奧馳亞 (MO) 2006 Q1 法說會逐字稿

Good morning and welcome to Altria Group's first quarter 2006 earnings conference call.

Today's call is scheduled to last about one hour, including remarks by Altria management, and the question-and-answer session. [OPERATOR INSTRUCTIONS] Media representatives on the call will also be able to ask questions following the conclusion of questions from the investment community.

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

Please go ahead, sir.

Good morning, and thank you for joining us on the call today.

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

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

Kraft Foods reported its first quarter 2006 results yesterday and hosted a separate webcast.

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

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 Dinny Devitre, Altria's Senior Vice President and Chief Financial Officer, will summarize the highlights of our major operating company's performance during the first quarter, followed by your questions.

For a more detailed review, I direct your attention to the news release we issued this morning, which is the available on our web site at altria.com.

And now it's my pleasure to introduce Dinny.

Dinny?

Thank you, Nick, and good morning, everyone.

Altria's results in the first quarter were impacted by several items in both 2006 and the year-ago period.

Absent those items, our businesses achieved operating results that were in line with our expectations.

PM USA delivered strong share and income results.

PMI achieved broad volume and share gains, although income growth, as previously anticipated, was impacted by adverse currency movements, lower results in Spain, and a difficult comparison to the prior year.

In our food business, Kraft achieved solid organic revenue growth, and stronger results from operations.

But commodity costs, especially energy, packaging, and coffee, and the European Union business remain challenging.

Diluted earnings per share from continuing operations rose 33.1%, to $1.65, versus $1.24 in the first quarter of last year.

As detailed in Schedule 4 of our news release, our earnings per share growth of $0.41 was due to the following factors. $0.46 per share from the previously announced reversal of tax reserves, following the conclusion of an IRS examination of Altria's consolidated tax returns for the years 1996 through 1999; $0.09 from operations, driven mainly by gains at Philip Morris USA, income growth at PMI including acquisitions, and favorable product mix at Kraft; and $0.02 due to a lower effective tax rate.

Partially offset by $0.06 for restructuring costs and asset impairment primarily related to the Milk-Bone divestiture, $0.05 due to adverse currency movements, $0.03 for a litigation charge related to an Italian antitrust action at PMI, and $0.02 for higher shares outstanding.

We reaffirmed our previously announced projection for 2006 full-year diluted earnings per share from continuing operations in a range of $5.25 to $5.35.

In our news release, you will find details of the components to our guidance.

Turning to our domestic tobacco business, PM USA had an excellent quarter characterized by solid income and retail share growth driven by Marlboro.

Operating companies income rose 7.5% to $1.1 billion, primarily driven by lower wholesale and retail promotional allowance rates and higher volume.

Cigarette shipment volume of 43.3 billion units was up 1.2% from the previous year, but was estimated to be essentially flat when adjusted for one more shipping day versus the first quarter of 2005.

Retail share advanced 0.4 points to 50.4%, driven mainly by Marlboro, which achieved a 40.4% market share in the first quarter as measured by IRI/Capstone Total Retail Panel.

Importantly, Marlboro's price gap with the lowest priced brands was essentially stable at approximately 45%.

The deep discount segment at 11.6% was down 0.2 points.

In addition, cigarette imports continue to decline on a 12-month moving average basis.

With its strong business fundamentals, Philip Morris USA is on track to deliver moderate growth in retail share and operating companies income growth in the midsingle digit range for the full year 2006.

Turning to our international tobacco business, in the first quarter, PMI's operating companies income was down 5.2%, to $2 billion, due to a negative currency impact of 156 million; a $61 million charge for an Italian antitrust action; unfavorable volume mix; higher R&D expenses; and a difficult comparison with 2005, when PMI recorded income of 96 million for a one-time inventory sale to a new distributor in Italy.

These factors were partially offset by higher pricing and the favorable impact of acquisitions of $146 million.

Excluding unfavorable currency, acquisitions, the Italian antitrust charge, and the inventory sale in Italy in the first quarter of last year, PMI's operating companies income was up 2.8% versus the same period a year ago.

This modest growth rate was attributable to the challenges PMI faces in Spain.

Cigarette shipment volume in the first quarter increased 4.6% to 210.2 billion units due to the favorite impact of acquisitions in Indonesia and Colombia, coupled with solid gains in Argentina, Egypt, France, the Philippines, Russia, Turkey, and Ukraine.

These increases were partially offset by declines in Japan, reflecting the prior-year Marlboro inventory buildup in anticipation of the expiration of the license agreement;

Spain, due to lower share and lower total consumption; worldwide duty-free due to timing of shipments and lower travel allowances in Turkey; and the impact of the inventory sale in Italy during the first quarter of 2005.

Excluding acquisitions, the 2005 inventory sale in Italy and buildup of Marlboro inventory in Japan, PMI's cigarette shipments were essentially flat versus the first quarter of last year.

Turning to a brief review of PMI's first quarter results from a regional perspective, in the European Union region, excluding the 2005 inventory sale in Italy, PMI's cigarette shipments were down 6.8%, due largely to Spain.

In Spain, the low price segment nearly doubled to 20% share of market in 2005, and surged to 31% during the fourth quarter of 2005.

In January 2006, a smoking ban was enacted and the Spanish government raised both ad valorem and specific tax rates.

To defend its market share, PMI lowered its cigarette prices.

Following the introduction by the government of a minimum excise tax in February, and yet another increase in the ad valorem and specific tax rates, PMI restored its prices to pre-January levels.

In the first quarter, the total cigarette market in Spain declined 4.3%.

PMI's shipments were down 18%, and share declined 4.1 points to 32.6%.

However, on a sequential basis, PMI's share was up 1 point in total, and its premium and midpriced brands, Marlboro, Chesterfield and L&M, were up a combined 2.3 points versus the fourth quarter of 2005.

Share for the low price segment, which includes all brands priced at EUR2 or less for per pack of 20 cigarettes, fell to 29% in the first quarter of 2006.

We are cautiously optimistic that the situation in Spain has stabilized with the introduction of a minimum excise tax, but believe it is too early to predict when PMI's business will recover, as profitability remains significantly below 2005, due to the impact of higher excise taxes, lower volume, and unfavorable mix.

Unfortunately, a number of competitive brands priced at EUR1.75 to EUR1.85 per pack still remain on the market.

In Germany, we're encouraged by PMI's market share performance, which was up in the first quarter on both a sequential and year-over-year basis.

Share of total tobacco consumption rose 1.1 points to 29.1%, representing sequential share growth for the second consecutive quarter.

PMI's cigarette market share of 37.1% grew 0.7 points versus the prior year quarter and 0.5 points versus the fourth quarter of 2005, driven by the recent price repositioning of L&M, the growth of Next, and the resilience of Marlboro which was attributable to the growth of Marlboro Red.

In addition, PMI's share of tobacco portions advanced 6.1 points versus the prior year to 19.1%.

Late last year, the favorable taxation of tobacco portions in Germany was ruled to be against EU law.

Accordingly, tobacco portions manufactured as of April 1, 2006, now incur the same excise tax as that levied on cigarettes; however, existing stocks of tobacco portions are expected to remain in the German market through the third quarter of this year.

In Italy, PMI's reported shipment volume was down 28.8%, reflecting the inventory sale in 2005, the timing of shipments, and distributor inventory movements; however, PMI's in-market sales were up 5.7%, resulting in a share gain of 1.1 points to 53.3%.

Marlboro grew 0.7 points to 22.5% in the first quarter and market share gains were also recorded by Merit, Chesterfield, and L&M.

In France, PMI's business fundamentals continue to be very strong.

Cigarette shipments were up, and share grew 1.1 points to 42.6% driven by the continued success of Marlboro and the Philip Morris brand.

Overall in the EU, PMI's cigarette market share was 39.4%, down 0.6 points, as strong share gains in Italy, France, Germany, and the Benelux were offset by declines in Spain, Portugal, Poland, and the Czech Republic.

Moving to eastern Europe, middle eastern Africa.

Volume grew 5.3%, due mainly to Russia, Ukraine, Turkey and Egypt.

In Russia, total share was slightly down to 26.8%, but PMI's premium brands Marlboro and Parliament achieved share gains.

In Turkey, shipments increased nearly 5%, and share grew 5.5 points to 43.6%, driven by the strong performance of premium priced Parliament, as well as Lark and Muratti.

In Ukraine, shipments increased and share continued to grow, driven by consumer up trading to Marlboro, Parliament and Chesterfield.

Turning to Asia, volume increased 30% driven by the acquisition of Sampoerna in Indonesia.

Excluding the Sampoerna volume, shipments in Asia were down 4.8%, due mainly to the Marlboro inventory buildup in Japan mentioned earlier and a decline in Thailand partially offset by gains in the Philippines and Korea.

In Indonesia, results were strong with key brands A Hijau, A Mild, Dji Sam Soe, and Marlboro all performing well.

First quarter market share for PMI's portfolio was 27.3%, up 2.5 points on a pro forma basis, versus the same period last year.

In Japan the total market declined 1.4%.

PMI shipments were down 7%, due to the previously mentioned Marlboro inventory build in 2005, as well as a market decline of 1.4%.

Market share of 24.8% was unchanged versus the same period a year ago, with Marlboro share up 0.5 points to 10.1%, behind the success of Marlboro Ultra Lights Menthol.

Turning to Latin America, PMI shipments were up 19%, due primarily to the acquisition of Coltabaco in Colombia.

Excluding Coltabaco, shipments grew 3.7%, due mainly to Argentina.

Shipments and market share were up in Argentina, driven by the price repositioning of the Philip Morris brand, and the recent launch of Next.

Total Marlboro volume in the first quarter was down 6.5%, due mainly to the items detailed in our news release.

Absent the inventory sale in Italy and the inventory build in Japan, Marlboro cigarette shipments were down 0.6%, with declines in Germany, Spain, and worldwide duty-free, partially offset by gains in France, Japan, the Philippines and Russia.

Importantly, in many top income markets, Marlboro achieved solid share gains.

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 organic volume growth of about 1% in 2006, due to the challenges in Spain.

On a constant currency basis, operating companies income is forecast to increase in the midsingle digit range.

Let me now turn to our food business.

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

Kraft's net revenues were up 0.8% to $8.1 billion, driven by positive product mix and pricing, partially offset by lower volume, the impact of divestitures, and unfavorable currency of $95 million.

Kraft's ongoing volume was down approximately 1.1%, due to declines in the European Union and ready-to-drink beverages and the impact of discontinued products.

Operating income declined 12% to $1 billion, driven by higher restructuring and impairment costs; higher commodity costs primarily energy, packaging, and coffee; and gains on sales of businesses in 2005.

These were partially offset by favorable product mix, productivity, and cost saving initiatives.

To conclude, Altria achieved overall operating results that were in line with our expectations.

PMI's performance suffered from the challenges in Spain, but we are confident that the breadth of it portfolio and its outstanding resources will generate improved results as the year progresses.

And now I will be happy to take your questions.

[OPERATOR INSTRUCTIONS] David Adelman, Morgan Stanley.

Good morning, Dinny.

Hi.

Good morning, David.

First, Dinny, a question about PMI.

I realize both in the first quarter and the fourth quarter, there've been a number of one-off issues, and head winds, and so forth, that that business is facing.

But I think an objective observation is given the assets and the resources and the share positions that PMI should be doing better.

And my question with that backdrop, Dinny, is, are you taking a hard look at the cost structure, at the pricing strategies, and the spending and investment levels to try to get stronger performance out of the business over the next couple of quarters?

Are there things that you can proactively do to improve the performance?

Well, David, clearly, the first quarter for PMI has been a challenging one.

And before I address the quarter it's probably worth reminding ourselves that PMI is a superb company that generated over $2 billion of OCI in this quarter, and it really has an outstanding portfolio of brands, including Marlboro.

PMI's income in the first quarter, as I pointed out, was up 2.8% after adjusting for currency and acquisitions.

The difficulties in Spain had a marked impact on the results, with a net effect of approximately 4 points of income growth.

So were it not for the adversities that we faced in Spain, PMI's income would have been up closer to 7%.

Unfortunately, in Spain, we've had to bear short-term pain to produce long-term gain, but I believe we are on track to position ourselves well for the long term.

As you know, we've been through the same cycle in other EU markets, including Germany, Italy, and France, and we've come out very successfully.

As far as the unit volume performance for the quarter was concerned, it did hit a temporary plateau, but when adjusted for Italy and the Japan inventory build in the first quarter of 2005, as I said, was essentially flat; and share trends, which -- when you look at share trends over a longer period, they're clearly -- very clearly on an upward trajectory.

Specifically to your comments regarding cost saving, PMI has put in place a number of productivity enhancing initiatives, the impact of which will become evident -- increasingly evident over the next few years.

Some of these savings will be plowed back into supporting the expansion of our R&D programs, but a large part of it will also flow to the bottom line.

As far as pricing is concerned, I've got to say that I think we do our best in terms of making sure that we keep our pricing and our profitability moving forward.

I know there's a lot of finger pointing that goes on in this area, but I'd like to make very clear that our objective in most markets is to grow our profitability.

At the same time, we will protect our market share because we have built many of these share positions in -- with premium priced brands, and we've invested heavily in them over the years, and we're not going to let those hard-earned gains be eroded by low-priced brands that sell purely on cheap price.

So we will defend our position when it comes to market share.

But having said that, and the fact remains that our income per thousand -- operating income per thousand if you compare 2000 and 2004, grew at a pretty good rate, close to double digits, and is much higher than most of our competitors.

So I think that's a -- rather a long answer to your question, but I hope I addressed the issues you raised.

And, Dinny, one quick follow-up.

What's your read on the prospect of a further increase in the minimum excise tax or some other tax reform in Spain, as we go through the balance of 2006?

Well, obviously, we are hopeful that something will happen, but the situation is too uncertain, David.

And I wouldn't like to make any prediction.

Okay.

Thank you.

Thank you.

Bonnie Herzog, CitiGroup.

Good morning, Dinny.

Hi, Bonnie.

Hi.

I just wanted to go back to something that actually was stated during the CAGNY Conference, which was dealing with the strict smoking regulations that have been passed throughout the world, and there was a comment made that certainly cigarette consumption is being affected.

And I think you've noticed that typically the consumption has leveled off around 3% below the base of where consumption was prior to the implementation of the regulation.

So I'm curious if, first of all, I got that correct, and secondly, if you feel that that is a reasonable expectation for consumption declines in the U.S., as we see more and more states pass smoking bans.

And then also, I'm curious about as we see the developed world becoming more and more restrictive on where consumers can smoke, have you noticed any significant changes in consumer behavior?

And if so, do you believe there are opportunities for your company?

First, with regard to the number of 3%, I guess anecdotally that is correct.

It's very difficult, really, to come to really accurate numbers on the impact of smoking bans.

In Italy last year, the total market declined by 6% and our best estimate is that about half of that was due to the smoking ban.

We noticed a similar -- a similar phenomenon in Ireland in the earlier year, and once again, 3% was the quoted number.

So I guess that's probably as good a number as anyone can come up with at this stage.

You asked about the U.S. particularly; however, the fact in the U.S. is that -- that smoking bans take place in different parts of the United States in different cities and it's very, very difficult to measure the impact city-by-city or even state-by-state.

The fact is that in the United States, the cigarette market is probably declining at about 2% per annum -- closer to 2%, 1.8 to 2% per annum, and that rate of decline is slightly up from what we had in earlier years where it was more like 1.5%.

And you'd have to say that that increase in the rate of decline has something to do with smoking bans.

And then -- I mean, that's got to be part of the reason for why you have talked more publicly about moving into other areas within the tobacco category, potentially.

Is that fair to say, Dinny?

Yes, I think that's a fair assumption.

And then, again, going back to consumer behavior, I guess it's always been my belief that as smoking bans go into effect, certainly, there might be a shock to the system, but it's hard, because a know a lot of this has been newer but over time, smokers possibly adapt, and it might still be a little early to decide over the long term how they will act and how they change.

And that's the behavior.

And I'm just curious if there's something that you have been able to study internationally that you can apply in the States and then again given that you're a leader, how you can leverage that and use that as an opportunity.

Well, actually, I can't describe it much better than you described it, Bonnie.

We see different reactions in different parts of the world, and we certainly are looking at products that would address this issue.

That's really all I can say at this stage, I'm afraid.

There's nothing more specific to add to what you just said earlier.

Will we hear about those products first half or second half?

I'm -- I'm not going to make a prediction on that.

Okay.

I just had to ask.

Okay.

Just a quick question on Japan.

Can you talk about your outlook for pricing, not specifically what you're going to do, just generally speaking in the country, the opportunities for pricing, given the economic environment in that country?

And then also, I'd be curious to hear specifically how Marlboro is performing in Japan, relative to your other brands in the country.

I guess what I'm trying to understand is what is your mix in Japan today, and sort of what has been the trend?

Yes.

Well, as far as pricing is concerned, obviously, I can't talk about that.

The only thing I can confirm is that there's an excise tax increase of 20 yen a pack, which will go through in Japan.

As far as -- as far as Marlboro is concerned, it is doing very well.

Its share was up 0.5 point in this quarter.

We've successfully launched Marlboro Ultra Lights Menthol.

The distribution of the brand looks very good.

And we -- and the other brand actually that's also doing well is we have a premium priced brand Parliament in Japan that has very good momentum and that is increasing its market share also.

Most of our mix in Japan is premium.

In fact, if you look at the premium plus category, we hold a 90% share of that category.

So we have the best mix of any of our competitors in Japan.

I think --

I just want to verify that that trend -- because we don't really talk a lot about -- because, you're right, it is.

I know it's so high.

We don't talk a lot about your other brands in Japan.

I want to verify, Dinny, that that, in fact -- that trend is either stable or is increasing, the premium mix within Japan.

Yes.

The premium mix in Japan, in fact, I would say is improving.

Okay.

That's great.

And just in terms of the pricing, I was honestly referring to the economic environment in Japan, because having just been there, it's my impression that the economy may be improving such that having met with some large companies there, there might be some opportunities for consumer companies to take, finally, some pricing.

So that's sort of what I was referring to.

Do you feel a little bit better about the economy in Japan?

Well, we feel better about the economy and that's why -- and that's reflected, in fact, in the sales of our Parliament brand which is doing particularly well, most recently and we -- we're finding over the years that when the economy in Japan improves, Parliament does well.

And, of course, Marlboro's also doing well.

So our premium part of our portfolio is doing very well, and will continue to do well with the economy improving.

Okay.

And then one final last question is innovation on Marlboro, specifically internationally.

I feel like we still really haven't heard a lot of news, whether it's line extensions, new packaging, is that still expected for 2006?

And if so, when?

No specifics.

Is that something we should expect?

Yes.

It's something you should expect, and keep tuned.

Okay.

Thank you very much.

Okay.

Judy Hong, Goldman Sachs.

Hi.

Good morning, Dinny.

Hi, Judy.

A few questions in Germany.

First, can you tell us how much Marlboro was down in volume in Germany?

Secondly, can you give us a little bit more details in terms of the price repositioning of L&M?

How much -- what's the price now versus before?

And thirdly, what are you doing proactively to prepare for some of the tobacco portions volume coming online and hopefully you capturing some of that tobacco portions volume?

As far as Marlboro is concerned, the volume was down about 8% for the quarter in Germany.

L&M, we reduced the price to 330 per 17 -- EUR3.30 per 17.

It had been a little higher than that before.

And as far as the portion situation is concerned, look, it's difficult to say how much of the portions business is going to come back to us.

We fell we are quite well-positioned because we were the last into the portions segment and we are underrepresented in the portions segment.

So I guess we have less switchback problems.

And our low-priced brands, I think are well-positioned to take back portion smokers who are coming back to the cigarette category.

So I think we're going to come out of this better than anyone else, but we just have to wait and see, Judy.

As you know, portions are going to remain in the market until the third quarter of this year.

Okay.

And then, it's just -- I was wondering if I could get a little bit more color in Russia.

You talked about your total share being down, but the premium share being up.

Is there more competition from the discount segment in that market?

Is that what's causing the total shares to be down?

Or I'm just wondering if you can give a little bit more color there.

Yes.

The fact is that all our premium brands and midpriced brands, Marlboro, Parliament, Virginia Slims, Muratti, and Chesterfield, all gained share.

We lost share with Apollo Soyuz and Optima, which are at the bottom of the market.

The reason we lost share, and this comes -- refers to an earlier question on pricing, is we -- we took up the prices on those brands and our competition didn't follow, or only followed partially.

As a result, we lost share with those low-priced brands.

We did have a little share loss with L&M, but if you take all our brands in the so-called value plus category, our market share was up.

So it's one of those unfortunate situations where we lost share because -- with these low-priced brands because our competition didn't follow.

Okay.

But in the marketplace as a segment, is the premium segment still gaining share, or is there more competition, just generally from the discount segment that's gaining momentum in that --?

No.

No.

The premium segment and the midpriced segments are gaining share.

Okay.

And then just following up on the question about Spain, I know you talked about being cautiously optimistic, but I wanted to just get a little bit more insight into how you think that the trend will really play out for the next few quarters.

The first quarter you talked about the income growth impact being about 4 points and -- for PMI, so it does sound like that is consistent with kind of your full-year outlook, where $0.10 of earnings impact from Spain.

And I'm just wondering if you think that as the year progresses what your consumption expectation is and how your volume and share performance will -- will trend.

Well, we're hoping that the situation in Spain improves, but to tell you very frankly, it's going to take us some time to regain our original profitability.

The fact of the matter is, that if you take the total tax incidence on Marlboro, including VAT, the tax incidence last year was about 71%.

It then rose to 75% in January of this year, and is currently at 77%.

So the brand is priced at EUR2.75 a pack with a 77% incidence against the same price last year when the tax incident was 71%.

So obviously our margins have taken a big hit.

And it's going to take us sometime to recover the lost profitability.

Okay.

Thanks, Dinny.

Thank you, Judy.

Christine Farkas, Merrill Lynch.

Thank you very much.

A couple of regional questions for you, Dinny.

With respect to Poland, think you were lapping a positive quarter a year ago, but you've commented in the release about outswitching to other tobacco products.

Can you describe what's going on there and how PMI's positioned?

And then I have a follow-up on Spain.

I guess just technically throughout the quarter how much of your sequential gains came in that period where your prices were reduced?

In other words, were the lower prices the big driver of the improvements in the quarter?

And what happened when the prices were resumed to January levels?

Thank you.

Yes.

As far as Spain -- Poland, let me answer Poland first.

The market was down over 3% and our shipments I think were down a little over 6%.

And so we -- and we lost about 1.6 points of a share.

And you're right, we did have a strong quarter in the first quarter of last year.

Our share loss was basically the result of losses from -- we have some local 70-millimeter trademark brands -- I mean 70-millimeter brands, which suffered.

And the fact of the matter is that the so-called deep discount category in Poland has really surged.

It's well over 50%; although in the most recent period, with some price increases taking place, it started to level off, and the midpriced segment has started to grow where PMI is well-positioned with L&M.

So I think the situation in Poland is improving, and I think we'll see better results in the second quarter and going forward.

With regard to Spain, the sequential improvement between the fourth quarter and first quarter obviously had something to do with the period when Marlboro's price was -- had been lowered, but what we noticed in the most recent period is that our premium brands are doing well.

They are not declining, and there's some indication that they're growing slightly.

Okay.

Great.

And just to back up to Poland, when you're talking about the repositioning or seeing improvements, drawing, I guess, an analogy to Argentina where in the fourth quarter, I believe PMI saw declines and it seems like repositioning and lower prices, I guess, in the quarter -- in the first quarter resulted in a nice reversal.

Is that the kind of thing that we would expect to see in Poland?

Not exactly.

The situation in Argentina and Poland are not exactly the same, but we are -- we are -- yes, we have seen improvements in Argentina, obviously.

And we're going to see improvements in Poland.

Okay.

A question on your guidance, Dinny, and perhaps this is subtle or I'm missing it.

The guidance hasn't changed in the 525 to 535 range, but is the $0.03 antitrust charge -- is that new new inclusion in your guidance?

Yes.

Okay.

Terrific.

That's it for me.

Thanks.

Okay.

Thank you.

At this time, we would like to invite media representatives as well as the investment community to pose any questions or comments that they may have. [OPERATOR INSTRUCTIONS].

Chris Growe, A.G. Edwards.

Good morning, Dinny.

Hi, Chris.

Hi.

Just a couple of questions for you.

If I could -- if you allow me just one more follow-up on Spain.

To the extent to which that market really is not fixed yet, in the sense that you still have a deep discount segment, is that the main rationale -- is the deep discount segment with the prices still at quite low levels, is that the main rationale for your keeping your guidance in place for roughly what you expect in decline of profits in Spain?

And what I'm incrementally concerned by is the questioning of the legitimacy of some of the minimum reference prices and to the extent that could spread to other markets as well.

I was wondering if you have a comment on those items?

As far as the -- you're right, there are -- the brands below EUR2 that are branded 1.75 and 1.85, they still have a share of about 15 to 17% and they're hovering in that range compared to sort of half that level last year.

So that segment clearly is an issue.

And as far as minimum reference prices are concerned -- well, first of all, the -- the Spanish problem can be resolved with -- if the government were to raise the minimum excise tax and you could very easily do that and get an effective base price of, say, EUR2 a pack, which I think would work very well for everyone.

With regard to the MRP, five countries have adopted the MRP, as you know.

That's France, Italy, Ireland, Belgium, and Austria.

The system is working very well, both from the -- for the government, both from a revenue point of view, as well as from a public health objective point of view.

There have been certain challenges by the DG tax of the EC challenges to these countries for the MRP, but the legal advice that we have been -- that we've received suggests that the -- the challenges are based on a rather narrow and technical view of the subject.

We'll just have to monitor the situation and continue to see what happens going forward.

And that's all I can say at this time.

And then -- just, again, to reiterate that point, that if you got the discount cigarettes in Spain up to around EUR2, and that's a number you've used before in the past, that would indicate somewhere around a 38% price gap today, if Marlboro stayed the same.

That'd be a good level to return Spain to some measure of profitability?

I think so.

Okay.

And then my second question is, just regarding PM USA.

And we've had some excise tax increases already this year and potentially more coming through.

So you've had a growth in absolute prices, and of course, the price increase you put in place earlier in the year.

So I guess assuming that your price gaps hold, do you feel pretty confident that PM USA can maintain this market share advance, and should we be incrementally concerned by the continual increase in absolute price levels given the excise tax price increases mostly?

Well, certainly, PM USA had a strong share growth in the first quarter.

I don't think you should necessarily extrapolate that performance for the remainder of the year.

And FETs are increasing and they have increased, I think already in three states this year, plus Cook County.

And the big FET states -- or FET locations that we've got to watch out for are Texas, which has quite a heavy weighted in the -- in the FET calculation.

And then, of course, California, where there's a ballot initiative, but that will only -- if that comes through, and we don't know at what level it will come through, but if that comes through, of course, the impact will be in 2007.

Okay.

Thank you.

Thank you.

Ann Gurkin, Davenport.

Good morning, Dinny.

Hi, Ann.

Just wondering if you could update us on PMI's potential acquisition strategy?

Is PMI willing to make acquisitions before a potential spin, and if so, would tobacco acquisitions fall in the range of particular brands, particular segments of the market, or maybe other tobacco products?

Can you update us a little bit on that strategy?

And then secondly, can I get an outlook for the Russian market for the rest of the year?

Look, as far as acquisitions are concerned for PMI, if you look at PMI's growth record of the past, whether you look at five years, ten years or 15 years, we've grown both organically and through acquisitions.

So I think from that, you can very clearly conclude that our future growth is also going to come from acquisitions and from organic growth.

Beyond that, I'm not going to become specific.

And your second question, Ann, was --

The outlook for the Russian market for the balance of the year.

Yes.

Our share in Russia for the year 2006 is going to be higher than our share in 2005.

So the little setback that we faced in the first quarter, we're going to overcome that, and our -- we'll end the year with better share and good volume growth in Russia versus 2005.

Great.

Thanks.

Okay.

Thomas Russo, Gardner Russo Gardner.

Hi, Dinny.

Hey, Tom.

Hi, Dinny.

Could you comment on your outlook for currency over the next three quarters, what you've built in and what you've provided for?

Currency, yes.

The easy question.

Thanks, Tom.

The -- in our guidance, I think we said that our guidance includes $0.14 of unfavorable currency, compared to 2005.

Now, if you look at spot rates as to where they are today, that $0.14 looks a bit conservative.

We're a little bit better than that $0.14.

But we didn't change the number because frankly, as you know, the currencies bounce all over the place and they could be totally different one week from now.

And so we've kept the numbers at $0.14.

Since we -- since we made that projection in January, the euro is looking a bit better, but the yen is looking a little worse.

So they're ups and downs.

But I'd say at this time, keeping a $0.14 unfavorable versus last year is the prudent thing to do.

Thank you.

Also, Dinny, can you talk a bit about the impact on Altria's non-Kraft equity as a result of the tax return adjustment?

Does this continue to build your Altria level corporate equity?

Yes.

And our equity -- Altria's equity at the end of the first quarter was $10.7 billion.

And that's separate from the share of Kraft's equity?

Yes.

Wonderful.

And where would that have been a year ago?

A year ago, you've got me, Tom, but I'm [inaudible] it was 3 or $4 billion lower.

Okay.

Great.

And then it seems like you did pay off a slug of debt in the first -- oh, the -- your debt's down by 1.5 billion during this reporting period, and your share count's up.

Any chance that you can begin a share repurchase before resolution of the outstanding legal questions and/or movement towards restructuring?

No chance, Tom.

Okay.

Thank you.

Thank you.

Thank you.

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

Well, thank you very much for joining us this morning on the call, and if you have any follow-up questions for Mike [Kenney] or myself, please give us a call and we'll look forward to talking with you in our second quarter.

Thank you again.

Have a great day.

Thank you.

This concludes today's Altria conference.

You may now disconnect.