奧馳亞 (MO) 2004 Q4 法說會逐字稿

Good afternoon, and welcome to Altria Group's 2004 full-year and fourth-quarter earnings conference call.

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

Today's call is scheduled to last about 1 hour, including remarks by Altria and a question-and-answer session.

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

You may remove yourself from the queue by pressing the pound key.

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

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

Please go ahead, sir.

Good afternoon, and thank you for joining us today.

I have several brief announcements before I introduce Diny Devitre.

First, as you all know, we issued our 2004 full-year and fourth-quarter earnings release this morning, and you can go to our website at www.altria.com to obtain a copy.

For those of you listening via the audio webcast, we are providing summary slides for full-year and fourth-quarter results for Altria and its operating companies, Philip Morris USA, Philip Morris International, Kraft Foods and Philip Morris Capital Corporation.

Louis Camilleri, Altria's Chairman and CEO, is joining us on this call and will be available, together with Diny, to take your questions.

Second, results were restated to reflect the impact of discontinued operation following Kraft's agreement to sell its sugar confectionary business.

Therefore, all references in our news release and on today's call are to continuing operations, unless otherwise stated.

For comparative purposes, we have also provided schedules with restated results for the years 2003 and 2004 in today's news release.

Third, in line with past practice, we intend to limit this call to a discussion of our business results.

We will not be covering litigation or regulatory issues.

Fourth, Kraft Foods reported its fourth-quarter and full-year 2004 results yesterday and hosted a separate webcast.

Since the food business was covered in detail on that webcast, our discussion -- discussion of Kraft will be limited on this call.

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

And finally, today's remarks will cover a review of Altria's consolidated results, the 2004 full-year and fourth-quarter performances of each of our operating companies, and our EPS guidance for 2005.

And now, it's my pleasure to introduce Altria's Senior Vice President and Chief Financial Officer, Diny Devitre.

Thank you, Nick, and good afternoon. 2004 marked a year of continued progress in Altria's business fundamentals, with solid results achieved by our domestic and international tobacco companies, and gains from our investment in SABMiller.

At Kraft, investments to generate strong top-line growth have proven to be successful in North America, and its sustainable growth plan is on track, although the cost of the plan adversely impacted income throughout 2004.

For the full year 2004, Altria's diluted earnings per share from continuing operations were up 2 percent to $4.57, versus $4.48 for the same period a year ago, including $0.10 in 2004 fourth quarter net charges, as detailed on Schedule 8 in our release.

In the fourth quarter, Altria's operating income declined 4.4 percent, to 3.4 billion dollars, due primarily to charges for the Kraft restructuring, and an increase in the provision for airline industry exposure at Philip Morris Capital Corporation.

These charges more than offset higher income at Philip Morris USA and Philip Morris International.

Diluted EPS from continuing operations were down 5.9 percent, to $0.96 in the fourth quarter versus the same quarter a year ago, including $0.12 in 2004 fourth-quarter, charges as detailed on Schedule 7 in our release.

We enter 2004 poised for growth in each of our operating companies.

PM USA's fundamentals are solid and it projects moderate growth in retail share and operating companies income growth in the low to mid single-digits in 2005.

PMI, with its superior brand portfolio led by Marlboro, L&M and Parliament, and its extraordinary global infrastructure, expects to deliver approximately 2 to 3 percent total volume growth, and double-digit operating companies income growth in 2005, assuming current exchange rates.

In 2005, Kraft is projecting diluted earnings per share on a continuing operations basis in a range of $1.75 to $1.80.

Altria Group, Inc. expects EPS from continuing operations, which excludes Kraft's discontinued operations of $0.03, to be between $4.95 and $5.05, or growth in the range of 8.3 percent to 10.5 percent, compared with $4.57 in 2004.

This projection assumes current foreign exchange rates, an effective income tax rate of 34.7 percent, and approximately $0.12 per share for restructuring at Kraft.

However, it does not include any tax benefits that could arise from the repatriation of funds from our international businesses under the provisions of the 2004 American Jobs Creation Act, nor does it include any benefit from prior year accrued contributions to the National Tobacco Growers Settlement Trust.

It also does not include any impact from potential acquisitions or divestitures.

Turning now to a review of each operating company's results, I will start with Philip Morris USA. 2004 was a year of steady progress for -- for PM USA, driven by effective price gap management and promotional programs.

Retail share grew over 1 share point versus 2003, to 49.8 percent of the total market.

Despite a declining cigarette industry, PM USA cigarette volume was 187.1 billion units, down 0.1 percent, and operating companies income rose 13.3 percent, to $4.4 billion.

The higher income was primarily due to savings resulting from changes to 2004 trade programs, including PM USA's returned goods policy and lower wholesale leaders program discounts, as well as the absence of a one-time inventory buy-down in 2003, and 202 million in charges related to the 2003 tobacco growers settlement, partially offset by increased costs under state settlement agreements.

Growth from Marlboro was outstanding in 2004, with retail share advancing 1.5 points to 39.5 percent.

Last year, PM USA continued to enhance Marlboro's brand equity and generated incremental share growth with the national launch of Marlboro Menthol 72mm.

PM USA's other focus brands, Parliament, Virginia Slims and Basic, also performed well, with stable retail share in 2004.

In the fourth quarter, PM USA's shipment volume of 47.1 billion units was up 1.5 percent versus 2003.

However, adjusting for the timing of promotions and wholesaler inventory changes, volume is estimated to have been essentially flat.

PM USA's operating companies income increased 9 percent, to $1.1 billion, driven by higher volume and the other factors I mentioned in the full-year discussion.

In December, PM USA announced a reduction in the wholesale promotional allowance on its focus brands, Marlboro, Parliament, Virginia Slims and Basic, of $1.00 per carton, from $6.50 to $5.50, effective December 12, 2004.

In addition, this month the price of its other brands was increased by $5.00 per 1,000 cigarettes, or $1.00 per carton.

During the fourth quarter, PM USA recorded charges related to its obligation under the recently enacted Fair and Equitable Tobacco Reform Act, but these charges had no material impact when compared to the prior year period, as they were offset by the absence of 2004 National Tobacco Growers Settlement Trust costs.

In the fourth quarter, PM USA's retail share increased 0.8 points, to 49.9 percent, on the strength of Marlboro.

Importantly, Marlboro's price gap with deep discount brands was essentially stable at 47 percent in the fourth quarter, reflecting Marlboro's average net price of $3.61 per pack, versus $2.46 per pack for the lowest effective price brands.

The deep discount segment, comprised of all other manufacturers' discount brands and major manufacturers' private label brands, achieved a retail share of 11.7 percent in the fourth quarter, down 0.3 share points versus last year.

The total discount segment was down 0.6 share points in the fourth quarter, to 26.7 percent.

To sum up on Philip Morris USA, the investments it has made are clearly paying off with solid financial performance and strong retail market share gains, particularly for Marlboro, which has delivered volume and share growth versus the year-ago quarter for the fifth consecutive time.

PM USA continues to innovate, adding consumer value and further building brand equity for Marlboro.

This month, it began shipping Marlboro 72mm Red and Lights in commemorative 50th anniversary packs for launch during the first quarter of the year.

It also began test marketing Marlboro UltraSmooth in several test markets, to evaluate consumer acceptance of its taste.

Turning now to our international tobacco business, in 2004 PMI delivered OCI of $6.6 billion, an increase of 4.5 percent.

The growth was due to favorable currency of $540 million, higher volume strengthened by the impact of acquisitions, and better pricing, partially offset by higher overhead and marketing costs, unfavorable mix, and the initial $250 million and ongoing annual charges for the cooperation agreement with the European community -- European Commission, rather.

Sorry.

Excluding the initial 250 million charge and a one-time charge of $44 million primarily related to the Eger factory closure in Hungary, PMI's OCI increased 9.1 percent versus 2003.

PMI's volume of 761.4 billion units was up 3.5 percent, or 25.6 billion units over 2003.

Volume growth of 7 percent around the globe, including acquired volume in Greece, Serbia and the Philippines, was partially offset by declines in France, Germany and Italy, which collectively had an adverse impact of 3.5 percentage points.

Marlboro's international volume in 2004 was down 1.3 percent, as solid gains in Central Europe, Eastern Europe and Asia, including Japan, were more than offset by lower volume in Western Europe, mainly France and Germany.

Excluding France and Germany, Marlboro volume was up 2.6 percent.

However, the performance of PMI's other international brands more than offset this decline.

L&M volume grew 6.7 percent over 2003, Parliament rose 7.4 percent, Chesterfield was up 2.5 percent and Lark increased 2.5 percent.

Let me now turn to a more detailed review of PMI's results in France, Germany and Italy.

In France, 2004 cigarette industry shipments declined to 55 billion units, a reduction of 21 percent compared to 2003.

PMI's 2004 cigarette volume was down 19.5 percent in France, but its market share trend steadily improved through the year, with share up 0.7 points, to 39.9 percent for the full year.

Marlboro demonstrated its resilience and ended the year at 29.1 percent, down one-half of a share point versus 2003, despite the fact that tens packs were withdrawn from the market late in 2003 and Marlboro's ten-pack format had a market share of about 3 percent.

In the fourth quarter, PMI's business performed very well in France.

Shipments were up 5.9 percent, aided by a favorable comparison to the fourth quarter of 2003, when volume was adversely affected by the October 2003 tax-driven price increase.

PMI's market share growth was robust, adding 1.4 points to 40.3 percent, driven by the renewed growth of Marlboro.

As 2005 progress, PMI expects improved quarter-over-quarter volume comparisons in France and anticipates some stability in overall consumption trends, as the government has stated it is unlike -- unlikely to raise taxes this year.

In Germany, total cigarette volume declined 15.5 percent, as consumers switched to low-price tobacco portions.

PMI's cigarette market share was down 0.4 points, to 36.8 percent.

Recall that tobacco portions are taxed at half the rate of cigarettes, and on average enjoy relatively similar margins to cigarettes.

Last year, tobacco portions grew to 13.5 billion units, compared to 5.5 billion in 2003.

Since April 2004, PMI has vigorously participated in this growing segment, with Marlboro and Next tobacco portions.

With increasing tobacco portions manufacturing capacity being installed, PMI's share of this segment grew to 10.3 percent in the fourth quarter, and 13.2 percent in December.

Within the cigarette market, Marlboro, the industry leader by far, achieved a 29.7 market share last year, down 0.4 points versus 2003.

In addition, PMI successfully launched Marlboro Blend 29 in selected channels in October.

On December 1, 2004, an industry-wide, tax-driven price increase went into effect in Germany, exacerbating the decline in the cigarette market last month.

PMI's fourth-quarter shipments were down 18.6 percent, and share declined 1.2 points to 36.2 percent, reflecting the timing of PMI's shipments of new-priced stock versus its competitors.

PMI believes that the current excise tax structure in Germany is untenable and that the government, which has lost significant excise tax revenues in 2004, will ultimately address the unreasonable difference in tax rates between cigarettes and tobacco portions.

In the meantime, PMI is encouraged by reports that the tax increase scheduled for September 2005 may be postponed or eliminated.

Until the tax situation is clarified, PMI's German business will continue to be a challenge.

In Italy, PMI's volume and share were down in 2004, due to losses in low-priced Diana and, to a lesser extent, Marlboro.

To improve its performance, PMI launched L&M last May to establish a presence in the low-priced segment.

It also expanded the field sales organization by over 60 percent in the last 2 years, and invested in merchandising programs at retail.

PMI's market share in Italy grew from a low point of 49.2 percent in March 2004, to 52.8 percent in December.

In addition, weekly share trends in early January continue to exhibit promising trends.

Encouragingly, the Italian government recently passed a minimum reference price law, similar to France, and implementation regulations are expected in the first quarter of 2005.

Furthermore, a couple of weeks ago PMI finalized arrangements with Logista, a subsidiary of Altadis, to distribute its brands, which will significantly improve PMI's cash flow and lower distribution costs in Italy.

This year, PMI expects its volume in Italy to stabilize and market share to continue to improve, driven by Marlboro.

Turning to a recap of PMI's fourth-quarter results, operating companies income increased 11.7 percent to $1.4 billion, due to favorable currency of $115 million, higher volume and pricing, partially offset by increased marketing expenses, and ongoing costs related to the cooperation agreement with the EC.

PMI shipment volume increased 2.6 percent in the fourth quarter to 172.7 billion units, due to solid gains in many key markets, partially offset by declines in Germany and Italy, reflecting lower total market volumes as a result of industry-wide, tax-driven price increases.

Marlboro volume in the fourth quarter was down 2.3 percent, due primarily to the issues I discussed in Germany.

However, Marlboro's share was up in many key markets, including Argentina, Austria, Egypt, France, Japan, the Philippines, Poland, Portugal, Spain, Russia, Turkey, the United Kingdom and the Ukraine.

PMI achieved terrific results in many key markets in the fourth quarter of 2004.

In Turkey, volume was up 18 percent, and share increased 4.5 points to 38.6 percent, driven by Bond Street and the renewed growth of Marlboro and Parliament.

In Russia, volume rose 7.9 percent, and share was up 0.8 points to 26.6 percent, due to the strength of PMI's portfolio, led by L&M, Marlboro and Parliament.

In Korea, volume advanced nearly 10 percent, driven by Elan, Ultra Lights and L&M.

In the Philippines, volume rose 29 percent, and share was up 7.2 points to 27.6 percent, due largely to Marlboro's success.

In Japan, market share was up 0.4 points to 24.5 percent, driven by the strength of Marlboro and recent new products, like Virginia Slims Rose and Lark Pacific Green.

Turning now to Philip Morris Capital Corporation, operating companies income of $144 million for the full-year 2004 and a loss of 106 million for the fourth quarter reflect an increase of 140 million in the provision for credit exposure related to the troubled airline industry in the fourth quarter of 2004, and lower lease portfolio revenues.

Turning to the food business, as you know, Kraft is executing against a sustainable growth plan to restore growth in a business environment that continues to be challenging.

The Company reported its results yesterday, so I shall contain my remarks to some very brief highlights, beginning with the full-year 2004 results.

Kraft's net revenues were up 5.5 percent last year, driven by new products, the impact of increased marketing spending, favorable currency and commodity-driven pricing.

In 2004, Kraft's volume increased 2.8 percent, as ongoing volume growth of 3 percent was partially offset by the impact of divestitures.

Operating income declined 21.3 percent to $4.6 billion, driven by restructuring and impairment charges, higher commodity costs and increased marketing spending, partially offset by volume growth, pricing, cost reduction initiatives and favorable currency.

In the fourth quarter, Kraft's net revenues were up 7 percent, with increased volume, positive mix, pricing, acquisitions and favorable currency all contributing, and volume grew 3.4 percent.

During the fourth quarter, Kraft announced the sale of its sugar confectionery, U.K. desserts and U.S. yogurt businesses.

All of these transactions are expected to be completed by mid-2005.

In accordance with relevant accounting rules, the sugar confectionery business is reflected as discontinued operations.

In summary, Altria's operating companies have good business fundamentals entering 2005.

PM USA's anticipating another year of retail share gains and income -- income growth driven by Marlboro.

PMI will continue its brand-building initiatives and expects continued widespread market share gains and income growth, despite continuing challenges in Germany, and Kraft continues to make solid progress on its restructuring plans and projects improved results this year.

This concludes my introductory remarks, and now Louis and I will be happy to take your questions.

Thank you.

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 on1 e on your touchtone phone.

Our first question is coming from Rob Campagnino from Prudential Equity.

Please go ahead.

Gentlemen.

Hi, Rob.

Hi, Rob.

One -- one sort of broader question.

Kraft looks to earn sort of around $2.00 for the foreseeable future.

PMI was only up slightly on a currency-neutral basis and -- and PM USA looks to be able to get to mid-single-digit growth when it can get pricing.

What -- how should we think about the long-term EPS growth algorithm for Altria, given what we've seen over the course of -- of the last couple of years?

Rob, this is Louie.

You know, I think the last couple of years, we've reinvested considerably in the business.

I would say across all 3 businesses.

We supported marketing which probably [inaudible] cuts to levels that were uncompetitive.

We've managed price gaps across all the businesses.

We've invested a lot in R&D and infrastructure, sales forces, etc., and that all comes at a cost.

And I would say over the last couple of years, our earnings have suffered from those investments.

I think going forward, and particularly next year, we feel pretty good about our growth.

As I think was pointed out by Diny in his remarks, there has been sequential improvement throughout 2004.

We have 1 or 2 favorabilities next year, probably the biggest being the take-back of the Marlboro agreement in Japan.

But I'm confident that if next year our growth rate, as our guidance suggests, is between 8 and 10 percent, I would hope that going forward beyond that, we should be able to grow EPS in the high single digits on a constant currency basis.

Thank you.

Just one question for domestic business, and one for the international business.

This is the first quarter I think in -- in the last 8 or 9 that we actually haven't seen sequential share growth at PM USA.

And -- and I know Diny commented on-- on the prospects for continued share growth, but how should we -- how should we look at that, given the fact that it does seem to be slowing down on a sequential basis?

Well, again, Rob, we've always said that we need to find the appropriate balance between share growth and income growth.

I think we've been somewhat criticized in the past for having put too much on share growth at the expense of income growth.

And now that sequential share growth is rather flattish, people are now saying, well, maybe you should have more share growth.

I think we're very focused on getting the appropriate balance.

I think we have -- a word of caution -- we have noticed more recently that some of our competitors have used a bit more free product, so that's a cautionary note, but we think we have the appropriate momentum.

And I think we have a number of exciting programs in place for 2005 to ensure continued share growth, and I would say moderate share growth to again balance share growth with income growth.

And -- and I know -- one last question.

I know it's early days, but -- but any comment on the impact from the smoking ban in Italy?

It is extremely early days.

I think it went into place essentially January 10.

You know, we've often been asked the question as to whether a smoking ban has a dramatic impact on consumption.

It's always difficult to actually allocate consumption patterns to one specific regulation.

Our experience has been, generally, that price through taxation has hurt consumption.

It's also had unintended consequences.

But, generally, smoking restrictions have a very marginal impact on total consumption.

In fact, Norway -- I think the Norwegian government statistics recently issued a report, I think last week, basically saying that they couldn't ascribe any reduction to consumption for their public smoking restrictions.

Okay.

I thank you for your time this afternoon.

Good luck in '05.

Thank you, Rob.

Thank you.

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

Please go ahead.

Hi, Louis.

Hi, Diny.

Hi, Judy.

Hi, Judy.

I'll start with a question on PM USA.

I guess I'm a little bit surprised by your guidance of low to mid-single-digit profit for 2005.

In -- in 2004, profit was up more than 6 percent.

You know, the lower discount rate that you announced at the end of December is $5.00 per thousand, and even considering higher MSA costs and -- and the costs related to the -- to the buyout, it seems to me that you could get to the same, if not more, growth profit in -- in PM USA in 2005 versus 2004, so I'm just wondering if there are any additional costs that we should be looking for?

Are you more cautious about volume outlook in 2004?

Can you just help me understand that?

I can strive to, Judy.

I think you've -- you've sort of mentioned all the elements.

There are essentially 2 that I would focus on in terms of trying to explain the numbers.

First of all, we have changed our pension assumptions.

We've reduced the pension return assumptions from 9 percent to a more conservative and prudent 8 percent.

And the discount rate has come down about half a point.

So that has quite a significant increase in pension costs and overhead costs.

And the other one is that we are investing behind product quality in terms of our manufacturing.

So those are probably 2 elements that may explain our guidance versus what I presume you think should be a higher number.

Okay.

That's -- that's -- that's helpful.

And then in terms of the international tobacco business, if -- if I remember correctly in -- in the third quarter, Marlboro volume was up, even with some challenges that you continued to face in Western Europe.

In fourth quarter I think Marlboro's volume was down 2.3 percent, and I understand that Italy and -- and Germany continue to be challenging, but with France growing again, I would have thought that Marlboro volume would be better than the 2.3 percent decline that you showed in the fourth quarter.

I'm just wondering if you can give more color as to Marlboro's performance in maybe some of the other markets.

That's a fair question, Judy.

You know, if you look at the third quarter and the fourth quarter and you eliminate acquisitions, the third quarter was -- and I'm talking total volume now, 2.9 percent, and the fourth quarter was 2.4 percent.

Now, within that, the fourth quarter was distorted, as you just mentioned, behind significant volume erosion in Italy and Germany.

Germany, we lost 2 billion units.

That, I don't think, is a reflection of the fundamentals of the business, and let me try to explain why.

As we continue to work on our balance sheet and improve our working capital, we very much focus on reducing inventories.

It just so happened that in Germany, we were in the process of reducing our inventories this summer, and therefore ordered less tax stamps than we otherwise would.

Lo and behold, the minister of finance, when he came up with the December tax increase, decided to allocate quotas at the old price, based on orders this summer.

So we were at a competitive disadvantage with old-priced product.

So our share in December lost something like more than 3 share points in Germany, because we were at that position where we had less product than we should have otherwise at the old price.

So I'm confident that we can recapture some of that, and it's a distortion in the fourth quarter, and as you can imagine, the main bulk of all that volume was Marlboro.

Italy is a slightly different story, where we had a price increase, as you know, in the quarter, so the trade reduced its inventories this quarter against a fourth quarter last year, where the trade increased its inventories before an anticipated price increase in early '04.

So we have those 2 phenomenons that hurt Marlboro quite materially, versus what you saw in the third quarter.

I think, you know, the underlying question you have is, has Marlboro lost its vibrancy and vitality, and I think quite to the contrary.

Marlboro is performing very strongly across the globe, and I think we have some very exciting new products with Marlboro.

If I take Marlboro Blend 29 in Germany, which, as Diny just mentioned has only been launched in a very few and selected outlets, the consumer feedback we're getting is overwhelmingly positive on the product, on the pack, and the demographics of that brand are also very attractive, so we feel pretty good about that line extension, and there are other programs coming up behind Marlboro that should sustain its growth.

Okay.

Just -- just follow-up on -- on Germany and Italy, then.

Are -- are the dynamics that you described really specific to the fourth quarter, and as you get into the first quarter and -- and second quarter of -- of this year, we should just see much better volume trends in those markets?

I think, and Diny mentioned this in his remarks, the 3 problem markets were France, Italy and Germany.

I believe that France and Italy, you will be seeing improvements as the year unfolds, and we feel pretty good about those 2 markets.

Germany, I feel will remain a challenge throughout 2005, and that's clearly in our numbers.

Until such time as the German government decides to correct what is clearly an incoherent tax policy, from both a revenue and health perspective, by equalizing the tax between cigarettes and tobacco portions, I feel that manufactured cigarettes will continue to decline, probably at the rate that happened this year, which is 15 percent-plus.

Offsetting that will clearly be growth in tobacco portions.

As we've mentioned in previous calls, this year we had significant capacity constraints.

In December, we came in with a bit more capacity and capacity will increase as the year unfolds, and we should be at full capacity this summer.

But, clearly, part of our cigarettes' erosion will be offset by growth in tobacco portions.

Okay.

Thank you very much.

You're welcome.

Thank you.

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

Please go ahead.

Good afternoon, Louis and Diny.

Hi, David.

Good afternoon.

A couple of things.

First, in -- in Italy the shipment decline in the fourth quarter, is that largely a one-off distortion because of the price increase and trade buying patterns, and you would expect, you know, perhaps a 2 percent market decline in '05 in Italy?

Yes, I think that's a fair assumption.

You know, our share had suffered early -- earlier in the year.

It sort of stabilized over the third quarter, and more recently we've seen growth.

And as Diny said in his remarks, you know, the most recent numbers are looking pretty good.

That's because the price gap, as I believe you're aware, David, has narrowed.

Now, the government is about -- has got legislation in place to put in a minimum reference price, similar to what France has enacted, and we're waiting, hopefully in the first quarter they will actually institute that minimum price that should help our volumes.

What -- what would that be, that -- that price level, Louis, at -- with --?

We don't know.

Today, you know, Marlboro retails at 370 euros a pack, the cheapest brands, all essentially at 290.

There are a couple of brands at 280.

I would hope that the minimum reference price would probably be set at 3.

Okay, and what's your early read on the December manufacturer price increase in Germany, its impact on cigarette consumption?

It's very difficult to read, David, because of the distortion I mentioned to you in terms of tax stamps at the old price.

I fear that, you know, German consumption of manufactured cigarettes will continue to decline at a double-digit rate, as I said to Judy.

It's probably our biggest challenge going forward.

We are encouraged that the government is looking at equalizing the tax rate.

As to when and to what extent they will do that remains a question mark.

We're also very encouraged that there are strong noises emanating from the government and other political parties that the tax increase that was slated to come into effect in September of this year would, in all likelihood, be postponed or totally eliminated.

As you probably know, they missed their tobacco revenue target by more than 2 billion euro in 2004, and that sort of number gets a lot of people's attention.

And, Louis, what about the balance sheet?

I think at year-end you had about $5.7 billion in cash.

You're probably generating excess cash flow of at least $1 billion a quarter.

You know, what's the outlook for the use of that cash as you go through '05?

I think you're indirectly referring to share repurchases, which, you know, as we said for the strategy that we are pursuing, that if circumstances permit, we would follow a break-up of the Company.

Until we do that, share repurchases will not happen.

You're right, we have got quite a lot of cash.

Most of it is offshore and we may, as the year unfolds, decide to bring some of that cash back home and benefit from the recent enactment of the American Jobs Creation Act.

I think we can bring back $7 billion.

As to the use of that, it will very much depend on the timing of any potential restructuring, David, because don't forget that on top of our 5.5 billion of cash, which is pure Altria cash, the other 280 is -- is Kraft cash.

We also have, as you know, bonds into escrows bid for Engle, bid for Price and other cases on which we hope we will prevail, and hence that cash should come back to us eventually.

That's some $3.2 billion.

Okay.

Thanks, Louis.

You're welcome.

Thank you.

Our next question is coming from Bonnie Herzog from Smith Barney.

Please go ahead.

Good afternoon.

Hi, Bonnie.

Hi.

I wanted to ask a question on the Marlboro UltraSmooth product that you touched on, just maybe hoping you could provide us with a little bit more color.

And I guess I assume that this is the product you've been talking about bringing to the market for the past couple of years.

How long do you expect this product to be in the test markets that you've -- you've identified?

And if it is deemed successful, would you roll this product out nationally, or wait for some form of regulation to give you a better framework in which to market it?

Bonnie, first of all, it's not one product.

There are -- you know in the 3 test markets, there are 3 different products.

And I think you're referring to the score program, which is PM USA's program to reduce constituent levels.

Yes.

And those various products use some of that technology.

But we have no evidence whatsoever, and I want to highlight this point and underline it, we have no evidence whatsoever that these products could reduce exposure to harmful compounds.

And we say so.

Right.

And, in fact, we have inserts on the pack of those products, specifically saying that there are no safe cigarettes, including these products.

And until such time as we have any evidence, we'll clearly will not make any claims.

I want to say that the score is not a product, it's a program, and we work on various technologies and continue to work on various technologies.

And as we've always said, one of the key factors of success is to ensure that the taste of -- the taste of the product is something that the consumer is willing to smoke.

And these tests are part of this whole program.

Okay.

That's helpful.

And then just shifting gears, internationally, I was hoping you could touch on the status of you taking back the manufacture and distribution of Marlboro in Japan.

You did mention it, or Diny did in his remarks.

Are you ready to fully distribute in Japan?

I guess I'm -- I'm thinking about is the investment that you need to -- you've needed to make in the country in terms of all the vending machines -- just wanted to kind of get a feel for where you're at.

Also, can you quantify the incremental profits that you are expecting this new business to generate for PMI annually?

Let me address the first part of the question.

We've been preparing for the -- the Marlboro take-back for a considerable amount of time now.

And, yes, the answer is we are ready to take it back.

We have invested and we continue to invest in -- in vending machines.

We have increased our sales force by more than 300 people, and we feel very confident that we are ready to take it back.

And to give you one sense of the dimensions is we had to replace close to a million vending columns which were in Japan tobacco vending machines.

But we feel very confident that under our full management, we can make Marlboro grow faster than it has in the past.

So we feel very good about that.

In terms of the income dimension, all I would say is that clearly, as Diny said, you know, we are forecasting double-digit growth at PMI.

And I would say that with the addition of Japan, we are very, very close to double-digit on a constant currency basis.

Okay.

Just a final, last quick question, on the money that you paid to the European union to help fight counterfeiting and smuggling, I'm just curious to -- to hear from you if that is, in fact, having any kind of positive impact?

The -- the answer is yes, but it's still very early days.

You know, this agreement has been in place for 6 months.

I think there are numerous instances where the cooperation has resulted in seizures, and you see it even, the impact here in -- in the United States, where our research shows that the incidence of counterfeit product is declining, which clearly is to the benefit of PM USA.

This is an ongoing project, Bonnie.

I think the relationships are excellent, the exchange of information and the actions in the market are working, but you can imagine that a lot of those actions are confidential by their very nature.

All right.

Thank you.

Thank you, Bonnie.

Thank you.

Our next question is coming from Marc Greenberg from Deutsche Bank.

Please go ahead.

Good afternoon, Louis and Diny.

Hi, Marc.

Hi, Marc.

My -- my first question relates to your views on the long-term price elasticity for the U.S. cigarette industry.

I'm hoping you can help me understand how we should think about the industry's ability to achieve better pricing over the next 3 to 5 years, how much you think that was what was lost in per-pack profitability over the past couple of years can be regained, and -- and maybe something on deep discount as relates to those points.

Yes, Mark, you're -- you're sort of entering a delicate subject here, which is pricing and industry pricing, and we, as a matter of policy, never talk about pricing.

All I would say is that, you know, the fundamentals of the business and the characteristics of the market are much improved over the last couple of years.

And I think as the states put in allocable share legislation, which is now 37 states, about 70 percent of industry volume, non-participating manufacturer legislation, which covers about 90 percent of industry volume, and I think it's around 45 states now, the more and more that these loopholes that have been used by others in the discount segment are closed, clearly the more pricing flexibility the premium segment will have.

Great.

The second question is a -- is a follow-up on -- on your comments with regards to Japan.

I'm wondering if you can help us understand how we should think about profit growth in that market beyond the transition period in '05, where you take back control of the Marlboro brand.

What -- what is it about the new operating structure, in your view, that can enable, you know, share gains for Marlboro?

Well, first of all, as you know, we get 8 months' benefit this year, and 4 months' benefit next year, so this is not just an '05 benefit.

Part of it will roll into '06 as well.

Beyond that, you get into pricing, and as you probably know, relative to consumer disposable income cigarettes are extremely cheap in Japan.

And I think the last industry price increase was yonks ago.

So I would hope that over time prices can increase, but also we feel that we can grow share at a better clip than we have in the past, especially on Marlboro.

Don't forget that Marlboro's [inaudible] to 24 share is higher than that of [inaudible].

Just -- just lastly on that, I know you talked about operating income on a currency neutral basis being double digit.

How are you thinking about currency impact --?

I said close to double digit, Marc.

Right.

Okay.

How are you thinking about currency impacts overall for Altria in 2005?

Listen, what we said is that our -- our guidance is based on -- at current rates.

And I would say that at -- at current rates, we're probably approaching the higher end of our guidance.

You know, I'm always worried when the whole world says that the dollar should weaken, because generally when there is a unanimous opinion, the contrary happens.

You know, the euro was at 136 in November, December.

It's now down to 131 today, I believe.

It was 129 3 days ago.

There's quite a lot of volatility.

And we'll see as the year unfolds.

Thanks.

Last question, just from following on David's shareholder value questions, given -- given what -- what is probably some curtailment in your ability to buy back shares, can we expect any incremental change in dividend policy?

In other words, have you benchmarked any percentage of operating cash flow for shareholder return this year?

Listen, the board decides the dividend in August, and our policy has always been to increase dividends in line with our -- what we believe is our earnings power.

The -- the board will decide then in August.

You must remember that the constraint that applies to share repurchases also applies to dividends, so you can't expect a huge dividends increase beyond what has been our historical norm, because it's the same issue.

Thank you very much.

You're welcome.

Thank you.

At this time, I would like to invite media to ask questions.

To do so, please press star, 1.

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

Please go ahead.

Good afternoon.

I've now joined the media.

Hi, Chris.

Hi.

I just had a -- just a follow-up and then one other question.

And my question on the -- on Italy, would -- do you believe the minimum reference price would be of sufficient magnitude to overcome what some believe would be in a -- a -- a decline in volume, based on the smoking ban?

Is it of -- is it of that size or that magnitude?

No, I don't think so, Chris.

Okay.

It will just put order in our market, and I think it's beneficial for government revenues.

Sure.

And then relative to the investment you've made the last couple of years amidst the better currency environment, and particularly behind the Marlboro brand, you know, in terms of a payoff from that investment, do you believe we'll see some of that in 2005?

I know there's obviously the tough conditions in Western Europe, still, but will Marlboro grow, I guess would be a question, for 2005?

That is certainly our intention.

Okay.

And then relative to the U.S., my last question, would you say that the -- the ability for you to price, as you see it today, is based on the -- if you want to call them legislative costs, I mean the costs for the deep discounters are going up based on these new legislation items, would that represent, and whether it's a $0.20 a pack or whatever the number is, would that represent your ability to price today?

In mean, that certainly could change over time.

We don't like to talk about pricing, Chris.

I think what you're mentioning is one of the elements.

There are a lot of elements.

And then I wonder if you just could maybe mention internationally, if there -- there was some discussion from Andre relative to some cost savings coming through this year.

Can you quantify those?

Again, just the size and perhaps as they flow through for the year?

Yeah, we continue to be very focused on costs.

But, you know, we continue to invest in our infrastructure and -- and in R&D.

Andre has disclosed that, you know, we should be able to generate $100 million of productivity going forward every year, but my sense is we are still investing in R&D and infrastructure, and that's clearly in our guidance.

Okay.

Thank you.

Thank you.

Thank you.

Our next question is coming from Brad Dorfman of Reuters.

Please go ahead.

Oh, yes.

Hi.

Toward the end of last year, of course, you talked about making -- starting to take steps that would be necessary if you do decide to split up the Company.

How far down the road are you in making those steps while you're waiting for the court decisions that are going to be necessary?

We continue to make progress on a monthly basis.

And to the point where you last -- the last decision or whatever you need comes in, you'd be ready to go right then?

Listen, I -- I don't -- you know, it very much depends on the circumstances at the time.

Our duty here is to ensure readiness, so that's what we are trying to achieve.

Are you ready now?

No, but circumstances don't permit it today.

Okay.

Thank you.

You're welcome.

Thank you.

Our next question is coming from Martin Steinig of J.P. Morgan.

Please go ahead.

Hi, gentlemen.

I just have a couple of questions.

You've talked about the potential of the Chinese market in the past and, clearly, SABMiller is a part of the group that's making money in China.

I guess standing in 2005, today, how far away is -- is PMI, and I guess the tobacco industry generally, from tapping the market in a meaningful -- meaningful way?

That's the billion dollar question.

Are we any closer than we were 5 years ago?

I would say yes.

I think the government monopoly has been in the throes of very aggressive reform in the recent past.

There's been a lot of consolidation at the manufacturing level.

They've reduced the number of brands available on the market to try to create national brands.

And there's been a huge drive for efficiency.

And I think all of this is because they're preparing for the inevitable opening up of the market one day.

I can't tell you when that will happen.

But clearly, with 35 percent of the world's consumption today, and an industry that is highly profitable, that clearly is a huge opportunity for the international tobacco industry.

I guess, secondly, related to, there are still a number of governments around the world with tobacco assets.

Can you give us any indication of where you see privatization is likely to happen near term, say the next 12-18 months?

You know, the -- the main ones -- Turkey has -- has announced, they tried to do it in 2004.

The numbers they got were deemed to be insufficient.

They're having another round now.

There is Taiwan, Thailand, which are government monopolies who've talked about privatization, and there -- there are several others.

But other than Turkey, I can't think of any that are within the next 12-month time frame.

Okay.

The -- the final thing I want to ask about is -- is Western Europe.

Volumes have gotten worse for 3 consecutive quarters, but clearly consumption isn't down 9, 10 percent.

Are you seeing an abnormal pickup in -- in low-priced markets like Poland or further east, and does that -- that cross-border trade something you can effectively manage with the price gap so wide across the different countries on the continent?

Yes, we're seeing -- actually, what -- what we're seeing is a surge in substitute products, and by that I mean the roll-your-own or tobacco portions, or cigarillos and products of that nature.

Clearly, we have seen some increase in border sales, and clearly, we have also seen an increase in -- in counterfeit.

The border sales are extremely different -- difficult to control, and that's one of the reasons we entered into the agreement with the EU, to try to stop that.

And we're looking at retail licensing and other forms that we could manage this potential flow over the borders, because it could get worse before it gets better.

Thank you very much.

You're welcome.

Thank you.

Our next question is coming from Ann Gurkin from Davenport.

Please go ahead.

Hello.

Hi, Ann.

I wanted to ask you if you any comments on a recently released Harvard study regarding the fire-safe cigarettes in New York, and the likelihood that maybe we'll see a national standard or you'll -- you'll roll out banded paper on all your cigarettes nationwide?

Well, we've always said that we favor one national standard.

And, you know, I think we have to be very careful on the definition here.

There's no such thing as a fire-safe cigarette.

There are cigarettes that have a -- a lower ignition propensity.

I'm sorry to play around with words here, but it's -- it's actually important.

There is no such thing as a fire-safe cigarette, and anybody who thinks there's a fire-safe cigarette is dreaming.

And the likelihood that we'll see a national rollout this year?

Well, you know, there's been talk about that for some time.

You know, our hope through FDA regulation was that there would be national standards on this and a lot of other things.

The last thing the industry needs is for different state standards.

So our hope is yes, Ann, but I don't know.

There's been talk about that for some time.

Okay.

And then I understand that PM USA has been aggressively adding scientists.

I was wondering if you could comment on that, and if those -- that's true, what are these scientists being hired to do?

Innovation.

Innovation in terms of reduced-risk cigarettes?

No.

Innovation to get products to the market faster?

We've -- we've said for some time that, you know, we were going to invest considerably in R&D.

By that, we mean capital as well as people.

So don't be surprised if PM USA is hiring scientists, as is PMI.

And all of this is to get more innovation in the tobacco industry.

Okay.

Thanks.

Thank you, Ann.

Thank you.

Our next question is coming from Filippe Goossens from CSFB.

Please go ahead.

Yes, good afternoon, Louis and Diny.

Good afternoon, Filippe.

Three quick questions, if I may.

Diny, a follow-up on your comments on the job creation act.

Any repatriation, if you were to decide to do so, would that be limited to cash on hand, or do your earnings actually exceed cash on hand and may therefore result in potential borrowings?

I'll answer that, Filippe.

Yes.

We don't yet have a plan, and as I said to you, what we could bring back, the maximum we could bring back is $7 billion.

And we'll have that in cash.

Then kind of talking about the uses of -- of free cash flow, as -- as you know, in -- in July you have a billion dollar bond coming due.

Can we assume that one of the options may be actually paying back that bond rather than refinance it, given your cash position?

Yes, we usually pay out debt when it's due, Filippe.

Well, then, but interest rates are, as you know, still very attractive at this moment, so -- okay.

And then my final question, if I may, any initial indications what you might do with your Miller stake?

I think the lockup agreement is expiring this -- this summer.

No, you know, we are very pleased with our stake in SABMiller.

We're very pleased with the transaction, we're very pleased with our economic ownership of SABMiller.

I think they've had spectacular results.

And, you know, we haven't decided what we'll do, whether we stay for the long term or not.

We'll see as events unfold.

Okay, great.

Thanks so much, gentlemen.

You're welcome.

Do we have one final question?

There doesn't -- doesn't appear to be.

Okay.

Well, thank you -- thank you very much.

I appreciate you joining us for the call today, and we will get back to you early on in -- in April with the date for the first-quarter earnings release and conference call.

Thank you very much.

Have a good day.

Thank you, everyone.

Thank you.

Thank you.

This does conclude today's teleconference.

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