奧馳亞 (MO) 2005 Q4 法說會逐字稿

Good morning and welcome to Altria Group's fourth quarter and year-end conference call. Today's call is scheduled to last about one hour, including remarks by Altria management and a question-and-answer session. (OPERATOR INSTRUCTIONS) I would like to turn the call over to Mr. 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're providing selective slides for fourth quarter and full-year results for Altria and its operating Companies, Philip Morris USA, Philip Morris International and Kraft Foods. Today's call is limited to a discussion of business results.

Kraft foods reported its fourth quarter and full-year 2005 results yesterday and hosts a separate webcast. Since the food business was covered in detail on that webcast, our discussion of Kraft will be limited on the 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 review of the various factors that could cause actual results to differ materially from projections.

Finally, Louis Camilleri, Altria's Chairman and CEO is joining us on this call. Following remarks by Dinny Devitre, our Senior Vice President and Chief Financial Officer. Both be have to take your questions. For a detailed review of our fourth quarter results and full-year results and EPS guidance for 2006, I direct your attention to the news release we issued earlier this morning, which available on our website at www.Altria.com. Now, it's my pleasure to introduce Dinny.

Thank you, Nick, and good morning. 2005 was a year of solid growth for Altria. Strong income gains from our tobacco businesses more than compensated for weaker results at Kraft foods, largely due to significantly higher commodity costs.

For the full-year 2005, diluted earnings per share from continuing operations were up 11.6% to $5.10 versus 4.57 for the same a year ago, including the items detailed on Schedule 8 in our release.

In the fourth quarter, Altria's diluted earnings per share from continuing operations increased 13.5% to $1.09, versus $0.96 in the prior year quarter, including the items detailed on Schedule 7 in our release. Altria Group Inc expects EPS from continuing operations in 2006 to between $4.85 and $4.95.

The components of our guidance include approximately $0.36 per share in charges for Kraft's restructuring program, $0.14 per share for unfavorable currency based on current exchange rates, about $0.10 per share for lower tobacco income in Spain. $0.05 per share due to higher shares outstanding and $0.04 per share, as a result of a higher-based income tax rate of 33.9%, versus a corresponding rate of 33.4% in 2005.

Our EPS guidance excludes any future acquisitions or divestitures or the potential reversal of tax accruals following the completion of audits in certain jurisdictions. As we inside our release, our guidance dictates a cautious outlook this early in the year.

Let me also remind you that the FASBs newly-revised standard regarding the accounting for employee stock options will have no material impact on Altria's EPS this year. As you may recall, the Company began issuing restricted stock in 2003, and we have already recognized the cost of stock-based compensation in our financial statements.

Turning now to a review of each operating Company's results. I'll start with Philip Morris USA, which received a balanced income and retail share growth in 2005. Operating companies income rose 4% to $4.6 billion, primarily driven by lower wholesale promotional allowance rates and the reversal of a 2004 accrual related to tobacco quarter buyout legislation. This was partially offset by lower volume. Charges for the disposition of full tobacco stock, higher R&D expenses, and a $56 million accrual for the [Boeken] case.

PM USA's total retail share reached a record of 50% in 2005 driven by Marlboro, which increased its retail share 0.5 points to a record 40% percent, as measured by IRI/Capstone total retail panel.

In a declining cigarette industry, PM USA's shipment volume of 185.5 billion units was down 0.8% from the previous year, but was estimated to be essentially flat when adjusted for the timing of promotional shipments and trade inventory changes, and two less shipping days versus 2004.

PM USA's other focus brand, Parliament, Virginia Slims and Basic also performed well with relatively stable retail share in 2005. In the fourth quarter, PM USA's operating companies income increased 0.4% to $1.1 billion due mainly to lower wholesale promotional allowances -- allowance rates and favorable quarter buyout costs, largely offset by lower and the reversal of the first three quarters of gross [indiscernible] expense in the fourth quarter of 2004.

In the fourth quarter of 2004, PM USA accrued quarter buyout expenses and simultaneously reversed expenses related to the gross trust. Thus PM USA's fourth quarter 2004 OCI was favorably impacted by approximately $52 million. Absent these adjustments, PM USA's OCI would have been up 5.5%.

Retail share was up 0.1 point to 50% in the fourth quarter on the strength of Marlboro. Shipment volume of 45.5 billion units was down 3.4% from the previous year, but was estimated to be essentially flat when adjusted for the timing of promotional shipments and trade in inventory changes, and one less shipping date versus the fourth quarter of 2004.

Importantly, Marlboro's price gap with the Lewis Price brand was stable at 46% in the fourth quarter. The deep discount segment, although flat at 11.8%, remains resilient despite the continued decline in the volume of cheap imports.

To sum up on Philip Morris USA, the business is delivering solid reflecting improved US cigarette industry dynamics as reflected by the lack of vitality of the deep discount segment, which has remained flat for the last several quarters. However, higher excise taxes and competitive price promotions remain key challenges.

PM USA's well positioned to continue its leadership of the industry, strengthened by its superb organization, powerful brands and effective strategies, and is dedicating significant resources to drive future growth, including more than $300 million for its new research and technology center.

In 2006, Philip Morris USA projects moderate growth in retail share in operating companies income growth in the low to mid-single digits.

Turning to our international tobacco business, in 2005, PMI delivered operating companies income of $7.8 billion, an increase of 19.2% or $1.3 billion. The income gain was driven by higher pricing, the impact of acquisitions of 341 million, favorable currency of 331 million, as well as, the return of the Marlboro license in Japan. The one-time inventory sale in Italy and the absence of the initial 2004 charge of $250 million for the EC agreement.

Unfavorable volume mix and higher expenses mainly for R&D, manufacturing, distribution, trade and selling partially offset the income gain. PMI's cigarette shipments of 804.5 billion units were up 5.7 % of 43 billion units driven by the impact of acquisitions in Indonesia and Colombia of 37.6 billion units, gains in Eastern Europe and Asia and the 3 billion unit one-time inventory sale in Italy.

Shipments were unfavorably effected by weaker volumes in the EU due mainly to Germany. Excluding the acquired volume, shipments rose 0.7%.

Total Marlboro cigarette volume in 2005 was up 2%, driven by increases in Eastern Europe, the Middle East and Africa, and one-time gains in Italy and Japan partially offset by declines in Germany and worldwide duty free. Absent the deterioration of cigarette consumption in Germany and the one-time gains in Italy and Japan, Marlboro would have been up 1.8% demonstrating its fundamental underlying strength.

Let me turn to a brief review of PMI's 2005 results from a regional perspective. In the Europe and Union region, cigarette volume declined 2.7 %. However, income was up solidly on both the U.S. dollar and local currency basis. PMIs cigarette market share of 39.3% was down .2 of a point versus prior year as gains in Italy, France, the Netherlands and the UK were offset by declines in Spain, Portugal, Switzerland, Greece, Germany and Poland.

In Germany, PMI cigarette shipment volume declined nearly 16% due to a lower total market as consumers switched to other tobacco products, mainly tobacco portions, which reached a level of 24 billion units in 2005. Cigarette market share of 36.6% was down 0.2 points as the premium segments remain under pressure from low-price tobacco offering.

PMIs total shipments -- total tobacco shipments including other tobacco products was down 8%. While PMI's annual or full-year share of total tobacco consumption declined 0.8 points to 28.6%. It grew its share of total tobacco consumption sequentially through the year from 28.1% in the first quarter to 29% in the fourth quarter.

Now that the equalization of the tax burden between cigarettes and tobacco portions has been mandated in Germany by the Europe and Court of Justice, tobacco portions will be taxed at the same rate of cigarettes for products manufactured as of April 1, 2006.

Regrettably, we believe lower-priced tobacco portions will remain available at retail for a good part of this year as a result of projected high-stock levels as of the crossover date.

Turning to Spain, the key issue remains the surge in the size of the deep discount segment. In 2005, it expanded to 20% of the total market, double its 2004 share and reached a 31.2% share in the fourth quarter. PMI cigarette shipments were down 2.2%. As a result of widening price gaps, share declined 1.1 points to 34.5% for the full year and declined 3.4 points to 31.5% in the fourth quarter with a pronounced product mix deterioration.

Share losses in the fourth quarter were incurred by Marlboro, Chesterfield, and L&M, partially offset gains by Next and Basic.

On January 1, 2006, the Spanish Government implemented a workplace smoking ban. Then on January 21, and in spite of the economic ministers recent statement, that the government aims to clamp down on low-price cigarette brands to help reduce consumption. It raised the ad valorem excise tax rate. This would have resulted in even larger price gaps if the tax had been passed on to consumers. In order to restore the competitiveness of its brand, PMI reduced its cigarette prices in Spain on January 26th, with Marlboro now retailing for EUR2.35 per pack versus the old price of EUR2.75.

While we project market share gains, this painful but necessary action will severely impact our income levels in Spain this year. In Italy, although the total market declined in 2005 due to tax-driven price increases and the indoor smoking ban, PMI's share rose to 52.6% in 2005, an increase of 1.1 points behind [Diana's] success and Marlboro's continued resilience.

In France, PMI's results were robust, driven by a stable pricing environment and moderate price gaps. The volume grew 2.5% and share rose 1.9 points to 41.7%, due to the strong performance of Marlboro and the Philip Morris brand. In Eastern Europe, the Middle East and Africa, PMI shipments were up over 6% in 2005 driven by gains in a majority of markets.

Marlboro performed strongly in the region in 2005, with shipments up 15% versus prior year and solid market share increases achieved in Russia, Turkey, Ukraine and Egypt.

In addition, volume for PMI's other l international brands, Parliament, Virginia Slims, Next and Bond Street, also rose sharply more than compensating for lower L&M shipment primarily in Turkey.

In Asia, including Japan, PMI's volume rose 21.3%, primarily due to the acquisition of some foreigner and higher shipments to the Philippines and Thailand, partially offset by lower volume in Australia and Korea.

Excluding the Sampoerna acquisition, volume was essentially flat with 2004. PMI's business in Indonesia is performing well and is ahead of plans in terms of both volume and income, with a full-year 26.1% market share, PMI is a major player in this 220-billion unit market driven by the continued success of Dji Sam Soe, A Mild and A Hijau. In Japan, PMI shipments were down slightly in 2005 driven by an overall market decline of 2.8%. Market share grew to a record 24.8%, up 0.3 points behind the strength of Marlboro and Virginia Slims. The total share for Marlboro rose to 0.5 points to 9.7% in 2005 aided by the successful launch of Marlboro Ultralights.

Turning to Latin America, volume increased 5.5% driven by the acquisition of cold tobacco in Colombia and higher shipments in Mexico, partially offset by declines in Argentina and Brazil, due to lower consumption of the continued increase in the deep discount segment in both markets. Excluding acquisitions, volume was down 3.8%.

In the fourth quarter, PMI's operating companies income increased 7.1% to $1.5 billion due to higher pricing and the impact of acquisitions of 121 million. Partially offset for higher asset impairment and exit costs, unfavorable currency of 11 million, unfavorable mix, increased R&D marketing and selling expenses, PMI shipment volume increased 6.6% in the fourth quarter to 184.2 billion units, driven by Turkey, Ukraine and the impact of acquisitions in Indonesia and Colombia, partially offset by declines in Germany, Italy, and Poland. Excluding acquisitions, PMI cigarette shipment volume declined 1.9%.

Marlboro volume in the fourth quarter was down 1.3%, due primarily to the declines in Germany. However, Marlboro share was up in many key markets, including Egypt, France, Germany, Greece, Japan, Mexico, the Philippines, Russia, Saudi Arabia, Turkey, the United Kingdom and the Ukraine.

During the fourth quarter, PMI and the China National Tobacco Corporation announced the establishment of a long-term alliance. As stated in the joint press release last December, agreements were signed for the license, manufacture, and sale of Marlboro in China, as well as for the establishment of an international joint venture equally owned by the CNTC/PMI.

The joint venture would develop business opportunities worldwide with a particular focus on offering consumers a portfolio of Chinese Heritage brands. Both the CNTC and PMI expect that these agreements will not result in a material impact on that financial results in 2006. The agreement represent an important first step in what we both hope will be a long-term successful partnership.

To sum up on PMI, we remain confident in the long-term growth potential of our international tobacco business. PMI expects to deliver approximately 4 to 5% volume growth and excluding acquisitions, organic volume growth of 1 to 2% in 2006. On a constant currency basis, operating companies income is forecast to increase in mid-single digits in 2006.

Let me now turn to our food business, beginning with some brief highlights for the full-year 2005. Kraft's net revenues were up 6% to $34.1 billion, reflecting pricing, positive mix -- excuse me -- favorable currency of $533 million, and the impact of an extra shipping week in 2005. Kraft estimates that this additional week positively impacted volume, revenue, and operating income growth rates by approximately 2% for the full-year and 7% for the fourth quarter.

Ongoing volume was up approximately 2% for the full year, which was essentially flat on a comparable 52-week basis, including a 0.7 point benefit from acquisitions. Factors contributing to the volume softness included Krafts focus on mix improvement , its SKU Reduction Program and the impact of pricing.

The pricing impact was most pronounced in the competitive European environment where discount retailers store brand generally either lagged or did not follow Kraft's price increase. Operating income increased 3% to 4.8 billion for the full year driven by positive mix, productivity, and restructuring savings. Lower restructuring in the impairment costs, favorable currency of $90 million, gains on sales of businesses and the benefit of the extra week. These were partially offset by significantly higher commodity costs, increased forced employment benefit costs, and increased consumer marketing support.

Kraft announced yesterday that it's expanding its restructuring program that will add approximately $700 million in savings, and $2.5 billion in costs to the original program that was announced in 2004. The total restructuring program is expected to generate annual savings of $1.2 billion with total costs of 3.7 billion when the program is completed in 2009.

In 2006, Kraft's diluted earnings per share on a continued operations basis will be in a range of $1.38 to $1.43. We expect to see better fundamental results at Kraft as the year unfolds.

In closing, I want to emphasize that all of our operating companies are investing for the future to ensure long-term success and each is pursuing business development opportunities and has an exciting pipeline of new products. PM USA's focus on developing new technologies that improve the products it currently manufactures and may lead to innovated new products. PMI continues its significant investment to drive growth, including participating in all growing and profitable tobacco segments, acquisitions, and new market entries. And Kraft is clearly focussed on successfully implementing its restructuring program and building brand equity through innovation and new product development. This concludes my introductory remarks, and now Louie and I will be happy to take your questions.

Thank you. [Operator Instructions] Our first question is coming from Christine Farkas from Merrill Lynch. Please go ahead.

Thank you very much and good morning. A question on PMI. Firstly, on Latin America. You talked about Argentina and Brazil suffering a little bit from deep discount shared gains. Can you talk about the status of market relative to what we have seen for example, in Spain, and in other troubled markets? And how you would get your overall organic growth of 1 to 2% in light of these markets. Thank you.

Thank you, Christine. You're right. Argentina and Brazil have been hurt and this new thing has been going all year, by the growth of the deep discount segment and, indeed, a higher incidence of contraband and cheap products. Both governments are very focussed on the elimination of contraband, and that leaves the deep discount segment.

We have narrowed price gaps over the last year or so, and I think ultimately, as is the case in most markets in the world, there are essentially two solutions. You either have to manage the price gap or you have to convince the government that it should adjust its tax structures. PMI, as you all know, has had considerable success in advocating fair excise tax structures to make sense from both government revenue perspectives and from a health perspective.

In Argentina, we are hopeful that the tax structure will change. Brazil is a very complicated matrix system and we're also confident that over time there will be adequate reform of taxation in Brazil.

Having said that, neither of those two markets have huge ramifications in terms of profitability. The more general question, Christine, I suppose related to Spain and the overall concern as to whether things or development in Spain are likely to be exported to other markets in the world.

I would first say that, generally, we have witnessed over the last, I would say three years, a significant emphasis by some of our competitors. To enter the low-price segments and to try to catch a volume at any cost. It's been going for some time in central Europe.

My own sense is that we can manage that situation and we have managed it in the past and we continue to manage it. Spain, per se, is a particular market that has its own characteristics, and I think it's important that you understand the dynamics of that market to explain that they are very different to what is happening elsewhere. You should be aware that the tax structure is essentially purely ad valorem. The low-price segment has been growing quite dramatically over the last year.

In fact, in the fourth quarter, that segment was growing at two market share points per month and finished at about 33.4%. Given the huge price gaps that we were facing and then he said the pronounced mix deterioration, we sold at Marlboro, Chesterfield and L&M, lost more than 6 share points in the fourth quarter. We had to react.

Frankly, I would have preferred to have reacted in November, but our hope was that the government would implement tax structure that would address this issue, which is actually hurting their revenues quite significantly. As you all know, they finally did address the issue by increasing taxes and essentially leaving the ad valorem tax structure in place. That did nothing to resolve the problem. So we had to respond and restore the competitiveness of our brand. That comes at a huge price.

Spain one of our top income markets in the top 5, but it will be still in the top 10 and I think, as both Dinny said, and I said in my quotes in the release, it's still very early days and we prefer to be cautious in our earnings outlook with regard to Spain. Obviously, the hope is that things will improve and, frankly, they should improve going from a government revenue perspective, and my hope is that our share in volume should react quite favorably to our price reposition. Does that answer your question, Christine?

That's terrific. Thank you. Just as a follow-up on Spain, however, your guidance set, would that include an expectation of increased volume? Or is this really a conservative of all-end hits or profits which assumes little change in volume?

Our projection currently is based on the margin erosion that comes from pricing. Offset partially by some volume, but I would hope that we could do better.

Thank you very much.

You're welcome.

Thank you. Our next question is coming from Bonnie Herzog with Citigroup.

Good morning, everyone. Actually, the question starting off with China and, of course, the deal that you recently announced. Could you give us a little bit more details on what you have done? For instance, is this an exclusive deal between yourself and the Chinese National Tobacco Company?

Also, the I would be curious to hear what types of marketing restriction exists in China? And then, will Philip Morris International be producing the Chinese Heritage Cigarettes in China and export those brands? Or how will you be handling that part of the deal? And then, I have many questions about this. In terms of the Chinese government, do you think they will now be more vested in cracking down on the counterfeiting that has probably occurred on Marlboro in the country?

Okay, thank you, Bonnie, as you say --

A lot.

A lot. Let me try to address most of them. As you know, we signed of series of agreements back on December 21st. Those agreements were with the China National Tobacco Company, as opposed to agreements with individual subsidiaries of that company. That is a first. Other companies that have agreements, generally are with -- generally, they're all with the provencial all-city organizations, such as Shanghai Tobacco or whatever. So, our agreements are right at the top with the China National Tobacco Company.

We see that as a first step, as Dinny said, and it the take time to have a material impact on our financials, but eventually it will. We're very confident that China National Tobacco is eager to grow more in China. It will be produced initially by 2 factory. One is the [Lon Yang] factory in the [indiscernible] province, and the other is the [Shang Sha] factory in the [indiscernible] province. That, again, is a first, because their essentially sublicensing the Brand 2 factory and they indeed, licensed further to other factories in the future. [Shang Sha] for you to know is a company that has volumes of about 100 billion units and actually owns the number one brand in China called [Visha].

So, the other question I am often asked is in terms of Marlboro's positioning in China, recent research we have conducted in the major cities, I believe there was some 30 major cities, shows the Marlboro has considerable vibrancy, especially in the demographic groups that is a particular interest to us, which is the legal age to 24 demographic group,where Marlboro share has been growing and, in fact, today is the number one international brand in that demographic segment. Again, in the urban centers. So, we feel pretty good about that.

With regard to counterfeit, the government and China National Tobacco Company are very focused on eradicating this plague as it were. You have to understand that they have a huge vested interest in any event, because the counterfeit has been expanded beyond international brands and they're actually counterfeiting local brands.

And, therefore, China National tobacco Company brand, and there has been considerable success in closing manufacturing facilities, printing plants, and other material suppliers. So we feel very good about that. We feel very good about that commitment and we, together with the rest of the international industry in China National Tobacco Company, work very closely on trying to eradicate counterfeit.

Okay, just a quick follow-up. Again, part of this deal was [indiscernible] you are going be, I guess, exporting part of the -- I'm sorry.

The other element is the joint venture. Which, again s a unique aspect to the alliance that we're building here. The joint venture, as we announced, will be based in Switzerland and it will have various objectives. The principle one being to market and commercialize Chinese Heritage brands. We will use both of our infrastructures to expand the presence of those brands.

We will export from China and, indeed, where it makes sense because of tariff barriers, we will produce in our own manufacturing facilities worldwide. So you will see both, Bonnie, it's not just purely exports. Not just the exports.

Clearly, we' will also use China as a source for certain materials, where they have a competitive advantage both in terms of quality and price. And, frankly, we also see various other opportunities, but there is business developments, ventures that the joint venture couldn't pursue.

That is very positive. That's helpful. I appreciate that. And I just have one final question.

Regarding your share buyback program as we move into 2006, hopefully, getting closer to the eventual breakup of your Company. Could you talk about when you or the Board might consider resuming your share buyback program? I guess, I'm assuming, it would probably happen after Kraft foods would be spun off. Could you address that, please.

I think that's a very fair assumption, Bonnie. We remain always consistent on that point. As you know, the legal environment is improving. And it's our hope and we can remain commit committed to the corporate restructuring that we have talked about now for some years. Until such time as a spin occurs, I don't believe that we will use our ample cash resources to buyback shares. I think that is more of a post restructuring thing than pre-restructuring.

All right.

I think we also explained from the day we stopped share repurchases that it was very important to increase our equity ex--Kraft and that we have done. In fact, at year-end '05, the equity was approaching $9 billion, a huge increase as to what it was two years before.

Okay. Thank you very much.

Thank you, Bonnie.

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

Hi, everybody.

Hi, Judy.

Hi, Judy.

I guess just looking at Philip Morris International. It seems to me that really the broad question is the ability for Philip Morris International to achieve robust pricing and mix improvements in the contexts of your competitive becoming more aggressive in the discount segment and your division to participate more aggressively in all segments that are growing. So, I guess the question is how confident you are in this context? The ability for Philip Morris International to achieve high single-digit profit growth going forward?

Judy, I would say that PMI and given its considerable strengths and assets, the vibrancy to its brands, the demographics of those brands and our positioning in the various case and [indiscernible] segments, as well as, our market share gains, gives us considerable confident that we can over the longer-term get to that high-single digit OCI target.

Now, having said, that there will be bumps along the road. Spain is one of them. I think what we have done in Spain makes eminent sense from every perspective and frankly, if I had a complaint, as I mentioned earlier, we should have acted in November and not waited until January. I don't think you could broaden Spain to other markets. Our history at PMI has always faced price skirmishes and generally, we have done extremely well. [Indiscernible] As you know, there was an explosion at the deep discount segment two years ago. We participated tactically in that segment and we convinced the government to impose a minimum excise tax. That's now happened and we see a shift back up to the premium segment. That's has hurt our volume because our low-price brands were doing quite well. In fact, in terms of the mix, it's very healthy. That's just one example. There are considerable other examples. France is another case in point.

I think if you take PMI's top 20 markets, I believe it's right to say that 17 of them have either minimum excise taxes in place or minimum reference prices. And, in fact, everybody's focused on France and Italy in terms of minimum reference prices. Belgium has now adopted a minimum reference price. Australia is about to adopt it, and we think that other countries will look at that very seriously.

The experience in France shows that ultimately the government and the industry benefits from such tax structures. So there will be bumps along the road. It's inevitable as competitors move in various directions. But I think, we have where with all within PMI. We have a battery of new exciting products , across most segments but predominantly in the premium segment. I feel confident we can get the 1 to 2% volume growth and the high-single digit OCI income growth on a constant currency basis.

In terms of Poland and some other markets you cited some down trading trend. How big is this deep discount segment in that market and what is the price GAAP in that market?

It's grown quite considerably. I would say over the last 18 months. The deep discount segment per se is roughly half of the market today. And the price GAAPs, I don't have them precisely in my own mind, but they quite significant. However, they have been narrowing over the last few months and we have taken certain actions. We should also know that there was an explosion in the roll-your-own segment in Poland in herd volumes. The government finally equalized taxes between roll-your-own tobacco and cigarettes. And that clearly helped the cigarette industry.

One question in the U.S. market. I think in the press release, you cited in the fourth quarter the share of Philip Morris USA premium segment was down based on some of the competitive dynamics. Could you give us a little bit more color in terms of the competitive dynamics that happened in the fourth quarter?

Yes, we saw a surge, a huge increase in the availability of product promotions and by that, I mean free products, buy one, get one free, or buy two, get one free. The incidents of the price promotions, particularly, regarding one competitive brand was huge. To the best of our estimates, some 27% of that brand's volume was its free product. So, that explains a bit. The trend that you saw in our premium segment, I don't think one should be alarmed at all. It was just, I think, reaction to this huge surge in free-product promotion.

Okay, just one final question for Dinny. Dinny, do you know why corporate expenses were up so much in the fourth quarter?

I can try to address that, Judy.

Thank you.

It was predominantly because of pension benefits, rather complex issues, but it is essentially a one-timer in terms of pension benefits related to the corporate headquarters streamlining.

Okay, so the underlying numbers shouldn't be different from what we have seen before.

No, and can you expect an ongoing reduction in that number into '06.

Okay, thank you very much.

Thank you, our next -- next question is coming from David Adelman with Morgan Stanley.

Good morning.

Hi, David.

Louis, there was a fairly substantial reduction in the performance levels of PMI in the fourth quarter versus say the second and third quarter, particularly on an organic bases. Volume was off 1.9, on an apples-to-apples basis, and this includes the benefit of Sampoerna and the Japanese takeback. Operating income was probably up about 6 1/2%. I realized that Spain and Germany got more challenging in the fourth quarter. That doesn't seem to be the whole issue; am I correct? Did other markets in general sequentially weaken? And if so, why?

I think that is a fair characterization, David. Germany was clearly a big one. I know, I'm not sure that you're aware of this, but, in fact, when the German Government ruled that they would equalize the tax between cigarettes and cautions, believe it or not, some of our competitors actually dropped the price portion. Somewhat inexplicable to me that someone would drop the price of a product that is about to disappear from the shelves. Poland was ahead and so is the mix. But there were other factors. Japan was probably one of them.

In the sense that last year we had shipped in anticipation of the Marlboro takeback, the other non-Marlboro brand, so that we could essentially ensure a smooth transition on the Marlboro takeback. There are other distortions of that nature, David, Korea is another one. Russia was one.

So, part of the quarters results, timing factors. I would say that it's fair and an inescapable fact that the fourth quarter appear mild is not exactly a terrific quarter; however, I don't believe that the quarter's representatives of the overall strength of the business. There were some distortions, and there was some runoff such as Spain, which clearly hurts us in terms of the mix deterioration.

Okay, Louie, your target for 2006, it assumes that the tax structure in Spain persists as it currently stands.

Yes. And, furthermore, there will be a further tax increase in the summer.

Okay. And then can you give -- can you comment, Louie, on your assessment of your overall in-market performance in Japan both on Marlboro and more broadly following the takeback of Marlboro.

I think we have done well in Japan. Marlboro in particular has grown. Grown significantly. As you know, we launched Marlboro UltraLight Menthol and that's doing well. In fact, if you look at the trend chart, ever since we took over Marlboro, the uptake is clear for anyone to see. The caution at this time of the year regarding Japan, is that there is an excise tax increase. Earmarked for July 1 this year. We will see what happens there.

So we are early in the year and as we said, we prefer to be cautious, but fundamentally, our share growth in Japan is strong. The market is down roughly 3% and we anticipate that consumption will continues to a rose, but we feel good about our share with Marlboro and the battery of new products that we have in our quiver, as it were.

One last question, Lou. Someone that can make your leading competitor in Japan, leary on its pricing tactics going into the excise price increase. Is that several years ago, as you know, you elected not to take pricing on Lark. Would you categorically rule out that type of tactic on your major brands going into this period?

You're getting into some very delicate areas, David. I would say that -- and we have said this generally, Japan today, relative to consumer disposable income has the cheapest cigarettes in the world, and it's our sense that there is clearly potential for price increase.

To go back to Lark, you have to remember that PMI did not have a real presence in the mainstream segment and we were the only ones who didn't have a significant price in the mainstream segment. Lark was just repositioned to the same price level as Mild 7 and as Kent. We didn't drop the price below that. So that should give you confidence as to our views on that market. More troubling for me is that in particular, one of our competitors has launched a brand in '05, lower than the main stream segment, and I think that may give, regretfully, J.T. some pull in terms of its pricing strategy going forward.

Okay, thank you very much.

Thank you, at this time, we will take questions from the media. [Operator Instructions] Our next question is coming from Rob Campagnino with Prudential Equity Group. Please go ahead.

I joined the media. Good morning, everyone. To talk about a position of strength, can made some comments about favorable dynamics in the U.S. Can you just go a little more in detail on the factors that contribute to the strength and the economy enforcement actions? I know you're going to say it's a combination but what gives you sort of the greatest level of comfort that the big performance continues?

I think the main one is the fact that the deep discount segment has no vibrancy whatsoever, Rob. Most are competitors focussed on the premium segment. The premium segment continues to grow. We have seen a significant reduction in the volume of products sold over the internet because of all the actions taken that you're aware of.

And we're just seeing that the market characteristics are a lot firmer than they have been in the past. So, I think the dynamics are there. I think most of our competitors are focussed on profit rather than volume. I'm often asked, well don't you think you should use the pricing lever more heavily. Frankly, if you look at our share growth, it would show that we have got the balance pretty well right. So I look at the market and I say to myself that things are looking pretty good, Rob. The one watch out clearly is excise taxes. As you know, they increased 12% last year, and we're watching Texas and California very carefully. They both have huge markets and that's clearly a watch out, but I think generally, the characteristics of the market are very fast.

Thank you for the answer. I appreciate it. I'm going to go write my story.

Thank you, Rob.

Thank you, the next question is from Nick [Indiscernible].

Hi, Louie, how are you.

Hi, Nick.

Just a quick question for you. There are rumors that one of your competitors may enter the market in the U.S. Is that an appropriate use of some of your major brands? Say Marlboro, is that something that you consider either in the U.S. or other markets in the world?

For obvious reasons, I wouldn't want to say too much, Nick, but as you're aware, PM USA has said that it would pursue its adjacency strategy. It is focussed on the other tobacco segment, some of which are clearly of interest to us and that you can clearly expect a lot of activity in the coming months on that front.

Okay, thank you.

I'm not prepared to say anything.

Can I slip in one other question on share repurchase activity. I think earlier you referred to consideration of share repurchase might take place after a Kraft spin. Would it take place after the Kraft spin or would you further address whether you would want to spin off the U.S. -- or the international business and at that point, leave it up to the individual entities what they do with their capital allocation decisions.

I think it would be posed to all restructuring, Nick.

Okay.

I hope that answers your question.

Yes, it does. Thank you.

Thank you.

Thank you, our next question is from David Ireland with [Indiscernible]. Please go ahead.

Good morning to you. Two questions, please. First, can you give us thoughts on the outlook for the German market when tobacco portion stocks are sold out. Secondly, can you say how [indiscernible] that the Spanish government will introduce a minimum excise tax, that rather say raise specific tax which could clearly force up the bottom end of the market but could leave still a size more price GAAP and put further in the manufacturer's take.

Okay, David. First of all, Germany, as you know, essentially the tax equalization takes effect on April 1, but only for manufactured products. So any product that is manufactured before April 1 will still benefit from the excise tax. In analyzing industry capacity of portions and the sort of monthly volumes, we estimate, this is just a gross estimate, that there will be around 10 billion units of portions available on April 1. So, our sense is that portions will be in the market probably until the end of September. So we will really see what we're all waiting for as to where consumers up trade to, probably in the fourth quarter of this year and clearly a lot more in '07. But I think for '06, most of the time, we will see portions in the market. Does that address your question?

Yes, indeed, yes. Just another question, please.

In terms of Spain, I can't speculate as to what the government will do. Whether it increases the specific component of the tax structure or implements a minimum excise tax, even an increasing the specific component would be a good thing. Clearly a minimum excise tax would be first. My own sense is that if you take the pricing dynamics today in the market, government revenue will fall considerable short of their budgeted target and my own sense is they will have to do something. We will wait and see.

I think the argument for a minimum excise tax are quite compelling, but I can't guess what the government will do.

Okay, many thanks.

You're welcome.

Thank you, our next question is coming from Chris Berk with Bloomberg News.

Hi, good morning.

Good morning.

The earlier section on the smokeless segment kind of got what I was curious about. Unless you're willing to say you would like to call buy U.S.T. or the like, I will not ask a question.

You shouldn't have asked the question then. We never comment. Never ever on potential acquisitions.

Can you offer any color on what is attractive about the smokeless category.

Well, there are a number of segments that have been growing for some time. And are showing significant growth potential, and they are lucrative segments.

Thanks for your time.

You're welcome.

Thank you, our next question is coming from Adam [Stillman] with Citigroup.

Good morning. A couple of follow-up questions to ones from once before. First of all, coming back to China. Can you say whether the potential volumes you can sell is [Mobra] in China, are in anyway linked to the volumes of the Chinese Heritage brands you sell in the rest of the world? I'm wondering if demand is great for [Mobra] will you be limited in the amount of volume that your partnerships can sell of that brand, if you can't move as much volume elsewhere? But, the first question, and I just wanted to -- want to further up an answer you gave.

You said in your guidance for the impact of Spain, you were assuming a further tax increase this summer. I was just wondering whether that is an assumption of some sort of minimum tax or what? And then finally, if I ask a third question, please? If I interpret it right, you said the most likely placed if you were required to take a similar price action in any other part of the world, the most likely region is the eastern Europe, and particularly, Poland, but even there you think it's pretty unlikely. Can you confirm that Poland is a pretty minor profit contributor for PMI?

Okay.

Thank you.

Let me hit one-by-one. Essentially your first question is, is there a quid pro quo in terms of Marlboro's performance in China versus the joint ventures performance elsewhere in the world. I don't think there is a quick pro quo. Clearly, the most successful the alliance is in terms of the joint venture, the more there will be supplied at Marlboro, and that's obvious, and that's part of the whole alliance per se. Essentially, you have to look at this from a very broad picture. China National Tobacco Company is the number one cigarette company in the world. With a volume of 1.9 trillion cigarettes.

We're number two and, essentially, together we represent half the world market. The other half to go after and we'll do that together. With the regard to the further tax increase in Spain, and our assumptions regarding our projection, just to clarify our assumption is that there will be a tax increase and there won't be any change in tax structure and the tax increase is there to try to make up for the government revenue shortfall that I mentioned earlier.

In regard to Poland, I can confirm Poland is not a major profit contributor. And that essentially, we don't see any major price repositioning going forward. I think the main one that we did where it was a major [Indiscernible] there is the Czech Republic. Does that address your questions?

Yes, I think it does. Yes, it does. Thank you very much.

You're welcome.

Our -- thank you. Our last question is from Thomas Rouso with [Indiscernible].

Hi, Louis.

Hi, Tom.

I'm Curious as to -- your sharing thoughts on what the consumer actually does in a market like Germany? You know, obviously, a large group of them migrated to the portion. They went for brands that were typically their royal friends and then they went through the bother of having to manufacture the cigarettes as they were themselves.

When you get a market, do you suspect the behavior will be able to fall back into the old habits with the old brands or have they been shaped in some fashion to either seek a better deal or become more brands promiscuous with the results of what they have gone through? May be can you address it as to your experience in both Greece and France where you had problems but you seem to resort order. How do the consumer's loyalty with the brand survive this kind of drastic treatment?

I think generally, Tom and I have to generalized here, but there is considerable imperical evidence to support the statement I'm about to make. Is that when you sell cheap brands, they become commodities and there is zero -- I mean zero consumer loyalty.

Where there is consumer loyalty is on brands that have equity and generally they are premium brands. Now, Germany is somewhat unique in the sense that portions today represent a volume of some 24 billion units. So, it's 15% of total tobacco consumption in Germany.

Okay.

It's going to be more complex because of what I mentioned earlier where, because of the stock level available, certain brands portions will be exhausted on the market. And my guess is the consumers will switch to other portions initially because they are attracted by price.

Okay.

There are, sir, once portions are eliminated from the market, my own sense is that consumers, and I can't give you the precise proportion, will probably switch to classic roll-your-own to what the Germans call fine cuts. Essentially to filter and to also to trade for a price-added discount to manufactured cigarettes. And also to manufactured cigarettes. As you know, what we have witnessed in '05, particularly, is the trade brands are cigarette trade brands, actually lost share in '05 and some of the cheaper brands gained share, major manufacturer brands. My guess is we will switch back into cigarettes and ultimately, given the price GAAPs that are relatively narrow in Germany, we should do quite well from that.

Thank you.

I'm just speculating here.

Okay, thank you.

Thank you, at this time I would like to turn the floor back to you for any further or final remarks.

Well, thank you very much for joining us on the call this morning and we look forward to talking with you in the first quarter. Just a reminder, if you didn't get a copy of the press release, go to www.Altria.com. Have a great day. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and have a wonderful day.