奧馳亞 (MO) 2003 Q4 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to Altria Group's fourth quarter and 2003 year-end earnings conference call. Today's call is scheduled to last about one hour, including remarks from management, as well as the question and answer session. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Mr. Nick Rolli, Vice President of Investor Relations and Financial Communications at Altria Group.

Good afternoon and thank you for joining us today. I have several brief announcements before I introduce Dinny Devitre.

First, we issued our 2003 full year and fourth quarter earnings release earlier today, and you can go to our website at www.altria.com to obtain a copy. For those of you listening via the audio webcast, we are providing summary slides for full year and fourth quarter results for Altria and its family of companies -- Kraft Foods, Inc., Philip Morris USA, Philip Morris International and Philip Morris Capital Corporation. Louis Camilleri, Altria's Chairman and CEO, is joining us on this call and will be available together with Dinny to take your questions.

Second, in-line with past practice, we intend to limit this call to a discussion of our business results. We will not be covering litigation or regulatory issues.

Third, Kraft Foods reported its 2003 results and announced a new sustainable growth program yesterday and hosted a separate webcast. Since the food business was covered in detail on that webcast, our discussion of Kraft will be limited on this call.

Fourth, today's remarks contain forward-looking statements and projections of future results and I direct your attention to the safe harbor statement at the end of our news release for a review of the various factors that could cause actual results to differ materially from projections.

Finally, today's remarks will cover a review of Altria's consolidated results, the 2003 full year and fourth quarter performances of each of our operating companies and our EPS guidance for 2004. This will leave ample time for Louis and Dinny to answer your questions. And now it's my pleasure to introduce Altria's Senior Vice President and Chief Financial Officer, Dinny Devitre.

Thank you Nick and good afternoon. While 2003 was a challenging year, our operating companies continued to reinvest in building their brands to drive long-term growth. These investments are gradually beginning to have their intended effect and are reflected in Altria's solid results in the fourth quarter. In 2003, Phillip Morris USA's performance returned to stability and predictability as its total retail share and that of Marlboro grew steadily through the year. Philip Morris International continued to deliver volume and strong income growth and widespread market share gains in 2003, despite challenges in France, Germany and Italy.

Kraft Foods, as you know, faces challenges that adversely impacted 2003 results. However, it has taken actions described in yesterday's announcement to significantly reduce its cost structure and reinvest in the business to restore volume and profit growth. We are confident that Kraft's strong leadership team and new global organization will leverage its strong base to achieve sustainable long-term growth.

As announced earlier last year, Altria shifted the strategic focus of Philip Morris Capital Corporation from growth of its lease portfolio to maximizing gains and generating cash flow from its leased assets. In 2003, PMCC generated free cash flow of approximately $1 billion. Altria also continued to deliver value to shareholders. In August 2003, we raised the dividend by 6.3 percent to $2.72 on an annualized basis, marking the 36th time in 34 years that we have increased the dividend. In total in 2003, we returned $6 billion to shareholders through dividends and share repurchases.

So in a year of both progress and challenges, Altria's diluted earnings per share were $4.52, including 10 cents in charges as described in our release. This compares to $5.21 in 2002 which included a net gain of 64 cents, mainly due to the 81-cent gain for the Miller Brewing Company transaction. In the fourth quarter, Altria generated solid results, somewhat flattered by a rather weak quarter a year ago. Operating income increased 11.9 percent to $3.6 billion, due primarily to higher operating company’s income from Philip Morris USA, favorable currency and other items as described in our release. Diluted EPS was up 20 percent versus the fourth quarter 2002 to $1.02.

I'll now review each operating company starting with Philip Morris USA, our domestic tobacco company. In 2003, Phillip Morris USA's operating company's income decreased 22.4 percent to $3.9 billion. (technical difficulty) support of ongoing programs to narrow price gaps, as well as lower volume and $202 million dollars in pre-tax charges related to the tobacco growers settlement and $82 million of pre-tax charges related to Philip Morris USA's headquarters move to Richmond and other exit costs. Philip Morris USA's shipment volume was down 2.3 percent to 187.2 billion units for the full year 2003. However, its premium mix improved by approximately 1.1 points to 91.3 percent.

As you are aware, Philip Morris USA reports retail share results based on the IRI Capstone Total Panel that started in the first quarter of 2003 and included data for the fourth quarter of 2002. Therefore, we will not be giving full-year share results versus 2002. In 2003, PM USA's total retail share grew sequentially through the year from 48.3 percent in the first quarter to 49.1 percent in the fourth quarter, driven by the steady improvement of Marlboro and the growth of Parliament. Marlboro's share grew from 37.5 percent in the first quarter to 38.5 percent in the fourth quarter, while Parliament's share grew from 1.5 percent to 1.7 percent in the same period. Share from Virginia Slims and Basic remained essentially flat at 2.4 percent and 4.2 percent, respectively.

Due largely to increased support for premium products by all manufacturers, the premium categories retail share strengthened to 72.7 percent in the fourth quarter of 2003. Philip Morris USA's share of this category grew through the year from 61 percent in the first quarter to 61.5 percent in the year's final quarter. Conversely, the discount categories retail share for the industry declined. During the year, the retail share of the deep discount segment as measured by IRI Capstone stayed flat at 10 percent of total industry. Additionally, the incoming volume of cheap imports as reported by the U.S. International Trade Commission slow to about a 12 percent growth rate in 2003 versus 42 percent growth in 2002. Importantly, Marlboro's price gap with deep discount brands remained in the mid-40 percent range in the fourth quarter, reflecting Marlboro's average net price at $3.50 per pack versus $2.42 per pack for the lowest priced brand.

Now let me briefly summarize PM USA's 2003 fourth-quarter results. Shipment volume of 46.3 billion units was up 6.2 percent versus the fourth quarter of 2002, reflecting an easy comparison with that quarter. Fourth quarter 2002 shipments were low because the Philip Morris USA shipped promotional products in the third quarter of 2002, which reached retail outlets in the fourth quarter of that year. Adjusting for that and other promotional shipments in the fourth quarter of 2003, volume is estimated to have been essentially flat. PM USA's operating company's income increased 25.1 percent to $987 million, driven by higher volume, partially offset by $20 million in charges related to the tobacco growers settlement and $46 million in charges for the headquarters move to Richmond and other exit costs. Philip Morris USA's total retail share of 49.1 percent continued to improve in the fourth quarter of 2003, increasing one share point compared to the year-ago period due to an impressive gain from Marlboro's and Parliament's continued vibrancy. Marlboro's retail share in the fourth quarter advanced 1.1 share points to 38.5 percent, while Parliament increased 0.4 points to 1.7 percent. Retail share was essentially stable for Virginia Slims and basic in the fourth quarter of 2003.

To sum up on Philip Morris USA; first, Philip Morris USA's strong program to restore retail share growth have resulted in a solid turnaround in the business with the Company's focused brands growing significantly through 2003 and achieving strong share gains versus the fourth quarter of 2002. Second, deep discount brands have stopped growing with retail share essentially flat since the fourth quarter of 2002. Third, Philip Morris USA continues to innovate, adding consumer value and further building brand equity for Marlboro and Parliament by introducing new brand styles in the premium segment. Early in 2003, it introduced Marlboro Blend # 27 and in July, Parliament Ultra Lights was launched. These new products both met their market share and distribution objectives. Recently, Philip Morris USA began test marketing Marlboro Menthol 72 mm, a new cigarette that is shorter than the king size variety.

Fourth, Philip Morris USA continues to develop and scientifically evaluate product that intentionally reduces adult smokers exposure to harmful compounds in cigarette smoke, and PM USA hopes to introduce a potentially reduced exposure product later this year. Fifth, Philip Morris USA is pursuing a number of important legislative initiatives at both the federal and state levels. Its top federal priority is supporting FDA regulation of tobacco products, which it believes would provide greater consistency in tobacco policy, more predictability for the tobacco industry and an effective way to address issues that are of concern to it and society. Additionally, Philip Morris USA actively supports bond cap legislation that provides broad protection for companies by limiting the size of the (indiscernible) bounds. To date, 31 states representing nearly 73 percent of the U.S. population have some form of bond cap limit, including 25 states that enacted those limits and six additional states, including Puerto Rico, that do not require it under their existing statutes.

Philip Morris USA continues to support actions by the states to address master (ph) settlement agreement compliance. For example, to date, 34 states representing 61 percent of industry volume have enacted legislation that toughens escrow deposit requirements established by the MSA and provides additional tools to the states to enforce the escrow statutes. Similarly, 19 states representing 38 percent of industry volume have taken action to close a loophole in the escrow statutes that allowed some manufacturers to avoid escrow payments exceeding a state's allocable share by concentrating volume in particular states.

Finally, Philip Morris USA is moving aggressively on brand integrity issues, particularly counterfeit and contraband product and has filed lawsuits against retailer outlets to be selling illegal cigarettes. Overall, PM USA has good momentum, demonstrated by its results in the fourth quarter and we're optimistic about its prospects for focus on fall share growth this year. As the economy rebounds, we anticipate that Philip Morris USA will improve its operating company's income performance by delivering growth in the low single digits.

Turning to our international tobacco business, PMI delivered operating company's income of $6.3 billion in 2003, an increase of 10.9 percent. The growth was due to favorable currency of $469 million, volume gains, higher pricing and the absence of 2002 charges for asset impairment and exit costs, partially offset by lower volume in the higher margin markets of France, Germany and Italy. PMI's 2003 shipment volume of 735.8 billion units grew 1.8 percent due to gains in many key markets and 5.5 billion units of additional volume from acquisitions during 2003. However, this growth rate was lower than PMI's long-term target of approximately 3 percent due primarily to declines in France, Germany and Italy.

In western Europe, volume was down 6.5 percent in 2003 due in large part to total market declines in Germany and France as a result of tax-driven price increases and low price competition in Italy. This was partially offset by increases in Spain where volume was up 7.1 percent driven by the improved performance of Marlboro, Chesterfield and the Philip Morris brand and higher volumes in Austria. In France, shipment volume was down 13 percent as tax-driven price increases over the past two years have led to an overall market decline. PMI's share in 2003 was up 0.3 points to 39.2 percent, driven by the Philip Morris brand and Basic, while Marlboro's share at 29.6 percent was down 3/10ths of a share point, fully reflecting the withdrawal of all (indiscernible) packs from the market where Marlboro enjoyed a significant segment share.

In Germany, the total market declined 6.3 percent last year, partly reflecting the growth of tobacco portions. Tobacco portions are taxed at the rate of roll your own and sell at half the price of Marlboro. Volume for tobacco portions grew 3.6 billion units last year. PMI, as you know, has filed an unfair competition claim and the EU itself has challenged the legality of such differing tax treatment for tobacco portions. PMI expects a decision to be handed down in February. Although PMI's volume in Germany declined 6.1 percent in 2003, PMI's share was up 0.3 points to 37.2 percent.

In Italy, PMI's volume was down 14.3 percent last year while share declined 7.1 points to 54.1 percent as Marlboro and Diana were adversely impacted by low end competitive brands. However, PMI's share in Italy has been stable recently after price gaps narrowed towards the end of 2003. In addition, several new product initiatives and marketing programs are planned for this year, which give us confidence that PMI will achieve volume and share growth in Italy in 2004. Overall, PMI's share in western Europe was down 0.8 points to 38.8 percent, but excluding Italy, was up 0.5 points to 35.3 percent.

In Central Europe, volume increased 5.9 percent for the year, led by strong gains in Romania and in Greece and Serbia, which also benefited primarily from acquisitions volume. This was partially offset by declines in Hungary and Poland due to intense price competition and declines in Lithuania and the Slovak Republic due to a significant increase in illegal cigarettes. In western and central Europe, there is a significant increase in counterfeit product available on the market, much of it Marlboro. Although it is difficult to quantify, this too is impacting volume.

In Eastern Europe, the Middle East and Africa, volume grew 11.5 percent, driven by continued gains in Russia, Turkey and the Ukraine. In Russia, PMI's broad portfolio performed strongly in 2003. Marlboro, L&M, Chesterfield, Parliament and Virginia Slims, as well as Optima and Next, all contributed to a 15.7 percent volume increase and a 2.7 percent share point gain. In Turkey, volume grew 14.3 percent and share increased 4.8 points due to L&M and the successful launch of Marati (ph) Ambassador. In the Ukraine, volume was also up due to the continued growth of Marlboro, L&M and Bond Street, as well as Next and Optima. In Asia, volume was down 0.5 percent last year due primarily to the Philippines and Indonesia. However, volume gains were achieved in Korea, Taiwan, Thailand and Japan. In Korea, PMI's results were propelled by the success of Locke (ph) and the launch of Virginia Slims Ultra Lights in July of last year. In Japan, shares rose 0.4 points to 24 percent due to Locke and Marlboro.

In Latin America, volume increased 2.9 percent for the year, reflecting strong 8 percent growth in Argentina due mainly to the performance of the Philip Morris brand, improved affordability of Marlboro and the 2002 price repositioning of L&M. In Mexico, volume was also higher due to the continued growth of Marlboro and Benson & Hedges. In 2003, Marlboro's international volume was down 1.9 percent due mainly to declines in France, Germany and Italy, as well as Turkey, Egypt and Indonesia. However, the performance of PMI's other international brands more than offset this decline. L&M volume increased 17 percent compared to 2002; Chesterfield grew 8 percent, Locke was up 8 percent and Parliament increased 4 percent. Importantly, PMI achieved market share gains in the key markets of Argentina, Austria, France, Germany, Greece, Japan, Poland, Russian, Singapore, the Slovak Republic, Spain, Turkey, the Ukraine and the United Kingdom. In many of these key markets, Marlboro drove the share gains. In addition, Marlboro's share was up in Brazil, the Czech Republic, Mexico, Switzerland and Portugal.

Turning to a brief recap of PMI's fourth-quarter results, operating company's income increased 8.2 percent to $1.3 billion due to favorable currency of $109 million; acquisition volume and higher pricing, partially offset by lower volume in the higher margin markets of Germany, Italy and France. PMI's shipment volume increased 1.6 percent in the fourth quarter to 168.3 billion units due to gains in many of it top income markets; a return to growth in the worldwide duty-free business and 4.4 billion units of additional volume from acquisitions in Greece and Serbia. This was partially offset by declines in Germany, Italy and France and the timing of shipments to Japan. In Japan, fourth quarter volume was down compared to 2002 as the earlier quarter benefited from higher shipments subsequent to the shutdown of U.S. West Coast shipping ports during the third quarter of 2002.

In summary, PMI's fundamentals remain strong. In many of its top income markets, PMI has solid momentum and proven growth strategies to generate future gains. The industry dynamics in Italy have improved and PMI anticipates restoring growth in this very important market in 2004. In France and Germany, total market consumption and PMI's volume will remain under pressure, although we're somewhat encouraged by consumer reaction to the January industry price increase in France which has been better than anticipated. PMI has well developed strategies to continue growing share in these markets. With the superior brand portfolio led by Marlboro and L&M and its extraordinary global infrastructure, PMI expects to deliver approximately 3 percent volume growth this year, excluding acquisitions, and approximately 5 percent including acquisitions. Clearly if exchange rates stay where they are, PMI expects operating company's income will grow at double-digit rates again this year.

Turning to Philip Morris Capital Corporation, operating company's income of $313 million for 2003 and 72 million for the fourth quarter was significantly above those of comparable periods in 2002, reflecting the recording of a $219 million provision for exposure to the airline industry in the fourth quarter of 2002, partly offset by the impact of lower investment balances as a result of PMCC's change in strategic direction. In view of PMCC's change in strategic direction, operating company's income will continue to decline in 2004 and future periods.

Let me now turn to our food business. As you know, Kraft is moving quickly to restore growth in a business environment that continues to be challenging. The Company reported its results yesterday, so I shall contain my remarks to some very brief highlights, beginning with full-year 2003 results. In 2003, Kraft's worldwide volume increased 0.7 percent as growth of 1.6 percent from ongoing businesses was partially offset by the impact of divestitures. Operating income declined 1.7, or 103 million to $6 billion due to higher commodity and benefit costs, unfavorable product mix, the previously announced reinvestment program in the U.S. focus categories and the impact of prior year gains on the sales of businesses. These were partially offset by the absence of $253 million in integration related and separation charges incurred in 2002, favorable currency of 94 million and volume growth.

In 2003, operating company's income for Kraft Foods North America was $4.9 billion, a decline of 0.7 percent. Operating company's income from Kraft Foods international was $1.3 billion, a decline of 3.6 percent. In the fourth quarter, Kraft's worldwide volume increased 1.1 percent as volume growth of 1.9 percent from ongoing businesses was partially offset by the impact of (indiscernible). Operating income was down 9 percent, or $146 million to $1.5 billion as higher commodity and benefit costs, investment spending in focus categories, adverse product mix and the absence of a prior year gain on the sale of a business were marginally offset by higher volume and by favorable currency. Kraft's operating company's income in North America was down 8 percent to $1.1 billion, while internationally, operating company's income declined 7.7 percent to 442 million.

Yesterday, Kraft outlined their restructuring program to strengthen performance and achieve long-term growth targets. The three-year restructuring program is expected to cost up to $1.2 billion pretax with cash outlays of approximately $600 million. In 2004, pretax charges under the restructuring program are estimated at between 750 and $800 million, with estimated savings of $120-$140 million reinvested in brand-building initiatives. Annual savings by 2006 will be approximately $400 million. On the long-term basis, Kraft's revenues are projected to grow by about 3 percent, supported by volume growth of 2-3 percent, and it expects to generate earnings-per-share growth of 6-9 percent, although this year, onetime costs associated with the restructuring program will lower Kraft's (indiscernible).

In summary, both Philip Morris USA and Philip Morris International have good business fundamentals entering 2004. Philip Morris USA delivered retail share growth and its business performance returned to predictability. PM International clearly benefited from currency which enabled it to increase its brand building initiative and it delivered widespread market share gains, strong income growth and volume gains despite challenges in Western European markets. Kraft has announced plans to improve performance and it's positioned to restore growth following the implementation of cost reduction programs and marketing initiatives.

Looking forward, Altria Group, Inc. expects to deliver full-year 2004 diluted earnings per share in the range of $4.57 to $4.67, which includes a 23 cent reduction for anticipated charges, of which 21 cents relates to the Kraft restructuring and 2 cents is for the remaining portion of Philip Morris USA's move to Richmond. Importantly, should the dollar remain at current levels, we expect to achieve the higher end of this range. This includes my introductory remarks, and now Louis and I will be happy to take your questions.

(Operator Instructions) Judy Hong, Goldman, Sachs & Co.

I want to start off with a couple questions on PMI. First of all, if we look at the fourth quarter volume numbers for PMI and we take out acquisitions, it looks like volume was actually down about 1 percent. Can you quantify how much impact the timing of the shipments that Japan had on that number?

Yes, I can. Essentially, if you had taken out the distortion for Japan, the volume would've been flat; again, driven by double-digit decreases in Italy, France and Germany in the quarter.

Okay. So now, you are expecting that number to get to about 3 percent without acquisition in 2004, and I guess I'm just wondering what factors are going to drive line to go from flat to 3 percent in 2004?

Ongoing, clearly, we need to address France, Italy, Germany and the rest of the business needs to continue to grow. Set let me try to address those key three markets. In terms of the Italy itself, our volume was still down in the quarter some 11 percent because as you probably know, pricing in the deep discount segment only started moving towards the middle of that quarter. The good news is that the price gaps have narrowed since and we have seen a stabilization in our share and we have a number of marketing programs and new products, plans for 2004 and with the stability that we have and the price gaps narrowing, we feel pretty confident that we can regain share. We are also somewhat cautiously optimistic that the government will implement a minimum tax in the not too distant future. And that, again, would sort of safeguard the price gaps. So where Italy has been a very difficult market for us because of various factors in 2003, we think we can recover volume in 2004.

In terms of France, the volume in the fourth quarter was actually down about 30 percent and the total market was down even further than that as we gained share. And that again was the result of the huge tax increases and resulting price increases that have taken place. And (indiscernible) there has also been a number of other factors that have impacted the rather strong number here. One is that the (indiscernible) as Dinny mentioned were eliminated from the market. And tens (ph) packs represented about 4.5 percent of the market. Those were eliminated in the fourth quarter. And my own sense also is that there have been various movements in trade inventories at the retail level which are very difficult to measure. But I cannot believe that consumption was actually down 30 percent in the fourth quarter.

The good news is that since the more recent price increases Dinny mentioned in his remarks, where Marlboro is now at EUR5 per pack, and the lowest is at 4.50 for a 20-pack and 4.25 for 19s, which is a new segment, but the stick price is still the same -- gaps have actually narrowed. And since January 1, our volume -- and I know it's still very early days -- but our volume seems to be holding up frankly a bit better than we had expected. But France will still be a difficult year, in terms of total consumption.

With regard to Germany where volume was down some 12 percent in the fourth quarter, again, we saw the continued phenomenon that we have seen throughout the year, which is the switch to tobacco portions. We are hoping to get a court ruling on our anti-competitive client within the next week or so. And hopefully, we will be able to shove down that segment which benefits from a huge excise tax advantage that we believe is not justified. You will recall a similar episode happened in the early '90s with Rawls (ph). That lasted some time about 18 months to two years, and eventually that segment was shut down and we think tobacco portions will be the same. The price increase and tax increase which was initially scheduled in Germany for January has now been postponed to March. We are not quite sure of the specific date yet, but we feel confident that, in terms of our share, our share will continue to grow in all three markets.

So a big shift in the volume here, Judy, is we're being a bit more bullish regarding those three markets in 2004 versus the erosion we suffered in 2003 for specific reasons. And we feel very good about the rest of the business and the continued momentum that we have had there. We have it reinvested in the business and we feel confident those reinvestments will pay off in terms of volume growth and share growth.

Just following up on that and focusing on Marlboro's trends for a moment outside of the U.S., in 2003, again, Marlboro showed a decline in volume and we really have not seen the brand grow in volume since I think 2000. Are you concerned at all about the brand equity of the brand? Some studies that I have seen seem to indicate that Marlboro's penetration has been declining among the young adult smokers in markets like France, and I'm just wondering if that is the (indiscernible) you have seen, or can you just talk about Marlboro's brand equity in some of the key markets?

I'm not sure of what studies you are referring to, Judy. I cannot think of any studies that are proving the point you're trying to make here. We felt very good about Marlboro throughout the world. We feel very good about its momentum, its demographics. The issue with Marlboro has been its price gap and the fact that it is a premium brand and there has been significant tax increases. Where the price gaps have been manageable, Marlboro has performed quite well. Marlboro's share was actually marginally up in France despite all that went on. And I think Marlboro's share in the legal age to 24 is up pretty well across every market I can think of. So I think where -- the other aspects that has hurt Marlboro is there has been, and this is no secret, a significant expansion in the availability of counterfeit product. And Marlboro being what it is is a later of the industry, a lot of the counterfeit product happens to be Marlboro, and we see it everywhere in the world, and that clearly has hurt Marlboro.

Moving onto Philip Morris USA, you've indicated that you expect profit to be off in a low-single digit rate in 2004. Now if we assume that volume stays flat, just looking at the fourth quarter underlying trend, and you are probably going to get some savings from the changes in the wholesale leaders program, it looks to me like you could potentially get savings of something like to 250-300 million. That translates to operating profit growth of at least 5-6 percent. Are you expecting to (indiscernible) back some of the cost savings at the retail level?

You're getting into an area where it's sort of linked to what we do vis-a-vis our competition. So if you allow me, I'm not going to get into it. Clearly, we feel very good about our competitive situation and we feel very good about the momentum we have and we want to continue that momentum. We feel that our guidance is a prudent guidance, and if we can do better, terrific. But that is our guidance.

My final question is really looking at your 2004 guidance. What are you assuming in terms of share buyback in the range that you provided to us?

We've actually assumed no share repurchases in our guidance.

Thank you.

David Adelman, Morgan Stanley.

Good afternoon. First of all, can you (indiscernible) that there has been absolutely no change -- your commandment and your intent and the intent of the board to consider all alternatives to maximize value for shareholders once the legal environment would allow you ask (ph)?

That is correct. I can confirm that to you.

Secondly, to follow up on Judy's question about share repurchases. Could you if you chose to, restart the purchase program once the bank debt is fully paid down?

It is a simple question, a rather more complicated answer. Clearly, first of all let stress -- we remain committed to rewarding shareholders in the forms of dividend and share repurchases, and that commitment remains as high as ever. Now as you all know, as a result of the (indiscernible) case, we did suffer a number of rating downgrades. And therefore, we have only recently recaptured what I would characterize as limited access to the commercial paper markets. And thus, we're still reliant on our bank facilities. And under those bank facilities, the agreement is that if we draw upon those facilities, we will not buy back shares. So the obvious question is -- how do you get a rating upgrade back to a 1P1 (ph) on your short-term paper? And I think that you would have to (indiscernible) the rating agencies, but my own opinion is that you would have to prove to the rating agencies that the like cases are manageable; we think they are, and that specifically we would have to win in the price case. I think once we have proven that it is possible that the rating agencies will upgrade our short-term paper. I think there are also a number of other considerations, David. It is no secret and has never been a secret that we're looking at a number of international tobacco acquisitions. Last year, we had Serbia and Greece, for example, and we hope that others will materialize. So that clearly is another potential use of cash.

And then very importantly regarding your first question, and that is when one explores all alternatives, one has to give due consideration to the balance sheet of the component parts. And specifically, regarding the equity of the potential component parts. And as you know, share repurchases reduce equity. So that is an element we're going to have to look at as well David. So we remain committed to share repurchases and I'm sure if we can, the board will probably resume share repurchases, but there are a number of other considerations to be taken account of, and prudence today would dictate that you should not assume that, and that is why our guidance does not assume any share repurchases.

But the last issue you mentioned, the book equity value, I assume that that is not a really as important as some of the other considerations. That not something that in the past, ever caused you to feel constrained?

No, but it is still a consideration that has to be factored into all of these analysis.

One last thing. For PMI in western Europe, for literally decades, that has been the gold standard of the Company. Do you think in '05 and beyond that that business can return to profitable volume and share growth?

I would hope so. I would hope that -- we had some turbulence, given the huge excess tax increases in France. The specific issues related to Italy where there was a price war -- and because it happened at the same time as the privatization on the one hand, the government could not act in terms of taxes, and we were somewhat limited in our ability to react as well. So that was a very special circumstance that I don't think will happen again. And Germany frankly to me it is inexplicable that the government would tax tobacco portions the way they do. So we had a confluence of events impacting three of our key markets, and I doubt that will happen going forward and I feel very good about our ability to continue to grow our share profitably in western Europe.

Thank you.

The one factor, as I mentioned earlier, the concern I have is counterfeit. And I think governments are starting to realize that that is a potential negative unintended consequence of these tax increases.

Bonnie Herzog, Smith Barney.

Good afternoon. Just a few questions, and I guess I'd like to start first with PMI. And I know you have said a lot about Germany already, but I was hoping you could talk a little bit about pricing strategy in Germany. I know you don't like to speak in specifics on this, but what I'm understanding is in Germany you are increasing your price on a pack of Marlboros to EUR3.50. And it sounds like the price increase that you are taking could be a little bit -- well it is on top of the excise tax increase. So my understanding of your strategy, your pricing strategy in Germany is that it is aggressive, possibly trying to regain some profitability, although there's probably going to be some additional down trading. Can you to speak to that a little bit, Louis, if you have sort of changed your strategy, in terms of --

Bonnie, I cannot comment on pricing. You know that. I think all I can say is we look at pricing and share and volume very carefully and we look at that balance.

Alright, I will move on. In terms of the U.S. business, you talked about the price points on premium and the discount brand. And I am seeing from studies we have conducted that the relative price gap from premium to deep discount is narrowing. I am talking at about 47 percent, which is the narrowest I have seen in probably the last 10 quarters. Is this consistent with what you are seeing as well?

Yes, this has definitely narrowed. So (indiscernible) the growth of the premium segment, which is doing very well and our brands within that. And Marlboro's volume in the fourth quarter was up 9 percent.

Okay. And that probably has to do with the comment that Dinny made about the deep discount not growing. I'm curious -- is that in all channels, or is that possibly in just the c-store channel? And then I would be curious to hear about the noncompliant deep discount market. Are you still seeing some growth in that area?

No, I think -- it's very difficult to measure volumes on the Internet or through the Native American reservations. But clearly from all our research, we see that the deep discount segment has been flat for a considerable amount of time now and that the action is more and more in the premium segment. And we feel very good about that. I think the various state actions that have been taken that Dinny referred to in his remarks has clearly helped and other potential actions being taken or will be taken in the future, such as the pact act (ph) that passed in the Senate in December with unanimous consent, will probably go through the House shortly. The pact act I think would be very good for the premium segment in eliminating product that is floating around illegally and not paying the due excise taxes and being potentially shipped to children.

Okay. Moving on to some guidance. I don't think I heard you say it, and I did not see it in the press release. Can you tell me or us what you think is a sustainable, long-term EPS growth rate at Altria, Kraft Foods in their press release -- (indiscernible) a number or a range in of 6-9 percent, in terms of their sustainable EPS growth over the long-term. Can you share with us what you think is reasonable to expect for your company going forward?

No, I'm not going to give a long-term EPS growth rate, Bonnie, today. All I can say is that we feel pretty comfortable with our guidance for '04. As Dinny said, if currency rates stay where they are, we should be very much at the top end of that guidance. And I would hope that in '05 and beyond, we could do better than we're doing in '04. Beyond that, I'm not going to give you any numbers.

No, but that is helpful. Finally, FDA discussions in Congress -- what is the latest that you're hearing and what the likelihood in your opinion that we see some type of FDA regulation in 2004?

It is an election year, so things are always difficult to achieve in an election year. We are still cautiously optimistic that something will happen. But clearly if it does happen, it's going to have to happen pretty early. If it's delayed, it is not going to happen until next year. But our sense is that clearly is a lot of support for FDA regulation, and we're very cautiously optimistic that something will fly.

Okay, thanks again for your time.

Thanks Bonnie.

Martin Feldman, Merrill Lynch & Co.

Thank you good afternoon. I'm sorry to continue on with the subject of PMI, but I think it is for me the most important part of the business. Louis, if I remember correctly, in November -- and forgive me if my memory is incorrect here -- but at a conference, you spoke about volume growth for PMI excluding China and acquisitions being at about 4 percent.

I said about 3.

Okay, I thought I remembered 4. That's fine because that was going to be the question (indiscernible) down at all. In terms of that 3 percent, can you give any color to that, in terms of what proportion of that growth would you hope to see come from Marlboro, what proportion of that growth would you expect to see come from the newer developing markets, rather than the EU or Japan? And to the extent that the growth is excluding acquisitions and excluding the first 12 markets, how much might PMI's margins come down, even as its absolute profits rise in local currency terms?

For some time, we have witnessed and we have known this for some time, that we would face an uphill battle in terms of geographic mix, and in many ways, product mix. L&M has probably been, and I think even our competitors would admit this, the most successful brand in the industry in the last 10 years. L&M is on fire. Continues to grow double digit, and therefore that being placed in the midprice segment representing a lot of the volume growth clearly reduces margins on the mix line. Most of our growth recently has also come from less developed markets, and certainly outside of Western Europe and Japan. So clearly from a volume mix point of view, the mix part is negative. But we still feel very comfortable and positive about the volume contribution more than offsetting the mix. And we still feel very good about our potential for continued profit growth in the developed markets of Western Europe and Japan, for example, given the momentum we have and our segment shares in those segments that are growing faster than the rest of the market.

Louis, is it fair to say that in order to achieve that growth, we will see growth in the number of brands outside your core brands at the moment, certainly in the third world?

No, but I mean, if you look at our OCI margins, Martin, for the year, we were up versus the prior year despite the mix. So I would not be overly concerned about that. Despite the hits we took in three of our key markets, our OCI margin was up. So that makes me feel very good about the future.

Just moving on again within PMI, there has not been much news from the tax (ph) claims that the Company faced in Italy. Has that gone quiet? I don't believe it has been resolved yet. Could you just give us some color on those claims?

Yes. The majority was resolved and there are still a few left out there and clearly, we're in discussions with the government and we would like to resolve them.

But those sums are not material are they?

No.

Within the U.S., when you look at the pricing environment -- now I'm not asking clearly what your pricing is -- but do you feel more comfortable that you have the deep discount in the segment under control -- could you imagine it actually beginning to decline over the next year or so, and the rate or the size of the margin pool for the industry beginning to grow?

All I can say is I feel very good about our position in the market and our competitor's position in the market. I think Mike and his team have done a fabulous job at regaining our competitive power in this market. And I think over time as we continue to execute with excellence and our shares continue to grow, we will restore profitability, but that very much depends on the deep discount segment and the ability of the states and the federal government to stop what I would characterize in a short word as illegal cigarettes. That is the main issue today, I think.

Would you be prepared to share your view as to what is likely to happen to consumption -- not shipments, but consumption over the next few years? And do you think (indiscernible) consumption might decrease any faster than the sort of more or less 1 percent in the decade up until the MSA?

No. Our view -- and we've been consistent in this, and clearly all of our research that we do, shows that consumption is coming down between 1.5 to 2 percent and we see no reason for a change in that trend, Martin.

My last question -- could you please remind us how quickly do you expect to wind down the positions in Philip Morris Capital Corporation, and how quickly would the associated debt be repaid?

I believe it is going to take quite some time, Martin. This is not a short-term affair. They had a great year in 2003 in terms of cash flow as Dinny said. We feel we should have a good year in '04, but given the nature of the business, I believe it is going to take at least 8-10 years.

Okay, thank you very much for that.

Rob Campagnino, Prudential Equity Group.

Good afternoon, gentlemen. Just a quick question. Assuming that at some point, you do get back into the market for your own shares, could you talk to us a little bit about your preference for share repurchase versus perhaps a substantial increase in your corporate dividend?

We've always said that we like to balance the two, Rob. I think our dividend policy has been very generous and will continue to be so. But I think share repurchases has the huge benefit of being very flexible. And clearly, you have seen in the past that that flexibility has served us well.

With regard to that flexibility, if indeed you plan on doing some aggressive financial engineering with the Company at some point, doesn't your forecast horizon for the dividend go from perpetuity to a very sort time frame that should make a more substantial dividend payment manageable?

Conversely, if we are going to do that, we might as well buy back shares whilst they are still very cheap. Economically, I think you're probably better off that way.

Reasonable. Thank you very much, gentlemen.

Andrew Conway, Credit Suisse First Boston.

Good afternoon. Question on the U.S. business. As you look at your planning process for this year, Louis, where you have the most comfort in your strategy? Is it maintaining promotional levels, acceleration of market share, cost structure -- how would you kind of frame up some of the levers that get you to your preliminary outlook?

It is pretty well a combination of everything you've said, Andrew. I think if I had to put my finger on one thing, it is the quality of the management and its execution ability within the organization and the strength of those brands and their competitive position today, our new product plans going forward. We're very excited about the position we're in today.

And that would imply that, given you have a great feel for the level of shipment growth given the price gap, this gives you the flexibility to make your investments and get the volume return you believe is adequate?

Correct.

Thank you very much.

Art Cecil, T. Rowe Price.

Hi. Has your position on share repurchase changed?

Not at all. All I am saying is that today, we have limited access to the short-term capital market. And in that situation, you're reliant on the bank facility. That is the only caveat.

I don't want to attribute too much wisdom to Wall Street, but there's been a common view that what was required was to pay off your bank debt and then share repurchase might become a live option again. And today, it sounds like we're being held hostage to the rating agencies on the one hand. And the notion that book equity is important strikes me as another rating agency concern, rather than a concern that you probably have.

I think it is combined. I don't think it is a rating agency concern. I think just prudence would dictate that today, you would not have time for that. That does not mean we're not going to do it and you will be one of the first to know with everybody else if we do resume. I don't want my remarks to be viewed in any way as us shying away from our historical program of rewarding shareholders in terms of dividends and buybacks.

But it certainly sounds like the credit agencies are standing in the doorway today more than Wall Street had thought previously. As far as '04's guidance is concerned, could you give me something on the tax rates you're and the interest expense number you're using?

In terms of the tax rate, we are currently planning for a slightly lower tax rate. I can't give you a specific number. And in fact, I cannot give you a specific number on our financing cost either.

But the tax rate might be down 50 basis points?

Around there.

And interest expense, do you think it would be flat or that might be down?

I'm not going to comment.

Okay, thanks a lot.

We will now open the floor for questions from the press. (Operator Instructions). Jessica Wall, Reuters.

Good afternoon, everybody. I am wondering how much of Marlboro's volume growth in the quarter came from Marlboro Blend 27 or the new menthol product that is in test market?

The new menthol product that is in test market is a really only in two cities, so its volume impact was very marginal. Those were in Chicago and Philadelphia. And then 27 clearly has been a contributor to Marlboro's growth for the rest of the family has been growing as well. So it's not the factor that explains Marlboro's growth, it is across the whole portfolio.

Okay. As far as a potentially reduced exposure product, are you waiting for any kind of signal about FDA regulation before you move forward with bringing something to market?

We would clearly prefer to have FDA regulation. But once we are comfortable with our product, we're not going to wait for FDA regulation if it is not there to launch it. But clearly, we would prefer it if the FDA regulation was in place.

Okay. And could you comment at all on the potential for increasing your equity they stake in FAB Miller, once the timeframe comes up with that deal?

No comment -- we never comment on acquisitions or divestitures.

Okay, thank you.

We have no more time for questions. I would now like to turn the call over to the speakers for any further or closing comments.

Thank you very much. We appreciate you joining us this afternoon. We look forward to talking with you again in the first quarter. We will be sending out a notice about mid-April with the date and dial-in information, and if you have any follow-up questions, as usual, you can contact Mike Kenny (ph) or myself in investor relations. Thank you very much.