奧馳亞 (MO) 2003 Q3 法說會逐字稿

Good morning and welcome to the Altria Group, Inc.

Third Quarter 2003 Earnings Conference Call.

My name is Maria.

I will be your conference coordinator on today's call.

The floor will be open for questions following the presentation.

To ask a question, press "1" "4" on your touchtone phone.

Press and media will be able to ask questions.

All the questions are taken from all in listening community.

It is now my pleasure to turn it over to your host Mr. Nick Rolli, Vice President, Investor Relations for Financial Communications.

Sir, the floor is yours.

Good morning.

Thank you for joining.

Today, Dinny Devitre, Senior Vice President and Chief Financial Officer of Altria Group Inc. will be hosting this call.

Before I introduce Dinny, I would like to make a few brief comments.

First, as you know, we issued our 2003 third quarter earnings release earlier this morning.

To get a copy you can go to the Altria's Investor Relations Web site at altria.com to obtain a copy.

For those of you listening via the audio Web cast, we are also providing a summary slides for third quarter for Altria Group Inc. and its family of companies, Kraft Foods, Philip Morris USA and Philip Morris International.

Second, this call will be limited to a discussion of our business results from the third quarter of 2003.

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 in detail on that call, our discussion of Kraft will be limited on this morning's call.

And fourth, today's remarks may contain projections to future results and I direct your attention to the Safe Harbor statement at the end of our news release for review the various factors that could cause actual results to differ from projections.

Now it's my pleasure to introduce Dinny Devitre.

Good morning.

In the third quarter Altria's domestic tobacco business significantly improved its performance.

While our international tobacco business performs strongly in many markets, it was adversely affected by industry dynamics in three keys Western European markets.

In our food business result reflected a particularly challenging quarter and reflected Kraft's reinvestment program in North America to narrow price gaps and enhance brand equity in several key categories.

Turning to Altria's third quarter 2003 results, diluted EPS of $1.22 reflected a difficult comparison with the third quarter of 2002 when Altria's results included a gain of 81 cents per share for the Miller Brewing Company transaction.

As stated in our release, Altria reaffirmed its projection for 2003 full year diluted EPS or $4.50 or $4.60 per share, including 8 cents of incurred in projected charges for the tobacco growth settlement and re-location of (inaudible).

Let me turn to Philip Morris USA, our domestic tobacco company.

PM-USA had a solid quarter as total retail share continued to improve versus the three previous quarters and shipment volume maintained stability.

Operating companies income was down 24.4% versus the same period last year to $1.1 billion due primarily to higher promotional spending, more volume, and $27 million of charges related to the previously announced move of Philip Morris USA's headquarters to Richmond.

Shipment volume was down 1% to 48.9 billion units in the third quarter although premium volume was stable.

Philip Morris USA's premium mix improved 1% to approximately 91%.

Retail shares of Philip Morris USA based on the IRA Capstone total retail panel was 48.8% in the third quarter up 0.3 points versus the second quarter driven by steady gains in Marlboro and the continued growth of parliament.

Combined retail share for Philip Morris USA's four focus brands, Marlboro, Parliament, Virginia Slims, and basic was 44.5% reflecting growth of 0.4 points versus the second quarter of this year.

Marlboro's share showed continued resilience, increasing 0.3 points versus the second quarter to 38.1% at retail while parliament's share was up 0.1 point to 1.8% at retail versus the second quarter.

In the third quarter, total retail share for the premium category up 72.6% with 0.2 shared points ahead second quarter with Philip Morris USA increasing its leading share for category by two-tenths of a share point to 61.3%.

The deep discount segment held a 9.9% retail share, a decline of 0.1 point versus the second quarter.

This represented the first sequential share decline in several quarters.

Also, the growth of imports has slowed on a three-month moving average basis.

Import volume has remained essentially flat since the fourth quarter of last year.

Going forward, several factors give us confidence about Philip Morris USA's performance.

First, retail share continues to grow on a sequential basis due to Marlboro and parliament, two of the best premium brands in the U.S. tobacco industry.

Second, the deep discount segment, which had been growing rapidly throughout 2002, has remained essentially flat since the fourth quarter of last year.

Third, Philip Morris USA continues to add consumer value and further build brand equity for Marlboro and parliament by introducing new brand styles in the premium segment.

In addition to the second quarter introduction of Marlboro brand no.27 and parliament ultralight, Philip Morris USA also continuous to test marketing premium chest (inaudible).

It also announced that it will begin test marketing an addition to the on the Marlboro menthol family in the fourth quarter.

Finally, Philip Morris USA continues to aggressively pursue programs to address contraband and counterfeit issues, an industry wide compliance of the master settlement agreement and related escort requirements.

To date, 33 states have enacted complimentary legislation to the MSA related escrow legislation and 16 states have enacted legislation to close Alicable share loopholes.

Turning to our international tobacco business, PMI delivered operating companies income of $1.7 billion in third quarter, an increase of 12.9% versus the prior year.

Driven by favorable currency of $150 million, volume gains, higher pricing, and charges in the third quarter of last year up 33 million for asset impairments and exit costs.

Excluding currency, PMI's operating companies income was up 0.9%, reflecting reinvestment of currency gains in brand building and price gap management.

PMI believes that in the slow growth environment that currently exists, investing for the future success of its brand portfolio is the right thing to do.

Shipments in the third quarter increased 0.8% to 189.4 billion units as volume growth, including approximately 1 billion units from PMI's acquisition in Serbia, was significantly moderated by declines in three principal markets: Italy, Germany, and France.

Let me address the issues and actions we are taking to restore volume growth in these markets.

In Italy, volume in the third quarter was down 19.3% and share declined 8.1 points to 53.1% versus prior year, due mainly to Marlboro and Diana, which remained under pressure from low priced competitive brands.

However, since May, PMI's monthly share has stabilized at about 54%.

The growth of low price brands has resulted in significant revenue losses for the Italian government because of the highly add volume in nature of Italy's excise tax structure.

Clearly it is not in the government's best interest to let this situation continue.

PMI's is cautiously optimistic that the Italian government will take appropriate action, possibly instituting a minimum tax to narrow price gaps.

In Germany, PMI's volume was down 7.3%, tax driven price increases in 2002 and 2003 have resulted in a market decline and the growth of tobacco cautions, which are taxed significantly lower than cigarettes.

Share was down 0.2 points, reflecting trade loading by some competitors.

PMI has filed unfair competition claims against the principal manufacturers of tobacco portions and in addition the European union has challenged the legality of such excise tax treatment.

Let me remind you that PMI encountered a similar situation in Germany in 1992 when the cigarette market was impacted by tobacco rules, which enjoyed a tax advantage versus cigarettes.

But by early 1993, the products' tax advantage began to be phased out.

Turning to France, PMI's volume was down 6.7% in the third quarter due to a lower total market as a result of tax driven price increases.

PMI's share was up 0.5 share points driven by the Philip Morris brand and the recent launch of basic, which has met PMI's objectives.

Marlboro's share was stable in the quarter.

So although the market in France has declined, PMI's market share has held up well despite a difficult pricing environment.

The French government has announced important changes to the taxation of tobacco products.

With the new tax and price increases effective October 20th, Marlboro's price gap versus low brands, low end brands, will likely decline from 57 euro cents or 17% to 53 euro cents or 13% on a 20s pack equivalent.

Going forward, tax increases will continue to impact total market size.

PMI remains well positioned in France to sustain its strong market position due to the declining price gap and the growth of the Philip Morris brand and basic.

In Western Europe, PMI's share declined 1.1 share points in the third quarter to 38.9%, essentially due to Italy.

Excluding Italy, share was up 0.3 points to 35.6%, driven by gains in France, Spain, Austria, and the United Kingdom.

In central Europe, volume was down 1.3% due to intense price competition in Lithuania, Poland, and the Slovak republic, partially offset by gains in other Baltic countries, Greece, and acquired volume in Serbia.

In Eastern Europe, Middle East, and Africa, volume advanced 9.4% due to an 8.5% increase in Russia where premium brands Marlboro and parliament and mid price offering L&M and Chesterfield continued to grow.

Market share in Russia was up 2.9 points to 24.5%.

Volume and share also advanced strongly in the Ukraine driven by Marlboro, L&M, and Bond Street.

In turkey, PMI's share rose to 33.1%, an increase of 6.8 share points versus the same quarter last year, propelled by the continued success of L&M and the recent launch of Morotee (ph) ambassador.

In Asia volume increased 3.3%, as gains in Japan, Korea, Taiwan, Malaysia and Vietnam were partially offset by Indonesia and the Philippines.

In Japan, shipments increased 5.5% due to a favorable comparison to the third quarter of 2002 when U.S. coast shipping ports were shut down, partially offset by trade inventory depletion following the July 2003 tax driven price increase.

PMI's market share in Japan in the quarter rose 0.5 points to 24.4% driven by Marlboro and Lark.

In Korea, volume and share improved significantly aided by the successful introduction of Lark and the July 2003 launch of Virginia Slims ultra lights.

Lock is now the fastest growing international Cigarette brand in Korea.

In Taiwan, volume was up driven by L&M and the recent introduction of Lark.

In Latin America volume rose 3.3% due mainly to Argentina where Marlboro and L&M continued to perform strongly as well as in Mexico and Central America.

In Argentina, share rose 0.2 points to 65.8%.

In Mexico Marlboro gained share helping PMI's overall share reach 59.7% in the quarter.

Total Marlboro volume was down 3% from the quarter due primarily to declines in France, Germany and Italy.

However, Marlboro remains resilient, has good share momentum, and is well positioned for volume and share growth given that in western Europe, Marlboro is holding share or is up in share year to date September in all major markets except Italy.

In addition, Marlboro's share is also growing in Japan and Korea and other key income regions of central Europe, eastern Europe, and Latin America.

PMI is also very encouraged by the performance of other international brands.

In the quarter, L&M volume increased nearly 11%, Parliament was up over 15%, Chesterfield grew 8%, Lark was up 34%, and Virginia Slims increased 14%.

To conclude on PMI, while the industry dynamics in Italy, France, and Germany remain challenging;

PMI has solutiones to restore growth in these markets and is determined to do so.

Total PMI volume in 2003 will be up between 1% and 2%.

However, in the longer term, PMI has the confidence that with its commanding shares and powerful brands, volume growth will accelerate.

PMI continues to be the leader of international premium segment with a category share that exceeds 50%.

In addition, with an international cigarette industry share of just about 15%, the potential for PMI remains enormous.

Let me now turn to our food business.

Kraft announced its third quarter results yesterday and confirmed its full year 2003 earnings guidance in a range of $2 to $2.5 per share.

Kraft Foods worldwide volume decreased 0.2%, partially reflecting the impact of divestitures.

Volume growth for ongoing businesses, which excludes the impact of businesses sold was 1%, driven by tack on acquisitions, solid growth in several north American business and broad strength across the Asian pacific region.

Volume was lower in European cookies, and European coffee, and chocolate due to softness in these categories.

Operating income decreased $150 million or 9.6% to $1.4 billion as higher commodity and benefit costs were previously announced investment spending in four north American focus categories, cheese, coffee, cold cuts, and biscuits and unfavorable mix will marginally offset via gain on sale of the European rice business and favorable currency.

Kraft Foods North America posted an operating company's income decrease of 11.6% to $1.2 billion while Kraft Foods international operating companies income increased 2.3% to $307 million.

Turning to financial services, Philip Morris capital corporations previously announced shipped in strategic focus remains on track.

For the third quarter and year to date September, it generated cash of $583 million and $700 million respectively.

To conclude my remarks, Kraft Foods is increasing marketing investments for the balance of this year in 2004 to strengthen support behind certain U.S. businesses to improve volume and share trends.

Philip Morris International delivered operating companies income growth of 12.9% aided by favorable currency and market share gains in many top income markets, although total volume growth was slowed by declines in western Europe.

Since implementing its enhanced sales and promotional programs, Philip Morris USA's shipment volume has stabilized and the business continues to achieve sequential retail share growth since the fourth quarter of 2002, two strong indicators that our domestic tobacco business has returned to predictability.

This concludes my introductory remarks.

Now I will be happy to take your questions.

Thank you.

The floor is now open for questions.

If you do have a question, please press the number "1" followed by "4" on your touch-tone telephone at this time.

If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. (inaudible) your question, than you please pick up your hand set to provide optimal sound quality.

Once again, ladies and gentlemen, that is "1" followed by "4" on your touch-tone telephone at this time.

Your first question is coming from Martin Feldman of Merrill Lynch.

Please go ahead.

Thank you.

Good morning, Dinny.

Good morning, Martin.

First on PM-USA, clearly since the begin beginning of this year you've seen growth in Marlboro, you have seen growth in -- and stability in your volumes and share.

If we exclude the benefit, the temporary benefits you're getting from the fact that the whole sail incentive program has been cut substantially since the 1st of October, when do you believe that you will start being able to report at least moderate earnings growth from the PM-USA business?

Well, first of all, the wholesale payment allowance benefit in fact only starts in the fourth quarter.

Right, at the beginning of this month.

Yes and I'm not in a position really to predict when our income growth on a quarter-to-quarter basis will improve, but I think we should be able to get there sometime next year.

OK.

Do you think cutting that program -- I know it was largely as a result of the litigation that you faced from some wholesalers, but has that hurt your relationship with the wholesalers and the wholesalers allegiance to your brands?

Or is it too early to tell?

I don't think so, Martin.

The basic terms remain the same.

The alliance, which we have reduced works out to about 22 cents per carton on a weighted basis.

We cut that for the fourth quarter.

We will be announcing a new program from the beginning of next year, and I think we'll be in good shape.

OK.

Thanks for that Dinny.

On the international business, two questions.

I think you indicated at the beginning of this year on one of the conference calls that to the extent that you do have favorable currency gains, you are going to be investing a lot of that extra cash into the businesses.

We've seen clearly very substantial reports of those gains today within PMI $150 million.

Have you, in fact, invested in the businesses to the extent that you thought you would earlier on in the year?

And have those gains helped the underlying businesses?

Martin, let me address the PMI situation sort of wholistically.

First, you're right.

Currency did help us.

But the fact is, we are dealing with a number of very slow growth and in some cases declining economies.

For example, if you look at the Euro zone, GDP actually declined 0.2% in the second quarter of this year compared to the first quarter of this year.

And this is obviously leading to significant excise tax increases in a number of countries and consumer down trading.

In this slow growth environment, we've made a deliberate decision to spend back currency gained in building our brands for the future.

It would be imprudent to do anything less.

And here it's important and you know this pretty well that for the five years to 2002, we gave up about $2 billion in unfavorable currency.

This year, obviously, currency is, you know, fairly -- very favorable.

And it's time we used this to reinvest in our brand.

And we've used it in a mixture of, you know, advertising as well as price gap management and we believe that it is going to start having an effect.

It's already started having an effect, but the main benefits will come probably in 2004.

So despite the favorable currency gains that you reported this quarter, you feel you've spent sufficiently to support the businesses.

Yes.

OK.

Dinny, just perhaps to use your expression, a holistic question here, but you spoke about the price gaps in France and Italy particularly.

And I know that that's something the company focuses on a lot obviously.

When I look at France, the price gap as you commented is going to go from 57 euro cents to 53 euro cents but the price of Marlboro on October 20th is going to go from 3 euro 60 to 4 euro 60 up almost 30%.

It's an old question but do you not feel that both in France and Italy, the absolute pricing is now beginning to take predominance over the price gap?

There's no doubt that in France the absolute price is up pretty high.

Going from Marlboro, which will be going from 3 euro 90 to 4 euro 60, you know, that is a big increase.

The low end is also coming up from 24 ten.

So the absolute increases in France are significant and this is going to have an impact on the total market, there's no doubt about that.

But we're pretty confident that our share will hold up.

In fact, our share has done well in France, Martin, for the year-to-date our share in France is up for the quarter.

Our share was up.

And I think we'll be able to hold our share pretty well and grow our share in France but there's no doubt that the total market will decline.

In Italy, it's a different question.

The absolute prices are much lower.

Marlboro, as you know, is at 3 euro 30 a pack.

And the lower end is at 2.20 a pack.

And the problem in Italy is clearly a price gap problem, which is going to be resolved one way or the other in the next few months.

Right, right.

Ok.

Thanks for that, Dinny.

Last question, your tax rate this quarter came in at 34.5%, I think than our expectations for the quarter and this time last year.

Right.

Can you give us some color and why the tax rate was lower and perhaps anticipation for the both the fourth quarter and to the extent that you can give any color for 2004?

Yes.

As far as the tax rate for the fourth quarter is concern, it will remain at 34.5.

Basically this is the result of some favorable rulings we've gotten at the state level on certain audit issues, and as far as 2004 is concerned, difficult to say.

But, you know, we'll have a better idea of that towards the end of this year.

But is it true to say they're trending in your favor?

You're probably right.

Fair assumption.

So it's improving, not deteriorating?

Exactly.

Thank you very much.

Thank you.

Thank you.

Your next question is coming from David Adelman of Morgan Stanley.

Please go ahead with your question.

Hi, Dinny.

Hi, David.

A couple of things, Dinny.

You talked about the optimism that volume growth would get better going forward over time plus one to two at PMI.

Are you backing away from the long-term goal of 4% organic growth?

In this kind of environment, it would be naive of me to say that we can get 4% volume growth.

But I think over the long run, we are still aiming for growth in the 3% to 4% range.

There are a number of markets where our market share is growing very strongly.

We've had great opportunities.

And of course we always have China, the China opportunity, in front of us.

So if we take all that into account, I still feel that over the long term, 3% to 4% is a good target to go for.

OK.

Could you talk a little more in the problem markets about what the solution is?

Basically you outlined in Italy you hope the government will raise the minimum tax, in Germany you hope lawsuits are successful.

In France you have hope to absorb the tax increase.

Are you doing anything different to try to drive your business in those markets?

I can assure you David from a brand building perspective, we're doing as much as can be done in these markets where the opportunities to obviously advertise are very limited.

But we're doing in terms of distribution, promotion at the point of sale, and we're well ahead of our competitors there.

We continue to remain innovative in the way we market our products.

As far as the price gap in Italy is concerned, as I said earlier, we have to resolve this problem one way or the other.

Either they come up or we go down.

And in one of these alternatives, we're going to resolve the price gap problem.

OK.

Couple of other things, Dinny.

Could you help us understand the order of magnitude of the favorable profit impact you'll get post April '05 for the return of Marlboro in Japan?

It's obviously very significant but can you put numbers to it for us?

It's going to be pretty significant.

I won't put any number out there but I'll tell you this, that to date obviously and until 2005 our arrangement was JT are basically that we share the profits from Marlboro.

After April 2005, you know, we'll have the full profit, the full margin from Marlboro for ourselves.

In addition, we'll be sourcing the product probably from a location, which is sort of lower cost than where it's currently manufactured.

On the other hand, offsetting this will be investments we'll have to make in Japan in strengthening our distribution both from a sale force point of view, investment in vending machines, et cetera, but overall, you've got to say that there's going to be a significant lift to our profitability in 2005 and then of course an annualized for 2006 on a full basis.

Dinny, on the balance sheet -- I realize you have the settlement accruals building but eventually have no net bank debt.

On an ongoing basis that's probably paid down in a large acquisition, maybe April or May of next year.

Is that the latest we'll have to wait to see the company back in market with share purchases?

Yes.

The fact of the matter is that cash in our balance sheet is approximately $6 billion.

A large majority of that cash is lying in Europe.

What's not needed for acquisitions will be dividend back to the U.S. in the most tax efficient manner.

And I've also got to say that our debt that shows up on the balance sheet I think short term debt of 4.4 billion is actually higher than that because we can show some of our short term debt on the long term debt, so, in fact, the actual number is $6 billion of cash and about $6.6 billion short term debt.

OK.

But you agree that sometime next year you should have that paid down you could be back in the market buying down stock?

Yes.

One last thing, Dinny.

Are you -- ?

Sometime next year we'll be in a position where we don't have bank debt.

At that point, I guess our board of directors will have to take a view on share buy back and what we do with that money and our policy with shared buy backs. 9

One last thing.

Your pace of shared growth of PM-USA accelerated in the quarter.

Do you think in part that was a function of less free product from RJ Reynolds?

Could you repeat that David.

Your pace of market growth at PM-USA in the quarter accelerated, the sequential pay to share growth accelerated somewhat.

I'm curious do you attribute any of that acceleration to Reynolds' reduction in free product?

It's kind of early to say that, David.

I think our share went up from 48.5 to 48.8.

In the earlier quarter it has gone up by 0.2 points.

This quarter it went up by 0.3 points.

I think our programs are starting to gel, things are working well in the field, so there are many factors I think accounting for that.

I wouldn't, you know, explain it just by the Reynolds strategy.

OK.

Thank you very much.

Thank you.

Thank you.

Your next question is coming from Bonnie Herzog of Smith Barney.

Please go ahead.

Good morning, Dinny.

I'm going to have to push you on this and I hope you can give us some guidance on your long-term estimates for EPS and then even global volume growth.

All your businesses I think are under pressure.

I know you talked through them in your prepared remarks and in answering questions, but just give us a sense of not necessarily even next year, you know, what you're expecting for your company for long term EPS growth and has that changed?

No, obviously we're not going to make predictions for long term EPS growth, Bonnie, we haven't done that in the past and what we will do is towards the end of this year, the beginning of next year, we'll give you guidance for 2004.

But at this stage, I'm not able to really say anything about 2004.

Can I -- OK.

I appreciate that and I know you're reluctant to give '04 but is it fair to say that we can expect to see Altria generate at least 10% EPS growth in the future?

Not even next year, just long-term.

This is what your company used to do.

Can you comment on that?

Anything is possible, but I'm not going to comment whether we're going to great level of growth.

All right.

Angle?

Money?

When are you expected to get that back given the favorable ruling?

Probably in the first quarter of next year.

OK.

First (inaudible) because that's a significant amount of money also and that maybe is a follow on question to the share buyback.

That would also aid you in getting back into the market possibly earlier, correct?

No, because the first quarter is, in fact, our peak borrowing period.

We'll still have bank debt, so --

Can I ask a follow on question, please, on PMI.

I think you talked about going forward long-term forward volume growth you're estimating to be 3% to 4%.

Is it fair to say that operating income or the leverage you'll get from that volume growth is now going to be in the range of mid to high single digits going forward?

What's realistic to expect coming out of PMI, excluding currency?

As I said, we're going to try to get as close as we can to 10%.

There will be some years obviously that we won't be able to do that, but our long term growth is still to be -- our long term objective, rather, is still to be as close as possible to 10% growth in OCI.

OK.

And then just going back and shifting gears to the U.S. business.

Obviously we've had significant changes recently and now you'll be focusing on two brands rather than four.

Can I hear in your opinion how that is going to change the competitive landscape?

You know, do you think it will have a significant impact?

What are you doing, if anything, given these changes?

You know, I'm just curious, again, to hear from your perspective how that will change things in the U.S.?

I think the U.S. industry is going to remain very competitive, Bonnie, and we're not going to change our strategy.

We're going to remain focused on growing our market share for our brands.

I don't think we change in our strategy.

Whatever that change is and we'll have to wait and see how it actually plays out in the market, but we're not going to change our strategy.

And in terms of innovation, I know you've done a few things this year.

You know, again, is it fair to say that that's going to continue at that pace in terms of introducing either line extensions or new brands?

Is that something that we should be looking for in the future from you?

Either in the U.S. or even globally, again, in tobacco?

Absolutely.

We're going to remain aggressive in terms of innovation.

Certainly here in the United States and absolutely around the world also.

And so far your initial feedback on some of the innovation that's been in the marketplace has been favorable.

Yes, it has been.

OK.

Thank you very much.

Thank you.

Thank you.

Your next question is coming from Robert Campagnino from Prudential Equity Group.

Please go ahead with your question.

Good morning, Dinny.

Good morning.

You are kind enough to speak t the price gaps in France and Italy.

Would you be so kind to speak to the price gap in Germany and the United States?

Yes.

In Germany, the price gap, the trade brands are at 2.70 and Marlboro is up 3.20 so that's a 50 euro cent gap in Germany.

That in fact has been coming down and in percentage terms actually it's down to about less than 20% now.

As far as the United States is concerned, the gap is, you know, sort of hovering between 45% and 50%.

In the third quarter it averaged out to about 47%.

And that's down from 49, I believe, at the end of the second quarter and up from 44 at the end of the first is that right?

That's exactly right.

You've suggested that in the past that there's a fairly significant economic component to some of the trends that have negatively impacted your business in the U.S.

I'm not sure you can answer this but have you seen any change in the behavior on the part of the consumer in recent months?

Any change in what sense.

In the sense that they seem to be willing to trade up more or foregoing the discount brands because of perhaps some marginal improvement in the economy that we've seen?

Essentially I'm trying to get where your share gains are from.

Completely from RJR or are you getting back some of the smokers that you might have lost due to the difficult economy?

Well, there's no doubt that as the economy improves, clearly the deep discount segment is going to find it more and more difficult.

And the fact of the matter is that for the first time we've seen this segment actually decline in share.

It had been sort of pretty steady at about 10%.

In this third quarter it went down to 9.9%.

The other sort of significant thing about the deep discount segment is that imports, which would be the growing segment within the deep discount category, has also sort of looks to have flattened out.

So that's encouraging news for us.

As far as the domestically made brands and, you know, the really representative brand here is USA gold.

USA gold has taken price increases.

Their retail price is now up to about $2.70 a pack.

And at that price, their market share in fact is stabled down.

So obviously these brands are hitting a sort of ceiling at a particular price.

And we hope going forward as the economy improves that we'll be able to get stronger and stronger in comparison so that segment.

That's a fair statement.

One last question.

I know you wanted to limit discussion on Kraft but could you possibly give us your view on the five-week numbers that were discussed on the conference call yesterday?

Are you pleased?

A little frustrated?

Can you tell us how you view the progress mate to date?

Obviously, it's still early to comment on Kraft's turn around.

The very early numbers that we got appear encouraging except for cookies, which were addressed yesterday.

The large part of our reinvestment remains to be done over the next few months, and, you know, we're looking forward to seeing the results from that.

But as far as the start is concerned, I've got to say I think we're pretty encouraged.

Thank you very much.

Thank you.

Thank you.

Your next question is coming from Judy Hong of Goldman Sachs.

Please go ahead with your question.

Hi, Dinny.

Hi, Judy.

Just a few questions to.

Start off with, PM-USA, I know you gave us the shipment numbers and some of the retail share number.

Can you give us the industry shipment number?

I don't think you gave us that.

Yes, the reason we don't give that anymore, Judy, is that we were originally giving you those numbers based on the data from management science associates, but we found that those numbers were not comprehensive and not complete because they didn't have, you know, many of the smaller manufacturers, many of the import brands, and so we've stopped giving that information because it was not accurate.

So I can tell you this, though, that if you look at just the top five manufacturers, the top five reporting manufacturers, that's Philip Morris, RJR, Brown, Laurel and Hard, and Ligot, that -- the volume in the third quarter was 91.2 billion units down 4.6% -- sorry 4.8% versus the third quarter last year.

So within that reporting environment, our volume was down 1%.

And that's all the information I can give you.

I can tell you this, though, as far as the total market is concerned in the United States, based on the latest information that we have from the United States department of agriculture, that market is declining at about 1.2 to 1.5% in 2003.

So it would be fair to say that you're actually gaining share 13 shipments basis as well?

For the year to date, our shipments are down about 4.8%.

The market, the total market, is obviously down less than that based on these USDA numbers.

So I wouldn't say we're gaining share on a shipment to shipment basis, but for the year 2003, -- our volume in the United States will be down somewhere between 2% and 3%, and the total market, say, will be down somewhere between 1.5% and 2% so we lose a little bit of share when you look at total shipments.

Is it also fair to say that if we look at the channels that the IRI Capstone data is not capturing, that the discount segment in those outlets is not growing anymore?

I think that's a fair assumption.

The deep discount is measured about 10%.

In reality, it's probably higher than that, closer to 13% to 14%.

But I think the same trend applies to that 14% number.

We think it's flat and maybe declining.

Now, just turning to PM international again, I know that you talked about the challenges that you're facing in western Europe, but if you look at third quarter trends in some of the other regions, it looks like seem a was down 1.3%, which was a deterioration from the first and the second quarter numbers.

Eastern Europe was up 9%, which is also slower rate of growth than what we've seen in the first half of this year so can you address some of the issues that you're seeing in some markets, what's causing the volume in those markets to be somewhat slower than what we've been used to seeing?

A lot of this is timing, Judy.

I've got to say in central Europe, yes, there is significant price competition in some markets like Poland, but a lot of it also has to do with timing.

And for the year, if you look at the year-to-date situation in central Europe, we're up actually 2.2%.

And so as far as Eastern Europe is concerned of course we're up.

We're doing very well in Eastern Europe.

Latin America we're doing fine.

In Asia, we're doing very well in Korea, very well in Japan, and we have some price gap issues in Indonesia.

But overall I would say coming back to what I said originally; we're doing well in practically every region in Philip Morris International.

Our problems really are in the three key markets of Germany, France, and Italy.

That's where we're taking the real hit in volume.

OK.

Thank you, Dinny.

Thank you.

Thank you.

Your next question is coming from Andrew Conway of Credit Suisse First Boston.

Please go ahead with your question.

Good morning.

Good morning.

Question in terms of your thinking about '04 just on the volume share and income trade off for Philip Morris USA.

In light of the PMI challenges with Western Europe carrying over into '04 from an income perspective, how are you thinking about market share versus margin year 2 when you've successfully halted some of the deep discount performance?

How should we look at, how the U.S. organization may strategically change their outlook in terms of levels of promotion, channel activities, how should we look at how you're thinking about the score card on those trade off?

I wish I could answer that question but obviously I can't tell you our promotional strategies going forward.

I will say this, though, that as far as Philip Morris USA is concerned, and its market share has been growing.

The objective is to keep the market share growing for our four focus brands.

And we will, of course, do our best to balance market share growth with income growth.

That's always been our strategy with Philip Morris USA.

And you can rest assured that that will be our strategy going forward.

And, Dinny, with that, if we assume that the level of promotional spending stays fairly constant year-over-year, with your core focus, is it reasonable to think that you should return to shipment growth in the U.S. business as we go through 2004?

No.

Shipment growth, I think that would be a tough assumption to make.

Thank you very much.

Thank you.

Your next question is coming from Art Cecil from T. Rowe Price.

Please go ahead with your question.

Good morning.

Can you tell us what the total state excise tax expense was in the third quarter versus a year ago third quarter?

The weighted average state excise taxes --

No.

Your total dollar amount that you paid in excise taxes, not the per pack thing.

We don't pay state taxes.

Our state taxes are paid by our distributors.

And how much of that is coming back?

We hope $1.3 billion.

And you said by maybe the first quarter?

First quarter, yes.

And what will be your MSA expense?

How much MSA expense will you record in '04 versus '03?

Look, I can't give you an exact number.

I will tell you that in '03 our MSA is running at about 47 cents a pack.

In 2004 it should run at about 49 cents a pack.

OK.

And then finally, could you clarify, I think in regard to somebody's question, you said that you spent back all of the currency benefit on the tobacco side in the third quarter in additional marketing and management of price gaps.

Is that what you said?

Yes.

And would you say Kraft is doing the same thing?

You mean you're talking about Kraft --.

Spending back the currency benefit.

Yes.

OK.

Thank you.

Thank you.

Thank you.

Your next question is coming from Jerry Gallagher (ph) of Deutsche Bank.

Please go ahead with your question.

Good morning.

Just a couple of questions on PMI.

The first one is on Germany.

You talked about price caps as they stand now against 3 euros 20 from Marlboro against 2.70.

Can you comment how you see those gaps moving over the next 18 months on the assumption that the one-year per pack excise tax is phased in over that 18 month period?

Yes.

We think that the -- that the gap will improve slightly over that period.

So I think the gap will be probably in the range of 15% to 18%.

So are you saying that both you and the low price guys will pass the one year to the consumer and therefore by function of basically going up by year over gap will be reduced by that dynamic?

That's a fair assumption, yes.

OK.

And the second question relates to Italy.

You're sitting at 3.30.

You commented that you may consider dropping the price of Marlboro, if the other guys don't start to move up.

How easy is it to drop the price of Marlboro given the comments you made about having government revenues et cetera?

I didn't actually say that we would reduce our prices.

I did say that there are two ways of reducing the price gap, either us coming down or the lower end coming up, and we're hoping very much that it's the lower end coming up.

So you cutting the price is not perhaps an option, then?

Well, it's always an option, but we're really hoping for the low end to come up.

OK.

Thank you very much.

Thank you.

Thank you.

Your next question is coming from Phillipe Gussence (ph) of Credit Suisse First Boston.

Please go ahead with your question.

Yes.

Good morning, Dinny.

A couple of questions from fixed income side.

The $4.4 billion that shows up as short term borrowings, can I assume that's all drawn under the bank lines?

No.

Some of that is commercial paper for Kraft.

Some of it is on the bank revolver for Altria.

But you cannot give a specific number for the part for Altria bank revolver?

No.

OK.

The second question I had, Dinny, this morning is you have about 500 million of debt coming in '03 and about 9 million in '04.

Can you share your current thinking how you might refinance that?

We're in good shape to refinance that through our cash flow and our financing line.

We're in fine shape to repay our debt.

OK.

Then with regard to acquisitions, you were recently actively involved in Greece and as well as in Serbia.

Can you give us perhaps a better feel what some of the parameters are for future potential activity?

Obviously I can't comment on that except to say we're always looking for opportunities internationally and we look at it in a very disciplined manner.

We have in the past looked at it in a disciplined manner and will continue to do so.

Thanks very much.

Thank you.

Thank you.

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

Good morning, Dinny.

Good morning.

I just have a couple follow questions it sort of follow-ups.

Your comment on one of the earlier questions sounds like you're expecting volume increase for domestic tobacco volume increase, is that the case?

Yes.

Regarding the FDA bill that was essentially shot down so far, is there any change in the time horizon for this new reduced risk product?

Will that come out earlier or later?

The reduced risk product is now scheduled for sometime next year.

Obviously we would like to launch it under some form of FDA regimen but if that is not possible, we'll launch it without that and in cooperation with public health authorities if possible.

The last question I have was in the US, is there any anticipated spending incrementally on call promotion due to the whole sail leaders program change that has gone into effect now for October?

Is there any planned changes on your part in terms of retail promotion?

No.

Thank you.

Thank you.

Your next question is coming from Merlin (ph) of Barklays.

Please go ahead with your question.

No question.

Sorry.

Thank you.

Your next question is coming from Chris Whitam (ph) of Lehman Brothers.

Please go ahead with your question.

Back to the issue of that price gap managements and give us some indication of how much of that price gap management is simply the cutting of the price of say Marlboro and then also maybe rather than moving into promoting newer brands at lower prices than the Marlboro brother.

That's a very tough question to answer.

You know, we spend back money on price gap management.

It's not just cutting the price of a brand but often maintaining the price for a brand.

It would be almost impossible for me right now to give you any indication of, you know, how that money is spent between those two different factors.

OK.

As a follow-up, one of the comments we had significantly about Germany where the U.K. produces a large share in that market is that they are very enthusiastic about introducing new tiers of brands below they're own sort of 3 euro plus brand.

And also that something you made a very strong point about at the Arizona conference.

I'm wondering if you could give us any indication of how much further that process or planning has evolved since then.

Sorry.

Could you just repeat that question?

Sure.

In Germany, you know, one of your larger competitors has talked enthusiastically about the process of having more formal tiers of brands at different price points in the market and I think it's something you alluded to in the consumer conference in Arizona, they gave me one.

And I was wondering if you could tell us how much more evolved you are in that thinking especially as we go into the higher taxes of the next two to three years?

Look, there are as far as PMI is concerned, there are obviously it's a very strong flair in the premium category in Europe and markets around the world but at the same time, it has brands well positioned in the medium price category and at the low end and if that's what it takes to keep growing our market share, that's what we'll do.

But our emphasis is always on the premium category.

We have terrific brands in the mid price and low end.

OK.

That's great.

Thank you very much.

Thank you.

Thank you.

Now we'll start taking questions from our press and media.

Your first question is coming from Jessica Wall (ph) from Reuters, America.

Please go ahead.

Good morning.

Good morning.

I'm curious if you think the prospects have changed for basic now that you are all losing support from RJR.

All I can say is that basics, which had been the declining losing share from 2002 and into the first quarter of 2003 has started to stabilize.

I think its share in the second quarter was 4.2%.

Its share in the third quarter was just a touch above that, so basic has stabilized and was determined to, in fact, increase its share and it's well positioned to do that.

As far as plans to increase any plans, do you plan to spend anymore on promoting the brand?

No.

OK.

As far as your discussions with rating agencies has anything changes in the past few weeks regarding the light case?

Well, we were taking off negative watch by the rating agencies, but otherwise no change in our ratings.

We continue to talk to them and we're frequently this touch with them, we present them our point of view in/as comprehensive a manner as we can but there's been no change in the ratings.

Do you have any possible time line on when you expect to regain access to the capital market?

A lot will depend on when we can get our ratings improved.

OK.

And going back to the U.S. cookie issue a little bit, I wonder how you see the category evolving in the face of growing obesity concerns.

I think the question was answered yesterday and it's obviously something that we will monitor very thoroughly, but we believe that the category but we believe the category will do fairly well.

That's all my questions for now.

Thank you.

Our last question is from Christina Burke (ph) from Dow Jones.

Please go ahead with your question.

Good morning.

Going back to the issue of the change in your wholesale leaders program.

Have you gotten any indication from your distributors about how they will be changing their pricing in the interim before a new program is put in place?

Yes.

Some of the distributors have obviously passed on the allowance -- the removal of the allowance on retail.

Others have not.

It's still too early to see any impact on the average price of our brands.

You know, after all, this change only took place on the 1st of October, only took place about two weeks ago and we'll just have to wait and see.

Now, kind of shifting to new products, Japan tobacco is broadening the sale of a product that they have kind of masked the scent and aroma of their cigarettes.

Is that an idea or a concept that you would be interested in exploring?

Oh, yes.

We always look at ideas like that.

In fact, you know, we ourselves have in the past introduced low aroma products and we'll be monitoring that segment.

If we see there is an opportunity there, on obviously we'll get in.

In terms of the fire safe issue in New York, where do things stand right now and what are you expecting some of the next moves 20be?

New York State has indicated that it will issue final regulations no later than December 31st of this year.

And then compliance to those regulations will have to take place 180 days later.

Obviously we're ready for that.

We have the banded paper on merit on a national basis and we're ready to move with it on our other products if and when that regulation comes in.

Now, in doing that, how complicated of a move would that be?

How expensive would that be to make that change over?

It's not that complicated.

As far as expense is concerned, I really don't have a number.

And just the last question I have, in Japan, as you get ready to shift when the licensing agreement ends in 2005, what kind of plans are you putting in place for that transition?

In Japan?

In Japan.

Well, first of all, we have, you know, between now and 2005, JT is going to continue to, you know, sell and distribute the product.

We have great faith in their commitment to continue selling and distributing Marlboro as well as they can.

After that, obviously, we're going to take the brand over.

Our sale force is already fairly large.

We'll have it in the appropriate size.

I think we'll be in good shape by 2005 to take over Marlboro.

OK.

Thank you.

Thank you.

OK.

Well, thank you very much.

We appreciate you all joining us this morning and we look forward to speaking with you about our first quarter and year-end earnings.

We'll be sending out a notice as we customarily do in early January with a date and dial in information for the 2003 Altria Group, Inc. total year-end conference call.

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

Thank you.

This does conclude today's teleconference.

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