奧馳亞 (MO) 2005 Q1 法說會逐字稿

Good morning and welcome to Altria Group's first quarter 2005 earnings conference call.

Today's call is scheduled to last about an hour including the question-and-answer session following remarks by Altria management. (OPERATOR INSTRUCTIONS) .

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

Please go ahead, sir.

Good morning and thank you for joining us today.

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

Today's call is limited to a discussion of our business results.

As you know Kraft Foods reported its first quarter 2005 results yesterday and hosted a separate webcast.

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

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

Finally, today's remarks by Diny Devitre, Altria's Senior Vice President and Chief Financial Officer will summarize the highlights of our major operating companies performance during the first 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.

And now it's my pleasure to introduce Diny.

Thank you, Nick, and good morning.

Altria's results in the first quarter were solid overall and met our expectations.

Diluted earnings per share from continuing operations rose 17% or $0.18 to $1.24 versus $1.06 in 2004.

Let me explain the $0.18 driving the earnings per-share growth. $0.07 were related to the absence of 2004 charges, $0.06 were due to higher earnings at Philip Morris USA and PMI, $0.05 were a result of favorable currency, $0.02 from a lower base tax rate in the quarter. 2005 asset impairment and exit costs at Kraft and Altria offset gains in the sales of businesses and special one-time tax items at Kraft as sh -- as shown on schedule 4 in our news release.

Partially offsetting these increases were $0.02 for higher shares outstanding.

We reaffirmed our 2005 full year diluted earnings per share from continuing operations in a range of $4.95 to $5.05 including approximately $0.12 per share in charges associated with Kraft's restructuring and assuming current exchange rates.

Our guidance excludes any tax impact that could arise consequent to the repatriation of funds from our international businesses under provisions of the American Jobs Creation Act for which we are awaiting the clarification of language in the legislation.

Any benefit from the prior year accrual for contributions to the National Tobacco Growers Settlement Trust pending a hearing and decision by the Supreme Court of North Carolina.

The impact of the Sampoerna transaction for which a tender offer for all of the remaining shares was initiated on April 18th and will close on May 18th, 2005, any future acquisitions or divestitures.

I should note that the tax rate of 33.1% in the first quarter was impacted by several one-time items, primarily the reversal of tax accruals no longer required at Kraft.

Our 2005 full year tax rate should be closer to 34%.

Turning to domestic tobacco.

PM USA delivered solid share end income results in the first quarter.

Operating companies income increased 7% to $1 billion due primarily to lower wholesale promotional allowances partially offset by expenses related to the quarter buyout legislation and lower raw -- and lower volume.

Cigarette shipment volume of 42.8 billion units was down 0.7% compared to the first quarter a year ago but was essentially flat when adjusted for an extra shipping date and the first quarter of 2004 and the timing of promotions including shipments to support Marlboro's 50th anniversary promotion.

PM USA's retail share advanced 0.4 points to 50% driven by Marlboro which was up 0.8 share points versus last year to 39.8%.

Importantly, Marlboro's price gap with the lowest effective price brands was 44% in the first quarter reflecting Marlboro's average net price at $3.71 per pack versus $2.57 per pack for the lowest effective priced brands.

During the quarter the premium category increased by 0.4 points to 73.5% of the US cigarette industry and PM USA's retail share of the premium segment grew 0.3 share points to 62.1% in the quarter.

The total discount segment was down 0.4 share points to 26.5%.

Within this the deep discount segment comprised of all other manufacturers' discount brands and major manufacturers' private label brands declined one-tenth of a share point versus last year to share of 11.8% in the first quarter.

As you know one of Philip Morris USA's major priorities is stemming the flow of illegal cigarettes including counterfeit and other forms of contraband and significant progress is being achieved on this front.

PM USA is working closely with law enforcement agencies to support their efforts to address the sale of illegally imported and diverted cigarettes and to seize and destroy counterfeit cigarettes.

PM USA is pleased about the recent agreement between the federal government and major credit-card companies along with state Attorney's General to prohibit the use of credit cards for the sale of cigarettes over the Internet.

To sum up on Philip Morris USA, its fundamentals are solid and it continues to project moderate growth in retail share and operating companies income growth in the low to mid single digits in 2005.

Turning to our international tobacco business.

I am pleased to say that overall PMI's fundamentals remain in good shape despite continuing challenges in Germany.

Operating companies income rose 13.1% to $2.1 billion due to higher pricing, favorable currency of $126 million and a $96 million benefit from the one-time inventory sale to PMI's new distributor, Logista, in Italy, partially offset by unfavorable mix and expenses of $39 million related to the EU agreement.

PMI cigarette shipment volume increased 2.1% to 200.9 billion units.

Continued strong recovery in France, gains in many markets throughout Central Europe, Eastern Europe and Asia were partially offset by lower volume in Germany.

Excluding the one-time inventory sale in Italy, PMI shipment volume was essentially flat in the first quarter due primarily to a 22% volume decline in Germany.

Let me provide some background on the market dynamics in Western Europe.

The total cigarette market in Western Europe was down nearly 12 billion units or 10% versus the first quarter of 2004.

However, when you include other tobacco products the decline was a more moderate 7%.

The lower market volume is principally attributable to Germany and Italy and also to one less selling day in the first quarter of 2005 versus the first quarter of 2004.

In the first quarter, PMI cigarette volume in -- in Western Europe increased 0.6% due mainly to France and the inventory sale in Italy mostly offset by a decline in Germany.

Excluding the inventory sale in Italy, PMI's volume was down 7.2% in Western Europe due primarily to Germany and the timing of shipments in Spain.

Importantly, PMI gained share in Western Europe in the first quarter driven by growth in all major markets except Germany.

PMI's overall share rose 0.2 points to 38.9% and income was up solidly on a constant currency basis.

Turning now to Germany.

The total cigarette market declined 20% in the quarter, however including other tobacco products total tobacco consumption was down a more modest 8%.

The German market in the first quarter was adversely affected by four main factors.

First, a continued decline in smoking incidents due to two large tax-driven price increases in 2004 where the average retail price of Marlboro increased 25% during the year.

Second, the very rapid growth of other tobacco products, mainly tobacco portions, which enjoy favored tax treatment versus cigarette.

Portions have grown to 5.1 billion units in the first quarter of 2005, more than double their volume in the first quarter of 2004 and now account for some 15.2% of total tobacco consumption versus 5.4% in the first quarter of 2004.

Third, one less selling day in the first quarter of 2005 versus the first quarter of 2004.

And finally, the impact of the trade -- of trade purchasing patterns ahead of tax driven price increases which favorably impacted the first quarter of 2004.

PMI cigarette volume in Germany was down 22% in the first quarter and market share declined 0.9 points to 36.4% due to the impact of higher prices, the growth of the tobacco portions segment and Marlboro's own growth in this segment where it now has a 6.6% share since its launch in April of last year.

PMI is taking action on two fronts to address the challenging situation in Germany.

First, it continues to vigorously participate in the tobacco portions segment.

In total, PMI captured a 13% share of the tobacco portions segment in the quarter on the combined strength of Marlboro and Next portions which were launched in the second quarter of 2004.

And second, within the -- within the cigarette category, PMI is strengthening its flagship brand, Marlboro, through attractive marketing activities and new line extensions.

Last October it launched Marlboro Blend num -- Blend 29 in selected cities and channels and thus far has received encouraging feedback on the new variant.

Going forward, PMI will gradually increase distribution and aware -- awareness of the product.

Assuming there are no further tax and price increases on cigarettes in 2005, the German cigarette market decline should moderate.

As the year progresses, PMI should achieve sequential improvement in cigarette volume and share trends and continued growth in the tobacco portions segment.

We believe PMI is effectively addressing the issues in Germany, however, this market will remain a very challenging environment until tobacco portions lose their favored tax treatment.

Importantly, while volume has decreased due to pricing and an irrational tax structure, I want to stress that income on a constant currency basis was up last year and continued to be up significantly in the first quarter of 2005 in Germany.

In France, PMI's results in the first quarter were robust in a total market that has stabilized.

Shipments were up 6% and market share grew from 39.2% to 45 -- to 41.5% behind the strong performance of Marlboro and the Philip Morris brand.

You will recall that 2004 was a difficult year for PMI in France so it is particularly gratifying to see that our business is recovering well aided by a stable pricing environment and moderate price gaps.

The stabilization of the total market in France and our growing market share which improved sequentially over the last four quarters served as a solid example of how PMI has successfully overcome a very challenging situation and bolsters our confidence in the prospects for our Western European business.

In Italy, the total market was down 10% due to consumer price sensitivity following the December 2004 tax driven price increases on cigarettes and the impact on the indoor smoking ban enacted in January of this year.

PMI's volume -- volume was up 28% in the quarter but this reflected the one-time inventory sale to Logista as well as the favorable timing of shipments related to the new distribution contra -- contract with Logista.

This timing favorability will be paid back in the second quarter and accordingly will adversely impact PMI's volume in that quarter.

Importantly, market share in Italy rose 0.4 points in the first quarter to 52.2% thanks to a strong recovery from mid-priced Diana.

Marlboro's share was lower and disproportionately impacted by the indoor smoking ban due to its high share of consumption in venues such as hotels, restaurants and cafes.

However, the most recent data suggests that its share is growing partially attributable to the opening of outdoor hospitality venues.

Overall, PMI expects that total market volume declines will moderate this year and its market share in Italy will continue to grow.

Turning to Central Europe.

PMI's volume rose 5.2% in the first quarter of 2005 due mainly to Greece, Poland and Romania partially offset by declines in the Czech Republic, Switzerland and inventory adjustments due to the transition of PMI's distribution system from wholesale to direct sale in Serbia.

Volume in Eastern Europe, the Middle Eastern and Africa grew 7.8% driven by gains in Egypt, Kazakhstan, Turkey and the Ukraine.

In Russia, although volume was down 1% due to trade inventory reductions, share was up 1.2 points to 27.2% due to the continued momentum of PMI's portfolio led by L & M, Marlboro and Parliament.

In the Ukraine volume was up 33% partially aided by the timing of shipments but also due to increased demand for PMI's international brands resulting in a market share increase of 1.2 points to 32%.

In Turkey, the government changed the excise structure for the fourth time since February of 2004 creating widespread pricing dislocation in the market.

Nevertheless, PMI's volume grew 4.1% and share rose 3.3 points to 38.7% on the back of its diversified brand portfolio.

Turning to Japan.

PMI's volume declined 6.5% in the first quarter due to the timing of shipments primarily related to the impending change in health warnings which become effective July 1, 2005, partially offset by a significant ramp up of Marlboro inventories in advance of the expiration of Japan Tobacco's Marlboro license and the return of full control of Marlboro to PMI in May.

PMI's market share increased 0.5 points to 24.8% driven by the continued success of Marlboro, Lark and Virginia Slims Rose.

In preparation for the Marlboro take-back in Japan, PMI has invested heavily behind expanding its sales force enabling it to increase the frequency and quality of sales calls over the past year.

PMI has also been investing in building up its own vending machine infrastructure and believes it is competitively positioned in this most important sales channel.

Regaining full control over Marlboro in Japan next month will entitle PMI to 100% of the profits generated by the brand and will fuel income gains in this extremely important and profitable market.

In the rest of Asia shipments rose 5.7% in the first quarter driven by strong growth in Thailand and the Philippines.

In Thailand, the continued growth of L & M was the key reason for a strong quarter while in the Philippines Marlboro's success drove volume growth of 13%.

In Latin America, PMI's shipments were down 3.7% due primarily to lower volume in Argentina and Brazil partially offset by continued growth in Mexico.

Aided by last year's -- aided by last year's introduction of Marl -- Marlboro Mild Flavor, PMI's volume in Mexico was up over 4% and share rose 2.5 points to a record 61.6%.

Total Marlboro volume in the first quarter was up 5.1% due to the timing of shipments to Japan, the inventory sale in Italy and gains in the Philippines and France partially offset by lower volume mainly in -- in Germany.

Excluding the timing of shipments to Japan and the one-time inventory sale in Italy Marlboro was down 1.1% due primarily to Germany.

In view of the ongoing weakness in Germany, as evidenced in the first quarter results, PMI expects to deliver approximately 1% to 2% total organic volume growth excluding acquisitions and the one-time inventory sale in Italy.

We are confident that momentum should improve as the year unfolds.

Operating companies income is projected to grow this year at double-digit rates assuming current exchange rates.

Both projections exclude any impact from this upon the Sampoerna acquisition.

Turning to Philip Morris Capital Corporation, operating companies income of $41 million for the first quarter of 2005 was below prior year due to lower lease portfolio revenues which as we said in our release reflects the shift in strategy and will result in lower operating companies income over time.

Let me now turn to our food business.

Kraft reported its results yesterday so -- so I shall contain my remarks to some very brief highlights.

Kraft's net revenues were up 6.4% to $8.1 billion driven mainly by positive mix, strong new product in developing market results, the impact of higher marketing spending commodity driven -- driven price increases and favorable currency of $164 million.

Kraft's ongoing volume was up 2.5% in total but was down 0.3% excluding acquisitions.

Operating income increased 18.9% to $1.2 billion due to lower asset impairment and exit costs, gains and sales of businesses, positive mix, cost-reduction efforts and favorable currency of $22 million.

However, excluding the lower impairment and exit costs and gains in sales of businesses operating income was down due to higher commodity costs, increased benefit costs and increased consumer marketing spending.

All in all, despite facing very challenging situations in all our businesses Altria Group had a solid quarter.

Our tobacco businesses continue to exhibit strong fundamentals and our food business is making steady progress against its sustainable growth plan.

And now I will be happy to take your questions.

Thank you.

Ladies and gentlemen the floor is now open for questions. (OPERATOR INSTRUCTIONS).

Our first question is coming from Judy Hong with Goldman Sachs.

Hello?

Hi, Judy, good morning.

I want to start with a few quick questions on -- in PMI.

First in Italy, can you clarify does the full 3 billion units of inventory load in Italy get worked down fully in the second quarter?

No.

First of all of the one-time inventory sale in Italy was 4 billion units, Judy.

Okay.

Then we had a timing favorability of 1.2 billion units which will be reversed in the second quarter.

So 1.2 billion?

Yes.

Okay, all right.

And then in Italy if you looked at Marlboro's share performance, I know that you alluded to the fact that it's being more adversely impacted by indoor smoking bans, but to -- what expect do you think Marlboro may be being hurt by consumers trading down to your discount brands like Diana?

Well, there's always a little bit of that impact immediately after a price increase, but I think the fact is that Marlboro has a very good demographics and has good growth potential and it in fact is increasing its market share as we speak.

So I think the -- the main impact on Marlboro in the first quarter has been the smoking ban.

And as the warmer weather arrives and people can use outdoor facilities at cafes, et cetera, the brand, market share will certainly recover.

Okay.

And then in Japan, the -- the 6.5% decline in volume in the first quarter, can you just reconcile the two factors that went the opposite direction.

On the positive side you got benefits as the -- the Marlboro inventory got ramped up and -- and on the negative side, I guess, the trade deloaded inventory anticipating a change in the health warnings is that what happened?

No.

And the way it works -- first of all, let me tell you that our end-market sales in Japan, which is the -- the fundamentals sales were basically flat compared to last year which is pretty good in a declining market.

As a result we increased our market share by about half a -- half a share point to 24.8%.

Plus we increased our share of international segment, of which we hold a little over 67%.

So, fundamentally our business in Japan is in very good shape.

Now, what happens in the -- in the first quarter in terms of inventories was obviously we had to increase inventories of Marlboro as we get ready to shift from Japanese-made Marlboro to U.S.

Marlboro so we had to bring in U.S. manufactured Marlboro in the first quarter into Japan.

We increased the -- the inventories there and we lowered our own inventories of -- of non-Marlboro brands in preparation basically for the health warning change that is going to take place in the middle of this year.

Okay.

And then my last question, and -- and this is just more on a broader basis, you looked at markets where the premium segment is relatively under-penetrated, particularly looking at markets in the Eastern Europe and Central Europe, to what extent are we beginning to see stronger penetration by Marlboro as a result of consumers really beginning to trade up to more premium brands and the premium brands becoming a bigger portion in those regions?

Yes.

That -- that is beginning to happen.

The premium segment is growing in a number of markets in Central Europe and Eastern Europe and as the premium segment grows, Marlboro of course which is very well positioned in the medium segment, is benefiting.

At the same time, from time to time there are price wars in a number of these markets, and the price wars obviously take place at the lower end of the market, and that sort of -- from time to time will temporarily dislocate the growth of the premium segment.

But if you look at it over period of time it's very clear that the premium segment in -- in Central Europe and Eastern Europe is growing and that Marlboro will be able to do very well in that segment.

Thanks, Diny.

Thank you.

Thank you.

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

Good morning, Diny.

I have -- I have a few questions.

I just wanted to start with the U.S. first.

Can you talk a little bit about the competitive environment in the U.S.?

I guess I've heard from many of the retailers that Reynolds is dealing with certainly some transitional issues and I'd love to hear from you have you been taking advantage of this, and if so, can you give us some examples of what you've done?

Bonnie, I'm not going to address obviously Reynolds' strategy and what they're doing.

All I can tell you is our people obviously have their foot on the accelerator and -- and that is resulting in good market share growth.

You could see that we -- we're up 50%, 0.4 ahead of the first quarter last year.

Marlboro has grown 0.8%, it's doing very well, and so we're -- we're very happy with that progress.

I really can't give you any -- any examples of how we're taking advantage of this situation, but let me just tell you we're taking advantage of this situation.

That helps.

But, you -- one example could be your contracts may be a little bit more flexibility, working a little bit better with some of the retailers, is that fair?

I can tell you something, we always try to work well with the trade whether it be at the wholesale level or at the retail level, but beyond that I don't think I should get into any details.

Okay.

And then still staying with the and U.S., the C&G channel obviously given the higher gas prices I'm curious what you're seeing?

Is this having any impact on cigarettes sold in this channel?

Also, is there any evidence of increased down trading?

I don't have the facts on that, Bonnie, so any number I give you would be guess work but I would -- my -- my understanding is that the decline, if there is anything, is really very minimal in those channels.

Okay.

Now turning internationally.

It appears that Japan Tobacco has been much more aggressive with increasing its vending machine placements and introducing more brands also a little bit more aggressive on pricing.

So I'm wondering how you feel about that as your certainly are now, obviously, taking over distribution of Marlboro into the country, do you feel that there's any threat of -- I hate to use the words price war, again, now that you're bringing this -- this business back fully into -- into your company?

And also curious when your Company eventually breaks up into possibly three separate pieces, will PM USA continue to make manufacture cigarettes for distribution in Japan?

Well, first of all talking about -- I think your first question refer to vending machines.

Yes.

And -- and PMI has been building up its vending machine infrastructure in Japan over many years and in the most recent past, of course, we've accelerated that buildup as we've prepared for the takeover of Marlboro.

As I said in my earlier remarks, we're very competitively positioned now.

We -- we feel comfortable with -- with -- with our position in the vending machine channels although we're going to -- we're continuing to increase our penetration of that channel.

There could be a little bit of dislocation during the time of the handover, but basically I think we're very well set this year to take Marlboro over and -- and to do well in -- in vending machines.

Then you talked about a price war.

I think the fact of the matter is that the Japanese market is basically a premium market and JT's actions have always largely been to launch premium brands, we see that continuing.

I think your third issue was regard to Philip Morris USA's a manufacturer of brands for the Japanese market and some other markets, and that's going to continue and we haven't made any decision regarding that and we haven't looked at exactly what we're going to do if and when there is a spin or a separation of PMI and PM USA.

[Inaudible] Okay.

Final question.

What is the status of the Indonesian excise tax increase?

Has a garment quantified how much it would like to raise excise tax and then what will your strategy be with Sampoerna ?

I'm not aware of any final decision on -- on the excise tax in -- in -- in Indonesia.

And as far as our strategy with Sampoerna we'll figure that out when we actually have control of Sampoerna.

But there's more discussion, correct about a po -- possible tax increase in -- in the country?

Yes, but there's been a lot of discussion for quite some time.

I don't think it's very specific to just the last few months.

Okay.

That's helpful.

Thanks again, Diny.

Okay.

Thank you.

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

Hi.

Good morning, Diny.

Hey, David.

Let me ask you a few things.

First, what's your preliminary view or estimate as to the -- the magnitude of the adverse impact on consumption in Italy as a result of the indoor smoking ban?

Look, there have been -- it's obviously very difficult to get a firm number on this.

Many people have various estimates.

Our best internal estimate is that the impact in the first quarter has been roughly 6%, 5 to 6%.

And does that -- does the -- does your experience there, Diny, make you a little more concerned longer term about the potential of a smoking bans becoming more prevalent in Western Europe in particular?

Well, obviously that's an issue but I think in different countries it's going to work in a different way, David.

In Ireland they had a smoking ban last year.

The initial impact was pretty heavy.

By the end of the year it had tapered off.

France had a smoking ban that went into effect I think in 2003, early 2004, well actually it was 2003.

And there was some initial impact there, then that tapered off also and I think we're going to say in Italy the impact taper off somewhat as the year progresses.

So, yes, in total, obviously smoking bans will have an impact and I guess we're going to see them in more and more countries in -- in Western Europe.

They will have an impact.

But I wouldn't take the -- the initial impact and extrapolate that because in fact we found that it does abate.

And Diny, what is the status of the -- of the effort within Italy to institute a minimum reference price?

We expected in fact the regulations to be written and completed by the first quarter.

As that hasn't happened we're now expecting it to happen in -- in the second quarter.

We'll -- we'll just have to wait and see, David, as we always have to in situations like this.

And you know at this point, Diny, with the precise minimum price would be?

Is that correct?

No, we don't know what the precise minimum price would be but I think whatever it is it'll probably end up narrowing gaps a little more than the current gaps.

And then let me just shift to Germany for a quick moment.

In -- if my rec --- memory is right, in December you suffered, within the cigarette segment, a significant sequential market share erosion because of the allocation of excise tax stamps.

And I'm just curious as you came through the first quarter and -- and competitors were on a more normalized basis with you within the cigarette category, how does -- how does your sh -- it doesn't -- it doesn't appear as if your share fully recovered.

Is that correct?

Share has not fully recovered but as we go sequentially through the first quarter January, February, March, in fact in March our -- our -- our GAAP versus last year was much lower than the -- the 0.9 share loss for the quarter.

So we're seeing a -- a recovery taking place but there is still some lingering effect, obviously of what happened in the fourth quarter.

Okay.

And then lastly, Diny, the -- what given up -- can you give us your updated intelligence on the prospect of tax harmonization or some tax harmonization between cigarettes and portions and other tobacco products within the market?

Is that becoming any more realistic?

From time to time we hear stories or reports that people are looking at this.

Obviously, it's a -- it's a -- it's a source of big revenue loss to the -- to the German government.

I think they're aware of that.

As I've said -- as we've said before the policy is incoherent, it is irrational and it would appear that some sort of resolution has to take place, especially in view of the fact that the German economy is not in that great shape and this is a big source of revenue loss to them.

But I really can't give you any more definitive information than that in terms of timing or when it's going to happen.

Okay.

Thanks a lot, Diny.

Thank you, Dave.

Thank you.

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

Good morning, Diny.

Hi, Chris.

Hi.

Just a couple quick questions.

To follow on David's question on Germany, is there still an expectation for that -- that second tax increase to come through this year, is there any sort of update there, there was some concern farm aid would not come through?

Yes.

The -- the second increase in September we still don't -- don't know for sure whether it's going to be postponed or canceled or -- it seems right now that there's a better than even chance that it will be either postponed for canceled, but we can't be sure.

Okay.

Okay.

And then I wanted to just ask a question or two on Philip Morris USA.

You seem to be fairly conservative there in your guidance with the -- there appeared to be a ration on the first quarter with better volumes in the midst of the price increase.

Is there anything else to be concerned by or items we should be aware coming up that would perhaps work against your profitability at Philip Morris USA?

Well, first of all, we just one quarter of the way through the year.

Secondly, yes, we -- we did report a 7% increase but if you look at schedule, I think schedule 3 it is of our press release, and you adjust for some one-time items, the -- the profit growth was more like, I think, 5.9 or 6%.

Right, 5.9.

So the fact is we're sort of - in the -- in the interest of prudence, it's probably best to hold that guidance at low single digits to mid single digits and that's what we're doing.

Okay.

And then, I guess, just a sort of a general question on PMI.

From your foreign exchange benefit that came through at 126 million or so, was that essentially, was there a good chunk of that reinvested back of the business in -- in this environment where you're pricing -- helping the profits for that quarter -- for the quarter?

Yes, I think a -- quite a large part of it was reinvested both in -- in -- in marketing activities in sales force activities as also -- as well as price gap management.

Yes.

And then just a last question regarding your cash balance.

Should we expect through the year that cash will build or is there something that can be used for Sampoerna or Cole (ph)Tobacco et cetera, I mean -- do -- we should assume there for -- for cash building through the year?

The -- the Sampoerna acquisition is basically going to be financed with loans that we -- new loans that we will be arranging with the banks.

Anything we bring back in terms of repatriated dividends will be financed with cash that is lying in Europe.

And -- but if you net out for all that, the fact is PMI is a cash generate -- generating company and so the underlying cash will continue to grow.

Okay.

Thank you.

Thank you.

Our next question is coming from Christine Farkas with Merrill Lynch.

Thank you very much.

Good morning, Diny.

Good morning.

Three -- three questions for you.

Firstly, can you comment on what the U.S. deep discount industry volumes did in the first quarter, that is excluding the private label brands from major manufacturers?

Yes, they had a share of about 10 -- 10%.

Okay.

And -- yeah, 10%.

For just to con -- to clarify, did it actually climb in the quarter?

No.

The -- the -- excluding private label, the number is basically flat with the same quarter last year.

Okay.

Thank you.

And to follow up or to -- to get back to Italy, can you comment on the -- on the terms of -- of the new distribution deal?

Would the -- would the margins in Italy then rise because of this -- this new agreement?

I don't think that -- when you say margins rise, I think the -- the distribution fees are more competitive than what we were paying the [Inaudible] which as the erstwhile distribution arm of the monopoly and our cash flow certainly improves as a result of the new agreement, but otherwise there's no change in margin.

Okay.

And -- and lastly, with respect to Japan, can -- can you comment on the -- the direction of your prices there?

Are you -- are you implementing price increase in Japan on your tobacco products?

No.

I mean we don't -- first of all we don't talk about pricing, the other is the price leader in Japan is the JT.

Okay.

Thank you for your much for that, Diny.

Thank you.

Thank you.

Our next question is coming from Martin Steinik with J.P. Morgan.

Hi Diny.

Hi there.

Can you give us some -- some more color on what's happening on the ground in Latin America and some of the markets where trading is -- is difficult like Brazil, I think in the release you mentioned competition from low-priced brands?

I remember you launched Next last year in Brazil is that helping?

And do you these -- these photo health warning labels in Brazil are an issue getting smokers to down trade?

It seems to be a couple of markets around the world now where we have both photo health warning labels in place and -- and down trading to low-price brands?

Well, I think if you look at Latin America, our biggest markets in terms of volume are Argentina, Brazil and Mexico.

In Argentina we're doing very well.

We have a market share well over 60% and the -- the -- the problem in Argentina is the emergence of a very low priced segment from local manufacturers which is increasing its share.

But overall, our business in Argentina is in good shape.

In Mexico, we have a market share of over 61% and it's a very profitable business and -- and it's growing well.

So Mexico we're in good shape.

Brazil is a -- is a tough market for us because has -- has always been BAT is the -- the big company there.

We have Marlboro, but we also have brands at the lower end and there has been a significant increase in low-priced competition in Brazil and -- and that is sort of affecting our -- our volume and profitability.

But this is something we've been used to in Brazil which happens from time to time and one has to just stick it out and be resilient and that's what we're being.

All right.

Could we shift to -- to Spain?

PMI mentioned that it expected the Spanish government to review toba -- tobacco fiscal and regulatory policies around this time and including excise tax.

Have there -- have there been any developments there, of late?

Well, there been no developments but that is being -- that is very much being carried out at the moment by the government, the -- the whole review of the -- of the excise structure and potential either minimum excise taxes or minimum reference price.

Okay.

Just one fol -- final question, Diny, on -- on PM USA.

You made an -- made an announcement on a new research hub in Virginia, $300 million, was developed into a new research hub, presumably that's primarily to develop reduced exposure products.

Is there anything you can talk about there in terms of developments, terms -- tell us how we might be able to better dodge our progress around those -- those new products and what we might expect over the next 12 months?

Yes.

Yes, we announced this new research and technology center which will be completed by 2007, and it'll -- it'll be a very high-tech center in -- in on the center of Richmond.

We plan to staff it with almost 500 scientists by the time it's fully going.

Most of its activities will be devoted to producing cigarettes with potentially reduced harm.

At the same time improving our current products.

But I think one of the most important aspects of -- of this research and tech center will be to enhance our capability to develop innovative products and innovation is -- is extremely important in this business.

And this research and tech seg -- center will be a very important driver for developing innovative products.

Thanks, Diny.

Thank you.

Thank you.

Our next question is coming from a Filippe Goosens with Credit Suisse First Boston.

Yes, good morning, Diny, just a -- a couple of follow-up questions with regard to the jobs creation act.

You indicated about, I think, it was actually a number i could use earlier in the week, the $4.8 billion in bank loans that you're seeking.

Are you planning to eventually turn those out in the bond market and secondly would you then seek a rating for PMI because I think right now you do not have a credit rating for PMI?

No, we're not seeking a -- a credit rating for PMI at this stage, Filippe, and we're not going to go into the market to offset the -- the-- the loan that we are arranging for PMI.

As far as the American Jobs Creation Act is concerned, as we have said in our, I guess in our annual report, we can bring in a maximum of $7.1 billion and at a -- at a preferential rate during this year.

We're working on that plan and hopefully we'll be able to have a plan in place a little later in the year.

Okay.

Great.

That will -- and that -- the -- that -- the money we bring home under the AJC will basically all be from our cash resources that are in Europe.

Okay.

And no indication at this moment, Diny, in terms of what these incremental proceeds will be used for?

They'll be used for the permitted uses that are per -- allowed under the American Jobs Creation Act.

There's a wide variety of items on which this money can be spent and we have a pretty broad idea of what we're going to do.

I think this is not the right time to get into the details.

That's fair enough.

Thank you very much, DIny.

Thank you.

Thank you.

At this time we would like to invite our media audience to ask questions. (OPERATOR INSTRUCTIONS) .

Our next question is coming from Todd Duvick with Banc of America Securities.

Yes, good morning.

Good morning.

I just wanted to clarify, if you could, with respect to the Sampoerna acquisition you indicated that your financing -- you're going to arrange some short-term bank loans to finance a portion of that transaction I guess along with some cash that you already have on the balance sheet, and your intent is not to turn out any of the short-term debt.

Is that correct?

What we're doing is we -- we have a 4.5 billion Euro loan that we are arranging with the banks.

Part of this will be a three-year term loan and part of it will be a five-year revolver and we're not -- we're not planning to turn it out as you say.

Okay.

All right.

Very good.

Thank you.

Thank you.

Thank you.

Our next question is coming from Peter Varser with Credit Suisse First Boston.

Good morning.

I was wondering whether you could just very briefly cite how much the Russian market was down given your comments that you're volumes were down 1% but your market share went up over 1%?

Yes.

When I say our volume was down 1% that's shipment volume which was down 1%.

Our in-market sales volume increased and because the market share numbers that I give you are based on in-market sales and -- so our in-market sales increased resulting in -- in -- in -- in volume increase.

It's -- as far as the total Russian market in the quarter, it was up slightly.

Thank you.

Thank you.

Thank you.

Thank you.

Our next question is coming from William Knobler with Atlanta Sosnoff.

You commented initially that the earnings reported didn't include any benefit from the accrual for contributions to the settlement trust.

What are the issues involved in including that and how much is involved in the benefit?

You're talking of the accrual, the accrual -- pri -- prior year accruals.

The prior year accruals for the growers trust was approximately $230 million.

Okay.

And -- and why is there any question about reflecting it?

No, we're very clear about it but it's been challenged by, I guess, a -- a -- a group of growers and they've taking it to the North Carolina Supreme Court.

Okay.

And going back to Japan for a moment.

What was your peak share in that country?

Our peak share is 24.8% which is where we are right now.

Okay.

And I assume from your comments that thus far and perhaps for the full year there will be very little benefit in the change in distribution as you reinvest in the market.

Would that be incorrect?

You're talking about --?

In Japan, yes.

Japan?

And -- and sorry.

Could you just rephrase that question or restate it?

Okay.

You've pretty much been consistent in saying that there's no benefit for the short term as you reinvest in more vending and also sales people and marketing expenses.

Will we begin to see a benefit in earnings this year or will it be next year before we see a benefit from the chang in distribution in earnings?.

Well certainly you'll see a gain in earnings because as I said we're now going to get the 100 -- 100% of the margin and profitability for Marlboro now will come full to us whereas till the end of April, we shared this with the JT.

So we're -- we're going to get immediate profitability during this year.

As far as the other part of the question, and I'm reading between the lines here, that you said, with -- with us taking over distribution result in -- in better profits?

And, yes, over a period of time us taking over the -- the -- the selling for -- for Marlboro hopefully will -- will accelerate Marlboro's market share growth and therefore result in better profits.

Great.

Thanks very much, Diny.

Thank you.

Thank you.

Our next question is coming from Keith Kitagawa with Greenwich Capital.

Hi.

Can you comment on why the cash in the balance sheet went down sequentially?

Cash in the balance sheet when down, we -- we -- we acquired 40% of the shares of the principal shareholder of some foreign [Inaudible]

So did that -- did that transaction close before the end of the quarter did -- was the cash put in some escrow account?

No, it closed before the end of the quarter that particular part of it.

Okay.

And also last quarter you gave us somewhat of a ex the -- the three li -- litigation cases, you made the statement that you are not in or close to breaking up the business.

Can you give a comment along the same lines, or at least the status abs -- ignoring the -- the Price and [Inaudible - background noise] and Rico cases?

We really have nothing to add since what we've said the last time.

Great.

Thanks.

Thank you.

Thank you.

Our final question is coming from Gale Alexander with Darcell (ph) Associates.

Good morning, DIny.

Good morning.

Could you give us an estimate of what you think your tobacco costs will be 2004 -- I mean 2005 versus 2004 for MO USA?

Will they be coming down?

The'll becoming down slightly.

Yes.

All right, thank you very much.

And could you just refresh my memory as to how much U.S. excise taxes went up in '03 and '04 and where are the key states where they're trying to put in launch increases this year?

As far as state excise taxes, the average -- weighted average for the year 19 -- 2003, rather, was somewhere around $0.68 a pack.

In 2004 -- in 2 -- in 2004, the average rate was $0.75 a pack.

That's a sort of increase of 10 or 12%.

And we're expecting roughly the same increase in -- in 2005.

All right.

Thank you very much.

Okay.

Thank you.

At this time I would like to hand the floor back over to Mr. Rolli for any closing remarks.

Well, thank -- thank you very much.

We appreciate your joining us this morning and we look forward to talking with you again next quarter in July.

Again, thank you and have a good day.

Thank you.

This does conclude today's teleconference.

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