have paid more attention to the agencies an spending more time with them and talking about litigation trends and in particular their statement about litigation risk increasing over the last few years I think was their terminology.

  • Do you think that in fact that might have been a strategic weakness on Altria's part?

  • Bill Ohlemeyer - VP and Associate General Counsel

  • We spend a fair amount of time explaining the litigation situation to them at their request in whatever level of detail they desire or they think they need, and we certainly, you know, do it on a regular basis.

  • They - I assume participate in calls when litigation developments occur and we have analysis calls on issue.

  • We're certainly willing to provide whatever level of detail or whatever frequency of information on the progress of the litigation they like but we make all the time that they need or they request available to them on whatever schedule they would like to have it, because obviously we think it's important for us to provide timely and accurate and appropriate information to people about the status of progress of litigation

  • William Booth

  • Were you surprised by some of their statements regarding your position in litigation?

  • Bill Ohlemeyer - VP and Associate General Counsel

  • Well, I don't know specifically what you're referring to, but I would be surprised, and I would strongly disagree with anyone who says that the litigation situation facing the company today is much different than it was six months ago or a year ago.

  • In fact, we have made progress I think in the last six months and there have been some external events like the US supreme court decision, some of the California decisions we have obtained in the trial in appellate courts that I would argue suggests that we have managed and continue to manage the litigation in a way that maintains or reduces it direct to (ph) the company.

  • William Booth

  • Thank you.

  • Operator

  • Thank you.

  • Our next question is coming from Ann Gurkin of Davenport.

  • Ann Gurkin

  • Good morning, just going back to this IRI capstone does it include import cigarette data?

  • Dinyar Devitre - SVP and CFO

  • Yes, I could include import cigarette data because it would go to stores which sell import cigarettes.

  • Ann Gurkin

  • OK.

  • And you have extended, you talked about this in the off invoice price discount.

  • At what point do you decide to make that a permanent decline increase?

  • Dinyar Devitre - SVP and CFO

  • That's up to Philip Morris U.S.A.

  • They sort of look at that on a very regular basis and they're going to make that decision.

  • But at the moment we have got it up there until the end of May.

  • Ann Gurkin

  • Can you give us any kind of parameters you're looking at or what they need to see?

  • Dinyar Devitre - SVP and CFO

  • Well, I think, you know, what they are looking at is their retail share and right now the retail share is looking pretty good.

  • So the other thing, Ann, is we're not going to get into details of this issue beyond May because frankly that involves our pricing strategy and we would rather not talking about that

  • Ann Gurkin

  • Thank you.

  • Operator

  • Thank you.

  • Our next question is coming from Chris Growe of AG Edwards.

  • Chris Growe

  • I have a couple questions.

  • First Dennie (ph), in terms just to be clear on the cash flow that builds up this year, the free cash flow, will that essentially sit as a cash balance in your cash account on the balance sheet or will you use it immediately to pay down the short term debt?

  • Dinyar Devitre - SVP and CFO

  • We will use it to pay down debt

  • Chris Growe

  • OK.

  • In terms of the dividend and I know this is going out a ways later in the summer but what's going to dictate your willingness to increase the dividend, is it EPS growth or will we more closely align to cash flow growth given your constraints in the short run?

  • Dinyar Devitre - SVP and CFO

  • The decision on the dividend is really up to the board of directors and so I really wouldn't like to get into that more than just saying that, you know, that is something that the board looks at the traditionally at the August meeting and they look at it again, they look at our October performance, they look at our cash flows and they make a considered decision

  • Chris Growe

  • Regarding the cash outflows to the escrow account for the price case, will that in itself, assuming you have access to the commercial favorable markets again let's say in the month or later in the year, will that interrupt your share repurchase program as far as you can tell.

  • Dinyar Devitre - SVP and CFO

  • No, if we get access back to the commercial paper market as we have in the past, you know, we will be able to go back to buy shares.

  • This cash payout which is about 610 million dollar this year, most of it loaded towards the final, the last quarter, should not, you know, significantly affect our share buyback

  • Chris Growe

  • OK.

  • My last question was on just the generally tax, excise tax environment for PMUSA this year and I was curious if you would consider adjusting at promotional levels lower to accommodate these higher taxes, is that part of the plan for the year or will they be absorbed?

  • Dinyar Devitre - SVP and CFO

  • It will be absorbed

  • Chris Growe

  • OK.

  • Thank you.

  • Dinyar Devitre - SVP and CFO

  • Sorry.

  • I didn't answer that question -- state excise taxes are always added on, they are not absorbed.

  • I didn't answer that correctly

  • Chris Growe

  • OK.

  • Operator

  • Thank you.

  • Our next question is coming from Dan Kurz of DK Equities.

  • Dan Kurz

  • Good morning.

  • I have a broad question on PMI.

  • Anti-American sentiment abroad has risen sharply in the aftermath of the Iraqi situation.

  • Your review of international share developments other than in the mid east doesn't appear to reflect that negative sentiment at least so far.

  • My question, do you have any sense, perhaps based on history, whether a lag negative impact maybe in the works at PMI and if so, how would you react, would you react to possibly lowering prices or increasing coupon type activity?

  • I would be grateful for anything that would help me frame (ph) this issue.

  • Dinyar Devitre - SVP and CFO

  • First of all it's sort of almost impossible to make any guess as to the impact of, you know, anti American sentiment on the sales of Marlboro in the non-Middle East markets.

  • That would be a wild guess by anyone.

  • And if it happened, I can't really tell you how we would react.

  • We wouldn't do any price adjustments or anything for that.

  • Because as I said it's a very difficult thing to estimate.

  • Dan Kurz

  • OK.

  • Historically speaking if one revisited the first gulf war or do you have any history --

  • Dinyar Devitre - SVP and CFO

  • There's no history to go by.

  • Dan Kurz

  • And separately referring back to an earlier question, when you talked about the increased investment at PMI dragging down or negatively impacting bottom line results, obviously that investment is not in traditional sense of the word but it is in a marketing sense of the word.

  • Dinyar Devitre - SVP and CFO

  • Both in a traditional and marketing sense

  • Dan Kurz

  • I assume that the bulk would be in marketing because obviously investment doesn't impact the P and L, it's placed on the balance sheet and advertised ...

  • Dinyar Devitre - SVP and CFO

  • Correct

  • Dan Kurz

  • Thank you

  • Operator

  • Thank you, ladies and gentlemen, this will be the last question coming from our investment community at this time.

  • Our last question is coming from Andrew Conway of CSFB.

  • Andrew Conway

  • Thank you Dennie (ph), Bill and Nick.

  • I apologize as I picked up the phone it was disconnected.

  • A couple parts to a question, Dennie (ph), I really value if you could give us your report card on the execution of promotions in the USA business from where you were November, December, to where we are here in April some of the lessons that Phillip Morris USA has learned on the promotional strategy and what in the marketplace would allow you as we get through the year, you know, from a point perspective to either step up promotions or moderate whether it's extending off invoice or not, what analytically are you looking at in the environment in the US business, and finally, is there a point this year where you think your intermittent growth can outperform the industry shipment growth as we move through 2003?

  • Dinyar Devitre - SVP and CFO

  • First of all, as the first part of your question, how effectively has the promotion been implemented and what lessons have we learned, obviously we think that off invoice promotion is much more efficient and it also gives us greater breadth and depth in achieving you know the required price, as a result of this off invoice promotion we are getting the desired price.

  • In 95 plus percent which is a high percentage of where we were last year with the normal promotion.

  • So in answer fought first part of your question is this is a much more efficient way of doing the promotion an we are happy with that.

  • The second part of your question refers to our future pricing strategies and I would rather not get into that because it's a slippery slope.

  • Third, as far as shipment growth, yeah, I can see probably in the second quarter our shipments are going to be either flat or a little up on last year and as you know, this first quarter we had very unfavorable comparisons to the first quarter last year and so we will get a bit of pay back for that in the second quarter and we will have better shipment growth.

  • Andrew Conway

  • Great Dennie (ph).

  • Thank you.

  • And my sense is as you look strategically in the current promotional environment after rebasing the profitability of your US business this year, my sense is that the focus will be to see some growth up 04 and beyond.

  • Dinyar Devitre - SVP and CFO

  • Yes.

  • Andrew Conway

  • Thank you.

  • Operator

  • Ladies and gentlemen, we would now like to open the floor from anyone with the press or media who does have any question or comments at this time for the presenters.

  • Again, ladies and gentlemen, if you are with the press or media and do have a question or comment please press 1 followed by 4 on your touch tone phone.

  • Please hold a moment while we do poll for questions.

  • Thank you.

  • Our first question is coming from Christina Berk of Dow Jones.

  • Christina Berk

  • Hello.

  • I have a couple questions on the aircraft leasing business.

  • I just was wondering if you kinds of talk about your total exposure in dollar terms and talk about what you are doing perhaps to scale back any exposure or get out of the business, what's your commitment to that?

  • Dinyar Devitre - SVP and CFO

  • We have an exposure about 25 percent of our portfolio is with airlines and our portfolio is a little over 9 billion dollars.

  • So that's the answer to the first part of your question.

  • With regard to what we are doing with the airline business, obviously because our exposure is quite significant we are looking at it very carefully, are monitoring the situation very carefully and it's almost sort of a week by week exercise and we will make the appropriate decisions as the year continues.

  • We will still got to see the aftermath of the -- the airlines have taken quite a beating in this war environment, as you know airline travel is down significantly.

  • We are looking at that, and we are looking at many other factors and we will make a decision at the appropriate time.

  • Christina Berk

  • Any idea of when that appropriate time might be?

  • Dinyar Devitre - SVP and CFO

  • Not really.

  • Probably sometime later this year.

  • Christina Berk

  • OK.

  • Thank you.

  • Operator

  • Our next question is coming from Jessica Wohl of Reuters.

  • Jessica Wohl

  • I guess my first question probably goes to Bill.

  • It was announced yesterday that you were moving the lower tar and anything teen statements from packaging and I wonder if you think that will have any effect on lights litigation going forward?

  • Bill Ohlemeyer - VP and Associate General Counsel

  • No, I don't think so.

  • It really is an issue that shouldn't be part of the litigation because in large part the claim that there is anything misleading about those states or that there should be additional warnings on those packages is preempted by federal law, it's one of the major bases of our appeal in the miles case that congress wrote the warnings, congress implemented a national regulatory scheme, federal trade commission is involved in deciding and regulating what cigarettes can be labeled as light and ultra light and all of that shouldn't be subject to you know second guessing in court rooms across the country.

  • So we think that from a litigation perspective, those kinds of issues are the kinds of issues that should not, you know, be a part of the litigation or should not be -- I guess what -- it's a litigation neutral decision, put it that way, because of the law that's to be applied to these cases.

  • Jessica Wohl

  • OK.

  • Expanding on that, are there any plans to change the wording on lights packages internationally?

  • Bill Ohlemeyer - VP and Associate General Counsel

  • In what sense?

  • Jessica Wohl

  • I guess just because of the European Union and the use of words like light and mild, what the status is of that and also the status of having anything that says lower tar or nicotine on packages there.

  • Dinyar Devitre - SVP and CFO

  • In the EU there are the new regulations which are required to change the wording

  • Jessica Wohl

  • And so when can we expect that to that to happen.

  • Is that happening now?

  • Dinyar Devitre - SVP and CFO

  • It will happen sometime this year.

  • Jessica Wohl

  • And Dennie (ph), just one more question.

  • You talked a lot about the impact on anti-American sentiment, can you elaborate on that a little bit and how much you think volumes are impacted in the first quarter, particularly in the Middle East.

  • Dinyar Devitre - SVP and CFO

  • Actually, I didn't talk a lot about it

  • Jessica Wohl

  • You were asked another question about it

  • Dinyar Devitre - SVP and CFO

  • As I said, it's very difficult to make an estimate.

  • But in the Middle East we estimate that we may have lost up to 200 million units in the first quarter.

  • Jessica Wohl

  • In any particular country?

  • Dinyar Devitre - SVP and CFO

  • By and large, you know, the gulf states in the Middle East.

  • Jessica Wohl

  • OK.

  • Thank you.

  • Operator

  • Ladies and gentlemen, there appear to be no further questions or comments from the press or media at this time.

  • I would now like to turn the floor back to the management for any closing comment.

  • Nick Rolli - VP of Investor Relations and Financial Communications

  • I just want to say thank you again for joining us this morning and we'll be back to talk with you in mid July with our second quarter earnings.

  • So again have a great day and thank you.