奧馳亞 (MO) 2004 Q3 法說會逐字稿

Good morning and welcome to Altria Group's 2004 third quarter earnings conference call. My name is Maria and I am your conference call operator. Today's call is scheduled to last about 1 hour including remarks by Altria management and the question and answer session.

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

I would now like to turn the call over to Mr. Nick Rolli, Vice President of Investor Relations and Financial Communication for Altria.

Good morning and thank you for joining us today. I have a few brief announcements before I introduce Dinny Devitre. For those people listening via the audio webcast, we are providing summary slides of third quarter results for Philip Morris USA, Philip Morris International and Kraft Foods. Today's call is limited to a discussion of our business results. Kraft Foods reported its third quarter results yesterday and hosted a separate webcast. Since the food business was covered in detail on that call, our discussion of Kraft will be limited on our call this morning.

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 our news release for a review of the various factors that could cause actual results to differ materially from projections. Today's remarks by Dinny Devitre, Altria's Senior Vice President and Chief Financial Officer, will summarize the highlights of our major operating companies' performance during the third quarter, followed by your questions. For a more detailed review, I direct your attention to the news release we issued earlier this morning which is available on our website at Altria.com.

Now it's my pleasure to introduce Dinny.

Thank you Nick and good morning.

During the third quarter Altria's businesses made good progress with solid tobacco performance and signs of improvement in food.

Before I cover each operating companies results let me explain the growth in Altria's earnings per share in the quarter. Diluted EPS in the third quarter rose 5.7%, or 7 cents, to $1.29 due to the following: 5 cents for one time gains from the sale of 2 businesses at SABMiller; 2 cents from higher earnings at PMI; 2 cents per share as a result of a lower overall effective tax rate due to the favorable resolution of an outstanding tax item at Kraft in the third quarter of 2004; 2 cents as a result of favorable currency; and 1 cent due to the lower charges related to PM USA's headquarters relocation. These increases in EPS were partially offset by 2 cents for higher shares outstanding, and 2 cents related to the previously announced food restructuring and lower earnings at Philip Morris USA, Kraft and PMCC.

We've narrowed our guidance for diluted earnings per share to a range of $4.55 to $4.60 for the the full year 2004 and believe we will achieve the high end of that range should current exchange rates hold. This includes charges for the Kraft restructuring, charges for the agreement that Philip Morris International signed on July 9th with the European community and the one-time tax benefits reported in the second and third quarters. It excludes the impact of any Kraft divestitures and any potential short term impact of the recently passed tobacco buyout legislation as the final regulations have yet to be issued by the United States Department of Agriculture.

Turning to domestic tobacco -- In the third quarter Philip Morris USA's operating companies income was flat at $1.1 billion, primarily reflecting lower volume and an $11 million provision for the Henley individual case in California, offset by lower charges in 2004 related to its headquarters move to Richmond. Cigarette shipment volume at 48.3 billion units was down 1% compared to the third quarter a year ago and down less than half a percent when adjusted for inventory distortions. Marlboro shipments were up in the third quarter and are up year-to-date September. Remarkably, Marlboro shipments have risen for the last 4 consecutive quarters versus the year-ago quarter. Regional share growth of Philip Morris USA was robust with share up 1.1 share point to 49.9% driven by Marlboro which increased its retail share by 1.5 points versus last year to 39.6%. Marlboro's price gap versus the lowest price brands was approximately 46% in the third quarter and in line with the second quarter of this year. The deep discount segment, comprised of all other manufacturers' discount brands and major manufacturers' private label brands, achieved a retail share of 11.9% in the third quarter, down one-tenth of a share point versus last year. Furthermore, import volume on a 12-month moving average basis is actually down since the beginning of this year.

On the legislative front, Philip Morris USA continued to witness progress in several important areas related to the state escrow statutes that were enacted in wake of the Master Settlement Agreement. Complementary NPM legislation that toughens enforcement of escrow deposit requirements has now passed in 44 states, the District of Columbia and Puerto Rico, representing approximately 87% of industry volume. This is an increase of 1 state, plus Puerto Rico versus the second quarter of 2004. And allocable share legislation has passed in 36 states and Puerto Rico, representing approximately 63% of industry volume. This is an increase of 3 states plus Puerto Rico versus the second quarter of 2004.

As you know, Congress recently passed legislation that does not include FDA regulation of tobacco products. This is deeply disappointing to Altria Group, Philip Morris USA and all those who wanted to see a coherent, comprehensive national tobacco policy in this country. However the passage of legislation giving the FDA authority over tobacco products remains a key priority for Altria and Philip Morris USA.

PM USA had hoped to scientifically evaluate and market potentially reduced exposure products under the oversight of the FDA.

Despite the disappointing results in Congress, Philip Morris USA continues its investments to develop, scientifically evaluate, commercialize and launch products with technology that potentially reduces smokers' exposure to harmful compounds in cigarette smoke. It is currently evaluating these product technologies to determine whether they meet the criteria for reduced exposure claims as recommended by the Institute of Medicine. Philip Morris USA will not make any reduced exposure claims about these products until this evaluation is completed. It intends to test market these products without any reduced exposure claims in order to gauge adult smoker acceptance of taste and flavor. The legislation contains a tobacco quota buyout program. The buyout program is expected to total $10 million to be paid out over 10 years in equal installments.

Philip Morris USA believes the elimination of the current Federal Tobacco program will enhance the long term viability of U.S. tobacco growing by removing the non-value added cost of the federal quota and price support program that burdens the current system. Notwithstanding the absence of FDA regulation we find the buyout component of this legislation to be acceptable. As the cost of U.S. tobacco will decline, U.S. tobacco will become more competitive and the buyout is good for farmers. Third it applies to all of those who sell tobacco products in the United States. PM USA's payments are partially offset by already scheduled payments to the National Tobacco Growers Settlement Trust, and finely, it will not have a material impact on Altria's consolidated results for 2005 and beyond.

Bear in mind, that the USDA has not yet finalized the regulations to implement this program. Issues relating to timing, allocation of costs, and the treatment of the current tobacco pool have yet to be determined. Accordingly our earnings guidance excluded any potential fourth quarter impact.

To conclude on Philip Morris USA, the solid performance of the business underscores its momentum and the strength of Marlboro, and the resilience of its other focus brands. Philip Morris USA is on track to deliver retail share gains and moderate operating companies income growth in the low single digits this year.

Turning to our international tobacco business -- PMI had a good quarter with volume and share gains achieved in most key markets, due in large part to the growth of Marlboro and the continued strong performance of L&M. Operating companies income increased 7% to $1.8 billion due primarily to favorable currency of $64 million, the impact of acquisitions, higher volumes, and pricing, partially offset by unfavorable mix, higher marketing costs, and $38 million in expenses related to the cooperation agreement with the EC. In the third quarter PMI's shipment volume of 199 billion units was up 5.1%. Acquisitions contributed 2.2 percentage points of growth, organic growth of 2.9% was particularly strong when one considers the volume erosion incurred in France and Germany. Absent these 2 markets, organic volume growth was 5.8%.

In France PMI's shipment volume was down 24.5%, however market share continued to improve up 0.9 points to 40% driven by the success of Basic and the Philip Morris brand. PMI achieved this share growth despite the fact that last year's third quarter included a significant contribution from Marlboro 10's packs. You may recall that all 10's packs were withdrawn from the French market in November 2003. Over the last 4 quarters PMI share has improved sequentially in France.

In September of this year, PMI entered the fine-cut segment in France with Chesterfield Roll-Your-Own in order to build a presence in this growing category which was up 14.3% versus last year. We are pleased with PMI's share performance in France. The new law that establishes a minimum reference price below which cigarettes cannot sell has gone into effect and the government has said that it is unlikely to raise taxes this year and next. Going forward we are optimistic that the French market will stabilize and PMI share trends will continue to improve.

In Germany total cigarette volume declined 18% and PMI shipments were down 18.7%. As a result PMI's market share declined 0.2 percentage points to 36.5% with Marlboro's share down 0.3 points to 29.4%. Total tobacco consumption including cigarettes, fine-cut and tobacco portions, and cigarillos was down a more modest 8% in the third quarter.

To further strengthen the Marlboro franchise in Germany PMI is introducing Marlboro Blend 29 this month. In addition to Marlboro Blend 29, PMI continues to develop other new Marlboro ideas for Germany with the goal of introducing them in 2005.

Finally PMI's recent entries in the rapidly growing tobacco portions segment in Germany have been well received in the market with Marlboro and Next tobacco portions achieving 8.3 share of the segment in the third quarter. Regretfully, their volume and share performance was constrained by a temporary capacity shortfall.

Looking ahead we see continued growth opportunities in the profitable tobacco portions segment. Overall PMI has solid long term growth potential in Germany largely due to Marlboro. In the near term however, the situation remains challenging particularly in light of the scheduled tax increase in December of this year. It is our hope that the German government is coming to realize that its current policy neither addresses revenue or public health objectives. Therefore it may consider a postponement or cancellation of the September 1, 2005 tax increase and a partial or full equalization of the tax burden on all tobacco products.

Turning to Italy, PMI shipments were down slightly in the third quarter and market share declined 2.1 points to 51%. On a sequential basis PMI's market share since April has been relatively stable as price gaps have narrowed. Going forward PMI should be able to improve its performance and restore growth in Italy for a number of reasons -- First, new minimum tax regulations approved in July have helped to narrow Marlboro's price gap versus low price gap brands. Second, significant investments are being made to expand the field sales force, introduce new retail trade programs, and modernize in-store merchandising. Third, L&M was launched in May in the low priced segment and its share reached 0.7% in September. And lastly, PMI is finalizing a new distribution agreement in Italy with Logista, a subsidiary of Altadis, that has a proven track record of providing very efficient distribution.

Overall in western Europe we are pleased that PMI's share was up in the third quarter to 38.9% following declines in the first 2 quarters of this year. Furthermore, we believe that governments throughout Europe are experiencing severe budget shortfalls as a result of consumers switching to low priced cigarettes and other tobacco products. We think this should lead to increased implementation of minimum excise taxes and/or minimum reference prices and equalization of tax burdens on all tobacco products.

Elsewhere, PMI achieved good results in the third quarter. For example, in Turkey our volume was up double digits driven by L&M, the continued success of Muratti, and the renewed growth of Marlboro and Parliament. The Turkish government recently announced a new tax structure that reduced the ad valorum rate from 55% to 28% and introduced a 3-tier specific tax based - - specific tax, based on the level of oriental tobacco inclusion in the cigarette blend. While PMI is today well represented in all 3 tax categories, the brand repositioning and the blend changes that were required did entail a short term margin loss.

In Russia volume rose 6.7% and share increased 1.2 points to 26.6% driven by gains of Parliament, Marlboro, L&M, Next and Chesterfield.

In Korea volume results were particularly robust due to the momentum of Marlboro Ultra Lights and the recently launched Elan, a premium priced slim cigarette.

In the Philippines, Marlboro's strong growth and the impact of acquisition volume were the key drivers behind our results.

In Japan, our market share was up 0.4 points in the third quarter to 24.6%, driven by the Philip Morris brand and Virginia Slims. Growth of the Philip Morris franchise was driven by innovative new packaging while Virginia Slims benefited from the July introduction of Virginia Slims Rose', a 1milligram, 100 millimeter, menthol product which has already captured nearly 0.6% share of the total market.

We are very encouraged by Marlboro's performance in the third quarter. Volume of 1 - - of 81.8 billion units was up 1.1% in spite of declines in France and Germany. Absent these 2 markets Marlboro was up 6.8%. We are starting to see the fruits of PMI's investments behind this powerful brand. For example, in Asia, Marlboro volume was up 17% due mainly to gains in the Philippines, Malaysia, Thailand and Korea.

In Eastern Europe, Middle Eastern Africa, Marlboro increased 11% due to Russia, Ukraine, Kazakhstan, Turkey and Egypt. While in Central Europe, Marlboro rose nearly 9% due mainly to Romania and Serbia. Furthermore, share gains for Marlboro were widespread in the third quarter as detailed in our press release.

L&M enjoyed another terrific quarter with volume up 8.7% due to growth in Romania, Russia, the Ukraine, Turkey, Saudi Arabia and Thailand. Gains were also achieved in Egypt, our world-wide duty free business, and in Italy where L&M was recently launched. To conclude on PMI, it is on track to deliver volume growth of about 4% to 4.5% for the full year 2004 and OCI growth up 10% at current exchange rates and excluding the impact of the EC agreement.

Kraft announced its third quarter results yesterday. Net revenues were up 4.7% driven by new products, the impact of increased marketing spending, favorable currency of 85 million and commodity driven pricing.

Operating income decreased 11.1% to $1.3 billion due largely to $61 million of charges for the previously announced restructuring program, higher commodity costs, in market spending, and the unfavorable net impact on the sales of businesses.

At Philip Morris Capital Corporation operating companies income declined 26 - - 27.6% to 55 million in the third quarter of 2004, due primarily to lower lease portfolio revenues as a result of PMCC's shift in strategic direction announced in 2003.

To conclude my remarks, Kraft's results were encouraging with strong top line growth and its sustainable growth plan is on track. Philip Morris International delivered strong volume growth of 5.1% despite the serious challenges the industry continues to confront in France and Germany. Philip Morris USA achieved robust retail share gains driven by Marlboro, which has delivered quarter-over-quarter volume and share growth versus the year-ago quarter for the fourth consecutive time.

That concludes my introductory remarks and now I will be happy to take your questions.

Thank you. The floor is now open for questions. If you have a question, please press star, then 1 on your touch tone telephone at this time. If at any point your question has been answered you may remove yourself from the queue by pressing the pound key. We do ask that while you pose your question that you please pick up your handset to provide optimum sound quality. Once again that is star, then 1 on your touch tone telephone at this time.

Our first question is coming from Rob Campagnino with Prudential Equity. Please pose your question.

Good morning Dinny.

Hi, Rob. Good morning.

At PMI, with respect to meeting demand in the tobacco portion segment, you mentioned that there were capacity constraints. Can we have an update on when those might be - - when those might be corrected?

We are correct - - we are starting to correct them right now. We get extra capacity going in November, but by the time we're at the kind of capacity we'd like, we'll probably be the second quarter of next year.

2Q next year. Thank you.

A question with respect to the buyout. Implicit in sort of the guidance you provided this morning, what is your forecast for the price of lease tobacco relative to the quota price as it stands now?

I think that's - - numbers that have been been quoted in the media range from between 40 cents a pound to 50 cents a pound.

Favorability relative to the current price?

Right. Going down yeah.

And one final quick question. You quoted a 46% price gap. What was the low price reference brand in that calculation? And if it wasn't a deep discount brand, do you have the gap using the discount brand as a reference brand?

As I've said in the past to this question, Rob, the way this is measured - - first of all it is measured in C stores. And what we do is, we take the, obviously, the price of Marlboro in C stores and then we - - we - - we get to the lowest priced brand including product promotion in the C store. And that could be a deep discount brand, it could be in fact a - - a premium brand from one of our competitors that is being deeply promoted. For the third quarter, Marlboro averaged a price of $3.60 a pack and the lowest effective price in our sample of C stores was $2.46 a pack.

But - - I understand that. Is the $2.46, did that represent a competitor's premium brand or is that indeed a deep discount brand?

It is an average overall.

It is an average. Okay. Thank you very much.

Thank you.

Our next question is coming from David Adelman with Morgan Stanley.

Good morning, Dinny.

Hi, David. Good morning.

First I want to understand, the prior guidance you had of 4.50 to 4.60, did that include your expectation of this gain at SABMiller and the lower tax rate in the third quarter?

Yes.

Yes, to both?

Yes.

Okay. Secondly, can you talk about when do you think you are going to see better underlying local currency operating profit growth in the tobacco business, excluding the windfall you get late next April because of the Japan situation? And the point I'm looking at is, you had better sequential organic and overall volume growth, Marlboro performed better, and yet operating - - local currency operating profit growth internationally was only up 1%.

No, that's not correct. Local currency operating profit at PMI in the third quarter including acquisitions was up more like 3.5%.

Okay, fine. So take 3.5%, Dinny.

Right. It is an improvement over where we were. And the answer to this question is really very simple, David. We are continuing to reinvest our currency benefits into the business. It is starting to pay off as we're seeing in the top line. And as you know in the cigarette business, you've got to get that top line going first and I think we're succeeding there and income will follow.

Okay.

And 2 last things, Dinny. The guidance for PM USA, that implies, if I'm correct, a down fourth quarter in terms of operating income. Are you being unduly conservative ticking to a low single digit operating profit forecast?

Our operating forecast is, as I said, low single digits. I don't think we are being unduly conservative.

Okay. And then lastly, can you talk about what your strategy from a pricing perspective is in Germany going into the December tax increase? Do you intend to at least on a per pack basis recoup the excise increase which, I think, could be about 30 euro cents a pack?

Well, David, we're going to announce, I think in the next couple of weeks what we are going to do in Germany with regard to pricing and I would rather wait until then to answer your question.

Do you think it was harder in the current environment than it was in March when you took a net manufacture - - ?

I don't think so.

You don't think it's harder to do that now?

No.

Okay. Thank you very much. Next question is from Bonnie Herzog with Smith Barney.

Good morning, Dinny.

Good morning, Bonnie.

I guess my first question is, I was hoping you could characterize the U.S. market for us, you know, today the environment in the U.S. Kind of compare the industry relative to where you were a year ago or even 2 years. Do you feel that the current environment is the best it has been in maybe the last 1 or 2 years? I'm trying to get a sense for what you're thinking in term of where the gap is today, all the legislation that's been passed, I'd a appreciate color on that.

Yeah. Well, first of all, with regards to the level of competition I think it is still pretty intense.

On the other hand we've seen improvements in a number of areas. The deep discount segment, for example, which was growing pretty rapidly in 2002 is sort of flat to slightly declining now. Imports which were coming in, cheap imports, which were sort of, you know, pouring into this market are on a decline on a 12-month moving average basis. So, I think that is a good sign. I think legislation, both NPM legislation and allocable share legislation, has got much more traction now. I quoted numbers earlier. I sort of covered most of the United States with NPM legislation and with allocable share legislation, we're all sort of, you know, sort of doing very well.

And finally I think a very important factor is that the incidence of counterfeit which had, you know, become pretty severe in 2002 shows improvement in - - showed improvement in 2003 and continues to, we believe, to show improvement in 2004. So I hope that sort of answers your question.

It absolutely does. And I mean, it does tell me, you see what I'm seeing which is very much an improved environment. I mean you do kind of say the competition, you know, is still somewhat intense. But I feel like there are so many things have been positive as you just described them that, finally, the industry is getting to a point where there is stabilization and possibly, you know, opportunities for improvement in terms of profitability.

All right. Next question. Reduced risk cigarette, you did talk about relative to the FDA legislation not being passed. I think before you had stated that we might see this product being introduced to the market by the end of this year. Can you give us a better sense of timing? Should we assume first or second quarter? You did talk about bringing it to the - - to market in a few test markets. Would we - - could we expect that in the next couple of quarters? In other words, would you bring it to market without FDA legislation?

Yes, I think in my earlier remarks I did say that we planned to test market a potentially reduced risk product. And I can say in the near future and I'll leave you to judge what near future is without being more specific. The fact of the matter is that PM USA is continuing to develop and, you know, evaluate these technologies with regard to a potentially reduced harm product. And it is evaluating these technologies particularly in light of the criteria for reduced exposure claim as recommended by the Institute of Medicine. So a lot of work is going on and the test market is very much in our plans. I can't really be very specific about timing because it's now starting to become a competitive issue.

All right.

Dinny, can you touch on your cash position? You have now $6.7 billion of cash on the books. I assume you are not going to comment about resuming the share buy back programs, so can you share with us what your priorities are for this cash?

Yes. You are right, we had, you know, close to $6.7 billion in cash on our balance sheet at the end of the third quarter, most of that is in Europe. Or a large part of that is in Europe.

I think I'd like to answer this question by saying, you know, as we've said in the past, we are looking at all alternatives to maximize shareholder value. And towards this end, we really believe it is in the best interest of shareholders of Altria to have a strong balance sheet at this time. And with regard to the cash balance between Europe and the United States, you know, we bring back cash back to the United States in as tax efficient a manner as possible from time to time and we take opportunities and we will continue to follow that policy.

Okay, thank you.

Thank you.

Thank you. Our next question is coming from Judy Hong with Goldman Sachs.

Hi, Dinny.

Hi, Judy.

Question on PMI. You know, you talked about growing operating profit by at least 10% for the full year, which assumes that you are going to have a very strong fourth quarter from a profit standpoint, because year-to-date I think you're running profit of about 8%. Which means that in the fourth quarter you could have something like 15 or 16% to get to that 10% growth. And I am just wondering, you know, what gives you the confidence that you are going to achieve that kind of profit growth, and how much currency benefit are you assuming in the fourth quarter?

Yes, PMI will grow double digits - - will grow its OCI at a double digit rate in the fourth quarter. We're sort of already, you know, well into the fourth quarter. We have a pretty good feel of, you know, what our volumes are, what our business is looking like. We know the exchange rates today are pretty good. In fact, the euro is at a $1.25 so, we're confident we'll get that double digit growth in the fourth quarter.

From a volume standpoint, I mean, do you - - are you expecting sequentially much better volume growth in the in the fourth quarter versus the third quarter?

No.

So, it is more of a mix and product and geographic mix that you are assuming and some of the currency upside?

Yes.

Okay.

And then I just wanted to understand better, in Italy your strategy. You know, clearly it looks like your share has stabilized sequentially, but your share went from 62% just a couple of years ago down to 51%. How effective do you think some of the programs that you have implemented so far are? And do you think that you can recoup some of the market share losses from the programs that you've implemented so far or do you see the need to step it up even more?

The programs we've implemented I think are, you know, very solid programs at the point of sale, these always take time to really have their full impact. I think, there's no doubt , that our loss in market share was due to the price gaps between Marlboro and, you know, these brands that were at 2.40 and 2.50 a pack. The good news is that in the last few months many of those brands have come up in price and brands that were at $2 - - EUR2.50 a pack have in fact come up to 2.70. Some have gone to 2.80.

So the sort of gaps that we were suffering from until a few months ago are much improved. And I think that is going to help us in Italy and I think are already starting to help us.

Okay, thank you.

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

Morning, Dinny.

Morning.

Question for you as you - - it seems that your organization has put much renewed emphasis on Marlboro internationally over the past 12 months. What would, in your mind, would be the 2 key drivers that have driven Marlboro up almost 7% excluding France and Germany in the quarter?

Well, brand building in - in the cigarette business requires, you know, many skills. Obviously a good consumer communication, always ensuring that the product - - that our product tests well and superior to our competitors' products, always looking at product quality. But I think, also, a very important management focus on top, from the very top to the bottom, management focus on getting Marlboro going and growing again. And I think that's what we've been doing in the last couple of years and it is starting to to bear fruit.

Great. And when you look to 2005 now, from an operating company profit growth rate for PMI, ex-Japan and ex-currency, would we expect your unit volume growth to be similar to EBIT growth? How should we look at your early read?

I don't think you should look at any early read because frankly, I don't have an early read. You know, we were sort of just starting the budgeting process for next year. I will tell you that, you know, obviously our volume is starting to do better than it has in the past most recent periods. We have the Japan license benefit, and I think very importantly the worst of Western Europe will clearly be behind us in 2005. Other than that, it would be inappropriate to say anything specific.

Okay Dinny, and that would suggest, as we move through '05, perhaps some of the unfavorable mix will dissipate somewhat as we move through the the year.

That is a fair assumption.

And finally, Dinny, looking at the U.S. business, given the stability and strength of the Marlboro brand and your continual share gains, at what point does PM USA reassess its promotional strategies?

We've already said that we're going to grow our business in the USA in a balanced manner in terms of market share growth on the one hand and income growth on the other hand. From time to time, you know, one gets a little more emphasis than the other, but the plan is balanced growth and you can be assured that that's what we're focused on going forward.

Thank you very much, Dinny.

Thank you.

Thank you. Our next question is coming from Martin Steineck (ph) with J.P. Morgan.

Hi Dinny.

Hi.

You mentioned earlier in the call that you are reinvesting currency benefits behind your brands and sales force. As we look into next year can you expect to grow your business let's say in mid to single high digit EBIT growth level or whatever level comes out of the budget process with the same amount of spend in the market that you are putting behind them this year? Or should we expect you to have to take the pedal off investment spending behind your brands in the absence of currency benefits to maintain underlying growth?

Our view on investing behind our brands, obviously, when we have currency - - favorable currency, it sort of becomes easier to do that. On the other hand our single focus is to do the best for our brands under any circumstances. You know, whether currency is good or currency is not good. Because the brand is the first - - is the most important thing. And we will continue to support our brands to the level we think is appropriate to keep them growing. That's been our policy in the past and is going to be our policy next year and the years ahead.

Alright. Centering on PMI, in French market. I know last quarter you were feeling optimistic that the worst was behind us in the French market but Q3 volume decline remained 25% more or less. Is there anything you are seeing that gives you hope that we can expect an end to this sort of double digit decline in duty paid market volumes in France?

Yeah. You know, our volume was down 24.5% but in fact in market volume was down a little lower, more like 20% but still down. I mean, that's a big number. Fourth quarter I think France is going to look much better than the year-to-date performance. And I can't give you an exact number but I say it is going to look much, much better.

One final question then on regulation generally. We've seen increased discussion on public smoking bans and on health warning labels particularly in Europe and in other markets and emerging markets, of course health warning labels are in Canada now. Can you give us your take at how you're expecting this might impact your premium brands, and how you might might adjust marketing to communicate to smokers in this sort of environment where the brand is at risk?

[Background laughter] Well look, first of all as far as, you know, smoking bans and health warnings are concerned we support the policies of public health communities and the government in various countries and we're going to continue to do that. We will also continue to advertise and promote our brands where we can within the law. We've done innovative things in various countries staying well within the spirit and letter of the law and we are going to continue to do that. So, I hope that answers your question.

Thanks, Dinny.

Thank you.

Thank you. Our next question is coming from Ann Gurkin with Davenport.

Good morning.

Hi Ann. Good morning.

I wanted to start with the quota buyout in the U.S. and potentially lower tobacco prices and just have a better understanding why it will not have more of an impact on your numbers. Are you spending some of that money - - I would guess the payments of the settlement - - or the buyout, but are you spending that back against brands?

No. I mean, as I mentioned in my earlier remarks, the cost burden of the buyout program will be shared by all manufacturers and all those who sell tobacco products in the United States. And as I said, the total cost will be approximately $10 billion over 10 years. Now, so we'll have to pay out our share of this 10 billion, at the same time we'll get an offset for more already scheduled payments to the National Tobacco Grower Settlement Trust, so there will be an offset there. And so when you add all that up, and then of course there's the benefit of reduced tobacco, more competitively priced tobacco, but when you add all that that up - - In fact for Altria on a global basis it is not material.

Okay. And sticking with the U.S. market, given there is likely the lower end we'll raise - - we'll need to raise prices in light of the quota buyout payments and in light of the more stable U.S. market or improving U.S. market. Do you anticipate a market - - a better market in which you and the whole industry will be able to raise prices again?

Well Ann, I'm not going to talk about our pricing strategy obviously, I don't think you'd want me to either. But I will say that, you know, everybody will have to make this - - will have to share the burden of the quota buyout and that includes the small manufacturers as well as the importers of tobacco into the United States - - tobacco products into the United States.

Alright, and then are there any updates on China?

No further updates from what I said in the second quarter. You know, we're continuing to work with the Chinese monopoly on various projects and issues of mutual interest. We're working well together and we're working hard and nothing further to add to that at this moment.

Great. Thanks very much.

Thanks a lot.

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

Hi, Dinny. Good morning. I just had a couple of ones and I'll stick mostly to PM USA but my first question was on the tax rate. And I don't recall if you said it or not but with the fourth quarter tax rate, what should we plan for Altria's tax rate for the fourth quarter?

It would be closer to somewhere between 35.5 and 36%.

Okay. So the benefit that came through this quarter was all of Kraft and it will go back to revert to the previous level in the fourth quarter?

That's right.

Okay. And then on PM USA you had a pretty aggressive new product campaign for the last sort of 18 months that stimulated volumes a bit. Will that - is that expected to continue into 2005 as well?

You mean the new product program?

Yeah, new product program which, you know, had a lull there for a couple years as well so --

I am not specifically aware of PM USA's new product program for 2005, but I think you can assume that, you know, we'll have a fairly robust new product program.

Okay, the - - I know that PM USA is driving cost savings from its move to Richmond along with some productivity initiatives, what could that total - - or what will that total in '04 and perhaps how - - or where could that go in '05?

Well we've said that the move to Richmond is going to save approximately $60 million a year on an annualized basis. That is one specific number we have out there.

At the same time, you know, we've said we are investing in upgrading equipment, (inaudible) equipment that is going to lead to productivity improvements. I don't really have a number for you in terms of how much that's going to translate to in terms of savings, but those are the 2 major initiatives, cost saving initiatives, we have out there.

Okay. I guess what I am trying to just put a general framework around PM USA, if there is volume declines in the market and volume declines are forecasted for '05 as well, there still could be enough on the savings side to produce some moderate profit growth, is that a reasonable assumption for '05 without giving guidance?

Yes.

Okay. And then my last question, just on excise tax and the risk in the coming year to higher excise taxes, is that a notable risk for 2005?

Philip Morris USA?

USA, yes.

Look, you know the weighted average state excise tax currently is about 77 cents. I think 9 states increased taxes this year. We expect the year to end at about 78 cents. And I think, you know, you could expect a similar type of growth in SEP next year. Hopefully a little more - - a little less than what there was this year.

Okay. Thank you.

Thank you. At this time we would like to invite media representatives to ask questions. (Operator Instructions)

Thank you, our next question is coming from Brad Dorfman from Reuters.

Good morning. I am going to try and take a different tack or another path at something that has been asked here a couple times.

When you talk about wanting to have a balance between - - between growing share and growing profit, and looking specifically at the U.S, is the time come to shift that balance more toward the income side again? And when might you take some moves to make that shift? And then also, the market share you are gaining in Marlboro, is that profitable share or is that share that is strictly coming because of promotions?

I'll answer your second question first. It is a very profitable share. The share we grow from Marlboro is very profitable share.

The answer to your first question, is - - you know is difficult, it is all a question of timing. It's also a question of tactics. But, as I said, the clear policy over a period of time, is balanced income and market share growth.

Okay. Thank you.

Thank you.

Thank you. Our next question is coming from Thomas Ruso (ph) with Gardener Russo Gardener (ph).

Hi, Dinny.

Hi, Tom.

I have a couple of questions.

What progress is underway at the EU level for your - - your settlement, the payments? Whether they've gone out and whether there has been any enforcement progress underway for the compliance with the EU tax settlement?

Tom, it is still a bit early. You know, obviously, it just got started, but our people are in discussion with the - - with the EC compliance people. There is constant communication. But, it is too early to sort of give you any results as it were from that agreement.

Okay. And then talk briefly about the role out in New York State of the fire retardant paper select product. And then possibly as to whether it has rolled out into other regions and other jurisdictions. What has your experience been?

Well we met, obviously, the deadline, very effectively for fire retardant regulations and ignition propensity regulations, and it is working fine. You know, we're tracking consumer response on this product pretty carefully and things look okay. As far as, you know, extending to other states, we really would like a - - a national tobacco policy on this, on the whole area of ignition propensity. And that is what we're hoping to work towards. At the moment, of course, it is just centered in New York State.

Thanks, Dinny, keep up the good work.

Thank you.

Thank you. Our next question is coming from Philip Gussman with Credit Suisse First Boston.

Good morning.

Good morning. First question I had was, as you know last week Congress passed the American Jobs Creation Act providing some new incentives for the repatriation of overseas profits. There was also, I think the day afterwards, an article in the Wall Street Journal that listed a number for the Altria Corporation. Can you just perhaps share with us some order of magnitude, what that number actually may be, and what your current plans may be with regard to the potential repatriation of overseas earnings.

Philip, as you know, the Act, you may not know this, the Act contains over 600 pages of tax legislation. And there are a number of ambiguities in the Act, and some of these ambiguities in fact may be deliberate in - - to sort of help secure passage of the bill. For example, it is really not totally clear what are the permitted uses of repatriated dividends. Also it is not really clear over which period repatriated dividends can be expended. Having said that, the amount of dividends that may be repatriated is limited to the amount of earnings shown on the most recent audited financial statement as of June 30, 2003 as permanently reinvested outside the U.S. So if you look at note 13 of the 2002 Altria annual report, we have $7.1 billion of permanently reinvested foreign earnings available for repatriation under this provision. So, that's the number you have to look at. In addition, there will be some relief for domestic manufacturing but this will be partially offset by the loss of export incentives.

Now, if I understand correctly, Dinny, for people to be able to actually repatriate those earnings, if there is no cash available actually those companies may have to go out and even borrow at the subsidiary level. I would imagine that would not be the case for Altria if you were to decide to repatriate those earnings. In other words I am trying to look at what could be the impact on the the consolidated leverage of your Company.

We are looking at this whole thing just now. We are not going to rule out any options. Obviously we have a lot of cash in Europe and there is a tremendous pool there. But you know, we are looking at the situation and we are looking at all possible alternatives and we will make a decision in - - at an appropriate time.

Great. And then the final question I had, Dinny, was, we had the opportunity last week to meet at Cagni with the CEO of SABMiller, and he indicated with regard to the stake that is currently owned by Altria that that stake would be too large for SABMiller at any point to buy that from you guys. Can you just kind of refresh our minds in terms of what the long term strategic set is of that stake in your portfolio please? Thank you.

We have until June 30th, I think that is the lockout period, June 30th of 2005, and you know, until then we don't have to make a decision. We are looking at the situation and that is all I can say at this point.

Great. Thank you very much, Dinny.

Thank you.

Thank you. Our final question is coming from Donald Lipkin with Bear Stearns.

Hi there. Couple of quick questions for you. What is your - - you said that import volumes had been pouring into the U.S. and it is down in the quarter, and I guess for the year. What is your estimate of how much import volume is down for the quarter and for the first 9 months?

I think for the - - if I look at it year-to-date August, the volume is at about 14.6 billion compared to 15.6 billion same time last year.

Okay. And then why do you think that the import volume is down so much compared to overall deep discount volume which seems to be relatively flat?

Difficult to give you a specific answer. But I would say that a number of importers were not following the rules as well as say, some of the local manufacturers, more local manufacturers over here. Now they just sort of follow the rules because of enforcements with NPM legislation, allocable share legislation has just become - - has become tougher and I think that impacts the importers more than it impacts others.

Okay. And then in terms of - - you had said that your volume is down about 1%, but if you adjust it for inventory it would be down 0.5%. If I looked at the 9 months shipment which were relatively - - which are basically flat for the first 9 months compared to last year, would there be an inventory effect on the first 9 months shipments?

Well, if you take the first 9 months, we are probably down a wee bit, maybe .2%.

Is that an adjusted -- in other words.

That is an adjusted number.

Adjusted number, so just slightly more than - -just an extra 2% - - .2%.

Well actually, if you look at our year-to-date volume in USA it is down .6% on a reported shipment basis. And if you adjust for inventory distortions it is down about .2%.

I see thank you. And then the IRI capstone numbers on your report, it says that they do not include internet mail order. I was wondering, does it include your - - the internet mail order shipments that would come from Philip Morris, in other words, that would organize with you?

We don't sell to the internet or mail order. That is all done, you know, by retailers and by the internet and mail order operators. And since we don't measure that segment it wouldn't include our brands either.

But I mean, aren't the internet mail order companies buying the cigarettes from you?

No. They are not buying it from us.

Oh they're not. They're buying it from distributors in other words?

They are buying it from I don't know who, retailers, some wholesalers, et cetera.

Okay. But in other - - but in terms of - -but all your shipments are included in the IRI capstone numbers?

Yes.

So if they ended up in the internet they would be included in the IRI number --

No, no, no. When we measure IRA capstone, you are not actually - - first of all you are not measuring shipments, you are measuring market share.

Okay.

And so - - and if you are measuring market share at the retail level so you are not really capturing shipments.

I see. Okay.

In the sense that you were referring to them.

Okay. Thank you very much.

Thank you.

Thank you. At this time I would like to turn the floor back over to Mr. Nick Rolli for any closing remarks.

Okay. Well thank you very much for joining us on the call this morning. We appreciate your participation and look for forward to talking with all of you next year in January when we report our fourth quarter and full year 2004 results. Thank you very much, 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.