奧馳亞 (MO) 2004 Q1 法說會逐字稿

Good morning.

Welcome to Altria Group 2004 first quarter earnings conference call.

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

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

In order to ask a question, please press the star key followed by 1 on your touchtone phone at any time.

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

I'll now turn the call over to Nick Rolli, Vice President of Investor Relation and financial communications for Altria.

Please go ahead, sir.

Thank you for joining us today.

I have a few brief announcements before I introduce Diny Devitre.

For those listening via the webcast, we are providing summary slides of first quarter results for Philip Morris USA, Philip Morris International and Kraft Foods.

Today's call is limited to a discussion of the business and litigation and regulatory issues will not be covered.

Kraft Foods reported first quarter results yesterday and hosted a separate webcast so our discussion of Kraft will be limited on the call.

Today's remarks contain forward-looking statements and projections of future results and I direct you to the Safe Harbor statement at the end of the news release for a review of the various factors that could cause actual results to differ materially from projections.

Today's remarks by Diny Devitre will summarize the highlights of the major operating company's performance in the first quarter followed by your questions.

For more detailed review I direct your attention to the news release we issued earlier available on the website at www.altria.com.

Now, it is my pleasure to introduce Diny Devitre.

Thank you, Nick.

Altria's 2004 first quarter diluted EPS were $1.07 including 9 cents in charges for the previously announced Kraft restructuring and relocations for Philip Morris USA.

Excluding those charges diluted EPS earnings per share would have been $1.16 or 8.4% ahead of last year on a comparable basis.

Operating income decreased 3.5% to $3.7 billion due primarily to Kraft's lower income of $219 million and food restructuring charges and impairment costs of $308 million.

Partially offset by higher income $239 million from the domestic tobacco business and favorable currency of $278 million.

Turning to domestic tobacco.

PM USA had a robust first quarter.

Operating company's income grew 13.7% to $970 million due to the absence of one-time buydown costs incurred in the first quarter of 2003.

Lower return goods ex-expenses and who lower cash discounts paid to the trade.

Partially is offset by lower volume and pretax charges of $11 million for Philip Morris USA headquarters move to Richmond and other exit costs.

Shipment volume of 43.1 billion units was essentially flat compared to the same period a year-ago when adjusted for the timing of promotions, wholesale inventory changes and one extra shipping day this year.

We view this volume performance as particularly encouraging.

Retail share gains were very strong, particularly for Marlboro which grew 1.5 share points to 39%.

Importantly, Marlboro's price gap with deep discount brands remained in the low 40% in the first quarter, reflecting Marlboro's average net price of about $3.52 per pack versus $2.48 per pack for the lowest priced brands.

To get a more meaningful understanding of the trends in the lowest price end of the domestic cigarette market today it is necessary to combine both the deep discount brands and major manufacturers private label brands.

Taken together, these brands have clearly stopped growing with retail share at 11.9%, especially flat -- essentially flat on a sequential basis since the third quarter of 2002.

Another positive IPD indication of this trend is that imported brands are not growing with the latest 12 month moving average and three month moving average data showing steady declines.

Philip Morris USA continued to enhance Marlboro brand equity with the march national launch of Marlboro men on this 72-millimeter.

It met the initial share and distribution objectives.

Parliament also performed well in the quarter, adding 2/10 share point to 1.7% market share.

On the legislative front Philip Morris USA continued to witness progress in several important areas.

Complementary MPN legislation that toughens escrow deposit requirements has passed in 38 states representing 75% of industry volume.

An allocatable share legislation passed in 25 states representing 45% of industry volume.

PM USA tends to work closely with law enforcement agencies to address the sale of illegal cigarettes.

To date it has filed over 2800 lawsuits against retailers selling illegal cigarettes.

Moreover, there are indications that the availability of counterfeit product in states that have experienced the highest incidence of counterfeit, such as California and Texas, has declined.

Philip Morris USA is strongly supporting passage of the prevent all cigarette trafficking act or PACT act, a bill that passed in the U.S. Senate.

This federal law is aimed at providing law enforcement officials with additional tools that will better enable them to crack down on the illegal sales of cigarettes on the internet and through direct mail which are some of the principal sources of see state -- evading state excise taxes and illegally acquired escrow payments under the MSA.

A similar bill was approved by the House earlier this year.

And we are hopeful that this becomes law this year.

To conclude on Philip Morris USA the solid performance of the business underscores its momentum and the strength of Marlboro and its other focus brands.

PM USA is on track to deliver moderate retail share gains and operating income growth in the low single digits this year.

Turning to our international tobacco business.

Shipment volume grew 3.2% to 196.9 billion units including acquired Volume partially offset by low volume in France, Italy and Germany.

Absent these markets, volume was up 7.3%.

Excluding France, Italy and Germany and acquired volume shipments increased 3.3%.

Total Marlboro volume was down 3% in the quarter reflecting declines in France, Italy and Germany.

Absent these markets Marlboro would have been up 1.1 in the first quarter.

Operating companies income rose 8.6% to $1.8 billion including favorable currency of $243 million.

The favorable currency is allowing PMI to consciously invest in its brands and expand its selling, manufacturing and research infrastructure around the world.

First quarter results were broad based with strong performances in Asia, eastern and central Europe, Latin America, and worldwide duty free driven by Marlboro, L&M, Parliament and many other superb international brands.

PMI faces several challenges in key western European markets arched this morning I would and this morning I would like to address them.

In France, the problem is clearly the adverse impact of significant tax driven price increases.

From January 2003 through January 2004 the average retail selling price of a pack of cigarettes has increased 39%, driving the total market down by 23% in the quarter.

PMI shipments declined 31% in the quarter, although part of this decline was the result of trade inventory reductions with actual in-market sales declining by 23.6%.

Thus PMI's market share was essentially stable at 39.2%.

This is a very good share performance in a market where the super-low price category has a 21% share of total market.

Our share of that category is only 12%, but PMI is now well positioned to grow in that segment with Basic.

In addition, we believe that the French government is unlikely to raise taxes again this year.

This should result in greater price stability and will moderate the rate of market decline.

This factor coupled with the relatively modest price gap of 11% between Marlboro around the lowest priced cigarettes should allow PMI to gradually enjoy sequentially improving sales.

Indeed, on a 13-week moving average basis, PMI's volume in France has stabilized since January and the four week moving average has been improving since February.

We therefore believe that the most difficult sales declines in France are behind us and going forward we are more optimistic about our volume comparisons in France.

Turning to Italy.

PMI's volume declined 14.6% and share decreased by 3.9 points to 51.8%.

Shipments were distorted by unfavorable comparisons to the year-ago quarter reflecting the timing of price increases and related trade purchasing patterns.

Nevertheless, Marlboro, which sells at 3.50 euro per pack and Diana at 2.80 euro per pack continue to be adversely impacted by low priced competitive brands priced at 2.40 euro per pack.

On March 1st of this year, the government implemented a minimum tax.

However, the methodology of calculating the tax is based on last year's most popular price class or MPPC.

Which is 2.50 euro per pack versus the current PMCC of 2.80 euro per pack.

PMI has the experience and know how to tackle difficult challenges such as the one we face in Italy.

It is determined to recover last market share through a number of regulatory and marketing initiatives including seeking to change the minimum tax when methodology to use the current MPPC which should serve to further narrow price gaps in the competitors -- in the course of the year.

Significantly increasing and strengthening the sales force to reach a greater depth of the market and launching new retail trade programs and modernizing in-store merchandising to improve the presence of its brands at the point of a sale.

In Germany, the difficult economic environment coupled with the series of tax driven price increases has resulted in a 6% decline in the cigarette market during the first quarter of 2004 versus the first quarter of 2003.

However, the overall tobacco market in Germany which includes cigarettes, traditional fine cut products, tobacco portions and low priced significant riel lows declined by a more modest 1.2%.

The cigarette category accounted for 81% of the total market in the first quarter of this year compared with 85.1% in the year-ago quarter.

Traditional fine cut grew its share from 10.8% to 12.1%.

Tobacco portions grew from 3% to 5.6% and low priced cigar cigarellos grew from 1.1% to 1.3% in the first quarter of 2004.

Against this background PMI cigarette volume declined 3% in the quarter with share up slightly to 37.3%.

PMI has already announced it will make a robust entry into the growing tobacco portions category with Marlboro and Next late they are month.

Keep in mind that the margins on tobacco portions and manufactured cigarettes are relatively similar.

PMI's new marketing programs and entry in the portion segment coupled with Marlboro's resilience gives us confidence that PMI can grow its volume and share of the overall tobacco industry in Germany.

Finally, on PMI I would like to discuss the business rationale for the corporation agreement that PMI expects to conclude soon with the European Commission.

First, counterfeit is a serious and escalating problem in the EU and PMI estimates between 1% and 1.5% of total PMI sales are lost to counterfeiting of its brands.

Second, counterfeit damages the quality image of our products as some consumers unknowingly purchase poor quality fake cigarettes.

Third, the counter fitting and con gentleman band problem may exacerbate as ten additional companies exceed to the European union this year with a wide disparity in taxes, living standards and pricing.

Finally, we are optimistic that this agreement will go a long way in rebuilding the traditional trust and collaborative relationship between PMI and the EU on a range of issues that are of mutual concern and interest.

To conclude on PMI, certain markets remain challenging and PMI is executing strategies and making significant investments to restore growth in those markets.

Overall, we are confident that with its commanding shares powerful international brands, good momentum in many markets and strategy to eliminate counterfeit product PMI is on track to deliver its volume and OCI targets.

As the year progresses, PMI expects volume comparisons to become easier, reflecting the fact European volumes were particularly weak in the second half of 2003.

PMI also has strategies and plans in place to protect and grow its share in Europe, including new marketing programs and new product introductions.

Not Notwithstanding the challenges in western Europe PMI's broad based international business with strong performances in Asia, eastern and central Europe and Latin America will allow it to grow organic volume between 2% and 3% and approximately 5% including acquisitions and deliver double digit OCI growth at today's exchange rates.

Turning to our food business.

Kraft announced its first quarter results yesterday.

Worldwide volume increased -- excuse me -- increased 0.5% due to ongoing volume growth of 0.8% partially offset by the impact of divestitures.

Volume strength across many businesses was partially offset by continued challenges in cookies and cereals including the low carbohydrate diet phenomenon.

By trade inventory reductions in certain categories and countries and by tough comparisons with last year.

Kraft's operating income declined 33.5% to $989 million as charges of $308 million associated with the previously announced restructuring program and an intangible asset impairment charge, higher commodity and benefit costs and increased marketing investment were partially offset by favorable currency and volume growth.

At Philip Morris Capital Corporation operating companies income declined 15.7% to $70 million in the first quarter driven by lower lease portfolio revenues result of PMCC's shift in strategic direction announced last year.

To conclude my remarks, Kraft is making investments to improve volume and share trends and its sustainable growth plan is on track.

However, commodity costs surged in the quarter, most notably cheese costs and these are to be a challenge for Kraft this year.

Philip Morris International delivered OCI growth of 8.6% aided by favorable currency and market share gains in many top markets, although total volume growth was adversely impacted primarily by declines in France and Italy.

Philip Morris USA had a strong quarter with robust retail share growth driven by Marlboro and OCI growth of 30.7%.

Finally, we reaffirmed our previously announced projection for 2004 full year diluted earnings per share in a range of $4.57 to $4.67 which includes a 23 cents reduction for anticipated charges related to the Kraft restructuring program +q-and-a.

Ladies and gentlemen, we will now conduct the question and answer portion of the conference.

Again, in order to ask a question, please press the star key followed by 1 on your touchtone phone.

Our first question is coming from David Addleman (ph) with Morgan Stanley.

Please, go ahead with your question.

Good morning, Diny.

Hi, David.

Couple questions first about PM USA.

The target of low single digit operating growth for the full year, after this quarter isn't that unrealistically conservative?

Is would imply a 3% decline if operating income through the final nine months of the year.

David, yes, Philip Morris USA had a pretty robust first quarter.

We are taking a cautious view on volume for the remainder of the year plus we are going to have some additional marketing and selling and infrastructure expenses related to a variety of projects including new products.

So, I think you would have to assume that income for the remainder of the year will be slightly down on last year.

And what about the pricing gap level at 42%?

Are you getting to the point where you are willing to allow that to drift up some what?

That is lower than it has been during the last several quarters?

We have always said that we would like to have our price gaps in mid 40s range, David and it is a bit lower than that at the moment.

I think, you know, we have got a foot on the pedal as it were and we aim to continue growing this year.

Just a quick couple of things on PMI, Diny.

What did the prime situation weaken subsequent to the end of January?

My sense was on the last call you were fairly encouraged by the January French performance.

Did the business and market sequentially weaken as you got into February and March?

The market did sequentially weaken.

But as I said in my remarks, in fact, our 13 week moving average of in-market sales is pretty stable since the beginning of January and on a 4-week moving average showing improvement since February.

What is your sense of recent year-over-year consumption decline in France in.

That is very difficult to say, David.

As I said, the -- the total market FTC -- was down 23% in the quarter.

Obviously consumption is not down by that extent.

Making an estimate is very difficult, but some past figures that I have looked at suggest that consumption could be down by 50 or 60% of that number.

Then the last question, Diny.

The market share in Italy was down, I think about a point and a half spent.

I realize -- swept.

I realize year-over-year the marketplace has changed but what do you attribute the most recent sequentially share erosion to in the Italian market?

I think you got to take a few more quarters into account before looking at the sequentially numbers.

There was quite a lot of disruption in the first quarter in terms of price increases and, yo you know, different timings by different competitors.

I wouldn't read to much in that sequentially decline from the fourth quarter of last year to the first quarter of this year.

Thank you.

Thank you.

Thank you.

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

Please pose your question.

Good morning.

Good morning.

I wonder if you could talk about the strategy in international tobacco as you are entering tobacco portions in Germany and also with the Asic brand in France is there more of an opportunity you see and mostly in the western European economies where you have had difficulties in entering the lower end segment and trying to battle on that front?

Well, Chris, the fact of the matter is that we have commanding shares of the premium sent in Europe -- segment in Europe,.

You know, in a number of countries we have over 90% of the premium segment so obviously to get our volume moving we have got to enter some of the lower priced categories.

In the case of Germany, as you know, we -- we challenged this legally, the excise treatment for portions.

We weren't successful so we decided to get into the category and I think we're going to do it with two brands, Next and Marlboro and I think that is a good move.

As far as Basic is concerned it has done extremely well in France and increased its share to almost 1.5 share points.

It is growing very well and we have to look at initiatives such as this in a number of other western European markets.

I wonder for your sort of 2-3% internal growth for international tobacco is there assumption for a tax change in Italy or anything else that may not be sort of currently on the books, if you will.

That guidance takes into account all we know about, you know, upcoming tax increases.

Okay.

And then just to be clear on the EU agreement., the $250 million that you may take would that be the initial payment and first year anniversary payment, is that correct?

Or how does that work?

The 250 is the initial payment.

Okay.

And then we have to make $150 million on the first anniversary.

Okay.

Okay.

And then in the U.S. division we have talked about a reduced risk product from time to time.

Is that -- what sort of time frame do you have currently for that product is.

I can't give you a specific month but the plan is to introduce it later this year.

Okay.

Thank you.

Thank you.

Our next question is coming from Rob Campagnino with Prudential Equity Group.

Please, go ahead.

Good morning, gentlemen.

Good morning, Rob..

One question nationally and one domestically.

With regard to agreement -- competitor with the EU I assume the milestone can change based on the effectiveness of enforcement.

What would the payment stream look like if you received sort of no significant improvement in counterfeit trends?

I think the -- the -- the agreement calls for payment of $250 million this year, $150 million in the first anniversary.

I think $100 million on the second anniversary and then $75 million thereafter and it is only adjusted, it can be adjusted for market share in the previous year.

On the out years then?

So there is no change to that.

Okay.

The IRI marlin data that we see indicates a slight reacceleration of deep discount share growth in January and February after more than a year of stability.

What are you sighing in the total retail panel for that second of the market?

As I said in my earlier remarks, Rob, the so-called deep discount brands about 30-40 basis point but the fact is that that has all been sourced from a decline in major manufacturers private label brands so if you look at private label brands from the major manufacturers they have gone down.

They ran at 2.1 2.2% and down to 1.7% of market.

Combine the traditional team discount and private label brands you will find that the total is in fact hovering around between 111.8 -- 11.8 and 12%.

I would say slightly declining.

One last quick question.

You might have said this but can you quantify the benefit in the quarter from the change in returned goods policy.

I wouldn't want to do that, Rob, thank you.

Are you allowing that product to be discounted similar to the -- similar to the way that RJR is?

I don't understand your question.

In leu of being returned RJR allows the product to be discounted.

Are you allowing the trade to do the same?

No.

Thank you very much.

Okay.

Thank you.

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

Please, go ahead.

Hi, Denny.

Hi, Judy.

Just a couple of more questions on western Europe.

In Germany, can you talk about your rational for entering the portions market with the Marlboro brand name and whether there is any concern that that might hurt the brand equity?

No, I don't think it will hurt the brand equity.

Our real objective in Germany is, you know, we believe that the portions segment should be given the same excise tax treatment as regular cigarettes.

We tried to challenge this and were unsuccessful in the Court.

So we joined the market.

It's a profitable segment.

Very close to cigarette profitability.

We have the same situation with Marlboro rolls about ten years ago and, you know, we entered the rolled market and finally the rolled market closed down and nothing happened as as Marlboro -- as far as Marlboro's imagery was concerned so we are pretty confident that this is not going to affect Marlboro's image.

And then in France, given the tough market conditions in that market, do you think that it may be difficult for the industry participants to take another prices up by 6-7% this summer as some of he companies have indicated?

I wouldn't strike talk about pricing going forward but I can say that the government has announced that they are not going to raise taxes in France.

In fact, they said for four years. know about that but certainly -- I don't know about that but certainly we can be sure that there are not going to be any tax increases in this year.

On a brighter note if F. you look at PMI Asia vol -- volume was up substantially and you talked about significant investment you are making in that region.

Can you elaborate that a little bit more?

The fact of the matter is on the manufacturing side we started our own manufacturing in the Philippines and our own manufacturing in Korea.

And then in a number of markets including Thailand, Malaysia, Taiwan, we have expanded the sales force.

We launched a number of innovative new brands in Korea lock premium.

Marlboro Ultra Lights in a round corner box and so we have had a lot of new brand activity in many Asian markets so it is a combination of marketing initiatives, sales infrastructure and manufacturing.

And those could be viewed as up front investments that even though volume is coming in strong right now you're not getting as much profit increase and over time you should get the benefit on the profit side?

We're getting some of the benefit on the profit right now and I guess we will get more going forward.

Okay.

And then just my last question on your guidance.

You beat your first quarter consensus by 3 cents but you're not changing the full year guidance.

Does that suggest some what weaker than expected outlook for the balance of the year?

No.

But it -- it reflects, you know, prudence.

Okay.

Thanks.

Thank you.

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

Please, go ahead.

Thank you.

Good morning.

Diny.

Hi, Martin.

Diny, a few questions.

I usually like to focus on PMI.

If you were to exclude the troublesome markets in Europe, France, Italy and Germany, can you give us some sort of idea what volume growth for all of PMI might have been and perhaps what OCI or operating profit would have been for PMI?

Well, I think I referred to that -- that that if we exclude the troubled markets our volume was up 7.3%.

That is excluding France, Italy and Germany.

, right.

And then if you excluded France, Italy Germany and acquired volume our volume would have been up 3.3%.

And from a profit point of view?

I'm not going to comment on that, Martin.

But clearly it would have been significantly higher, right, I mean the growth would have been better?

Difficult to say because, you know, the -- France, Italy and Germany are all profitable markets.

All right.

Okay.

Diny, I think what struck me most about the international profits and I'm really interested in your explanation here is in we look at 2003 without the benefit of the 4 of $9 million -- $469 million in currency PMI was essentially flat, up 1%.

If I look at this quarter and you exclude the $243 million in currencies, PMI was down 5.8%.

Now, you did make the comment that you are taking advantage of currency in order to invest in the business to invest in brands and to invest where you thought appropriate.

How much is that negative 5.8% within PMI as reported indicative of the business or does it reflect growing levels of investments in the brands?

Well well, obviously, you know, part of that impact is felt by -- I mean the issues in France and Italy, you know, have impacted that number.

But at the same time, we have increased our investment in marketing and in infrastructure as well as in research and development.

Okay.

I mean is this -- is the -- was this quarter with $243 million in currency benefit the highest you had in currency benefit in a --

I'm not sure.

But probably one of the highest we have ever had, yes.

Right, right.

In a quarter.

Okay.

Just moving on a little bit.

When you referred to the low single digit growth within PM USA this year, can we assume that most or a significant part of that, the cost and the reason we that growth rate is not higher is because of the cost associated with your prep or your potentially reduced risk product?

Well, that is one of the factors.

And, you know, with Philip Morris USA we are taking a cautious outlook on volume for the remainder of the year.

That is one.

Might I ask, I mean -- clearly you don't want to disappoint.

We understand that.

But you have had such good growth in terms of Marlboro, and in terms of the overall business during the last few months, and to some extent managed to minimize the problems last year.

Why would you suddenly adopt this more cautious view than perhaps you had in the last few months?

All I can say, Martin, once again, is yes, we had a robust first quarter and we are very happy about it.

Marlboro it doing extremely well and our business is doing well, but we -- we continue to view the remainder of the year with -- with caution and I think that is the right approach to take.

And, as I said, we will have certain expenses on the marketing side and on the infrastructure side related to new brand activity.

Diny, and my last question you and your chairman I think especially your chairman has referred to the constituent part vs of the company and trying to grow shareholders value through every means possible.

Clearly the potential restructuring is something that is widely spoken about at this point.

How much preplanning is occurring internally for the time when the litigation does in fact allow you to take those steps?

And I think specifically, for example of the service agreement you have with Kraft.

There is a lot of planning that has to go in place.

How much of that has already begun?

We are always planning for all contingencies and as you know generally our company has been known for planning things well and well ahead of time.

Okay.

Well, I will assume that you are working hard on.

Thanks very much for taking my questions.

Thanks, Diny.

Thank you, our next question is coming from Martin Steineck with J.P. Morgan.

Please, go ahead.

Hi, Diny.

How concerned are you that the new low cost Country entering the EU next month will exacerbate declines in can you respond to smokers sourcing their cigarettes in Poland where your take per pack is clearly lower than in western Europe?

Well, look at the fact of the matter is that you are right, there are going to be ten countries exceeding to the EU next month.

Our overall share in these markets is, in fact, a little over 40%.

So we have better share in these markets than we have in the EU.

And the total size of the cigarette market in the countries joining the EU is about 136 billion units so it is going to significantly expand the size of the EU cigarette market.

The -- the only issue that we have to look out for, frankly, is that in these countries the excise tax rate will have to be gradually transitioned to the EU rate and that is going to take about 5 or 6 years and - during that period there may be some disruption but I think it as gradual crossover to the minimum EU rates.

I think we should be okay and I think we are in good shape in these markets.

Just one final question on PMI.

Given the difficult trading environment in western Europe one area I did want to ask you about is cost savings.

You talked about delivering 100 million in cost savings this year.

Are you on target to achieve this and where is it coming from?

I don't recall any 100 million number.

I recall 100 million in cost savings figure talked about for 2004 and annually going forward and I'm wondering if you're on target to achieve that?

I think maybe you are referring to some statements made in the Cagney conference.

Exactly.

We are con target to achieve that.

Where is that coming from?

The supply chain?

Yes, basically the supply chain.

Thank you very much.

Okay.

Thank you.

Our next question is coming from Andrew Conway with Credit Suisse First Boston.

Please, go ahead.

Good morning, Diny.

Good morning.

Question to ask you on PMI.

When did you see it earliest that the company should be able to achieve positive country mix effect from the improving environment or gradually improving environment in western Europe?

When do you think we will be able to see that in the income statement?

When you say positive country mix, what do you mean?

The margin improvement in western Europe gradually as you lap the more favorable volume environment, when do you see the margin improvement perhaps contributing greater to the PMI business?

Probably by the second half of this year.

Great.

And Diny, could you give us a little bit of an update, also, just on another European country, Spain, just in terms of any of the dynamics in terms of market share performance, Marlboro or anything that you think is valuable to share?

Yeah, our brands and our business in Spain is doing extremely well.

I think our market share for the dr for the latest quarter was up 1.7%.

And Marlboro is doing well.

Chesterfield is doing well.

So we are in good shape.

Thank you.

Thank you.

Our next question is coming from Bonnie Herzog with Smith Barney Please proceed.

Good morning, Diny.

Good morning, Bonnie.

I wanted to go back PM USA and ask you to reconcile the volume not being up during the quarter.

I guess I'm trying to understand.

You lapped an easy comp on a year-over-year basis.

PM USA volume that was reported last quarter, I mean last year this time was down 16%.

And I understand that you had some promotion volume last year during this time that you didn't necessarily repeat again this year so I guess I thought your volume might have been stronger especially with the extra shipping days so can you help me understand that, first of all?

The one main factor was that inventories, wholesale inventories were down significantly in this first quarter.

So the change on the change was something like 800 million units.

And then on top of that, we had an unfavorable comparison with regard to the timing of promotions, you know, last year promotional quantities were sent out in the first quarter.

Were shipped out in the first quarter and hit retail in the first quarter.

Whereas this year they were sent out towards the end of the fourth quarter and hit retail in the first quarter.

So, we had an unfavorability there and it is true that we had one extra selling day and that added about, you know, helped the quarter by about 700 million.

So if you adjust for all these three factors, actual -- I won't call them actual shipments but comparable shipments were sort of flat.

Okay.

And then can you help me reconcile the topline being up I guess around 5%, I certainly recognize that you have a little bit of help from a mix benefit as, you know, more premium volume was sold in the quarter than your second tier.

But was that enough to drive the topline?

What else did you have going on in the quarter, I guess is it the promotional items that crow did not do -- that you did not do in the quarter or you get a little bit of the price --

Yes, that's exactly it.

I have a follow-on question to I think it was Judy's question about the Marlboro portions in Germany.

I would be curious to hear how that would be positioned relative to the next brand in the market and then have you considered entering the roll your own market in the U.S.?

I would see it as a potential opportunity considering that the category growth is exploding.

Yeah.

Coming the first part of your question, there are I guess two price categories for portions in Germany.

Marlboro would be at the higher of those.

And Next, the Next portions would be at the lower priced category.

And then with regard to your question about the United States, I'm not aware of any plans we have to enter that category.

Would you be opposed to it?

I mean are you aware that the growth rate is exploding or just any commentary on what you have seen in the marketplace in the U.S. on roll your own or make your own?

You know, I would have to talk to the people at Philip Morris USA about that.

Fair enough.

Just really quickly going back to in Germany and I don't know if you have mentioned this, Diny, but what is the percentage that that -- that that category represents in Germany?

Well, if you look at traditional fine cut and tobacco portions it is a little over 17%.

Okay.

And tobacco portions is about 5.5%.

Okay.

That's helpful.

Then I just had a quick question on the shorter Marlboro Menthol launch.

Right now in the market you have been offering a buy one get one free promotion on the brand so therefore if you look at it on a price per back, it is quite low and I'm curious how you envision the product being positioned in the future?

Do you plan on positioning it gean the first and second tier or are you trying to get the price point closer to a regular Marlboro?

I'm curious what kind of consumer you are attracting with this shorter Marlboro Menthol or is it fully can our -- cannibalized our regular Marlboro Menthol line?

It is not fully cannibalizing our regular Marlboro Menthol line.

It will be a fully priced cigarette and that is what we announced with we had the plan.

We hope to attract a cross section of menthol smokers to the brand.

I know you announced that it will be a premium.

And it will be a premium going forward.

At some point stop the buy one, get one free.

That's an introductory offer I assume.

This is what one does with all brand inductions, there is always a little more up front go but if you think about the value prop proposition from the consumer I'm trying to understand.

A shorter cigarette.

Will the consumer be willing to spend a shorter amount on a cigarette than it would for a longer cigarette.

Our research leads us to believe that it does.

Let me ask on the balance sheet.

You made a settlement payment in April so I'm curious what are your priorities for your cash, assuming that you won't be buying back stock for the remainder of the year as you discussed last quarter in.

Most of our cash, Bonnie, is in Europe.

Okay.

And, you know, we will bring that back in the most tax efficient manner from time to time..

The -- the cash that was on the balance sheet here was actually used to pay the dividend in early April.

And then am I correct in saying the settlement payment was due as well?

A cash payment was made in April?

Yes.

Sorry, which settlement are you talking about?

I'm sorry I'm referring -- I'm referring to the MSA payment.

Yeah, the MSA payment was made on the 31st of March.

So that would have been reflected in this balance already?

Right, right.

Thank you very much.

Okay.

Thank you.

Our next question is from Phillip with Credit Suisse First Boston.

Two quick questions.

The first one, Diny, your $1.3 billion, 364 day bank line matures in July.

Do you plan to extend that facility and if so, are you looking at the same dollar amount again?

We don't know as yet.

We will soon decide on whether we want to roll that over or not.

Okay.

And then my second question, Diny, if my math is correct in terms of the short-term debt on the balance sheet, the portion attributable total DA is $2.2 billion and if I then subtract 250 coming due this year it would indicate slightly under $2 billion in short-term borrowings.

It the bulk of that still under the bank line as compared to a paper borrowings?

No, the bulk of that is in commercial paper borrowings.

So you have reasonably established good access to that market again.

Is that correct.

Yes, yes.

Wonderful.

Thank you very much, Diny.

Thank you.

Thank you.

Our next question is coming from Chris Wickham with Lehman Brothers.

Please, go ahead.

Sorry to go back to SIM.

I'm wondering in terms of Italy, whether you can give us flesh on how you are able to sort of manipulate that tax system and any regulatory problems in term is of doing more in-store and modernizing the in-store offer there are no issues with regard to point of sale.

Everything we do there is within what is permitted and so that activity is perfectly fine.

And the -- what was the first part of your question again?

Give us a bit more flesh on the sort of mechanism when talking about the movement in tax system and then the MPCC and what is generally the MPCC.

Unfortunately, the minimum tax that came into being on March 1st was linked to the last year MPPC which is 2.50 a pack and the current is 2.80 a pack.

We have been appealing this matter to the government and the ministry of finance in Italy and we are hopeful that at some time in the not too distant future we will be able to resolve this problem with the government.

Okay.

And just sort after follow-up question on Russia as well mean you talked just looking in terms of sort of volume gain you get through market share gains.

I mean your -- could you just give us how many sigh who who you are gaining share from?

Gaining share within the premium and higher priced segments as well?

We are actually -- our portfolio in Russia is broad-based.

We have terrific representation in the premium category in the value and low end categories and we are in fact gaining share in all those categories.

Ace said, we have a -- as I said, we have a good portfolio of brands there.

And most of them are doing well within their segment.

Would you say you are gaining a disproportionate amount of share from local operators or the other international class.

That is continuing to take place.

Okay.

One final question on PM USA.

In terms of the Marlboro performance, that was good, are you able to give any indication sort of like mainstream red or lights or menthol or which was driving that share gain.

I'm pleased to say that all Marlboro formats did well in the quarter including Red, Lights, Menthol, and Ultralights.

Excellent.

Thank you very much.

Okay.

Thank you.

Our next question is coming from Jonathan Fell with Morgan Stanley.

Please go ahead.

Morning.

A quick question about roll your own.

Your statement mentions that roll your own started to grow in Poland.

I wonder if you could tell us a little bit about what is behind that and then a more fill low thing I suppose with taxes going up in Europe, have a good result in France in the first part of this year and entering the category in MYO in germ.

Do you think an entry into make your own or roll your own is going to become an increasing feature of your strategy in Europe in the way that you are now also focusing more on discount cigarettes in these countries?

We will take the markets and issues one by one.

Where we feel it is necessary to inner that category we're going to do that like we have done in Germany.

And you're right that, you know, the roll your own segment is growing in a number of markets.

In France it is growing.

In Poland it is growing and it is growing in Poland basically because of, you know, significant tax increases in that market and a lot of down switching taking place to lower priced brands as well as roll your own.

And, you know, we're going to look at each country on a case-by-case basis and decide whether we want to enter or not.

Hello?

Thank you.

Our next question is coming from Ann Gurkin with Davenport.

Please, go ahead.

Good morning.

Good morning.

I have a couple of questions, if I may yes.

Starting with the U.S.

In your opinion with what is the likelihood of FDA regulation this year and or a quota buyout?

Well, the -- you know, the FDA legislation could be a bit of a challenge this year because it is an election year and, you know, the quota buyout is tied to that but we are hopeful that, you know, in the future or next year we bill able to move forward with this.

Okay.

I apologize if I missed this.

It T. you give D. you give you the domestic industry volume for the U.S. market for the quarter.

We don't give ought out those numbers any more because they are fairly meaningless.

Okay.

Okay.

Canada passed, I think it is bill C-260 that will require the use of fire safe paper.

Any comments on that and when do you think regulations may be implemented in -- implemented in Canada?

I'm not.

I'm not exactly sure of when regulation will be implemented in Canada.

I know that the bill was recently passed and we will have to look at the exact implications and implementation dates included in the regulation.

But I would assume that maybe we would have to go in with fire safe paper there next year.

Okay.

Are you ready in terms of fire safe paper?

Yeah, we are absolutely ready.

Okay.

Switching over to -- one more question in the U.S.

When you mentioned moderate retail share gain in PM USA is that reflecting growth of focus brands as well as maybe including reduced exposure cigarettes as well as maybe some other new new brand line extense tensions?

Can you comment any on that?

I'm talking about the overall market share which includes the focus on four brands as well as the unsupported which are declining and losing market share.

So, you know, when we talk about moderate share gains we include, you know, our existing brands and new brands.

And new brands could include line extensions this year besides --

Could.

Okay.

Switching over to PMI.

Focusing on France, Germany and Italy, can you talk about performance of the premium versus discount or value segment in each one of those markets and what the share of each segment holds now in each one of those markets?

Yeah, well, in most of those markets the premium segment in fact, you know, dominates and I will give you some numbers.

For example, in Italy, you know, the premium segment is about 43 or 44%, it is the same in Germany.

And whereas the low price in Germany is about the low and Superlow is about 33% and in Italy the low and superlow is higher because it is -- it has some of the old monopoly brands there so it is 48% in the low and superlow.

And then in France the premium segment is about 50%.

And the low and superlow is -- segment is about 35%.

And how has that changed versus last year?

Obviously, a slight decline in the premium segment.

Varied between 1 to 2 points.

It is the largest in Italy where it is down nearly 4 point.

Is it better to look on a sequentially basis?

Pardon in.

Would it be better to look at it on a sequentially basis?

Yeah, on a sequential basis, I would say it is -- it is down slightly if from the 4th quarter.

Okay.

In most of those markets the premium segment is down lightly.

And discount is growing on average what percentage?

Sequential, I really don't have the exact numbers but in fact it is probably about .1 or .2 of a share point.

Okay.

On a sequential basis.

Okay.

That's great.

Thank you very much.

Okay.

Thank you.

Once again, to ask a question, please press star one on your touchtone telephone.

At this time we would like to invite media representatives to ask questions.

Our first question is coming from Jessica Woll with Reuters.

Please pose your question.

Potential sales or loss to counterfeit.

Do you have an estimate for PM USA?

First I all I would like to say on the PMI number we real don't have an exact number it is very difficult to estimate counterfeit.

That is our best guess on a range for PMI.

And as far as Philip Morris USA is concerned, our estimates last year were that, you know, counterfeit was running at, you know, between 1-2% of the total market.

And there are indications, as I said in my earlier remarks, that that -- that that number is down slightly.

How much down we don't know as yet.

Do you think that that is down because of work that you are doing with law enforcement?

Absolutely.

Okay.

Going back to something that on Kraft's call yesterday, do you feel that Kraft and Altria gave enough timely information to investors about Roger's illness last month?

Look, I think the Board of Directors of Kraft handled this matter appropriately.

They struck exactly the right balance between informing investors about Roger's illness and, at the same time, respect Roger's privacy.

It was based on what we knew and when we knew it.

And finally, as soon as we knew that Roger -- what Roger had had, and that he was in full recovery, we announced that he would return on the 10th of May.

And, you know, I'm happy to say that Roger is recovering very well.

And looks forward to being back in full action on the 10th of May.

That's great.

Thanks.

Just one more quick question about PM USA.

Are you concerned at all with the retail share decline in Virginia Slims in the quarter?

And if so, what are you going to do to promote that band going -- brand going forward in.

We're not concerned.

The share of Virginia Slims if you look at it over a longer period of time is essentially flat and the people at PM USA, you know, are being as innovative about selling and merchandising that brand as possible and I think the brand will continue to do pretty well.

Okay.

Thank you.

Thank you.

Our final question is coming from Kristina Burke with Dow Jones.

Please, go ahead.

Good morning.

I'm wondering what if you can update me on developments in regard to bond cap legislation?

I know that there was a new lights case filed in Washington state where there is no bond cap in place.

Yeah, I think at last count there were over 30 states that had bond cap legislation or didn't require bond cap legislation.

And really that is all I'm going to say about that because we don't want to get into regulatory or legal issues on this call.

Okay.

And in terms of the share repurchase program, is the eye -- can you update me on o what your thoughts are in regard to resuming that?

We announced earlier, I think it was on our fourth quarter earnings conference call that we had no plans to buy back shares this year.

And that was part of our guidance and that very much remains our position.

Okay.

Thank you.

Thank you.

Thanks.

Thank you.

At this time I would like to turn the floor back over to management for any closing remarks.

Okay.

Thank you very much.

We appreciate your participation in this morning's call and we certainly look forward to talking to you again next quarter.

If you have any follow follow-up questions contact Mike Kenny or myself and we would be happy to talk further.

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.